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%)
Gearingâ€
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: ConvertibleÂ
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
Friday, 22nd November 2024
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