The Edinburgh Investment Trust Plc Annual Financial Report 2022 - Flipbook - Page 22
20 / STRATEGIC REPORT / THE EDINBURGH INVESTMENT TRUST PLC
Principal Risks and Uncertainties / continued
BORROWING RISK
registration services, accounting and company secretarial services.
The Company may borrow to provide gearing to the equity
portfolio of up to 25% of net assets. Borrowing is a mix of the
Company’s £100 million debenture stock which will mature at 30
September 2022 and £20m of long-term fixed rate Unsecured
Senior Loan Notes and a £25 million bank facility. The Company
has in place agreements for replacement funding for the
debenture through additional fixed rate notes. Details of all
borrowings are given in Notes 11 and 12. The principal gearing
risk is that the level of gearing may have an adverse impact
on performance. Secondary risks include whether the cost of
borrowing is too high and whether the bank facility which is
currently undrawn can be renewed and on terms acceptable to
the Company.
The principal risks arising from the above contracts relate to
performance of the Manager, the performance of administrative,
registration, depositary, custodial and banking services, and
the failure of information technology systems used by third
party service providers. These risk areas could lead to the loss
or impairment of the Company’s assets, inadequate returns to
shareholders and loss of investment trust status. Consequently,
in respect of these activities the Company is dependent on
the Manager’s control systems and those of its administrator,
depositary, custodian and registrar.
Within an overall limit set by the Board, the Manager has full
discretion over the amount of the borrowing it uses to gear its
portfolio, whilst the issuance, repurchase, or restructuring of
borrowing are for the Board to decide.
Borrowing and gearing risk is included in the risk control summary
report that is reviewed by the Board at each meeting. Additionally,
compliance with the Company’s investment policy guidelines
is continuously monitored by the Manager and reported to the
Board at each meeting.
INCOME/DIVIDEND RISK
The Company is subject to the risk that income generation from
its investments fails to reach the level of income required to meet
its objectives.
The Board monitors this risk through the review of detailed
income forecasts and comparison against budget. These are
contained within the Board papers and the Board considers the
level of income at each meeting.
SHARE PRICE RISK
There is a risk that the Company’s prospects and NAV may not be
fully reflected in the share price from time-to-time.
The share price is monitored on a daily basis and, at the request
of the Board, the Company is empowered to repurchase shares
within agreed parameters which are regularly reviewed with
the Company’s broker. The discount at which the shares trade
to NAV can be influenced by share repurchases. During the
year, the Company repurchased 1,104,800 shares for holding in
treasury (2021: 2,500,000).
Share price risk is included in the risk control summary report that
is reviewed by the Board at each meeting.
CORPORATE GOVERNANCE AND INTERNAL CONTROLS
RISK
The Board has delegated to third party service providers the
management of the investment portfolio, depositary and
custody services (which include the safeguarding of the assets),
An annual review of the control environments of all service
providers is carried out by the Company Secretary who provides
an assessment of these risks and the operation of the controls for
consideration by the Audit Committee and is formally reported to
and considered by the Board.
RELIANCE ON THE MANAGER AND OTHER THIRD PARTY
PROVIDERS RISK
The Company is reliant upon the performance of third party
service providers for its executive function and other service
provisions. The Company’s most significant contract is with
the Manager, to whom responsibility for management of
the Company’s portfolio is delegated. The Company has
other contractual arrangements with third parties to act as
administrator, company secretary, registrar, depositary and broker.
The Company’s operational structure means that all cyber risk
(information and physical security) arises at its third party
service providers, including fraud, sabotage or crime against
the Company. Failure by any service provider to carry out its
obligations to the Company in accordance with the terms of its
appointment could have a materially detrimental impact on the
operation of the Company and could affect the ability of the
Company to pursue successfully its investment policy and expose
the Company to risk of loss or to reputational risk.
In particular, the Manager performs services which are integral
to the operation of the Company. The Manager may be exposed
to the risk that litigation, misconduct, operational failures,
negative publicity and press speculation, whether or not it is
valid, will harm its reputation. Any damage to the reputation
of the Manager could result in counterparties and third parties
being unwilling to deal with the Manager and by extension the
Company. This could have an adverse impact on the ability of the
Company to pursue its investment policy.
The Board seeks to manage these risks in a number of ways:
–The Company Secretary reviews the performance and the
service organisation control reports of third party service
providers and reports to the Board on an annual basis.
–The Board reviews the performance of the Manager at every
Board meeting and otherwise as appropriate. The Board
has the power to replace the Manager and reviews the
management contract formally once a year.