The Equity Income Trust for Charities. Final Report and Accounts October 2017

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1 Final Report and Accounts October 2017

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3 Contents The Equity Income Trust for Charities Fund Information Investment objective and policy Alternative Investment Fund Managers Directive (AIFMD) Financial highlights Fund information Ongoing charges figure Participation Management charges Investment Adviser Supervisory Board Review of Investment Activities Risk Profile Specific risks Statement of the Manager s Responsibilities Report of the Trustee Independent Auditors Report to the Supervisory Board of The Equity Income Trust for Charities Comparative Tables Portfolio Statement Summary of Portfolio Transactions Largest purchases Largest sales Statement of Total Return Statement of Change in Net Assets Attributable to Unitholders Balance Sheet Notes to the Accounts Accounting policies Net capital gains Revenue Expenses Taxation Distributions Fair value hierarchy Debtors Other creditors Contingent liabilities Related party transactions Unit classes Derivative and other financial instruments Direct transaction costs Units in issue reconciliation Remuneration Distribution Table Quarterly distribution for the three months ended 31 January Interim distribution for the three months ended 30 April Quarterly distribution for the three months ended 31 July Final distribution for the three months ended 31 October Equalisation General Information Collectively these comprise the Manager s report.

4 Fund Information Investment objective and policy The Equity Income Trust for Charities ( the fund ) aims to provide a portfolio yield in excess of the FTSE All Share Index, targeting a premium of 30 per cent, through investing predominately in UK equities. The income provision will be the primary objective. The fund s secondary target is to provide capital growth in order that its total return exceeds that of the FTSE All Share Index over rolling five year periods. Subject to cash reasonably held for redemptions and expenses, it is the intention of the fund to remain fully invested except where market conditions necessitate the use of a defensive investment strategy which involves the holding of cash or near cash. Alternative Investment Fund Managers Directive (AIFMD) The AIFMD, as implemented in the UK by the Alternative Investment Fund Managers (AIFMs) Regulations 2013, establishes an EU wide harmonised framework for monitoring and supervising risks posed by AIFMs and the alternative investment funds (AIFs) they manage. The fund is an AIF and Schroder Unit Trusts Limited (the Manager) was authorised by the Financial Conduct Authority (FCA) to act as an AIFM on 2 July The AIFMD requires certain information to be disclosed to unitholders. It is intended that any such information will in future be provided in the report and accounts, unless such information is required to be disclosed without delay, in which case it will be made via the Schroders website at: Financial highlights Selling price % change A Income units 97.81p 91.52p 6.87 A Accumulation units p p S Income units 54.50p 50.87p 7.14 S Accumulation units p p to to Distributions per A Income unit p p 4

5 Fund Information (continued) Fund information Launch date 2 December 2002 Launch price 50.00p per A Income unit Launch date 1 October 2013 Launch price 89.32p per A Accumulation unit Launch date 1 October 2014 Launch price 50.00p per S Income unit Launch date 2 November 2015 Launch price 98.70p per S Accumulation unit Quarterly Interim Quarterly Final Accounting dates 31 January 30 April 31 July 31 October Revenue allocation dates 15 March 15 June 15 September 15 December Ongoing charges figure For the year For the year to to A Income units 0.61% 0.62% A Accumulation units 0.61% 0.62% S Income units 0.37% 0.38% S Accumulation units 0.37% 0.38% 1 1 The Ongoing charges figure is annualised based on the fees incurred during the accounting period. Participation Charities in England and Wales (and every appropriate body in Scotland and Northern Ireland) may participate in the fund unless specifically precluded by their deeds or other governing instrument. For A Income units and A Accumulation units the minimum initial investment is 10,000 and, for subsequent purchases 1,000. Applications for subscriptions into the S Income units and S Accumulation units are accepted at the (Schroder Unit Trusts Limited) the Manager s discretion. There is no maximum limit on the amount which may be invested. The fund can issue both Income and Accumulation units. Income unitholders receive regular quarterly distributions, while accumulation unitholders benefit from the reinvestment of their revenue into the fund. 5

6 Fund Information (continued) Management charges There is no preliminary charge. The Annual management charge is 0.50% (plus VAT) of the value of the fund for A Income units and A Accumulation units and 0.30% (plus VAT) of the value of the fund for S Income units and S Accumulation units and is charged to the capital of the fund. Investment Adviser Supervisory Board The Manager has delegated the function of Investment Adviser to Schroder Investment Management Limited. The duties and responsibilities of the Supervisory Board are set out in the Scheme rules. These include the determination of the criteria and methods for evaluating the performance of the fund, making and revising a written statement of the investment objectives of the fund and an obligation to inform the Charity Commissioners promptly should the Supervisory Board not be satisfied at any time as to the compliance with the Scheme Particulars by the Trustee or the Manager. 6

7 Review of Investment Activities From 31 October 2016 to 31 October 2017, the price of A Accumulation units on a selling price to selling price basis rose 12.26%. In comparison, the FTSE¹ All Share Index generated a total return of 13.39%². UK Equity Markets rose over the twelve months as stronger real economic growth and a recovery in industrial and commodity prices benefited corporate margins and risk sentiment. The FTSE Index delivered a return of just over 12% 2 but mid and small caps continued to dominate, with total returns of 18.5% 2 (FTSE Index) and 20.6% 2 (FTSE 1 Small Cap Index) respectively. At the sector level, leisure goods, industrial engineers, mining and life insurance were among the best performing sectors. Defensive sectors such as telecommunications, utilities, pharmaceuticals and food & drug retailers, as well as the oil services sector struggled to perform. Returns were positive over the period and the fund delivered the primary objective of a yield premium of 130% and declared a total dividend of 4.70 pence per share, a growth of 4.4% on the prior year (4.50p). However, the fund s total return was marginally behind the FTSE All Share Index, while the average UK Income fund produced a return of 12.42%. At the stock level key holdings in Electrocomponents, Man Group, Persimmon and Hastings Group Holdings added value, while on the negative tack Provident Financial, Greene King, BT Group and Royal Mail held back performance. With investors focused on growth and quality assets, higher yielding stocks remained out of favour. For example, the FTSE Higher Yield Index rose by 10.3% 2 in the period but the FTSE Lower Yield Index delivered a return of 16.6% 2. The portfolio remained focused on premium income stocks with new positions established in Assura (real estate), Computacenter (software), Go-Ahead (leisure) and Persimmon (housebuilders). The fund also established new holdings in dividend growth stocks, with the purchase of Croda International, RELX and Allied Irish Banks. Additions were funded by reducing positions in AstraZeneca, BT Group and HSBC Holdings and exiting the holdings in Intermediate Capital Group, Jardine Lloyd Thompson Group and BTG. Overall positioning is focused on maintaining the premium yield and growing the nominal dividend distribution of the fund. Fund Manager: Matthew Hudson Matthew Hudson joined Schroders in July 2013 following the acquisition of Cazenove Capital He joined Cazenove Capital in 2001 from AIB Govett Investment Management. Prior to this he was a chartered accountant at PricewaterhouseCoopers He is Head of the Business Cycle equity team at Schroders, with responsibility for UK equity income and UK Opportunities portfolios He manages the Schroder UK Alpha Income Fund and Equity Income Trust for Charities, a UK authorised Common Investment Fund alongside the Schroder UK Opportunities Fund Matthew graduated from Cambridge University with a degree in History. Matthew has 19 years of investment experience 1 FTSE International Limited ( FTSE ) FTSE. FTSE is a trade mark of London Stock Exchange plc and The Financial Times Limited and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. 2 Source: Thomson Reuters Datastream. Please remember that past performance is not a guide to future performance and it might not be repeated. The value of investments and the revenue from them may go down as well as up and investors may not get back the amount originally invested. Because of this, you are not certain to make a profit on your investments and you may lose money. 7

8 Risk Profile Specific risks The fund invests solely in the securities of a particular country. There may be a greater risk than investing in funds that hold securities in a range of countries. The fund may invest in a wide range of derivatives in order to meet its investment objectives and for leverage. The use of leverage can increase gains as well as losses and expose the fund to increased risk. As a result of the Annual management charge being charged wholly to capital, the distributable revenue of the fund may be higher, but the capital value of the fund may be eroded which may affect future performance. For these reasons, the purchase of units should not normally be regarded as a short term investment. 8

9 Statement of the Manager s Responsibilities The Manager is required by the Charities Act 2011 to prepare accounts for each annual and half yearly accounting period, in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), which give a true and fair view of the financial position of the fund and of its net revenue and the net capital gains on the property of the fund for the year. In preparing the accounts the Manager is required to: select suitable accounting policies and then apply them consistently; comply with the requirements of the Charities Act 2011 and Regulation 6 of The Charities (Accounts and Reports) Regulations 2008; follow generally accepted accounting principles and applicable accounting standards; prepare the accounts on the basis that the fund will continue in operation unless it is inappropriate to do so; keep proper accounting records which enable it to demonstrate that the accounts as prepared comply with the above requirements; make judgements and estimates that are prudent and reasonable. The Manager is responsible for the management of the fund which was created by a Scheme of the Charity Commissioners under section 24 of the Charities Act 1993, in accordance with the Scheme Particulars and the Scheme made by the Charity Commissioners on 11 June 2007 and for taking reasonable steps for the prevention and detection of fraud, error and non-compliance with law or regulations. In accordance with the Scheme, Part 9 of the Charities Act 2011 and The Charities (Accounts and Reports) Regulations 2008 the Manager is deemed to be the Charity Trustee of the fund. In the opinion of the Manager, the Investment Adviser has complied with the terms of the Scheme, and the investment management agreement for the year from 1 November 2016 to 31 October The Manager s report and accounts for the year ended 31 October 2017 were signed on 8 December 2017 on behalf of the Manager by: J.A. Walker-Hazell Directors P. Chislett 9

10 Report of the Trustee Statement of the Trustee s responsibilities in relation to the accounts of the Scheme The Trustee is under a duty to take into custody or under its control all of the property of the Scheme and to hold it in trust for the holders of units. Under Clause 9 of the Scheme it is also the duty of the Trustee to enquire into the conduct of the Manager in the management of the Scheme in each annual accounting period and to report thereon to unitholders in a report which shall contain the matters prescribed in Clause 9. A copy of the Trustee s report is set out below. Report of the Trustee for the accounting period from 1 November 2016 to 31 October 2017 The Equity Income Trust for Charities ( the fund ) Report under Clause 9(h) of the Scheme As Trustee of the above fund we hereby report that, for the year ended 31 October 2017 and having made such enquiries as we think appropriate, we have discharged our responsibilities for those aspects of the administration and management of the fund and its property which are specified in Clause 9 of the Scheme and, in respect of the supervision and oversight of the Manager s compliance with the Scheme of the Charity Commissioners and the Scheme Particulars, and that the Manager has not exceeded the powers conferred on it and is maintaining adequate and proper records, that we have maintained custody and control of the property of the fund and that all revenue which is due to the fund has been collected. J.P. Morgan Europe Limited Trustee Bournemouth 22 November

11 Independent Auditors Report to the Supervisory Board of The Equity Income Trust for Charities Report on the audit of the financial statements Opinion In our opinion, The Equity Income Trust for Charities financial statements (the financial statements ): give a true and fair view of the financial position of the charity s affairs as at 31 October 2017 and of the net revenue and the net capital gains of its scheme property for the year then ended; and have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, and applicable law), the Scheme of the Charity Commissioners, the Scheme Particulars and the Statement of Recommended Practice for UK Authorised Funds; and have been prepared in accordance with the requirements of the Charities Act 2011 and Regulation 6 of The Charities (Accounts and Reports) Regulations We have audited the financial statements, included within the Final Report and Accounts (the Annual Report ), which comprise: the balance sheet as at 31 October 2017; the statement of total return and the statement of change in net assets attributable to unitholders for the year then ended; the notes to the financial statements, which include a description of the significant accounting policies; and the distribution tables. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) ( ISAs (UK) ) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the fund in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the Financial Reporting Council s (FRC) Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. 11

12 Independent Auditors Report to the Supervisory Board of The Equity Income Trust for Charities (continued) Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: the Manager s use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or the Manager has not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the fund s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the fund s ability to continue as a going concern. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our Auditors Report thereon. The Manager is responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. Reporting required by the Charities Act 2011 Under the Charities Act 2011 we are required to report to you if, in our opinion the information given in the Manager s Report is inconsistent in any material respect with the financial statements. We have no exceptions to report arising from this responsibility. 12

13 Independent Auditors Report to the Supervisory Board of The Equity Income Trust for Charities (continued) Responsibilities for the financial statements and the audit Responsibilities of the Manager for the financial statements As explained more fully in the Statement of the Manager s Responsibilities set out on page 9, the Manager is responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Manager is also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Manager is responsible for assessing the fund s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Manager either intends to liquidate the fund or to cease operations, or has no realistic alternative but to do so. Auditors responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditors Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC s website at: This description forms part of our Auditors Report. Use of this report This report, including the opinions, has been prepared for and only for the charity s Supervisory Board as a body in accordance with section 144 of the Charities Act 2011 and regulations made under section 154 of that Act (Regulation 24 of The Charities (Accounts and Reports) Regulations 2008) and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. 13

14 Independent Auditors Report to the Supervisory Board of The Equity Income Trust for Charities (continued) Other required reporting Charities Act 2011 exception reporting Under the Charities Act 2011 we are required to report to you if, in our opinion: we have not received all the information and explanations we require for our audit; or sufficient accounting records have not been kept; or the financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 8 December

15 Comparative Tables A Income units Financial year to 31 October p per unit p per unit p per unit Change in net asset value Opening net asset value Return before operating charges Operating charges (0.58) (0.54) (0.58) Return after operating charges* Distributions 1 (4.70) (4.50) (4.30) Closing net asset value *after direct transaction costs of (0.05) (0.06) (0.07) Performance Return after charges (%) Other information Closing net asset value ( 000 s) 297, , ,516 Closing number of units 308,734, ,861, ,473,441 Operating charges (%) Direct transaction costs (%)** Prices Highest buying price (p) Lowest selling price (p)

16 Comparative Tables (continued) A Accumulation units Financial year to 31 October p per unit p per unit p per unit Change in net asset value Opening net asset value Return before operating charges Operating charges (0.69) (0.61) (0.62) Return after operating charges* Distributions 1 (5.57) (5.06) (4.61) Retained distributions Closing net asset value *after direct transaction costs of (0.06) (0.07) (0.08) Performance Return after charges (%) Other information Closing net asset value ( 000 s) 2,389 2,048 1,631 Closing number of units 2,022,115 1,945,479 1,650,431 Operating charges (%) Direct transaction costs (%)** Prices Highest buying price (p) Lowest selling price (p)

17 Comparative Tables (continued) S Income units Financial year to 31 October p per unit p per unit p per unit Change in net asset value Opening net asset value Return before operating charges Operating charges (0.20) (0.18) (0.19) Return after operating charges* Distributions 1 (2.62) (2.50) (2.35) Closing net asset value *after direct transaction costs of (0.03) (0.03) (0.04) Performance Return after charges (%) Other information Closing net asset value ( 000 s) 21,859 12,852 11,431 Closing number of units 40,754,488 25,661,327 23,164,316 Operating charges (%) Direct transaction costs (%)** Prices Highest buying price (p) Lowest selling price (p)

18 Comparative Tables (continued) S Accumulation units Financial year to 31 October p per unit p per unit Change in net asset value Opening net asset value Return before operating charges Operating charges (0.43) (0.37) Return after operating charges* Distributions 1 (5.58) (5.07) Retained distributions Closing net asset value *after direct transaction costs of (0.06) (0.07) Performance Return after charges (%) Other information Closing net asset value ( 000 s) 1, Closing number of units 1,097, ,317 Operating charges (%) Direct transaction costs (%)** Prices Highest buying price (p) Lowest selling price (p) The unit class was launched on 2 November These figures have been rounded to 2 decimal places. ** Direct transaction costs have been stated after deducting the proportion of the amounts collected from dilution adjustments. The Operating charges are calculated on an ex-post basis and as such may differ from the Ongoing charges figure where the Ongoing charges figure has been annualised for a unit class that has not been in existence for a full year. For Accumulation unit classes, prior years figures have been updated in line with the Investment Association (IA) circular issued on 6 October Please remember that past performance is not a guide to future performance and it might not be repeated. The value of investments and the revenue from them may go down as well as up and investors may not get back the amount originally invested. Because of this, you are not certain to make a profit on your investments and you may lose money. 18

19 Portfolio Statement Holding at Market Value % of net s assets Ireland Financials 0.97% ( %) Allied Irish Banks 700,000 3, , United Kingdom Oil & Gas 12.50% ( %) BP 3,700,080 18, Royal Dutch Shell B 887,000 21, , Basic Materials 10.73% ( %) BHP Billiton 540,000 7, Croda International 160,000 6, Elementis 2,250,000 6, Rio Tinto 400,000 14, , Industrials 8.78% ( %) BAE Systems 750,000 4, Cobham 2,700,000 3, Electrocomponents 455,000 3, Ferguson 75,000 3, Ibstock 1,900,000 4, Royal Mail 1,263,687 4, Travis Perkins 235,090 3, , Consumer Goods 4.30% ( %) Dairy Crest Group 965,178 5, Headlam Group 600,000 3, Persimmon 160,000 4, ,

20 Portfolio Statement (continued) Holding at Market Value % of net s assets Health Care 6.05% ( %) AstraZeneca 105,000 5, GlaxoSmithKline 1,050,000 14, , Consumer Services 11.36% ( %) DFS Furniture 1,060,000 2, Go-Ahead Group 200,000 3, Greene King 800,000 4, Hollywood Bowl Group 1,700,000 3, Informa 907,066 6, ITV 2,098,464 3, Marks & Spencer Group 1,700,000 5, National Express Group 1,000,000 3, Saga 2,200,000 4, , Telecommunications 4.82% ( %) BT Group 1,000,000 2, Vodafone Group 6,000,000 12, , Utilities 5.98% ( %) Centrica 3,000,000 5, National Grid 1,130,587 10, Pennon Group 500,000 3, , Financials 30.06% ( %) Ashmore Group 1,640,000 6, Assura 5,400,000 3, Aviva 1,200,000 6, Direct Line Insurance Group 2,350,000 8, Hastings Group Holdings 1,299,640 4, HSBC Holdings 1,930,000 14, Legal & General Group 2,360,000 6,

21 Portfolio Statement (continued) Holding at Market Value % of net s assets Financials (continued) Lloyds Banking Group 22,267,059 15, Man Group 2,690,000 5, Morses Club 283, Phoenix Group Holdings 750,000 5, Prudential 600,000 11, RSA Insurance Group 419,412 2, TP ICAP 1,450,000 7, , Technology 3.25% ( %) Computacenter 472,000 4, Fidessa Group 117,000 2, Laird 1,947,967 3, , Portfolio of investments 318, Net other assets 3, Net assets attributable to unitholders 322, Unless otherwise stated the above securities are ordinary shares or common stock and admitted to official stock exchange listings. 21

22 Summary of Portfolio Transactions Largest purchases Largest sales Cost For the year ended 31 October s Prudential 10,019 BHP Billiton 7,909 RELX 7,718 Persimmon 6,579 Croda International 6,197 TP ICAP 5,705 BAE Systems 4,159 Computacenter 4,153 Marks & Spencer Group 3,976 Ferguson 3,777 Proceeds For the year ended 31 October s HSBC Holdings 16,836 BAE Systems 9,125 RELX 9,092 Sage Group 6,324 Barratt Developments 6,266 Electrocomponents 6,141 Aviva 5,936 BT Group 5,824 AstraZeneca 5,464 British Land 5,434 22

23 Statement of Total Return For the year ended 31 October 2017 Income Notes 000 s 000 s 000 s 000 s Net capital gains 2 24,782 7,073 Revenue 3 16,482 17,935 Expenses 4 (2,031) (2,195) Net revenue before taxation 14,451 15,740 Taxation Net revenue after taxation 14,451 15,740 Total return before distributions 39,233 22,813 Distributions 6 (16,927) (18,636) Change in net assets attributable to unitholders from investment activities 22,306 4,177 Statement of Change in Net Assets Attributable to Unitholders For the year ended 31 October s 000 s 000 s 000 s Opening net assets attributable to unitholders 352, ,578 Amounts receivable on issue of units 6,834 31,181 Amounts payable on cancellation of units (58,744) (44,095) (51,910) (12,914) Dilution adjustment Change in net assets attributable to unitholders from investment activities 22,306 4,177 Retained distribution on Accumulation units Unclaimed distributions 1 0 Closing net assets attributable to unitholders 322, ,067 23

24 Balance Sheet As at 31 October Notes 000 s 000 s Assets Investments 318, ,987 Current assets Debtors 8 1,685 3,117 Cash and bank balances 8,625 12,784 Total assets 329, ,888 Liabilities Creditors Distributions payable (5,303) (5,938) Other creditors 9 (1,130) (883) Total liabilities (6,433) (6,821) Net assets attributable to unitholders 322, ,067 24

25 Notes to the Accounts 1 Accounting policies Basis of preparation The accounts have been prepared under the historical cost basis, as modified by the revaluation of investments, and in accordance with applicable law and the Charities Act 2011, the Charities (Accounts and Reports) Regulations 2008, the Scheme of the Charity Commissioners of 11 June 2007 and the disclosure requirements of the Statement of Recommended Practice (SORP) for Financial Statements of UK Authorised Funds issued by the Investment Management Association (IMA (now The Investment Association)) in May 2014 and in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 102 (The Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102)). The accounts are exempt from complying with the Accounting and Reporting by Charities SORP 2015 under paragraph 15 of that document. Revenue Dividends and real estate income distributions receivable from equity investments are recognised net of attributable tax credits and are credited to revenue when they are first quoted ex-dividend. Interest receivable from bank balances is accounted for on an accruals basis. Underwriting commissions are included in revenue when received except where the fund is required to take up shares. In these cases commission is deducted from the capital cost of those shares on a proportional basis. Special dividends Special dividends are treated as revenue or capital depending on the facts of each particular case. Equalisation Equalisation on distributions received by the fund is deducted from the cost of investments. Expenses Expenses of the fund are charged against revenue except for costs associated with the purchase and sale of investments which are allocated to the capital of the fund. The Annual management charge is initially charged to revenue but ultimately borne by the capital of the fund. Distributions Quarterly distributions are made on 15 March, 15 June, 15 September and 15 December. 25

26 Notes to the Accounts (continued) Dilution adjustment In certain circumstances the Manager may apply a dilution adjustment on subscriptions and redemptions of units. If applied, the dilution adjustment is paid to the fund. See Prospectus for further details. Dilution adjustments include an estimate of dealing costs and the spread on underlying investments. From 1 January 2017 the transactional revenue earned from the spread (the difference between the creation price and the cancellation price), to the extent that in respect of any Dealing Day subscriptions are netted off against redemptions has been paid by the Manager into the fund and will be included within the dilution adjustment in the Statement of Change in Assets Attributable to Unitholders. Valuation Listed investments of the fund have been valued at market value at 18:00 on the balance sheet date. Market value is defined by the SORP as fair value which generally is the bid value of each security. 2 Net capital gains The net capital gains during the year comprise: s 000 s Non-derivative securities 24,787 7,075 Foreign currency losses (3) 0 Transaction costs (2) (2) Net capital gains 24,782 7,073 The non-derivatives securities above includes: s 000 s Realised gains/(losses) 22,410 (7,886) Unrealised gains 2,374 14,961 Total gains 24,784 7,075 Total realised gains/(losses) for the year were 22,410,496 (2016-7,886,141) and the movement in unrealised gains was 2,373,986 ( ,961,371). Included in realised losses for the year were unrealised losses recognised in previous years. 26

27 Notes to the Accounts (continued) 3 Revenue s 000 s UK dividends 15,591 16,973 Overseas dividends Real estate income distributions Bank interest 4 36 Underwriting commission 0 18 Total revenue 16,482 17,935 4 Expenses s 000 s Payable to the Manager, associates of the Manager and agents of either of them: Annual management charge 1,983 2,142 1,983 2,142 Payable to the Trustee, associates of the Trustee and agents of either of them: Trustee s fees Safe custody fees Other expenses: Audit fee Total expenses 2,031 2,195 5 Taxation The Equity Income Trust for Charities is a registered charity and its unitholders are restricted to those with charitable status in England and Wales and appropriate bodies in Scotland and Northern Ireland. Investment policy is set in recognition of the charitable restrictions and accordingly the revenue and the net capital gains are exempt from direct taxation in the United Kingdom. Indirect taxation incurred is included in the expenditure to which it relates. The Trustee, J.P.Morgan Europe Limited, arranges for the reclaim of tax on revenue received by the fund. However, it may not always be possible for overseas tax to be reclaimed. Quarterly distributions are paid without deduction of tax. 27

28 Notes to the Accounts (continued) 6 Distributions Distributions The distributions take account of revenue received on the issue of units and revenue deducted on the cancellation of units, and comprise: s 000 s Quarterly Dividend distribution 2,963 3,216 Interim Dividend distribution 4,093 4,676 Quarterly Dividend distribution 3,926 4,554 Final Dividend distribution 5,363 5,977 16,345 18,423 Add: Revenue deducted on cancellation of units Deduct: Revenue received on issue of units (86) (359) Distributions 16,927 18,636 Net revenue after taxation 14,451 15,740 Annual management charge taken to capital 1,983 2,142 Expenses taken to capital 0 (2) Movement in undistributed revenue Distributions 16,927 18,636 Details of the distributions per unit are set out in the Distribution Table on pages 35 and Fair value hierarchy Valuation technique 000 s 000 s Quoted prices for identical instruments in active markets 318, ,987 Total 318, ,987 8 Debtors s 000 s Amounts receivable for issue of units 60 0 Sales awaiting settlement 740 1,414 Accrued UK dividends 726 1,520 1 Accrued overseas dividends Accrued bank interest 1 0 Accrued underwriting commission 0 18 Overseas withholding tax recoverable Total debtors 1,685 3,117 1 Accrued UK dividends amounts include a reallocation adjustment of 64,498 between Accrued UK dividends and Accrued Overseas dividends. 28

29 Notes to the Accounts (continued) 9 Other creditors s 000 s 000 s 000 s Amounts payable for cancellation of units Purchases awaiting settlement Accrued expenses Annual management charge Trustee and Agents Trustee s fees 6 9 Safe custody fees 1 0 Transaction costs Other accrued expenses Total other creditors 1, Contingent liabilities The aggregate contingent liabilities not provided for at the balance sheet date are: s 000 s Nil paid rights 0 2,667 Total contingent liabilities 0 2, Related party transactions The Manager exercises control over the fund and is therefore a related party by virtue of its controlling influence. Amounts paid during the year or due to the Manager at the balance sheet date are disclosed under Expenses and Other creditors in the Notes to the Accounts. The Manager acts as principal on all transactions of units in the fund. The aggregate monies received through the issue and cancellation of units are disclosed in the Statement of Change in Net Assets Attributable to Unitholders and Distributions in the Notes to the Accounts. Amounts due from or to the Manager in respect of unit transactions at the balance sheet date are disclosed under Debtors and Other creditors in the Notes to the Accounts. Units held or managed by the Manager or associates of the Manager as a percentage of the fund s net asset value at the balance sheet date were 92.65% ( %). 29

30 Notes to the Accounts (continued) 12 Unit classes The fund currently has four unit classes: A Income units, A Accumulation units, S Income units and S Accumulation units. The Annual management charge (plus VAT) is based on the average value of the fund, calculated on a monthly basis, and covers the remuneration of the Manager, the Investment Adviser and their overhead expenses and for each unit class is as follows: A Income units 0.50% A Accumulation units 0.50% S Income units 0.30% S Accumulation units 0.30% The closing net asset value of each unit class, the closing net asset value per unit and the closing number of units in issue are given in the Comparative Tables on page 15 to 18. The distributions per unit class are given in the Distribution Table on page 35 and 36. All classes have the same rights on winding up. 13 Derivative and other financial instruments In accordance with the investment objective, the fund may hold certain financial instruments. These comprise: securities held in accordance with the investment objective and policy; cash and short term debtors and creditors arising directly from operations. The fund has little exposure to credit risk. The main risks arising from the fund s financial instruments are market price, liquidity and interest rate risks. The Manager s policies for managing these risks are summarised below and have been applied throughout the year and the prior year. Market price risk The fund s investment portfolio is exposed to market price fluctuations which are monitored by the Manager in pursuance of the investment objective and policy. Adherence to investment guidelines and to investment and borrowing powers set out in the Scheme made by the Charity Commissioners on 11 June 2007 and the Scheme Particulars mitigates the risk of excessive exposure to any particular type of security or issuer. Liquidity risk The primary source of this risk to the fund is the liability to unitholders for any cancellation of units. This risk is minimised by holding cash, readily realisable securities and access to overdraft facilities up to the amount prescribed by the FCA s Collective Investment Schemes sourcebook. Interest rate risk Interest receivable on bank balances will be affected by fluctuations in interest rates. 30

31 Notes to the Accounts (continued) Interest rate risk profile of financial assets and financial liabilities The interest rate risk profile of financial assets and liabilities at the balance sheet date was as follows: Financial assets Floating rate not carrying financial assets interest Total Currency 000 s 000 s 000 s Euro ,127 3, Sterling , , , , , ,888 Financial liabilities not carrying interest Total Currency 000 s 000 s Sterling ,433 6, ,821 6,821 There are no material amounts of non-interest bearing financial assets, other than equities, which do not have a maturity date. Floating rate financial assets and financial liabilities Sterling denominated bank balances bear interest at rates based on the Sterling Overnight Index Average rate. Fair value of financial assets and financial liabilities There is no material difference between the value of the financial assets and liabilities, as shown in the balance sheet, and their fair value. Global risk exposure Leverage Information on the limit usage and level of leverage The fund uses a risk management process that allows the Manager to monitor the risk to ensure they are being managed in line with their investment policy and risk profile. Leverage ratios are important risk metrics to represent the current risk profile of the fund and are monitored on a daily basis. Leverage is a way for the fund to increase its exposure through the use of financial derivative instruments and/or borrowing of cash or securities where applicable it is expressed as a ratio between the exposure of the fund and its Net Asset Value. The leverage ratio is calculated in accordance with two methodologies for calculating the exposure of the fund, the Gross method and the Commitment method. 31

32 Notes to the Accounts (continued) There were no new arrangements for managing the liquidity and no changes to the maximum ratio level of leverage occurred during the year. In accordance with AIFM rules, the leverage details as at the balance sheet date were as follows: Leverage Commitment Commitment Commitment As at 31 October ratio limit ratio level utilised % % Gross ratio Gross ratio Gross As at 31 October limit level utilised % % 14 Direct transaction costs In the case of shares, broker commissions and transfer taxes/stamp duty are paid by the fund on each transaction. In addition, there is a dealing spread between buying and selling prices of the underlying investments. Unlike shares, other types of investments (such as bonds, money market instruments, derivatives) have no separately identifiable transaction costs; these costs form part of the dealing spread. Dealing spreads vary considerably depending on the transaction value and market sentiment. Commissions Taxes Principal Commissions Taxes Total cost % of % of s 000 s 000 s 000 s principal principal Purchases Purchases 1 : Equities 109, , Corporate actions purchases: Equities 3, , , ,103 Sales Equities 162,147 (135) 0 162,012 (0.08) 0.00 Total cost of the fund s average net asset value (%) Excluding corporate actions. 32

33 Notes to the Accounts (continued) Commissions Taxes Principal Commissions Taxes Total cost % of % of s 000 s 000 s 000 s principal principal Purchases Purchases 1 : Equities 136, , Corporate actions purchases: Equities , ,046 Sales Equities 153,555 (140) 0 153,415 (0.09) 0.00 Total cost of the fund s average net asset value (%) Excluding corporate actions. Average portfolio dealing spread As at the balance sheet date the average portfolio dealing spread was 0.10% ( %). This spread represents the difference between the values determined respectively by reference to the bid and offer prices of investments expressed as a percentage of the value determined by reference to the offer price. 15 Units in issue reconciliation Number Number of units Number Number Number of units in issue as of units of units of units in issue as at issued cancelled converted at A Income units 373,861,210 4,793,200 (61,621,759) (8,297,709) 308,734,942 A Accumulation units 1,945, ,612 (13,553) (44,423) 2,022,115 S Income units 25,661,327 4,126,880 (1,819,242) 12,785,523 40,754,488 S Accumulation units 278,317 12,673 (241,035) 1,047,857 1,097,812 33

34 Remuneration Alternative Investment Fund Managers Directive (AIFMD) Remuneration Disclosures for Schroder Unit Trust Limited (SUTL) as at 31 December 2016 The following disclosures are required under the Alternative Investment Fund Managers Directive, as transposed in the UK into chapter SYSC 19B of the Financial Conduct Authority Handbook. These disclosures should be read in conjunction with the Schroders Plc Remuneration Report on pages 68 to 96 of the 2016 Annual Report & Accounts (available on the Group s website which provides more information on the activities of our Remuneration Committee and our remuneration principles and policies. SUTL s AIFMD Material Risk Takers are individuals in roles which can materially affect the risk of SUTL or any AIF it manages. The Remuneration Committee of Schroders plc has established a Remuneration Policy to ensure the requirements of AIFMD are met proportionately for all AIFMD Material Risk Takers. The directors of SUTL are responsible for the adoption of the Remuneration Policy, for reviewing it at least annually, for overseeing its implementation and for ensuring compliance with relevant local legislation and regulation. Details of the latest remuneration policy can be downloaded from The remuneration data that follows reflects amounts paid in respect of performance during At 31 December 2016, SUTL managed a total of 47,509 million assets under management, of which 16,464 million were in Alternative Investment Funds (AIFs). The total amount of remuneration paid by SUTL to its staff is nil as SUTL has no employees. AIFMD Material Risk Takers of SUTL are employed and paid by other Schroders Group companies. Employees who serve as Directors of SUTL receive no additional fees in respect of their role on the Board of SUTL. The following disclosures relate to AIFMD Material Risk Takers of SUTL. Some of these individuals are employed by and provide services to other companies in, and clients of, the Schroders group. As a result, only a portion of remuneration for those individuals is included in the aggregate remuneration figures that follow, based on an objective apportionment to reflect the balance of each role. The aggregate total remuneration paid to the 136 AIFMD Material Risk Takers of SUTL in respect of the financial year ending 31 December 2016, and attributed to SUTL and the AIFs it manages, is 6,797,656, of which 2,076,922 is paid to Senior Management and 4,720,734 is paid to other AIFMD Material Risk Takers. 34