Annual Financial Report
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M&G Credit Income Investment Trust plc (MGCI)
M&G Credit Income Investment Trust plc
Annual Report and audited Financial Statements for the year ended 31 December 2020
The full Annual Report and Accounts will shortly be available via the Company's website at www.mandg.co.uk/creditincomeinvestmenttrust or by contacting the Company Secretary at mandgcredit@linkgroup.co.uk.
The Directors present the results of the Company for the year ended 31 December 2020.
The third party research commissioned by the Company from Kepler, published on 26 March 2021, can be found at the following link: https://www.trustintelligence.co.uk/articles/fund-profile-m-g-credit-income-mar-2021 Company summary M&G Credit Income Investment Trust plc (the "Company") was incorporated on 17 July 2018 as a public company limited by shares. Admission to the London Stock Exchange's (LSE) main market for listed securities and dealings in its Ordinary Shares commenced on 14 November 2018. The Company is an investment trust within the meaning of section 1158 of the Corporation Tax Act (CTA) 2010. Financial highlights
a Alternative performance measure. Further information can be found on pages 108 to 109 of the full Annual Report and Accounts. Chairman's Statement
Performance I am delighted to report that your Company has exceeded the performance originally targeted at our Initial Public Offering (IPO). This target was to achieve an annualised dividend yield of LIBOR plus 2.5% (on the 100p issue price) from launch until 31 December 2019 and of LIBOR plus 4% (on the opening net asset value (NAV) per Ordinary Share) thereafter. Your Company's NAV at its launch on 14 November 2018, being the gross proceeds of the IPO less the IPO expenses, was 98.38p per Ordinary Share. The opening NAV on 1 January 2020 was 101.72p per Ordinary Share and the NAV on 31 December 2020 was 101.40p per Ordinary Share. Including dividends paid, the annualised NAV total return was 4.4% since launch although the NAV total return for the year to 31 December 2020 was 3.7%, reflecting the effects of the COVID-19 pandemic.
Your Company navigated the difficult conditions of 2020 with great success and with no material deterioration to the credit quality of its portfolio, showing our Investment Manager's skill in delivering on its objective of low asset value volatility while building our ability to pay a regular and attractive level of income. The results showed the Company's ability to produce high risk-adjusted returns from a predominately investment-grade portfolio.
Having begun the year with relatively benign economic conditions, 2020 will be remembered for the impact of the COVID-19 pandemic on economies and society. The first half of the year showed NAV per Ordinary Share falling to 93.69p on 31 March 2020 as a result of the indiscriminate market sell-off before recovering to finish at 97.23p on 30 June 2020. The Company had been defensively positioned going into the March sell-off which allowed our Investment Manager to benefit from the market weakness by purchasing attractively priced public corporate bonds and then realising gains as the market recovered.
During the second half of the year credit markets recovered steadily and our Investment Manager was able to take advantage of a reopened flow of attractively priced private debt opportunities. By 31 December 2020 the amount of private debt instruments in your Company's portfolio, including irrevocable commitments, had increased to 49.25% (versus 27.41% at 31 December 2019) with an additional investment of some 10% in illiquid public assets which are intended to be held to maturity. These are largely higher-yielding assets which will support the payment of the regular quarterly dividend increase already announced in respect of the 2021 financial year.
The Board is of the view that the portfolio is now appropriately positioned with regard to its dividend target set at launch. In accordance with the agreement previously notified to Shareholders, the management fee paid by the Company to the Investment Manager will increase with effect from 1 April 2021 from 0.5% to 0.7% per annum of the Company's net asset value.
Share issuance and discount management Your Directors believe that it is in the interests of shareholders for the Company to increase its assets under management over time as this should reduce its ongoing charges figure and provide greater market liquidity and diversification for holders. On 4 June 2020, given the favourable opportunities arising from the market dislocation due to the COVID-19 pandemic and the reopening of the private debt markets, the Company announced that it had issued and placed 14,745,770 Ordinary Shares at a price of 97.0p per Ordinary Share, raising £14.2 million net of expenses. This represented a premium to the then last published NAV (adjusted for the payment of the first quarter dividend) of 1.98%.
Subsequently, the Company's Ordinary Shares began to trade at a discount to NAV. Your Directors believe that this is not in the best interest of shareholders, both because the Company is unable to issue new shares and because existing shareholders are unable to value their holdings at or near to NAV. Accordingly, the Company announced on 18 November 2020 that it had given instructions to Winterflood Securities Limited to purchase the Company's Ordinary Shares, subject to certain pre-determined parameters and in accordance with the Company's discount management policy. As at 31 December 2020, 140,000 shares had been purchased and were held in treasury.
On 31 December 2020 the Ordinary Share price was 92.00p, representing a 9.27% discount to NAV as at that date.
Your Board is continuing to work with the Investment Manager in regard to the share price discount. To this end, the Company has commissioned third party research from Kepler Trust Intelligence which can be viewed at https://wwwtrustintelligence.co.uk/investor/articles/fund-researchinvestor-m-g-credit-income-retail-mar-2021. In addition, the Investment Manager has held many meetings with existing and potential investors to increase demand for the Company's shares. The most recent investor presentation can be viewed on the Company's website at www.mandg.co.uk/investor/funds/credit-income-investment-trust/gb00bfyyl325/. We have confidence that Winterflood will continue to purchase the Company's Ordinary Shares when it is effective to do so and the Board continues to consider other options available to it.
Dividends Your Board is pleased that the Company paid dividends in respect of the year ended 31 December 2020 in accordance with the target set at launch. The Company paid quarterly dividends totalling 4.28p per Ordinary Share in respect of the year as a whole. This represented a dividend yield of LIBOR plus 4% on the opening NAV as at 1 January 2020, adjusted for the last dividend paid on 26 February 2021; and a dividend yield of 4.7% on the Ordinary Share price on 31 December 2020. Total dividends paid since launch have been fully covered by earnings derived from income and capital gains.
Your Board believes that it should pay dividends from income and prior capital gains (including accumulated capital gains from previous years). It therefore proposes to continue hereafter with three, level quarterly interim dividends in respect of each financial year plus a variable, fourth interim dividend to be determined after each year end, which will take into account the net income over the whole financial year and, if appropriate, any capital gains.
The Company proposes to increase the first three interim quarterly dividends to be paid in respect of the 2021 financial year to an annual rate of LIBOR plus 3%, calculated by reference to the opening NAV as at 1 January 2021, adjusted for the payment of the last dividend in respect of the prior year.
The Company uses the average daily three-month LIBOR as its reference for the purposes of its targeted dividend rate. LIBOR is in the process of being phased out by 31 December 2021 in favour of a new measure called Sterling Overnight Index Average (SONIA). Your Board will announce in due course the way in which SONIA will be substituted for LIBOR for the purpose of guidance on future dividends as well as for benchmarking the Company's investment performance.
Environmental, Social and Governance (ESG) issues and UK exit from the European Union The information regarding ESG issues and the UK exit from the European Union can be found below.
Portfolio Manager In May the Company announced that Adam English had been appointed as Portfolio Manager following Jeremy Richards's retirement from full time employment. Robert Whitten and Yiu-Wai Cheung have been named as Deputy Fund Managers. The Board has worked closely with Adam and the wider investment team since the launch of the Company and they have our full confidence.
Changes to the Articles of Association The Board is proposing to make amendments to the Company's Articles of Association (the "Articles") to enable the Company to hold general meetings wholly or partially by electronic means and to give additional powers in respect of postponing or adjourning meetings in appropriate circumstances. The amendments are being sought to introduce flexibility to respond to challenges such as those posed by government restrictions on social interactions as a result of the COVID-19 pandemic, which have made it practically impossible at times for shareholders to attend general meetings in person.
The principal changes proposed to the Articles, and their effect, are set out in more detail on pages 40 to 41 of the full Annual Report and Accounts.
Annual General Meeting Arrangements The Company's Annual General Meeting will be held at 12:00 noon on Wednesday, 9 June 2021 at the offices of Herbert Smith Freehills LLP, Exchange House, Primrose Street, London, EC2A 2EG.
As at the date of this report, restrictions on gatherings and social distancing measures remain in place and, given the ongoing uncertainty and visibility on the level of Government guidelines in early June, the Board has again decided to proceed with this year's AGM, with the minimum quorum requirements of two members only present in person. Voting will be conducted by way of a poll. In the unlikely event of the situation changing, the Company will update shareholders through an announcement to the London Stock Exchange and on the Company's website.
The Board strongly advises that no shareholders attend the AGM in person. However, shareholders can be represented by the chairman of the meeting acting as their proxy. The Board therefore urges you to lodge your votes in respect of the meeting in advance, by completing your proxy forms this will ensure that your votes are registered. Shareholders are also invited to address any questions to the company secretary via email to mandgcredit@linkgroup.co.uk. The Board is aware that many shareholders welcome the views of the Investment Manager and a presentation from the Investment Manager will be uploaded to the Company's website on the day of the AGM for shareholders to view.
Outlook Your Company's portfolio is now approaching a good balance between higher-yielding private assets and the more liquid public assets which allow us to take advantage of market volatility and future opportunities. It is defensively positioned and it benefits from the flexibility provided by our currently undrawn £25 million revolving credit facility: together these should enable us to weather any future market shocks while having the firepower to purchase suitable assets as they arise.
Our Investment Manager believes that an annual total return, and thus ultimately a dividend yield, of LIBOR plus 4% will continue to be achievable in the future although there can be no guarantee that this will occur in any individual year.
The first quarter of the current year has started very well, with a NAV total return of over 2%, and our Investment Manager remains confident that it will continue to find attractive opportunities, particularly in private assets.
David Simpson Chairman
27 April 2021
Investment manager's report We are pleased to provide commentary on the factors that have impacted our investment approach over the last year, with particular reference to the performance and shape of the portfolio as we have sought to build it in accordance with the mandate agreed at IPO.
During 2020, we saw significant levels of volatility across financial markets. The broad recovery across asset classes has been remarkable, aided by swift and significant policy responses from governments and central banks. In March, the significant re-pricing across corporate bond markets presented attractive medium-term opportunities for investors with patient capital and the extensive resources required to evaluate individual opportunities.
The Investment Manager was able to use the initial period of market dislocation to increase credit exposure and yield in the portfolio. Asset valuations recovered in the second half of 2020, resulting in the NAV of 101.40p per Ordinary Share as at 31 December 2020 being above the NAV at launch.
For the year ended 31 December 2020, the Company declared dividends of 4.28p per Ordinary Share (of which 0.85p per Ordinary Share was paid in May 2020, 0.77p per Ordinary Share was paid in August 2020, 0.71p per Ordinary Share was paid in November 2020 and 1.95p per Ordinary Share paid in February 2021).
The portfolio is 79% invested in investment grade assets, with a weighted average credit rating across the whole portfolio of BBB. The annualised dividend yield in respect of last year was equivalent to an annual rate of 4% over LIBOR on the opening NAV (adjusted for the final interim dividend in respect of the period ended 31 December 2019). The NAV total return for the same period was 3.7%.
Portfolio activity and positioning The Company entered 2020 cautiously positioned. Attractively priced assets were hard to find as a result of tight spreads on corporate credit and low government bond yields, so we remained defensively positioned with allocations to high grade asset-backed securities (ABS) and covered bonds. The outbreak of COVID-19 in Europe led to a fast and dramatic repricing across all risk assets. The speed and severity of the spread widening across all sectors, regardless of credit quality or duration, was extraordinary. As a result, the NAV of the Company declined. However, this dislocation presented attractive opportunities in the public markets. We were able to use existing cash holdings alongside proceeds from the sale of ABS and covered bonds to redeploy into mispriced, longer dated, fixed rate investment grade and high yield corporate bonds. Private transactions were put on hold, with almost all lenders and borrowers awaiting some semblance of market stabilisation and the establishment of a "new normal" before re-engaging.
As a result of the fiscal and monetary policy measures implemented by governments and central banks around the world, investor confidence started to return by the end of the second quarter. As liquidity in the ABS market improved, we were able to continue adding credit risk to the portfolio and increase the yield by switching into longer dated, fixed rate bonds. The Company was able to add attractively priced new issues as companies sought to improve balance sheets and liquidity alongside bonds from the secondary market where valuations had become misaligned relative to the underlying credit fundamentals.
Towards the end of the second quarter, we saw the reopening of the private credit markets with a significant number of borrowers seeking finance. Those private transactions that came to market in the second half of the year were very attractive; improved covenants, more conservative structures and better pricing than prior to the start of the pandemic. The Company committed to a number of private deals in the second half of the year across a variety of sectors, including the first direct investment into the social housing/infrastructure sector. This project relates to the maintenance of residential dwellings in the London borough of Lambeth and the provision of green spaces; a community centre; and a district heating network. As at 31 December 2020, the private asset portion of the portfolio, including irrevocable commitments, had increased to 49.25% (versus 27.41% at 31 December 2019) with an additional investment of approximately 10% in illiquid publicly listed assets, which are intended to be held to maturity. There continues to be a strong pipeline of private lending opportunities. The Company increased it's holding in the M&G European Loan Fund ('ELF') in the second half of the year (11.98% as at 31 December 2020) as it offered good relative value to public high yield bonds. This loan portfolio was not immune from the fall in asset prices at the end of March and, whilst that NAV recovered in 2020, the loans market lagged the recovery seen in the public high yield market. This is a long-term holding intended to provide a steady and attractive stream of income.
Credit markets rallied strongly towards the end of 2020, bolstered by vaccine optimism, the removal of uncertainty over the US presidency and continued central bank support. Returns for the year as a whole finished in positive territory in both investment grade and high yield markets. Credit spreads in high yield markets ended the year higher than they were at the start of 2020, with investment grade credit spreads broadly unchanged despite the substantially different economic climate. In the public markets, we took the opportunity to reduce our exposure to sectors that may experience difficulty over the short-to-medium term, where spreads were no longer sufficiently wide enough to compensate for the associated risks. In addition, we sold some of the more defensive positions in the portfolio which had tightened significantly versus the long-term target of the Company. This improved the risk profile, realised capital gains and added to the yield of the portfolio The proceeds were used to purchase new private transactions.
We continue to hedge the interest rate risk of the fixed rate bonds in the portfolio to reduce the portfolio's sensitivity to changes to interest rates Gilt futures are used to maintain a modified duration of between 1 and 1.5 years. When the Gilt yields fall this position will detract from the portfolio performance however, in a rising yield environment, the hedging strategy will provide an offset to a fall in price of duration sensitive fixed rate bonds.
In June 2020, the Company raised an additional £14.2 million (net of expenses) via a placing of Ordinary Shares. The money raised was initially invested in a variety of public corporate bonds that were offering good relative value, but has since been redeployed into private and more illiquid public assets. In the second half of 2020, the Company entered into an unsecured revolving credit facility with State Street Bank International GmbH. It is intended that this will be used to provide liquidity for investing when it is unattractive to sell existing holdings. The facility will be particularly useful when there is a significant number of private investments due to settle within a short period.
Outlook In early 2021, investor sentiment is optimistic and appears to be assuming a smooth recovery, no doubt buoyed by the vaccine rollout and the agreement of the Brexit deal between the UK and the EU. This investor confidence, coupled with central bank support, has resulted in a rally in credit market spreads offset by an increase in Government yields across most developed markets.
Underlying NAV performance has had a strong start to 2021. In the first quarter of the year NAV total return was up by 2.02%, which compares well to the performance on fixed income indices such as the ICE BofA Sterling and Collateralised Index which fell by 4.48% and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index which rose by 1.51%. The Company performance compares well to these fixed income indices due to both its low interest rate risk, achieved by hedging the fixed-rate instruments in the portfolio, and to the tightening credit spread environment.
The Company is now reaching its long-term state of deployment and is delivering on its long-term performance objective set out at launch. The pipeline for new private investments remains strong with £32 million expressions of interest given with an average yield in line with the long term dividend policy of the Company. However, there has been some compression in illiquidity premia vs public markets as public market tightening is now beginning to be reflected in private transactions. Therefore, selecting the correct investments will be key.
Looking ahead, the Company will continue to sell strongly performing public bonds. These were generally bought at much wider spread levels in 2020 and will realise good capital gains. The cash raised will be redeployed into private assets which are being presented to us at attractive yield levels and will improve the income coverage of the dividend.
M&G Alternatives Investment Management Limited
27 April 2021
Portfolio analysis
Top 20 holdings
Geographical exposure
Portfolio overview
Source: State Street
Credit rating breakdown
Note: ELF is an open-ended fund managed by M&G which invests in leveraged loans issued by, generally, substantial private companies located in the UK and Continental Europe. ELF is not rated and the Investment Manager has determined an implied rating for this investment, utilising rating methodologies typically attributable to collateralised loan obligations. On this basis, 78% of the Company's investment in ELF has been ascribed as being investment grade, and 22% has been ascribed as being sub-investment grade. These percentages have been utilised on a consistent basis for the purposes of determination of the Company's adherence to its obligation to hold no more than 30% of its assets in below investment grade securities.
Strategic Review The Directors present the Strategic Report of the Company for the period ended 31 December 2020. The Strategic Report aims to provide Shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company during the period under review.
Business and status of the Company The Company was incorporated on 17 July 2018 and the Initial Public Offering (IPO) of the Company's shares took place on 14 November 2018.
The Company is registered in England and Wales as a public limited company and is an investment company within the terms of section 833 of the Companies Act 2006. The principal activity of the Company is to carry on business as an investment trust.
The Company has been approved by HM Revenue & Customs as an authorised investment trust under sections 1158 and 1159 of the Corporation Tax Act 2010. In the opinion of the Directors, the Company is directing its affairs so as to enable it to continue to qualify for such approval.
The Company's shares have a listing on the premium segment of the Official List of the FCA and trade on the London Stock Exchange's (LSE) main market for listed securities.
Investment objective The Company aims to generate a regular and attractive level of income with low asset value volatility.
Investment policy The Company seeks to achieve its investment objective by investing in a diversified portfolio of public and private debt and debt-like instruments ("Debt Instruments"). Over the longer term, it is expected that the Company will be mainly invested in private Debt Instruments, which are those instruments not quoted on a stock exchange.
The Company operates an unconstrained investment approach and investments may include, but are not limited to:
The Company invests primarily in Sterling denominated Debt Instruments. Where the Company invests in assets not denominated in Sterling, it is generally the case that these assets are hedged back to Sterling. Investment restrictions There are no restrictions, either maximum or minimum, on the Company's exposure to sectors, asset classes or geography. The Company, however, achieves diversification and a spread of risk by adhering to the limits and restrictions set out below.
The Company's portfolio comprises a minimum of 50 investments.
The Company may invest up to 30% of Gross Assets in below investment grade Debt Instruments, which are those instruments rated below BBB- by S&P or Fitch or Baa3 by Moody's or, in the case of unrated Debt Instruments, which have an internal M&G rating below BBB-.
The following restrictions will also apply at the individual Debt Instrument level which, for the avoidance of doubt, does not apply to investments to which the Company is exposed through collective investment vehicles:
a Secured Debt Instruments are secured by a first or secondary fixed and/or floating charge. b This limit excludes investments in G7 Sovereign Instruments.
For the purposes of the above investment restrictions, the credit rating of a Debt Instrument is taken to be the rating assigned by S&P, Fitch or Moody's, or in the case of unrated Debt Instruments, an internal rating by M&G. In the case of split ratings by recognised rating agencies, the second-highest rating will be used.
The Company typically invests directly, but it also invests indirectly through collective investment vehicles which are managed by an M&G Entity. The Company may not invest more than 20% of Gross Assets in any one collective investment vehicle and not more than 40% of Gross Assets in collective investment vehicles in aggregate. No more than 10% of Gross Assets may be invested in other investment companies which are listed on the Official List.
Unless otherwise stated, the above investment restrictions apply at the time of investment. Borrowings The Company is managed primarily on an ungeared basis although the Company may, from time to time, be geared tactically through the use of borrowings. Borrowings will principally be used for investment purposes, but may also be used to manage the Company's working capital requirements or to fund market purchases of Shares. Gearing represented by borrowing will not exceed 30% of the Company's Net Asset Value, calculated at the time of draw down, but is typically not expected to exceed 20% of the Company's Net Asset Value.
Hedging and derivatives The Company will not employ derivatives for investment purposes. Derivatives may however be used for efficient portfolio management, including for currency hedging.
Cash management The Company may hold cash on deposit and may invest in cash equivalent investments, which may include short- term investments in money market-type funds ("Cash and Cash Equivalents").
There is no restriction on the amount of Cash and Cash Equivalents that the Company may hold and there may be times when it is appropriate for the Company to have a significant Cash and Cash Equivalents position. For the avoidance of doubt, the restrictions set out above in relation to investing in collective investment vehicles do not apply to money market type funds.
Changes to the investment policy Any material change to the Company's investment policy set out above will require the approval of Shareholders by way of an ordinary resolution at a general meeting and the approval of the Financial Conduct Authority (FCA).
Investment strategy The Company seeks to achieve its investment objective by investing in a diversified portfolio of public and private debt and debt-like instruments of which at least 70% is investment grade. The Company is mainly invested in private debt instruments. This part of the portfolio generally includes debt instruments which are nominally quoted but are generally illiquid. Most of these will be floating rate instruments, purchased at inception and with the intention to be held to maturity or until prepaid by issuers; shareholders can expect their returns from these instruments to come primarily from the interest paid by the issuers.
The remainder of the Company's portfolio is invested in cash, cash equivalents and quoted debt instruments, which are more readily available and which can generally be sold at market prices when suitable opportunities arise. These instruments may also be traded to take advantage of market conditions. Fixed rate instruments will often be hedged in order to protect the portfolio from adverse changes in interest. Shareholders can expect their returns from this part of the portfolio to come from a combination of interest income and capital movements.
Investment process The investment process for the Company consists of a number of stages: the decision to invest, monitoring of investments and ongoing engagement and divestment.
Investment decision-making is undertaken by the Investment Manager, who determine whether an investment is appropriate for the Company's investment mandate. Investments are only made after extensive research based on information, research and analysis from the Investment Manager's in-house analysts and external sources. The investment process is designed to ensure that the risk and return profile of investments is fully understood.
Regular monitoring of investments enables determination of whether an investment remains appropriate. This includes monitoring the performance of investments by fund managers, analysts and internal control and governance processes. The Investment Manager proactively engages with relevant parties on any issue which may, potentially, affect an investment's ability to deliver sustainable performance in line with expectations.
At some point, the Investment Manager may decide to divest from an investment (or the investment may complete in line with agreed terms, including pre-payment). This might be for a variety of reasons including; the investment being no longer suitable for the investment mandate, the outcome of engagement being unsatisfactory or as a result of the investment team's valuation assessment. Investment decision making is only undertaken by the fund managers designated by the Investment Manager.
As part of the investment process, full consideration is given to sustainability risk, as set our in more detail below.
Key performance indicators In order to measure the success of the Company in meeting its objectives and policy, and to evaluate the performance of the Investment Manager, the Directors take into account the following key performance indicators (KPIs):
a From the date of Initial Public Offering (IPO) 14 November 2018. b Alternative performance measures. Please see pages 108 to 109 of the full Annual Report and Accounts for further information.
Share price discount or premium to NAV The share price discount to NAV as at 31 December 2020 was (9.27)% (31 December 2019: 4.21% premium). During the year to 31 December 2020 the shares traded at an average discount to NAV of 1.59%.
Dividend yield The Company paid dividends during the year on a quarterly basis. The second dividend of 1.65p per Ordinary Share in respect of the period ended 31 December 2019 was paid on 28 February 2020.
The first quarterly dividend in respect of the year ended 31 December 2020 of 0.85p per Ordinary Share in respect of the year ended 31 December 2020 was paid on 28 May 2020. The second quarterly dividend of 0.77p per Ordinary Share was paid on 28 August 2020 and the third quarterly dividend of 0.71p per Ordinary Share was paid on 27 November 2020.
The fourth quarterly dividend of 1.95p per Ordinary Share was paid on 26 February 2021. The total dividend declared per share for the year ended 31 December 2020 was 4.28p (period ended 31 December 2019: 3.74p).
The annualised dividend yield for the year was 4.65%, based on the closing share price on 31 December 2020 (for the period since IPO, based on the closing share price on 31 December 2019, the yield was 3.13%).
Portfolio performance In support of the Company's investment objective, the Board monitors the portfolio performance against the benchmark of a NAV total return of LIBOR plus 4% per annum. In addition, performance is assessed against a number of total return indices in public investment grade and high yield markets.
In addition, progress of deployment of funds into private assets is monitored alongside the balance of fixed to floating rate coupons, yield to maturity and modified duration of the portfolio. Further details are provided in the Chairman's statement and Investment Manager's report above.
Ongoing charge The Board reviews the costs of running the Company calculated using the Association of Investment Companies' (AIC) methodology for the ongoing charges. Risk management Role of the Board The Directors have overall responsibility for risk management and internal control within the Company. They recognise that risk is inherent in the Company's operation and that effective risk management is an important element in the success of the organisation. The Directors have delegated responsibility for the assurance of the risk management process and the review of mitigating controls to the Audit Committee.
The Directors, when setting the risk management strategy, also determine the nature and extent of the significant risks and their risk appetite in implementing this strategy.
In arriving at its judgement of what risks the Company faces, the Board has considered the Company's operations in the light of the following factors:
Principal risks The Company is exposed to a variety of risks that could cause the valuation of its assets and/or the income from the investment portfolio to fluctuate. The Board, through delegation to the Audit Committee, has undertaken a robust assessment and review of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Accordingly, the Audit Committee has taken into consideration the risks posed to the Company by the societal and economic impacts of governmental responses to the ongoing COVID-19 pandemic and considers this to be a major ongoing risk event which has the potential to affect the likelihood of occurrence and materiality of impact of the Company's principal risks on its net asset value and performance. The pandemic has triggered, and may continue to trigger, increased volatility in terms of global risk asset valuations as well as presenting operational challenges for the Company's service providers as they respond to various limitations on free movement of staff imposed by governments across the world. The Board continues to receive regular reporting from the Company's major service providers and does not anticipate a fall in the level of service. The duration and ultimate impact of the pandemic is not presently possible to predict and the Board will continue to monitor and report on material developments on an ongoing basis.
These risks are formally documented in the Company's risk register, so that the risks identified and the controls in place to mitigate those risks can be monitored. Any new or emerging risks that are identified and that are considered to be of significance are also included in the Company's risk register together with any mitigating actions required.
The Board will continue to assess these risks on an ongoing basis In relation to the UK Code, the Board is confident that the procedures that the Company has put in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the reporting period.
The key risks identified by the Board, and the associated key mitigants and controls, are set out below:
UK exit from the European Union The UK officially left the EU on 31 January 2020 ("Brexit") and the agreed transitional arrangements, where all relevant rules and regulations remained in place, ended on 31 December 2020. A post-Brexit agreement on trade and other issues was agreed just a week before the transitional period ended, although, there is still no established bilateral agreement relating to the provision of cross border financial services.
The Directors believe the activities by the Company will continue to be largely unchanged by the UK's ongoing relationship with the EU, at least for the foreseeable future.
Viability statement The UK Financial Reporting Council (FRC) maintains the UK's Corporate Governance Code ("the Code") to promote high quality corporate governance and reporting. Under the Code, the Directors are required to state that in their opinion the Company's resources are adequate for it to continue in business for at least 12 months from the date of the Financial Statements and, therefore, it is appropriate that the Financial Statements be prepared on a going concern basis. This statement appears below.
The Directors are also required, in accordance with provision 31 of the 2018 UK Corporate Governance Code, to assess the prospects for the Company over a longer period than the 12 months referred to in the going concern guidance and statement. The Directors have elected to review the viability of the Company for a three-year period by reference to the weighted average life of the Debt Instruments in the Company's portfolio.
In assessing the viability of the Company over this three-year period, the Directors have considered a number of factors. Most importantly, they have weighed the characteristics of a closed-end fund and the investment policy of the Company against the risks the Company faces as set out in this Strategic Report. The Directors have also taken account in their assessment of the uncertainty around the potential duration of the COVID-19 pandemic, its impact on the global economy and the prospects for the Company's portfolio.
The Directors have assumed that neither the closed-ended structure of the Company, the investment policy it follows nor the risks it faces are likely to change substantially, or for the worse with respect to the viability of the Company, over the three-year period they have selected for the purposes of this viability statement. The Directors have also assumed that the Company will continue to maintain a sufficient level of liquidity and to generate substantial income for the foreseeable future in order to meet its liabilities. As the Directors are ultimately responsible for ensuring that the investment policy of the Company is followed by the Investment Manager, they are confident in making these assumptions about the future of the Company.
The Company is an investment trust, not a trading company, and it invests in a diversified portfolio. As a closed-ended fund, it is not subject to redemptions by Shareholders prior to, potentially, the 2024 exit opportunity.
Before the Company's fifth annual general meeting in 2024, the Board will formulate and submit to Shareholders proposals (which may constitute a tender offer or other method of distribution) to provide Shareholders an opportunity to realise the value of their Ordinary Shares at NAV per Ordinary Share less costs. In all circumstances, the Board will seek to balance the interests of both continuing Shareholders and those electing to realise their investment with a view to minimising any reduction in the overall size of the Company.
The Company's portfolio also generates substantial levels of income to meet its expenses, which are largely fixed overheads that represent a small percentage of its net assets. Based on their assessment of the nature of the Company, its investment policy and financial resources, the Directors have a reasonable expectation that the Company will be able to continue in operation and to meet its liabilities as they fall due over the next three years.
Going concern statement The activities of the Company, together with the factors likely to affect its future development, including its performance, financial position, cash flows and liquidity position, are described in the Strategic Report.
In addition, the Company's policies and processes for managing its key financial risks are described in note 14.
As at 31 December 2020, the Company's total assets less current liabilities were £146.63m (31 December 2019: £132.23m). The Directors have reviewed the financial projections of the Company from the date of this report, which shows that the Company will be able to generate sufficient cash flows in order to meet its liabilities as they fall due.
As a consequence, the Directors believe that the Company continues to be well placed to manage its business risks successfully. In assessing the going concern basis of accounting, the Directors have also considered the COVID-19 pandemic and the impact this may have on the Company's investments and the Company's NAV. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future and for a period of 12 months from the date of the approval of this Annual Report. Accordingly, they continue to adopt the going concern basis in preparing this Annual Report and Accounts. Investment management and third-party service provider arrangements The Board has overall responsibility for the Company's activities, including the review of investment activity and performance and the control and supervision of all suppliers of services to the Company, including the Investment Manager. It is also responsible for the determination of the Company's investment policy and strategy and the Company's system of internal and financial controls, including ensuring that commercial risks and financing needs are properly considered and that the obligations of a public limited company are adhered to.
To assist the Board in the operations of the Company, arrangements have been put in place to delegate authority for the performance of day-to-day operations of the Company to the Investment Manager and other third-party service providers. The Board has appointed the Investment Manager to manage the Company's investment portfolio within guidelines set by the Board.
The Investment Manager is in frequent contact with the Board and supplies the Directors with regular updates on the Company's activities and detailed reports at each Board meeting.
Investment Manager The Company has appointed M&G Alternatives Investment Management Limited (the "Investment Manager") to act as the Company's Alternative Investment Fund Manager (AIFM) for the purposes of the AIFM Directive and, accordingly, the Investment Manager is responsible for providing discretionary portfolio management and risk management services to the Company.
The Investment Management Agreement dated 26 September 2018 is for an initial term of five years from 14 November 2018 and thereafter subject to termination on not less than six months' written notice by either party. The Investment Management Agreement can be terminated at any time in the event of the insolvency of the Company or the Investment Manager or in the event that the Investment Manager ceases to be authorised and regulated by the FCA (if required to be so authorised and regulated to continue to carry out its duties under the Investment Management Agreement).
The Investment Manager is entitled to receive from the Company an investment management fee, which is calculated and paid quarterly in arrears at an annual rate of 0.5% per annum of the prevailing published NAV until such time as the Board agrees that the portfolio is appropriately positioned to meet the Company's medium term annualised dividend target of LIBOR plus 4%.
Subsequent to the year-end the Board agreed that the portfolio was appropriately positioned to meet the Company's medium term annualised dividend target of LIBOR plus 4%. On 2 March 2021 a side letter to the Investment Management Agreement was executed to reflect that with effect from 1 April 2021 the Investment Management Fee would be calculated at the rate of 0.7% per annum of the prevailing published NAV.
Where the Company invests in a collective investment vehicle that is managed or advised by an M&G entity, the Investment Manager reduces its investment management fee by the amount of any equivalent management fee that is charged to such collective investment vehicle or such entity rebates its management fee such that the Investment Manager ensures the Company is not charged twice. The above arrangement does not apply to any other fees or expenses charged to the Company or any such entity in which it invests.
The Investment Manager is also entitled to be paid half of any arrangement fee charged by the Company to the issuer of a Debt Instrument in which the Company invests. The balance of any arrangement fee is retained by the Company.
Continuing appointment of Investment Manager As at the date of this Report, the Directors are of the opinion that the Investment Manager has executed the Company's investment strategy according to the Board's expectations. Accordingly, the Directors believe that the continuing appointment of M&G Alternatives Investment Management Limited as the Investment Manager of the Company, on the terms agreed, is in the best interests of the Company and its Shareholders as a whole.
Administrator Under an Administration Agreement dated 26 September 2018, the Company has appointed State Street Bank and Trust Company to act as administrator. The administrator provides day-to-day administration of the Company and is also responsible for the Company's general administrative functions, including the calculation and publication of the NAV and maintenance of the Company's accounting and statutory records.
The Administration Agreement is terminable, inter alia, upon not less than six months' written notice. The Administration Agreement is also terminable immediately upon the occurrence of certain standard events, including the insolvency of the Company or the Administrator or a party committing a material breach of the Administration Agreement (where such breach has not been remedied within 30 calendar days of written notice being given).
Depositary Under a Depositary Agreement dated 26 September 2018, the Company has also appointed State Street Trustees Limited as depositary to provide depositary services to the Company, which will include safekeeping of the assets of the Company. The Depositary is permitted to delegate (and authorise its delegates to sub-delegate) the safekeeping of the assets of the Company.
The Administrator and Depositary are entitled to a combined fee (the "State Street Fee"). The State Street Fee shall be up to 0.08% of the NAV per annum. The fee is subject to a minimum ratea, whereby if the NAV is less than £250 million, the fee will be calculated as if the NAV were £250 million. The State Street Fee is calculated monthly and payable monthly in arrears.
a The minimum rate is waived until 31 December 2021.
Custodian The Depositary has delegated safekeeping duties as set out in the AIFM Directive and the FCA Handbook to State Street Bank & Trust Company, whom it has appointed as global sub-custodian. Registrar The Company entered into a Registrar Agreement dated 26 September 2018 with Link Group to provide registrar services in relation to the transfer and settlement of shares. Under the agreement, the Registrar is entitled to a fee calculated on the basis of the number of Shareholders and the number of transfers processed (exclusive of any VAT). In addition, the Registrar is entitled to certain other fees for ad hoc services rendered from time to time. The Registrar Agreement is for an initial period of one year from the date of Initial Admission and thereafter shall automatically renew for successive periods of 12 months unless or until terminated by either party (a) at the end of the initial period, provided written notice is given to the other party at least 6 months prior to the end of the initial period or (b) at the end of any successive 12-month period, provided written notice is given to the other party at least six months prior to the end of such successive 12-month period.
In April 2021 the Company entered into a new Registrar Agreement with Link Group to provide registrar services in relation to the transfer and settlement of shares. Effective from 1 May 2021, under the terms of the agreement a fixed annual fee of £13,000 will be payable. The Registrar Agreement is for a period of three years until 30 April 2024 when the fee will increase in line with RPI.
Company Secretary The Company entered into a Company Secretarial Services Agreement dated 26 September 2018 appointing Link Company Matters Limited ("Company Matters") as Company Secretary to provide the company secretarial functions required by the Companies Act. Under the terms of the Company Secretarial Services Agreement, the aggregate fees payable to Company Matters was £61,920 per annum. Following the initial period of 12 months the Company Secretarial Agreement automatically renews for successive periods of 12 months unless or until terminated by either party, provided written notice is given at the end of any successive 12-month period, provided written notice is given to the other party at least six months prior to the end of such successive 12-month period.
With effect from 1 September 2020, the Company entered into an addendum to the Company Secretarial Services Agreement under the terms of which the annual fee was increased to £65,000 and a one-off fee of £5,000 was payable in relation to the services provided between September 2019 and August 2020.
Section 172 Statement
Overview The Directors' overarching duty is to act in good faith and in a way that is the most likely to promote the success of the Company as set out in Section 172 of the Companies Act 2006. In doing so, Directors must take into consideration the interests of the various stakeholders of the Company and the impact the Company has on the community and the environment; take a long-term view on consequences of the decisions they make; and aim to maintain a reputation for high standards of business conduct and fair treatment between the members of the Company.
Fulfilling this duty naturally supports the Company in achieving its investment objective and helps to ensure that all decisions are made in a responsible and sustainable way. In accordance with the requirements of the Companies (Miscellaneous Reporting) Regulations 2018, the Company explains how the Directors have discharged their duty under Section 172 below.
To ensure that the Directors are aware of and understand their duties, they are provided with the relevant information as part of their induction, as well as receiving regular and ongoing updates and training on the relevant matters. They also have continued access to the advice and services of the Company Secretary and, when deemed necessary, the Directors can seek independent professional advice.
The schedule of Matters Reserved for the Board, as well as the Terms of Reference of its committees are reviewed on at least an annual basis and further describe the Directors' responsibilities and obligations, and include any statutory and regulatory duties. The Audit Committee has the responsibility for the ongoing review of the Company's risk management systems and internal controls and, to the extent that they are applicable, risks related to the matters set out in Section 172 are included in the Company's risk register and are subject to periodic and regular reviews and monitoring.
Decision-making The Board considers the impact that any material decision will have on all relevant stakeholders to ensure that it is making a decision that promotes the long-term success of the Company, whether this be in relation to dividends, new investment opportunities, potential future fundraisings etc.
Stakeholders The Board seeks to understand the needs and priorities of the Company's stakeholders and these are taken into account during all its discussions and as part of its decision-making. The Board has considered which parties should be deemed to be stakeholders of the Company. As the Company is an externally managed investment company and does not have any employees or customers, its key stakeholders comprise its Shareholders, regulators (including service party regulators) and service providers. The section below discusses why these stakeholders are considered of importance to the Company and the actions taken to ensure that their interests are taken into account.
The above mechanisms for engaging with stakeholders are kept under review by the Directors and will be discussed on a regular basis at Board meetings to ensure that they remain effective.
Examples of the Board's principal decisions during the year, and how the Board fulfilled its duties under Section 172 of the Act, and the related engagement activities are set out below.
Culture The Directors are of the opinion that establishing and maintaining a healthy corporate culture amongst the Board and in its interaction with the Investment Manager, Shareholders and other stakeholders will support the delivery of its purpose, values and strategy. The Board seeks to promote a culture of openness, transparency and integrity through ongoing dialogue and engagement with its stakeholders, principally the Investment Manager.
The Board strives to ensure that its culture is in line with the Company's purpose, values and strategy and will consider this through its annual evaluation processes. There are also policies and procedures in place to assist with maintaining a culture of good governance that include those relating to Directors' dealings in the Company's shares, conflicts of interest, bribery and tax evasion.
The Board seeks to appoint appropriate third-party service providers and evaluates their services on a regular basis as described on above. Their ongoing appointments are not only reflective of their performance by reference to their contractual and service level obligations, but also take into account the extent to which their individual corporate cultures align with those of the Company. The Board considers the culture of the Investment Manager and other stakeholders, including their policies, practices and behaviour, through regular reporting from these stakeholders and in particular during the annual review of the performance and continuing appointment of all service providers.
Employees, human rights and social and community issues The Board recognises certain requirements under the Companies Act 2006 to detail information about human rights, employees and community issues, including information about any policies it has in relation to these matters and the effectiveness of these policies. These requirements are not in practice applicable to the Company as it has no employees, all the Directors are non-executive and it has outsourced all operational functions to third-party service providers. The Company has therefore not reported further in respect of these provisions.
Under listing rule 15 4 29(R), the Company, as a closed-ended investment fund, is exempt from complying with the Task Force on Climate-related Financial Disclosures.
Board diversity As at 31 December 2020, the Board of Directors of the Company comprised three male directors and one female director. The Board is an enthusiastic supporter of diversity in its composition, recognizing that it brings additional benefits to the Company and its stakeholders beyond specialist skills, knowledge, experience, backgrounds and perspectives. As a result, the Board's views on diversity principles are aligned with those expressed in the Hampton-Alexander Review regarding the proportion of women on boards and also the Parker Review about ethnic representation on boards, amongst other published commentaries. It is the intention of the Board to work towards enhancement of its diversity alongside the maintenance of key skillsets as the Company grows its size over the medium term, and developments in this area will be reported to stakeholders periodically.
It is the Board's policy that any future Board appointments will be made on the basis of merit against the specific criteria for the role being offered and there will be no discrimination on the grounds of gender, race, ethnic or national origins, religion, sexual orientation, age or disabilities.
Environmental, social and governance (ESG) issues The Company has no employees, property or activities other than investments, so its direct environmental impact is minimal. In carrying out its activities and in its relationships with service providers and their employees, the Company aims to conduct itself responsibly, ethically and fairly.
The day-to-day management of the Company's investing activities is delegated to the Investment Manager.
The Investment Manager has a long-term track record of commitment to responsible investment principles, and became a signatory to the United Nations-supported PRI Association ("the PRI"), the world's leading organisational proponent of responsible investing, more than eight years ago. By virtue of that status, the Investment Manager has committed itself to adhering to the following overarching principles in the conduct of its investment management activities.
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.
As a signatory member to the PRI, the Investment Manager is committed to providing detailed ESG transparency to market participants in relation to its business activities. The most recent transparency report is available at https://www.unpri.org/signatorydirectory/mandg-investments/1483.article.
Given its commitment to responsible investment, the Investment Manager has allocated significant human and financial capital to the implementation of the PRI principles.
Sustainability risk and investment process The Board believes that sustainability risk can have a material impact on long term investment outcomes. Sustainability risk means exposure to an environmental, social or governance ("ESG") event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment. The Company's goal is to generate the best possible risk adjusted returns for investors, taking into account all factors that influence investment performance, and therefore ESG issues are incorporated into investment decisions wherever they have a potentially meaningful impact on risk or return.
ESG factors themselves are, generally, non-financial considerations that may impact the risk, volatility and long-term return of individual investments, as well as markets as a whole. Individual investments can have both a positive and negative impact on society and the environment.
In certain contexts, ESG factors may be referred to as sustainability factors. Due to the nature of its stated investment strategy, the Company does not seek to actively promote ESG factors and does not seek to maximise portfolio alignment with ESG factors, but it nevertheless remains exposed to sustainability risks.
Impacts on the Company following the occurrence of a sustainability risk event may be numerous and will vary depending on the specific investment risk, geographical region and asset class. In general, where a sustainability risk event occurs in respect of an individual asset, there is the potential for a negative impact on, or an entire loss of, its value.
The following types of sustainability risks have the potential to materially impact the returns of the Company over time :
The potential impacts of sustainability risk events on the Company's portfolio include degradation of issuer cashflow and consequent inability to meet debt servicing obligations, and inability to continue to actively and competitively participate in its chosen markets. Sustainability risks may also affect the credit quality of an issuer. The Company has exposure to higher-yielding private debt arrangements, which may include debt securities of smaller companies, some of which may be privately owned, and thus may be less transparent in respect of environmental, social and governance and sustainability-related disclosures.
In order to ensure that sustainability risks are properly considered within the investment decision making and risk monitoring processes, to the extent that they represent potential or actual material risks and/or opportunities for maximising long-term risk-adjusted returns, the Investment Manager follows a series of environmental, social and governance investment principles described in the Investment Manager's ESG Principles Statement, which can be accessed via the Investment Manager's website.
Greenhouse gas emissions The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emission-producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013. Modern slavery The Company, as an investment vehicle, does not provide goods or services in the normal course of business and does not have customers. The Directors consider that the Company is thus not required to make a slavery or human trafficking statement under the Modern Slavery Act 2015. The Board considers the Company's supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
Approval The Strategic Report was approved by the Board at its meeting on 27 April 2021. The Chairman's Statement together with the Investment Manager's Report form part of this Strategic Report.
David Simpson Chairman
27 April 2021
Statement of Directors' responsibilities in respect of the Annual Report and audited Financial Statements
The Directors are responsible for preparing the Annual Report and audited Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are 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, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial report
The Directors confirm that to the best of their knowledge:
The 2018 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and audited Financial Statements are fair, balanced and understandable In order to reach a conclusion on this matter, the Board has requested that the Audit Committee advise on whether it considers that the Annual Report and audited Financial Statements fulfil these requirements The process by which the Audit Committee has reached these conclusions is set out in the Corporate Governance Statement in the full Annual Report and Accounts. As a result, the Board has concluded that the Annual Report and audited Financial Statements for the year ended 31 December 2020, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.
On behalf of the Board
David Simpson Chairman
27 April 2021
NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 December 2020 but is derived from those accounts. The statutory accounts will be delivered to the Registrar of Companies in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts at www.mandg.co.uk/creditincomeinvestmenttrust. Income statement
a Return figures have been calculated using weighted average shares for the year 1 January 2020 to 31 December 2020 and for the period 14 November 2018 to 31 December 2019. The total column of this statement represents the Company's profit and loss account. The "Revenue" and "Capital" columns represent supplementary information provided under guidance issued by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. The Company has no other comprehensive income and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the period.
The notes below form an integral part of these Financial Statements.
Statement of financial position
The notes below form an integral part of these Financial Statements.
Approved and authorised for issue by the Board of Directors on 27 April 2021 and signed on its behalf by:
David SimpsonChairman Company registration number: 11469317 27 April 2021
Statement of changes in equity
The notes below form an integral part of these Financial Statements.
Cash flow statement
a Receipts from the sale of, and payments to acquire investment securities have been classified as components of cash flows from operating activities because they form part of the company's dealing operations.
The notes below form an integral part of these Financial Statements.
Notes to the Financial Statements
The Company is a public limited company incorporated in England and Wales, with the registered office of Beaufort House, 51 New North Road, Exeter EX4 4EP.
The significant accounting policies, as set out below, have all been applied consistently throughout the year and the preceding period.
a) Basis of accounting
The Financial Statements have been prepared on a going concern basis under the historical cost convention, modified to include certain items at fair value, and in accordance with United Kingdom Accounting Standards, including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" (United Kingdom Generally Accepted Accounting Practice) and the Statement of Recommended Practice issued by the Association of Investment Companies ('SORP') in October 2019 "Financial Statements of Investment Trust Companies and Venture Capital Trusts".
The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and for at least the next 12 months from the date of approval of these financial statements. In forming this opinion, the Directors have considered the potential impact of COVID-19 and viability of the Company. The Directors have reviewed the liquidity of the investment portfolio, financial projections, the level of income and expenses, and key service providers' operational resilience in making their assessment. Further information is given in the Viability Statement and the Going Concern Statement above.
The functional and presentational currency of the Company is pounds sterling because that is the currency of the primary economic environment in which the Company operates.
All values are recorded to nearest thousands, unless otherwise stated.
b) Financial instruments
Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument.
Financial liabilities are classified according to the substance of the contractual arrangements entered into.
Financial assets and liabilities All financial assets and liabilities are classified as at fair value through profit or loss (FVTPL), and are initially measured at fair value (which is normally the transaction price excluding transaction costs), unless the arrangement constitutes a financing transaction. If an arrangement constitutes a financing transaction, the financial asset or financial liability is measured at the present value of the future payments discounted at a market rate of interest for a similar Debt Instrument.
Changes in the fair value of financial instruments held at FVTPL and gains and losses on disposal are recognised as capital.
Financial assets and liabilities are offset in the statement of financial position only when there exists a legally enforceable right to set off the recognised amounts and the Company intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
With the exception of some hedging instruments, other Debt Instruments not meeting conditions of being 'basic' financial instruments are measured at FVTPL.
Commitments to make and receive loans that meet the conditions mentioned above are measured at cost (which may be nil) less any impairment. They are recorded and disclosed at the date of the legal commitment and recognised upon funding.
Financial assets are derecognised only when (a) the contractual rights to the cash flows from the financial asset expire or are settled, (b) the Company transfers to another party substantially all of the risks and rewards of ownership of the financial asset, or (c) the Company, despite having retained some, but not all, significant risks and rewards of ownership, has transferred control of the asset to another party.
Financial liabilities are derecognised only when the obligation specified in the contract is discharged, cancelled or expires.
Derivative financial instruments Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in the Income Statement. Derivative returns are recognised as revenue or capital depending on their nature.
Fair value measurement The best evidence of fair value is a quoted price for an identical asset in an active market. When quoted prices are unavailable, the price of a recent transaction for an identical asset provides evidence of fair value as long as there has not been a significant change in economic circumstances or a significant lapse of time since the transaction took place. If the market is not active and recent transactions of an identical asset on their own are not a good estimate of fair value, the fair value is estimated by using a valuation technique.
c) Impairment of assets
Assets, other than those measured at fair value, are assessed for indicators of impairment at each balance sheet date. If there is objective evidence of impairment, an impairment loss is recognised in profit or loss as described below.
Non-financial assets An asset is impaired where there is objective evidence that, as a result of one or more events that occurred after initial recognition, the estimated recoverable value of the asset has been reduced. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use.
Where indicators exist for a decrease in impairment loss previously recognised for assets other than goodwill, the prior impairment loss is tested to determine reversal. An impairment loss is reversed on an individual impaired asset to the extent that the revised recoverable value does not lead to a revised carrying amount higher than the carrying value had no impairment been recognised.
d) Tax
Current tax is accounted for at the appropriate rate of corporation tax. The tax accounting treatment follows the principal amounts involved.
Deferred tax is recognised in respect of all timing differences between the treatment of certain items for tax and accounting purposes that have originated but not reversed at the balance sheet date.
Due to the Company's status as an investment trust company and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments. e) Income and expenses
Interest from Debt Instruments is recognised as revenue by reference to the coupon payable adjusted to spread any premium or discount on purchase over its remaining life. Other interest income is recognised as revenue on an accruals basis. Income from investment funds is recognised in revenue when the right to receive it is established. Expenses not incidental to the purchase or sale of investments are recognised on an accruals basis and charged to revenue. Rebate of management fees incurred by investment funds managed by M&G Alternatives Investment Management Limited are recognised on an accrual basis as revenue or capital in accordance with the underlying scheme's distribution policy.
f) Finance costFinance costs are recognised on an accrual basis and are charged to revenue.
g) Foreign currency
Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date.
Other exchange differences are recognised in profit or loss in the period in which they arise.
All gains and losses on the translation of foreign currency are recognised as revenue or capital in the Income Statement depending on the underlying nature of the transactions.
h) Cash and Cash Equivalents
Cash and Cash Equivalents are defined as cash and short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to insignificant risk of change in value.
They also include unfunded commitments on investments not classified under financial assets.
i) Share capital and reservesCalled up ordinary share capital Called up ordinary share capital represents the nominal value of Ordinary Shares issued.
Share premium Share premium represents the excess over nominal value of shares issued, net of expenses of the share issue, except where amounts have been cancelled in accordance with section 610 of the Companies Act 2006 and transferred to special distributable reserve.
Special distributable reserve Share premium of £99,000,001 was cancelled on 12 February 2019 and transferred to the special distributable reserve, in accordance with section 610 of the Companies Act 2006. The Company may, at the discretion of the Board, pay all or part of any future dividends out of this special distributable reserve, taking into account the Company's investment objective. The costs of repurchasing Ordinary Shares has been funded by the special distributable reserve.
Capital reserve Capital reserve reflects any:
This reserve can also be used for distributions by way of a dividend.
Revenue reserve Revenue reserve reflects all income and expenditure which are recognised in the revenue column of the Income Statement and is distributable by way of dividends.
j) Investment management fee
Investment management fees are recognised on an accruals basis and are charged to revenue.
k) Accounting judgements, estimates and assumptions
The preparation of the financial statements requires the Directors to make judgements, estimates and assumptions that affect the amounts recognised in the Financial Statements. However, uncertainty about these judgements, assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in future periods.
Whilst estimates are based on best judgement using information and financial data available the actual outcome may differ from these estimates.
No significant judgements, estimates or assumptions have been required in the preparation of the accounts for the current period.
a Return figures have been calculated using weighted average shares for the period 1 January 2020 to 31 December 2020. b Return figures have been calculated using weighted average shares for the period 14 November 2018 (date of IPO) to 31 December 2019.
The amount outstanding at the year/period end is shown in note 10.
The basis for calculating the investment management fee is set out above.
a Non-audit fees (including VAT) payable to the auditor in respect of the agreed upon procedures on the interim as of 30 June 2020 are £12,000 (30 June 2019: £21,000). The agreed upon procedures did not constitute an audit engagement or a review of the Half Year Report. In addition, for the period ending 31 December 2019 non-audit service fees of £81,600 (including VAT) were paid to the auditor in relation to the reporting accountant role for the Company's IPO, recognised in the share premium account.
On 19 October 2020 the Company entered into a £25 million revolving credit facility agreement with State Street Bank International GmbH. As at 31 December 2020 no amounts were drawn down.
Set out below are the total dividends in respect of the year/period, which forms the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered.
On 28 January 2021 the Board declared a fourth interim dividend of 1.95p per Ordinary Share for the year ended 31 December 2020, which was paid on 26 February 2021 to Ordinary Shareholders on the register on 5 February 2021. The ex-dividend date was 4 February 2021.
In accordance with FRS 102, Section 32, 'Events After the End of the Reporting Period', the 2020 fourth interim dividend has not been included as a liability in this set of financial statements.
The corporation tax rate was 19.0%. The tax charge for the year differs from the charge resulting from applying the standard rate of corporation tax in the UK for an investment trust company. The differences are explained below:
As at 31 December 2020, the Company had unutilised management expenses of £nil (2019: £nil) carried forward. Due to the Company's status as an investment trust and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on capital gains and losses arising on the revaluation or disposal of investments.
The Company received £68,430,000 (2019: £43,715,000) from investments sold in the year. The book cost of these investments when they were purchased was £65,840,000 (2019: £41,832,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.
11 Called up share capital
The analysis of the capital reserve is as follows:
The above split in capital reserve is shown in accordance with provisions of the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts', 2019.
12 Special distributable reserve
The share premium of £99,000,001 was cancelled on 12 February 2019 and transferred to the special distributable reserve, in accordance with section 610 of the Companies Act 2006. The Company may, at the discretion of the Board, pay all or part of any future dividends out of this special distributable reserve, taking into account the Company's investment objective. The ordinary dividends of 0.13p from the May 2020 XD and 0.14p from the August 2020 XD date was paid out of the special distributable reserve.
13 Related party transactions
M&G Alternatives Investment Management Limited, as Investment Manager, is a related party to the Company. The management fee payable to the Investment Manager for the year is disclosed in the income statement, in note 4 and amounts outstanding at the year end are shown in note 10.
The Company holds an investment in M&G European Loan Fund which is managed by M&G Investment Management Limited. At the year end this was valued at £17,287,306 (31.12.2019: £14,018,558) and represented 11.98% (31.12.2019: 10.81%) of the Company's investment portfolio.
The Directors of the Company are related parties. The details of the fees payable to Directors and details of Directors' shareholdings are given in the Directors' Remuneration Report in the full annual report.
14 Financial instruments
In pursuing the Company's objectives, the Company accepts market price risk and interest rate risk, in relation to the portfolio of investments. Since the Company's investment objectives are to deliver returns over the long term, transactions with the sole intention of realising short-term returns are not undertaken.
The quantitative data disclosed is representative of the Company's exposure to risk throughout the year.
The AIFM attempts to gain the best and most consistent returns for clients via the following:
Portfolio management decisions are based on an in-house credit assessment and instrument rating which is carried out by the AIFM's credit analysts.
Market risk Market risk embodies the potential for both losses and gains and includes foreign currency risk, interest rate risk and price risk, which are discussed in detail under separate headings within this note.
Market risk arises mainly from uncertainty about future values of financial instruments influenced by other price, currency and interest rate movements. It represents the potential loss the Company may suffer through holding market positions in investments in the face of market movements.
Management of market risk The Board meets formally at least four times a year with the Investment Manager to review, inter alia, the Company's strategy and performance, the composition of the investment portfolio and the management of risk. The investment management team has responsibility for monitoring the portfolio, which is selected in accordance with the Company's investment objective and seeks to ensure that any investments meet an acceptable risk/reward profile.
Market risk arising from foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
The fair values of the Company's monetary items which have foreign currency exposure at 31 December 2020 are shown below.
The Company is exposed to risks that the exchange rate of its reporting currencies relative to other currencies may change in a manner which has an adverse effect on the value of the portion of the Company's assets which are denominated in currencies other than their own currencies. Typically, the fund manager will substantially hedge these risks using foreign exchange forward contracts.
The following table illustrates the sensitivity of revenue and capital return on ordinary activities after tax and net assets attributable to Shareholders to an increase of or decrease of 5% in exchange rates. A 5% increase in the value of the fund's currency exposure would have the effect of increasing the return and net assets by £1,727,000 (2019: £797,000). A 5% decrease would have an equal and opposite effect.
Market risk arising from interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
The Company's investments may be subject to interest rate risk. When interest rates decline, the value of fixed rate obligations can be expected to rise, and conversely when interest rates rise, the value of fixed-rate obligations can be expected to decline. In general, if prevailing interest rates fall significantly below the interest rates on any Debt Investments held by the Company, such investments are more likely to be the subject of prepayments than if prevailing rates remain at or above the rates borne by such investments.
Since the global financial crash there has been a sustained period of very low levels of central bank-set interest rates. It is expected that central banks will raise their interest rates in the near future. For investments that have a fixed rate of return, any such interest rate rises may negatively impact the returns on the investments and the returns realised by the investors.
The following table illustrates the sensitivity of revenue and capital return on ordinary activities after tax and net assets attributable to shareholders to an increase or decrease of 2% in interest rates. As at 31 December 2020 the prevailing base rate was 0.1%. The decrease in interest rates illustrated below of 2% is reasonably possible based on observation of market conditions and historic trends. The sensitivity analysis is based on the Company's bond holdings at each reporting date, with all other variables held constant.
Market risk arising from other price risk Market price risk includes changes in market prices, other than those arising from interest rate risk, which may affect the value of investments.
The following table illustrates the sensitivity of revenue and capital return on ordinary activities after tax and net assets attributable to shareholders to an increase or decrease of 10% in the fair value of the Company's investments. This level of change is considered to be reasonably possible based on observation of market conditions and historical trends. The sensitivity analysis is based on the Company's investments at each reporting date, with all other variables held constant.
Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company invests in illiquid public and private Debt Instruments. Such investments may be difficult to value or realise (if at all) and therefore the market price that is achievable for such investments might be lower than the valuation of these assets and as reflected in the Company's published NAV per Ordinary Share.
The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required are as follows:
Credit risk Credit risk is the risk that one party to a financial instrument or contract will cause a financial loss for the other party by failing to discharge an obligation. In the case of invested assets this is the potential for the reduction in the value of investments which relates to the risk of an issuer being unable to meet its obligations, whilst for trading activities this relates to the risk that the counterparty to any contract the Company enters into being unable to meet its obligations causing loss.
The Investment Manager maintains a credit risk policy and standards which set out the assessment and measurement of credit risk, compliance with which is monitored, and exposures and breaches are reported daily by the Risk team. The policy is reviewed on an annual basis to ensure that it remains fit for purpose and relevant to changes in the risk environment.
Investment mandates specify explicitly the counterparty risk appetite for cash on deposit, foreign exchange and OTC trading whilst other counterparty risk is taken for the purposes of efficient portfolio management and reduction in risk.
Management of counterparty risk To mitigate counterparty risk the AIFM follows the standards below:
Credit risk exposure The following amounts shown in the statement of financial position represent the maximum exposure to credit risk at the year/period end.
No debtors are past their due date and none have been written down or deemed to be impaired.
Fair values of financial assets and financial liabilities All financial assets and liabilities are either carried at fair value or the amount in the Statement of Financial Position is a reasonable approximation of fair value. 15 Fair value hierarchy Under FRS 102 an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the levels stated below.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.
The determination of what constitutes 'observable' requires significant judgement by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary and provided by independent sources that are actively involved in the relevant market.
The financial assets measured at FVTPL are grouped into the fair value hierarchy as follows:
Valuation techniques for Level 3 The debt investments within the Company utilise a number of valuation methodologies such as a discounted cash flow model, which will use the relevant credit spread and underlying reference instrument to calculate a discount rate. Unobservable inputs typically include spread premiums and internal credit ratings.
Some debt instruments are valued at par and are monitored to ensure this represents fair value for these instruments. On a monthly basis these instruments are assessed to understand whether there is any evidence of market price movements, including impairment or any upcoming refinancing.
In addition, some are priced by a single broker quote, which is typically the traded broker, who provides an indicative mark.
Level 3 reconciliation The following table shows a reconciliation of all movements in a fair value of financial instruments categorised within Level 3 between the beginning and the end of the financial year:
aDuring the year ended 31 December 2020, following a review of the levels for some of the bonds, they have moved from Level 2 to Level 3. 16 Capital commitments There were outstanding unfunded investment commitments of £3,494,000 (2019: £2,675,000) at the year end.
17 Capital management policies and procedures
The Company's capital management objectives are:
The capital of the company consists of equity, comprising issued capital, reserves and retained earnings.
The Board monitors and reviews the broad structure of the company's capital on an ongoing basis.
This review includes:
Company information Directors (all non-executive) David Simpson (Chairman) Richard Boléat (Chairman of the Audit Committee, Senior Independent Director) Mark Hutchinson Barbara Powley
AIFM and Investment Manager M&G Alternatives Investment Management Limited (MAGAIM)1 10 Fenchurch Avenue, London EC3M 5AG Website: www.mandg.co.uk Telephone: +44 (0) 800 390 390
Administrator State Street Bank and Trust Company1 20 Churchill Place, London E14 5HJ
Company Secretary and registered office Link Company Matters Limited Beaufort House, 51 New North Road, Exeter EX4 4EP Telephone: 01392 477 500
Broker Winterflood Securities Limited1 The Atrium, Cannon Bridge House, 25 Dowgate Hill, London EC4R 2GA
Solicitors Herbert Smith Freehills LLP1 Exchange House, Primrose Street, London EC2A 2EG
Auditor Deloitte LLP Saltire Court, 20 Castle Street, Edinburgh EH1 2DB
Registrar and transfer office Link Group Shareholder Services Department 10th Floor, Central Square, 29 Wellington Street, Leeds LS1 4DL
Telephone: 0371 664 0300 (Calls are charged at the standard geographic rate and will vary by provider Calls outside the United Kingdom will be charged at the applicable international rate.) Email: shareholderenquiries@linkgroup.co.uk Website: www.linkgroup.eu
Depositary State Street Trustees Limited1 20 Churchill Place, London E14 5HJ
Custodian State Street Bank and Trust Company 20 Churchill Place, London E14 5HJ
Banker State Street Bank International GmbH Brienner Straße 59, 0333 Munich, Germany
Association of Investment Companies (AIC) The Company is a member of the AIC, which publishes monthly statistical information in respect of member companies.
The AIC can be contacted on 020 7282 5555, enquiries@theaic.co.uk or visit the website: www.theaic.co.uk
Company website
1 Authorised and regulated by the Financial Conduct Authority.
Glossary
Asset: Anything having commercial or exchange value that is owned by a business, institution or individual.
Asset backed security (ABS): A security whose income payments and value are derived from and collateralised by a specified pool of underlying assets.
Asset class: Category of assets, such as cash, company shares, fixed income securities and their sub-categories, as well as tangible assets such as real estate.
Association of Investment Companies (AIC): The UK trade body that represents investment managers. It works with investment managers, liaising with government on matters of taxation and regulation, and also aims to help investors understand the industry and the investment options available to them.
Basis points (bps): A common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
Bond: A loan in the form of a security, usually issued by a government or company, which normally pays a fixed rate of interest over a given time period, at the end of which the initial amount borrowed is repaid.
Callable bond: A bond that can be redeemed (in other words, called) by the issuer before its maturity date. The price at which the issuer buys back the bond is normally higher than its issue price. A bond is usually called when interest rates fall, so that the issuer can refinance its debt at the new, lower interest rates.
Capital: Refers to the financial assets, or resources, that a company has to fund its business operations.
Capitalisation: The total market value of all of a company's outstanding shares.
CTA: Corporation Tax Act.
Closed-ended: A term used to describe an investment company whose capital is fixed and whose shares are not generally redeemable at the option of a holder.
Comparative sector: A group of investment companies with similar investment objectives and/or types of investment, as classified by bodies such as the AIC or Morningstar(TM). Sector definitions are mostly based on the main assets an investment company should invest in, and may also have a geographic focus. Sectors can be the basis for comparing the different characteristics of similar investment companies, such as their performance or charging structure.
Consumer Prices Index (CPI): An index used to measure inflation, which is the rate of change in prices for a basket of goods and services. The contents of the basket are meant to be representative of products and services we typically spend our money on.
Convertible bonds: Fixed income securities that can be exchanged for predetermined amounts of company shares at certain times during their life.
Corporate bonds: Fixed income securities issued by a company. They are also known as bonds and can offer higher interest payments than bonds issued by governments as they are often considered more risky.
Credit: The borrowing capacity of an individual, company or government. More narrowly, the term is often used as a synonym for fixed income securities issued by companies.
Credit default swaps (CDS): Are a type of derivative, namely financial instruments whose value, and price, are dependent on one or more underlying assets. CDS are insurance-like contracts that allow investors to transfer the risk of a fixed income security defaulting to another investor.
Credit rating: An independent assessment of a borrower's ability to repay its debts. A high rating indicates that the credit rating agency considers the issuer to be at low risk of default; likewise, a low rating indicates high risk of default. Standard & Poor's, Fitch and Moody's are the three most prominent credit rating agencies. Default means that a company or government is unable to meet interest payments or repay the initial investment amount at the end of a security's life.
Credit spread: The difference between the yield of a corporate bond, a fixed income security issued by a company, and a government bond of the same life span. Yield refers to the income received from an investment and is expressed as a percentage of the investment's current market value.
Debt instrument: A formal contract that a government, a business or an individual can use to borrow money. Debt instruments outline the detailed conditions of the loan, such as the amount and schedule of payment of interest, the length of time before the principal is paid back, or any guarantees (collateral) that the borrower offers. Any type of debt can be a debt instrument -- from bonds and loans to credit cards.
Default: When a borrower does not maintain interest payments or repay the amount borrowed when due.
Derivatives: Financial instruments whose value, and price, are dependent on one or more underlying assets. Derivatives can be used to gain exposure to, or to help protect against, expected changes in the value of the underlying investments. Derivatives may be traded on a regulated exchange or traded over the counter.
Developed economy / market: Well-established economies with a high degree of industrialisation, standard of living and security.
Dividend: Dividends represent a share in the profits of the company and are paid out to a company's shareholders at set times of the year.
Emerging economy or market: Economies in the process of rapid growth and increasing industrialisation. Investments in emerging markets are generally considered to be riskier than those in developed markets.
Episode: A phase during which investors allow their emotions to affect their decision making, which can cause financial markets to move irrationally.
Equities: Shares of ownership in a company.
Ex-dividend, ex-distribution or XD date: The date on which declared distributions or dividends officially belong to underlying investors.
Exposure: The proportion of an investment company invested in a particular share/fixed income security, sector/region, usually expressed as a percentage of the overall portfolio.
Fixed income security: A loan in the form of a security, usually issued by a government or company, which normally pays a fixed rate of interest over a given time period, at the end of which the initial amount borrowed is repaid.
Floating rate notes (FRNs): Securities whose interest (income) payments are periodically adjusted depending on the change in a reference interest rate.
Gearing: Is a measure of financial leverage that demonstrates the degree to which the Investment Trust's operations are funded by equity capital versus creditor financing.
Gilts: Fixed income securities issued by the UK Government.
Government bonds: Fixed income securities issued by governments, that normally pay a fixed rate of interest over a given time period, at the end of which the initial investment is repaid.
Hard currency (bonds): Refers to bonds denominated in a highly traded, relatively stable international currency, rather than in the bond issuer's local currency. Bonds issued in a more stable hard currency, such as the US dollar, can be more attractive to investors where there are concerns that the local currency could lose value over time, eroding the value of bonds and their income.
Hedging: A method of reducing unnecessary or unintended risk.
High yield bonds: Fixed income securities issued by companies with a low credit rating from a recognised credit rating agency. They are considered to be at higher risk of default than better quality, i.e. higher rated fixed income securities but have the potential for higher rewards. Default means that a company or government is unable to meet interest payments or repay the initial investment amount at the end of security's life.
Index: An index represents a particular market or a portion of it, serving as a performance indicator for that market.
Index-linked bonds: Fixed income securities where both the value of the loan and the interest payments are adjusted in line with inflation over the life of the security. Also referred to as inflation-linked bonds.
Inflation: The rate of increase in the cost of living. Inflation is usually quoted as an annual percentage, comparing the average price this month with the same month a year earlier.
Investment grade bonds: Fixed income securities issued by a company with a medium or high credit rating from a recognised credit rating agency. They are considered to be at lower risk from default than those issued by companies with lower credit ratings. Default means that a company or government is unable to meet interest payments or repay the initial investment amount at the end of a security's life.
Investment trust: An investment trust is a form of collective investment fund found mostly in the United Kingdom. Investment trusts are closed-end funds and are constituted as public limited companies.
IRR: Internal Rate of Return.
IPO: Initial Public Offering. The process of offering shares of a private corporation to the public.
Issuer: An entity that sells securities, such as fixed income securities and company shares.
Leverage: When referring to a company, leverage is the level of a company's debt in relation to its assets. A company with significantly more debt than capital is considered to be leveraged. It can also refer to an investment company that borrows money or uses derivatives to magnify an investment position.
LIBOR: The three-month GBP London Interbank Borrowing Rate is the rate at which banks borrow money from each other (in UK pounds) for a three-month period.
Liquidity: A company is considered highly liquid if it has plenty of cash at its disposal. A company's shares are considered highly liquid if they can be easily bought or sold since large amounts are regularly traded.
Local currency (bonds): Refers to bonds denominated in the currency of the issuer's country, rather than in a highly traded international currency, such as the US dollar. The value of local currency bonds tends to fluctuate more than bonds issued in a hard currency, as these currencies tend to be less stable.
Long position: Refers to ownership of a security held in the expectation that the security will rise in value.
Macroeconomic: Refers to the performance and behaviour of an economy at the regional or national level. Macroeconomic factors such as economic output, unemployment, inflation and investment are key indicators of economic performance. Sometimes abbreviated to 'macro'.
Maturity: The length of time until the initial investment amount of a fixed income security is due to be repaid to the holder of the security.
Mezzanine tranche: A generally small layer of corporate debt positioned between the senior tranche (mostly AAA) and a junior tranche (unrated, typically called equity tranche).
Modified duration: A measure of the sensitivity of a fixed income security, also called a bond, or bond fund to changes in interest rates. The higher a bond or bond fund's modified duration, the more sensitive it is to interest rate movements.
Monetary policy: A central bank's regulation of money in circulation and interest rates.
Morningstar(TM): A provider of independent investment research, including performance statistics and independent investment company ratings.
Near cash: Deposits or investments with similar characteristics to cash.
Net asset value (NAV): An investment company's net asset value is calculated by taking the current value of its assets and subtracting its liabilities.
NAV total return: A measure showing how the net asset value (NAV) per share has performed over a period of time, taking into account both capital returns and dividends paid to shareholders.
The AIC shows NAV total return as a percentage change from the start of the period. It assumes that dividends paid to shareholders are reinvested at NAV at the time the shares are quoted ex-dividend.
NAV total return shows performance which isn't affected by movements in discounts and premiums. It also takes into account the fact that different investment companies pay out different levels of dividends.
Non-executive director (NED): A non-executive director is a member of a company's board of directors who is not part of the executive team. A non-executive director typically does not engage in the day-to-day management of the organisation, but is involved in policymaking and planning exercises.
Official List: The Official List (or UKLA Official List) is the list maintained by the Financial Conduct Authority in accordance with Section 74(1) of the Financial Services and Markets Act 2000 (the Act) for the purposes of Part VI of the Act.
Ongoing charges figure: The ongoing charges figure includes charges for management of the fund; administration services; and services provided by external parties, which include depository, custody and audit, as well as incorporating the ongoing charge figure from funds held in the portfolio (taking into account any rebates). The ongoing charges figure (as a percentage of shareholders' funds) is an annualised rate calculated using average net assets over the period in accordance with the Association of Investment Companies' (AIC) recommended methodology.
Options: Financial contracts that offer the right, but not the obligation, to buy or sell an asset at a given price on or before a given date in the future.
Overweight: If an investment company is 'overweight' in a stock, it holds a larger proportion of that stock than the comparable index or sector.
Payment date: The date on which dividends will be paid by the investment company to investors.
Private debt instruments: These instruments not tracked on a stock exchange and typically issued to small groups of institutional investors.
Public debt instruments: These instruments refers to assets that are listed on a recognised exchange.
REIT (real estate investment trust): A REIT is a company that owns, operates or finances income-producing real estate.
Retail Prices Index (RPI): A UK inflation index that measures the rate of change of prices for a basket of goods and services in the UK, including mortgage payments and council tax.
Securitise/securitisation: The creation and issuance of tradeable securities, such as bonds, that are backed by the income generated by an illiquid asset or group of assets. By pooling a collection of illiquid assets, such as mortgages, securities backed by the mortgages' income payments can be packaged and sold to a wider range of investors.
Senior tranche: The highest tranche of a debt security, i.e. the one deemed least risky. Any losses on the value of the security are only experienced in the senior tranche once all other tranches have lost all their value. For this relative safety, the senior tranche pays the lowest rate of interest.
Short position: A way for an Investment Manager to express his or her view that the market might fall in value.
Short dated corporate bonds: Fixed income securities issued by companies and repaid over relatively short periods.
Short dated government bonds: Fixed income securities issued by governments and repaid over relatively short periods.
Spread duration: A measure of the portfolio's sensitivity to changes in credit spreads.
Sub-investment grade bonds: Fixed income securities issued by a company with a low rating from a recognised credit rating agency. They are considered to be at higher risk from default than those issued by companies with higher credit ratings. Default means that a company or government is unable to meet interest payments or repay the initial investment amount at the end of a security's life.
Swap: A swap is a derivative contract where two parties agree to exchange separate streams of cash flows. A common type of swap is an interest rate swap to hedge against interest rate risk.
Synthetic inflation-linked bonds: Refers to securities created using a combination of assets to simulate the characteristics of inflation-linked bonds. By buying inflation-linked government bonds and selling protection against companies defaulting on their debts, using credit default swaps, the combined synthetic investment will behave similarly to a physical inflation-linked bond, had one been issued. Synthetic inflation-linked bonds are usually created where a company does not have any inflation- linked bonds in issue.
Tap issuance programme: A method of share issuance whereby the Company issues shares over a period of time, rather than in one sale. A tap issue allows the Company to make its shares available to investors when market conditions are most favourable.
Total return: The term for the gain or loss derived from an investment over a particular period. Total return includes income (in the form of interest or dividend payments) and capital gains.
Treasury shares: Shares that the company bought back from the marketplace and it keeps in its treasury; they do not count for the distribution of dividends or the calculation of earnings per share or net asset value per share. Also known as treasury stock.
Valuation: The worth of an asset or company based on its current price.
Volatility: The degree to which a given security, investment company, fund, or index rapidly changes. It is calculated as the degree of deviation from the norm for that type of investment over a given time period. The higher the volatility, the riskier the security tends to be.
Weighted average life (WAL): The asset-weighted average number of years to final maturity of the portfolio, based on the final maturity for all assets/exposures.
Yield: This refers to either the interest received from a fixed income security or to the dividends received from a share. It is usually expressed as a percentage based on the investment's costs, its current market value or its face value. Dividends represent a share in the profits of a company and are paid out to the Company's shareholders at set times of the year.
Yield to maturity: The total return anticipated on the portfolio if the underlying bonds are held until maturity.
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| ISIN: | GB00BFYYL325, GB00BFYYT831 |
| Category Code: | ACS |
| TIDM: | MGCI |
| LEI Code: | 549300E9W63X1E5A3N24 |
| OAM Categories: | 1.1. Annual financial and audit reports |
| Sequence No.: | 101560 |
| EQS News ID: | 1189539 |
| End of Announcement | EQS News Service |
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