Annual Financial Report
City Merchants High Yield Trust Limited
Annual Financial Report Announcement
For the year ended 31 December 2019
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Financial Information and Performance Statistics
| Twelve Month Total Return(1)(2) | 2019 | 2018 |
| Net asset value | +13.4% | –3.6% |
| Share price | +18.7% | –7.6% |
| Ongoing Charges Ratio(2) | 1.02% | 0.98% |
| Dividend for the year | 10p | 10p |
Year End Information
| 31 DECEMBER 2019 |
31 DECEMBER 2018 |
% Change |
|
| Net asset value per ordinary share(2) | 192.11p | 178.69p | +7.5 |
| Share price(1) | 197.00p | 175.00p | +12.6 |
| Premium/(discount)(2) | 2.5% | (2.1)% | |
| Gearing(2) | |||
| Gross gearing | nil | nil | |
| Net cash(2) | 4.3% | 2.4% |
(1) Source: Refinitiv.
(2) Alternative Performance Measure (APM). See Glossary of Terms and Alternative Performance Measures on pages 65 to 67 of the financial report for details of the explanation and reconciliations of APMs.
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Chairman’s Statement
The rapid spread of COVID-19 has had a profound impact on countries around the world and on behalf of the Board I wish to extend our best wishes to all our shareholders in these challenging times.
Ordinarily I would start my report with a review of the Company’s performance during the last financial year, however in the circumstances it seems appropriate to begin by commenting on how the COVID-19 crisis has impacted the Company thus far in 2020.
I am able to report that despite the huge disruption caused by restrictions on movement, the Company has continued to operate smoothly. The Company’s investment management, company secretarial, corporate broking, depositary and custodian functions have all functioned effectively. The Board is in close contact with key third party providers and will continue to monitor developments closely.
Governments responded to the spread of COVID-19 by restricting movement for fear that the virus would overwhelm healthcare resources. The resulting sudden collapse in economic activity and uncertainty over how the crisis would be resolved led to steep falls in asset prices, and the high yield market experienced losses well into double digits during March. Fortunately, the portfolio entered the crisis on a strong footing with raised cash levels and a defensive stance reflecting the extent to which yields had fallen during 2019. The portfolio remains well diversified and constructed using rigorous ‘bottom-up’ credit analysis of each security, and the Manager is in a good position to invest selectively as opportunities emerge.
Unsurprisingly, given the panic which at times gripped markets, the share price became detached from the Company’s Net Asset Value (NAV) and for a brief period in March the discount exceeded 20% before narrowing. The Board will continue to monitor closely the share price in relation to the NAV. Finally, before turning to a review of performance during 2019, I can confirm that our dividend target of 10 pence per share for the current financial year remains unchanged.
2019 Performance
It is hard to escape the conclusion that conventional economic theory can provide little insight into the nature of the market environment during 2019. It used to be a tenet of the ‘dismal science’ that as an economy approached capacity inflation would inevitably start to accelerate and interest rates rise as central banks moved to dampen price pressure. This ‘tightening’ in monetary policy in response to rising inflation usually marked an end to the cycle and presaged a challenging period for asset markets.
However, despite continued economic growth in 2019, the threat of inflation in the UK and throughout the developed world remained muted allowing central banks to remain very much in stimulus mode. Concerned about the impact of trade tensions between the United States and China the Federal Reserve cut rates three times in 2019, largely reversing 2018’s tightening. The European Central Bank introduced a fresh round of stimulus, and it was little surprise that asset markets were propelled higher by a seemingly relentless tide of ‘cheap money’. Continued modest growth and monetary stimulus provided a favourable environment for high yield securities and yields fell steadily throughout the year.
I am pleased to report that the Company’s NAV total return for the year was +13.4% compared with a total return of +12.6% for the ICE Bank of America Merrill Lynch European Currency High Yield Index (‘the Index’) and an average return of +8.9% for funds in the Investment Association Sterling Strategic Bond sector. The share price returned a very respectable +18.7% moving from a discount to a premium to NAV during the year.
Investment returns over the longer term are a more meaningful guide to an active investment manager’s effectiveness, and to repeat a mantra familiar to regular readers of the Company’s Annual Financial Reports the Board pays particular attention to returns over three and five years in its appraisal of investment performance. For the three and five years to the end of 2019 the Company’s NAV total return was +18.9% and +37.0% respectively, compared to total returns of +18.3% and +32.9% for the Index.*
Dividends
We recognise the importance that shareholders place on dividend income and I am able to report that we again met our target of 10p for the year, paid in four equal, interim dividends. The fourth payment was paid on 25 February 2020 and as with previous years was paid in the form of an interim. This meant that it could be paid earlier than would be the case had we declared a final dividend, since this would need approval at the Annual General Meeting (AGM).
Costs
The Company’s ongoing charges ratio (OCR) for the year was 1.02% compared to 0.98% for the previous year. The OCR is a measure of the expenses of managing the Company. The year-on-year increase in the OCR was the result of a number of factors including the costs associated with the implementation of our Board succession plan and the appointment of a new administrator.
We remain confident that the Company is competitive when compared to actively managed alternative investment vehicles and the Board remains focused on ensuring that costs are kept to a minimum.
Premium/Discount and Share Issuance
The Board closely monitors the Company’s share price in relation to the NAV. Powers are sought each year at the AGM both to issue and to buy back shares. These powers provide us with some scope to influence the premium or discount, though it should be kept in mind that the premium or discount at which shares trade can be determined by factors beyond the Board’s influence.
The Company’s shares traded at a small premium to NAV for most of 2019. The average premium was 0.9% and we issued a further 2,950,000 shares during the year. Shares are always issued at a premium sufficient to ensure that existing shareholders do not experience dilution of the NAV.
The average price of these shares issued was 191.90p and I am pleased to confirm that a further 1,600,000 shares have been issued since the date of this report. The Company has seen its shares in issue grow by approximately 9% in the past three years.
Gearing
As at 31 December 2019 the Company’s net cash position was 4.3% (compared to 2.4% at the end of 2018). The Company’s policy on borrowing is determined by the Board and the maximum amount of borrowing permitted remains unchanged at 30% of total assets. The decision to gear the portfolio within the parameters set by the Board rests with the Manager and hence will be driven by the Manager’s assessment of market conditions, valuation and the fundamental outlook for individual high yield securities.
The Board’s preferred method of financing is to use repo facilities. Securities sold under agreements to repurchase (repo financing) are typically more efficient and less costly than loan arrangements. Having established appropriate repo facilities, we allowed our existing bank credit facilities to lapse during the year. More detail regarding repo arrangements can be found on page 9. Since the year end and as at 23 April 2020, the Company has 4.7% of repo borrowing and cash of 3.6%, resulting in net gearing of 1.1%.
Board Composition
Philip Taylor retired from the Board on 4 September 2019. Philip joined the Board in December 2011 and served throughout his tenure as Chairman of the Audit Committee. On behalf of the Board and shareholders I would like to thank him for his excellent contribution over the years.
I am delighted to welcome two new members to the Board, Heather MacCallum and Stuart McMaster both of whom joined in June 2019. They both bring a wealth of experience to the Board, and Heather assumed the Chair of the Audit Committee on Philip’s retirement.
Environmental, Social and Governance Matters (ESG)
There seems little doubt that both investors and investment managers will pay greater attention to environmental, social and governance matters during the coming year. A number of factors account for this increased focus on ‘ESG’ factors, including regulatory change and the growing public discourse on climate change. It is perhaps the ‘E’ component of ‘ESG’ which is set to have the biggest potential impact on capital markets over the longer term.
The Board recognises the importance of ESG considerations and on page 18 we explain our approach. We will continue to monitor closely developments in this space. The Manager is well-placed to assess the risks and opportunities which may result from accelerating ESG-driven change. The Manager is a Tier 1 signatory of the Financial Reporting Council’s Stewardship Code and is an active member of the UK Sustainable Investment and Finance Association. In addition, the Manager achieved a global ‘A+’ rating in 2018 from United Nations sponsored Principles of Responsible Investment (PRI) for Strategy and Governance.
Liquidity
Portfolio liquidity, or rather ‘illiquidity’ was an important topic for the UK investment industry in 2019. In June the Governor of the Bank of England Mark Carney highlighted the risk that illiquid holdings might impact on the ability of investors to redeem their shareholdings. Let me reassure shareholders that the liquidity of the Company’s investments is reviewed regularly by the Board, that the portfolio is well diversified, and largely invested in readily tradable securities.
Change of Company Secretary, Administrator and Registered Office
During the year R&H Fund Services (Jersey) Limited advised the Board that they would no longer be carrying out company secretarial services for listed funds and served notice on 1 August 2019. Following a competitive tender process, the Board selected JTC Fund Solutions (Jersey) Limited as their new Company Secretary and Administrator with effect from 10 December 2019. As a result of the change, the registered office of the Company changed to JTC Fund Solutions (Jersey) Limited, details of which can be found on page 70.
AGM
This year with many travel and meeting restrictions in place due to the Stay at Home Measures introduced by the Government on 26 March 2020 in response to COVID-19, the Board has taken the decision to postpone the date of the AGM to later in the year, as permitted by Jersey law. The situation and Government guidance are being monitored and shareholders will be notified as soon as possible when a date has been agreed and arrangements made for the AGM, which is expected to be before the end of September 2020. Invesco will provide details via the Company's website at www.invesco.co.uk/citymerchants, a separate announcement will be made to the market and a Notice of Meeting sent to shareholders.
Outlook
Predicting the direction of financial markets is challenging at the best of times and I am forced to conclude that the rapid spread of COVID-19 makes the outlook for markets as uncertain as I can recall during the course of a thirty-year investment career; events have unfolded at a dramatic, unsettling pace and we have little by way of precedent to guide us.
We have entered a period of economic and social dislocation as efforts to slow the virus’s rate of progress remain the priority of government, here and abroad. Global economic growth will be hit hard, but by how much and for how long remains very unclear. Unfortunately, the shock to economic activity will result in corporate failures. Hopefully, the combination of increased hospital and testing capacity will allow a gradual relaxation in the restrictions on movement and hence a return to economic normality.
One lesson we can draw on from financial history is the importance of rapid and aggressive policy action in the face of sudden economic shocks. It is therefore encouraging to see the extensive, coordinated action by central banks and governments to keep the ‘financial plumbing’ working and to provide economic stimulus. Furthermore, we should perhaps not lose sight of the fact that the major economies entered the crisis in reasonable shape, with financial systems much improved since the Global Financial Crisis of 2008-09.
How best to approach high yield investment faced with this type of challenging environment? An experienced investment team and a robust, well established investment process are, in my view, two essential requirements. In addition, there is no substitute for rigorous, detailed analysis of each company, its long-term prospects and the risks it faces. It is precisely this type of approach which sits at the core of the Manager’s long-established and successful record in high yield markets, and which gives the Board confidence that the Company is well placed to navigate the challenges of the coming months.
Tim Scholefield
Chairman
24 April 2020
* Index performance shows sterling hedged total returns.
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STRATEGIC REPORT
for the year ended 31 December 2019
Managers’ Investment Report
Market Background
High yield bond markets rebounded strongly in 2019. Index data from ICE Bank of America Merrill Lynch European Currency High Yield Index shows that European currency (€ and £) high yield delivered its highest return since 2012 and US high yield its highest return since 2016.
The main driver of this strong performance was the pivot by central banks back towards a more accommodative policy. This helped to offset the impact of weaker economic data and concerns over global trade, which are factors that would normally be expected to have a negative influence on high yield bond returns.
At the start of 2019, the US Federal Reserve System (the Fed) moved from contemplating rate hikes to discussing rate cuts. It subsequently made three 25 basis points (bps) cuts in the Federal Funds Rate, which took the upper bound to 1.75% by 31 December 2019. The European Central Bank (ECB), which ended its Quantitative Easing (QE) programme in December 2018, followed the Fed’s lead. In March 2019, it announced plans for a new Targeted Longer Term Refinancing Operation (TLTRO) and later in the year announced plans to restart bond purchases.
Given the pivotal role that central banks have played within financial markets since the global financial crisis, these policy announcements were very well received. The about turn by central banks did not however lift all bonds. Some were more materially impacted by concerns over the weakening economic backdrop. This dispersion of yields, which began in late 2018 and continued through much of 2019, saw a meaningful number of bonds priced at a significant discount to par. Furthermore, there were several high profile bankruptcies and restructurings in the European high yield market during 2019. These included Thomas Cook, New Look, House of Fraser and Debenhams. Signs of a stabilisation of economic data and optimism over trade at the end of the year saw some of the names that had come under pressure rally strongly.
Over the course of the year, European currency high yield credit spreads tightened from 522bps to 324bps. This reduces credit spreads to the level they were at in early summer 2018. Over this period yields moved from 5.18% to 3.61%.
Portfolio strategy
Over the 12 months to 31 December 2019 the NAV per share rose from 178.69p to 192.11p delivering a total return of +13.4%. A total dividend of 10 pence has been paid for the year.
Positioning continues to reflect the Company’s objective of delivering a consistent and relatively high level of income. To this end, we used the strength of markets during 2019 as an opportunity to take profits and reduce the subordinated financials exposure we had built up toward the end of 2018. The allocation to this area of the market was reduced from 36% at the start of 2019 to 27% by the end of the year. At the same time, the allocation to non-financial high yield and corporate hybrids was increased.
Following these changes, the portfolio continues to hold a core of non-financial high yield corporate bonds, focused on seasoned issuers that we consider have a low likelihood of default. Alongside these core positions the portfolio also has a smaller allocation to more speculative positions. The expectation with these bonds is that the return will come from both capital appreciation and income. The dispersion that we saw in markets at the start of 2019 provided the opportunity to add to this part of the portfolio. Examples of bonds that we thought offered value that we added to the portfolio include Jaguar Land Rover and car seat manufacturer, Adient. As these bonds rallied and offered less value, we took profits.
Despite the adjustments, at a sector level the portfolio’s largest exposure remains financials (both subordinated bank and subordinated insurance bonds). Elsewhere, the largest allocations are to telecoms, food, cable and auto companies.
The Company continues to exploit opportunities in both the European and US markets. Most of the currency exposure from these positions is hedged back to sterling with around 5% left in US dollars and 2% in euros at the end of December 2019.
Outlook
Thankfully, the portfolio entered the COVID-19 crisis on a relatively strong footing. The portfolio was cautiously positioned by the end of 2019, which was a natural response to yields having fallen so much and our sober view on valuations. At the very early stages of the virus outbreak, we raised cash in the portfolio significantly. As the crisis developed, we also put a hedge in place via a credit default swap. This defensive stance has meaningfully reduced the impact of market volatility on the Company’s NAV and leaves the Company with a solid base from which to invest.
The portfolio is well diversified and has always maintained exposure to well over 100 different companies. It is our belief that such diversification of credit risk is essential in a portfolio that is focussed on high yield bonds. These are unprecedented times and it is not clear how the default environment will evolve but a diversified portfolio will leave the Company in a strong position to cope.
The global policy responses announced so far are astounding but markets remain rightly focused on the economic impact that the virus will inflict. High yield bond markets have repriced to reflect the severe economic shock that we can expect, but a lack of market liquidity has undoubtedly exacerbated price moves. Such dislocation between prices today and longer-term value is already creating very attractive opportunities for the Company. Whilst maintaining a prudent level of cash we are slowly and cautiously starting to add positions to the portfolio, buying bonds from companies that we believe have a balance sheet and business profile that can survive even a severe economic disruption.
Finally, the portfolio has been constructed with a bottom-up approach, based on individual company selection and fundamental analysis. Invesco has a team of highly experienced credit analysts whose job it is to navigate credit markets in both good times and bad. We believe the Company is well positioned for the challenges ahead and to continue to deliver an attractive level of income for shareholders.
Rhys Davies Paul Read Paul Causer
Portfolio Managers
24 April 2020
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STRATEGIC REPORT
Business Review
Purpose, Business Model and Strategy
City Merchants High Yield Trust Limited is a Jersey domiciled investment company which is listed on the London Stock Exchange and its investment objective is set out below.
The Company’s purpose is to generate sustainable returns for its shareholders by investing their pooled capital to achieve the Company’s investment objective through the application of its investment policy (set out below) and with the aim of spreading investment risk.
The strategy the Board follows to achieve the 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:
– Invesco Fund Managers Limited (the ‘Manager’) to manage the portfolio in accordance with the Board’s strategy; and
– JTC Fund Solutions (Jersey) Limited (the ‘Company Secretary’) to provide company secretarial and general administration services, with effect from 10 December 2019. This service was, until this date, undertaken by R&H Fund Services (Jersey) Limited (‘R&H’).
In addition to the management and administrative functions of the Manager and the Company Secretary, the Company has contractual arrangements with Link Market Services (Jersey) Limited to act as registrar and the Bank of New York Mellon (International) Limited (BNYMIL) as depository and custodian.
The Board has oversight of the Company’s service providers, and monitors them on a formal and regular basis. The Board has a collegiate culture and pursues its fiduciary responsibilities with independence, integrity and diligence, taking advice and outside views as appropriate and constructively challenging and interacting with service providers, including the Manager. The portfolio managers responsible for the day-to-day management of the portfolio are Rhys Davies, Paul Read and Paul Causer.
The Company is an alternative investment fund for the purposes of the Alternative Investment Fund Managers Directive.
Investment Objective and Policy
Investment Objective
The Company’s investment objective is to seek to obtain capital growth and high income 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 Manager 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 are 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.
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 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, which has set a maximum of 30% of the Company’s total assets. This limit may be varied from time to time in the light of prevailing circumstances, but has not been changed since the Company’s incorporation in its current form. The Manager has discretion to borrow within the limit set by the Board. Any borrowings are covered by investments in matching currencies to manage exposure to exchange rate fluctuations.
The Board has reviewed the methods of financing available to the Company including repo financing whereby a company participates in sale and repurchase arrangements in connection with its portfolio. Under these arrangements, a company sells fixed interest securities and is contractually obliged to repurchase them at a fixed price on a fixed date, whilst retaining economic exposure to the securities sold. The difference between the (lower) sale price and the later purchase price is the cost (effectively interest) of the repo financing. Repo financing agreements are in place and may be used subject to the aggregate 30% ceiling. The Company did not use repo financing during the year to 31 December 2019 (2018: none) nor drawdown on the credit facility (2018: none) which lapsed on 4 May 2019. Since the year end and as at 23 April 2020, the Company has 4.7% of repo borrowing and cash of 3.6%, resulting in net gearing of 1.1%.
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 Ratio
Performance
As the Company’s objective is to seek to obtain capital growth and high income, the performance is best measured in terms of total return. There is no single index against which the Company’s performance may be meaningfully assessed. 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 6 to 7. The Manager has a long-term horizon and consequently the Board pays close attention to returns over three and five years in its assessment of investment performance. As explained in the Chairman’s Statement, the Board has noted the performance in the year and is satisfied with the longer term performance of the portfolio.
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 that follows shows the performance of the share price and net asset value (both on a total return basis) for the last ten years.
Dividends and Dividend Payment Policy
Dividends form a key component of the total return to shareholders and the Board currently targets dividends of 10p per year. This target has been met in the year under review. Dividends paid over the last ten years are shown in the table on page 2.
The Board’s Dividend Payment Policy is to pay dividends on a regular quarterly basis in May, August, November and February in respect of each accounting year. The timing of these regular three-monthly payments means that shareholders do not have an opportunity to vote on a final dividend. Recognising the importance of shareholder engagement, and although not required by any regulation, shareholders are given an opportunity to vote on this policy at the forthcoming AGM.
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. Powers are taken each year to issue and buy back shares, which can assist short term management, however the level of discount or premium is mostly a function of investor sentiment and demand for the shares, over which the Board may have limited influence. The ideal would be for the shares to trade close to their net asset value. The following graph shows the discount/premium through the year, ending with a premium of 2.5%. As explained in the Chairman’s Statement, demand for shares during the year resulted in the issue of 2,950,000 shares at an average price of 191.90p.
Ongoing Charges Ratio
The expenses of managing the Company are carefully monitored by the Board. The standard measure of these is the ongoing charges ratio (OCR), which 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 ratio provides a guide to the effect on performance of annual operating costs. The Company’s ongoing charges ratio for the current year was 1.02%, compared to 0.98% for the previous year. The year-on-year increase in the OCR was the result of a number of factors including the costs of implementing a Board succession plan and the appointment of a new administrator.
Investment Process
At the core of the portfolio managers’ philosophy is a belief in active investment management. They seek to invest where they see the potential for attractive returns and to avoid risks that they do not think are well rewarded. Fundamental principles drive a genuinely unconstrained investment approach, with a strong emphasis on value.
The investment process comprises four key elements to deliver the information the portfolio managers use to make their decisions:
• top down, macroeconomic analysis – examining the factors that shape the economy;
• credit analysis using internal and external research with a view to maximising returns from acceptable and understood credit risk exposure;
• value assessment, considering the risk/return profile of any bond in relation to cash, core government bonds and the rest of the fixed interest universe; and
• risk considerations, analysing all holdings to allow for a comprehensive understanding of risks involved to ensure diversification of the portfolio.
The portfolio managers enter into the majority of positions with a view to holding them until their call or maturity date and their investment process is based on making investments where the yield to maturity or call appears to them to be at least an adequate reward for the risk. The nature of the high yield market and the Company’s mandate mean that there will be occasions when the value the portfolio manager assessed in an investment is fully realised by the market. On these occasions, they may exit the position before maturity.
The portfolio managers believe that it is good investment practice to try and keep the level of turnover low, whilst at the same time recognising that this should not at any time act as a deterrent to effective portfolio management. Turnover will generally be very low due to the long term nature of many of the holdings and given the closed end nature of the Company, the portfolio managers are not presented with regular daily inflows and outflows which require managing.
Internal Control and Risk Management
The Directors have overall responsibility for the Company’s system of internal controls and are responsible for reviewing the effectiveness of these controls. This includes safeguarding of the Company’s assets. The Directors have carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
The Audit Committee (the ‘Committee’), on behalf of the Board, has established an ongoing process for identifying and assessing the risks to which the Company is exposed by reference to a risk control summary, which maps the risks, mitigating controls in place, and monitoring and reporting of relevant information to it. The review of the risk control summary also incorporated a robust assessment of new and emerging risks for monitoring purposes.
As part of the process, the Committee has identified four risk categories: strategic; investment management; third party service providers; and regulation and corporate governance. An explanation of these categories follows.
Strategic Risk
The Board sets the Company’s strategy, including setting its objective and how this should be achieved. The Board assesses the performance of the Company in the context of the market and macro conditions and gives direction to, and monitors, the Manager’s actions, and those of other third parties, on behalf of the Company.
Investment Management Risk
Investment management covers management of the portfolio together with cash management, gearing and hedging, all being areas the portfolio managers can control, and which generate the Company’s investment performance.
Third Party Service Providers Risk
The Company has no employees and its Directors are appointed on a non-executive basis. The Company is reliant on third party service providers (TPPs) for its executive functions. The Company’s most significant TPPs are the Manager, to which portfolio management is delegated, and the Company Secretary. Other significant TPPs are the corporate broker, depositary, custodian, registrar and auditor.
Regulation and Corporate Governance Risk
The Company is required to comply with many regulations. For the year under review these included but were not limited to, the provisions of the Companies (Jersey) Law 1991, the UK Listing Rules, the Alternative Investment Fund Managers Directive, the Market Abuse Regulation, the FCA’s Disclosure Guidance and Transparency Rules, the UK Corporate Governance Code and International Financial Reporting Standards.
A matrix of the risks, set out according to their assessed risk levels after mitigation, enables the Directors to concentrate on those risks that are most significant, and also forms the basis of the list of principal risks and uncertainties on pages 13 to 15. The ratings take into account the Directors’ risk appetite and the ongoing monitoring by the Manager.
Oversight of the control environment is based on the Company’s relationship with its TPPs, all of which have clearly defined lines of responsibility, delegated authority, and control procedures and systems. The Company’s main TPPs, the Manager and the Company Secretary, both have, a ‘Three Lines of Defence Model’, which is embedded into their risk management systems.
The effectiveness of the Company’s internal control and risk management system is reviewed at least twice a year by the Committee. The Committee received and considered, together with representatives of the Manager, reports in relation to operations and systems of internal controls of the Manager, Company Secretary, accounting administrator, custodian and registrar. The Committee also receives regular reports from the Manager’s internal audit and compliance departments. The Committee also received a comprehensive and satisfactory, report from the depositary at the year end Committee meeting. The Company’s risk management policies and procedures for financial instruments are set out in note 18 on pages 53 to 59.
Due diligence is undertaken before any contracts are entered into with any third party service provider. The Manager regularly reviews, against agreed service standards, the performance of TPPs 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 Committee. These various reports and reviews did not identify any significant failings or weaknesses which were relevant to the Company 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 any hedging and gearing; performance against relevant indices and the Company’s peers; the portfolio managers’ review, including of the market, the portfolio, transactions and prospects; revenue forecasts; and investment monitoring against investment guidelines. The portfolio managers are permitted discretion within these investment guidelines, which are set by the Board. Compliance with the guidelines is monitored daily by the Manager. Any proposed variation to these guidelines is referred to the Board for consideration and approval.
The Board, through the Management Engagement Committee, formally reviews the performance of the Manager and the Company Secretary annually and informally at every board meeting. The Board has reviewed and accepted both the Manager’s and Company Secretary’s whistleblowing policy under which staff of both Invesco Fund Managers Limited and JTC Fund Solutions (Jersey) Limited can, in confidence, raise concerns about possible improprieties or irregularities in matters affecting the Company.
Principal Risks and Uncertainties
The Board has carried out a robust assessment of the risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity. The principal risks that follow are those identified by the Board after consideration of mitigating factors. In carrying out this assessment, consideration was given to market uncertainty in relation to Brexit and the continuing impact of COVID-19.
Strategic Risks
Market Risk
The Risk: The Company invests primarily in fixed interest securities, the majority of which are traded on global security markets. The principal risk for investors in the Company is a significant fall and/or a prolonged period of decline in these markets. This could be triggered by unfavourable developments globally and/or in one or more regions, contemporary examples being the market uncertainty in relation to Brexit during 2019 and in 2020 the COVID-19 outbreak. The Board cannot control the effect of such external influences on the portfolio. Market risk also arises from movements in foreign currency exchange rates and interest rates.
Mitigating Procedures and Controls: An explanation of market risk and how this is addressed is given in note 18.1 to the financial statements.
Investment Objectives
The Risk: The Company’s investment objectives and structure no longer meet investors’ demands.
Mitigating Procedures and Controls: The Board receives regular reports reviewing the Company’s investment performance against its stated objectives and peer groups, and reports from discussion with its broker and major shareholders. The Board also has a periodic strategy meeting.
Lack of Liquidity in the Company’s Shares
The Risk: Lack of liquidity and lack of marketability of the Company’s shares leading to stagnant share price and wide discount.
Mitigating Procedures and Controls: The Board receives regular reports from both the Manager and the Company’s broker on the Company’s share price performance and level of discount (or premium), together with regular reports on marketing and meetings with shareholders and prospective investors. The Board recognises the importance of the Company’s scale in terms of the aggregate value of its shares in the market (‘market cap’) in creating liquidity and the benefit of a wide shareholder base, and has the ability to both issue and buy back shares to assist with market volatility. The foundation to this lies in solid investment performance and a high level of dividend. Powers are also taken to issue and buy back shares.
Investment Management Risk
Performance
The Risk: The portfolio persistently underperforms relevant indices and/or peers because of the investments selected. Performance will also be affected by market risk, which was addressed above, and by credit 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.
Mitigating Procedures and Controls: The Company does not have a formal benchmark, however, the ICE Bank of America Merrill Lynch European Currency High Yield Index (‘the Index’) is used in contribution analysis. This index tracks the performance of EUR and GBP denominated sub-investment grade corporate debt publicly issued in the eurobond, sterling domestic and euro domestic markets. The Board regularly compares the Company’s NAV performance over both the short and long term to that of the Index and relevant peers as well as reviewing analyses breaking out contributory elements of the portfolio’s performance compared with the Index. The Board also receives reports on and reviews: the constituents of the portfolio, transactions in the period and, if applicable, gearing and hedging. The investment process the portfolio managers employ to address risk versus return is explained on page 11, and an explanation of credit risk and how this is addressed is given in note 18.3 to the financial statements.
Borrowing Risk
The Risk: Borrowings 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. There is no guarantee that it will be possible to re-finance repo financing arrangements on their maturity either at all or on terms that are acceptable to the Company, in which case any amounts owing by the Company would need to be funded by the sale of investments and the Company may not be able to realise the expected value of those assets. Repo financing introduces an element of counterparty risk. Repo financing transactions require the counterparty to sell the relevant assets to the Company on the repurchase date at a fixed price but if a counterparty failed to do so, the Company would be left with a contractual claim against the defaulting counterparty and there is no guarantee the Company would be able to recover all of the value of the assets from that counterparty. In adverse market conditions, the risks of counterparty default may be greater than at other times.
Mitigating Procedures and Controls: All borrowings are actively managed by the Manager and monitored by the Board. The Company will only enter into repo arrangements with counterparties who are authorised or regulated by an appropriate regulator and whose credit rating is not less than the minimum investment grade credit ratings issued by internationally recognised agencies. There is a maximum limit allowed with any one counterparty, and transactions typically have a maturity tenor of three months or less.
Third Party Service Providers Risk
Unsatisfactory Performance of Third Party Service Providers (TPPs)
The Risk: Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operations of the Company and affect its ability to pursue successfully its investment policy and expose it to reputational risk. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company’s financial position.
Mitigating Procedures and Controls: Details of how the Board monitors the services provided by the Manager and the other TPPs, and the key elements designed to provide effective internal control, are included in the internal control and risk management section on pages 11 and 12.
Information Technology Resilience and Security
The Risk: The Company’s operational structure means that all cyber risk (information technology and physical security) arises at its TPPs. This cyber risk includes fraud, sabotage or crime perpetrated against the Company or any of its TPPs.
Mitigating Procedures and Controls: The Audit Committee on behalf of the Board regularly reviews TPPs’ audited service organisation control reports and meets with representatives of the Manager’s Investment Management, Compliance, Internal Audit and Investment Trust teams as well as the Company Secretary’s senior staff and Compliance team. The Board receives regular updates on the Manager’s and the Secretary’s information security. The Board monitors TPPs’ business continuity plans and testing – including their regular ‘live’ testing of workplace recovery arrangements.
Pandemic (COVID-19) Risk
The Risk: As the spread of COVID-19 continues, the Directors are monitoring the situation closely, together with the Manager and other service providers. A range of actions has been implemented to ensure that the Company and its service providers are able to continue to operate as normal, even in the event of prolonged disruption.
Mitigating Procedure and Controls: The Manager’s business continuity plans are reviewed on an ongoing basis and the Directors are satisfied that the Manager has in place robust plans and infrastructure to minimise the impact on its operations so that the Company can continue to trade, meet regulatory obligations, report and meet shareholder requirements.
The Manager has mandated work from home arrangements and implemented split team working for those whose work is deemed necessary to be carried out on business premises. Any meetings are being held virtually or via conference calls.
Other similar working arrangements are in place for the Company’s third-party service providers. The Directors remain confident that with these measures in place, the Company is in a good position to continue operating as normal in these extreme market conditions. In addition, due to the nature of the Company being a closed end investment company, the portfolio managers are not presented with regular daily inflows and outflows that require managing.
Regulation and Corporate Governance Risk
Failure to Comply With or Adverse Changes to Law or Regulation
The Risk: A serious breach of law or regulation could lead to suspension from the Official List and from trading on the London Stock Exchange, a fine or a qualified audit report. Adverse changes to law or regulation could affect the ability of the Company to operate or the practicality of its domicile.
Mitigating Procedures and Controls: The Board, the Company Secretary and the Manager monitor compliance with and changes to government policy, legislation and other regulations relevant to the Company.
Viability Statement
This Company is an investment company whose business consists of investing the pooled funds of its shareholders to provide them with capital growth and a high income over the long term, predominantly from a portfolio of high yielding fixed income securities. Long term for this purpose is considered to be at least five years and the Directors have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.
The main risk to the Company’s continuation is shareholder dissatisfaction through failure to meet the Company’s investment objective, through poor investment performance or the investment policy not being appropriate in prevailing market conditions, either of which could affect the demand for and liquidity of the Company’s shares. Accordingly, failure to meet the Company’s investment objective, and contributory market and investment risks, are deemed by the Board to be principal risks of the Company and are given particular consideration in the continuing assessment of its long term viability.
The Company’s investment objective and policy are kept under review. In essence they are the same as they have been since the Company commenced trading in 2012, which in turn were unchanged from those of the Company’s UK based predecessor, City Merchants High Yield Trust plc. The continued relevance of the investment objective and policy are underlined by the Company’s annual continuation vote. Last year nearly 100% of the votes registered were in favour of continuation and the Board has no reason to believe that the continuation resolution will not be passed at the forthcoming and subsequent AGMs.
Performance derives from returns for risk taken. The Manager’s Investment Report on pages 6 and 7 sets out the current investment strategy of the portfolio managers. The portfolio contains a high level of relatively high-yielding non-investment grade bonds and these carry a higher risk of default than investment grade paper. This is discussed further in note 18 to the financial statements. The Board has adopted investment limits within which the portfolio managers operate. The Directors and the portfolio managers constantly monitor the portfolio, its ratings and default risk. A bond rating analysis of the portfolio at the year-end is shown on page 20. Exposure is weighted towards higher quality issuers where the risk of default is considered to be more remote.
The terms of the Company’s corporate transition in 2012 allow direct comparison of the Company’s financial information with its UK predecessor. Taking the two together, performance has been strong for many years through different, and difficult, market cycles – as shown by the ten year total return performance graph on page 10. The investment policy has effectively been stress tested by market events in 2007/8 and earlier cycles, and in recent times by both global and domestic events. These events affected performance, but at no time did they threaten the viability of the Company. Whilst past performance may not be indicative of performance in the future, the investment policy has been consistent and the Company’s portfolio managers, overseen by the Board, have been in place throughout those past periods.
Performance and demand for the Company’s shares are not things that can be forecast. Indeed the COVID-19 outbreak is having a significant, if not unprecedented impact on the economy and markets. However, the portfolio manager has put in place a defensive strategy to reduce the impact. Furthermore, the portfolio manager and other service providers have taken steps to mitigate and control the impact on their own businesses thereby ensuring that the Company can continue to trade, report and meet shareholder needs. There are no current indications that the Company is unable to weather the COVID-19 impact or that performance and demand for the Company’s shares may be permanently affected over the next five years so as to affect the Company’s viability.
As described in note 18.2 to the financial statements on page 58 liquidity risk is not viewed by the Directors as a significant risk. The majority of the Company’s assets are readily realisable and amount to many times the value of its short term liabilities and annual operating costs. The Company is permitted to borrow up to a maximum of 30% of the Company’s total assets but currently has no long term debt obligations.
Based on the above analysis, the Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment. Despite the recent disruption from COVID-19 and the impact on global markets, the Directors consider that the Company's investment strategy will continue to serve shareholders well over the longer term.
Investment Management
As noted earlier, 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 arrears 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 fee, based on an initial amount of £22,500 plus RPI per annum, for administrative services.
The portfolio managers responsible for the day-to-day management of the portfolio are Rhys Davies, Paul Read and Paul Causer.
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 pages 9 to 11.
The Management Engagement Committee is responsible for reviewing the Manager. 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.
Financial Position
The Company’s balance sheet on page 44 shows the assets and liabilities at the year end. A £20 million revolving credit facility was available until 4 May 2019 when this lapsed and was not renewed. The Company also has repo financing agreements in place, which were not used during the year. Subsequent to the year end, the Company has started to utilise repo financing and, as at 23 April 2020, the Company has 4.7% of repo borrowing and cash of 3.6%, resulting in net gearing of 1.1%.
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 7.
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 reviewed the performance of the Company, the Directors have no reason to believe that a resolution to release them from that obligation, will not be passed at the AGM to be held later in the year.
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 31 MARCH 2020 |
At 31 DECEMBER 2019 |
At 31 DECEMBER 2018 |
||||
| FUND MANAGER/REGISTERED HOLDER | HOLDING | % | HOLDING | % | HOLDING | % |
| Hargreaves Lansdown, stockbrokers (EO) | 11,326,497 | 11.1 | 10,582,817 | 10.6 | 8,841,373 | 9.1 |
| Charles Stanley | 10,437,444 | 10.3 | 10,076,470 | 10.1 | 10,162,647 | 10.8 |
| Redmayne Bentley, stockbrokers | 7,288,841 | 7.2 | 6,825,247 | 6.8 | 5,797,331 | 6.0 |
| Interactive Investor (EO) | 7,252,850 | 7.1 | 7,302,539 | 7.3 | 2,336,078 | 2.4 |
| Invesco | 6,881,470 | 6.8 | 6,881,470 | 6.9 | 6,881,470 | 7.1 |
| EFG Harris Allday, stockbrokers | 6,008,026 | 5.9 | 5,974,261 | 6.0 | 5,264,368 | 5.4 |
| Brewin Dolphin, stockbrokers | 3,633,604 | 3.6 | 3,557,849 | 3.6 | 3,546,085 | 3.7 |
| AJ Bell, stockbrokers (EO) | 3,601,127 | 3.5 | 3,301,548 | 3.3 | 2,753,505 | 2.8 |
Board’s Duty to Promote the Success of the Company
The Directors have a fiduciary duty to act, in good faith, for the benefit of shareholders taken as a whole. In the UK, section 172 of the Companies Act 2006 seeks to codify this duty and to widen the responsibility to incorporate the consideration of wider relationships that are necessary for the Company’s sustainability. As a UK listed Company it is necessary for the Company to report against this UK statutory duty, being that the Directors have a duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests. This is reflected in the summary of the Board’s responsibilities on page 28.
In fulfilling these duties, and in accordance with the Company’s nature as an investment company with no employees and no customers in the traditional sense, the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole. Notwithstanding this, the Board has a responsible governance culture and also has due regard for broader matters so far as they apply. In particular, the Board engages with the Manager and Company Secretary at every Board meeting and the Management Engagement Committee also reviews the Company’s relationships with these and other service providers, such as the registrar, depositary and custodian, at least annually. The assessment of the Manager consequent to these reviews is set out on page 16.
The Company communicates with its shareholders at least three times a year providing information about shareholder meetings, dividend payments and half-yearly and annual financial results. In addition, the annual general meeting of the Company is under normal circumstances held in a central London location, providing shareholders with the opportunity to attend and meet with the Directors and the Manager. The AGM this year has been postponed, due to the circumstances surrounding COVID-19 and will be held at a later date in 2020, the details of which shall be communicated to shareholders. Furthermore, the Manager provides a schedule of regional meetings with institutional investors and analysts to gather the views and thoughts of investors.
Board Diversity
The Company’s policy on diversity is set out on page 29. The Board considers diversity, including the balance of skills, knowledge, experience and gender 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. During the year to 31 December 2019, due to Board refreshment, the Board comprised between four and six non-executive directors at various times of whom one was female, thereby constituting 20% female representation. The Board briefly comprised of four male directors whilst the Board undertook a recruitment process for the replacement of Winifred Robbins. The recruitment process resulted in the appointment of Stuart McMaster and Heather MacCallum. Further details of the recruitment process can be found on pages 28 and 29. Summary biographical details of the Directors are set out on page 25. The Company has no employees.
Environment, Social and Governance (ESG) Matters
As an investment company with no employees, property or activities outside investment, environmental policy has limited direct application. In relation to the portfolio, the Company has delegated the management of the Company’s investments to the Manager, who has an ESG Guiding Framework which sets out a number of principles that are intended to be considered in the context of its responsibility to manage investments in the financial interests of shareholders.
The Manager is committed to being a responsible investor and applies, and is a signatory to, the United Nations Principles for Responsible Investment, which demonstrates its extensive efforts in terms of ESG integration, active ownership, investor collaboration and transparency. The Manager is also a signatory to the FRC Stewardship Code 2012, which seeks to improve the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.
The Henley fixed income team incorporates ESG considerations in its investment process as part of the evaluation of new primary and secondary market opportunities, with identified ESG concerns feeding into the final investment decision and assessment of relative value. The process for ESG integration in fixed income differs from that of equities given the nature of the primary issuance process and the reduced availability of data for unlisted companies where a significant proportion of investments are made. The investment team makes its own subjective conclusions about the ESG characteristics of each investment held and about the overall ESG characteristics of the portfolio, although third party ESG ratings may inform their view. Additionally, the Manager’s ESG team provides formalised ESG portfolio monitoring. This is a rigorous semi-annual process where the portfolio is reviewed from an ESG perspective.
Regarding Stewardship, as noted on page 31, in the normal course of business the fixed income team has relatively few opportunities to engage via shareholder voting, although they normally fully engage on bond holder matters or if equity positions are held. The team is an active investor in the primary market and where appropriate will seek to engage with issuers in order to influence the terms and conditions of bonds issued. A copy of the Manager’s Stewardship Code can be found at www.invesco.co.uk.
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers or employees. Accordingly, the Directors consider that the Company is not within the scope of the UK Modern Slavery Act 2015.
This Strategic Report was approved by the Board of Directors on 24 April 2020.
JTC Fund Solutions (Jersey) Limited
Company Secretary
.
INVESTMENTS IN ORDER OF VALUATION
AT 31 DECEMBER 2019
| MARKET | ||||||
| MOODY/S&P | COUNTRY OF | VALUE | % OF | |||
| ISSUER | ISSUE | RATING | INDUSTRY | INCORPORATION | £000 | PORTFOLIO |
| Aviva | 6.125% Perpetual | A3/BBB+ | Financials | UK | 4,001 | 2.2 |
| 8.875% Preference | NR/NR | 1,714 | 1.0 | |||
| 5,715 | 3.2 | |||||
| Altice | 7.375% 01 May 2026 | B2/B | Telecommunications | France | 3,398 | 1.9 |
| 6.625% 15 Feb 2023 | B2/B+ | Luxembourg | 1,230 | 0.7 | ||
| 7.5% 15 May 2026 | B2/B+ | 510 | 0.3 | |||
| 5,138 | 2.9 | |||||
| Lloyds Banking Group | 7.875% Perpetual | Baa3/BB– | Financials | UK | 4,937 | 2.7 |
| Virgin Media Finance | 6.25% 28 Mar 2029 | Ba3/BB– | Consumer Services | UK | 3,353 | 1.9 |
| 5.75% 15 Apr 2023 (SNR) | B1/B | Ireland | 1,337 | 0.7 | ||
| 4,690 | 2.6 | |||||
| Vodafone Group | 6.25% 03 Oct 2078 | Ba1/BB+ | Telecommunications | UK | 1,641 | 0.9 |
| 4.875% 03 Oct 2078 | Ba1/BB+ | 1,404 | 0.8 | |||
| 7% FRN 04 Apr 2079 | Ba1/BB+ | 859 | 0.5 | |||
| 1.5% Cnv 12 Mar 2022 | NR/NR | 343 | 0.2 | |||
| 4,247 | 2.4 | |||||
| Koninklijke KPN | 6.875% FRN 14 Mar 2073 | Ba2/BB+ | Telecommunications | Netherlands | 4,034 | 2.2 |
| Barclays | 9.25% Perpetual | Ba2/BB+ | Financials | UK | 1,133 | 0.6 |
| 8% FRN Perpetual | Ba3/B+ | 1,081 | 0.6 | |||
| 7.125% FRN Perpetual | Ba3/B+ | 689 | 0.4 | |||
| 7.875% FRN Perpetual | Ba3/B+ | 554 | 0.3 | |||
| 2.75% FRN Perpetual | Ba2/BB+ | 128 | 0.1 | |||
| 3,585 | 2.0 | |||||
| Stonegate | 4.875% 15 Mar 2022 (SNR) | B2/B– | Consumer Services | UK | 1,836 | 1.0 |
| FRN 15 Mar 2022 (SNR) | B2/B– | 902 | 0.5 | |||
| 7% FRN 15 Mar 2022 (SNR) | B2/B– | 803 | 0.5 | |||
| 3,541 | 2.0 | |||||
| Enel | 7.75% 10 Sep 2075 | Ba1/BBB– | Utilities | Italy | 2,708 | 1.5 |
| 6.625% 15 Sep 2076 | Ba1/BBB– | 820 | 0.5 | |||
| 3,528 | 2.0 | |||||
| Telecom Italia | 7.721% 04 Jun 2038 | Ba1/BB+ | Telecommunications | Luxembourg | 1,854 | 1.0 |
| 5.303% 30 May 2024 | Ba1/BB+ | Italy | 1,620 | 0.9 | ||
| 3,474 | 1.9 | |||||
| Ziggo Bond Finance | 6% 15 Jan 2027 (SNR) | B3/B– | Telecommunications | Netherlands | 2,385 | 1.3 |
| 5.875% 15 Jan 2025 | B3/B– | 932 | 0.5 | |||
| 3,317 | 1.8 | |||||
| Matalan Finance | 9.5% 31 Jan 2024 (SNR) | Caa2/CCC | Consumer Goods | UK | 1,745 | 1.0 |
| 6.75% 31 Jan 2023 (SNR) | B2/B– | 1,431 | 0.8 | |||
| 3,176 | 1.8 | |||||
| Premier Foods Finance | 6.25% 15 Oct 2023 | B2/B | Consumer Goods | UK | 2,239 | 1.3 |
| FRN 15 Jul 2022 (SNR) | B2/B | 782 | 0.4 | |||
| 3,021 | 1.7 | |||||
| Arqiva Broadcast Finance | 6.75% 30 Sep 2023 | B2/NR | Telecommunications | UK | 2,978 | 1.7 |
| DKT Finance | 9.375% 17 Jun 2023 (SNR) | Caa1/B– | Financials | Denmark | 1,685 | 1.0 |
| 7% 17 Jun 2023 (SNR) | Caa1/B– | 1,129 | 0.6 | |||
| 2,814 | 1.6 | |||||
| Virgin Money | 8.75% Perpetual | Ba2/B | Financials | UK | 2,809 | 1.6 |
| Enterprise Inns | 6.375% 15 Feb 2022 (SNR) | NR/BB– | Consumer Services | UK | 1,264 | 0.7 |
| 6% 06 Oct 2023 | NR/BB– | 1,002 | 0.5 | |||
| 7.5% 15 Mar 2024 | NR/B | 513 | 0.3 | |||
| 2,779 | 1.5 | |||||
| Teva Pharmaceutical | 6.75% 01 Mar 2028 (SNR) | Ba2/BB | Health Care | Netherlands | 1,881 | 1.0 |
| 6% 31 Jan 2025 (SNR) | Ba2/BB | 545 | 0.3 | |||
| 7.125% 31 Jan 2025 (SUB) | Ba2/BB | 331 | 0.2 | |||
| 2,757 | 1.5 | |||||
| Pinnacle Bidco | 6.375% 15 Feb 2025 (SNR) | B2/B | Financials | UK | 2,604 | 1.4 |
| Aker BP | 5.875% 31 Mar 2025 (SNR) | Ba1/BBB– | Oil and Gas | Norway | 2,002 | 1.1 |
| 6% 01 Jul 2022 (SNR) | Ba1/BBB– | 480 | 0.3 | |||
| 2,482 | 1.4 | |||||
| Sainsbury’s | 6.5% Var Perpetual | NR/NR | Consumer Services | UK | 1,652 | 0.9 |
| 6% FRN 23 Nov 2027 | NR/NR | 827 | 0.5 | |||
| 2,479 | 1.4 | |||||
| Balfour Beatty | 10.75p Cnv Preference | NR/NR | Industrials | UK | 2,458 | 1.4 |
| Royal Bank of Scotland | 7.64% FRN Perpetual | Ba2/BB– | Financials | UK | 1,484 | 0.8 |
| 8% Cnv FRN Perpetual | Ba2u/B+ | 610 | 0.4 | |||
| 8.625% FRN Perpetual | Ba2u/B+ | 356 | 0.2 | |||
| 2,450 | 1.4 | |||||
| Panther BF Aggregator | 8.5% 15 May 2027 (SNR) | B3/B | Basic Materials | USA | 2,402 | 1.3 |
| Co-Operative Bank | 9.5% FRN 25 Apr 2029 | NR/NR | Financials | UK | 1,761 | 1.0 |
| 5.125% 17 May 2024 (SNR) | NR/BB | 492 | 0.3 | |||
| 2,253 | 1.3 | |||||
| Algeco Scotsman | 8% 15 Feb 2023 (SNR) | B2/B– | Consumer Services | UK | 1,466 | 0.8 |
| 10% 15 Aug 2023 (SNR) | Caa1/CCC | 753 | 0.4 | |||
| 2,219 | 1.2 | |||||
| Adient | 7% 15 May 2026 (SNR) | Ba2/BB– | Consumer Goods | USA | 1,783 | 1.0 |
| 3.5% 15 Aug 2024 | B3/B | Jersey | 320 | 0.2 | ||
| 2,103 | 1.2 | |||||
| Electricite De France | 6% Perpetual | Baa3/BB | Utilities | France | 1,441 | 0.8 |
| 5.875% Perpetual | Baa3/BB | 657 | 0.4 | |||
| 2,098 | 1.2 | |||||
| Drax Finco | 4.25% 01 May 2022 (SNR) | NR/BB+ | Utilities | UK | 2,040 | 1.1 |
| Pension Insurance | 7.375% FRN Perpetual | NR/NR | Financials | UK | 2,028 | 1.1 |
| IHO Verwaltungs | 6% 15 May 2027 (SNR) | Ba1/BB+ | Consumer Goods | Germany | 1,278 | 0.7 |
| 3.875% 15 May 2027 (SNR) | Ba1/BB+ | 734 | 0.4 | |||
| 2,012 | 1.1 | |||||
| Citigroup Capital | 6.829% FRN Perpetual | Baa3/BB+ | Financials | USA | 1,926 | 1.1 |
| Fiat Chrysler Automobiles | 4.5% 15 Apr 2020 | Ba2/BB+ | Consumer Goods | Netherlands | 1,896 | 1.1 |
| Burger King France | 8% 15 Dec 2022 (SNR) | NR/CCC | Consumer Services | France | 1,444 | 0.8 |
| FRN 01 May 2023 | B3/B– | 446 | 0.2 | |||
| 1,890 | 1.0 | |||||
| Codere Finance | 7.625% 01 Nov 2021 (SNR) | B3/B– | Consumer Services | Luxembourg | 1,087 | 0.6 |
| 6.75% 01 Nov 2021 (SNR) | B3/B– | 782 | 0.4 | |||
| 1,869 | 1.0 | |||||
| Marb Bondco | 6.875% 19 Jan 2025 (SNR) | NR/BB– | Financials | UK | 1,865 | 1.0 |
| William Hill | 4.75% 01 May 2026 | Ba1/BB | Consumer Services | UK | 1,862 | 1.0 |
| Banco BPM | 8.75% FRN Perpetual | B3/NR | Financials | Italy | 1,830 | 1.0 |
| Neptune Energy | 6.625% 15 May 2025 (SNR) | B1/BB– | Oil and Gas | UK | 1,802 | 1.0 |
| Ocado | 4% 15 Jun 2024 (SNR) | Ba3/NR | Consumer Services | UK | 1,750 | 1.0 |
| Loxam SAS | 5.75% 15 Jul 2027 | NR/B | Consumer Services | France | 951 | 0.5 |
| 3.75% 15 Jul 2026 (SNR) | NR/BB– | 749 | 0.4 | |||
| 1,700 | 0.9 | |||||
| Permanent TSB | 8.625% FRN Perpetual | NR/NR | Financials | Ireland | 1,569 | 0.9 |
| Ecclesiastical Insurance Office | 8.625% Preference | NR/NR | Financials | UK | 1,550 | 0.9 |
| Iron Mountain | 3.875% 15 Nov 2025 | Ba3/BB– | Financials | UK | 1,513 | 0.8 |
| SCOR | 5.25% 13 Mar 2067 | Baa1u/A– | Financials | France | 1,512 | 0.8 |
| Telefonica | 5.875% FRN Perpetual (SUB) | Ba2/BB+ | Telecommunications | Netherlands | 1,381 | 0.8 |
| DNO ASA | 8.375% 29 May 2024 | NR/NR | Oil and Gas | Norway | 825 | 0.5 |
| 8.75% 31 May 2023 | NR/NR | 537 | 0.3 | |||
| 1,362 | 0.8 | |||||
| Picard | FRN 30 Nov 2023 | B3/B | Consumer Services | France | 1,341 | 0.7 |
| Maxeda DIY | 6.125% 15 Jul 2022 (SNR) | B2/B– | Consumer Services | Netherlands | 1,304 | 0.7 |
| Platin | 5.375% 15 Jun 2023 (SNR) | B3/B | Industrials | Germany | 1,236 | 0.7 |
| Orange | 5.875% Perpetual | Baa3/BBB– | Telecommunications | France | 1,211 | 0.7 |
| Beazley | 5.875% 04 Nov 2026 | NR/NR | Financials | Ireland | 1,206 | 0.7 |
| Société Genérale | 7.375% 31 Dec 2065 | Ba2/BB+ | Financials | France | 1,194 | 0.7 |
| OneSavings Bank | 9.125% FRN Perpetual | NR/NR | Financials | UK | 1,189 | 0.7 |
| Time Warner Cable | 5.25% 15 Jul 2042 | Ba1/BBB– | Consumer Services | USA | 1,184 | 0.7 |
| Bombardier | 6% 15 Oct 2022 | Caa1/B– | Industrials | Canada | 906 | 0.5 |
| 7.5% 15 Mar 2025 | Caa1/B– | 272 | 0.2 | |||
| 1,178 | 0.7 | |||||
| Yew Grove REIT | Common Stock | NR/NR | Financials | Ireland | 1,176 | 0.7 |
| Banco Comercial Portugues | 9.25% 30 Apr 2067 | B2/CCC+ | Financials | Portugal | 1,126 | 0.6 |
| HSBC | 5.25% 14 Mar 2044 | A3/BBB+ | Financials | UK | 584 | 0.3 |
| 4.25% 14 Mar 2024 | A3/BBB+ | 512 | 0.3 | |||
| 1,096 | 0.6 | |||||
| Petra Diamonds | 7.25% 01 May 2022 (SNR) | Caa1/CCC+ | Basic Materials | UK | 1,092 | 0.6 |
| Vistajet | 10.5% 01 Jun 2024 (SNR) | B3/B– | Technology | Malta | 1,074 | 0.6 |
| Deutsche Bank | 7.125% Perpetual | B1/B+ | Financials | Germany | 1,066 | 0.6 |
| Direct Line Insurance | 9.25% FRN 27 Apr 2042 | A3/BBB+ | Financials | UK | 1,055 | 0.6 |
| Travis Perkins | 4.5% 07 Sep 2023 (SNR) | NR/BB+ | Industrials | UK | 1,049 | 0.6 |
| Walnut Bidco | 9.125% 01 AUG 2024 (SNR) | B1/B+ | Consumer Goods | Jersey | 1,038 | 0.6 |
| BNP Paribas | Cnv FRN Perpetual | Baa3/BB+ | Financials | Belgium | 1,020 | 0.6 |
| Trafigura | 7.5% FRN Perpetual (SUB) | NR/NR | Basic Materials | Singapore | 774 | 0.5 |
| 5.25% 19 Mar 2023 (SNR) | NR/NR | Luxembourg | 241 | 0.1 | ||
| 1,015 | 0.6 | |||||
| UniCredit International Bank | 8% FRN Perpetual | NR/NR | Financials | Italy | 986 | 0.5 |
| Intesa Sanpaolo | 7% Perpetual | Ba3/BB– | Financials | Italy | 984 | 0.5 |
| Ithaca Energy | 9.375% 15 Jul 2024 (SNR) | B3/B | Oil and Gas | UK | 953 | 0.5 |
| Takko | FRN 15 Nov 2023 (SNR) | B2/B– | Consumer Goods | Luxembourg | 924 | 0.5 |
| EG Global Finance | 4.375% 07 Feb 2025 (SNR) | B2/B | Oil and Gas | UK | 460 | 0.2 |
| 8.5% 30 Oct 2025 (SNR) | B2/B | 294 | 0.2 | |||
| 6.75% 07 Feb 2025 (SNR) | B2/B | 154 | 0.1 | |||
| 908 | 0.5 | |||||
| AXA | 6.379% FRN Perpetual | Baa1/BBB | Financials | France | 907 | 0.5 |
| Sigma Holdco | 7.875% 15 May 2026 (SNR) | B3/B– | Consumer Goods | Netherlands | 904 | 0.5 |
| Pizza Express | 6.625% 01 Aug 2021 | Caa1/CCC– | Consumer Services | UK | 903 | 0.5 |
| Scottish Widows | 5.5% 16 Jun 2023 | Baa1/BBB+ | Financials | UK | 890 | 0.5 |
| Trinseo | 5.375% 01 Sep 2025 (SNR) | B2/B+ | Basic Materials | Luxembourg | 889 | 0.5 |
| Lamb Weston | 4.625% 01 Nov 2024 | Ba2/BB+ | Consumer Goods | USA | 880 | 0.5 |
| CGG | FRN 21 Feb 2024 | Caa1/NR | Oil and Gas | France | 564 | 0.3 |
| Common Stock | NR/NR | 295 | 0.2 | |||
| 859 | 0.5 | |||||
| EDP – Energias de Portugal | 4.496% 30 Apr 2079 | Ba2/BB | Utilities | Portugal | 851 | 0.5 |
| J. C. Penney | 8.625% 15 Mar 2025 (SNR) | Caa2/CCC– | Consumer Services | USA | 565 | 0.3 |
| 6.375% 15 Oct 2036 (SNR) | Caa3/CCC– | 270 | 0.2 | |||
| 835 | 0.5 | |||||
| FAGE International | 5.625% 15 Aug 2026 (SNR) | B2/B+ | Consumer Goods | Luxembourg | 828 | 0.5 |
| Tasty Bondco | 6.25 15 May 2026 (SNR) | B2/B | Consumer Services | Spain | 815 | 0.5 |
| Phoenix Life | 7.25% Perpetual | WR/NR | Financials | UK | 811 | 0.4 |
| Diamond 1 | 5.45% 15 Jun 2023 | Baa3/BBB– | Technology | USA | 809 | 0.4 |
| Aegon | 5.625% FRN Perpetual | Baa3/BBB– | Financials | Netherlands | 796 | 0.4 |
| Crystal Almond | 4.25% 15 Oct 2024 (SNR) | NR/B | Telecommunications | Luxembourg | 791 | 0.4 |
| VIVAT | 6.25% Perpetual | NR/NR | Financials | Netherlands | 767 | 0.4 |
| National Bank Of Greece | 8.25% FRN 18 Jul 2029 | Caa2/CCC | Financials | Greece | 740 | 0.4 |
| Miller Homes | FRN 15 Oct 2023 (SNR) | NR/BB– | Consumer Goods | UK | 543 | 0.3 |
| 5.5% 15 Oct 2023 (SNR) | NR/BB– | 196 | 0.1 | |||
| 739 | 0.4 | |||||
| Peel Land & Property Investments |
8.375% Var 30 Apr 2040 | NR/BBB | Financials | UK | 738 | 0.4 |
| Brink's | 4.625% 15 Oct 2027 | Ba2/BB | Industrials | USA | 668 | 0.4 |
| Nationwide | 5.875% FRN Perpetual | Baa3/BB+ | Financials | UK | 639 | 0.4 |
| CYBG | 9.25% Perpetual | Ba2u/B | Financials | UK | 621 | 0.3 |
| CIRSA Finance | 7.875% 20 Dec 2023 | B2/B | Financials | Luxembourg | 615 | 0.3 |
| Puma International | 5% 24 Jan 2026 | Ba3/NR | Oil and Gas | Luxembourg | 612 | 0.3 |
| AMC Entertainment | 6.375% 15 Nov 2024 | B3/CCC+ | Consumer Services | USA | 560 | 0.3 |
| (SUB NTS) | ||||||
| XPO Logistics | 6.5% 15 Jun 2022 (SNR) | Ba3/BB– | Industrials | USA | 558 | 0.3 |
| Commerzbank | 8.125% 19 Sep 2023 | Baa3/BBB– | Financials | Germany | 524 | 0.3 |
| Rothschilds Continuation Finance | FRN Perpetual | NR/NR | Financials | Netherlands | 522 | 0.3 |
| Hertz | 7.625% 01 Jun 2022 | B1/BB– | Consumer Services | USA | 506 | 0.3 |
| Jaguar Land Rover | 2.75% 24 Jan 2021 | B1/B+ | Consumer Goods | UK | 499 | 0.3 |
| Solvay Finance | 5.869% Var Perpetual | Ba1/BB+ | Basic Materials | France | 499 | 0.3 |
| Principality Building Society | 7% Perpetual | Ba2/NR | Financials | UK | 499 | 0.3 |
| Europcar Mobility | 4% 30 Apr 2026 (SNR) | B3/B | Consumer Services | France | 491 | 0.3 |
| JRP Group | 9% 26 Oct 2026 | NR/NR | Financials | UK | 467 | 0.3 |
| Bayer AG | 3.125% FRN 12 Nov 2079 | Baa3/BB+ | Health Care | Germany | 434 | 0.2 |
| (SUB) | ||||||
| PGH Capital | 5.375% 06 Jul 2027 | NR/NR | Financials | Cayman Islands | 432 | 0.2 |
| Nyrstar | 0% 31 Jul 2026 (SNR) | NR/NR | Basic Materials | Malta | 381 | 0.2 |
| CEMEX | 6.125% 05 May 2025 | NR/BB | Industrials | Mexico | 359 | 0.2 |
| Argentina (Rep Of) | 6.875% 11 Jan 2048 (SNR) | Caa2/CC | Government Bonds | Argentina | 354 | 0.2 |
| La Financière ATALIAN | 4% 15 May 2024 (SNR) | Caa1/B | Financials | France | 338 | 0.2 |
| Odyssey Europe | 8% 15 May 2023 (SNR) | B2/B | Consumer Services | UK | 327 | 0.2 |
| Rothesay Life | 8% 30 Oct 2025 | NR/NR | Financials | UK | 306 | 0.2 |
| Millicom International Cellular | 5.125% 15 Jan 2028 | Ba2/NR | Telecommunications | Luxembourg | 300 | 0.2 |
| Petroleos Mexicanos | 6.75% 21 Sep 2047 (SNR) | Baa3/BBB+ | Oil and Gas | Mexico | 265 | 0.1 |
| Whitbread | 3.375% 16 Oct 2025 (SNR) | NR/NR | Consumer Services | UK | 259 | 0.1 |
| NMC Health | 1.875% Cnv 30 Apr 2025 | NR/NR | Health Care | Jersey | 239 | 0.1 |
| ASR Nederland | 4.625% Cnv FRN Perpetual | NR/BB+ | Financials | Netherlands | 235 | 0.1 |
| Tesco | 6.15% 15 Nov 2037 (SNR) | Baa3/BBB– | Consumer Services | UK | 205 | 0.1 |
| CIS General Insurance | 12% FRN 08 May 2025 | NR/NR | Industrials | UK | 103 | 0.1 |
| Chemours | 7% 15 May 2025 | Ba3/B+ | Basic Materials | USA | 91 | 0.0 |
| M&G Finance | 7.5% FRN Perpetual (SUB NTS) | NR/NR | Financials | Luxembourg | 18 | 0.0 |
| 179,728 | 100.0 |
Abbreviations used in the above valuation:
Cnv: Convertible
FRN: Floating Rate Note
SNR: Senior
Var: Variable
SUB NTS: Subordinated Notes
.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN RESPECT OF THE PREPARATION OF THE 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 as adopted by the European Union (IFRSs). 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 17) 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 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 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 25, 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
• they consider that 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.
• so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware, and each Director has taken steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.
Signed on behalf of the Board of Directors
Heather MacCallum
Audit Committee Chair
24 April 2020
.
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
| 2019 | 2018 | ||||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL | ||
| NOTES | £000 | £000 | £000 | £000 | £000 | £000 | |
| Profit/(loss) on investments held at fair value |
11 |
— |
10,086 |
10,086 |
— |
(12,911) |
(12,911) |
| Profit/(loss) on derivative instruments – currency hedges | — | 4,861 | 4,861 | — | (3,395) | (3,395) | |
| Exchange differences | — | (1,380) | (1,380) | — | 355 | 355 | |
| Income | 4 | 11,200 | — | 11,200 | 11,247 | — | 11,247 |
| Investment management fee | 5 | (907) | (489) | (1,396) | (875) | (470) | (1,345) |
| Other expenses | 6 | (471) | (3) | (474) | (436) | (1) | (437) |
| Profit/(loss) before finance costs and taxation |
9,822 |
13,075 |
22,897 |
9,936 |
(16,422) |
(6,486) |
|
| Finance costs | 7 | (13) | (7) | (20) | (28) | (15) | (43) |
| Profit/(loss) before taxation | 9,809 | 13,068 | 22,877 | 9,908 | (16,437) | (6,529) | |
| Taxation | 8 | (13) | — | (13) | — | — | — |
| Profit/(loss) after taxation | 9,796 | 13,068 | 22,864 | 9,908 | (16,437) | (6,529) | |
| Return per ordinary share – basic | 9 | 10.0p | 13.3p | 23.3p | 10.3p | (17.1p) | (6.8p) |
The total column of this statement represents the Company’s statement of comprehensive income, prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The profit/(loss) after taxation is the total comprehensive income/(loss). 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 of the Company. No operations were acquired or discontinued in the year.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
| STATED | CAPITAL | REVENUE | |||
| CAPITAL | RESERVE | RESERVE | TOTAL | ||
| NOTES | £000 | £000 | £000 | £000 | |
| At 31 December 2017 | 155,458 | 27,659 | 3,517 | 186,634 | |
| Total comprehensive income/(loss) for the year | — | (16,437) | 9,908 | (6,529) | |
| Dividends paid | 10 | (23) | — | (9,586) | (9,609) |
| Net proceeds from issue of new shares | 15 | 2,993 | — | — | 2,993 |
| At 31 December 2018 | 158,428 | 11,222 | 3,839 | 173,489 | |
| Total comprehensive income for the year | 13,068 | 9,796 | 22,864 | ||
| Dividends paid | 10 | (32) | (9,752) | (9,784) | |
| Net proceeds from issue of new shares | 15 | 5,617 | 5,617 | ||
| At 31 December 2019 | 164,013 | 24,290 | 3,883 | 192,186 |
.
BALANCE SHEET
AT 31 DECEMBER
| 2019 | 2018 | ||
| NOTES | £000 | £000 | |
| Non-current assets | |||
| Investments held at fair value through profit or loss | 11 | 179,728 | 168,188 |
| Current assets | |||
| Other receivables | 12 | 3,285 | 3,128 |
| Derivative financial instruments – unrealised net profit | 13 | 1,309 | — |
| Cash and cash equivalents | 8,321 | 4,181 | |
| 12,915 | 7,309 | ||
| Current liabilities | |||
| Other payables | 14 | (457) | (427) |
| Derivative financial instruments – unrealised net loss | 13 | — | (1,581) |
| Net current assets | 12,458 | 5,301 | |
| Net assets | 192,186 | 173,489 | |
| Capital and reserves | |||
| Stated capital | 15 | 164,013 | 158,428 |
| Capital reserve | 16 | 24,290 | 11,222 |
| Revenue reserve | 16 | 3,883 | 3,839 |
| Total shareholders’ funds | 192,186 | 173,489 | |
| Net asset value per ordinary share | 17 | 192.11p | 178.69p |
These financial statements were approved and authorised for issue by the Board of Directors on 24 April 2020.
Heather MacCallum
Audit Committee Chair
Signed on behalf of the Board of Directors
.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER
| 2019 | 2018 | |
| £000 | £000 | |
| Cash flow from operating activities | ||
| Profit/(loss) before finance costs and taxation | 22,897 | (6,486) |
| Tax on overseas income | (13) | — |
| Adjustments for: | ||
| Purchase of investments | (58,645) | (57,228) |
| Sale of investments | 57,191 | 51,102 |
| (1,454) | (6,126) | |
| (Profit)/loss on investments held at fair value | (10,086) | 12,911 |
| Net cash movement from derivative instruments – currency hedges | (2,890) | 2,031 |
| Decrease/(increase) in receivables | 38 | (258) |
| Increase/(decrease) in payables | 35 | (24) |
| Net cash inflow from operating activities after taxation | 8,527 | 2,048 |
| Cash flow from financing activities | ||
| Finance costs paid | (25) | (43) |
| Net proceeds from issue of new shares | 5,422 | 2,993 |
| Dividends paid - note 10 | (9,784) | (9,609) |
| Net cash outflow from financing activities | (4,387) | (6,659) |
| Net increase/(decrease) in cash and cash equivalents | 4,140 | (4,611) |
| Cash and cash equivalents at start of the year | 4,181 | 8,792 |
| Cash and cash equivalents at end of the year | 8,321 | 4,181 |
| Reconciliation of cash and cash equivalents to the | ||
| Balance Sheet is as follows: | ||
| Cash held at custodian | 1,464 | 1,614 |
| Short-Term Investment Company (Global Series) plc, | ||
| money market fund | 6,857 | 2,567 |
| Cash and cash equivalents | 8,321 | 4,181 |
| Cash flows from operating activities includes: | ||
| Dividends received | 535 | 521 |
| Interest received | 10,655 | 10,465 |
.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019
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
The principal 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. These policies have been consistently applied during the current year and preceding year, unless otherwise stated.
(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’, updated by the Association of Investment Companies in October 2019, is consistent with the requirements of IFRS, the Directors have prepared 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 the SORP.
The revised SORP issued in October 2019 is applicable for accounting periods beginning on or after 1 January 2019. As a result, the presentation of gains and losses arising from disposals of investments and gains and losses on revaluation of investments have now been combined, as shown in note 11 with no impact to the net asset value or profit/(loss) reported for both the current or prior year. No other accounting policies or disclosures have changed as a result of the revised SORP.
(ii) Going Concern
As explained under ‘Annual Continuation Vote’ on page 17, 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. The Directors also determined that the financial statements should be prepared on a going concern basis as reported on page 36. 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 year had no significant impact on the amounts reported in these financial statements but may impact accounting for future transactions and arrangements.
The following standards became effective during the year:
• IFRS 16: Leases (effective 1 January 2019). This requires lessees to recognise new assets and liabilities under an on-balance sheet accounting model that is similar to current finance lease accounting.
• IFRIC 23: Uncertainty over Income Tax Treatments (effective 1 January 2019). This applies where there is uncertainty over the acceptable income tax treatment of an item under IAS12.
The adoption of the above standards and interpretations (or any other standards and interpretations which are in issue but not effective) have not had a material impact on the financial statements of the Company.
(iv) Critical Accounting Estimates and Judgements
The preparation of the financial statements may require the Directors to make estimations where uncertainty exists. It also requires the Directors to exercise judgement in the process of applying the accounting policies. There have been no significant judgements, estimates or assumptions for the current or preceding year, except for the allocation of management fee and finance costs (see note 2(h)).
(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
Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument. These are offset 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
Financial assets are derecognised 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
Financial liabilities are derecognised when the Company’s 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
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.
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.
(e) Cash and Cash Equivalents
Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds.
(f) Securities Sold Under Agreements to Repurchase (‘repo financing’)
The Company participates in repo financing arrangements in connection with its investment portfolio. Under these arrangements, the Company sells fixed interest securities but is contractually obliged to repurchase them at a fixed price on a fixed date. Securities which are the subject of repo financing arrangements are included in investments in the balance sheet at their fair value and the associated liability is recognised at amortised cost, being the capital amounts owing under the repo financing arrangements. The difference between sale and repurchase prices for such transactions is reflected in the statement of comprehensive income over the lives of the transactions, within finance costs which is allocated equally between capital and revenue. This accounting has been adopted because the repurchase price results in a lender‘s return for the transferee as the Company has retained substantially all the risks and rewards of ownership of the asset.
(g) Income Recognition
All income is recognised in the statement of comprehensive income. Interest income arising from fixed income securities 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 is taken into account on an accruals basis.
Special dividends are considered individually to ascertain the reason behind the payment. This will determine whether they are treated as income or capital in the income statement.
(h) 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.
(i) 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.
| 2019 | 2018 | |
| £000 | £000 | |
| Income from investments | ||
| UK dividends | 448 | 447 |
| UK investment income – interest | 5,002 | 5,099 |
| Overseas investment income – interest | 5,631 | 5,667 |
| Overseas dividends | 82 | 29 |
| Overseas special dividends | 19 | — |
| 11,182 | 11,242 | |
| Other income | ||
| Deposit interest | 18 | 5 |
| Total income | 11,200 | 11,247 |
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.
| 2019 | 2018 | |||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Investment management fee | 907 | 489 | 1,396 | 875 | 470 | 1,345 |
Details of the investment management agreement are given on page 16 in the Strategic Report.
At 31 December 2019, £360,000 (2018: £325,000) was accrued in respect of the investment management fee.
6. Other Expenses
The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.
| 2019 | 2018 | |||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Directors’ fees (i) | 137 | — | 137 | 129 | — | 129 |
| Auditors’ fees (ii): | ||||||
| for audit of the Company’s | ||||||
| annual financial statements | 30 | — | 30 | 30 | — | 30 |
| Other expenses (iii) | 304 | 3 | 307 | 277 | 1 | 278 |
| 471 | 3 | 474 | 436 | 1 | 437 | |
(i) The maximum Directors’ fees authorised by the Articles of Association are £150,000 per annum. The Report on Directors’ Remuneration and Interests provides further information on Directors’ fees.
(ii) Auditor’s fees include out of pocket expenses.
(iii) Other expenses include:
• £40,000 (2018: £41,000) due to R&H Fund Services (Jersey) Limited who acted as Administrator and Company Secretary to the Company under an Agreement dated 19 December 2011 which was terminated on 10 December 2019. With effect from 10 December 2019, JTC Fund Solutions (Jersey) Limited was appointed as new Company Administrator and Secretary for an annual fee of £70,000.
• an administration fee due to the Manager of £27,000 (2018: 26,000). It is based on an initial fee of £22,500 plus RPI increases in May of each year.
• custodian transaction charges of £3,008 (2018: £942). These are charged to capital.
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.
| 2019 | 2018 | |||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Commitment fees due on loan facility | 9 | 5 | 14 | 26 | 14 | 40 |
| Bank charges | 4 | 2 | 6 | 2 | 1 | 3 |
| 13 | 7 | 20 | 28 | 15 | 43 |
The Company had a 364 day committed £20 million multi-currency revolving credit facility with Bank of New York Mellon which lapsed on 4 May 2019 and was not renewed. No amounts had been drawn down under the facility during the year or the previous year.
Interest payable was based on the interbank offered rate for the currency drawn down plus a margin. The commitment fee was based on 0.20% of the average undrawn amount each quarter.
The Company has repo financing arrangements in place, which were not used during the year or the previous year.
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 result in a revenue tax, the only overseas tax arises on assets domiciled in countries with which Jersey has no double-taxation treaty.
| 2019 | 2018 | |
| £000 | £000 | |
| Overseas taxation | 13 | — |
The Company is subject to Jersey income tax at the rate of 0% (2018: 0%). The overseas tax charge consists of irrecoverable withholding tax suffered.
9. Return per Ordinary Share
Return per ordinary 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 returns on ordinary activities after taxation and on 98,065,591 (2018: 96,209,286) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.
There were no dilutive shares at the year end (2018: nil).
10. Dividends on Ordinary Shares
Dividends are usually paid from the income less expenses. Dividends are paid as an amount per ordinary share held.
| 2019 | 2018 | |||
| Pence | £000 | Pence | £000 | |
| Dividends paid and recognised in the year: | ||||
| Fourth interim | 2.50 | 2,427 | 2.50 | 2,388 |
| First interim | 2.50 | 2,441 | 2.50 | 2,388 |
| Second interim | 2.50 | 2,447 | 2.50 | 2,414 |
| Third interim | 2.50 | 2,469 | 2.50 | 2,419 |
| 10.00 | 9,784 | 10.00 | 9,609 | |
Dividends paid in the year have been charged to revenue except for £32,000 (2018: £23,000) 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).
Set out below are the dividends that have been declared in respect of the financial years ended 31 December:
| 2019 | 2018 | |||
| Pence | £000 | Pence | £000 | |
| Dividends in respect of the year: | ||||
| First interim | 2.50 | 2,441 | 2.50 | 2,388 |
| Second interim | 2.50 | 2,447 | 2.50 | 2,414 |
| Third interim | 2.50 | 2,469 | 2.50 | 2,419 |
| Fourth interim | 2.50 | 2,513 | 2.50 | 2,427 |
| 10.00 | 9,870 | 10.00 | 9,648 | |
The fourth interim dividend for 2019 was paid on 25 February 2020 to shareholders on the register on 24 January 2020.
11. Investments Held at Fair Value Through Profit and Loss
The portfolio is principally made up of investments which are listed and traded on regulated stock exchanges. Profits and losses 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/(losses) in the year
| 2019 | 2018 | |
| £000 | £000 | |
| Opening book cost | 166,354 | 159,830 |
| Opening investment holding profits | 1,834 | 15,179 |
| Opening valuation | 168,188 | 175,009 |
| Movements in the year: | ||
| Purchases at cost | 58,645 | 57,228 |
| Sales – proceeds | (57,191) | (51,138) |
| Profit/(loss) on investments in the year | 10,086 | (12,911)* |
| Closing valuation | 179,728 | 168,188 |
| Closing book cost | 171,675 | 166,354 |
| Closing investment holding profits | 8,053 | 1,834 |
| Closing valuation | 179,728 | 168,188 |
The Company received £57,191,000 (2018: £51,138,000) from investments sold in the year. The book cost of these investments when they were purchased was £53,324,000 (2018: £50,704,000) realising a profit of £3,867,000 (2018: £434,000). These investments have been revalued over time and, until they were sold, any unrealised profits/losses were included in the fair value of the investments.
* Due to adoption of the revised SORP issued in October 2019 (see Note 2(a)(i)). The loss on investments figure of £12,911,000 for the year ended 31 December 2018 is as follows:
| 2018 | |
| £000 | |
| Net realised profit on sales | 434 |
| Investment holding loss in the year | (13,345) |
| Loss on investments | (12,911) |
(b) Transaction costs
The transaction costs included in gains on investments amount to £nil (2018: £nil) on purchases and £nil (2018: £nil) for sales.
(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 order 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.
| 2019 | 2018 | |
| £000 | £000 | |
| Amount due from the liquidation of CMHYT plc (predecessor vehicle) | — | 36 |
| Proceeds due from issue of new shares | 195 | — |
| Prepayments and accrued income | 3,090 | 3,092 |
| 3,285 | 3,128 |
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.
| 2019 | 2018 | |
| £000 | £000 | |
| Forward currency contracts – net unrealised profit/(loss) | 1,309 | (1,581) |
| 1,309 | (1,581) |
14. Other Payables
Other payables are amounts which must be paid by the Company, and include amounts owed to suppliers, such as the Manager and auditor, and any amounts due to brokers for the purchase of investments.
| 2019 | 2018 | |
| £000 | £000 | |
| Accruals | 457 | 427 |
| 457 | 427 |
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.
| 2019 | 2018 | 2019 | 2018 | |
| Number | Number | £000 | £000 | |
| Allotted ordinary shares of no par value | ||||
| Brought forward | 97,091,204 | 95,516,204 | 158,428 | 155,458 |
| Net issue proceeds | 2,950,000 | 1,575,000 | 5,617 | 2,993 |
| Dividends paid from stated capital | — | — | (32) | (23) |
| 100,041,204 | 97,091,204 | 164,013 | 158,428 |
Details of the stated capital and rights attaching to the Company’s ordinary shares are shown in the Director’s Report on page 61.
For the year to 31 December 2019, 2,950,000 (2018: 1,575,000) 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 £5,661,000 (2018: £3,010,000), at an average price of 191.90p (2018: 191.09p), and the net proceeds after issue costs were £5,617,000 (2018: £2,993,000). The net proceeds included an aggregate amount of £32,000 (2018: £23,000) 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 1,600,000 ordinary shares were issued at an average price of 196.40p.
Because the criteria in paragraphs 16C and 16D of IAS 32 Financial Instruments: Presentation, have been met, the stated capital of the Company is classified as equity even though there is a continuation vote.
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 unrealised 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 of disposals of investments. In addition, costs allocated to capital are recognised in the capital reserve. The revenue reserve shows the net revenue after payment of any dividend from the reserve. 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 year end were as follows:
| Net Asset Value | Net Assets | |||
| per Ordinary Share | Attributable | |||
| 2019 | 2018 | 2019 | 2018 | |
| Pence | Pence | £000 | £000 | |
| Ordinary shares | 192.11 | 178.69 | 192,186 | 173,489 |
Net asset value per ordinary share is based on net assets at the year end and on 100,041,204 (2018: 97,091,204) 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 management risk on pages 13 and 14 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 in accordance with its 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 and cash equivalents, borrowings (including repo financing) other receivables and other payables that arise directly from the Company’s operations.
The Company may enter into derivative transactions, including credit default swaps, 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. During the year the only derivatives entered into were forward currency contracts.
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 security fundamentals give the portfolio managers the best possible understanding of the risks associated with a particular security. 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, including credit risk (18.3). Borrowing 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 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 has 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 is reviewed by Directors at each Board meeting. The Company may use forward currency contracts to mitigate currency risk. Borrowings through repo financing in foreign currencies can also 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. All borrowings 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.
| US | ||
| Euro | Dollar | |
| 31 December 2019 | £000 | £000 |
| Investments at fair value through profit or loss that are monetary items (fixed and floating interest) |
27,385 |
66,193 |
| Forward currency contracts | (24,643) | (57,497) |
| Other receivables (due from brokers and dividends) | 442 | 1,008 |
| Cash and cash equivalents | 575 | 422 |
| Foreign currency exposure on net monetary items | 3,759 | 10,126 |
| Investments at fair value through profit or loss that | 1,471 | — |
| Total net foreign currency | 5,230 | 10,126 |
| US | ||
| Euro | Dollar | |
| 31 December 2018 | £000 | £000 |
| Investments at fair value through profit or loss that are monetary items (fixed and floating interest) |
22,947 |
57,587 |
| Forward currency contracts | (23,225) | (47,554) |
| Other receivables (due from brokers and dividends) | 389 | 986 |
| Cash and cash equivalents | 635 | 587 |
| Foreign currency exposure on net monetary items | 746 | 11,606 |
| Investments at fair value through profit or loss that are equities | 1,437 | — |
| Total net foreign currency | 2,183 | 11,606 |
The above may not be representative of the exposure to risk during the year reported because the levels of monetary foreign currency exposure may change significantly throughout the year.
Currency Sensitivity
The effect on the Statement of Comprehensive Income and the net asset value that changes in exchange rates have on the Company’s financial assets and liabilities is based on the following currencies. These changes have been calculated by reference to the volatility of exchange rates during the period using the standard deviation of currency fluctuations against the mean.
| 2019 | 2018 | |
| £/Euro | ±2.3% | ±1.0% |
| £/US Dollar | ±2.6% | ±3.6% |
The following sensitivity analysis is based on the Company’s monetary foreign currency financial instruments held at the balance sheet date, taking account of any forward foreign exchange contracts that offset the effects of changes in currency exchange rates, and the income receivable in foreign currency in the year.
If sterling had strengthened by the changes in exchange rates shown above, this would have had the following effect:
| US | ||
| Euro | Dollar | |
| 2019 | £000 | £000 |
| Effect on Statement of Comprehensive Income – profit/(loss) after taxation | ||
| Revenue loss | (35) | (108) |
| Capital loss | (110) | (237) |
| Total return after taxation for the year | (145) | (345) |
| Effect on net asset value | –0.1% | –0.2% |
| US | ||
| Euro | Dollar | |
| 2018 | £000 | £000 |
| Effect on Statement of Comprehensive Income – profit/(loss) after taxation | ||
| Revenue loss | (13) | (88) |
| Capital loss | (22) | (418) |
| Total return after taxation for the year | (35) | (506) |
| Effect on net asset value | 0.0% | –0.3% |
If sterling had weakened against the euro or dollar to this extent, the effect would have been the exact opposite.
In the opinion of the Directors, the above sensitivity analysis is not representative of the year 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 available repo financing arrangements it can use to finance investment activity, details of which are shown in note 7. The Company uses these 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.
| WITHIN | MORE THAN | ||
| ONE YEAR | ONE YEAR | TOTAL | |
| 2019 | £000 | £000 | £000 |
| Exposure to floating interest rates: | |||
| Investments held at fair value through profit or loss | 7,715 | 32,016 | 39,731 |
| Cash and cash equivalents | 8,321 | — | 8,321 |
| 16,036 | 32,016 | 48,052 | |
| Exposure to fixed interest rates: | |||
| Investments held at fair value through profit | |||
| or loss | 5,103 | 127,701 | 132,804 |
| Net exposure to interest rates | 21,139 | 159,717 | 180,856 |
| Within | More than | ||
| one year | one year | Total | |
| 2018 | £000 | £000 | £000 |
| Exposure to floating interest rates: | |||
| Investments held at fair value through profit or loss | 13,249 | 25,034 | 38,283 |
| Cash and cash equivalents | 4,181 | — | 4,181 |
| 17,430 | 25,034 | 42,464 | |
| Exposure to fixed interest rates: | |||
| Investments held at fair value through profit or loss | 5,989 | 117,069 | 123,058 |
| Net exposure to interest rates | 23,419 | 142,103 | 165,522 |
The nominal interest rates on the investments at fair value through profit or loss are shown in the portfolio list on pages 21 to 24. The weighted average effective interest rate on these investments is 6.5% (2018: 6.5%). The weighted average effective interest rate on cash and cash equivalents is 0.75% (2018: 0.52%).
Interest Rate Sensitivity
The following table illustrates the sensitivity of the profit or loss 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.
| 2019 | 2018 | |
| £000 | £000 | |
| Effect on Statement of Comprehensive | ||
| Income – profit/(loss) after taxation | ||
| Revenue profit | 83 | 42 |
| Capital loss | (6,056) | (5,841) |
| Total loss after taxation for the year | (5,973) | (5,799) |
| Effect on NAV per ordinary share | (6.0)p | (6.0)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 year as a whole, since the level of exposure changes frequently as borrowings can be drawn down and repaid as required throughout the year.
18.1.3 Other Price Risk
Other price risk 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 closely 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 60.
Concentration of Exposure to Other Price Risks
The Company’s investment portfolio is not concentrated in 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
Excluding fixed interest securities and convertibles, at the year end the Company held other investments of £7,193,000 (2018: £6,847,000). The effect of a 30% increase or decrease in the fair values of these investments (including any exposure through derivatives) on the profit after taxation for the year is £2,158,000 (2018: 10% increase or decrease: £685,000). This level of change is considered to be reasonably possible based on the observation of current market volatility since the year end due to the outbreak of COVID-19. 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/replacing repo financing 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 (including repo financing).
Liquidity Risk Exposure
Financial liabilities at the balance sheet date comprised of other payables of £457,000 (2018: £427,000), all of which were payable in less than three months.
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 74.8% (2018: 71.5%) of the Company’s portfolio consisted 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 be subject to greater uncertainties from 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 88.8% (2018: 91.1%) 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 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
Almost 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 also considered when assessing the risk of defaults. Investments in bonds are across a variety of industrial sectors and geographical markets to avoid concentration of credit risk. Counterparties for derivative transactions are also a source of credit risk. Transactions involving derivatives are entered into only with banks whose credit ratings are taken into account to minimise default risk. The credit ratings of the derivatives counterparties range from Aa3 through to Baa2. In addition, the Company may use credit default swaps (CDSs) to offset the credit risk of the portfolio. During the year, the Company did not use CDSs (2018: none).
Details of the Company’s investments, including their credit ratings, are shown on pages 21 to 24. Credit risk for transactions involving derivatives and equity investments is minimised as the Company only uses approved counterparties.
Cash balances are held with approved deposit takers only and are limited to a maximum of 4% of the Company’s net asset value with any one deposit taker. Balances held with Invesco Liquidity Funds plc (formerly Short-Term Investments Company (Global Series) plc, a triple-A rated money market fund (STIC)), are limited to a maximum of 10% of the Company’s net asset value. At the balance sheet date the Company had £1.46 million (2018: £1.61 million) held at the custodian and £6.86 million (2018: £2.57 million) held in Invesco Liquidity Funds plc.
There are no financial assets that are past due or impaired during the year (2018: none).
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 derivatives, which as stated above are carried at fair value.
19. Classification Under Fair Value Hierarchy
The valuation techniques used by the Company are explained in the accounting policies note 2(c). 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 The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
Level 2 Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.
Level 3 Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.
There were no transfers in the year between any of the levels.
Normally 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, the 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. No Level 3 investments were held during the year or the previous year.
| Level 1 | Level 2 | Total | |
| 2019 | £000 | £000 | £000 |
| Financial assets designated at fair value through | |||
| profit or loss: | |||
| Quoted securities: | |||
| Fixed interest securities(1) | — | 170,088 | 170,088 |
| Convertibles | — | 2,447 | 2,447 |
| Preference | 3,264 | — | 3,264 |
| Convertible preference | 2,458 | — | 2,458 |
| Equities | 1,471 | — | 1,471 |
| Derivative financial instruments: | |||
| Forward currency contracts | — | 1,309 | 1,309 |
| Total for financial assets | 7,193 | 173,844 | 181,037 |
| Level 1 | Level 2 | Total | |
| 2018 | £000 | £000 | £000 |
| Financial assets designated at fair value through | |||
| profit or loss: | |||
| Quoted securities: | |||
| Fixed interest securities(1) | — | 159,386 | 159,386 |
| Convertibles | — | 1,955 | 1,955 |
| Preference | 2,855 | — | 2,855 |
| Convertible preference | 2,555 | — | 2,555 |
| Equities | 1,437 | — | 1,437 |
| Total for financial assets | 6,847 | 161,341 | 168,188 |
| Financial liabilities designated at fair value through | |||
| profit or loss: | |||
| Derivative financial instruments – forward currency contracts | — | (1,581) | (1,581) |
| Total for financial liabilities | — | (1,581) | (1,581) |
(1) Fixed interest securities include both fixed and floating rate securities.
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 page 8.
The main risks to the Company’s investments are shown in the Strategic Report under the ‘Principal Risks and Uncertainties’ section on pages 13 to 15. 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 Board regularly monitors the level of borrowing used by the Company and has imposed limits within which borrowings should be managed.
Total equity at the balance sheet date, the composition of which is shown on the balance sheet on page 44, was £192,186,000 (2018: £173,489,000).
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 other financial commitments of the Company as at 31 December 2019 (2018: nil).
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 as adopted by the EU, the Company has identified the Directors as related parties and Directors fees paid have been disclosed in the Report on Directors’ Remuneration and Interests on page 34 with additional disclosure in note 6. Full details of Directors’ interests are set out in the Report on Directors’ Remuneration and Interests on page 35. No other related parties have been identified.
Invesco Fund Managers Limited and Invesco Asset Management Limited, both of which are wholly owned subsidiaries of Invesco Limited, provided investment management and administration services to the Company. Details of the services and fees are disclosed in the Strategic Report and management fees payable are shown in note 5.
23. Post Balance Sheet Events
Any significant events that occurred after the end of the reporting period but before the signing of the balance sheet will be shown here.
Except for the events around COVID-19 below, there are no other significant events after the end of the reporting period requiring disclosure.
Since the year end the COVID-19 virus was declared a global pandemic which has had a significant impact on global markets. As at 23 April 2020, the latest practical date prior to publication of this annual financial report, the impact to the Company’s total return share price and NAV has been -11.8% and -10.5% respectively. Further commentary can be found in the Chairman’s Statement and Portfolio Managers' Report.
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This annual financial report announcement is not the Company’s statutory accounts. The statutory accounts for the period ended 31 December 2019 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, JTC Fund Solutions (Jersey) Limited, PO Box 1075, 28 Esplanade, St Helier, Jersey JE4 2QP or the Manager’s website via the directory found at the following link: www.invesco.co.uk/citymerchants.
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Hilary Jones
JTC Fund Solutions (Jersey) Limited
Telephone: 01534 700000
24 April 2020
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