Announcement of Annual Results

RNS Number : 8188E
Acorn Income Fund Ld
13 April 2011
 



 

ACORN INCOME FUND LIMITED

 

ANNOUNCEMENT OF ANNUAL RESULTS

 

The Directors announce the statement of results for the year ended 31 December 2010 as follows:

 

 

Investment Objectives and Policy                             

For the year ended 31 December 2010

 

The objectives of Acorn Income Fund Limited (the "Company") are to provide shareholders with a high income and also the opportunity for capital growth.

 

The Company's portfolio is invested in equities and interest-bearing securities in order to achieve its investment objectives.  It is the aim of the Company to provide both income and capital growth predominantly through investment of approximately 70% of the portfolio in smaller capitalised United Kingdom companies admitted to the Official List of the United Kingdom Listing Authority and traded on the London Stock Exchange or traded on AIM.  The Company also aims to enhance income for shareholders by investing approximately 30% of its assets in high yielding instruments which will be predominantly fixed interest securities (including corporate bonds, preference and permanent interest bearing shares, convertible and reverse convertible bonds and debentures) but may include up to 15% of the portfolio (measured at the time of acquisition) in high yielding investment company shares.

 

CHAIRMAN'S STATEMENT

Dear Shareholder,

 

During 2010 the UK market continued its recovery from the low points set in March 2009 at the depths of the banking crisis. Over the course of the year the FTSE All Share index (total return) rose 14.51% with a strong year end rally during December. Smaller company stocks performed well relative to the market leaders over the year. The FTSE Small Cap (ex investment companies) total return index returned 16.91% and the Hoare Govett Smaller Company (ex investment company) index was up 28.49% in the 12 months to 31 December 2010. The outperformance of small cap stocks provided a favourable background for the Company which at the start of the year had 62.7% of gross assets committed to the Smaller Companies Portfolio; 30.5% of the fund was in the Income Portfolio and 6.8% in cash. During the course of the year the allocation to the Smaller Companies Portfolio was increased and that, together with the strong relative performance of the Smaller Companies Portfolio, meant that by the year end the portfolio split was as follows;

Smaller Companies Portfolio  79.2%

Income Portfolio                      18.7%

Operating Cash                      2.1%

 

Investment performance

The Company's net asset value per share rose by 48.59% from 131.22p to 194.98p over the year. Including dividends paid during the year the total return on net assets was 54.68%. This was achieved from strong performance at the gross assets level plus the additional leverage provided by the Company's bank facility. Some small enhancement to NAV return was provided by the buying back of shares. Gross assets total return over the twelve months to 31 December was 38.06%, well ahead of the small cap indices.

 

The main features in the strategic positioning of the Income Portfolio during the course of the year were the maintenance of a hedge, through a short gilt position, against rising long-term interest rates, allowing the portfolio to remain exposed to the potential for credit spreads between corporates and gilts to narrow. The portfolio maintained a significant exposure to the financial sector where this potential was perceived to be the greatest.  Although official interest rates have not yet been increased and the weak economy may delay a rise, our investment advisers continue to position the portfolio so that some protection against rising rates is maintained. Protection in this area was added during the year by acquiring instruments which are index linked or floating rate. The amount of capital committed to the Income Portfolio was reduced during the year in favour of the Smaller Companies Portfolio where stronger returns were anticipated. This proved to be a correct call. Some of the individual stock performances in the Smaller Companies Portfolio were spectacular with some positions doubling in value.

 

With a continuation vote to be proposed at the AGM this year it is appropriate to consider the long term performance records since the appointment of Premier Fund Managers Limited ("Premier") and Unicorn Asset Management Limited ("Unicorn") as investment advisers from 17 January 2007. The performance over the period from 17 January 2007 to 31 December 2010 is as follows:

Net Asset Value total return                                        +18.02%

Gross Assets total return                                            + 15.43%

Hoare Govett Smaller Companies TR                        +12.5%

FTSE Small cap Index TR                                          -22.49%

(Source Financial Express, Bloomberg and Premier Asset Management)

Your board believes this is a creditable achievement during a period when market conditions have varied between abnormal and unprecedented.

 

Dividends

Earnings per share for the year were 6.42p (6.73p) and dividends totalling 6.25p (6.0p) were paid during the year with the fourth interim dividend being increased from 1.5p to 1.75p.   

 

Share buy back

The board has sought to contain the share price discount to asset value, as well as raising the investment performance, by undertaking selective share purchases. Over the course of the year the Company bought back 165,000 shares.  The shares are currently held in treasury providing scope to reissue them if appropriate circumstances arise. At the start of the period the shares were trading on a discount to asset value of 13.3%. This had moved out to 17% before the buyback was commenced but at the year end the discount was 14.2%.

 

Gearing and Bank Facility

As reported at the interim stage, in order to enable the Company to buy back shares and meet the post buy-back covenant test (which is much more demanding than the regular covenant test) £1.65m of loan was repaid in the first half and hence at the period end the amount of loan drawn down under the facility was £4.35m.  The more demanding covenant test only needs to be met immediately following the buy-back and then reverts to the regular test.  The loan margin of 2% over LIBOR remains attractive. 

 

Outlook

Markets remain sensitive to the economic outlook in Europe and the US while the recent political unrest in North Africa and the natural disaster in Japan have served to remind investors that there can be no certainties in investment. Against these events risk premiums have increased and markets fallen back. Nevertheless our small company adviser remains positive with the portfolio focused on international earners rather than the UK domestic market and with corporate activity now starting to take place. In the Income Portfolio our adviser is cautious with regard to the bond markets against the expectation of rising interest rates but positioned to capture some benefit from this trend, for example through floating rate instruments. 

 

Continuation Resolution

The Company's articles provide for shareholders to vote on the continuation of the company at the AGM in 2011. Accordingly a resolution that the Company should cease to continue as presently constituted has been included in the resolutions to be proposed at the general meeting to be held on 24 August 2011. 

 

Your board has reviewed the investment mandate and considers that it continues to provide a valid and potentially profitable investment strategy. The focus on UK smaller companies is consistent with the yield objective as the smaller company universe provides a good range of stocks offering attractive levels of yield and sustainable dividends. The Income Portfolio, which has been focused on fixed interest securities and actively managed, has served to enhance the overall portfolio yield and deliver returns in excess of the cost of the Company's borrowing, while providing some diversification by asset class. 

 

Your board has also reviewed the performance and capability of the investment advisers. The directors have been impressed with the performance generated by the investment advisers since the change in the management arrangements implemented in January 2007. A review of investment performance since that date is set out above. Premier Asset Management (Guernsey) Ltd is wholly owned by Premier Asset Management Ltd, which is regulated in the UK and has approximately £2.5 billion under management, and ample resource and expertise to fulfil its duties as manager. The board therefore considers that, based on past investment performance and the capabilities of the manager and its investment advisers, there is a good case for the Company's continued existence.

 

The board will publish a circular prior to the general meeting setting out details regarding the proposed continuation.  

 

In the circumstances the board would encourage shareholders to vote for continuation of the Company at the general meeting. For clarity, shareholders wishing the Company to continue should vote against special resolution 1. If however shareholders vote against continuation the board will, within three months of the date of the general meeting, put forward proposals for the winding up of the Company.

 

John Boothman

Chairman

 

INVESTMENT ADVISERS' REPORT

Smaller Companies Portfolio

 

The Smaller Companies Portfolio returned a capital gain of 49.8% compared to a return of 28.5% by the Hoare Govett Smaller Companies Index.  The year under review has been very strong with a return to favour of strong well funded companies with strong international and export exposure.

 

Over the year Renishaw rose by 125.7% as its markets recovered, Fenner also benefited from strong mineral markets rising by 113.6% and Lupus rose by 112.7% on the back of recovery prospects and a management change.  Other noticeable risers include Acal +102.2%, Devro +90.2%, IMI +82.3% and Bodycote +76.4%. Two stocks were down on the year (BPI -11.6% and Mucklow -8.2%).

 

During the year Davis Service Group was added to the portfolio as new management were appointed and Phoenix IT was purchased following a change in the dividend policy. A number of holdings were increased including Castings, Lookers, Consort Medical and Brewin Dolphin.  The holding in IMI was reduced as it entered the FTSE 100 after a period of sustained performance.  The holdings in Harvey Nash, Acal, MacFarlane, Avesco and BPI were reduced.

 

We continue to focus on companies with strong positions in overseas markets which will benefit from international economic growth. Our focus on well funded companies who can pay growing dividends will continue as we believe dividends are an important part of total returns.  Corporate activity has picked up over the year but has still to spread to the mid and small capitalisation stocks. The company remains focused on the key investment principles that have served it well over the long term.

 

John McClure

Unicorn Asset Management Limited

 

Income Portfolio

Performance

 

The portfolio provided attractive returns over the year with market timing and security selection contributing to performance. The portfolio continues to generate relatively high yield.

 

Portfolio Commentary

The Monetary Policy Committee (MPC) maintained interest rates at 0.5% over the past year balancing the risks of declining growth and high inflation. The MPC appear uncertain as to which poses the greater threat to the economy as illustrated by the last MPC minutes highlighting a three way split. One member voted for an increase in Quantitative Easing, a policy used to increase money supply and stimulate demand, whilst another member voted for an immediate rate hike. However, the majority voted for no change reflecting the continued economic uncertainty. If inflation remains elevated, as we expect, and economic growth robust then the MPC will come under increasing pressure to increase rates.

 

The portfolio's hedge against the returns of gilts has been maintained throughout the year. The hedge acts to reduce the duration of the portfolio, limiting interest rate risk. With the hedge in place the return profile will be more aligned with credit performance. As a result the portfolio did not participate significantly in the gilt rally over the first half of the year nor suffer from the sharp rise in gilt yields during the last quarter.

 

Credit spreads suffered a volatile year with sovereign debt concerns driving markets, particularly bank credit. Credit spreads reached highs in the second quarter as Greece was bailed out by the IMF and Eurozone members. Despite the bailout the bond vigilantes turned their attention to other European peripheral countries, namely Portugal, Ireland, Italy and Spain. Fears of contagion spread and the cost to insure against defaults in bank debt returned to levels not seen since the depths of the credit crisis. Over the second half of the year credit spreads tightened gradually until the end of November when Ireland was bailed out by other EU nations and spreads widened again. Subordinated and senior bank debt suffered as policy makers talked of increased burden sharing for bonds.

 

Despite sovereign woes corporates are much healthier relative to last year as they have typically increased their debt maturity profiles at historically low rates and returned to profitability and free cash flows. Accordingly the spread between financials and corporate has widened as corporate yields have fallen. We hold an overweight position in financials and expect that as sovereign concerns dissipate, regulation becomes clearer, and capital ratios improve then financial credit spreads should tighten in more than corporate yields from these elevated levels.

 

In the first quarter we sold a number of high yielding positions and reinvested into holdings that would provide protection against inflation and associated rate hikes, namely a long dated EDF index linked bond and an Anglian Water floating rate note. We entered into the second quarter with a reduced risk profile and a high cash balance which assisted in our performance as Greece was bailed out. In addition, sales were made in the second quarter in order to provide further flexibility to the Smaller Companies Portfolio and to finance the Company share buybacks. These measures left the Smaller Companies Portfolio with a greater proportion of the Company's assets as equity market strength was considered more likely than superior bond returns. Accordingly transactions in the second half of the year were smaller however bond specific performances contributed significantly to overall performance. Lloyds enhanced capital notes (ECN), our largest holding, returned double digit returns over the year. The ECNs seemingly benefited from the increased capital funding requirements required by the new Basel III regulations. Equally our positions in subordinated Barclay's debt, long dated BAA debt and a holding in a high yield bond fund all provided attractive returns over the period.

 

Outlook

The recent concerns over fiscal deficits and bank funding illustrate that there are still stumbling blocks to overcome. However, governments, central banks, financials and corporates finally appear alert to such risks and therefore able to nullify any pain quicker than they did two years ago. Large corporates in particular have successfully accessed the bond markets meaning periods of market volatility should not affect their viability. We would expect not only the default rate to fall sharply and remain low but also rating agencies to begin to reverse the substantial downgrades during the last few years.

 

Paul Smith

Premier Fund Managers Limited

 

SCHEDULE OF PRINCIPAL INVESTMENTS

as at 31 December 2010

 

TOP 10 HOLDINGS


NOMINAL HOLDINGS


VALUATION


TOTAL ASSETS




GBP


%







Smaller Companies Portfolio












Fenner Plc

395,788


1,412,172


6.55

Devro Plc

525,000


1,316,175


6.10

Diploma Plc

378,135


1,037,035


4.81

Renishaw Plc

80,703


992,647


4.60

James Halstead Plc

122,750


902,213


4.18

RPC Group Plc

275,000


866,250


4.02

VP Plc

352,914


811,702


3.76

Castings Plc

284,112


752,897


3.49

IMI Plc

79,300


749,385


3.47

Primary Health Properties

193,969


635,248


2.94










9,475,724


43.92













Income Portfolio












LBG Capital No. 1 Plc

350,000


304,675


1.41

Icap Group Holdings Plc

250,000


229,078


1.06

Invesco Leveraged High Yield

400,000


220,000


1.02

ING Bank NV

200,000


202,117


0.94

Aviva Plc

250,000


198,056


0.92

Santander Issuances

200,000


194,058


0.90

HSBC Holdings Plc

200,000


185,695


0.86

Greenwich Loan Income Fund Limited

625,000


178,125


0.83

JP Morgan Chase

200,000


168,132


0.78

Barclays Bank Plc 4.875%

250,000


167,564


0.78










2,047,500


9.50







TOTAL



11,523,224


53.42







 

 

SCHEDULE OF PRINCIPAL INVESTMENTS

as at 31 December 2009

TOP 10 HOLDINGS


NOMINAL HOLDINGS


VALUATION


TOTAL ASSETS




GBP


%







Smaller Companies Portfolio












James Halstead Plc

122,750


699,675


3.93

Devro Plc

525,000


698,250


3.92

Diploma Plc

378,135


665,518


3.74

Fenner Plc

395,788


662,945


3.72

RPC Group Plc

275,000


643,500


3.61

VP Plc

352,914


610,541


3.43

IMI Plc

113,800


590,053


3.31

Primary Health Properties

193,969


560,570


3.15

Stobart Group Ltd

426,000


523,980


2.94

Mucklow (A&J) Group Plc

156,000


473,070


2.66










6,128,102


34.41













Income Portfolio












Tsy 2 1/2% 2024I/L Stock

150,000


391,068


2.20

LBG Capital No 1 Plc

350,000


281,750


1.58

Enterprise Inns Plc

280,000


226,750


1.27

Icap Group Holdings Plc

250,000


226,313


1.27

HSBC Holdings Plc

200,000


195,600


1.10

Aviva Plc

250,000


193,296


1.09

Invesco Leveraged High Yield

350,000


184,625


1.04

Bear Stearns Co Inc

200,000


173,997


0.98

Bellway Plc

150,000


162,750


0.91

Greenwich Loan Income Fund Limited

625,000


162,500


0.91










2,198,649


12.35







TOTAL



8,326,751


46.76







 

COMPANY DETAILS

History

The Company was incorporated on 5 January 1999 and commenced its activities on 11 February 1999. 29,600,002 Ordinary shares were issued.

 

The special resolution proposed at the Company's Annual General Meeting in 2006, that the Company cease as an investment company, was not carried by the necessary 75% majority of votes cast. Nevertheless, to provide an exit opportunity for the shareholders the Company made a Tender Offer to repurchase up to all of its Ordinary shares at net asset value, calculated after taking account of all costs.  Applications under the Tender Offer were received for 20,660,212 Ordinary shares, leaving 8,939,790 Ordinary shares in issue after the Extraordinary General Meeting on 5 January 2007.

 

At the 5 January 2007 Extraordinary General Meeting, it was resolved that the issued share capital of the Company be reduced from £7,400,000.50 to £296,000.02, effected by the cancellation of 24p per issued Ordinary share, thus reducing the nominal amount of such shares from 25p to 1p per Ordinary share. It was also resolved that £17,000,000 standing to the credit of the Company's share premium account be cancelled. The £7,104,000.48, resulting from the cancellation of share capital, and the £17,000,000, resulting from the cancellation of the share premium account, were credited to a distributable reserve.

 

As part of the Tender Offer the Manager changed from Collins Stewart Fund Management Limited to Premier Asset Management (Guernsey) Limited.

 

Investment Objectives

The Company's investment objectives are to provide Shareholders with a high income and also the opportunity for capital growth.

 

Investment Policy

The Company's investment policy is to allocate approximately 70% of the Company's assets to the Smaller Companies Portfolio with the balance to the Income Portfolio.  (Prior to the Tender Offer, this was approximately 75% to the Smaller Companies Portfolio with the balance allocated to the Income Portfolio). 

 

The Smaller Companies Portfolio is principally invested in UK equities with a market capitalisation of under £1 billion. Unicorn as the Investment Adviser of the Smaller Companies Portfolio, focuses on companies with experienced and well motivated management products or services supplying growth markets, sound operational and management controls, good cash generation and a progressive dividend.

Premier manages the Income Portfolio and aims to maximise income with the objective of capital protection. The Income Portfolio comprises sterling denominated fixed interest securities including corporate bonds, preference and permanent interest bearing shares, convertibles, reverse convertibles, debentures and other similar securities. The Income Portfolio may also contain higher yielding shares of other investment companies, including property investment companies, however these will not exceed 15% of the overall portfolio (at the time of acquisition).

 

Bank Loan

On 13 February 2007, a new £6 million revolving credit loan facility was arranged with the Bank of Scotland and the maturity date being 13 February 2012. The interest payable on this facility is 1% over LIBOR with a non-utilisation charge of 0.5% on any undrawn part of the facility.

 

The capital covenant on the facility requires a ratio of specified investment to debt of 2:1. Specified investments includes UK listed securities with a market capitalisation of over £50 million, investment grade bonds and reverse convertible bonds meeting certain criteria relating to the issuer and the reference equity.

 

Management Fees

The management fee is 0.7% per annum of total assets together with a performance fee of 15% over a total return of 10% per annum.  No performance fee was payable in 2010.  The total expenses ratio ("TER") of the Company is capped at 1.5% of total assets, excluding performance fees and non-routine administration and professional fees and with adjustments made to allow for repayment of debt or the buy back of shares.  The application of these calculations for 2010 indicates that a refund of £33,698 is due from the Manager.  The net management fee charged in 2010 was £100,000. The Board has considered the level of fees charged on comparable investment trusts and recognises the importance of setting a level that enables the management contract to be commercially viable for the Manager.

 

At the general meeting held on 24 August 2010, the shareholders approved the proposal to increase the minimum fee, payable to the Manager with effect from 1 January 2010, included in the TER calculation to £100,000 from £50,000.

 

MANAGEMENT REPORT

For the year ended 31 December 2010

 

A description of important events which have occurred during the financial period, their impact on the performance of the Company as shown in the financial statements and a description of the principal risks and uncertainties facing the Company is given in the Chairman's Statement, Investment Advisers' Reports, the schedule of Risk Factors and the notes to the financial statements and is incorporated here by reference.

 

There were no material related party transactions which took place in the financial period.

 

Going Concern

In accordance with the Company's articles of association, the shareholders are to vote on the continuation of the Company at the Annual General Meeting in August 2011.  While the outcome of the vote is uncertain and may result in the winding up of the Company, the Board, after making enquiries, has a reasonable expectation that the Company has adequate resources to continue in existence for the foreseeable future.  Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.  A more detailed statement regarding Going Concern can be found in the Directors' Report.

 

 

Michael McKean                                 

Director                                              

12 April 2011

 

STATEMENT OF COMPREHENSIVE INCOME


Year ended

31 Dec 2010


Year ended 31 Dec 2009


Note

Revenue

GBP


Capital

GBP


Total

GBP


Total

GBP









Net gains on financial assets








designated as at fair value through








profit or loss

-


5,731,457


5,731,457


3,700,285









Gains on foreign currency contracts

-


8,178


8,178


99,340









Investment income

826,732


-


826,732


841,983









Total income and gains

826,732


5,739,635


6,566,367


4,641,608









Expenses

(239,174)


(110,192)


(349,366)


(320,216)









Return on ordinary activities








before finance costs and taxation

587,558


5,629,443


6,217,001


4,321,392









Interest payable and similar








charges

(19,521)


(58,563)


(78,084)


(89,853)









Return on ordinary activities








before taxation

568,037


5,570,880


6,138,917


4,231,539









Taxation on ordinary activities

-


-


-


-









Total comprehensive income for








the year attributable to








shareholders

568,037


5,570,880


6,138,917


4,231,539


















Pence


Pence


Pence


Pence

Return per Ordinary share

6.42


62.94


69.36


47.33









Dividend per Ordinary share

6.25


0.00


6.25


6.00

for the year ended 31 December 2010


The Total column of this statement is the Statement of Comprehensive Income of the Company.  The Company had no other comprehensive income during the year other than that reflected in the above Statement of Comprehensive Income.  The supplementary revenue return and capital return columns have been prepared in accordance with the Statement of Recommended Practice ("SORP") issued by the Association of Investment Companies ("AIC").

 

In arriving at the results for the financial year, all amounts above relate to continuing operations.

 

No operations were acquired or discontinued in the year.

 

STATEMENT OF FINANCIAL POSITION




Notes


31 Dec 2010


31 Dec 2009





GBP


GBP

NON-CURRENT ASSETS







Financial assets designated as at fair value through







profit  or loss




20,712,993


16,347,910








CURRENT ASSETS







Receivables




308,050


388,018

Cash and cash equivalents




551,030


958,929

Derivative financial assets




-


108,563












859,080


1,455,510








TOTAL ASSETS




21,572,073


17,803,420








CURRENT LIABILITIES







Derivative financial liabilities




42,564


-

Payables - due within one year




69,978


72,414








NON-CURRENT LIABILITIES







Payables - due after one year




4,350,000


6,000,000








TOTAL LIABILITIES




4,462,542


6,072,414








NET ASSETS




17,109,531


11,731,006















EQUITY







Share capital




89,398


89,398

Share premium




79,173


79,173

Treasury shares




(207,018)


-

Revenue reserve




1,363,079


1,348,416

Special reserve




10,000,000


10,000,000

Capital reserve




5,784,899


214,019








TOTAL EQUITY




17,109,531


11,731,006



















Pence


Pence

Net asset value per Ordinary Share




194.98


131.22

as at 31 December 2010


 

The financial statements were approved by the Board of Directors on 12 April 2011 and signed on its behalf by:

 

 

 

 

Michael McKean                                                         

Director

 

 

STATEMENT OF CASH FLOWS




 

Notes


Year ended

31 Dec 2010


Year ended

31 Dec 2009





GBP


GBP

Operating activities














Return on ordinary activities before taxation




6,138,917


4,231,539

Net gains on financial assets designated as at fair value





through profit or loss


(5,731,457)


(3,700,285)

Investment income




(826,732)


(841,983)

Interest expense




78,084


89,853

Increase / (Decrease) in derivative financial liabilities


119,447


(311,913)

(Decrease) / Increase in payables and appropriations


(2,436)


1,361

(Increase) / Decrease in receivables excluding accrued





investment income


(67,289)


8,825








Net cash outflow from operating activities before





investment income




(291,466)


(522,603)








Investment income received




873,262


907,043








Net cash inflow from operating activities before taxation


581,796


384,440








Tax paid




-


-








Net cash inflow from operating activities after taxation


581,796


384,440








Investing activities














Purchase of financial assets




(3,081,851)


(7,783,012)

Sale of financial assets




4,580,632


6,729,843








Net cash inflow / (outflow) from investing activities


1,498,781


(1,053,169)








Financing activities














Equity dividends paid




(553,374)


(536,387)

(Repayment) / Drawdown of bank loan




(1,650,000)


1,600,000

Purchase of own shares




(207,018)


-

Bank loan interest paid




(78,084)


(89,853)















Net cash (outflow) / inflow from financing activities


(2,488,476)


973,760








(Decrease) / Increase in cash and cash equivalents


(407,899)


305,031








Cash and cash equivalents at beginning of year




958,929


653,898








Cash and cash equivalents at end of year




551,030


958,929

for the year ended 31 December 2010



Share

Capital

Share

Premium

Treasury

Shares

Revenue

Reserve

Special

Reserve

Capital

Reserve

 

Total










31 Dec 2010

31 Dec 2010

31 Dec 2010

31 Dec 2010

31 Dec 2010

31 Dec 2010

31 Dec 2010


GBP

GBP

GBP

GBP

GBP

GBP

GBP









Balances as at  1 January 2010

89,398

79,173

-

1,348,416

10,000,000

214,019

11,731,006

Total comprehensive income for the year attributable to shareholders

-

-

-

568,037

-

5,570,880

6,138,917

Dividends

-

-

-

(553,374)

-

-

(553,374)

Treasury shares acquired

-

-

(207,018)

-

-

-

(207,018)









Balances as at 31 December 2010

89,398

79,173

(207,018)

1,363,079

10,000,000

5,784,899

17,109,531

 

 


Share

Capital

Share

Premium

Treasury

Shares

Revenue

Reserve

Special

Reserve

Capital

Reserve

 

Total










31 Dec 2009

31 Dec 2009

31 Dec 2009

31 Dec 2009

31 Dec 2009

31 Dec 2009

31 Dec 2009


GBP

GBP

GBP

GBP

GBP

GBP

GBP









Balances as at 1 January 2009

89,398

79,173

-

1,282,796

10,000,000

(3,415,513)

8,035,854

Total comprehensive income for the year attributable to shareholders

-

-

-

602,007

-

3,629,532

4,231,539

Dividends

-

-

-

(536,387)

-

-

(536,387)









Balances as at 31 December 2010

89,398

79,173

-

1,348,416

10,000,000

214,019

11,731,006

 

 

 

1          ACCOUNTING POLICIES

 

(a)        Basis of preparation

The financial statements, which give a true and fair view, have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB"), the AIC's SORP (as revised in January 2009) where this is consistent with the requirements of IFRS and all in compliance with The Companies (Guernsey) Law, 2008 (as amended).  All accounting policies adopted for the period are consistent with IFRS issued by the IASB.  The financial statements have been prepared on an historical cost basis except for the measurement at fair value of certain financial instruments.

 

The following Standards or Interpretations have been issued by the IASB but  not yet adopted by the Company:

 

IFRS 7 Financial Instruments: Disclosures - Amendments enhancing disclosures about transfer of financial assets effective for annual periods beginning on or after 1 July 2011.

 

IFRS 9 Financial Instruments - Classification and Measurement (revised November 2009) effective for annual periods beginning on or after 1 January 2013.

 

IAS 24 Related Party Disclosures - Revised definition of related parties (revised November 2009) effective for annual periods beginning on or after 1 January 2011.

 

IAS 32 Financial Instruments: Presentation - Amendments relating to classification of rights issues (revised 2009) effective for annual periods beginning on or after 1 February 2010.

 

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments effective for annual periods beginning on or after 1 July 2010.

 

Some of these Standards and Interpretations may require additional disclosure in future financial statements.  None are expected to affect the financial position of the Company.

 

(b)        Use of estimates and judgements

Management use estimates and judgements in allocating expenses between Revenue and Capital.

 

(c)        Share capital

Ordinary shares are classified as equity.  Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity.

 

(d)        Taxation

The Company has been granted exemption under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 from Guernsey Income Tax, and has elected to remain exempt following changes in the Guernsey tax regime.  The Company pays an annual fee of £600.

 

(e)        Treasury shares

Treasury shares are classified as a deduction from equity and recorded for the consideration paid.

 

(f)         Capital reserve

The following are accounted for in this reserve:

-           gains and losses on the realisation of investments;

-           expenses charged to this account in accordance with the policy below;

-           increases and decreases in the valuation of the investments held at the year end; and

-           unrealised exchange differences of a capital nature.

 

(g)        Expenses

All expenses are accounted for on an accruals basis.  Expenses are charged to the capital reserve where a connection with the maintenance or enhancement of the value of the investments can be demonstrated.

 

75% of the Company's management fee and financing costs are charged to the capital reserve in line with the Board's expected long-term split of returns between income and capital gains from the investment portfolio.

 

100% of any performance fee is charged to the capital account.

 

All other expenses are charged through the revenue account.

 

(h)        Investment income

Interest income and distributions receivable are accounted for on an accruals basis.  Interest income relates only to interest on bank balances.  Bond income is accounted for on the effective interest rate ("EIR") basis.

 

(i)         Foreign currency translation

The currency of the primary economic environment in which the Company operates (the functional currency) is Great British Pounds (GBP) which is also the presentational currency.

 

Transactions denominated in foreign currencies are translated into GBP at the rate of exchange ruling at the date of the transaction.

 

Monetary assets and liabilities, other than investments, denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange ruling at that date.  Foreign exchange differences arising on translation are recognised in the Statement of Comprehensive Income.  Foreign exchange differences relating to investments are taken to the capital reserve.  Realised and unrealised foreign exchange differences on non-capital assets or liabilities are taken to the Statement of Comprehensive Income in the period in which they arise.

 

(j)         Cash and cash equivalents

Cash and cash equivalents are defined as cash in hand, demand deposits and short term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.  For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash, deposits at bank and money market deposits.

 

(k)        Investments

All investments have been designated as financial assets at "fair value through profit or loss".  Investments are initially recognised on the date of purchase at cost, being fair value of the consideration given.  Subsequently, investments are measured at fair value, with unrealised gains and losses on investments recognised in the Statement of Comprehensive Income.  Investments are derecognised on the date of sale.  Gains and losses on the sale of investments will be taken to the Statement of Comprehensive Income in the period in which they arise.  For investments actively traded in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices as at the close of business on the reporting date.

 

(l)         Derivatives

Derivatives consist of forward exchange contracts which are stated at market value, with the resulting net realised and unrealised gains and losses being reflected in the Statement of Comprehensive Income.

 

(m)      Trade date accounting

All "regular way" purchases and sales of financial assets are recognised on the "trade date", i.e. the date that the entity commits to purchase or sell the asset.  Regular way purchases or sales are purchases or sales of financial assets that require delivery of the asset within the timeframe generally established by regulation or convention in the market place.

 

(n)        Segmental reporting

During the year under review, the Audit Committee discussed the subject of Segmental Reporting, as defined under IFRS 8, with the Company's Administrator and the Company's Auditors.  These discussions were reported back to the Board with the recommendation that that the Board reassess the segmental reporting disclosure as previously presented in the 2009 audited financial statements.  This recommendation was approved by the Board and the Accounts have accordingly been prepared in the revised format. 

 

The Company retains two Investment Advisers, Unicorn Asset Management Limited and Premier Fund Managers Limited for the Smaller Companies Portfolio and Income Portfolio respectively. As the Board reviews the performance of each portfolio separately and decides on the allocation of resources based on this performance, the Board has determined that the Company has two reportable segments (2009: one).

 

The Board is charged with setting the Company's investment strategy in accordance with the Prospectus. They have delegated the day to day implementation of this strategy to its Investment Advisers but retain responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions.  The investment decisions of the Investment Advisers are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board.  The Investment Advisers have been given full authority to act on behalf of the Company, including the authority to purchase and sell securities and other investments on behalf of the Company and to carry out other actions as appropriate to give effect thereto.  Whilst the Investment Advisers may make the investment decisions on a day to day basis regarding the allocation of funds to different investments, any changes to the investment strategy or major allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Advisers.  The Board therefore retains full responsibility as to the major allocation decisions made on an ongoing basis.  The Investment Advisers will always act under the terms of the Prospectus which cannot be radically changed without the approval of the Board and the Shareholders.

 

The key measure of performance used by the Board to assess the Company's performance and to allocate resources is the total return on the Company's net asset value, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

 

The schedule of principal investments held as at the period end are presented in the Investment Adviser's Report.

 

(o)        Going concern

The Company has adequate financial resources and as a consequence, the directors believe the Company is well placed to manage its business risks successfully despite the current economic climate. 

 

In accordance with the Company's articles of association, the shareholders are to vote on the continuation of the Company at the Annual General Meeting in August 2011. While the outcome of the vote is uncertain and may result in the winding up of the Company, the Board, after making enquiries, have a reasonable expectation that the Company has adequate resources to continue in existence for the foreseeable future. Accordingly, the directors have adopted the going concern basis in preparing the financial information.

 

2          OPERATING SEGMENTS

 

The Company has two reportable segments, being the Income Portfolio and the Smaller Companies Portfolio. Each of these portfolios is managed separately as they entail different investment objectives and strategies and contain investments in different products.

 

For each of the portfolios, the Board reviews internal management reports on a quarterly basis. The objectives and principal investment products of the respective reportable segments are as follows:

 

 

Segment                                 Investment objectives and principal investments products

Income Portfolio                      To maximise income through investments in sterling denominated fixed interest securities including corporate bonds, preference and permanent interest bearing shares, convertibles, reverse convertibles, debentures and other similar securities.

 

Smaller Companies Portfolio  To maximise income and capital growth through investments in UK equities with a market capitalisation of under £1 billion.

 

Information regarding the results of each reportable segment is included below. Performance is measured based on the increase in value of each portfolio, as included in the internal management reports that are reviewed by the Board.

 

Segment information is measured on the same basis as those used in the preparation of the Company's financial statements.

 


 

Income Portfolio


Smaller Companies Portfolio


 

 

Unallocated


 

 

Total

 

 

GBP


GBP


GBP


GBP

2010

 








External revenues:








Net gains on financial assets designated as at fair value through profit or loss

 

148,404


 

5,583,053


 

-


 

5,731,457

Gains on foreign currency contracts

-


-


8,178


8,178

Investment income:








Bank interest

-


-


138


138

Dividend income

54,608


522,701


-


577,309

Bond income

213,281


-


-


213,281

Sundry income

-


-


36,004


36,004

 

Total income and gains

 

416,293


 

6,105,754


 

44,320


 

6,566,367









Expenses

-


-


(349,366)


(349,366)









Interest payable and similar charges

-


-


(78,084)


(78,084)









Total comprehensive income for the year attributable to shareholders

 

416,293


 

6,105,754


 

(383,130)


 

6,138,917

 

 








Financial assets designated as at fair value through profit or loss

 

3,946,251


 

16,766,742


 

-


 

20,712,993

Receivables

-


-


308,050


308,050

Cash and cash equivalents

93,850


314,095


143,085


551,030









Total assets

4,040,101


17,080,837


451,135


21,572,073









Derivative financial liabilities

(10,057)


-


(32,507)


(42,564)

Payables

-


-


(4,419,978)


(4,419,978)









Total liabilities

(10,057)


-


(4,452,485)


(4,462,542)










 

Income Portfolio


Smaller Companies Portfolio


 

 

Unallocated


 

 

Total


GBP


GBP


GBP


GBP









2009

 








External  revenues:








Net gains on financial assets designated as at fair value through profit or loss

 

923,963


 

2,776,322


 

-


 

3,700,285

Gains on foreign currency contracts

-


-


99,340


99,340

Investment income:








Bank interest

-


-


817


817

Dividend income

17,875


388,906


-


406,781

Bond income

343,972


-


-


343,972

Sundry income

-


-


90,413


90,413

 

Total income and gains

 

1,285,810


 

3,165,228


 

190,570


 

4,641,608









Expenses

-


-


(320,216)


(320,216)









Interest payable and similar charges

-


-


(89,853)


(89,853)









Total comprehensive income for the year attributable to shareholders

 

1,285,810


 

3,165,228


 

(219,499)


 

4,231,539

 

 








Financial assets designated as at fair value through profit or loss

 

5,261,378


 

11,086,532


 

-


 

16,347,910

Receivables

100,727


-


287,291


388,018

Cash and cash equivalents

198,855


609,064


151,010


958,929

Derivative financial assets

34,000


-


74,563


108,563









Total assets

5,594,960


11,695,596


512,864


17,803,420


 









Payables

-


-


(6,072,414)


(6,072,414)









Total liabilities

-


-


(6,072,414)


6,072,414)

 

            Geographical information

In presenting information on the basis of geographical segments, segment revenue and segment assets are based on the domicile countries of the investees and counterparties to derivative transactions.

 

 





Other





UK

Guernsey

Jersey

Europe

US

Australia

Total

2010

External revenues

GBP

GBP

GBP

GBP

GBP

GBP

GBP

Total








Revenue

18,171,696

825,948

381,682

651,935

535,510

146,222

20,712,993

 

 

 





Other





UK

Guernsey

Jersey

Europe

US

Australia

Total

2009

External revenues

GBP

GBP

GBP

GBP

GBP

GBP

GBP

Total








Revenue

13,621,290

713,030

334,604

621,863

915,494

141,629

16,347,910

 

 

The Company did not hold any non-current assets during the year other than financial instruments (2009: 0).

 

            Major customers

The Company regards its shareholders as customers. The Company's only shareholder with a holding greater than 10% at the year end was Charles Stanley Group plc.

 

 

3          INVESTMENT INCOME

 


Year ended

31 Dec 2010


Year ended

31 Dec 2009


GBP


GBP





Bank interest

138


817

Dividend income

577,309


406,781

Bond income

213,281


343,972

Sundry income

36,004


90,413






826,732


841,983

 

 

4          FOREIGN CURRENCY CONTRACTS

 




Year ended

31 Dec 2010


Year ended

31 Dec 2009




GBP


GBP







Unrealised (loss) / gain on forward foreign currency contracts

(70,664)


210,518

Realised gain / (loss) on forward foreign currency contracts

78,842


(111,178)










8,178


99,340

 

5          EXPENSES

 


Year ended

31 Dec 2010


Revenue


Capital


Total


GBP


GBP


GBP







Manager's fee

33,425


100,273


133,698

Administrator's fee

57,747


-


57,747

Registrar's fee

5,620


-


5,620

Directors' fees

50,000


-


50,000

Custody fees

12,174


-


12,174

Audit fees

20,996


-


20,996

Directors' and Officers' insurance

12,108


-


12,108

Annual fees

18,397


-


18,397

Bank charges

6,418


-


6,418

Commission paid

-


9,919


9,919

Sundry costs

12,825


-


12,825

Legal and professional fees

4,500


-


4,500

Gain / (loss) on foreign exchange

4,964


-


4,964








239,174


110,192


349,366

 

 


Year ended

31 Dec 2009


Revenue


Capital


Total


GBP


GBP


GBP







Manager's fee

26,574


79,722


106,296

Administrator's fee

55,000


-


55,000

Registrar's fee

3,040


-


3,040

Directors' fees

50,000


-


50,000

Custody fees

14,251


-


14,251

Audit fees

19,929


-


19,929

Directors' and Officers' insurance

11,247


-


11,247

Annual fees

17,230


-


17,230

Bank charges

7,612


-


7,612

Commission paid

-


22,981


22,981

Sundry costs

5,489


-


5,489

Legal and professional fees

8,761


-


8,761

Gain / (loss) on foreign exchange

(1,620)


-


(1,620)








217,513


102,703


320,216

 

 

6          DIRECTORS' REMUNERATION

 

Under their terms of appointment, each Director is paid a fee of £15,000 per annum by the Company, except for the Chairman, who receives £20,000 per annum.

 

7          DIVIDENDS IN RESPECT OF EQUITY SHARES

 


Year ended

31 Dec 2010


GBP


Pence per share





First interim payment

134,097


1.50

Second interim payment

134,097


1.50

Third interim payment

131,622


1.50

Fourth interim payment

153,558


1.75






553,374


6.25

 

 


Year ended

31 Dec 2009


GBP


Pence per share





First interim payment

134,097


1.50

Second interim payment

134,097


1.50

Third interim payment

134,097


1.50

Fourth interim payment

134,096


1.50






536,387


6.00

 

 

8          EARNINGS PER SHARE

 

Ordinary shares

The total return per Ordinary share is based on the total return on ordinary activities for the year attributable to Ordinary shareholders of £6,138,917 (2009: £4,231,539) and on 8,851,078 (2009: 8,939,790) shares, being the weighted average number of shares in issue during the year.  There are no dilutive instruments and therefore basic and diluted gain per share are identical.

 

The revenue return per Ordinary share is based on the revenue return on ordinary activities for the year attributable to Ordinary shareholders of £568,037 (2009: £602,007) and on 8,851,078 (2009: 8,939,790) shares, being the weighted average number of shares in issue during the year.  There are no dilutive instruments and therefore basic and diluted gain per share are identical.

 

The capital return per Ordinary share is based on the capital return on ordinary activities for the year attributable to Ordinary shareholders of £5,570,880 (2009: £7,600,759 loss) and on 8,851,078 (2009: 8,939,790) shares, being the weighted average number of shares in issue during the year.  There are no dilutive instruments and therefore basic and diluted gain per share are identical.

 

9          FINANCIAL ASSETS DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS

 

INVESTMENTS


31 Dec 2010


 

31 Dec 2009


GBP


GBP

FINANCIAL ASSETS DESIGNATED AS AT FAIR VALUE THROUGH




PROFIT OR LOSS








Opening portfolio cost

15,180,445


14,230,035





Unrealised appreciation / (depreciation) on valuation brought forward

1,167,465


(2,952,625)





Opening valuation

16,347,910


11,277,410





Movements in the year




Purchases at cost

3,081,851


7,783,012

Sales




 - proceeds

(4,479,905)


(6,378,797)

 - realised losses on sales

(4,667)


(453,805)





Unrealised appreciation on valuation for the year

5,767,804


4,120,090





Fair value of investments at 31 December 2010

20,712,993


16,347,910





Closing book cost

13,777,724


15,180,445

Closing unrealised appreciation

6,935,269


1,167,465






20,712,993


16,347,910





Realised losses on sales

(4,667)


(453,805)

Increase in unrealised appreciation

5,767,804


4,120,090

(Depreciation) / appreciation on fair value of derivative financial assets

(44,057)


34,000

Realised gains on derivative financial assets

12,377


-





Net gains on financial assets designated as at fair value through profit or




Loss

5,731,457


3,700,285

 

As at 31 December 2010, the closing fair value of investments comprises £16,766,742 (2009: £11,086,532) of equity shares and £3,946,251 (2009: £5,251,378) of fixed income securities.

 

The Investments held by the Company have been classified as Level 1.  This is in accordance with the fair value hierarchy.

 

Details of the value of each classification are listed in the table below.  Values are based on the market value of the investment as at the reporting date:

 

Financial assets designated as at







fair value through profit or loss

 

31 Dec 2010

Market Value

31 Dec 2010


31 Dec 2009

Market Value


31 Dec 2009

Market Value


%

GBP


%


GBP








Level 1

100

20,712,993


100


16,347,910








Total

100

20,712,993


100


16,347,910

 

There have been no transfers between levels of the fair value hierarchy during the year under review.

 

DERIVATIVE FINANCIAL ASSETS AND LIABILITIES

The derivative financial assets and liabilities held by the Company have been classified as Level 1.  This is in accordance with the fair value hierarchy.

 

Details of the value of each classification are listed in the table below.  Values are based on the market value of the derivative financial instrument as at the reporting date:

 

Derivative financial assets and liabilities designated as at fair value through profit or loss





31 Dec 2010

Market Value


31 Dec 2009

Market Value


GBP


GBP





Assets - Level 1

-


108,563

Liabilities - Level 1

(42,564)


-





Total

(42,564)


108,563

 

There have been no transfers between levels of the fair value hierarchy during the year under review.

 

 

10        RECEIVABLES

 


31 Dec 2010


31 Dec 2009


GBP


GBP





Prepayments

2,554


2,426

Accrued income

133,037


179,567

Investment transactions not settled

-


100,727

Sundry receivables

172,459


105,298






308,050


388,018

 

11        PAYABLES

 

(amounts falling due within one year)

31 Dec 2010


31 Dec 2009


GBP


GBP





Accrued expenses

68,778


72,414

Sundry payables

1,200


-






69,978


72,414

 

 

12        PAYABLES

 

(amounts falling due after one year)

31 Dec 2010


31 Dec 2009


GBP


GBP





Long term bank loan

4,350,000


6,000,000

 

Under a loan agreement dated 13 February 2007 between the Company and the Bank of Scotland a £6,000,000 Revolving Credit Facility was arranged for a period of five years.  The interest rate payable on this facility is 1% over Libor with a non-utilisation charge of 0.5% on any undrawn part of the facility.

 

The capital covenant on the facility requires a ratio of specified investment to debt of 2:1.  Specified investments include UK listed securities with a market capitalisation of over £50 million, investment grade bonds and reverse convertible bonds meeting certain criteria relating to the issuer and the reference equity, gilts or US Treasury stock and cash.  During the year, the Company has complied with all loan covenants.

 

During the year, the Company bought back its own shares in the market (see Note 14). To comply with loan covenants prior to the purchase of its own shares, the Company paid back a portion of the bank loan totalling £1,650,000.

 

13        SHARE CAPITAL

 

Authorised



GBP





Ordinary shares of 1p each



10,000,000









Issued



Number of




shares

The issue of shares took place as follows:




Ordinary shares

11 February 1999


29,600,002

Tender offer

17 January 2007


(20,660,212)





Number of shares in issue at 1 January 2010



8,939,790





Purchase of treasury shares 8 June 2010



(85,000)

Purchase of treasury shares 22 June 2010



(20,000)

Purchase of treasury shares 23 June 2010



(25,000)

Purchase of treasury shares 1 July 2010



(10,000)

Purchase of treasury shares 7 July 2010



(25,000)





Number of shares in issue at 31 December 2010



8,774,790








GBP





Issued capital as at 31 December 2010



89,398

 

14        TREASURY SHARES

 


31 Dec 2010


31 Dec 2009


GBP


GBP





Balance as at 1 January 2010

-


-

Acquired during the period

(207,018)


-





Balance as at 31 December 2010

(207,018)


-

 

The treasury shares reserve represents 165,000 Ordinary shares purchased in the market at various prices ranging from £1.235 to £1.28 and held by the Company in treasury.  No cancellations of Shares took place during the year under review.

 

 

15        RELATED PARTIES

 

Premier Asset Management (Guernsey) Limited is the Company's Manager and operates under the terms of the management agreement in force which gives it complete control over the Company's investment portfolio.  For further details regarding the terms of the management agreement see the section in the Report of the Directors.

 

£133,698 (2009: £106,296) of costs were incurred by the Company with this related party in the year, of which £36,365 (2009: £30,389) was due to this related party as at 31 December 2010.

 

Directors' remuneration is disclosed in Note 5.

 

 

16        FINANCIAL INSTRUMENTS

 

The Company's main financial instruments comprise:

 

(a)        Cash and cash equivalents that arise directly from the Company's operations;

 

(b)        Investments in listed entities and derivative financial assets;

 

(c)        Long term bank loan; and

 

(d)        Derivative financial liabilities.

 

17        FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

 

The following table details the categories of financial assets and liabilities held by the Company at the reporting date:

 


31 Dec 2010


31 Dec 2009


GBP


GBP

Financial assets




Financial assets at fair value through profit or loss

20,712,993


16,347,910





Derivative financial assets

-


108,563





Total financial assets at fair value through profit or loss

20,712,993


16,456,473





Loans and receivables

859,080


1,346,947





Total assets

21,572,073


17,803,420





Financial liabilities




Financial liabilities at fair value through profit or loss:




Payables - due within one year

69,978


72,414

Derivative financial liabilities

42,564


-





Total financial liabilities at fair value through profit or loss

112,542


72,414





Financial liabilities measured at amortised cost

4,350,000


6,000,000

 

Total liabilities excluding net assets attributable to holders of




Ordinary shares

4,462,542


6,072,414

 

Loans and receivables presented above represents cash and cash equivalents, balances due from brokers and other receivables as detailed in the Statement of Financial Position.

 

Financial liabilities measured at amortised cost presented above represents accrued expenses and loans payable as detailed in the Statement of Financial Position.

 

Derivative financial liabilities presented above represent forward foreign exchange contracts.

 

The main risks arising from the Company's financial instruments are market price risk, credit risk, liquidity risk, interest rate risk and foreign exchange risk.  The Board regularly review and agrees policies for managing each of these risks and these are summarised below:

 

(a)        Market Price Risk

Market price risk arises mainly from uncertainty about future prices of financial instruments held.  It represents the potential loss the Company might suffer through holding market positions in the face of price movements.  The Investment Advisers actively monitor market prices and report to the Board as to the appropriateness of the prices used for valuation purposes.  The Investment Advisers also attempt to minimise market price risk by undertaking a detailed analysis of the risk/reward relationship of each investee company prior to any investment being made.

 

Details of the Company's Investment Objective and Policy are given inside the front cover of this Report.

 

Price sensitivity

The following details the Company's sensitivity to a 15% increase and decrease in the market prices, with 15% being the sensitivity rate used when reporting price risk internally to key management personnel and representing management's assessment of the possible change in market prices.

 

At 31 December 2010, if market prices had been 15% higher with all the other variables held constant, the return attributable to shareholders for the year would have been £3,106,949 (2009: £2,452,187) greater, due to the increase in the fair value of financial assets at fair value through profit or loss.  This would represent an increase in Net Assets of 18.16% (2009: 20.90%).

 

If market prices had been 15% lower with all the other variables held constant, the net return attributable to shareholders for the year would have been £3,106,949 (2009: £2,452,187) lower, due to the decrease in the fair value of financial assets at fair value through profit or loss.  This would represent a decrease in Net Assets of 18.16% (2009: 20.90%).

 

(b)        Credit Risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Company.  The Directors receive financial information on a regular basis which is used to identify and monitor risk.  It is Company policy not to invest more than 20% of the gross assets of the Company in the securities of any one company or group at the time the investment is made.

 

The Company has no significant concentration of credit risk, with exposure spread over a large number of counterparties.  At 31 December 2010 the Company's largest exposure to a single investment was £1,412,172 (2009: £699,675), 6.55% (2009: 3.93%) of total assets.

 

Investors should be aware that the prospective returns to Shareholders mirror the returns under the Quoted Securities held or entered into by the Company and that any default by an issuer of any such Quoted Security held by the Company would have a consequential adverse effect on the ability of the Company to pay some or all of the entitlement to Shareholders.  Such a default might, for example, arise on the insolvency of an issuer of a Quoted Security.

 

The Company's financial assets exposed to credit risk are as follows:

 


31 Dec 2010


31 Dec 2009


GBP


GBP





Financial assets designated as at fair value through profit or loss

20,712,993


16,347,910

Derivative financial assets

-


108,563

Cash and cash equivalents

551,030


958,929

Balances due from brokers

-


100,727

Interest, dividends and other receivables

308,050


287,291






21,572,073


17,803,420

 

The credit ratings of the bonds, as rated by Moody's Investor Services Inc ("Moody's") were:

 

Rating

31 Dec 2010

31 Dec 2009

Aaa

4.13%

7.25%

Aa

9.20%

7.16%

A

25.58%

20.56%

Baa

25.95%

18.74%

Ba

9.01%

9.48%

WR

1.10%

4.10%

No rating available

25.03%

32.72%

 

(c)        Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments.  The Company's main financial commitment is its ongoing operating expenses.

 

The Investment Advisers ensure that the Company has sufficient liquid resources available to fulfil its operational plans and to meet its financial obligations as they fall due.  This is monitored by carrying out a solvency calculation on a quarterly basis by reference to management accounts and revenue projections.  The Board will approve, if appropriate, a Solvency Certificate resolution prior to declaring any interim dividend distributions.

 

The table below details the residual contractual maturities of financial liabilities:

 

As at 31 December 2010:


1-3 months


Over 1 year


GBP


GBP

Financial liabilities including derivatives




Payables - due within one year

69,978


-

Derivative financial instruments

42,564


-

Loans payable

-


4,350,000






112,542


4,350,000

 

As at 31 December 2009:


1-3 months


Over 1 year


GBP


GBP

Financial liabilities including derivatives




Payables - due within one year

72,414


-

Derivative financial instruments

-


-

Loans payable

-


6,000,000






72,414


6,000,000

 

(d)        Interest Rate Risk

In order to mitigate the potential risks to the Company should there be significant changes in interest rates, the Company could repay loans if the borrowing rate became no longer attractive.  On the investment side, the Company could hedge interest rate risk using various different methods.

 

The following table details the Company's exposure to interest rate risks.  It includes the Company's assets and liabilities at fair values, categorised by the earlier of contractual re-pricing or maturity date measured by the carrying value of the assets and liabilities:

 

As at 31 December 2010:


Less than

1 month

1 to 3

Months

Over

1 year

Fixed interest

 

Non-interest

Bearing

Total

 


GBP

GBP

GBP

GBP

GBP

GBP

Financial Assets







Financial assets at fair value through







profit or loss on initial recognition

-

-

-

3,642,210

17,070,783

20,712,993

Derivative financial instruments

-


-

-

-

-

Balances due from brokers

-

-

-

-

-

-

Cash and cash equivalents

551,030

-

-

-

-

551,030

Interest, dividends and other







receivables

-

-

-

-

308,050

308,050








Total Financial Assets

551,030

-

-

3,642,210

17,378,833

21,572,073

 

Financial Liabilities







Derivative financial instruments

-

-

-

-

42,564

42,564

Payables

-

-

-

-

69,978

69,978

Loans payable

4,350,000

-

-

-

-

4,350,000








Total Financial Liabilities

4,350,000

-

-

-

112,542

4,462,542

Total interest sensitivity gap

3,798,970

-

-

3,642,210



 

As at 31 December 2009:


Less than

1 month

1 to 3

Months

Over

1 year

Fixed interest

 

Non-interest

Bearing

Total

 


GBP

GBP

GBP

GBP

GBP

GBP

Financial Assets







Financial assets at fair value through







profit or loss on initial recognition

-

-

603,122

4,326,564

11,418,224

16,347,910

Derivative financial instruments

-


-

-

108,563

108,563

Balances due from brokers

-

-

-

-

100,727

100,727

Cash and cash equivalents

958,929

-

-

-

-

958,929

Interest, dividends and other receivables

 

-

 

-

 

-

 

-

 

287,291

 

287,291








Total Financial Assets

958,929

-

603,122

4,326,564

11,914,805

17,803,420

 

Financial Liabilities







Derivative financial instruments

-

-

-

-

-

-

Accrued expenses

-

-

-

-

72,414

72,414

Loans payable

6,000,000

-

-

-

-

6,000,000








Total Financial Liabilities

6,000,000

-

-

-

72,414

6,072,414

Total interest sensitivity gap

5,041,071

-

603,122

4,326,564



 

Interest rate sensitivity only takes account of the effect of interest rate movements on cash balances and loan amounts.  Any other interest rate risks are already reflected in the market price risk disclosures at Note 17(a).

 

Interest rate sensitivity

If interest rates had been 25 basis points higher and all other variables were held constant, the Company's return attributable to shareholders for the year ended 31 December 2010 would have decreased by approximately £9,497 (2009: £12,603) or 0.04% (2009: 0.07%) of Total Assets due to an increase in the amount of interest receivable on the bank balances of £1,378 (2009: £2,397) offset by an increase in the amount of interest payable on the bank loan of £10,875 (2009: £15,000).

 

If interest rates had been 25 basis points lower and all other variables were held constant, the Company's return attributable to shareholders for the year ended 31 December 2010 would have increased by approximately £9,497 (2009: £12,603) or 0.04% (2009: 0.07%) of Total Assets due to a decrease in the amount of interest receivable on the bank balances of £1,378 (2009: £2,397) offset by a decrease in the amount of interest payable on the bank loan of £10,875 (2009: £15,000).

 

(e)        Foreign Exchange Risk

Forward currency transactions are used to hedge the foreign currency exposure in bonds, other investments and cash balances held within the portfolio.  The purpose of the hedge is to protect the Company's assets from a decline in value that might arise from the depreciation of a foreign currency against sterling.

 

At 31 December 2010, the Company's holdings in forward currency contracts translated into GBP were as specified below:

 

 

 

Type of contract

 

 

Expiration

 

 

Underlying

Notional amount of contracts outstanding


Fair value assets / (liabilities)






GBP







Forward

March 2011

Sold EUR

1,130,000


(22,644)

Forward

March 2011

Sold USD

310,000


(1,675)

Forward

March 2011

Sold AUD

220,000


(8,188)






(32,507)

 

At 31 December 2009, the Company's holdings in forward currency contracts translated into GBP were as specified below:

 

 

 

Type of contract

 

 

Expiration

 

 

Underlying

Notional amount of contracts outstanding


Fair value assets / (liabilities)






GBP







Forward

January 2010

Sold USD

420,000


4,311

Forward

January 2010

Sold EUR

1,800,000


72,141

Forward

January 2010

Sold GBP

134,397


(1,533)

Forward

March 2010

Sold AUD

215,000


(356)






74,563

 

Exchange rate exposures are managed by minimising the amount of foreign currency held at any one time and entering into forward exchange contracts.

 

The following table sets out the Company's total exposure to foreign currency risk and the net exposure to foreign currencies of the monetary assets and liabilities:

 


Monetary

Assets

GBP


Monetary

Liabilities

GBP


Forward FX

Contracts

GBP


Net

Exposure

GBP









Euro

841,235


-


(946,322)


(105,086)

US Dollar

178,336


-


(196,717)


(18,381)

Australian Dollar

99,741


-


(135,998)


(36,257)

 

Amounts in the above table are based on the carrying value of monetary assets and liabilities and the underlying principal amount of forward currency contracts.

 

(f)         Capital Management

The principal investment objectives of the Company are to provide shareholders with a high income and also the opportunity for income and capital growth by investing primarily in smaller capitalised United Kingdom companies admitted to the Official List of the United Kingdom Listing Authority and traded on the London Stock Exchange or traded on AIM.

 

The Company's portfolio is invested in equities and high income and fixed interest and other income-bearing securities in order to achieve its investment objectives.  It is the aim of the Company to provide both income and capital growth predominantly through investment of approximately 70% of the portfolio in smaller capitalised United Kingdom companies.  The Company also aims to further enhance income for shareholders by investing approximately 30% of its assets in high yielding securities which will be predominantly fixed income securities (including corporate bonds, preference and permanent interest bearing shares, convertible and reverse convertible bonds and debentures) but may include up to 15% of the portfolio (measured at time of acquisition) in high yielding investment company shares.

 

The Company employs gearing in the form of a bank loan.  This gearing means that for any movement, up or down, in the Company's total assets there will, in most circumstances be a greater movement in the net asset value of the Ordinary shares.  This in turn may be reflected in greater volatility in the share price of the Ordinary shares and adds to the risk associated with this investment.  The Company is required to adhere to a number of covenants in respect of its gearing arrangements.  Failure to meet these requirements could jeopardise the Company's future as these borrowings are secured by a prior charge on the Company's assets.  The Board monitors the compliance with any covenants on a regular basis.

 

As the Company's Ordinary shares are traded on the London Stock Exchange, the Ordinary shares may trade at a discount to their Net Asset Value per Share on occasion.  However, the Directors and the manager monitor the discount on a regular basis.

 

The Company monitors capital on the basis of the carrying amount of equity as presented on the face of the statement of financial position.  Capital for the reporting periods under review is summarised as follows:

 


GBP



Distributable reserves

1,363,079

Share capital and share premium

168,571

Non distributable reserves

15,784,899

Treasury shares

(207,018)



Total

17,109,531

 

The distributable reserves comprises the revenue reserve.  Included in non distributable reserves are the special reserve and the capital reserve.  The special reserve was created on the cancellation of part of the Company's share premium account.  The Directors have resolved that the capital reserve is a non distributable reserve.

 

For further information about this announcement contact:

 

Anson Fund Managers Limited

Secretary

Tel:  01481 722 260

 

13 April 2011

 

END OF ANNOUNCEMENT

 

E&OE - in transmission

 

 

 


This information is provided by RNS
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