Annual Financial Report

City Merchants High Yield Trust Limited Annual Financial Report Announcement For the year ended 31 December 2014 FINANCIAL INFORMATION AND PERFORMANCE STATISTICS AT AT 31 DECEMBER 31 DECEMBER 2014 2013 Total Return Net Asset Value† +5.0% +13.3% Share price +8.5% +18.5% Ongoing Charges† 1.02% 1.02% Dividend for the year 10p 10p Year End Information 31 DECEMBER 31 DECEMBER % 2014 2013 CHANGE Net asset value per share 183.40p 184.12p -0.4 Share price 189.25p 184.00p +2.9 Premium/(discount) per share 3.2% (0.1%) Gearing† Gross gearing nil nil Net cash 6.5% 5.5% CHAIRMAN'S STATEMENT The Company performed well in 2014 despite continuing volatility in bond markets and the increasing difficulty of sourcing quality high yield paper at good yields. For the year ended 31 December 2014, the total NAV return was 5.0% compared with the Investment Management Association Sterling Strategic Bond sector return of 6.3%. The Manager's Investment Report summarises the market background and portfolio strategy for the year, including how the portfolio is positioned and outlook. The Company continues to produce an attractive level of income for shareholders. We were able to meet our dividend target of 10p in respect of the financial year, matching last year's total, and hope to repeat this in the coming year. The Board believes the portfolio remains well positioned to continue to provide an attractive level of income for shareholders. There is potential for further capital appreciation but also for some disappointment. Demand for the Company's shares proved to be strong with the result that the shares traded at a premium to NAV for most of the year. As a result, I am delighted to report that 8,026,132 ordinary shares (almost 10% of share capital) were issued in the year, with approximately £15 million of capital raised. The issue price was at an average premium to NAV of 1.5% and the resultant enhancement to NAV was 0.8% after costs. Since the year end a further 1,200,000 shares have been issued. The Directors will once again be asking shareholders to renew the authority to issue shares under special resolution 4 at the forthcoming AGM. However, given the rate at which the Company has been issuing shares, which the Board hopes will continue, the Board is seeking authority to issue up to 20% of its share capital instead of 10% as it has in the past. This is being done as a precaution against exhausting this authority prior to the next year's AGM. Notwithstanding the increased shareholder authority sought, the Company is prohibited from issuing more than 10% of its share capital in any 12 month period without publishing a prospectus and, as such, any issues in excess of 10% would only take place after publication of a prospectus. In July 2014 the Company announced the appointment of Rhys Davies as Deputy Portfolio Manager to assist Paul Read and Paul Causer. Mr Davies has considerable experience of the Company's portfolio and Mr Read and Mr Causer continue to be joint lead portfolio managers. Readers will notice that the Investment Objective and Policy wording on page 7 of the Annual Financial Report has been changed slightly to clarify the delineation between the objective and the policy and to emphasise that the Company's investments are mainly in fixed income securities. As mentioned in my Half-Yearly statement, the Company worked with its Manager on the effective implementation of the Alternative Investment Fund Managers Directive (AIFMD) during the year and the appointment of the required depositary for the safekeeping of the Company's investments. It is not expected or intended that the new arrangements will result in any change to the way the Company's assets are invested. Following relaxation of the UK tax rules on company residence, your Directors have taken legal advice on changing the Company's Articles of Association to exclude the restrictions as to where meetings can be held. Accordingly, we ask shareholders to vote in favour of special resolution 7 to change the Articles to permit the Company to hold meetings in locations other than Jersey. If the resolution is passed it is intended that future AGMs will be held in London, as most shareholders reside in the UK, rather than continuing with the current practice of holding the AGM in Jersey and a separate shareholder meeting in the UK. Annual General Meeting (AGM) The AGM will be held at the offices of R&H Fund Services (Jersey) Limited, Ordnance House, 31 Pier Road, St. Helier, Jersey JE4 8PW, at 10.30 am on 25 June 2015. All of the resolutions are described in detail in the Directors' Report on pages 51 to 53 of the Annual Financial Report. As all the Directors were elected at the 2013 AGM, no directors are due for re-election this year. In addition to the usual ordinary resolutions to receive this annual report and re-elect the auditor, there are five items of special business, two of which have been set out above and the remaining three annual resolutions are: • ordinary resolution 3 to continue the Company; • special resolution 5 to renew the authority to buy back up to 14.99% of the Company's issued ordinary shares; and • special resolution 6 that enables the Company to call general meetings (other than AGMs) on 14 days' notice. Mainland Shareholder Meeting Shareholders should note that, as last year, in addition to the AGM in Jersey an opportunity is being provided to pose questions on the annual report and hear from the portfolio managers at a meeting to be held in London at 11.00 am on 23 June 2015. This additional shareholder meeting will be held in Invesco Perpetual's offices on the first floor of 43-45 Portman Square, London W1H 6LY. Clive Nicholson Chairman 1 April 2015 . STRATEGIC REPORT FOR THE YEAR ENDED 31 DECEMBER 2014 MANAGER'S INVESTMENT REPORT Market Background 2014 was a period of mixed returns for high yield bonds. Demand for income remained strong, but economic growth deteriorated in the Eurozone and global inflation was lower than the market had anticipated at the start of the year. As the market adjusted to the new economic outlook the timing of future interest rate hikes was pushed out. This changing economic backdrop favoured more interest rate sensitive bonds and core government and investment grade corporate bonds outperformed high yield. Within high yield performance was also skewed towards higher quality, more interest rate sensitive bonds. In the second half of the year we started to see a divergence in the performance of European and US high yield bonds with Europe outperforming. In Europe, deteriorating economic growth and low inflation increased the pressure on the European Central Bank (ECB) to implement quantitative easing (QE). As expectations that the ECB would need to implement QE increased, government bonds rallied strongly. In turn this benefitted higher quality corporate bonds, which tend to have a higher sensitivity to interest rate changes. Concerns about economic growth reinforced the trend toward quality, with the lowest rated high yield bonds coming under pressure. During the second half of the year a sharp fall in crude oil prices accelerated the decline in inflation. The impact of lower oil prices has been particularly hard felt in the US high yield market, which has a high exposure to energy companies. This has increased the divergence in the performance of US and European high yield markets. According to data from Merrill Lynch, European high yield bonds had a total return for the year of 5.8%. The aggregate yield for the asset class fell 17bps, from 5.07% to 4.88%. BB rated bonds returned 7.9% while CCC and below returned -2.7%. These returns compare to 12.6% for sterling investment grade corporate bonds (a higher duration as well as higher quality market) and 14.7% for gilts. US high yield returned 2.7% while German Bunds returned 10.7%. (All returns sterling hedged.) 2014 was another strong year for European high yield issuance. Barclays estimate there was a total of €69 billion issued in European currencies, down just 1.6% on the record breaking levels of 2013. Much of the issuance was skewed toward the April to July quarter during which time €31.6 billion was issued. The primary market was much quieter during the second half of the year as investors' preference shifted toward higher quality bonds and the cost of funding increased. Although overall default rates remain low there were a number of credit events through the year, including Portuguese banking group Banco Espirito Santo, UK telecoms company Phones 4U and Spanish multinational company Abengoa. These events caused short term spikes in the overall level of market volatility. Portfolio Strategy For the year ended 31 December 2014, the NAV total return on the ordinary shares of the Company was 5.0%. The NAV per share fell by 0.72p to 183.4p. A total dividend of 10p has been paid for the year. We began the year positioned defensively, with a relatively high allocation to cash. Exposure was focused on high quality well established companies rated as high yield, as well as high yielding investment grade names. Other than financials, we did not see much value in investment grade corporate bonds and, to us, it seemed difficult to build a convincing investment thesis for high yield bonds to appreciate much from the levels they had already attained. This overall defensive stance was maintained through the year, although we did use the weakness in high yield markets during late summer/autumn to add some selective high yield exposure. We have not employed gearing in the portfolio. Our loan facility remains inexpensive and we will use it if we see an opportunity to add value in a market correction. Many of our holdings are in high quality European banks that have the defensive qualities we want while also providing a reasonably attractive level of yield. This exposure is held across the capital structure although the largest weighting is in subordinated debt. Given the market's concerns about economic growth, this typically cyclical sector underperformed the broader corporate bond market over the year. However, when viewed in terms of the reward to risk, we think that we are still better rewarded for the combination of credit and subordination risk on these instruments than for taking credit risk in conventional corporate bonds. We also have holdings in hybrid capital instruments and convertible bonds. Our hybrids are across sectors including insurance, telecoms and utilities. We believe the subordination risk of these more junior debt instruments is attractive in the context of these companies' relatively strong balance sheets. Many of the securities we hold are in investment grade names. We are holding convertible bonds which we think offer attractive levels of income as well as giving the portfolio some sensitivity to the equity market. We will continue to seek opportunities to add yield to the portfolio where we consider that the balance of reward to risk is attractive. Outlook Our outlook remains cautious. We think that the high yield bond market is relatively highly valued and has limited potential for further capital appreciation. We think that, although the demand for income will remain an important factor in total returns across bond markets, duration is once again likely to be the dominant factor. In this context the economic backdrop remains relatively supportive: inflation is low while economic growth is generally weak and this should allow central banks to remain accommodative for some time to come. However, with a large part of the investment universe already reflecting this benign outlook the opportunity for disappointment is, in our view, not insignificant. Paul Read Paul Causer Rhys Davies Portfolio Managers Deputy Portfolio Manager 1 April 2015 . BUSINESS REVIEW Strategy and Business Model City Merchants High Yield Trust Limited is a Jersey domiciled investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. The business model the Company has adopted to achieve its objective has been to contract investment management and administration to appropriate external service providers, who are subject to oversight by the Board. The principal service providers are: - From 22 July 2014, Invesco Fund Managers Limited (the `Manager') to manage the portfolio in accordance with the Board's strategy. Prior to 22 July 2014, Invesco Asset Management Limited (IAML) was the Manager and, in practice, IAML continues to manage the portfolio under delegated authority; and - R&H Fund Services (Jersey) Limited to provide company secretarial and general administration services. The Company also has contractual arrangements with third parties to act as registrar, corporate broker and, since 22 July 2014, depositary. Investment Management As noted above, the Manager provides investment management and certain administrative services to the Company. The agreement is terminable by either party giving no less than three months' prior written notice and subject to earlier termination without compensation in the event of a material breach of the agreement or the insolvency of either party. The management fee is payable quarterly in arrear and is equal to 0.1875% of the value of the Company's total assets under management less current liabilities at the end of the relevant quarter. In addition, the Manager is paid a fixed fee of £22,500 plus RPI per annum for administrative services. The change of Manager in July 2014 did not affect the notice period or fee arrangements. The portfolio managers responsible for the day-to-day management of the portfolio are Paul Read and Paul Causer. In addition, Rhys Davies was appointed as the deputy portfolio manager on 3 July 2014. The Manager's Responsibilities The Directors have delegated to the Manager the responsibility for the investment management activities of the Company, for seeking and evaluating investment opportunities and for analysing the accounts of investee companies. The Manager has full discretion to manage the assets of the Company in accordance with the Company's stated objectives and policies as determined from time to time by the Board and approved by shareholders. Within the guidelines specified by the Board, the Manager has discretion to make purchases and sales, make and withdraw cash deposits, enter into underwriting commitments and exercise all rights over the investment portfolio. The Manager also advises on currency exposures and borrowings. Assessment of the Manager The performance of the Manager is reviewed continuously by the Board and the ongoing requirements of the Company and services received are assessed annually with reference to key performance indicators as set out on page 8 of the Annual Financial Report. Based on its recent review of activities, the Board believes that the continuing appointment of Invesco Fund Managers Limited remains in the best interests of the Company and its shareholders. Investment Objective and Policy The Investment Objective and Policy has been changed slightly from that previously approved by shareholders to clarify the delineation between the objective and the policy and to emphasise that the Company's investments are mainly in fixed interest securities. Accordingly, the following wording differs from that used in last year's annual financial report, although the substance is intended to be the same. Investment Objective The Company's investment objective is to seek to obtain both high income and capital growth from investment, predominantly in high-yielding fixed-interest securities. Investment Policy The Company seeks to provide a high level of dividend income relative to prevailing interest rates mainly through investment in bonds and other fixed-interest securities. The Company also invests in equities and other equity-like instruments consistent with the overall objective. This Investment Policy should be read in conjunction with the descriptions of Investment Style, Investment Limits, Derivatives and Currency Hedging, and Borrowings set out below. Investment Style The Company's investment manager, Invesco Fund Managers Limited, seeks to ensure that the portfolio is diversified, having regard to the nature and type of securities (including duration, credit rating, performance and risk measures and liquidity) and the geographic and industry sector composition of the portfolio. The Company may hold both illiquid securities (for example, securities where trading volumes are relatively low and unlisted securities) and concentrated positions (for example, where a high proportion of the Company's total assets is comprised of a relatively small number of investments). Investment Limits - the Company may invest in fixed-interest securities, including but not restricted to preference shares, loan stocks (convertible and redeemable), corporate bonds and government stocks, up to 100% of total assets; - investments in equities may be made up to an aggregate limit of 20% of total assets; - the aggregate value of holdings of shares and securities in a single issuer or company, including a listed investment company or trust, will not exceed 15% of the value of the Company's investments; and - investments in unlisted investments will not exceed 10% of the Company's total assets for individual holdings and 25% in aggregate of total assets. All the above limits are measured at the time a new investment is made. Derivatives and Currency Hedging The Company may enter into derivative transactions (including options, futures, contracts for difference, credit derivatives and interest rate swaps) for the purposes of efficient portfolio management. The Company will not enter into derivative transactions for speculative purposes. Efficient portfolio management may include reduction of risk, reduction of cost and enhancement of capital or income through transactions designed to hedge all or part of the portfolio, to replicate or gain synthetic exposure to a particular investment position where this can be done more effectively or efficiently through the use of derivatives than through investment in physical securities or to transfer risk or obtain protection from a particular type of risk which might attach to portfolio investments. The Company may hedge against exposure to changes in currency rates to the full extent of any such exposure. Borrowings The Company's borrowing policy is determined by the Board. The level of borrowing may be varied from time to time in the light of prevailing circumstances subject to a maximum of 30% of the Company's total assets at any time. Any borrowings are covered by investments in matching currencies to manage exposure to exchange rate fluctuations. Key Performance Indicators The Board reviews performance by reference to a number of Key Performance Indicators which include the following: • Performance • Dividends • Premium/Discount • Ongoing Charges Performance As the Company's objective is to achieve both high income and capital growth, the performance is best measured in terms of total return. There is no stock market index against which the Company's performance may be measured with any degree of relevance. Therefore, the Board refers to a variety of relevant data and this is reflected in both the Chairman's Statement and the Manager's Investment Report on pages 3 to 6 of the Annual Financial Report. The Board is satisfied with the portfolio performance in the year. When considering historical returns, the terms of the reconstruction in 2012 allow direct comparison of the Company's financial information with that of its predecessor, City Merchants High Yield Trust plc. It is therefore appropriate to combine the information from both companies, and the graph below shows the performance of the share price for the last ten years. Dividends Dividends form a key component of the total return to shareholders and the Board is currently targeting dividends of 10p per year. This target has been met in the year under review. Dividends are paid quarterly in May, August, October and December. Dividends paid over the last ten years are shown in the table on page 2 of the Annual Financial Report. Premium/Discount The Board monitors the price of the Company's shares in relation to their net asset value and the premium/discount at which the shares trade. The Board has limited influence on the price at which the Company's shares trade, which is mostly a function of investor sentiment and demand for the shares. The ideal would be for the shares to trade close to their net asset value. The following graph shows the premium/discount through the year, ending with a premium of 3.2%. As explained in the Chairman's Statement, demand for shares throughout the year resulted in the issue of 8,026,132 shares at an average price of 187.48p. Subsequent to the year end, a further 1,200,000 shares have been issued. Ongoing Charges The expenses of managing the Company are carefully monitored by the Board. The standard measure of these ongoing charges is calculated by dividing the sum of such expenses over the course of the year, including those charged to capital, by the average net asset value. This ongoing charges figure provides a guide to the effect on performance of annual operating costs. The Company's ongoing charges figure for the current and previous year was 1.02%. The Board is satisfied with the level of ongoing charges. Financial Position The Company's balance sheet on page 33 of the Annual Financial Report shows the assets and liabilities at the year end. A £20 million revolving credit facility is available, though it was not used during the year. Details of this facility, including applicable covenants, are shown in note 7 to the financial statements. Performance and Future Development The performance and future development of the Company depend on the success of the Company's investment strategy. A review of the Company's performance, market background, investment activity and strategy during the year, together with the investment outlook are provided in the Chairman's Statement and Manager's Investment Report on pages 3 to 6 of the Annual Financial Report. Annual Continuation Vote The Articles of Association of the Company require that unless an ordinary resolution is passed at or before the Annual General Meeting (AGM) each year releasing the Directors from the obligation to do so, the Directors shall convene a general meeting within six months of the AGM at which a special resolution would be proposed to wind up the Company. Having made enquiries, the Directors have no reason to believe that the resolution to release them from that obligation, that is being put to shareholders at the forthcoming AGM, will not be passed. This view is further supported by the ongoing demand for the Company's shares, evidenced by them trading at a premuim to net asset value for most of the year and by the frequency and volume of new shares issued. Internal Control and Risk Management The Directors acknowledge that they are responsible for ensuring that the Company maintains a system of internal financial and non-financial controls (internal controls) to safeguard shareholders' investments and the Company's assets. The Directors assess the risks to which the Company is exposed by reference to a risk control summary, which maps the risks, mitigating controls in place and relevant information reported to them. The resultant ratings of the mitigated risks, in the form of a risk heat map, allow the Directors to concentrate on those risks that are most significant and also forms the basis of the list of principal risks and uncertainties set out below. The ratings take into account the Directors' risk appetite and the ongoing monitoring by the Manager. The effectiveness of the Company's internal control and risk management system is reviewed at least biannually by the Audit Committee. The Audit Committee has received satisfactory reports on both the Manager's and the custodian's operations and systems of internal control from the Manager's Compliance and Internal Audit Officers. Subsequent to the appointment of the depositary during the year, the Committee also received a comprehensive, and satisfactory, report from the depositary at the year end Audit Committee meeting. The Manager regularly reviews, against agreed service standards, the performance of all third party providers through formal and informal meetings, and by reference to third party independently audited control reports. The results of the Manager's reviews are reported to and reviewed by the Audit Committee. These various reports did not identify any significant failings or weaknesses during the year and up to the date of this annual financial report. If any had been identified, the required remedial action would have been taken. Reporting to the Board at each board meeting comprises, but is not limited to: financial reports, including hedging and gearing; performance against stock market indices and the Company's peer group; portfolio managers' review, including of the market, the portfolio, transactions and prospects; revenue forecasts; and investment monitoring against guidelines. In particular the Board formally reviews the performance of the Manager annually and informally at every board meeting. The Board has reviewed and accepted the Manager's `Whistleblowing' policy under which staff of Invesco Fund Managers Limited can, in confidence, raise concerns about possible improprieties or irregularities in matters affecting the Company. Principal Risks and Uncertainties The internal control and risk management system, which was explained above, identifies the key risks to the Company. These principal risks are considered to be: Investment Objective There can be no guarantee that the Company will meet its investment objective. The Board has established investment guidelines to ensure that investments are made in accordance with the investment policy. Investment Risk The Company invests primarily in fixed interest securities and equities, the majority of which are traded on the world's major securities markets. A significant fall in the markets and/or a prolonged period of decline relative to other forms of investment pose a significant risk to investors. The Board cannot mitigate the effect of such external influences on the portfolio. Other investment risks include market risk (currency, interest rate and other risk) and credit risk, including counterparty risk. A significant portion of the Company's portfolio consists of non-investment grade securities which by their nature have a higher risk of default as well as the likelihood of price volatility. An explanation of market risk and how this is addressed is given in note 18 to the financial statements. For a discussion of the economic and market conditions facing the Company and the current and future performance of the portfolio of the Company, see the Chairman's Statement and the Manager's Investment Report. The investment style employed by the Manager is set out under Investment Objective and Policy on pages 7 and 8 of the Annual Financial Report. Foreign Exchange Risk The movement of exchange rates may have unfavourable or favourable impact on returns as the majority of the assets are non-sterling denominated. This risk can be mitigated by the use of hedging and by the use of non-sterling denominated borrowing. The foreign currency exposure of the Company is monitored by the Manager on a daily basis and reviewed at Board meetings. Derivatives The Company may enter into derivative transactions for efficient portfolio management. Derivative instruments can be highly volatile and expose investors to a high risk of loss. Where used to hedge risk there is a risk that the return on a derivative does not exactly correlate to the returns on the underlying investment, obligation or market sector being hedged against. If there is an imperfect correlation, the Company may be exposed to greater loss than if the derivative had not been entered into. Dividends The dividends declared by the Board are based on income generated from the portfolio and this is monitored regularly by the Board. There can be no guarantee that any dividend target set by the Board will be met. Ordinary Shares and Discount Past performance of the Company is not necessarily indicative of future performance. The Company's share price may go down as well as up and investors may not get back the full value of their investment. The share price may not reflect the NAV per share and therefore trade at a discount. The Board, the Manager and the Company's corporate broker maintain an active dialogue with the aim of ensuring that the market rating of the Company's shares reflects the underlying NAV. Buy back and issuance facilities help the management of this process. Although the shares trade on the London Stock Exchange, it is possible that there may be times when there is not a liquid market in the shares and shareholders may have difficulty selling them. Gearing of Returns through Borrowings Performance may be geared by means of the Company's credit facility, which was available during the year, although not used. There is no guarantee that this facility will be renewable at maturity on terms acceptable to the Company and any amounts owing by the Company would then need to be funded by the sale of investments. Both the Manager and Board monitor this position closely. Gearing and borrowing levels are managed by the portfolio managers using their assessment of risk versus reward. Levels must be within the guidelines set strategically by the Board. Gearing for investment purposes will amplify the reduction in NAV in a falling market, which in turn is likely to adversely affect the Company's share price. Operational Risk, including Reliance on Third Party Providers Disruption to, or failure of, any third party provider to carry out its obligations could have a materially detrimental impact on the effective operation of the Company, prevent accurate reporting and monitoring of the Company's financial position or effect the ability of the Company to pursue its investment policy successfully. Such failure could also expose the Company to reputational risk. In addition, any damage to the reputation of the Manager could result in potential counterparties and third parties being unwilling to deal with the Manager and by extension the Company. Details of how the Board monitors the services provided by the Manager and the other third party providers, and the key elements designed to provide effective internal control, are included in the internal control and risk management section on pages 10 and 11 of the Annual Financial Report, and in note 18 to the financial statements. The risk that one of the portfolio managers might be incapacitated or otherwise unavailable is mitigated by the fact that they work within and are supported by the wider Invesco Fixed Interest team. Regulatory and Tax Related The Company is subject to various laws and regulations including from it being registered under the Companies (Jersey) Law 1991, its status as a collective investment fund registered under the Collective Investment Funds (Jersey) Law 1988, its listing on the Official List of the UK Listing Authority and its admission to trading on the London Stock Exchange. A serious breach of regulatory rules may lead to suspension from the Official List and from trading on the London Stock Exchange, a fine or a qualified audit report. Failure by the Company to maintain its non-UK tax resident status may subject the Company to additional taxes which may materially adversely affect the Company's business and therefore its share value. The Board relies on the ongoing monitoring of its company secretary, Manager and other professional advisers to ensure compliance and reviews their regular reports to the Board. Substantial Holdings in the Company The Company has been notified of the following holdings of 3% and over of the Company's ordinary share capital carrying unrestricted voting rights: AT AT AT 23 MARCH 2015 31 DECEMBER 2014 31 DECEMBER 2013 HOLDING % HOLDING % HOLDING % Charles Stanley, stockbrokers 7,827,881 9.6 7,752,439 9.6 6,880,948 9.5 Invesco Perpetual 7,101,392 8.7 7,101,392 8.8 7,101,392 9.8 Hargreaves Lansdown, 4,272,425 5.2 3,949,936 4.9 2,675,352 3.7 stockbrokers Alliance Trust Savings 4,210,393 5.1 4,113,063 5.1 3,673,040 5.1 Brewin Dolphin, stockbrokers 3,733,982 4.6 3,456,055 4.3 4,451,918 6.1 Court Funds Office (NI) 3,410,031 4.2 3,819,686 4.7 1,705,653 2.3 Smith & Williamson 3,312,287 4.0 3,320,220 4.1 2,961,280 4.1 Rathbones 2,949,423 3.6 2,966,092 3.7 2,676,996 3.7 Redmayne Bentley, 2,582,301 3.2 2,471,506 3.1 2,334,277 3.2 stockbrokers Barclays Stockbrokers 2,347,847 2.9 2,318,386 2.9 2,209,330 3.0 Legal & General Investment 2,210,117 2.7 2,177,250 2.7 2,202,807 3.0 Management Board Diversity The Company's policy on diversity is set out on page 23 of the Annual Financial Report. The Board considers diversity, including the balance of skills, knowledge, diversity (including gender) and experience, amongst other factors when reviewing its composition and appointing new directors, but does not consider it appropriate to establish targets or quotas in this regard. The Board comprises five non-executive directors of whom one is a woman, thereby constituting 20% female representation. Summary biographical details of the Directors are set out on page 20 of the Annual Financial Report. The Company has no employees. Social and Environmental Matters As an investment company with no property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company's policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to, or not to, make an investment on environmental and social grounds alone. The Manager applies the United Nations Principles for Responsible Investment This Strategic Report was approved by the Board of Directors on 1 April 2015. R&H Fund Services (Jersey) Limited Company Secretary . INVESTMENTS IN ORDER OF VALUATION AT 31 DECEMBER 2014 MARKET MOODY/S&P COUNTRY OF VALUE % OF ISSUER ISSUE RATING INDUSTRY INCORPORATION £'000 PORTFOLIO Lloyds Banking Group 7.875% Perpetual NR/B+ Financials UK 3,954 2.91 - Lloyds Bank & LBG Capital 7% Var Perpetual NR/B+ 3,039 2.24 6,993 5.15 Aviva 6.125% Perpetual Baa1/BBB Financials UK 3,863 2.85 General Accident 8.875% NR/NR 1,524 1.12 Preference 5,387 3.97 General Motors Wts 10 Jul 2019 Equity Consumer Goods USA 4,461 3.29 Wts 10 Jul 2016 Equity 510 0.38 4,971 3.67 Société Genérale 8.875% FRN Ba2/BB+ Financials France 4,544 3.35 Perpetual 8.25% Perpetual Ba2/BB+ 235 0.17 7.875% FRN Ba2/BB+ 174 0.12 Perpetual 4,953 3.64 Premier Farnell 89.2p NR/NR Industrials UK 4,077 3.00 Convertible Preference Credit Agricole 7.589% FRN Ba2/BB+ Financials France 2,371 1.75 Perpetual 7.5% Var NR/NR 899 0.66 Perpetual 8.125% FRN Ba2/BB+ 565 0.42 Perpetual 3,835 2.83 Telefonica Europe 6.75% Perpetual Ba1/BB+ Telecommunications Netherlands 2,206 1.63 5.875% Perpetual Ba1/BB+ 1,169 0.86 3,375 2.49 Iron Mountain 6.125% 15 Sep Ba2/B+ Industrials USA 1,998 1.47 2022 6.75% 15 Oct B2/B- 1,358 1.00 2018 3,356 2.47 Twinkle Pizza 6.625% 01 Aug B2/B Consumer Services UK 1,934 1.42 2021 8.625% 01 Aug Caa1/CCC+ 1,202 0.89 2022 3,136 2.31 Standard Chartered 5.125% 06 Jun A3/BBB Financials UK 1,821 1.34 2034 5.7% 26 Mar 2044 A3/BBB 1,315 0.97 3,136 2.31 Intesa Sanpaolo 8.375% FRN Ba3/B+ Financials Italy 2,982 2.20 Perpetual Balfour Beatty 10.75p NR/NR Industrials UK 2,747 2.02 Convertible Preference Enterprise Inns 6.5% 06 Dec 2018 NR/BB- Consumer Goods UK 2,567 1.89 (SNR) Electricite De France 6% Perpetual A3/BBB+ Utilities France 1,382 1.02 5.875% Perpetual A3/BBB+ 1,042 0.77 2,424 1.79 Enel 7.75% 10 Sep Ba1/BB+ Utilities Italy 1,582 1.17 2075 6.625% 15 Sep Ba1/BB+ 797 0.59 2076 2,379 1.76 Barclays 9.25% Perpetual Ba1/BB+ Financials UK 1,188 0.88 7% Perpetual NR/B 957 0.70 2,145 1.58 Citigroup Capital 6.829% FRN 28 Ba1/BB Financials USA 2,137 1.57 Jun 2067 REA Finance 9.5% 31 Dec 2017 NR/NR Consumer Goods Netherlands 2,090 1.54 Koninklijke KPN 6.875% FRN 14 Ba2/BB Telecommunications Netherlands 2,078 1.53 Mar 2073 Catlin Insurance 7.249% FRN NR/BBB+ Financials USA 2,011 1.48 Perpetual Gala Finance 8.875% 01 Sep B2/B+ Consumer Services UK 1,879 1.38 2018 Santos Finance 8.25% FRN 22 Sep NR/BBB- Oil and Gas Australia 1,647 1.21 2070 Origin Energy 7.875% 16 Jun Ba1/BB+ Utilities Australia 1,639 1.21 2071 Obrascon Huarte Lain 8.75% 15 Mar B1/NR Industrials Spain 1,620 1.19 2018 TMF 9.875% 01 Dec Caa1/CCC+ Financials Netherlands 1,583 1.17 2019 Mobile Challenger 8.75% 15 Mar NR/B- Telecommunications Luxembourg 1,577 1.16 2019   Intermediate BPCE 9% FRN Perpetual Ba2/BB+ Financials France 1,572 1.16 Standard Life 6.75% Perpetual A3/A- Financials UK 1,115 0.82 5.5% 04 Dec 2042 Baa2/BBB 378 0.28 1,493 1.10 UniCredit 8.125% FRN B1/B+ Financials Luxembourg 893 0.66 International Perpetual   Bank 8.5925% FRN B1/B+ 541 0.40 Perpetual 1,434 1.06 Constellium 8% 15 Jan 2023 B1/NR Basic Materials France 658 0.48 4.625% 15 May B1/B 476 0.35 2021 5.75% 15 May B1/B 279 0.21 2024 1,413 1.04 Gala Electric Casinos 11.5% 01 Jun Caa2/CCC+ Consumer Services UK 1,349 0.99 2019 Ecclesiastical 8.625% NR/NR Financials UK 1,285 0.95 Insurance Office Preference Alcatel-Lucent 6.5% 15 Jan 2018 WR/B Technology USA 618 0.46 6.45% 15 Mar WR/B 613 0.45 2029 1,231 0.91 Virgin Media Finance 6% 15 Apr 2021 Ba3/BB- Consumer Services UK 684 0.50 6.25% 28 Mar Ba3/BB- 518 0.39 2029 1,202 0.89 Campofrio Food 8.25% 31 Oct Ba3/BB+ Consumer Goods Spain 1,189 0.88 2016 Orange 5.875% Var 29 Baa3/BBB- Telecommunications France 1,157 0.85 Dec 2019 Direct Line Insurance 9.25% FRN 27 Apr Baa1/BBB+ Financials UK 1,152 0.85 2042 Deutsche Bank 7.125% Perpetual Ba3/BB Financials Germany 1,145 0.84 Galapagos 7% 15 Jun 2022 Caa1/CCC+ Industrials Luxembourg 1,104 0.81 Southern Water 8.5% 15 Apr 2019 NR/BB- Utilities UK 1,100 0.81 (Greensands) Thames Water 7.75% 01 Apr B1/NR Utilities UK 1,081 0.80 2019 Abengoa 8.5% 31 Mar 2016 B2/B Industrials Spain 773 0.57 4.5% Cnv 03 Feb NR/NR 303 0.22 2017 1,076 0.79 Volkswagen 4.625% Perpetual Baa2/BBB+ Consumer Goods Netherlands 1,035 0.76 International Finance HSBC 5.25% 14 Mar A3/BBB+ Financials UK 438 0.32 2044 4.25% 14 Mar A3/BBB+ 427 0.32 2024 6.375% Cnv Baa3/NR 168 0.12 Perpetual 1,033 0.76 Chrysler 8% 15 Jun 2019 B1/B Consumer Goods USA 1,018 0.75 Bombardier 6% 15 Oct 2022 Ba3/BB- Industrials Canada 973 0.72 CGG Veritas 6.875% 15 Jan B1/B+ Oil and Gas France 683 0.50 2022 7.75% 15 May B1/B+ 266 0.20 2017 949 0.70 BNP Paribas Fortis Cnv FRN Ba3/BB Financials Belgium 886 0.65 Perpetual Fiat Chrysler 7.875% Cnv 15 NR/B- Consumer Goods Netherlands 884 0.65 Dec 2016 Automobiles Scottish Widows 5.5% 16 Jun 2023 Baa1/BBB+ Financials UK 859 0.63 Premier Foods Finance 6.5% Snr 15 Mar B2/B Consumer Goods UK 858 0.63 2021 BBVA 9% Perpetual NR/NR Financials Spain 826 0.61 Phoenix Life 7.25% Perpetual WR/NR Financials UK 819 0.60 Zobele 7.875% 01 Feb B2/B Basic Materials Italy 788 0.58 2018 Stretford 79 6.25% Snr 15 Jul B1/B+ Consumer Services UK 785 0.58 2021 Algeco Scotsman 9% 15 Oct 2018 B2/NR Consumer Services UK 777 0.57 Global Finance InterGen Services 7.5% 30 Jun 2021 B1/B+ Oil and Gas Netherlands 771 0.57 Bormioli Rocco 10% 01 Aug 2018 B3/B+ Consumer Goods Luxembourg 746 0.55 Greenko 8% 01 Aug 2019 NR/B Utilities Netherlands 744 0.55 AXA 6.379% FRN Baa1/BBB- Financials France 695 0.51 Perpetual Peabody Energy 4.75% Cnv 15 Dec B2/B- Basic Materials USA 676 0.50 2066 Unitymedia Hessen 5.625% 15 Apr Ba3/BB- Consumer Services Germany 671 0.49 2023 Peel Land & Property 8.375% Var 30 NR/BBB Financials UK 669 0.49 Apr 2040 Investments Telekom Austria 5.625% Perpetual Ba1/BB+ Telecommunications Austria 666 0.49 Play Topco 7.75% 28 Feb Caa1/CCC+ Telecommunications Luxembourg 647 0.48 2020 Equiniti Newco 2 7.125% 15 Dec B3/B Industrials UK 533 0.39 2018 FRN 15 Dec 2018 B3/B 113 0.09 646 0.48 Vedanta Resources 8.25% 07 Jun Ba3/BB Basic Materials UK 636 0.47 2021 Vougeot Bidco 7.875% 15 Jul B2/B Consumer Services UK 588 0.43 2020 CEMEX España 9.25% 12 May NR/B+ Industrials Spain 584 0.43 2020 AG Spring Finance II 7.5% 01 Jun 2018 B2/B Financials Ireland 578 0.43 Manutencoop Facility 8.5% 01 Aug 2020 B2/B Consumer Services Italy 573 0.42 Management Pendragon 6.875% 01 May B1/B+ Consumer Services UK 567 0.42 2020 ENCE Energia y 7.25% 15 Feb B1/BB- Utilities Spain 566 0.42 2020 Celulosa Jaguar Land Rover 8.25% 15 Mar Ba2/BB Consumer Goods UK 550 0.41 2020 La Financiere Atalian 7.25% 15 Jan B3/B Consumer Services France 533 0.39 2020 Legal & General 6.385% FRN Baa2/BBB+ Financials UK 524 0.39 Perpetual Braas Monier Building FRN 15 Oct 2020 B1/B+ Industrials Luxembourg 513 0.38 Principality Building 7% Perpetual Ba3/NR Society Financials UK 513 0.38 J Sainsbury 1.25% Cnv 21 Nov NR/NR Consumer Services UK 513 0.38 2019 Arqiva Broadcast 9.5% 31 Mar 2020 B3/NR Telecommunications UK 504 0.37   Finance DFS Furniture 7.625% 15 Aug B2/B Consumer Goods UK 485 0.36 2018 Odeon & UCI Finco 9% 01 Aug 2018 B3/CCC+ Consumer Services UK 467 0.34 Tesco 5.2% 05 Mar 2057 Baa3/BBB- Consumer Services UK 454 0.33 M&G Finance 7.5% FRN NR/NR Financials Luxembourg 449 0.33 Perpetual Commerzbank 8.125% 19 Sep Ba2/BB Financials Germany 443 0.33 2023 Eileme 2 11.75% 31 Jan B2/B+ Telecommunications Sweden 441 0.32 2020 S & B Industrial 9.25% 15 Aug B3/B+ Basic Materials Luxembourg 441 0.32 2020 Minerals Stonegate Pub 5.75% 15 Apr B2/B+ Consumer Services UK 432 0.32 2019   Company Lottomatica 8.25% FRN 03 Mar Ba2/BB Consumer Services Italy 420 0.31 2066 Boparan Finance 5.5% 15 Jul 2021 B1/B+ Consumer Services UK 416 0.31 Ono Finance II 11.125% 15 Jul Ba2/BBB Consumer Services Ireland 412 0.30 2019 KraussMaffei 8.75% 15 Dec B2/B- Industrials Germany 409 0.30 2020 SMCP 8.875% 15 Jun B3/B Consumer Goods France 406 0.30 2020 First Quantum 7.25% 15 May B1/B+ Basic Materials Canada 404 0.30 Minerals 2022 Solvay Finance 5.425% Perpetual Ba1/BBB- Basic Materials France 400 0.29 Telenet Finance 6.75% 15 Aug B1/B+ Telecommunications Luxembourg 218 0.16 2024 6.25% 15 Aug B1/B+ 169 0.13 2022 387 0.29 Nationale-Nederlanden 4.625% 08 Apr Baa3/BBB- Financials Netherlands 344 0.25 2044 Rothschilds FRN Perpetual NR/NR Financials Netherlands 340 0.25 Continuation Finance AA Bond 9.5% 31 Jul 2043 NR/BB Consumer Services UK 330 0.24 Eco Services 8.5% Snr 01 Nov Caa1/CCC+ Basic Materials USA 326 0.24 Operations 2022 Credit Suisse 6.25% Var NR/BB Financials Switzerland 325 0.24 Perpetual Suez Environnement 4.82% FRN Baa2/NR Utilities France 316 0.23 Perpetual Novae 6.5% 27 Apr 2017 Baa3/NR Financials UK 309 0.23 Sisal 7.25% 30 Sep B1/B Consumer Services Italy 298 0.22 2017 Takko 9.875% 15 Apr Caa1/CCC Consumer Services Luxembourg 295 0.22 2019 Aperam 7.75% 01 Apr B2/BB- Industrials Luxembourg 262 0.19 2018 Gestamp Funding 5.875% 31 May B1/BB Consumer Goods Luxembourg 246 0.18 2020   Luxembourg Puma Energy 6.75% 01 Feb Ba3/NR Oil and Gas Luxembourg 243 0.18 2021 Enquest 7% 15 Apr 2022 B3/B Oil and Gas UK 219 0.16 Care UK Health and FRN 15 Jan 2020 Caa2/CCC+ Health Care UK 212 0.16 Social Care Lecta 8.875% 15 May B2/B Basic Materials Luxembourg 202 0.15 2019 Altice 7.75% 15 May B3/B Telecommunications Luxembourg 167 0.12 2022 Pearl 6.5864% FRN NR/NR Financials UK 164 0.12 Perpetual Investec Tier I 7.075% Perpetual B1/NR Financials UK 155 0.11 NH Hotels 6.875% 15 Nov NR/B Consumer Services Spain 125 0.09 2019 FAGE International 9.875% 01 Feb B3/B Consumer Goods Greece 117 0.09 2020 Pfleiderer Finance 7.125% FRN WR/NR Industrials Netherlands 18 - Perpetual 135,749 100.0 Abbreviations used in the above valuation: Cnv: Convertible­ FRN: Floating Rate Note Snr: Senior Var: Variable Wts: Warrants . STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE PREPARATION OF FINANCIAL STATEMENTS The Directors are responsible for preparing the annual financial report in accordance with applicable laws and regulations. Company law requires the Directors to prepare financial statements for each financial period. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial statements are required by law to 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. International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's `Framework for the preparation and presentation of financial statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. In preparing these financial statements, the Directors are required to: • properly select and apply accounting policies and then apply them consistently; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and • make an assessment of the Company's ability to continue as a going concern. The financial statements have been prepared on a going concern basis. When considering this, the Directors took into account the annual shareholders' continuation vote (as explained in detail on page 10 of the Annual Financial Report) and the following: the Company's investment objective and risk management policies, the nature of the portfolio and expenditure and cash flow projections. As a result, they determined that the Company has good shareholder adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the accounts comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing the Strategic Report, a Corporate Governance Statement and a Directors' Report that comply with that law and those regulations. The Directors of the Company, who are listed on page 20 of the Annual Financial Report, each confirm to the best of their knowledge that: • the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; • this annual financial report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and • this annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy. Clive Nicholson Chairman Signed on behalf of the Board of Directors 1 April 2015 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2014 2013 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL £'000 £'000 £'000 £'000 £'000 £'000 NOTES (Loss)/profit on 11 - (2,674) (2,674) - 10,272 10,272 investments held at fair value Exchange differences - (27) (27) - (500) (500) Profit/(loss) on - 2,336 2,336 - (384) (384) derivative instruments - currency hedges Income 4 8,922 - 8,922 8,686 - 8,686 Investment management 5 (702) (378) (1,080) (632) (340) (972) fees Other expenses 6 (383) (1) (384) (361) (1) (362) Profit/(loss) before 7,837 (744) 7,093 7,693 9,047 16,740 finance costs and taxation Finance costs 7 (25) (14) (39) (29) (15) (44) Profit/(loss) before 7,812 (758) 7,054 7,664 9,032 16,696 tax Taxation 8 (119) - (119) (75) - (75) Profit/(loss) after 7,693 (758) 6,935 7,589 9,032 16,621 tax Return per ordinary 9 10.0p (1.0)p 9.0p 10.4p 12.4p 22.8p share The total column of this statement represents the Company's statement of comprehensive income, prepared in accordance with International Financial Reporting Standards. The profit after tax is the total comprehensive income. The supplementary revenue and capital columns are both prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations and the Company has no other profits or losses. No operations were acquired or discontinued in the year. . STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER NOTES STATED CAPITAL REVENUE TOTAL CAPITAL RESERVE RESERVE £'000 £'000 £'000 £'000 At 31 December 2012 113,410 9,336 1,929 124,675 Total comprehensive income for the - 9,032 7,589 16,621 year Dividends paid 10 - - (7,279) (7,279) At 31 December 2013 113,410 18,368 2,239 134,017 Net proceeds from issue of new shares 14,939 - - 14,939 Total comprehensive income for the - (758) 7,693 6,935 year Dividends paid 10 (140) - (7,540) (7,680) At 31 December 2014 128,209 17,610 2,392 148,211 . BALANCE SHEET AT 31 DECEMBER NOTES 2014 2013 £'000 £'000 Non-current assets   Investments held at fair value through profit or 11 135,749 123,775 loss Current assets   Other receivables 12 2,833 3,028   Derivative financial instruments - unrealised profit 13 466 216   Cash and cash equivalents 9,577 7,365 12,876 10,609 Current liabilities   Other payables 14 (414) (367) (414) (367) Net current assets 12,462 10,242 Net assets 148,211 134,017 Capital and reserves   Stated capital 15 128,209 113,410   Capital reserve 16 17,610 18,368   Revenue reserve 16 2,392 2,239 Shareholders' funds 148,211 134,017 Net asset value per ordinary share 17 183.40p 184.12p These financial statements were approved and authorised for issue by the Board of Directors on 1 April 2015. Signed on behalf of the Board of Directors Clive Nicholson Chairman The accompanying notes are an integral part of these financial statements. . STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2014 2013 £'000 £'000 Cash flow from operating activities Profit before tax 7,054 16,696 Taxation (119) (75) Adjustment for:   Purchases of investments (63,066) (30,182)   Sales of investments 48,944 33,680 (14,122) 3,498   Loss/(profit) on investments 2,674 (10,272)   Exchange differences 45 65   Net cash (outflow)/inflow from derivative instruments - (250) (226) currency hedges   Finance costs 39 44 Operating cash flows before movements in working capital (4,679) 9,730 Increase in receivables (331) (95) Increase in payables 47 24 Net cash flows from operating activities (4,963) 9,659 Cash flow from financing activities Finance cost paid (39) (44) Net proceeds from issue of shares 14,939 - Equity dividends paid - note 10 (7,680) (7,279) Net cash flows from financing activities 7,220 (7,323) Net increase in cash and cash equivalents 2,257 2,336 Exchange differences (45) (65) Movement in cash and cash equivalents 2,212 2,271 Cash and cash equivalents at beginning of year 7,365 5,094 Cash and cash equivalents at the end of the year 9,577 7,365 . NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 1. Principal Activity The Company is a closed-end investment company incorporated in Jersey and operates under the Companies (Jersey) Law 1991. The principal activity of the Company is investment in a diversified portfolio of high-yielding fixed-interest securities as set out in the Company's Investment Objective and Policy. 2. Principal Accounting Policies Accounting policies describe the Company's approach to recognising and measuring transactions during the year and the position of the Company at the year end. The principal accounting policies adopted in the preparation of these financial statements are set out below. (a) Basis of Preparation (i) Accounting Standards Applied The financial statements have been prepared on an historical cost basis, except for the measurement at fair value of investments and derivatives, and in accordance with the applicable International Financial Reporting Standards (IFRS) and interpretations issued by the International Financial Reporting Interpretations Committee as adopted by the European Union. The standards are those endorsed by the European Union and effective at the date the financial statements were approved by the Board. Where presentational guidance set out in the Statement of Recommended Practice (SORP) `Financial Statements of Investment Trust Companies and Venture Capital Trusts', issued by the Association of Investment Companies in January 2009, is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. The supplementary information which analyses the statement of comprehensive income between items of a revenue and a capital nature is presented in accordance with this. (ii) Going Concern As explained under `Annual Continuation Vote' on page 10, the Company has an annual continuation vote. However, as also explained in that note the Directors believe shareholders will vote for the Company to continue. Accordingly, the financial statements have been prepared on a going concern basis and the accounts do not include any adjustments which might arise from cessation of the Company. (iii) Adoption of New and Revised Standards New and revised standards and interpretations that became effective during the period had no significant impact on the amounts reported in these financial statements but may impact accounting for future transactions and arrangements. At the date of authorising these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU). • Mandatory Effective Date and Transition Disclosures - Amendments to IFRS 9 and IFRS 7 Financial Instruments: Disclosure (effective 1 January 2015). • IFRS 9: Financial Instruments (2013) (effective 1 January 2018). • Amendment to IAS 1: Presentation of Financial Statements (effective 1 January 2016). The Directors do not expect the adoption of above standards and interpretations (or any other standards and interpretations which are in issue but not effective) will have a material impact on the financial statements of the Company in future periods. (iv) Critical Accounting Estimates and Judgements The preparation of the financial statements requires the Company to make estimations where uncertainty exists. It also requires the Company to exercise judgement in the process of applying the accounting policies. The critical accounting estimates and areas involving a higher degree of judgement or complexity comprise the fair value of derivatives and other financial instruments. The Directors use their judgement in selecting an appropriate valuation technique for financial instruments not quoted on an active market. Valuation techniques commonly used by market practitioners are applied. For derivative financial instruments, assumptions are made based on quoted market rates adjusted for specific features of the instrument. Other financial instruments are valued using a discounted cash flow analysis based on assumptions supported, where possible, by observable market prices or rated. (b) Foreign Currency (i) Functional and Presentation Currency The financial statements are presented in sterling, which is the Company's functional and presentation currency and the currency in which the Company's stated capital and expenses are denominated, as well as certain of its income, assets and liabilities. (ii) Transactions and Balances Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rate of exchange ruling on the date of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. All profits and losses, whether realised or unrealised, are recognised in the statement of comprehensive income and are taken to capital reserve or revenue reserve, depending on whether the gain or loss is capital or revenue in nature. (c) Financial Instruments (i) Recognition of Financial Assets and Financial Liabilities The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis. (ii) Derecognition of Financial Assets The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset. (iii) Derecognition of Financial Liabilities The Company derecognises financial liabilities when its obligations are discharged, cancelled or expired. (iv) Trade Date Accounting Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets. (v) Classification of Financial Assets and Financial Liabilities Financial Assets The Company's investments are classified as held at fair value through profit or loss as the investments are managed and their performance evaluated on a fair value basis in accordance with the Company's documented investment strategy and this is also the basis on which information about investments is provided internally to the Board. Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the statement of comprehensive income, and are subsequently valued at fair value. For investments that are actively traded in organised financial markets, fair value is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Where there is no active market, investments are valued by the Directors at fair value based on recommendations from Invesco's Pricing Committee using valuation techniques such as earnings multiples, recent arm's length transactions and net assets, adjusted if appropriate. Financial Liabilities Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method. (d) Derivatives and Hedging Derivative instruments are valued at fair value in the balance sheet. Hedge accounting has not been adopted. Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date and any profits and losses are recognised in the statement of comprehensive income and taken to capital reserves. Futures contracts entered into for hedging purposes are valued at fair value at the quoted trade price of the contract and any profits and losses on the closure or revaluation of positions are recognised in the statement of comprehensive income and taken to capital reserves. (e) Cash and Cash Equivalents Cash and cash equivalents comprise cash at bank and short-term deposits with an original maturity date of three months or less. (f) Revenue Recognition All income is recognised in the statement of comprehensive income. Interest income arising from fixed income securities and cash is recognised using the effective interest method. Dividend income arises from equity investments held and is recognised on the date investments are marked `ex-dividend'. Deposit interest and underwriting commission are taken into account on an accruals basis. (g) Expenses and Finance Costs All expenses are accounted for on an accruals basis and are recognised in the statement of comprehensive income. Investment management fees and finance costs are allocated 35% to capital and 65% to revenue in accordance with the Board's expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio. Except for custodian dealing costs, all other expenses are charged through revenue. Expenses in relation to the set up of the Company are charged to stated capital. (h) Tax Overseas interest and dividends are shown gross of withholding tax and the corresponding irrecoverable tax is shown as a charge in the statement of comprehensive income. 3. Segmental Reporting No segmental reporting is provided as the Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt and, to a significantly lesser extent, equity securities. 4. Income This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source. 2014 2013 £'000 £'000 Income from investments UK dividends 629 720 UK investment income - interest 3,032 2,987 Overseas investment income - interest 5,241 4,966 Overseas dividends 19 11 8,921 8,684 Other income Deposit interest 1 2 Total income 8,922 8,686 5. Investment Management Fee This note shows the fees paid to the Manager, which are calculated quarterly on the basis of the value of the assets being managed. 2014 2013 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Investment management fee 702 378 1,080 632 340 972 Details of the investment management agreement are disclosed on page 7 of the Annual Financial Report. At the year end the management fee accrued was £ 278,000 (2013: £251,000). 6. Other Expenses The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified. 2014 2013 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 General expenses (i) 240 1 241 223 1 224 Directors' fees (ii) 114 - 114 108 - 108 Auditor's remuneration:   - for the audit of the     financial statements 29 - 29 30 - 30 383 1 384 361 1 362 (i) General expenses include £38,200 (2013: £37,500) due to R&H Fund Services (Jersey) who act as Administrator and Company Secretary to the Company under an Agreement dated 19 December 2011. This agreement is terminable at any time by either party giving no less than three months' notice. The fee is payable quarterly in arrears based on the initial rate of £37,500 per annum. The fee is revised with effect from 1 January each year, by the application of a formula based on the Retail Price Index for the month of December of the previous year. General expenses also include an administration fee due to Invesco Perpetual of £24,000 (2013: £23,000). It is based on an initial fee of £22,500 plus RPI increases in May. Custodian dealing costs of £1,000 (2013: £1,000) are charged wholly to capital. (ii) The maximum Directors' fees authorised by the Articles of Association are £150,000 per annum. 7. Finance Costs Finance costs arise on any borrowing facilities the Company has and comprise commitment fees on any unused facility as well as interest when the facility is used. 2014 2013 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Commitment fees due on loan facility   25 14 39 29 15 44   The Company has a 364 day committed £20 million multi-currency revolving credit facility with Bank of New York Mellon which is renewable on 8 May 2015. Available currencies are sterling, euros or US dollars. Drawings under this facility are subject to the restriction that the Company's total financial indebtedness must not exceed 30% of total assets and that the assets must be in excess of £50 million. At the balance sheet date the Company had no drawdowns (2013: none). Interest payable is based on the interbank offered rate for the currency drawn down. The commitment fee at the balance sheet date is based on 0.20% of the average undrawn amount each quarter. 8. Taxation As a Jersey investment company no tax is payable on capital gains and, as the Company principally invests in assets which do not suffer tax on income, the only overseas tax arises on the few assets domiciled in countries with which Jersey has no double-taxation treaty, e.g. Italy and Portugal. 2014 2013 £'000 £'000 Overseas taxation 119 75 The Company is subject to Jersey income tax at the rate of 0% (2013: 0%). The overseas tax charge consists of irrecoverable withholding tax. 9. Return per Ordinary Share Return per share is the amount of gain generated for the financial year divided by the weighted average number of ordinary shares in issue. The basic revenue, capital and total return per ordinary share is based on each of the profit after tax and on 77,275,510 (2013: 72,786,327) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year. 10. Dividends on Ordinary Shares Dividends are paid from the income less expenses. Dividends are paid as an amount per ordinary share held. 2014 2013 Pence £'000 Pence £'000 Dividends paid and recognised in the period: Fourth interim 2.5 1,828 2.5 1,820 First interim 2.5 1,904 2.5 1,820 Second interim 2.5 1,962 2.5 1,819 Third interim 2.5 1,986 2.5 1,820 10.0 7,680 10.0 7,279 Dividends paid in the year have been charged to revenue except for £140,000 which was charged to stated capital. This amount is equivalent to the income accrued on the new shares issued in the year (see note 15). 10. Dividends on Ordinary Shares (continued) Set out below are the dividends that have been declared in respect of the financial period: 2014 2013 Pence £'000 Pence £'000 Dividends in respect of the period: First interim 2.5 1,904 2.5 1,820 Second interim 2.5 1,962 2.5 1,819 Third interim 2.5 1,986 2.5 1,820 Fourth interim 2.5 2,020 2.5 1,828 10.0 7,872 10.0 7,287 11. Investments Held at Fair Value Through Profit or Loss The portfolio is principally made up of investments which are listed and traded on a regulated stock exchange. Profits and losses in the year are either: • realised, usually arising when investments are sold; or • unrealised, being the difference from cost of those investments still held at the year end. (a) Analysis of investment profits 2014 2013 £'000 £'000 Opening bookcost 109,147 109,118 Opening investment holding profits 14,628 8,409 Opening valuation 123,775 117,527 Movements in the year:   Purchases at cost 63,066 30,182   Sales - proceeds (48,418) (34,206)   Sales - net realised profit 3,854 4,053 Movement in investment holding profit (6,528) 6,219 Closing valuation 135,749 123,775 Closing book cost 127,649 109,147 Closing investment holding profit 8,100 14,628 Closing valuation 135,749 123,775 Realised profit in the year 3,854 4,053 Movement in investment holding profit in the year (6,528) 6,219 (2,674) 10,272 (b) Transaction costs The transaction costs on investments amount to £1,000 on sales and £3,000 on purchases (2013: £1,000 on sales and none on purchases). (c) Registration of investments The investments of the Company are registered in the name of the Company or in the name of nominees and held to the account of the Company. 12. Other Receivables Other receivables are amounts which are due to the Company, such as income which has been earned (accrued) but not yet received and monies due from brokers for investments sold. 2014 2013 £'000 £'000 Prepayments and accrued income 2,833 2,502 Amount due from brokers - 526 2,833 3,028 13. Derivative Financial Instruments Derivative financial instruments are financial instruments that derive their value from the performance of another item, such as an asset or exchange rates. They are used to manage the risk associated with fluctuations in the value of certain assets and liabilities. The Company can use derivatives to manage its exposure to fluctuations in foreign exchange rates. Derivative financial instruments comprise forward currency contracts. 2014 2013 £'000 £'000 Forward currency contracts - net unrealised profit 466 216 466 216 14. Other Payables Other payables are amounts which must be paid by the Company, and include any amounts due to brokers for the purchase of investments or amounts owed to suppliers, such as the Manager and auditor. 2014 2013 £'000 £'000 Accruals 414 367 414 367 15. Stated Capital The stated capital represents the total number of shares in issue, for which dividends accrue. Stated capital can be used for distributions under Jersey law. 2014 2013 2014 2013 NUMBER NUMBER £'000 £'000 Allotted ordinary shares of no par value Brought forward 72,786,327 72,786,327 113,410 113,410 Net issue proceeds 8,026,132 - 14,939 - Dividends paid from stated capital - - (140) - Carried forward 80,812,459 72,786,327 128,209 113,410 For the year to 31 December 2014 8,026,132 new ordinary shares were issued to the Company's corporate broker, Winterflood Securities Limited, for onward transmission to their clients. These shares were issued in tranches of various quantities throughout the year to satisfy secondary market demand. The gross issue proceeds were £15,048,000, at an average price of 187.48p, and the net proceeds after issue costs were £14,939,000. The net proceeds included an aggregate amount of £140,000 which arose from the income accrued component of the net asset value at the date of issue of the new shares. Subsequent to the year end 1,200,000 ordinary shares have been issued, at an average price of 188.02p. 16. Reserves This note explains the different reserves attributable to shareholders. The aggregate of the reserves and stated capital (see previous note) make up total shareholders' funds. The capital reserve includes investment holding profits and losses, being the difference between cost and market value at the balance sheet date, as well as realised profits and losses on disposals of investments. Both the capital and revenue reserves are distributable. 17. Net Asset Value per Ordinary Share The Company's total net assets (total assets less total liabilities) are often termed shareholders' funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue. The net asset value per ordinary share and the net assets attributable at the period end were as follows: NET ASSET VALUE NET ASSETS PER ORDINARY ATTRIBUTABLE SHARE 2014 2013 2014 2013 PENCE PENCE £'000 £'000 Ordinary shares 183.40 184.12 148,211 134,017 The net asset value per ordinary share is based on 80,812,459 (2013: 72,786,327) ordinary shares, being the number of ordinary shares in issue at the year end. 18. Financial Instruments Financial instruments comprise the Company's investment portfolio and derivative financial instruments (for the latter see note 13) as well as any cash, borrowings, other receivables and other payables. The following note explains the risks that affect the Company's financial instruments and looks at the Company's exposure to these various risks. Risk Management Policies and Procedures The Strategic Report details the Company's approach to investment risk management on page 11 and the accounting policies in note 2 explain the Company's valuation basis for investments and currency. As an investment company, the Company invests in loan stocks, corporate bonds, government stocks, preference shares and equities which are held for the long-term in order to achieve the Company's Investment Objective and Investment Policy. In pursuing these, the Company is exposed to a variety of risks that could result in either a reduction in the Company's net assets or a reduction in the profits available for payment as dividends. The Company's principal financial instruments at risk comprise its investment portfolio. Other financial instruments at risk include cash, borrowings, other receivables and other payables that arise directly from the Company's operations. These risks and the Directors' approach to managing them are set out below, and have not changed from those applying in the comparative year. Risk management is an integral part of the investment management process. The Manager controls risk by ensuring that the Company's portfolio is appropriately diversified and the portfolio managers actively monitor both the ratings and liquidity of the fixed-interest securities taking into account the Company's financing requirements. In-depth and continual analysis of market and stock fundamentals give the portfolio managers the best possible understanding of the risks associated with a particular stock. The portfolio managers assess the exposure to market risk when making each investment decision, and monitor the overall level of market risk on the whole of the portfolio on an ongoing basis. High-yield fixed-interest securities are subject to a variety of risks, as explained under credit risk (18.3). Gearing by using the Company's credit facility increases the Company's exposure to interest rate risk and this is explained under interest rate risk (18.1.2). The day to day management of the investment activities, borrowings and hedging of the Company has been delegated to the Manager, and is the responsibility of the portfolio managers to whom the Board has given wide discretion to operate within set guidelines. Any proposed variation outside those guidelines is referred to the Board and the guidelines themselves are reviewed at every board meeting. 18.1 Market Risk Market risk arises from changes in the fair value or future cash flows of a financial instrument because of movements in market prices. Market risk comprises three types of risk: currency risk (18.1.1), interest rate risk (18.1.2) and other price risk (18.1.3). 18.1.1 Currency Risk The Company's assets, liabilities and income which are denominated in currencies other than sterling and movements in exchange rates will affect the sterling value of those items. Management of the Currency Risk The Board meets at least quarterly to assess risk and review investment performance. The portfolio managers monitor the Company's exposure to foreign currencies on a daily basis and report to the Board. Drawings in foreign currencies on the borrowing facility can be used to limit the Company's currency exposure and to achieve the portfolio characteristics that assist the Company in meeting its investment objective and policy. The Company may use forward currency contracts to mitigate currency risk. All facility drawings and derivative contracts are limited to currencies and amounts commensurate with asset exposure to those currencies. Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt. Currency Exposure The fair values of the Company's monetary items that have foreign currency exposure at 31 December follow. Where the Company's investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis to show the overall level of exposure. 31 DECEMBER 2014 EURO US CANADIAN SWISS £'000 DOLLAR DOLLAR FRANC £'000 £'000 £'000 Investments at fair value 34,627 17,766 - - through profit or loss that are monetary items (fixed and floating interest) Cash at bank 2,994 983 - 1 Other receivables (due 789 284 - - from brokers and dividends) Forward currency (35,752) (6,100) - - contracts Foreign currency exposure 2,658 12,933 - 1 on net monetary items Investments at fair value through profit or   loss that are equities - 4,971 - - Total net foreign 2,658 17,904 - 1 currency exposure 31 DECEMBER 2013 EURO US CANADIAN SWISS £'000 DOLLAR DOLLAR FRANC £'000 £'000 £'000 Investments at fair value through profit or   loss that are monetary 45,584 10,829 - - items (fixed-interest) Cash at bank 1,765 1,654 - 109 Other receivables (due from brokers, dividends   receivable and accrued 1,011 155 - - income) Forward currency (44,489) - - - contracts Foreign currency exposure 3,871 12,638 - 109 on net monetary items Investments at fair value through profit or   loss that are equities/ - 6,275 24 420 warrants Total net foreign 3,871 18,913 24 529 currency exposure The above may not be representative of the exposure to risk during the period reported because the levels of monetary foreign currency exposure may change significantly throughout the period. Currency Sensitivity The effect on the income statement and the net asset value that changes in exchange rates have on the Company's financial assets and liabilities is based on the following exchange rates. These rates have been calculated by reference to the volatility of exchange rates during the period using the standard deviation of currency fluctuations against the mean. 2014 2013 £/Euro ±2.1% ±1.4% £/US dollar ±2.7% ±2.8% £/Canadian dollar ±1.4% ±3.7% £/Swiss franc ±1.6% ±1.3% The following sensitivity analysis is based on the Company's monetary foreign currency financial instruments held at the balance sheet date and takes account of any forward foreign exchange contracts that offset the effects of changes in currency exchange rates. If sterling had strengthened by the changes in exchange rates shown above, this would have had the following effect: 2014 EURO US CANADIAN SWISS £'000 DOLLAR DOLLAR FRANC £'000 £'000 £'000 Effect on income statement   Revenue loss (58) (28) - -   Capital loss (56) (483) - - Effect on net asset value (114) (511) - - 2013 EURO US CANADIAN SWISS £'000 DOLLAR DOLLAR FRANC £'000 £'000 £'000 Effect on income statement   Revenue loss (45) (24) - -   Capital loss (54) (530) (1) (7) Effect on net asset value (99) (554) (1) (7) If sterling had weakened by the changes in exchange rates shown above this would have an equal and opposite effect. In the opinion of the Directors, the above sensitivity analysis is not representative of the period as a whole, since the level of exposure changes frequently as part of the currency risk management process of the Company. 18.1.2 Interest Rate Risk The Company is exposed to interest rate risk in a number of ways. Movements in interest rates may affect the fair value of fixed-interest rate securities, income receivable on cash deposits and floating rate securities, and interest payable on variable rate borrowings. Interest rate risk is related above all to long-term financial instruments. Management of Interest Rate Risk The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account as part of the portfolio management and borrowings processes of the Manager. The Board reviews on a regular basis the investment portfolio and borrowings. This encompasses the valuation of fixed-interest and floating rate securities. When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependant on the base rate of the custodian. The Company has a credit facility with which it can finance investment activity, details of which are shown in note 7. The Company uses the facility at levels approved and monitored by the Board. Interest Rate Exposure The following table shows the Company's exposure to interest rate risk at the balance sheet date arising from its monetary financial assets and liabilities. 2014 WITHIN MORE THAN TOTAL ONE YEAR ONE YEAR £'000 £'000 £'000 Exposure to floating interest rates: Investments at fair value through - 63,893 63,893 profit or loss Cash and cash equivalents 9,577 - 9,577 9,577 63,893 73,470 Exposure to fixed-interest rates: Investments at fair value through - 57,252 57,252 profit or loss Net exposure to interest rates 9,577 121,145 130,722 2013 WITHIN MORE THAN TOTAL ONE YEAR ONE YEAR £'000 £'000 £'000 Exposure to floating interest rates: Investments at fair value through - 45,727 45,727 profit or loss Cash and cash equivalents 7,365 - 7,365 7,365 45,727 53,092 Exposure to fixed-interest rates: Investments at fair value through 594 61,776 62,370 profit or loss Net exposure to interest rates 7,959 107,503 115,462 The nominal interest rates on the investments at fair value through profit or loss are shown in the portfolio list on pages 16 to 19. The weighted average effective interest rate on these investments is 6.7% (2013: 6.9%). The weighted average effective interest rate on cash and cash equivalents is 0.22% (2013: 0.23%). Interest Rate Sensitivity The following table illustrates the sensitivity of the profit after taxation for the year to a 1% increase in interest rates in regard to the Company's financial assets and financial liabilities. As future changes cannot be estimated with any degree of certainty, the sensitivity analysis is based on the Company's financial instruments held at the balance sheet date, with all other variables held constant. 2014 2013 £'000 £'000 Effect on statement of comprehensive income   Revenue profit 96 74   Capital loss (5,391) (4,313) Total profit/(loss) after taxation for the year (5,295) (4,239) Effect on NAV (6.6)p (5.8)p If interest rates had decreased by 1%, this would have had an equal and opposite effect. The above exposure and sensitivity analysis are not representative of the period as a whole, since the level of exposure changes frequently as borrowings are drawn down and repaid throughout the period. In particular, for the year under review there has been limited interest rate movements and as a consequence little change in interest rate sensitivity. 18.1.3 Other Price Risk Other price risks includes changes in market prices, other than those arising from currency risk or interest rate risk, which may affect the value of the investment portfolio, whether by factors specific to an individual investment or its issuer, or by factors affecting the wider market. Management of Other Price Risk It is the portfolio managers' responsibility to manage the portfolio and borrowings in accordance with the investment objective and policy, and in accordance with the investment policy guidelines set by the Board. The Board manages the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis compliance with these. The Board also reviews investment performance. Because the Company's portfolio is the result of the portfolio managers investment process, performance may not correlate with the markets in which the Company invests. The Company's exposure to other changes in market prices at 31 December on its investments is shown in the fair value hierarchy table on page 48 of the Annual Financial Report. Concentration of Exposure to Other Price Risks The Company's investment portfolio is not concentrated to any single country of domicile, however, it is recognised that an investment's country of domicile or listing does not necessarily equate to its exposure to the economic conditions in that country. Other Price Risk Sensitivity Except for fixed interest securities and convertibles, at the year end the Company also held other investments of £14,604,000 (2013: £15,679,000). The effect of a 10% increase or decrease in the fair values of these investments (including any exposure through derivatives) on the profit after taxation for the period is £1,460,000 (2013: £1,568,000). This level of change is considered to be reasonably possible based on the observation of current market conditions. The sensitivity analysis is based on the Company's other investments (including equity exposure through derivatives) at the balance sheet date with all other variables held constant. 18.2 Liquidity Risk This is the risk that the Company may encounter difficulty in meeting its obligations associated with financial liabilities i.e. when realising assets or raising finance to meet financial commitments. A lack of liquidity in the portfolio may make it difficult for the Company to realise assets at or near their purported value in the event of a forced sale. Management of Liquidity Risk Liquidity risk is not viewed by the Directors as a significant risk because a majority of the Company's assets comprise readily realisable securities, although a lack of liquidity in non-investment grade securities may make it difficult to rebalance the Company's investment portfolio as and when the portfolio managers believe it would be advantageous to do so. On a daily basis the portfolio managers ascertain the Company's cash and borrowing requirements by reviewing future cash flows arising from purchases and sales of investments, interest and dividend receipts, expenses and dividend payments, and available financing. Liquidity Risk Exposure The contractual maturities of the financial liabilities at the balance sheet, based on the earliest date on which payment can be required follow: 2014 2013 THREE MONTHS THREE MONTHS OR LESS OR LESS £'000 £'000 Other payables 414 367 414 367 18.3 Credit Risk Credit risk is the risk that the failure of the counterparty to a transaction to discharge its obligation under that transaction could result in a loss to the Company. This risk also includes transactions in derivatives. At the year end 62.8% (2014: 52.9%) of the Company's portfolio consists of non-investment grade securities. To the extent that the Company invests in non-investment grade securities, the Company may realise a higher current yield than the yield offered by investment grade securities. On the other hand, investments in such securities involve a greater volatility of price and a greater risk of default by the issuers of such securities, with consequent loss of interest payments and principal. Non-investment grade securities are likely to have greater uncertainties of risk exposure to adverse conditions and will be speculative with respect to an issuer's capacity to meet interest payments and repay principal in accordance with its obligations. Investment grade and non-investment grade securities totalled 79.8% (2014: 75.7%) of the portfolio at the year end. Adverse changes in the financial position of an issuer of such high-yield fixed-interest securities or in general economic conditions may impair the ability of the issuer to make payments of principal and/or interest or may cause the liquidation or insolvency of an issuer. The portfolio may be adversely affected if the Company's custodian suffers insolvency or other financial difficulties. The appointment of a depositary during the year has substantially lessened this risk. The Board reviews the custodian's annual control report and the Manager's management of the relationship with the custodian. Management of and Exposure to Credit Risk All of the Company's assets are subject to credit risk. The Company's principal credit risk is the risk of default of the non-investment grade debt. Where the portfolio managers make an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account to minimise the risk to the Company of default. Investments in bonds are across a variety of industrial sectors and geographical markets to avoid concentration of credit risk. Transactions involving derivatives are entered into only with banks whose credit rating are taken into account to minimise default risk. Details of the Company's investments, including their credit ratings, are shown on pages 16 to 19. Credit risk for transactions involving derivatives and equity investments is minimised as the Company only uses approved counterparties. Cash balances are held with approved depositaries only and are limited to a maximum of 4% of the Company's net asset value with any one depositary. Balances held with Short-Term Investments Company (Global Series) plc, a triple-A rated money market fund (STIC), are limited to a maximum of 6% of the Company's net asset value. At the balance sheet date the Company had £4.5 million (2013: £2.8 million) held at the custodian and £5.1 million (2013: £4.6 million) held in STIC. Fair Values of Financial Assets and Financial Liabilities Financial assets are either carried in the balance sheet at their fair value (investments and derivatives), or the balance sheet amount is a reasonable approximation of fair value (due from brokers, dividends receivable, accrued income, due to brokers, accruals and cash). Financial liabilities are carried at amortised cost except for derivative which as stated above, are carried at fair value. 19. Classification Under Fair Value Hierarchy The table that follows sets out the fair value of the financial instruments. The three levels set out in IFRS 13 hierarchy follow: Level 1 - valued using quoted prices in active markets for identical assets. Level 2 - valued by reference to valuation techniques using observable inputs other than quoted prices within Level 1. Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability. 2014 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL £'000 £'000 £'000 £'000 Financial assets designated at fair value   through profit or loss:   Quoted securities:   - Fixed interest securities(1) - 117,715 - 117,715   - Convertibles - 3,430 - 3,430   - Preference 2,809 - - 2,809   - Convertible preference 6,824 - - 6,824   - Equities - - - -   - Warrants 4,971 - - 4,971   Unquoted securities:   - Equities - - - - 14,604 121,145 - 135,749 Derivative financial instruments:   Currency hedges - 466 - 466 Total for financial assets 14,604 121,611 - 136,215 1. Fixed interest securities include both fixed and floating rate securities. 2013 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL £'000 £'000 £'000 £'000 Financial assets designated at fair value   through profit or loss:   Quoted securities:   - Fixed interest securities(1) - 103,571 - 103,571   - Convertibles - 4,525 - 4,525   - Preference 2,559 - - 2,559   - Convertible preference 6,235 - - 6,235   - Equities 649 - - 649   - Warrants 6,212 - - 6,212   Unquoted securities:   - Equities - - 24 24 15,655 108,096 24 123,775 Derivative financial instruments:   Currency hedges - 216 - 216 Total for financial assets 15,655 108,312 24 123,991 (1) Fixed interest securities include both fixed and floating rate securities. The valuation techniques used by the Company are explained in the accounting policies note. There were no transfers in the period between any of the levels. Normally investment company investments would be valued using stock market active prices, with investments disclosed as Level 1 and this is the case for the quoted equity investments that the Company holds. However, a majority of the Company's investments are non-equity investments. Evaluated prices from a third party pricing vendor are used to price these securities, together with a price comparison made to secondary and tertiary evaluated third party sources. Evaluated prices are in turn based on a variety of sources including broker quotes and benchmarks. As a result, the Company's non-equity investments have been shown as Level 2 - recognising that the fair values of these investments are not as visible as quoted equity investments and their higher inherent pricing risk. However, this does not mean that the fair values shown in the portfolio valuation are not achievable at point of sale. Level 3 investments comprise investments held at Directors' valuation as disclosed in the accounting policies note. None were held at the end of the year and a reconciliation of movements in value for the two years is set out below. 2014 2013 £'000 £'000 Opening fair value 24 167 Investments redeemed, sold or written off (24) (8) Movement in holding losses in the year/period - (135) Closing fair value of Level 3 - 24 20. Capital Management The Company's capital, or equity, is represented by its net assets which are managed to achieve the Company's investment objective set out on pages 7 and 8. The main risks to the Company's investments are shown in the Strategic Report under the `Principles Risks and Uncertainties' section on pages 11 and 12. These also explain that the Company is able to borrow and that any resultant gearing will amplify the effect on equity of changes in the value of the portfolio. The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy-back shares and it also determines dividend payments. The Company is subject to externally imposed capital requirements with respect to the availability of the borrowing facility, by the terms imposed by the custodian. The Board regularly monitors, and has complied with, the externally imposed capital requirements throughout the period. Total equity at the balance sheet date, the composition of which is shown on the balance sheet on page 33 of the Annual Financial Report, was £148,211,000 (2013: £134,017,000). 21. Contingencies, Guarantees and Financial Commitments Liabilities the Company is committed to honour but which are dependent on a future circumstance or event occurring would be disclosed in this note if any existed. There were no contingencies, guarantees or financial commitments outstanding at the balance sheet date. 22. Related Party Transactions and Transactions with the Manager A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under International Financial Reporting Standards, the Company has identified the Directors as related parties. The Directors' remuneration and interests have been disclosed on pages 27 and 28 of the Annual Financial Report with additional disclosure in note 6. No other related parties have been identified. Details of the Manager and the investment management agreement are disclosed in the Strategic Report on page 7 and management fees payable to the Manager are shown in note 5. . This annual financial report announcement is not the Company’s statutory accounts. The statutory accounts for the period ended 31 December 2014 have been audited and approved but are not yet filed. They received an audit report which is unqualified and does not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. The audited annual financial report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the Company’s Registered Office, Ordnance House, 31 Pier Road, St.Helier, Jersey, JE4 8PW or the Manager’s website via the directory found at the following link: www.invescoperpetual.co.uk/investmenttrusts. The Annual General Meeting of the Company will be held at the offices of R&H Fund Services (Jersey) Limited on 25 June 2015 at 10.30am. By order of the Board R&H Fund Services (Jersey) Limited Company Secretary 1 April 2015
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