Annual Financial Report

RNS Number : 3697L

City Natural Res High Yield Tst PLC

30 September 2016

 

To:                    RNS

From:                City Natural Resources High Yield Trust plc

Date:                 30 September 2016

Chairman's Statement

Introduction

During January 2016 your Company's share price fell to 65.0 pence.  This proved, after more than five years, to be the low, and I am pleased to report that performance has rebounded strongly since then. Your Board greatly appreciates the patience that shareholders have displayed in waiting for this volatile asset class to stabilise after these turbulent years.

Investment and Share Price Performance

At 30 June 2016 your Company's net asset value stood at 127.4 pence per share, giving a net asset value total return for the year of 10.7 per cent.  The benchmark index returned 14.2 per cent.

The story of the year is more complicated than this headline, with the Company's net asset value falling to 87.6 pence in January 2016, before beginning a rapid and sustained recovery.  The net asset value stands at 141.5 pence as I write.

The Company's ordinary share price total return of 10.8 per cent for the year was virtually identical to its net asset value total return, the discount at which the Company's shares trade opening and closing the year at just over 22 per cent.  The discount has since closed, and the share price stands at 116.5 pence as I write, reflecting a discount of 17.7 per cent.

Just as it has done over the last five years, your Company provides a unique exposure to the less accessible areas of mining and resource stocks.  The associated and inevitable volatility that so hurt shareholders during the commodity downturn, is now benefitting them as that downturn appears to come to an end.  Ian Francis, Keith Watson and Rob Crayfourd, our portfolio managers, report on investment performance in more detail below.

Over the long term, and since the redirection of the Company in 2003, the net asset value total return is 233.7 per cent, ordinary share price total return 164.4 per cent, and benchmark total return 193.6 per cent.

Discount Control

The average discount over the year to 30 June 2016 was 16.5 per cent, and over three years 14.8 per cent. Your Board is fully aware of the trend in the investment trust sector of introducing Discount Control Mechanisms (DCM). While this is completely appropriate for many companies with liquid investment portfolios our mandate, as stated in the previous paragraph, is to provide access for shareholders to less liquid areas of the resources sector. Inevitably this involves smaller companies and holdings that are not immediately realisable, which is exactly the capability of closed end investment companies.

Over the long term this policy has produced good returns and we remain committed to this strategy. However, it unsurprisingly leads to a discount being accorded to the net asset value of your Company. Were we to operate a DCM this could require the sale of our most liquid stocks, and so increased illiquidity, leading to a greater discount in the medium term. For this reason your Board aims to mitigate our discount by long term good performance.  

Income and Dividends

Income and dividends have been a focus of the Company since 2004, with dividends increasing by 280 per cent since then, and we believe they contribute an important element of stability in our volatile asset class. 

This year's fourth interim dividend of 3.02 pence per share brought the total dividend for the year to 5.60 pence, the same level as was paid last year.  Earnings per share of 5.08 pence means that the dividend for the year was uncovered, but the Board has no qualms about utilizing revenue reserves to maintain current dividend levels, as it has done this year, so long as longer term income generation is deemed safe.  The revenue reserve, which stands at 6.4 pence per share after the payment of the fourth interim dividend, has been built up against just this sort of eventuality.

The yield on the Company's shares is [4.7] per cent as I write.

Gearing and 3.5% Cumulative Unsecured Loan Stock 2018 ("CULS")

Gearing was generally maintained in the range of 20 per cent to 25 per cent of shareholders' funds during the year, 25 per cent being the upper limit allowed under the Company's investment policy.  It was 20.0 per cent at the year end.

The Company had £39.9 million nominal of CULS in issue at 30 June 2015.  It bought back £5.4 million nominal for cancellation during the period at a small discount to par value, benefitting shareholders at the margin.  £34.5 million nominal of CULS remained in issue at 30 June 2016.

The Company's 3.5% Cumulative Unsecured Loan Stock 2018 ("CULS") mid-price declined marginally from 96.5 pence to 95.5 pence during the year.

Board Changes

One long standing Director having retired at each of the last two AGMs, and two new Directors having been appointed to replace them, the Board concluded that Shareholders' interests would not be best served by changing the Board further this year during a time of extreme volatility and also of change in the investment management team.  Looking to next year, the Board has concluded that Helen Green should, with effect from the end of September, replace Richard Prickett as Chairman of the Audit Committee, a position that he has fulfilled for 10 years. Helen's qualifications and experience are ideally suited for this role. Board development will continue under consideration in the year ahead.

Auditor

KPMG LLP has been auditor to the Company since before its redirection in 2003, and the Board has decided that, in interests of good governance, the audit should now be put out to tender. It is expected that this process will be completed by the end of 2016.

Annual General Meeting

The Company's Annual General Meeting returns to Edinburgh after an absence of a number of years, and will take place at the Bonham Hotel, 35 Drumsheugh Gardens at 12.30pm on Tuesday 29 November 2016.  Scotland has always been generous in its support for the Company and I hope that as many shareholders as possible, from both Scotland and further afield, will join us and take the opportunity to meet the Directors and the investment managers over a buffet lunch after the meeting.

Outlook

While the world seems no more certain a place now than it did last year, and recent global growth forecasts are not encouraging, the outlook for commodity markets has improved.

The jury remains out on China's prospects, with strongly divergent views held, but it has for the moment certainly recovered its appetite for raw materials and appears on course to deliver its much heralded 6.5% GDP growth target.  The US recovery continues, albeit in subdued fashion, and Europe has proved surprisingly resilient despite a number of ongoing issues, not least the euro.  The UK's local issues over Brexit dominate domestic politics, but its main impact so far as your Company is concerned was the sterling weakness which followed the result of the vote, reinforcing a performance measured in sterling terms.

The Brexit vote also gave politicians worldwide, already wary of the effects of even threatening monetary tightening, an excuse to prevaricate further; as a result, interest rates once again look likely to remain lower for longer.  Central Bank stimulus has been the main intervention to prevent recession turning to depression resulting in an addiction to cheap credit, negative interest rates in some countries, and what increasingly looks like a 'bond bubble'. Real growth derived from productivity gains and raised investment levels, continues to be elusive.

The oil price remains a focus for attention, and while it has recovered, it has not recovered too much.  Your Company has benefitted from its historically low energy exposure, and it has also benefitted from a historically high precious metals exposure; this is an area to which we remain committed at the present time.

When I wrote to you in March I said that we were cautiously moderating our previous defensive positioning, and this proved to be well timed.  After a strong run the commodity markets have paused for breath, and may easily be subject to further volatility as a result of the factors mentioned above; but the fundamental injection of realism that the long bear market engendered gives grounds for optimism as to the durability of the recovery.

Geoff Burns

Chairman

30 September 2016

 

 

Investment Manager's Review

First Half Capitulation Unwinds

The last year has been one of the most difficult periods on record for investors, particularly so in the resources sector. Against a background of slowing growth and accentuated by over-leverage, the first half year was characterised by severe commodity price declines and extreme stock price volatility, indicative of market capitulation. Investor relief since the sector tumult at the turn of the calendar year has been palpable over the second six months across equity and debt asset classes whose performances had synchronised. Hindsight has shown that the extreme pessimism at the turn of 2016 was indeed misplaced, as discussed in our interim report, and the deflationary death spiral has subsequently unwound. Despite this challenging environment the Company's total return was up 10.5% for the year, led by the strong second half performance from the more focussed portfolio outweighing first half declines. With an emphasis on high quality assets and cash generation we believe the Company is well placed to sustain performance as investors discriminate more carefully in the next phase of the recovery cycle.

Demand Fears Overdone

China's economy, still the most important for raw material demand, experienced a strong recovery in imports as its industries restocked, boosted by extensive economic stimulus during the March quarter which, at over 4tr Yuan, was equivalent to half the level of stimulus provided in the 2008-9 crisis. Economic data has subsequently shown a broad based improvement in demand trends, in particular in infrastructure and property where strong price rises have latterly begun to feed through to higher floor space development. China appears on course to achieve its official 6.5% GDP growth target. Away from China demand growth in the US is improving while in Europe, though anaemic, it is showing signs of stability.

The implementation by Chinese authorities of measures to curb exuberant speculation bares testament to the speed of the ensuing recovery in asset prices. Though such actions have cooled short-term excesses we believe they will helpfully smooth out the improvement in underlying demand and sustain momentum, if at a more moderate pace, over the medium-term. Improved stability may encourage greater private sector investment activity which has been understandably cautious given the speed of recent change, providing us with further comfort.

Supply Growth Challenged

Balance sheet stress is now enforcing producer discipline via capex reductions, impairing the outlook for future supply growth. To date this has been most evident among major commercial mining groups, which are faced with more stringent financing terms constraining future expansion plans, which have stalled. We continue to expect return on equity and cash flow improvement, resulting from spending reductions, to be soaked up by servicing debt, limiting scope for expansion over the medium-term. Despite the recovery in commodity prices the viability of supply expansion remains pressured.

Meanwhile China's central planners, impatient at the less motivated response of domestic state owned enterprises which have benefitted from a degree of debt relief and have suffered fewer-than-expected bankruptcies, are enforcing permanent mine closures and imposing more stringent environmental standards, demonstrating a strong reform commitment as they seek to reduce uneconomic and deflationary overcapacity. As an illustration, China's authorities have ordered the closure of 500 million tonnes of domestic coal production and are drafting new rules to reduce mine pollution and drive land remediation. Such moves together with a general rise in energy prices and an easing of competitive currency devaluation, particularly by commodity exporters, is placing upward pressure on production costs, a complete reversal of trends leading into the Q1 meltdown.

Fund Positioning

The Company continues to hold an historically low weighting in energy stocks after the collapse in the oil price in November 2014, following OPEC's decision not to support pricing via cuts in production. We are becoming increasingly positive to the sector as the Oil market looks likely to balance in 2017, but any investments are reliant on them offering a better value proposition than their mining counterparts. Broadly, energy equities continue to discount oil prices above our expectation and above the US$52 per barrel level which has recently incentivised some US shale production but also appears to have elicited a resurgence of Saudi led price discounting.

The UK's relevance to broader industrial commodity demand is extremely limited and while the politically inspired Brexit vote is forefront in many UK based shareholders minds' the impact on the Company has been a more direct translation benefit to both NAV and income from its predominantly non sterling investments. Gold has been a natural beneficiary of sterling's weakness and the Company's exposure to precious metal equities, which have been among the best performing assets year-todate, has been extremely beneficial to performance over the last six months. The Company remains heavily weighted towards precious and industrial metals where we see better valued opportunities.

A Cash Generation Emphasis

With a focus biased towards high quality assets and cash generation, we believe the Company is well placed to sustain performance as investors discriminate more carefully in the next phase of the recovery cycle. Examples include the potential for continued re-rating of positions in First Quantum which has been able to support investment in its core growth projects through the downturn. Adherence to reform by China's planners, incorporating tighter environmental standards, provides opportunities for certain commodities such as zinc and lead, the supply of which China has until recently been self-sufficient. This is likely to sustain the performance of miners such as Trevali. The Company's exposure to agriculture should also benefit from China's increased focus on food efficacy, which is wrapped into the need for environmental reform. Farming on as much as 3.3m hectares of contaminated land, approximately 15% of China's farm acreage, has been banned indefinitely and remediation may take time to effect.

The recent larger-than-expected reduction in dividends from BW LPG, one of the largest dividend paying equities within the Fund, post the June 2016 year-end illustrates some of the challenges presented by a low interest rate and low yield environment. In this context the fixed income bond element of the portfolio remains the most substantial contributor to fund income supplemented by improving dividend cash generating prospects for many of the Company equity holdings. The majority of this nonsterling income stream has benefitted from Brexit providing further assistance to help sustain the portfolio's dividend, in addition to the Company's reserve buffer. In addition to the £4.7m of cash held by the Company at 30 June 2016, there was £11.2m of UK Treasury Stocks in the portfolio. These are held to offset the 2018 CULS liability and keep the Company's gearing within the agreed parameters. A continued emphasis on cash flow remains a key equity investment theme, one that offers the potential to sustain further capital growth and lift future equity dividend income during the next phase of a recovery cycle.

Ian Francis, Keith Watson, Rob Crayfourd

New City Investment Managers

30 September 2016

 

 

Audited Income Statement

for the year ended 30 June 2016

			2016	2016	2016
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Gains on investments		-		6,814	6,814
Exchange gains		-		31	31
Income		4,837		-	4,837
Investment management fee		(214)		(642)	(856)
Other expenses		(455)		-	(455)
Net return before finance costs and taxation		4,168		6,203	10,371
Interest payable and similar charges		(318)		(1,769)	(2,087)
Net return on ordinary activities before taxation		3,850		4,434	8,284
Tax on ordinary activities		(451)		195	(256)
Net return attributable to equity shareholders		3,399		4,629	8,028
Return per ordinary share	1	5.08p		6.92p	12.00p

Audited Income Statement

for the year ended 30 June 2015

			2015	2015	2015
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Losses on investments		-		(23,454)	(23,454)
Exchange losses		-		(117)	(117)
Income		5,839		-	5,839
Investment management fee		(274)		(821)	(1,095)
Other expenses		(483)		-	(483)
Net return before finance costs and taxation		5,082		(24,392)	(19,310)
Interest payable and similar charges		(375)		(1,869)	(2,244)
Net return on ordinary activities before taxation		4,707		(26,261)	(21,554)
Tax on ordinary activities		(592)		350	(242)
Net return attributable to equity shareholders		4,115		(25,911)	(21,796)
Return per ordinary share	1	6.15p		(38.75)p	(32.60)p

 

Audited Balance Sheet

as at 30 June 2016

	Notes	As at 30 June 2016	As at 30 June 2015
		£'000	£'000
Fixed assets
Investments		113,525	107,229
Current assets
Debtors		576	1,332
Cash at bank and on deposit		4,738	11,333
		5,314	12,665
Creditors: amounts falling due within one year		(627)	(1,226)
Net current assets		4,687	11,439
3.5% Convertible Unsecured Loan Stock 2018	4	(33,025)	(37,270)
Net assets		85,187	81,398
Capital and reserves
Called-up share capital		16,719	16,719
Special distributable reserve	5	30,386	30,386
Share premium	5	4,810	4,806
Equity component of 3.5% Convertible Unsecured Loan Stock 2018	4/5	1,213	2,248
Capital reserve	5	25,734	20,568
Revenue reserve	5	6,325	6,671
Equity shareholders' funds		85,187	81,398
Net asset value per share	2	127.38p	121.72p

Audited Statement of Changes in Equity

For the year ended 30 June 2016

			Share	Special	CULS
		Share	Premium	distributable	Equity	Capital	Revenue
		capital	Account	reserve	Component	reserve	reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 June 2015	16,719		4,806	30,386	2,248	20,568	6,671	81,398
CULS conversion and buyback	-		4	-	(1,035)	724	-	(307)
Return on ordinary activities after taxation	-		-	-	-	4,629	3,399	8,028
Effective yield	-		-	-	-	(187)	-	(187)
Dividends paid	-		-	-	-	-	(3,745)	(3,745)
At 30 June 2016	16,719		4,810	30,386	1,213	25,734	6,325	85,187

Audited Statement of Changes in Equity

For the year ended 30 June 2015

			Share	Special	CULS
		Share	Premium	distributable	Equity	Capital	Revenue
		capital	Account	reserve	Component	reserve	reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 June 2014	16,718		4,796	30,386	2,973	45,757	6,299	106,929
CULS conversion	1		10	-	(725)	724	-	10
Return on ordinary activities after taxation	-		-	-	-	(25,913)	4,117	(21,796)
Dividends paid	-		-	-	-	-	(3,745)	(3,745)
At 30 June 2016	16,719		4,806	30,386	2,248	20,568	6,671	81,398

 

Audited Cash Flow Statement

for the year to 30 June 2016

		Year ended 30 June 2016	Year ended 30 June 2015
		£'000	£'000
Operating activities
Investment income received		4,536	5,800
Deposit interest received		2	6
Other income received		65	-
Investment management fees paid		(853)	(1,120)
Other cash payments		(473)	(504)
Net cash inflow from operating activities		3,277	4,182
Investing activities
Purchases of investments		(113,165)	(94,733)
Disposals of investments		113,696	92,631
Net cash inflow/(outflow) from investing activities		531	(2,102)
Financing activities
Buyback of CULS		(5,372)	-
Equity dividends paid		(3,745)	(3,745)
Interest on bank facility/overdraft		(2)	(26)
Interest on 3.5% Convertible Unsecured Loan Stock 2018		(1,315)	(1,398)
Net cash outflow from financing activities		(10,434)	-
Decrease in net cash		(6,626)	(3,089)
Reconciliation of net cash flow to movement in net cash Decrease in cash in the year		(6,626)	(3,089)
Exchange gains/(losses)		31	(117)
Movement in net cash in the year		(6,595)	(3,206)
Opening net cash at 1 July		11,333	14,539
Closing net cash at 30 June		4,738	11,333

Notes

1.         The revenue return per ordinary share is based on a net profit after taxation of £3,399,000 (2015: £4,115,000) and on a weighted average of 66,875,991 ordinary shares in issue during the year (2015: 66,874,250).

The capital return per ordinary share is based on a net capital profit of £4,629,000 (2015: a net capital loss of £25,911,000) and on a weighted average of 66,875,991 ordinary shares in issue during the year (2015: 66,874,250).

2.         The net asset value per ordinary share is based on net assets of £85.2 million (2015: £81.4 million) and on 66,876,768 (2015: 66,875,765) ordinary shares, being the number of ordinary shares in issue at the year end.

3.         The Board declared a fourth interim dividend of 3.02p per share which was paid on 26 August 2016 to shareholders on the register on 28 July 2016, having an ex-dividend date of 29 July 2016. 

4.         3.5% Convertible Unsecured Loan Stock 2018

	Nominal number of CULS £'000	Liability component £'000	Equity component £'000
Balance at the beginning of the year	39,930	37,270	2,248
Amortisation of discount on issue and issue expenses	-	97	-
Transfer of CULS liability discount amortisation	-	724	(724)
Conversion during the year	(4)	(3)	-
Buyback of CULS	(5,372)	(5,063)	(311)
Balance at the end of the year	34,554	33,025	1,213

On 26 September 2011, the Company issued £40,000,000 nominal of 3.5% Convertible Unsecured Loan Stock 2018. The CULS can be converted at the election of holders into ordinary shares during the months of March and September in each year throughout their life, commencing March 2012 to September 2018 at a rate of 1 ordinary share for every 377.1848p nominal of CULS.

On 9 October 2015, the Company issued 54 ordinary shares in connection with the exercise of £207 nominal of the Company's CULS.  On 19 April 2016, the Company issued 949 ordinary shares in connection with the exercise of £3,581 nominal of the Company's CULS.

Throughout the year. £5,372,000 nominal of CULS were purchased for cancellation by the Company.

Once 80% of the nominal amount of the CULS issued have been converted, the Company is allowed to request that holders redeem or convert the remainder. Interest is paid on the CULS on 31 March and 30 September in each year, 25% of the interest is charged to revenue in line with the Board's expected long-term split of returns from the investment portfolio of the Company.

As at 30 June 2016, there was £34,553,872 nominal of CULS in issue, which are due for repayment on 26 September 2018.

5.         Reserves

	Special reserve £'000	Share premium £'000	Equity element of CULS £'000	Capital reserve £'000	Revenue reserve £'000
At 30 June 2015	30,386	4,806	2,248	20,568	6,671
Exchange gains	-	-	-	31	-
Losses on sales of investments	-	-	-	(11,317)	-
Increases in fair value adjustment	-	-	-	(171)	-
Current year effective yield	-	-	-	18,302	-
Prior year effective yield	-	-	-	(187)	-
Costs charged to capital	-	-	-	(2,216)	-
Taxation credited to capital	-	-	-	195	-
Dividends paid	-	-	-	-	(3,745)
Retained net revenue for the year	-	-	-	-	3,399
Transfer of CULS liability discount amortisation	-	-	(724)	724	-
CULS buybacks	-	4	(311)	-	-
At 30 June 2016	30,386	4,810	1,213	25,734	6,325

The special reserve is available for the buying back of shares. £6,325,000 is available for distribution as a dividend as represented in the revenue reserve.

6.         The following are considered related parties: the Board of Directors ("the Board") and           CQS/New City Investment Managers (the "Investment Manager").

As at 30 June 2016, the Company held shares in New City Energy Ltd and Golden Prospect Precious Metals Ltd, these two investment companies are also managed by the Investment Manager.

7.         These are not full statutory accounts for the year ended 30 June 2016.  The full audited annual report and accounts for the year ended 30 June 2016 will be sent to shareholders in October 2016 and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

Principal Risks

The principal risks faced by the Company are: investment and strategy risk; market risk; sector risk; financial risk; earnings and dividend risk; operational risk and regulatory risk. These risks, which have not changed materially since the annual report for the year ended 30 June 2015, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 June 2016.  The report will be made available on the manager's website www.ncim.co.uk during October 2016.

The Company's financial instruments comprise its investment portfolio, cash balances, bank facilities and debtors and creditors that arise directly from its operations.  As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective.  The Company can make use of flexible borrowings for short term purposes to achieve improved performance in rising markets and to seek to enhance the returns to shareholders, when considered appropriate by the Investment Manager. The downside risk of borrowings may be reduced by raising the level of cash balances held.

Listed fixed asset investments held are valued at fair value.  For listed securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed.  Unlisted investments are valued by the Directors on the basis of all information available to them at the time of valuation.  The fair value of all other financial assets and liabilities is represented by their carrying value in the Balance Sheet. The fair value of the 3.5% Convertible Unsecured Loan Stock 2018 is not materially different from its carrying value in the Balance Sheet.

The main risks that the Company faces arising from its financial instruments are:

(i)         market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

(ii)         interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii)        foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales and income will fluctuate because of movements in currency rates;

(iv)        credit risk, being the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company; and

(v)         liquidity risk, being the risk that the bank may demand re-payment of a loan or that the Company many not be able to liquidate quickly its investments.

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.  To mitigate the risk the Board's investment strategy is to select investments for their fundamental value.  Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments.  An appropriate spread of investments is held in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a country or sector.  The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy. 

Investment and portfolio performance are discussed in more detail in the Investment Manager's Review.

If the investment portfolio valuation fell by 10 per cent at 30 June 2016, the impact on the profit or loss and the net asset value would have been negative £11.4 million (2015: negative £10.7 million).  If the investment portfolio valuation rose by 10 per cent the impact would have been equal and opposite. The calculations are based on the portfolio valuation as at the respective balance sheet dates are not representative of the year as a whole, and may not be reflective of future market conditions.

Interest rate risk

Financial assets

Bond and preference share yields, and their prices, are determined by market perception as to the appropriate level of yields given the economic background. Key determinants include economic growth prospects, inflation, the Government's fiscal position, short term interest rates and international market comparisons.  The Investment Manager takes all these factors into account when making any investment decisions as well as considering the financial standing of the potential investee company.

Returns from bonds and preference shares are fixed at the time of purchase, as the fixed coupon payments are known, as are the final redemption proceeds.  Consequentially, if a bond is held until its redemption date, the total return achieved is unaltered from its purchase date.  However, over the life of a bond the market price at any given time will depend on the market environment at that time.  Therefore, a bond sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.

The Company's exposure to floating interest rates gives rise to cash flow interest rate risk and its exposure to fixed interest rates gives rise to fair value interest rate risk. Interest rate risk on fixed rate interest instruments is considered to be part of market price risk as disclosed above.

Floating rate

When the Company retains cash balances they are held in floating rate deposit accounts.  The benchmark rate which determines the interest payments received on cash balances is the bank base rate for the relevant currency for each deposit.

Financial liabilities

The Company may utilise the bank facility to meet any liabilities due.  The Company has borrowed in sterling at a variable rate based on the UK bank base rate. The Board sets borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis.

If the bank base rate had increased by 0.5 per cent, the impact on the profit or loss would have been a loss of £2,000 (2015: £25,000). If the bank base rate had decreased by 0.5 per cent, the impact on the profit or loss would have been equal and opposite. The calculations are based on borrowings as at the respective balance sheet dates and are not representative of the year as a whole.

Foreign Currency Risk

The Company invests in overseas securities and may hold foreign currency cash balances which give rise to currency risks. The Company does not hedge its currency exposure and as a result the movement of exchange rates between pounds sterling and the other currencies in which the Company's investments are denominated may have a material effect, unfavourable or favourable, on the returns otherwise experienced on the investments made by the Company. Although the Investment Manager may seek to manage all or part of the Company's foreign exchange exposure, there is no assurance that this can be performed effectively.

The Investment Manager does not intend to hedge the Company's foreign currency exposure at the present time.

Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company.  The Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis.  The carrying amounts of financial assets best represents the maximum credit risk exposure at the balance sheet date.

Credit risk on fixed interest investments is considered to be part of market price risk.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement.  Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the high credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk.

The cash held by the Company and all the assets of the Company which are traded on a recognised exchange are held by HSBC Bank, the Company's custodian.  Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited.  The Board monitors the Company's risk by reviewing the custodian's internal control reports.

Should the credit quality or the financial position of HSBC Bank deteriorate significantly the Investment Manager will move the cash holdings to another bank.

There were no significant concentrations of credit risk to counterparties as at 30 June 2016 and as at 30 June 2015. No individual investment exceeded 6.7 per cent of net assets as at 30 June 2016 (2015: 8.6 per cent).

Liquidity risk

The Company's financial instruments include investments in unlisted investments which are not traded in an organised public market and which generally may be illiquid.  As a result, the Company may not be able to liquidate these investments at an amount close to their fair value.

The Company's liquidity risk is managed on an ongoing basis by the Investment Manager.  The Company's overall liquidity risks are monitored on a quarterly basis by the Board.

The Company maintains sufficient cash and readily realisable securities to pay accounts payable and accrued expenses.  The Company also maintains sufficient cash and readily realisable securities to meet any demand repayment on an overdraft facility.

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards including FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgments and estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

• 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 comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Statement of Corporate Governance that comply with that law and those regulations. The financial statements are published on www.ncim.co.uk which is a website maintained by the Company's Investment Manager. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with UK GAAP, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

• that in the opinion of the Directors, the Annual Report and Accounts taken as whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's performance, business model and strategy; and

• the Strategic Report includes fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

On behalf of the Board

Geoff Burns,

Chairman

30 September 2016

 

END

 

 

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