267694 EdinburghIT AR 2024 WEB - Flipbook - Page 21
THE EDINBURGH INVESTMENT TRUST PLC / STRATEGIC REPORT / 19
PRINCIPAL RISKS AND
UNCERTAINTIES
RISK MANAGEMENT AND MITIGATION
MARKET RISK
The Manager (AIFM) is responsible for the portfolio
management of the Company and for exercising the risk
management function in respect of the Company. As part of
this risk management function, the AIFM maintains a register
of identified risks including emerging risks likely to impact
the Company. This is updated regularly, following discussions
with the Manager and highlighted to the Board.
All the Company’s investments are traded on recognised stock
exchanges, bar a very small number that have delisted/been
suspended since purchase. 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, a recurrence of a 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.
The Board, through the Audit Committee and with the
assistance of the Manager, 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 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 UK 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
are delegated to the Manager. The Board has carried out
a robust assessment of the principal and emerging risks
facing the Company, including those that would threaten its
business model, future performance, solvency or liquidity.
The following sets out a description of the principal
and emerging risks and how they are being managed or
mitigated.
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 prepared by the Manager and reviewed by the Board
at each meeting. Additionally, the Board receives reports
on the performance of the portfolio at each meeting. The
portfolio is positioned by the Portfolio Manager for medium
to long-term returns.
INVESTMENT PERFORMANCE RISK
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 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.
