Annual Financial Report

RNS Number : 3073B

Aurora Investment Trust PLC

15 June 2016

ANNUAL FINANCIAL REPORT ANNOUNCEMENT

AURORA INVESTMENT TRUST PLC

YEAR ENDED 29 FEBRUARY 2016

STRATEGIC REPORT

OBJECTIVE

To provide shareholders with long term returns through capital and income growth.

POLICY

The strategy adopted was amended upon the appointment of Phoenix Asset Management Partners (Phoenix) as Investment Manager on 28 January 2016. Phoenix seeks to achieve the Objective by investing in a portfolio of UK listed equities.

The portfolio will be relatively concentrated. The exact number of individual holdings will very over time but typically the portfolio will consist of 15 to 20 holdings.

BENCHMARK

Performance is benchmarked against the FTSE All-Share Index, representing the overall London market. Prior to 28 January 2016 a capital only benchmark was used. Subsequent to that date the index used has been changed to a total return basis.

DIVIDEND

The Directors recommend a dividend of 1.00p per share (2015: 3.85p)

ANNUAL GENERAL MEETING

The Annual General Meeting of the Company will be held at the offices of Grant Thornton (UK) LLP, 30 Finsbury Square, London EC2P 2YU on 13 July 2016 at 12.00 noon.

CHAIRMAN'S STATEMENT

This has been a momentous year for Aurora with Phoenix Asset Management taking over from Mars as the Investment Manager on 28 January, 2016.

The performance for the year to end February 2016 was - 4.71%, outperforming the benchmark FTSE All-Share Index -10.64% by 5.93% and mostly reflecting the historic Mars' investment strategy, although the portfolio was reorganised by Phoenix in February.

After 19 years of commitment to Aurora, since it was launched, James Barstow stood down as a director on 28 January. The Board extends its thanks to him and wishes him well.

History of Events leading to Phoenix's Appointment as Manager

Shareholders will recollect that at the AGM in July 2014 the Continuation Vote was passed, but with the undertaking not to hold a further vote in 2017, and instead to seek an alternative future for the Trust. Constructive talks were held by the Chairman with the chairmen of a number of larger Investment Trusts, with a view to a possible merger. In early September, however, Phoenix Asset Management acquired a 23.2% stake in Aurora, following which I and the Board met with Gary Channon, CIO, and Charlotte Maby, MD of Phoenix. We were greatly impressed by Phoenix's investment strategy, described in more detail below; we felt it represented a very good fit for Aurora and offered the prospect, on Phoenix's track record, of achieving significant outperformance. An announcement was made on 24 September, 2015 of the proposal that Phoenix take over as Investment Manager. A Circular was sent to Shareholders on 17 November, 2015 concerning the proposed change of the Investment policy and to authorise share issues and sales from Treasury.

A General Meeting of Shareholders was held on 11 December, 2015 which approved the proposals in the Circular. Phoenix took over as Manager on 28 January, 2016, following which a Prospectus was published relating to a placing and an ongoing placing programme. The re-organisation of Aurora's investment portfolio into the Phoenix "model" was completed in the course of February and March, and 4,858,750 new shares were admitted under the placing programme on 29 March, 2016.

A new Investment Management agreement with Phoenix was entered into on 28 January 2016. Its key features are no management fees and an annual performance only fee, equal to one-third of NAV per share total returns in excess of the FTSE All-Share return. This fee is subject to claw back and a high water mark and is capped at 4% of NAV, p.a., in the case of an absolute increase in NAV per share; and 2% in the case of a decrease. Aurora is now managed with the same investment approach as Phoenix's open-ended UK Fund. Since its inception in 1998 this has delivered, net of fees, cumulative NAV total returns of 412%, and annualised returns of 9.5%, compared with 118% and 4.4% for the FTSE All-Share.

Liberum was appointed Broker to Aurora on 25 January 2016 since when, as of 2 June 2016 a total of 3,492,104 shares have been sold out of the Treasury, which, together with the placing, increased the NAV of Aurora. While the 17 November 2015 Circular provided for a possible tender offer, this was not activated as departing shareholders were able to sell their shares in the market on better terms. We, thus, now have shareholders who support the new Phoenix "value investing" approach.

The Phoenix Investment Philosophy

Unlike some value investors, Phoenix does not seek to buy any businesses at distressed prices. Rather, they aim to buy great businesses at attractive prices. The Phoenix definition of a great business is, amongst other things, of it having a high return on capital (15% or above), pricing power and that it can be observed, transparently, doing business in the real world. It is from understanding why a business earns such high returns that investment outperformance can be anticipated. Phoenix builds up the required knowledge by studying the relevant industries and companies in detail - a learning process which can take several years. When it comes to price, Phoenix is disciplined in only paying half of what they believe the business is actually worth. Inevitably, the opportunities to buy great businesses at half price are rare - frequently Phoenix will identify a business which fits their objective, but at a price that does not. Inevitably, therefore, Phoenix has to be patient. Having spent considerable time identifying great businesses, they usually have to wait further years before the price reaches a level at which they are willing to invest. This often arises when there has been some bad news about a particular company and the stock falls out of favour.

The rarity of suitable investment candidates, combined with the time consuming nature of the investment process, results in a concentrated portfolio, typically of between 15 and 20 investments. The portfolio turnover is low, typically with only one or two new investments made each year.

Phoenix defines risk as being the potential for a permanent loss of capital - rather than share price volatility. They see permanent loss of capital as a function of an insufficiently thorough understanding of a business and the potential threats it faces. An ongoing monitoring and research programme for every stock in the portfolio seeks to mitigate this risk.

The in depth and unusual nature of the research that Phoenix undertakes is the most distinguishing feature of its investment approach. They spend 80% of their time monitoring the businesses we own. Shareholders may be interested in reading the detailed, historic track record of the Phoenix UK Fund since its inception in 1998 in the Appendix at the back of this Report and Accounts.

Going Forward

As part of the changes, Tristan Chapple, Director of Phoenix, and the well-known journalist David Stevenson were appointed to the Board on 28 January and 1 February respectively. Tristan Chapple's particular role is to keep the Board fully appraised of the investment portfolio and its performance.

The objective is to build Aurora to approximately £100m in size in the medium term. New shares can be issued under the Ongoing Placing Programme, at a premium to NAV.

The AGM will seek shareholder agreement to changing the date of the next Continuation Vote to 2019, as a consequence of the appointment of the new Investment Manager and to allow an appropriate period to assess their performance.

The Board has also changed the year end date to 31 December, to align with that of the calculation period for the performance fee.

Dividend Policy

The Board proposes a dividend of 1p per share, meeting the HMRC minimum distribution regulations.

As advised at the 11 December 2015 General Meeting of Shareholders, future Dividend Policy will be to distribute substantially all of the net revenue, which is likely to vary from year to year. Also, there has been an increase in the number of shares in issue (excluding Treasury Stock) of approximately 70%, which has of itself reduced the amount distributable per share.

As well as extending a warm welcome to shareholders to the AGM to be held at 12 noon on Wednesday 13 July, I also invite shareholders to "save the date" for the 2017 Phoenix and Aurora Annual Investors' Meeting, to be held on 2 March 2017, at 18.00 for 18.30, to which an invitation will be sent to Aurora shareholders.

Lord Flight

Chairman

15 June 2016

STATEMENT BY THE CIO OF THE INVESTMENT MANAGER

We are excited to have started managing the Aurora Investment Trust. I want to lay out for you how we are going to approach that task and why we expect that to deliver excellent returns over the long term. Although new to Aurora, the approach we will use is identical to that we have used for over 18 years at Phoenix.

We are business-like investors, we don't think we are buying shares, but rather a piece of a whole business. So we spend our time thinking about the characteristics of that business, its prospects and value. We choose businesses with some innate quality that allows them to earn sustainably high returns on their shareholders capital, which might be from a brand, a patent, a strong market position, being the low cost producer and a number of other ways.

We choose businesses that have a long term future because our ideal holding period is forever. We want to understand the factors that drive the market they serve over the long term. That includes the competitive landscape and how that is evolving.

We choose businesses where we can monitor the factors above and we spend most of our time doing that. For example, for our retailers we continuously mystery shop their stores and those of their competitors and we monitor the cost of a basket of goods on their websites and those of their competitors. We talk to their customers, their current and ex-staff and their suppliers. We read their employee forums (if they are available), we follow all the stories about them online and in print, we monitor their planning applications for new stores and we talk to their competitors.

If you come to work at Phoenix as an analyst you will spend most of your time seeing business in action, i.e. visiting premises, attending trade shows and meeting managements. On top of that we retain an army of lowly paid friends, family and associates as well a regular stream of work experience students to help us with this work.

When people ask me about risk management, this is the key part of it for us. Knowing our businesses, especially through the eyes of their customers and seeing how they are faring against their competitors is how we reduce risk. When we do meet managements we have a completely different level of engagement to typical institutional investors, we talk about the business in the field and not about the share price.

We don't use external research. We form our own views from our own work.

We see managements as stewards of shareholders capital and we pay very close attention to how they do that. We pick managers who we trust to manage the business competently, to allocate our capital intelligently and who are aligned with the interests of their shareholders.

As with businesses we research and monitor them. We study their backgrounds, their track records and accomplishments. Apart from the usual sources we will look at everything from social media postings to divorce filings to try to understand the people we are choosing to hand your money to. When we meet them we will use various findings from behavioural psychology to get deeper insights into their characters.

The one variable in the investment equation that we control is the price we pay. It's true that the market sets the trading price of shares, but we don't have to take it. At Phoenix we determine the price we are willing to pay and if that's not available we don't act.

The highest price we pay is the one where in our estimation if things were to go wrong in the business we will get our money back. If the business performs along our central case then we will make a return of 15% per annum.

These parameters mean that we never pay more than half what we think a business is worth. That discount is what Benjamin Graham called the "Margin of Safety", it's what protects us from our mistakes and the fluctuations of business outcomes.

When we are deciding how much to invest in a company we consider what the downside looks like and how well we can monitor it, what the upside scenarios will return and how probable they are, how well we know the company and how long we have been working on their industry and a number of other factors. When the stars align and we get a great well managed business at a very attractive price then we will make a significant commitment. If the stock price keeps falling, which it usually does when we start buying, we will be prepared to keep adding to the holding. The more attractive the proposition the more we will commit. The maximum we will commit is 15% of our capital. Those kind of opportunities come along rarely.

The portfolio will typically contain around 15 holdings of which the top 5 are at least half of the portfolio. We believe this is sufficient diversification to protect us from our mistakes whilst delivering the benefits of focus. Owning lots of stocks diversifies your risk of deviating from the market average and yet that's not what we care about. Owning a few stocks that you know and follow closely reduces your risks of losing money on them. Making good risk adjusted long term returns is our goal which we expect to be in excess of the market average.

In the 18 years we've been investing this way we have averaged an 80:20 split between investments that have made money versus losses. When we consider the value of gains against losses the ratio is higher than 80. This relationship has been fairly consistent throughout our history. This is very much higher than is typical for a fund manager and we believe is due to the rigour of our process and our discipline in adhering to it.

We have a highly detailed manual for how we assess companies and a long checklist of factors we consider before we make an investment. This process continues after we make an investment and all these assessments are documented. This allows us to learn from our mistakes and to continually improve our process.

We run our winners. When we identify and get to invest in a great business that has a long term prospect of earning high returns on its starting and retained capital then our job is almost done, all we need to do is keep monitoring it to see that our assumptions hold true. When you make significant investments that work then sometimes their weightings become substantial, nothing in our approach forces us to reduce those. If they reach a level of weight and value where we think the overall portfolio risk is impacted then we will act to trim them but not sell entirely.

Having a rational team-based process assists us in dealing with what we believe is the biggest cause of poor investment returns and that is psychological bias. We have always paid a lot of attention to the discoveries in the field of behavioural psychology. A key one is that you can't fix subconscious biases just because you are aware of them, it requires a framework of thinking that is essentially inhuman, removed of emotion and focused on the facts. Our investment process at Phoenix we believe helps us to do that.

We believe that it is innate human biases that mean our approach will always work over the long term provided we keep applying it consistently. Share prices deviate from their intrinsic values for many reasons and at times the psychology of the crowd will drive a good business to an extremely undervalued price. If you don't care about share prices, and we don't, and you don't have gearing, which we don't, and you have patient capital and we believe we do, then you can take advantage of those overshoots.

One of the ironies of our track record at Phoenix is that when we were doing our very best work our returns at that time were poor. The three down years we had in 1999, 2002 and 2008, were also our most active years as we were busy buying what the market was marking down. Because we didn't fear further falls in share prices, and gearing didn't pose a risk to the portfolio and because our investors were supportive, we were able to make some great investments based upon long term values.

As it happens all those losses were recovered within 12 months but that may of not have been the case, it could have taken longer, for the genuine long term investor it doesn't matter.

Our process frees us from caring about share prices, our risk management rules free us from gearing risk and so the final ingredient is to ensure that we attract the right type of investors. To that end we try to communicate very clearly what we do and what to expect. Our focused approach, combined with a willingness to invest into very unpopular stocks, can lead to significant volatility and temporary drawdowns. The test I use is to ask yourself how you will act if the portfolio halves in price. No one is happy in those circumstances but will you have the presence of mind to stick with the investment if we are doing what we have always done and the fall is due to a general crisis in the market?

To help you do that we will always communicate in an open and honest way especially about our failings and errors. We have an 18 year record of doing that. We will also be able to tell you our estimate of the underlying intrinsic value of the portfolio, regardless of the current share prices.

If you think you would be able to stick through that sort of turbulence then firstly, you are in a small minority and secondly, we would like to have you on board.

The ability to ignore the noise, focus on the long term, act rationally in times of extremity, and to run winners is the basis of great long term investment returns.

Gary Channon

CIO Phoenix Asset Management Partners Limited

INVESTMENT MANAGER'S REVIEW AND OUTLOOK

A lot of careful thought went into the naming of our firm, Phoenix Asset Management Partners. "Phoenix" was chosen because we look for companies whose shares are too cheap due to short-term problems. As the Chairman has already implied, we buy shares when we believe the business can rise Phoenix-like from the flames, with the potential to be great in the future. Only after we had printed the stationary did we realise that "Phoenix" is the "John Smith" of business names, and that perhaps if we had cast the net slightly wider into the realms of Greek mythology (or indeed anywhere else), we might have found something more distinctive. On a recent car journey, and as an alternative to "I spy" (my wife and I have a young child) we spotted Phoenix Drainage Engineers, Phoenix Fish & Chips and Phoenix Building Services. Despite these indignities, "Phoenix" sums up our investment approach perfectly and we stand by it. The "Asset Management" part of our name doesn't need explaining, although the "Partners" bit probably does. "Partners" is not a reference to our corporate structure. It is a reference to you, our investors. It is an enormous privilege and a great responsibility to be managing your money and we aspire to treat you as Partners in that endeavour. What does this mean in practise? Firstly, that our interests are aligned (that we invest our own money alongside yours) and secondly, that in our dealings with you, we behave as we would want to be treated ourselves. One of the ways we try and achieve this is to communicate in a clear, relevant, honest and transparent way. And so it is in that frame of mind that we consider the current portfolio.

Most of the time an investor's return is the result of a business being able to take three steps forward for every two steps back. In other words, business doesn't usually progress in a straight line. Certainly that has been our experience over the last 18 years (since Phoenix was founded in 1998) and when we come across an exception, we tread very carefully. Bellway and Barratt Developments, our two house-building investments, are currently experiencing very favourable trading conditions. Consumer sentiment is robust, interest rates are incredibly low and there is a housing shortage in the UK. If that's the kindling for the fire, the Government is wafting the flames with a number of favourable policies and initiatives including: the Help to Buy Scheme (whereby the Government subsidises the buyer's deposit, giving them access to more favourable mortgage terms), simplification of the planning system and the sale of land owned by the Government to house-builders. The consequence of all this is that house-builders are currently making hay; sales and profits are growing, returns on capital are at record levels and both Barratt & Bellway are buying land today on very favourable terms, which is important for future profitability. We have recently asked ourselves more than once, is this too good to be true? In answering that question, we can't help but observe that for all the tailwinds and good news, both stocks are already cheap. It would be concerning to us if the valuations reflected the current wonderful trading conditions or the attractive long term growth prospects that they both face. And yet these great, well managed businesses trade on less than 10 times earnings, with practically no debt.

We sometimes get asked how Lloyds meets our investment criteria. Generally, banking isn't for us. We have considered and rejected other businesses because they have investment banking operations we don't understand or overseas divisions exposed to unknown risks. Lloyds does not have either of these issues and its appeal to us today can be attributed to a few fairly simple observations. Firstly, it is a bank focused on UK domestic business: current accounts, mortgage lending and loans, i.e. nothing racy. Secondly, (as the competition commission discovered when they investigated the banking sector) Lloyds customers (and in fact UK banking customers in general) are very loyal and don't change their banking provider very often. This means that Lloyds has been able to maintain persistently high market share despite not being the cheapest provider of almost any service and product it provides. Thirdly, the hideous banking crisis of 2007/8 and its aftermath means that Lloyds is operating cautiously and under far more scrutiny than at any time in recent memory. Over the last couple of years the strong underlying profitability of the business has become apparent and the current valuation appears to be very low.

Another question that crops up quite frequently at the moment is: "have you found any investment opportunities in commodities businesses?" the implication being that distressed sectors often yield rich pickings for value investors. The short answer is no. The slightly longer answer is that Gary has been looking quite excitedly at opportunities in the oil, gas and mining sector for the last 18 months. However, our view is that there is potentially a lot more pain to come and that watchful waiting is the appropriate course of action at the moment. Having said that, in Vesuvius we do have some existing exposure to the steel production industry. (They sell products and services to foundries) Phoenix's MD, Charlotte Maby, is the analyst responsible for this stock and, after her most recent visit to the annual industry conference in the Black Forest, (where she was one of if not the only financial analyst in attendance) she assured us that this excellent, 100 year old business was in good shape, and demonstrating resilience and pricing power in what are difficult markets.

Mystery shopping and gathering "scuttlebutt" keeps us in-touch with what's happening at the coalface of a business and is a very important aspect of our approach. Last year, we (meaning a very busy James Wilson and a number of bemused interns) visited approximately 200 food retail locations, dividing that effort primarily between Tesco and Morrisons. Both are making some progress towards being rehabilitated after several years of underperformance. Generally speaking, the evidence from our store visits validates the "back to basics" strategies that have been announced by both management teams. For example, some of Morrisons problems came about when, attempting to attract wealthier southern customers with flash store fittings and slick advertising, they lost the hearts and minds of their core "value" market. Now under new management and without compromising the freshness and quality for which they are renowned, Morrisons stores have a clear appeal to the value oriented shopper. Under CEO Dave Lewis, Tesco is asking its customers what they want and then making the necessary improvements to deliver things like: better service, simpler ranges and consistently low pricing. But it's not all good news for Tesco and Morrisons and the recovery stories have a long way to go. The future of online grocery shopping is an unknown quantity and a risk to be watched. But that last point is important: we have the ability to watch the risk unfold (and relatively slowly; shopping habits are persistent) and respond accordingly if we need to. We also see a lot of hand wringing about the threat from the German discount supermarkets, Aldi & Lidl. Our view is that they are very formidable competitors who have been given more freedom to compete in the UK than should have been the case; both Tesco and Morrisons have had to do some fire-fighting to respond to the threat. We think that the important point is this: there are parts of the UK where the German discounters have been trading for well over 20 years (Bristol for example) and yet their market share in these areas is bounded by the willingness of the local population to do some or all of their shopping in a discounter. Even in these areas where the Germans have been established a long time, Tesco and Morrisons (and Asda and Sainsbury) have strong market positions. We think this can be extrapolated nationally and leads us to conclude that the end is not nigh for Tesco and Morrisons. The share prices of both stocks are low; we think the long term prospects for both businesses are excellent.

Some of our peers smirk when they hear we are invested in Sports Direct. We can't be sure why although our best guess is that it is intended as a knowing gesture, an acknowledgement between investors that we are taking a bit of a punt on a beaten-up company with a slightly swashbuckling reputation. How strange! We are invested because it is one of the best run businesses we have ever come across. We have owned the shares a long time, (in the offshore fund we have been running since 1998) originally buying shortly after the (not very well managed) floatation. At that time (2007/8) the City narrative was something along the lines of "the stores are jumble sales and the management team are incompetent". Mike Ashley and his excellent management team then spent several years proving the City wrong, out-foxed several of their competitors and until last year the business was feted as an exemplar of retailing excellence. One or two PR snafus followed by a profit warning in January has halved the share price from 8 pounds to 4. We visit around 60 sports retail locations in the UK and Europe each year and don't see any evidence to suggest that the valuation today should be half of what is was last year.

Diageo, Unilever and Glaxo are in quite different businesses (the former sometimes making you sick, the latter making you better) and yet the investments have some similarities. Firstly, steady, long-term global population expansion and GDP growth provides a helpful tailwind and means that both businesses have more potential customers this year than last. Furthermore, as the world becomes richer, consumer demand for their products increases. Secondly, each derives a strong competitive advantage from their industrial capability. Vast distribution networks, sophisticated marketing divisions and, (especially relevant in Glaxo's case), world class research and development, are all widening the moat and helping to protect market share. Each year there will be ebbs and flows for all three businesses; notable failures and successes with particular products or in certain markets. But we expect the trends mentioned above will deliver a favourable result to us as long term shareholders.

Staying on the subject of alcohol, JD Wetherspoon is a good example of how a great business can prosper in the face of headwinds. The number of pubs in the UK is in steady decline and yet they open new ones every year. Wetherspoon's margins have fallen because of price pressure and wage cost increases and yet return on capital (a much more important metric for us) has remained stable. Why? Because the business is run in a rational way by people who have a relentless focus on making the pubs as good as they can be. Chairman Tim Martin was recently speaking to one of his kitchen staff about serving traditional Sunday lunches (presumably a sacrosanct meal for many pub businesses). The employee told him that roasting potatoes and joints of meat was interfering with the breakfast service. On further analysis it turned out that there was more money to be made from getting breakfast right than serving "Sunday lunch". So they stopped serving "Sunday lunch".

Outlook

One or two specific potential opportunities and threats need to be acknowledged before the inevitable section on "Brexit". Interest rates will start to rise at some point and when they do, sentiment on house builders might become negative; investors are likely to fear falling house prices or stagnation in the housing market. However, as mentioned above, the valuations of Barratt and Bellway are low enough to make them very attractive long term investments even if both of those things happen. Furthermore, if we have a period of lower house prices, housebuilders will be compensated by falling land prices (their single biggest cost), cushioning the blow and protecting long term profitability.

Lloyds has had two clouds hanging over it for some time: the PPI saga and the Government stake, which has created an "overhang" in the stock. It seems likely that both of these issues may be resolved in the not too distant future.

At the time of writing, "Brexit" is causing some stock market nervousness. In the short term, this is likely to persist until the vote is held. We would remind our investors to focus - as we do - on long term fundamental business performance and not on what might happen to share prices in the short or medium term. A vote not to leave is likely to be the most benign outcome for equities and may lead to a relief rally. A "leave" vote is likely to lead to either a definitive exit or, more probably, a second round of negotiations of Britain's membership terms. While those discussions rumble on, volatility seems likely. If Britain did go on to leave the EU, a prolonged period of uncertainty seems almost inevitable. A "leave" vote could have a significant negative effect on consumer confidence, in which case a recession of some kind is likely. If that happens then we would expect our cyclical businesses to be negatively impacted. A slowdown in the housing market and a tightening of belts will impact our house-builders and supermarkets. People might go to the pub less frequently or not spend as much when they do go. Drinkers might buy cheap supermarket vodka rather than Smirnoff. They might not buy as many trainers or football shirts. Yet for all this pontificating, we don't know what will happen and a "leave" vote could all play out with much less uncertainty than people expect, although we doubt it. This sounds a little gloomy and unsatisfactory until we remind ourselves that it doesn't matter that much. This sounds flippant but it isn't. Our approach is about investing for the long-term in businesses that are persistent winners and these sorts of companies can weather a storm.

We shouldn't talk about the risks of a Brexit wobble without touching on what a great opportunity it might present. Stock market fear and negative over-reaction are things we relish because we will get opportunities to make great investments. Perhaps we won't get that with Brexit and it will be a damp squib. But even if that turns out to be the case, history would suggest that we never have to wait too long for a stock market panic and the smorgasbord of potential investment opportunities that it usually presents.

Tristan Chapple

Investment Manager

Phoenix Asset Management Partners Limited

INVESTMENT POLICY AND PERFORMANCE

This report deals with the results of Aurora Investment Trust plc. The Company's subsidiary AIT Trading Limited (AIT) is currently inactive, with no assets or liabilities. The inclusion of the results of AIT in the Company's accounts would not be material for the purpose of giving a true and fair view.

The Company adopted a revised Investment Policy on 28 January 2016, with the appointment of Phoenix Asset Management Partners ("Phoenix") as the Company's new Investment Manager.

INVESTMENT POLICY

The Company's objective is to provide shareholders with long term returns through capital and income growth by investing in a concentrated portfolio of UK listed equities.

The Company seeks to achieve its investment objective by investing in a portfolio of UK listed equities. The portfolio will be relatively concentrated. The exact number of individual holdings will very over time but typically the portfolio will consist of 15 to 20 holdings. The Company may use derivatives and similar instruments for the purpose of capital preservation. There are no pre-defined maximum or minimum exposure levels for each individual holding or sector, but these exposures re reported to, and monitored by, the Board in order to ensure that adequate diversification is achieved. The Company's policy is not to invest more than 15% of its gross assets in any one investment.

While there is a comparable index for the purposes of measuring performance over material periods, no attention is paid to the composition of this index when constructing the portfolio and the composition of the portfolio is likely to vary substantially from that of the index. The Company may from time to time invest in other UK listed investment companies, but the Company will not invest more than 10% in aggregate of the total assets of the Company in other listed closed-ended funds other than closed-ended investment funds which themselves have published investment policies to invest no more than 15 per cent of their total assets in other listed closed-ended funds. The Company will not invest in any other fund managed by the Company's investment manager.

The Company does not currently intend to use gearing. However, if the Board did decide to utilise gearing the aggregate borrowings of the Company would be restricted to 30 per cent of aggregate of the paid up nominal capital plus the capital and revenue reserves.

Any material change to the investment policy of the Company will only be made with the approval of the Shareholders.

DIVIDEND POLICY

The revised investment policy does not include any fixed dividend policy. However, the Board will distribute substantially all of the net revenue arising from the investment portfolio. Accordingly, the Company is expected to continue to pay an annual final dividend, but this could be lower than the level of recent dividends and may very each year. No KPI objective has been set with regard to dividend payments.

OBJECTIVES AND KEY PERFORMANCE INDICATORS (KPIs)

The Company's principal investment objective is to achieve capital growth. The Company's success in attaining its objectives is measured by reference to KPIs as follows:

a) To make an absolute total return for shareholders on a long-term basis.

b) The Company's Benchmark is the FTSE All-Share Index (total return), against which the Net Asset Value (NAV) return is compared. After achieving the goal of making absolute returns for shareholders, the next aim is to provide a better return from the portfolio than from the market as measured by the Benchmark.

c) The Company seeks to ensure that the operating expenses of running the Company as a proportion of NAV (the Ongoing Charges Ratio) are reasonable.

PERFORMANCE

With effect from 28 January 2016, the Investment Manager has been Phoenix Asset Management Partners Limited, replacing Mars Asset Management Limited (Mars). Both are regulated by the FCA. The main fund manager is Gary Channon, replacing James Barstow (previously managing director of Mars). Phoenix reports in detail upon the Company's activities in the IMR.

Under the new Investment Management Agreement no monthly management fees are payable. A performance fee is payable to the Investment Manager only if the benchmark is beaten. The benchmark is now the FTSE All-Share Index Total Return; previously it was the FTSE All-Share Index capital only.

In view of the change of Investment Manager, it is appropriate to note separately the Company's performance for the period from 28 January 2016 to 29 February 2016. During this period the Company achieved an absolute total return for shareholders and outperformed the total return benchmark, thereby meeting both KPI objectives:

	Period 28 January 2016 to
	29 February 2016

Net Asset Value per share	+4.50%
Benchmark (total return)	+2.32%

The Company's performance from launch up to 27 January 2016, compared to the capital only benchmark then in use, was as follows:

	Period from 1 March 2015 to 27 January 2016	Period from 1 March 2011 to 27 January 2016	Since launch (1997)

Net Asset Value per share	(8.74%)	(41.91%)	+59.95%*
Benchmark (capital only)	(12.22%)	+5.79%	+52.43%

*by reference to a starting value of 97.78p (net of launch expenses).

The Company outperformed its then benchmark during the period since launch and in the eleven months ended 27 January 2016, but underperformed in the period of approximately five years from 1 March 2011.

The Ongoing Charges ratio is shown for the full years 2016 and 2015 respectively:

	Year ended 29 February 2016	Year ended 28 February 2015

Ongoing Charges Ratio	2.48%	2.25%

The ratio is calculated excluding finance costs but including operating expenses charged to capital and applied to the average NAV of the year. Expenses of a type not expected to recur under normal circumstances are excluded from the calculation.

REVENUE RESULT AND DIVIDEND

The Company's revenue profit after tax for the period amounted to £203,622 (2015: £415,841). In arriving at this result for the year 2016, income due for the year from AIT of £38,758 was written off.

At the Annual General Meeting on 13 July 2016, a resolution will be proposed to approve a final dividend of 1.00p (2015: 3.85p) per ordinary share. Based on the number of shares in issue on 2 June 2016 (excluding treasury shares) this will absorb £187,479 (2015: £400,287). The final dividend will be paid on 22 July 2016 to shareholders on the register at 24 June 2016; the ordinary shares will go ex-dividend on 23 July 2016. In accordance with International Financial Reporting Standards this dividend is not reflected in the financial statements for the year ended 29 February 2016.

RISK ANALYSIS

The Board considers that the principal risks faced by the shareholders of the Company fall into two categories:

External Risks

Poor performance in the UK and/or world economies; poor corporate profits and dividends.

Poor stock market performance caused by market-specific factors, such as rising interest rates, the unwinding of "bubbles" or disinvestment by institutions, superimposed on general economic factors, or caused by shocks, wars, disease etc. The Board does not consider, however, that short-term volatility represents a risk for the long-term shareholder, since it regards long-term performance to be of primary importance.

Internal Risks

Poor asset management, which may include poor stock selection, excessive concentration of the portfolio, mistakes regarding currency movements, speculation in shares of companies without sound or established businesses and speculation in derivatives.

Poor governance, compliance or administration, including particularly the risk of loss of investment trust status.

All these and other risks can result in shareholders not making acceptable returns from their investment in the Company.

RISK CONTROLS

External risks

As described in the Investment Policy section above, external risks are mitigated by diversification of the portfolio and by not utilising gearing.

Risk diversification

An element of risk is inherent in investment undertaken on a selective basis. The Company seeks to mitigate the degree of risk by investing in securities in substantial organisations, normally listed and traded on the London Stock Exchange, and by spreading its investments across a range of such securities. At 29 February 2016 the Company held 18 stocks, spread across 11 main sectors.

Gearing

The Company has discontinued the use of gearing as an element of its investment policy. Under the articles, borrowings are permitted up to a maximum of 30% of NAV. The Company's agreement with BNP also permits borrowing of up to 30% of NAV, but there is currently no intention to make use of this allowance.

The Board will keep under review whether any provision should be made for the use of short-term borrowing for the sole purpose of meeting working capital requirements from time to time.

Further details concerning currency risks, liquidity risks and interest rate risks are given in note 19.

Internal risks

The control of risks related to governance, compliance and administration is dealt with in the report on Corporate Governance.

VIABILITY STATEMENT

The Company is subject to continuation votes every three years. The Company announced that, as a consequence of the appointment of a new Investment Manager, the continuation vote that would have been held in 2017 should not take place and should be superseded by the inauguration of a new three-year schedule with the next vote falling due in 2019. (This would be subject to a proposed change to the articles, to be submitted for approved by shareholders at the AGM this year).

The Directors consider that a three-year time frame, being the period up to the proposed date of the next continuation vote, is an appropriate period over which to assess the Company's viability.

After making inquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence and meet its liabilities as they fall due for at least three years from the date of approval of this document.

In reaching this conclusion, the directors have considered each of the principal risks and uncertainties set out above. They have considered the liquidity and solvency of the Company, the level of discount at which its shares trade, its income and expenditure profile including the absence of monthly management fees and the discontinuation of the use of gearing as an instrument of normal investment policy. The Company's investments comprise readily realisable securities which could, if necessary, be sold to meet the Company's funding requirements. The Company's plan to expand by the issue of new share capital and the sale of shares from treasury is kept under close, ongoing review by the Board. Portfolio changes and market developments are also discussed at quarterly Board meetings. The internal control framework of the Company is subject to formal review on at least an annual basis.

The directors do not expect there to be any material increase in the annual ongoing charges of the Company over the period of their assessment. The Company's income from investments and cash realisable from the sale of investments provide substantial cover to the Company's operating expenses and any other costs likely to be faced by the Company during the period under review.

SOCIAL, ETHICAL, HUMAN RIGHTS AND ENVIRONMENTAL MATTERS

Being an investment company, with no staff, premises, manufacturing or other operations of its own, the Company does not have any direct influence on social, ethical, human rights and environmental matters.

BOARDROOM DIVERSITY

The Company has no employees other than the Directors. At 29 February 2016 the Company had five directors, all of whom were male. The Company's policy is that the Board should have a broad range of skills; while keeping this in mind, consideration is given to the recommendations of the AIC Code and other guidance on boardroom diversity.

FIVE YEAR SUMMARY

The following data are all expressed as pence per share. NAV figures are all calculated at bid prices. They are shown both as previously published and as adjusted by adding back the final dividend for each year.

Year	NAV	Dividend in respect of year	Share price (mid market)

2012	214.84	3.55	175.75
2013	186.13	3.75	152.75
2014	191.78	3.80	166.00
2015	171.37	3.85	147.50
2016	162.30	1.00	158.00

OUTLOOK

The outlook for Aurora is discussed in the Chairman's Statement and the Manager's Review and Outlook.

TOP HOLDINGS

AT 29 FEBRUARY 2016

	Date of first purchase	Weight	By valuation	Avg. Net Cost Incl. Sales per share	Share Price	Market Cap	Net Cash/ (Debt)	Enterprise Value
		%	£	£	£	£	£	£

Lloyds Banking Group	Dec-15	13.0	2,397,526	0.63	0.72	51.5bn	(11.5bn)	63bn
Tesco	Dec-15	11.8	2,179,890	1.62	1.80	15.8bn	(5.1bn)	20.9bn
Barratt Developments	Dec-15	9.2	1,690,097	5.92	5.90	5.9bn	24.2m	5.8bn
Bellway	Dec-15	6.5	1,196,688	26.53	25.68	3.1bn	(60m)	3.1bn
Morrisons	Dec-15	6.2	1,136,316	1.66	1.99	4.7bn	(1.7bn)	6.4bn
Glaxosmithkline	Dec-15	4.8	889,764	14.33	14.00	68.7bn	(10.7bn)	79.4bn
JD Weatherspoon	Jan-16	4.7	875,023	6.70	7.20	855m	(626m)	1.5bn
Sports Direct	Dec-15	4.6	844,400	3.95	4.05	2.4bn	20m	2.4bn
Vesuvius	Dec-15	4.1	759,217	2.99	3.00	818m	(292m)	1.1bn
Diageo	Dec-15	4.0	743,400	18.65	18.59	46.1bn	(9.5bn)	55.6bn
Unilever	Dec-15	3.9	713,790	30.05	30.92	40.5bn	(9.0bn)	49.5bn
Other (<3%)		5.5
Total		78.3
Cash		21.7
Overall Total		100.0

PORTFOLIO ANALYSIS

AT 29 FEBRUARY 2016

	Percentage of Portfolio
Agriculture	1.3
Construction	20.0
Mining	0.5
Retail	28.8
Financial	17.4
Consumer	6.1
Pharmaceuticals	6.2
Fast Moving Consumer Goods	10.0
Materials	5.3
Leisure	3.8
Oil & Gas	0.6


	100.0

ANALYSIS BY TYPE, MARKET AND CURRENCY

All investments are of Ordinary Shares, denominated in sterling. All holdings carried at a value are in listed companies with the exception of Asian Citrus and Randall & Quilter, which are both quoted on AIM. The Company also has registered holdings in Naibu Global and China Chaintek, but these have each been written down to a valuation of £Nil.

This Strategic Report was approved by the Board on 15 June 2016.

For and on behalf of the Board

Lord Flight

Chairman

15 June 2016

GOVERNANCE

STATEMENT OF DIRECTORS' RESPONSIBILITIES FOR THE ANNUAL REPORT

The directors are responsible for preparing the Strategic Report, the Directors' Report, the Remuneration Reports and the financial statements in accordance with applicable law and regulations.

Company law in the United Kingdom requires the directors to prepare financial statements for each financial year. Under that law the directors have to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the Company financial statements under IFRS as adopted by the European Union. Under company law the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company and Group for that period. In preparing these financial statements, the directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and accounting estimates which are reasonable and prudent;

· state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements;

· prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006 and Article 4 of the IAS Regulation. 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.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the website used by the Company.

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Disclosure of information to auditor

The directors confirm that:

· so far as each director is aware, there is no relevant audit information of which the Company's auditor is unaware; and

· the directors have taken all the steps that they ought to have taken as directors to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information.

Statement under the Disclosure and Transparency Rules 4.1.12

The directors confirm that to the best of their knowledge and belief;

(a) This annual report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties that they face;

(b) the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation take as a whole; and

Having taken advice from the Audit Committee, the Directors consider that the annual report and financial statements taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

For and on behalf of the Board

Lord Flight

Chairman

15 June 2016

FINANCIALS

STATEMENT OF

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 29 FEBRUARY 2016

Year ended 29 February 2016

Year ended 28 February 2015

		Revenue	Capital	Total	Revenue	Capital	Total
Note		£'000	£'000	£'000	£'000	£'000	£'000
	Losses on investments designated at fair value through profit or loss	-	( 826)	(826)	-	(1,626)	(1,626)

2	Investment income	671	-	671	846	-	846
	Total income	671	(826)	(155)	846	(1,626)	(780)
3	Investment management fees	(66)	(191)	(257)	(85)	(85)	(170)
3	Other expenses	(341)	-	(341)	(249)	-	(249)
	Profit/(loss) before finance costs and tax	264	(1,017)	(753)	512	(1,711)	(1,199)
6	Finance costs	(57)	(57)	(114)	(95)	(95)	(190)
	Provision for gains/(losses) on investment in subsidiary	-	380	380	-	(337)	(337)
	Profit/(loss) before tax	207	(694)	(487)	417	(2,143)	(1,726)
7	Tax	(3)	-	(3)	(1)	-	(1)
	Profit/(loss) and total comprehensive income for the year	204	(694)	(490)	416	(2,143)	(1,727)

9	Earnings per share	1.95p	(6.66p)	(4.71p)	4.00p	(20.61p)	(16.61p)

The revenue and capital columns, including the revenue and capital earnings per share data, are supplementary information prepared under guidance published by the AIC.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period. All revenue is attributable to the equity holders of the Company. There are no minority interests.

The Board recommends a final dividend of 1.00p per share (see note 8)

BALANCE SHEET

AT 29 FEBRUARY 2016

		2016	2015
Notes		£'000	£'000
	NON-CURRENT ASSETS
10	Investments designated at fair value through profit or loss	14,445	21,243
11	Investment in subsidiary	-	194
		14,445	21,437
	CURRENT ASSETS
	Other receivables	51	308
	Cash and cash equivalents	4,145	145
		4,196	453

	TOTAL ASSETS	18,641	21,890

	CURRENT LIABILITIES:
	Other payables	201	73
	Bank loan and overdraft	-	4,000
		201	4,073


	TOTAL ASSETS LESS CURRENT LIABILITIES	18,440	17,817

	EQUITY
12	Called up share capital	3,598	3,598
	Capital redemption reserve	179	179
	Share premium account	12,510	10,997
14	Investment holding losses	(4,371)	(8,505)
14	Other capital reserves	6,038	10,866
	Revenue reserve	486	682

	TOTAL EQUITY	18,440	17,817

15	Net assets per ordinary share	162.30p	171.37p

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 29 FEBRUARY 2016

2016	Notes
		Share capital	Capital redemption reserve	Share premium account	Investment holding losses	Other capital reserves	Revenue reserve	Total
		£,000	£'000	£,000	£,000	£,000	£,000	£,000

Opening equity		3,598	179	10,997	(8,505)	10,866	682	17,817

Total comprehensive income/(loss) for the year		-	-	-	2,363	(3,057)	204	(490)

Provision for losses on investment in subsidiary	11	-	-	-	1,771	(1,771)	-	-

Sale of shares from treasury		-	-	1,513	-	-	-	1,513

Dividends paid	8	-	-	-	-	-	( 400)	( 400)

Closing equity		3,598	179	12,510	(4,371)	6,038	486	18,440

2015	Notes
		Share capital	Capital redemption reserve	Share premium account	Investment holding losses	Other capital reserves	Revenue reserve	Total
		£,000	£'000	£,000	£,000	£,000	£,000	£,000

Opening equity		3,598	179	10,997	(8,302)	12,806	661	19,939

Total comprehensive income/(loss) for the year		-	-	-	(203)	(1940)	416	(1,727)

Dividends paid	8	-	-	-	-	-	(395)	(395)

Closing equity		3,598	179	10,997	(8,505)	10,866	682	17,817

CASH FLOW STATEMENT

FOR THE YEAR ENDED 29 FEBRUARY 2016

	2016	2015
	£'000	£'000

NET CASH INFLOW FROM OPERATING ACTIVITIES
Cash inflow from investment income and interest	660	785
Cash outflow from management expenses	(400)	(432)

Payments to acquire non-current asset investments	(14,162)	(6,468)
Receipts on disposal of non-current asset investments	20,133	7,671

Foreign exchange difference received	1	-
Tax paid	(3)	-

NET CASH INFLOW FROM OPERATING ACTIVITIES	6,229	1,556


CASH FLOWS FROM INVESTING ACTIVITIES
Decrease/(increase) in loans advanced to subsidiary	771	(515)

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid	(400)	(395)
Decrease in bank borrowings	(4,000)	(453)
Finance charges and interest paid	(113)	(188)
Sale of treasury shares	1,513	-
NET CASH FLOW FROM FINANCING ACTIVITIES	(3,000)	(1,036)


INCREASE/(DECREASE) IN CASH	4,000	5



Cash and cash equivalents at beginning of year	145	140

Increase in cash	4,000	5

Cash and cash equivalents at end of year	4,145	145

NOTES TO THE FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

Basis of Accounting

The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the IASB and International Accounting Standards and Standing Interpretations Committee interpretations approved by the IASC that remain in effect, and to the extent that they have been adopted by the European Union.

Under IFRS, the AIC Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in November 2014 has no formal status, but the Company adheres to the guidance of the SORP.

The accounting policies are unchanged from those used in the last annual financial statements except where otherwise stated. The particular accounting policies adopted are described below:

(a) Accounting Convention

The accounts are prepared under the historical cost basis, except for the measurement of fair value of investments.

(b) Subsidiary

The accounts are of the Company and do not consolidate its subsidiary AIT Trading Limited ("AIT"). AIT became inactive during the year and had no net assets at 29 February 2016. The inclusion of the results of AIT would not be material for the purposes of giving a true and fair view.

As the Company's business is investing in financial assets with a view to profiting from their total return in the form of increases in fair value, investments are designated as fair value through profit or loss on initial recognition in accordance with IAS 39. At this time, fair value is the consideration given, excluding material transaction or other dealing costs associated with the investment.

After initial recognition such investments are valued at fair value. For quoted investments this is established by reference to bid, or last, market prices depending on the convention of the exchange on which the investment is quoted. Gains or losses are recognised in the capital column of the Statement of Comprehensive Income. All purchases and sales of investments are accounted for on a trade date basis.

The investment of the Company in AIT is stated at cost less impairment.

(d) Income from Investments

Investment income from ordinary shares is accounted for on the basis of ex-dividend dates. Income from fixed interest shares and securities is accounted for on an accruals basis using the effective interest method. Special Dividends are assessed on their individual merits and are credited to the capital column of the Statement of Comprehensive Income if the substance of the payment is a return of capital; with this exception all investment income is taken to the revenue column of the Statement of Comprehensive Income. Income from gilts and bank interest receivable is accounted for on an accruals basis using the effective yield.

(e) Capital Reserves

The Company is not precluded by its Articles from making any distribution of capital profits by way of dividend, but the Directors have no current plans to do so. Profits and losses on disposals of investments are taken to the gains on disposal reserve. Revaluation movements are taken to the investment holding reserve via the capital column of the Statement of Comprehensive Income.

(f) Investment Management Fees, Finance Costs and Other Costs

Finance costs and monthly management fees are allocated between capital and revenue according to the Board's expected long-term split of returns between capital gains and income; one-half of these costs are charged to gains on disposal via the capital column of the Statement of Comprehensive Income. Performance-related fees are charged to gains on disposal via the capital column of the Statement of Comprehensive Income. Other costs are normally charged to revenue, unless there is a compelling reason to charge to capital. Tax relief in respect of costs allocated to capital is credited to capital via the capital column of the Statement of Comprehensive Income on the marginal basis.

(g) Taxation

Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date.

Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. In addition, tax losses available to be carried forward as well as other income tax credits are assessed for recognition as deferred tax assets.

Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply at their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that they will be able to be offset against future taxable income.

Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to equity.

(h) Foreign currency

The currency of the primary economic environment in which the Company operates (the functional currency) is pounds sterling ("Sterling"), which is also the presentational currency of the Company. Transactions involving currencies other than Sterling are recorded at the exchange rate ruling on the transaction date. At each balance sheet date, monetary items and non-monetary assets and liabilities, which are fair valued and which are denominated in foreign currencies, are retranslated at the closing rates of exchange. Such exchange differences are included in the Statement of Comprehensive Income and allocated to capital if of a capital nature or to revenue if of a revenue nature. Exchange differences allocated to capital are taken to gains on disposal or investment holding losses, as appropriate.

(i) Cash and cash equivalents

Cash and Cash Equivalents in the Cash Flow Statement comprise cash held at bank.

(j) Dividends payable to equity shareholders

Dividends payable to equity shareholders are recognised in the Statement of Changes in Equity when they are paid, or have been approved by shareholders in the case of a final dividend.

2.	INCOME	2016	2015
	Income from investments:	£'000	£'000
	Franked dividends from listed or quoted investments	368	645
	Unfranked income from overseas dividends	209	58
	Income from listed fixed interest securities	55	101
	Interest income from subsidiary company	39	42
		671	846
	Other income:
	Bank interest receivable	-	-

		671	846

3.	INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES		2016			2015
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fees - monthly - performance	66 -	66 125	132 125	85 -	85 -	170 -
		66	191	257	85	85	170
	Administration fees	76	-	76	72	-	72
	Registrar's fees	20	-	20	16	-	16
	Directors' fees	83	-	83	80	-	80
	Legal fees	-	-	-	6	-	6
	Auditors' fees - audit of the Company and of the consolidated financial statements - audit of the subsidiary	33 2	- -	33 2	23 2	- -	23 2
	- audit-related assurance services	9	-	9	6	-	6
	Write off income from subsidiary company	39	-	39	-	-	-
	Miscellaneous expenses	79	-	79	50	-	50
	Total other expenses	341	-	341	249	-	249

All expenses include any relevant irrecoverable VAT. The amounts excluding VAT paid or accrued for the audit of the Company are £27,000 (2015: £21,000). The Company pays for the audit of the subsidiary, for which £2,000 is accrued in the Company's accounts (2015: £1,500).

4. DIRECTORS' FEES

The fees paid or accrued were £75,241 (2015: £74,750). There were no other emoluments. The gross figures shown for directors' fees in note 3 above include employers' National Insurance charges or VAT, as appropriate. Full details of the fees of each director are given in the Directors' Remuneration Report.

5. TRANSACTION CHARGES

G		2016	2015
		£'000	£'000

	Transaction costs on purchases of investments	96	37
	Transaction costs on sales of investments	46	15
	Total transaction costs included in gains or losses on investments at fair value through profit or loss	142	52

6.	INTEREST PAYABLE AND SIMILAR CHARGES		2016			2015
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
	Interest payable	30	30	60	55	55	110
	Facility and arrangement fees and other charges	27	27	54	40	40	80
		57	57	114	95	95	190

7.	TAXATION		2016			2015
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
	Corporation tax	-	-	-	-	-	-
	Overseas tax	3	-	3	1	-	1
	Tax charge in respect of the current year	3	-	3	1	-	1

Current taxation

The taxation charge for the year is different from the standard rate of corporation tax in the UK (20%). The differences are explained below:

	2016	2015
	£'000	£'000
Total loss before tax	(487)	(1,726)

Theoretical tax at UK corporation tax rate of 20.09% (2015: 21.17%)	(98)	(365)
Effects of:
Capital losses that are not taxable	140	453
UK dividends which are not taxable	(74)	(137)
Overseas dividends that are not taxable	(42)	(12)
Increase in excess tax losses	124	99
Expenses charged to capital account for which a deduction is claimed	(50)	(38)
Overseas tax written off/(recovered)	3	1
Actual current tax	3	1

The Company is an investment trust and therefore is not charged to tax on capital gains.

Factors that may affect future tax charges

The Company has tax losses of £8,303,358 (2015: £7,923,090) in respect of management expenses and of £1,688,351 (2015: £1,575,043) in respect of loan interest. These amounts are available to offset future taxable revenue. A deferred tax asset has not been recognised in respect of those expenses and will be recoverable only to the extent that the Company has sufficient future taxable revenue.

8. ORDINARY DIVIDENDS

	2016	2015
	£'000	£'000
Dividends reflected in the financial statements:
Final dividend paid for the year 2015 at 3.85p (2014: 3.80p)	400	395

Dividends not reflected in the financial statements:
Proposed final dividend for the year 2016 at 1.00p (2015: 3.85p)	187	400

9. EARNINGS PER SHARE

Earnings per share are based on the loss of £490,295 (2015: loss £1,727,508) attributable to the weighted average of 10,411,919 (2015: 10,397,059) ordinary shares of 25p in issue during the year, excluding shares held in Treasury.

Supplementary information is provided as follows: revenue earnings per share are based on the revenue profit of £203,622 (2015: profit £415,841); capital earnings per share are based on the net capital loss of £693,917 (2015: loss £2,143,349), attributable to 10,411,919 (2015: 10,397,059) ordinary voting shares of 25p.

10.	INVESTMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS	2016	2015
		£'000	£'000
	UK listed securities	14,445	20,283
	Hong Kong listed security	-	960
	Total non-current investments designated at fair value through profit or loss	14,445	21,243
	Movements during the year:
	Opening balance of investments, at cost	29,942	30,759
	Additions, at cost	14,160	6,456

	Disposals - proceeds received or receivable	(20,124)	(7,479)
	- add realised losses/ less realised profits	(3,196)	(1,760)
	- at cost	(23,320)	(9,239)
	Investment in subsidiary	(1,966)	1,966
	Cost of investments designated at fair value through profit or loss at 29 February	18,816	29,942

	Revaluation of investments to market value:
	Opening balance	(8,505)	(8,302)
	Increase in unrealised appreciation debited to investment holding reserve	2,363	134
	Provision for write-off of investment in subsidiary	1,771	(337)
	Balance at 29 February	(4,371)	(8,505)

	Market value of non-current investments designated at fair value through profit or loss at 29 February	14,445	21,437

11. SUBSIDIARY

The Company has an investment in AIT Trading Limited (AIT), a wholly owned subsidiary registered in England and Wales, which comprises two ordinary shares of £1 each. AIT undertook purchases of investments for re-sale in the shorter term, with the objective of achieving a trading profit. The profit before tax of AIT for the year was £341,213 (2015: loss £337,289). The net deficit of AIT at the Balance Sheet date was £1,430,702 (2015: net deficit £1,771,916). No dividend was paid from AIT to the Company (2015: £nil).

AIT previously undertook purchases of investments for re-sale in the shorter term with the objective of achieving a trading profit. This activity is incompatible with the new investment management policy and AIT ceased trading during the year. The company had made a short term loan to AIT to finance its trading operations and charged interest at the same rate as charged by Coutts to the Company, which has previously been provided for as shown below. The Company has now fully written off its investment £194,000 and has not prepared Group accounts as the inclusion of the results of the result of AIT in the Company's accounts would not be material for the purpose of a true and fair view.

	2015	Movement	2016
	£'000	£'000	£'000
Investment in subsidiary:
Loan to AIT	1,966	(770)	1,196
Provision / Write-off of loan	(1,772)	576	(1,196)
Net investment in subsidiary	194	(194)	-
Other receivables:
Loan interest	196	39	235
Provision/write-off	-	(235)	(235)
Other receivables	196	(196)	-

Provision for gains/(losses) on investment in subsidiary
Provision brought forward	(1,435)		(1,772)
Movement in provision - capital - revenue	(337) -		380 (39)
Provision carried forward/write-off	(1,772)		(1,431)

12.	SHARE CAPITAL
	At 28 February:		2016	2015
	Authorised
	Ordinary shares of 25p	Number	40,000,000	40,000,000
		£'000	10,000	10,000
	Allotted, issued and fully paid
	Ordinary shares of 25p	Number	14,391,389	14,391,389
		£'000	3,598	3,598

During the year ended 29 February 2016 the Company did not purchase any of its own shares (2015: Nil). No shares were issued or cancelled during the year (2015: Nil). At 29 February 2016, the Company had 14,391,389 shares in issue.

During the year ended 29 February 2016 964,810 shares were sold from Treasury. At 29 February 2016 3,029,520 shares (2015:3,994,330) were held in Treasury and the number of voting shares in issue was 11,361,869 (2015: 10,397,059).

Since 29 February 2016 up to 2 June 2016 a further 3,492,104 shares have been sold from Treasury.

On 29 March 2016, a Placing was effected, resulting in the issue of 4,858,750 new shares (see note 22). As at 2 June 2016 the number of shares in issue is 19,250,139 the number held in Treasury is 502,226 and the number of voting shares is 18,747,913.

13. TOTAL EQUITY

Total Equity includes, in addition to Share Capital, the following reserves:

Capital Redemption Reserve. When any shares are redeemed or cancelled, a transfer of realised profit must be made to this reserve in order to maintain the level of capital that is not distributable.

Share Premium Account. When shares are issued at a premium to their nominal value, the "capital profit" arising on their allotment must be held in a Share Premium Account, which is not distributable in the ordinary course and may be utilised only in certain limited circumstances.

Capital profits arising from the Company's investment transactions are held as Capital Reserves, subdivided between Gains on Disposal for profits arising upon sales of investments and Investment Holding gains/losses for portfolio revaluations. The movements on this account are analysed in note 14 below.

The Company's Revenue Reserves are the net profits that have arisen from the Company's revenue income in the form of dividends and interest, less operating expenses and dividends paid out to the Company's shareholders.

14.	CAPITAL RESERVES	2016		2015
		£'000	£'000
	Investment holding gains/(losses)

	Opening balance	(8,505)	(8,302)

	Revaluation of investments - listed	2,362	134

	Exchange differences	1	-

	Provision for impairment of holding in subsidiary	1,771	(337)

	Balance of investment holding gains/(losses) account at 29 February	(4,371)	(8,505)


	Other capital reserves

	Opening balance	10,866		12,806

	Net gains and losses on realisation of investments	(2,809)		(1,759)

	Write-off of holding in subsidiary	(1,771)		-

	Expenses of capital management: management fees	(191)		(85)
	: finance costs	(57)		(95)
	Net expenses	(248)		(180)

	Exchange differences	-		(1)

	Balance of other capital reserves at 29 February	6,038		10,866


	Total capital reserve at 29 February	1,667		2,361

15. NET ASSETS PER ORDINARY SHARE

The figure for net assets per ordinary share is based on £18,440,457 (2015: £17,816,748) divided by 11,361,869 (2015: 10,397,059) voting ordinary shares in issue at 29 February 2016, excluding shares held in Treasury.

16.	RECONCILIATION OF PROFIT BEFORE FINANCE COSTS AND TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES	2016	2015
		£'000	£'000

	Loss before finance costs and tax	(753)	(1,199)

	Decrease in non-current investments	6,798	2,649
	Decrease in sales for future settlement	-	180
	Decrease/(increase) in other receivables	60	(71)
	(Decrease)/increase in other payables	127	(3)
	Taxation (paid)/recovered	(3)	-

	Net cash inflow from operating activities	6,229	1,556

17. RELATED PARTY TRANSACTIONS

Details of transactions with AIT Trading Limited (AIT) are set out in note 11. During the course of realising the AIT

portfolio, the Company purchased investments to a value of £399,500 from AIT. These investments were subsequently sold

for £340,066.

Details of the management, administration and secretarial contracts can be found in the Directors' Report. As disclosed in that Report, Mr Barstow was a director both of the Company and of the former Investment Manager. Mr Chapple is a director of the company and an employee of the present Investment Manager. Fees payable to the current and former Investment Managers are detailed in note 3. Other payables include accruals of a monthly management fee of £Nil (2015: £13,437) and administration fees of £15,842 for two months (2015: £6,000 for one month). A provision has been made for a performance fee of £124,821 (2015: £Nil). Any performance fee will be payable in shares after the end of the performance fee period, but the amount that would have been payable at 29 February had the performance fee period ended on that date has been provided in the accounts as an equivalent value of money. All figures include any appropriate VAT.

18. FINANCIAL ASSETS/LIABILITIES

Investments are carried in the balance sheet at fair value. For other financial assets and financial liabilities, the balance sheet value is considered to be a reasonable approximation of fair value.

Financial assets

The Company's financial assets comprise equity investments, fixed interest securities, short-term receivables and cash balances. The currency and cash-flow profile of those financial assets was:

		2016			2015
	Interest bearing	Non- interest bearing	Total	Interest bearing	Non- interest bearing	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Non-current investments at fair value through profit or loss:
£ sterling equities	-	14,445	14,445	-	18,791	18,791
Hong Kong $ equities	-	-	-	-	960	960
£ fixed interest	-	-	-	1,492	-	1,492
		14,445	14,445	1,492	19,751	21,243

Cash at bank:
Floating rate - £ sterling	-	4,145	4,145	-	145	145

	-	4,145	4,145	-	145	145

Cash at bank includes £4,090,097 (2015: £32,584) held by the Group's Depository, BNP.

Financial liabilities

The Company finances its investment activities through its ordinary share capital and reserves. It has discontinued the use of borrowing for such purposes. The Company's financial liabilities comprise short-term trade payables. Foreign currency balances are stated in the accounts in sterling at the exchange rate as at the Balance Sheet date.

The Company's borrowing facilities from its banker, Coutts & Co, were cancelled by mutual agreement on 2 November 2015.

The currency and cash-flow profile of the financial liabilities of the Company was:

	2016	2015
	£'000	£'000

Interest bearing: Bank overdraft:
Sterling	-	4,000
	-	4,000
Non interest bearing:
Short term trade payables	-	-

	-	4,000

19. FINANCIAL INSTRUMENTS - RISK ANALYSIS

The general risk analysis undertaken by the Board and its overall policy approach to risk management are set out in the Business Review. Issues associated with portfolio distribution and concentration risk are discussed in the Investment Policy section of the Business Review. This note, which is incorporated in accordance with accounting standard IFRS7, examines in greater detail the identification, measurement and management of risks potentially affecting the value of financial instruments and how those risks potentially affect the performance and financial position of the Company.

The risks concerned are categorised as follows:

A) Potential Market Risks, which are principally (i) Currency Risk (ii) Interest Rate Risk and (iii) Other Price Risk.

B) Liquidity Risk

C) Credit Risk

Each is considered in turn below:

A (i) Currency Risk

All the securities detailed in the Business Review are listed on the London Stock Exchange or quoted on AIM. Where the underlying currency or currency of quotation is not sterling this is noted. The element of currency risk on investments may be indirect and reflected in the effect of underlying currency movements upon the London market price, whether quoted in foreign currency or not.

Based on the portfolio as at 29 February 2016, there were no investments denominated in Euros and consequently there was no currency risk arising from the possibility of a fall in the value of sterling against the Euro, impacting upon the value of investments or income.

The Company had no foreign currency borrowings at 29 February 2016 (2015: Nil) and no sensitivity analysis is presented for this risk.

A (ii) Interest Rate Risk

The Company did not hold fixed interest securities at 29 February 2016. The weighted average interest rate of the fixed rate financial assets had been 9.43% in 2015 and the weighted average period for which rates had been fixed was indefinite.

With the exception of cash, no interest rate risks arise in respect of any current asset. All cash held as a current asset is sterling denominated, earning interest at the bank's or custodian's variable interest rates.

Interest was charged on the bank borrowing facilities at the bank's variable interest rates as appropriate to the currency concerned in the case of each balance. At 29 February 2016, the Company's total borrowing was £Nil (2015 £4,000,000). All borrowing during the year was in sterling.

A (iii) Other Price Risk

The principal price risk for the Company is the price volatility of shares that are owned by the Company. As described in the Investment Manager's Review, the Company spreads its investments across different sectors and geographies, but, as shown by the Portfolio Analysis in the Business Review, the Company may maintain relatively strong concentrations in particular sectors selected by the Investment Manager.

B Liquidity Risk

Liquidity Risk is considered to be small, because the portfolio is invested in readily realisable securities. As a consequence, cash flow risks are also considered to be small. The Manager estimates that, under normal market conditions and without causing excessive disturbance to the prices of the securities concerned, the majority of the portfolio could be realised within 5 days.

The Company's loan facilities were repayable upon demand and have been repaid.

C Credit Risk

The Company invests in quoted equities and fixed interest securities. The Company's investments are held by BNP ("the Depository"), which is a large international bank with a high reputation. The Company's normal policy is to remain fully invested at most times and not to hold very large quantities of cash. At 29 February 2016, cash at bank comprised £4,090,097 (2015: £37,716) held by the Custodian and £54,557 held by Coutts & Co (2015: £112,426), also part of a large international bank with a very high credit rating.

Credit Risk arising on transactions with brokers relates to transactions awaiting settlement. This risk is considered to be very low because transactions are almost always undertaken on a delivery versus payment basis with member firms of the London Stock Exchange.

D Capital management policies and procedures

The Company' s capital management objectives are:

· to ensure the Company's ability to continue as a going concern; and

· to provide an adequate return to shareholders

by pursuing investment policies commensurately with the level of risk.

The Company monitors capital on the basis of the carrying amount of equity, less cash and cash equivalents as presented on the face of the statement of financial position.

The Company sets the amount of capital in proportion to its overall financing structure, i.e. equity and financial liabilities. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders (within the statutory limits applying to investment trusts), return capital to shareholders, issue new shares, or sell assets to reduce debt.

20. FAIR VALUE HIERARCHY

Under IFRS13 investment companies are required to disclose the fair value hierarchy that classifies financial instruments measured at fair value at one of three levels according to the relative reliability of the inputs used to estimate the fair values.

Classification		Input

Level 1		Valued using quoted prices in active markets for identical assets
Level 2		Valued by reference to valuation techniques using observable inputs other than quoted prices included within Level 1
Level 3		Valued by reference to valuation techniques using inputs that are not based on observable market data

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.

Assessment of Hierarchy

The Company's subsidiary is held at cost less impairment and therefore its valuation as an investment in the Company's balance sheet does not fall within the fair value hierarchy. The investment has been written off in 2016.

	2016	2015

Level 1	14,445	21,243
Level 2	-	-
Level 3	-	-

21. Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Company

At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Company.

Information on new standards, amendments and interpretations that are expected to be relevant to the Company's financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Company's financial statements.

The Company intends to adopt these standards (where applicable) when they become effective.

· IFRS 9 Financial Instruments - classification and measurement of financial assets and financial liabilities as defined in IAS39 (IASB effective date 1 January 2018).

22. POST BALANCE SHEET DATE EVENTS

On 29 March 2016 the Company raised £8,098,079 in a placing of 4,858,750 new shares, in pursuance of a prospectus dated 22 March 2016. The prospectus also provided for an ongoing Placing Programme, under which up to 55 million further shares may be issued from time to time during the period from 30 March 2016 to 21 March 2017. The price at which shares may be issued under this Programme is the NAV per share at the time of issue plus a premium to cover the expenses of the issue as determined by the Board at the time of each issue. As at that date of this report no additional shares have been issued under terms of the Programme.

Since 29 February 2016 the Company has made further sales of shares from Treasury totalling 3,492,104 shares. As at 2 June 2016 the Company has 19,250,139 shares in issue, of which 502,226 are held in Treasury. The number of voting shares is 18,747,913.

23. Financial information

This announcement does not constitute the Company's statutory accounts. The financial information for 2016 is derived from the statutory accounts for 2016, which will be delivered to the registrar of companies following the Company's Annual General Meeting. The statutory accounts for 2015 have been delivered to the registrar of companies. The auditors reported on the 2015 accounts; their report was unqualified and did not include a statement under Section 498(2) or (3) of the Companies Act 2006.

The annual report for the year ended 29 February 2016 will be posted to shareholders and will be made available on the Investment Manager's website.

This announcement contains regulated information under the Disclosure Rules and Transparency Rules of the FCA.

The annual report will be submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/NSM

24. Annual general meeting

The Annual General Meeting will be held on 13 July 2016 at 12.00 noon at the offices of Grant Thornton (UK) LLP, 30 Finsbury Square, London EC1V 4RU.

15 June 2016

Secretary and registered office

Cavendish Administration Limited

Mermaid House

2 Puddle Dock

London EC4V 3DB

Tel: 020 7653 9690

END

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The company news service from the London Stock Exchange

END

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Annual Financial Report

CHAIRMAN'S STATEMENT

INVESTMENT MANAGER'S REVIEW AND OUTLOOK

External Risks

Internal Risks

Poor asset management, which may include poor stock selection, excessive concentration of the portfolio, mistakes regarding currency movements, speculation in shares of companies without sound or established businesses and speculation in derivatives.

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Gearing

Internal risks

TOP HOLDINGS

PORTFOLIO ANALYSIS

STATEMENT OF DIRECTORS' RESPONSIBILITIES FOR THE ANNUAL REPORT

Disclosure of information to auditor

STATEMENT OF

Year ended 28 February 2015

Note

BALANCE SHEET

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 29 FEBRUARY 2016

CASH FLOW STATEMENT

NOTES TO THE FINANCIAL STATEMENTS

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