The Edinburgh Investment Trust Plc Annual Financial Report 2022 - Flipbook - Page 21
THE EDINBURGH INVESTMENT TRUST PLC / STRATEGIC REPORT / 19
Principal Risks and Uncertainties
RISK MANAGEMENT AND MITIGATION
INVESTMENT PERFORMANCE RISK
The Board, through the Audit Committee and with the assistance of
the Manager, maintains and regularly reviews a report of potential
risks to the Company in the form of a risk control summary. The
document includes a description of each identified risk, the mitigating
action taken, reporting and disclosure to the Board and an impact
and probability risk rating. The rating is given both prior to and after
the Board’s mitigation of each risk. The information is then displayed
in matrix form which allows the Board to identify the Company’s key
risks. As the changing risk environment in which the Company operates
has evolved, the total number of risks has fluctuated, with certain risks
having been removed and new risks added with emerging risks actively
discussed as part of this process and, so far as practicable, mitigated.
The Board sets investment policy and risk guidelines, together
with investment limits, and monitors adherence to these at each
Board meeting. All individual investment decisions are delegated
to the Portfolio Manager. The Portfolio Manager’s approach is to
construct a portfolio which should benefit from expected future
trends in the UK and global economies. The Portfolio Manager
is a long-term investor, prepared to take substantial positions in
securities and sectors across a range of different types of stock.
This reflects the Portfolio Manager’s high conviction, stock-driven
investment process and total return approach. Strategy, asset
allocation and stock selection decisions by the Portfolio Manager
can lead to underperformance of the portfolio relative to the
benchmark and/or income targets.
The composition of the Board is regularly reviewed to ensure its
members offer sufficient knowledge and experience to assess,
anticipate and mitigate these risks, as far as possible.
The Company’s key long-term investment objectives are an increase
in the net asset value per share in excess of the growth in the FTSE
All-Share Index (the ‘benchmark’) and an increase in dividends in excess
of the annual rate of inflation. The principal risks and uncertainties
facing the Company are an integral consideration when assessing
the operations in place to meet these objectives, including the
performance of the portfolio, share price and dividends. The Board is
ultimately responsible for the risk control systems but the day-to-day
operation and monitoring is delegated to the Manager. The Board
has carried out a robust assessment of the principal risks facing the
Company, including those that would threaten its business model,
future performance, solvency or liquidity with consideration being
given to the effect of the COVID-19 pandemic, Russia’s invasion of
Ukraine, supply chain issues globally and risks of stagflation. The
following sets out a description of the principal risks and how they are
being managed or mitigated.
MARKET RISK
A great majority of the Company’s investments are traded on
recognised stock exchanges. The principal risk for investors in the
Company is a significant fall, and/or a prolonged period of decline in
those markets. The Company’s investments, and the income derived
from them, are influenced by many factors such as general economic
conditions, interest rates, inflation, the severe impact of the COVID-19
pandemic, geopolitical events, the war in Ukraine and government
policies as well as by supply and demand reflecting investor sentiment.
Such factors are outside the control of the Board and Manager and may
give rise to high levels of volatility in the prices of investments held by
the Company. The asset value and price of the Company’s shares and
its earnings and dividends may consequently also experience volatility
and may decline.
Fluctuations in interest rates and exchange rates could reduce returns
and lead to depreciation of the Company’s net asset value.
Market risk is included in the risk control summary report that is
reviewed by the Board at each meeting. Additionally, the Board
receives reports on the performance of the portfolio at each meeting.
The Portfolio Manager’s style may result in a concentrated
portfolio with significant overweight or underweight positions
in individual stocks or sectors compared to the index and
consequently the Company’s performance may deviate
significantly, possibly for extended periods, from that of the
benchmark. In a similar way, the Portfolio Manager manages
other portfolios holding many of the same stocks as the Company
which reflects the Portfolio Manager’s high conviction style of
investment management. This could increase the liquidity and
price risk of certain stocks under certain scenarios and market
conditions. However, the Board and Portfolio Manager believe
that the investment process and policy outlined above should,
over the long term, meet the Company’s objectives of Net Asset
Value per share growth in excess of the benchmark and real
dividend per share growth. Investment selection is delegated
to the Portfolio Manager. The Board does not specify asset
allocations. Information on the Company’s performance against
the benchmark and peer group is provided to the Board at each
Board meeting. The Board uses this to review the performance
of the Company, taking into account how performance relates to
the Company’s objectives. The Portfolio Manager is responsible
for monitoring the portfolio selected and seeks to ensure that
individual stocks meet an acceptable risk-reward profile.
As described in the investment policy, derivatives may be used
provided that the market exposure arising is less than 25% of the
value of the portfolio.
Investment Performance risk is included in the risk control
summary report that is reviewed by the Board at each meeting.
The Board also receives reports on the performance of the
portfolio and on compliance with the Company’s investment
policy guidelines from the Manager at each meeting.