Annual Financial Report

RNS Number : 8440P

CQS Natural Resources Grwth&Inc PLC

15 October 2019

 

CQS NATURAL RESOURCES GROWTH AND INCOME PLC

Annual Results Announcement

for the year ended 30 June 2019

Financial Highlights

Total Return*			Year to 30 June 2019		Year to 30 June 2018		Period from 1 August 2003 to 30 June 2019
Net asset value			(13.88)%		12.0%		248.11%
Ordinary share price			(17.34)%		9.9%		180.47%
Composite index			12.79%		17.4%		350.75%
Euromoney Global Mining Index (sterling adjusted)			13.20%		23.2%		369.60%
Credit Suisse High Yield Index [sterling adjusted]			11.13%		1.4%		308.72%
Capital Values			30 June 2019		30 June 2018		% change period
Net asset value per share			116.2p		142.4p		(18.40)%
Ordinary share price (mid market)			89.3p		115.3p		(22.55)%
3.5% Convertible Unsecured Loan Stock ("CULS") (mid market)			-		100.0p		(100)%
Revenue and Dividends			30 June 2019		30 June 2018		% change period
Revenue earnings per ordinary share			2.67p		3.28p		(18.60)%
Dividends per ordinary share			5.60p		5.60p		0%
Dividend Yield			6.3%		4.9%
Discount (difference between share price and fully diluted net asset value)			23.1%		19.0%
Gearing*
Gearing provided by bank loan/CULS			12.3%		16.9%
Ongoing charges (as a percentage of average shareholders' funds)			1.9%		1.8%
					Year to		Year to
					30 June 2019		30 June 2019
Period's Highs/Lows					High		Low
Net asset value per share					143.8p		98.9p
Ordinary share price (mid market)					117.8p		83.9p
Discount					25.4%		10.0%
Dividend History	Rate	xd date		Record date		Payment date
Fourth interim 2019	1.82p	25 July 2019		26 July 2019		30 August 2019
Third interim 2019	1.26p	25 April 2019		26 April 2019		24 May 2019
Second interim 2019	1.26p	24 January 2019		25 January 2019		28 February 2019
First interim 2019	1.26p	25 October 2018		26 October 2018		30 November 2018
Total	5.60p
Fourth interim 2018	2.62p	26 July 2018		27 July 2018		31 August 2018
Third interim 2018	0.40p	7 June 2018		8 June 2018		22 June 2018
Third interim 2018	0.86p	26 April 2018		27 April 2018		25 May 2018
Second interim 2018	0.86p	25 January 2018		26 January 2018		28 February 2018
First interim 2018	0.86p	26 October 2017		27 October 2017		24 November 2017
Total	5.60p

* A glossary of the terms used can be found in the Annual Report and Financial Statements.

STRATEGIC REPORT

CHAIRMAN'S STATEMENT

Overview

The year to 30 June 2019 has been challenging and was largely affected by the savage sell off in global equities in the last quarter of CY18. The Company was not immune to this and suffered painful performance. Since then the Company's net asset value ("NAV") has out-performed its peers and its exposure to precious metals have been very beneficial. This has not been reflected in the share price due to several factors such as US / China trade wars, geopolitical tensions, the Woodford fall out and Brexit uncertainties to name but a few. The Investment Manager has articulated all of these in more detail in their review.

Performance

At 30 June 2019 your Company's net asset value ("NAV") per share was 116.2 pence representing a fall of 13.9%. Although this underperformance is disappointing, since the change of investment objective on 1 August 2003 in the period to 30 June 2019 the Company has delivered a cumulative NAV total return of 248.1% indicating the value added by the thoughtful stock selection of our Investment Manager.

Additional information on the performance of the Company is set out in the performance highlights. The Investment Manager's report also provides further information on investment style, sector allocation and some of our larger portfolio holdings.

As at 14 October 2019, the Company's NAV is 111.96 pence and the share price is 87.20 pence.

Dividends and Income

Income and dividends have been a focus of the Company since 2003. Dividends paid to shareholders during the year under review totaled 5.6 pence per share and were 2.8 times the amount paid per share in 2004. The Board considers that the dividend is an important element of stability and investor appeal in our volatile asset class and will continue to pay four interim dividends totaling 5.6 pence for this year.

In my statement last year I advised that the Investment Manager was increasing the portfolio's allocation to equities with an eye to total return and without regard to their yield, and this has continued throughout this year. The Board does not believe that it is a necessity for the annual dividend target to be covered by current year revenue alone. The Investment Manager is focused on generating capital growth and income from the portfolio and their investment choices should not therefore be driven entirely by the need to meet an annual income target. If portfolio income is not sufficient during the year to meet the dividend target the Board will continue to use distributable reserves to do so.

Dividend yield for the year to 30 June 2019 rose to 6.3% (2018: 4.9%) and as at 10 October 2019 was 6.5%.

Discount

At the year end the Company's shares were trading at a discount of 23.1% and during the year ranged from a high of 25.4% to a low of 10.0% with an average discount of 17.2%. As at the close of business on 14 October 2019, the discount was 22.1%.

The Board is conscious of the prevailing discount at which your Company's shares trade and will continue to monitor movements in the discount. It remains the Board's aim to mitigate the discount at which the Company's shares trade by delivering good long term performance.

Gearing

The repayment of the Company's convertible unsecured loan stock in September 2018 was partially financed by a new £20 million unsecured revolving credit facility with Scotiabank. The agreed gearing limit is 25%, however the gearing level was reduced during the year as a consequence of the repayment of the convertible unsecured loan stock and at 30 June 2019 was 12.3% (2018: 16.9%).

As at 10 October 2019, net gearing stands at 15.5% per cent, with £13m of the credit facility drawn down.

Annual General Meeting

The Company's 24th Annual General Meeting will be held on 5 December 2019 at One Fleet Place, London EC4M 7WS at 2 pm. Details of the business of the meeting is set out in the Notice of Meeting in the Annual Report and Financial Statements.

We would encourage shareholders to attend the Annual General Meeting to meet the Board. The Investment Manager will also be giving a presentation on the year under review and the current financial year.

Outlook

The Investment Manager has set out a detailed review of the various global and domestic uncertainties that have significant effects on the investment strategy.

The dominant theme remains the US/China trade war. The Trump administration has chosen to weaponise trade tariffs and even now these are hanging over the EU. In addition civil unrest in Hong Kong is exacerbating this and locally Brexit uncertainty is causing unease. The major effect of this to the Company would be currency volatility affecting the NAV.

The Company, has however, positioned itself for the medium to longer term and is looking beyond the 2020 US election cycle. China is still growing at an estimated 5-6% per annum and demand will outstrip supply of the various commodities that the Company's portfolio covers. Precious metals have performed very strongly this year and the Company has significant holdings in that sector.

The closed end structure of the Company enables the Investment Manager to invest over the medium to longer term without liquidity fears of cash withdrawals.

The CQS group has extensive research capabilities which supports the Investment Manager's investment strategy and we look forward with cautious optimism.

I would like to conclude by extending my thanks to all shareholders for their continued support.

Richard Prickett

Chairman

14 October 2019

INVESTMENT   MANAGER'S REVIEW

Performance

This financial year was marked by some difficult periods for smaller cap equities. This is evident by the weak performance of the fund from June 18' to June 19', down by 14% over that period. The three months since the end of the financial year have been much improved.

Over the financial year almost all the poor performance was seen in the 4th quarter of CY18, with the fund falling by 13.9%. This was a period of marked small cap performance globally across multiple sectors, not just resources. This was driven by a number of factors, but trade war concerns were a major contributor, which again we will discuss in more detail. This saw an effective capitulation across many names in the fund to what we believed were over sold levels, where we looked to opportunistically add. A further headwind for the fund was our lack of iron ore exposure, which rallied strongly in the first half of 2019 following Vale's Brumadinho tailings dam failure, which resulted in Vale cutting supply. This is due to not being invested in the majors like BHP and Rio, hence we are less exposed to iron ore than the broader sector as iron ore is such a large proportion of their earnings. We did hold Fortescue Metals, an iron ore producer in Australia, although since the end of the financial year we have sold that position as we believed the strength in iron ore looked unsustainable.

Auto sales were also very weak over the financial year, with minimal signs of improvement at the time of writing. This is important as it is a key driver of Zinc demand, with 50% of Zinc used for galvanising steel and much of this is used for vehicles. This weighed on some key holdings for the fund such as Trevali and Ascendant, which also weighed on performance over the period. Despite the soft pricing global warehouse stocks (LME and Shanghai) have continued to decline to around 6 days of global usage, a level that previously would indicate zinc pricing 50% higher than we are today.

At the time of our last AGM (December 2018) we were most of the way through the dire 4Q. We have previously and continue to flag the positive supply fundamentals for mining, noting all the concerns over the period were primarily demand related.

The first half of CY 19 showed a broader recovery in mining. One of the notable out performers were the precious metal miners which saw strong performance over this period, and posted the largest gains from May through to the end of September. Most of this gain is not reflected in the financial year numbers.

The performance YTD has improved, making back much of the underperformance seen in 4Q18, which was a period of investor capitulation in smaller cap mining equities. This improved performance was also due to favourable commodity positioning. The fund holds a large weighting to precious metal mining equites (~24%) which have meaningfully out performed, whilst the low weighting to Oil and Gas and iron ore has been beneficial. The relatively sizeable weighting to base metal miners did weigh on performance, but was more than offset by the positioning in precious metals which saw an improvement in metal pricing and equity ratings. The drivers of each of these are addressed in more detail below. This improved relative performance unfortunately was not fully reflected in the share price as the discount to the NAV widened from 15% at the start of the year to 24% at the time of writing (24.9.19).

Outlook

Beyond the headlines of trade wars and central banks reducing interest rates globally, again addressed in more detail later on, the underlying simple fundamentals of supply and demand continue to look constructive. The valuations of the underlying producers look favourable versus historic levels and especially against other sectors. This discount is even more extreme when looking at smaller companies (<$1bn) with many of our names trading at 0.5x & 0.6x P/NAV for gold and base metal miners, due to an additional discount by virtue of not meeting liquidity requirements for large funds and passive ETF's. CQS Natural Resources does not try to emulate or track any of the major ETF's or indices, instead focusing on the opportunities in which we see the most attractive value opportunities. This is a strategy that has been difficult for the last few years, as we have been left fighting a tide of capital flow from active to passive strategies and hence flows out of smaller cap equities more generally.

Against this geopolitical events have also weighed on the sector raising demand concerns, deferring the broader sector recovery we expect. Put simply, commodities and mining especially have been out of favour for over 5 years, this has led to a greater focus on capital discipline which has resulted in a dearth of new capacity additions now and for the next few years.

Against this background of muted supply growth even a low level of demand growth would tighten the market and support higher pricing. The key question is therefore demand, with increasingly negative sentiment resulting from the prolonged US-China trade war. We believe this sentiment has overshot to the downside, with a greater risk that any improvement or resolution could lead to a recovery in demand growth and a scenario where the world is in supply deficit for many commodities, an environment that would lead to better pricing. China still looks to grow by 5-6% per year, and though stimulus has been thus far limited we believe a slowing beyond this could prompt more action.

We have no crystal ball as to how the trade war will develop, in part due an unpredictable US president. We have opted to position for this backdrop with a large weighting to precious metal miners as useful portfolio insurance. We are comfortable with this weighting as gold equities have recently shown their ability to act with a negative correlation to the broader market, thus offering protection against weakness, but also because we believe they are attractively valued, even at a gold price lower than the $1520/oz we see today (24.9.19), so can perform well under either scenario.

Geopolitics

The most significant of these is the US/China trade war, with commodity markets driven by daily tweets from US President Donald Trump. There is a strong argument to suggest President Trump may become more amenable to negotiating given the slew of negative global growth data that is now having knock on impacts on US domestic growth. This is especially poignant coming in to 2020 as an election year. The US continues to see a trade deficit despite the tariffs, with the deficit at $55.2Bn in June, or $662Bn annualised, which compares to $621Bn in 2018. It is notable that $419Bn was with China in 2018, which is why President Trump is so focused on it, although it could be easily reduced via major agricultural and energy imports, which will likely form part of any solution.

If the current uncertainty extends materially leading to continued negative global growth data, China will likely respond to any domestic slow down through a pickup in stimulus. This is a fine balance for China, as reducing rates would act to lower the Yuan relative to the USD, a key focus of President Trump, risking an escalation of a currency war.

US sanctions curtailed supply in Iran and Venezuela which initially supported the oil price. This was further compounded by tensions as Iran impounded a UK flagged oil tanker and threatened to shut down the key shipping route of the strait of Hormuz. Whilst their threat is unlikely it highlights the potential for an escalation of the wider Middle East region, a key supplier of oil globally. In the second half of the financial year oil has pulled back on demand concerns from fall out from trade conflicts on global growth and more recently the expectation of growth in US oil supplies, which we have well flagged and a key reason for our low weighting to energy producers. On the 14th September we saw an attack on a major Saudi oil facility, impacting 5M barrels per day of oil supply, with Iran the most likely perpetrator. In the days that followed Saudi reported being able to add back much of this production with the intention of returning to full production by the end of the month. The relatively muted response in oil prices, ending the week up by 7% highlights the spare capacity within the global oil system. We remain cautious on the oil price, but are increasingly less so, noting that US production growth is slowing and increasing Middle East tensions add to the potential for supply shocks. We will gradually look to add to our current low level of energy weighting within the fund.

Brexit also remains a key uncertainty and whilst significant to us in the UK, its impact is limited on the wider commodity market. The key impact on the fund is in the reference currency for the NAV. A weaker sterling has benefitted the NAV as most assets are held in other currencies. As we approach the 31 October 2019, the date set for the UK's exit from the EU, we will continue to see volatility in sterling. This is something we are closely monitoring, noting that a swing in either direction may provide either a headwind or tailwind to future NAV performance in sterling.

Precious Metals

Gold and silver have been the notable out performers in the commodity space. The performance of the fund has been a key beneficiary given the circa 25% weighting to precious metals. The declining interest rate outlook has been the main cause of improved sentiment, leading to $16Trn of negative yielding bonds, but this has been caused by slowing global data due to the trade war between the US and China.

President Trump's enforcement of sanctions and tariffs on countries which he wishes to exert leverage upon has elevated the risk for many to rely on the US dollar as a settlement mechanism. This has led to strong Central Bank buying, adding 374t in the first half of 2019, the largest addition in the 19 years of the World Gold Councils' data series. This is encouraging for the sake of gold and precious metals, as it suggests we will see continued purchases for the foreseeable future from a number of very large and sticky buyers. The physical ETF's for comparison have shown meaningful physical additions, but they also present a risk if these typically faster money acquirers were to switch to selling.

Base Metals

Base metals were weaker on global demand concerns due to the US/China trade war. The fund has a meaningful exposure which has weighed on performance. We had not expected trade talks to be so protracted and lead to such a negative impact on global growth. President Trump is now very motivated to strike a deal as it has started to impact US equity performance, on which he partially grades himself. The true knock on implications are now being felt with warnings from the likes of Apple as to their reliance on parts delivery. At the time of writing President Trump had just extended the period which US companies are allowed to trade with Huawei. This trade war has offset what we had believed was a positive fundamental back drop of constrained supply, following a 5 year period of minimal capex on new projects and thus there is a lack of new supply. Base metal prices today are implying a very bearish outlook for demand which we believe is too negative, although this is clearly dependent on trade war developments. The uncertainty that has come from the present situation has extended this period of reduced development activity, with very few new projects being sanctioned. If we do see anything better than a very bearish outcome it could lead to a strong rebound in the underlying metals and equities.

Oil

Oil was very weak over the period. The initial weakness came from demand concerns on slowing global growth, but this latterly became more focused in increasing US production. We have repeatedly referred to this risk as the US adds new pipeline capacity, with the Permian basin adding 1-2M barrels per day of capacity over the next few months, which is why we maintained minimal exposure, which has benefitted the fund. The Fund has been well placed in Hurricane and Diversified Gas and Oil which are relatively defensive due to low production costs.

Shipping

The Fund's shipping exposure is partly to gain exposure to the energy themes we see. Both BW LPG and Euornav stand to benefit from increased US shale production growth. As shale oil is increasingly exported from the US to Asia, Euronav stands to benefit where the longer shipping routes increase utilisation for the entire fleet. BW LPG transports propane, again primarily from the US to Asia. Propane is produced as a by-product of shale production, so the increased production will increase flows and the spread between pricing which supports higher day rates for their vessels.

Additionally all shipping looks likely to benefit from a new ruling, IMO 2020, requiring shipping vessels to use less sulphur in their shipping fuel. The impact of this is to elevate the fuel price which is worn by the customer, but therefore encourages slower steaming to increase efficiency. This will act to increase the utilisation across the sector overall, benefitting day rates. At normal day rates all of the shipping names held in the fund would pay meaningful double digit dividends.

Ian Francis, Keith Watson, Rob Crayford

New City Investment Managers

14 October 2019

TOP TEN LARGEST HOLDINGS

	Valuation 30 June 2018 £'000	Purchases £'000	Sales £'000	Appreciation/ (depreciation) £'000	Valuation 30 June 2019 £'000
First Quantum** (note 1) Primarily a copper producer with mines in Africa and a large development project in Panama.	8,265	969	-	(2,368)	6,866
Ero Copper A copper producer with mining assets in Brazil.	2,227	426	(1,263)	3,230	4,620
Hurricane Energy (note 2) Developer of a large oil discovery in the West of Shetland, first oil produced in May 2019 from fractured basement rock.	4,209	-	(162)	502	4,549
BW LPG The world's leading owner and operator of LPG carriers.	2,439	189	-	789	3,417
REA Holding** (note 3) The Company cultivate oil palms and produces crude oil palm and other palm products.	6,283	-	-	(2,526)	3,757
Ascendant Resources (note 4) A zinc producer that acquired the mine called El Mochito from Nyrstar for $0.5m.	7,280	-	-	(4,046)	3,234
West African Resources An Australian listed gold developer and explorer with the Sanbrado discovery in Burkina Faso.	3,516	635	(715)	(402)	3,034
Americas Silver** (note 5) The Company mines silver, zinc, lead and copper.	2,772	417	-	(272)	2,917
Trevali Mining Trevali produces and explores for zinc and lead in Peru.	6,146	1,374	(127)	(4,565)	2,828
Euronav NV (note 6) The world's largest independent crude oil tanker company.	1,056	1,099	-	59	2,214
Top ten investments	44,193	5,109	(2,267)	(9,599)	37,436

COMMENTS ON LARGEST POSITIONS
 

First Quantum

First Quantum is primarily a copper company, with mines in Zambia and Portugal and a large new project now ramping up in Panama. We have added to this position over the period as despite negative sentiment in copper we still see a looming deficit and with the start-up of the Cobre Panama mine the company will have much improved debt levels. We are more comfortable with the debt levels for this company as they have numerous options in even the worst case scenario such as a non-core asset sales or even a proportional sell down of the Cobre Panama mine.

Ero Copper

This is primarily a copper miner, but also owns a gold mine, with assets in Brazil. This is a low capex restart of brown field facilities. The grades and potential are truly world class, and with 30 rigs currently drilling is one of the most active in the sector.

Hurricane Energy

This North Sea oil and gas explorer has turned producer over the period. Following a successful execution they started production, first announced on the 11th of May. They had a setback following an unsuccessful well on an extension of the Lancaster field called Warwick, but we are optimistic on further success on a well they are currently drilling on the Lincoln target. We hold this position despite our cautious view on the oil price due to a low operating cost of around $35/bbl. The position is held in both the equity and convertible bond, which would likely convert in to equity when they are callable in July 2020 at a discount to the current share price. The company is free cash flow generative and can self-fund any further expansions.

REA Holdings

Indonesian Palm Oil producer in the province of east Kalimantan. This position is predominantly held across the 2020 bonds and preference shares, with a smaller position in the equity.

BW LPG

As previously mentioned BW LPG is a shipper of propane. This is a direct play on increased US shale production, where propane is produced as a by-product of Shale production. It is our belief that this pickup in activity in the US, a key reason for our caution on the oil price, will result in more propane production. BW LPG benefits from this as more is exported from the US, which in turn requires more ships that specialise in its transport. This increases the utilisation and thus lifts the day rates for these ships. This increases earnings for the company of which it pays out 50% as a dividend.

Precious metal miners - inc West African Resources & Americas Silver

Our positions are more diverse within this sector, with only Americas Silver and West African Resources making the top 20. This is because there are far more options that meet our valuation criteria, due a material discount in the smaller precious metal miners relative to their larger peers. We believe the discount is unjustified longer term as it is more technically driven, with a reduction in active funds within the space, capital flows have been dominated by the precious metal ETF's that have a large cap bias.

West African Resources is building a gold mine in Burkina Faso in West Africa which is due to start production in early 2020. This will be a low cost project producing 250k oz/y in the first few years of production.

Americas Silver has a mine in Mexico, and two in the US. It produces Gold, Silver, Zinc and some lead. Two of the mines are operational and one is currently being built and will enter production in late 2020.

Trevali Mining

Zinc miner with assets in Canada, Peru, Burkina Faso and Namibia. The performance for the year has been disappointing with the primary cause being the decline in the Zinc price. In response to the weakness a new CEO has been appointed who was formerly the COO of base metals for Vale. His strong operational background should aid this company with a turn around.

Euronav

Crude oil shipper, with one of the largest fleets of the largest format VLCC ships and blue ship clients. They are a key beneficiary of trade war related disruptions as it forces longer shipping routes and increases day rates. Strong cash generation from current day rates should result in a sizeable dividend given the strong prior payout ratios. Its current valuation is around 0.8x P/NAV, which means it could accretively sell a vessel and buy back stock. If OPEC chose to remove their quotas, or Iran and Venezuela ever see operations improve, this would lead to a further improvement in day rates.

Notes to the Investment Portfolio

Note 1 - Includes First Quantum equity valued at £6,124,000 and First Quantum Minerals 7.5% 01/04/2025 valued at £742,000.

Note 2 - Includes Hurricane Energy equity valued at £607,000 Hurricane Energy Convertible 7.5% 24/07/2022 valued at £3,942,000.

Note 3 - Includes REA Holdings 9% Pref Shares valued at £3,300,000 and REA Finance 8.75% 31/08/2020 valued at £457,000.

Note 4 - Includes Ascendant Resources equity valued at £3,167,000 and warrants valued at £66,000.

Note 5 - Includes Americas Silver equity valued at £2,830,000 and Americas Silver warrants valued at £67,000.

Note 6 - Includes Euronav NV equity valued at £1,103,000 and Euronav Luxembourg SA 7.5% 31/05/2022 valued at £1,111,000.

** Denotes a Level 2 security

	2019 % of total investments	2018 % of total investments
Gold	16.1	16.0
Copper	15.3	10.7
Zinc	6.9	10.8
Shipping	6.2	5.2
Oil & Gas	5.5	5.4
Silver	4.8	2.6
Uranium	4.2	2.9
Base Metals	3.2	3.8
Iron	3.0	1.6
Nickel	2.3	0.3
Coal	2.2	2.1
Rare Earth	1.6	1.1
Lithium	1.5	0.9
Alternative energy	1.2	1.7
Palm Oil	0.3	0.5
Platinum	0.3	0.2
Agriculture	0.2	0.3
Steel	0.1	-
Fixed Interest Securities	18.0	17.3
Treasury Stock	-	8.5
Preference Shares	7.1	8.1
Total Investments	100.0	100.0

CLASSIFICATION OF INVESTMENT PORTFOLIO BY SECTOR

As at 30 June	2019 % of total investments	2018 % of total investments
Canada	38.1	36.0
Australia	18.1	17.0
UK	14.8	24.5
Europe	6.1	6.9
US	19.9	15.4
Unquoted	3.0	0.2
Total Investments	100.0	100.0

INVESTMENT PORTFOLIO

as at 30 June 2019

Company		Sector		Valuation £'000			Total Investments %
First Quantum Minerals** (Note 1)		Copper		6,866			7.8
Ero Copper Corp Common		Copper		4,620			5.3
Hurricane Energy (Note 2)		Oil & Gas		4,549			5.2
Rea Holdings** (Note 3)		Palm Oil		3,757			4.3
BW LPG Ltd USD0.01		Shipping		3,417			3.9
Ascendant Resources** (Note 4)		Zinc		3,234			3.7
West African Resources Limited Common		Gold		3,034			3.5
Americas Silver **(Note 5)		Silver		2,917			3.3
Trevali Mining Corp Common NPV		Zinc		2,828			3.3
Euronav Luxembourg (Note 6)		Shipping		2,214			2.5
Top ten investments				37,436			42.8
Tizir Ltd 9.5% 19/07/2022		Rare Earth		2,205			2.5
Metals X Ltd Common NPV		Gold		2,168			2.5
Talon Metals		Nickel		1,999			2.3
Arch Coal Inc Class 'A' Common USD0.01		Coal		1,946			2.2
Goodbulk Ltd Common USD1		Shipping		1,843			2.1
NexGen Energy Ltd Common NPV		Uranium		1,802			2.1
Oilflow SPV 1 DAC 12% 13/01/2022		Oil & Gas		1,638			1.9
Central Asia Metals Plc Ordinary		Copper		1,581			1.8
Diversified Gas & Oil Plc Ordinary 1p		Oil & Gas		1,481			1.7
Trafigura Group Pte 6.875% Variable Perpetual		Finance		1,425			1.6
Top twenty investments				18,088			20.7
Lynas Corporation Limited Common NPV		Rare Earth		1,412			1.6
Westgold Resources Limited Common NPV		Gold		1,343			1.5
Roxgold Inc Common NPV		Gold		1,325			1.5
Sigma Lithium Resources Corp Common NPV		Lithium		1,320			1.5
Independence Group NL Common		Gold		1,174			1.4
Raven Russia Limited 12% Preferred		Other investments		1,155			1.3
Base Resources Ltd Common NPV		Base metals		1,147			1.3
LBG 7.875% Variable Perpetual		Finance		1,132			1.3
Adriatic Metals Plc Common		Iron		1,088			1.3
Foran Mining Corp Common NPV		Copper		1,049			1.2
Top thirty investments				12,145			13.9
Silver Lake Resources Limited Common NPV		Silver		1,013			1.2
Fortescue Metals Group Ltd		Iron		994			1.1
Aquila Resources**		Gold		928			1.1
Ecclesiastical Insurance Preferred 8.625% Perp		Finance		918			1.0
Ur-Energy**		Uranium		906			1.0
Balfour Beatty Preferred 9.675% 01/07/2020		Other investments		884			1.0
Integra Resources Corp Common		Gold		825			1.0
Contura Energy Inc Common USD0.01		Alternative energy		813			0.9
Galena Mining Limited Common NPV		Base metals		803			0.9
Gran Colombia Gold Corp** (Note 10)		Gold		777			0.9
Top forty investments				8,861			10.1
Odyssey Energy Ltd Common NPV	Oil & Gas			737		0.9
Pretium Resources Inc Common NPV	Gold			701		0.8
Adventus Mining Corp Common NPV	Base metals			678		0.8
American Tanker Inc 9.25% 22/02/2022	Shipping			632		0.7
PizzaExpress Financing 8.625% 01/08/2022	Other investments			583		0.7
Elematic Oyj 10% 30/06/2021	Oil & Gas			547		0.6
Fission Uranium Corp NPV	Uranium			537		0.6
Jupiter Mines Ltd Common NPV	Iron			504		0.6
Asanko Gold Inc Common NPV	Gold			473		0.5
Sabina Gold & Silver Corp NPV	Gold			369		0.4
Top fifty investments				5,761		6.6
Oro Negro 7.5% 24/01/2019	Oil & Gas			367		0.4
Guyana Goldfields Inc Common NPV	Gold			367		0.4
Denison Mines Corp Common NPV	Uranium			366		0.4
Petro Matad Ltd Common USD0.01	Oil & Gas			342		0.4
Pure Gold Mining (Placing line)	Gold			331		0.4
Oklo Resources Ltd NPV	Gold			313		0.4
Platinum Group Metals**	Platinum			296		0.3
St George Mining**	Nickel			296		0.3
R.E.A. Holdings Plc Ordinary 25p	Palm Oil			264		0.3
Vintage Energy Ltd Common NPV	Oil & Gas			232		0.3
Top sixty investments				3,174		3.6
Cardinal Resources Ltd Common	Gold			218		0.2
Greencoat UK Wind Plc Ordinary	Alternative energy			216		0.2
Fortuna Silver Mines Inc Common NPV	Silver			205		0.2
Polarcus Ltd	Oil & Gas			204		0.2
Bluestone Resources**	Other mining investments			181		0.2
Precision Drilling Corp NPV	Oil & Gas			147		0.2
Avance Gas Holding Ltd Common USD1	Shipping			138		0.2
Sherritt International Corp 8% 15/11/2021	Nickel			127		0.2
Stelco Holdings Inc W/I	Steel			90		0.1
Clean Seed Capital Group Ltd Common NPV	Agriculture			75		0.1
Top seventy investments				1,601		1.8
Santacruz Silver Mining Ltd NPV	Silver			73		0.1
Agriculture Investment Group Corp Common	Agriculture			58		0.1
Mandalay Resources Corp Common NPV	Gold			56		0.1
Lydian International Ltd Common NPV	Gold			49		0.1
Devex Resources Ltd Common NPV	Uranium			47		0.1
Samco Gold Ltd Common NPV	Gold			44		-
Valore Metals Corp NPV	Gold			40		-
Amani Gold Limited Common NPV	Gold			38		-
Ausgold Ltd Common NPV	Gold			34		-
Pan American Silver Corp CVR's (USD)	Silver			25		-
Top eighty investments					464			0.5
Other investments					17			-
Total investments					87,547			100.0

STRATEGIC REVIEW

Introduction

This review is part of the Strategic Report being presented by the Company under guidelines for UK-listed Companies' Annual Reports in accordance with The Companies Act 2006, and is designed to provide information primarily about the Company's business and results for the year ended 30 June 2019. It should be read in conjunction with the Chairman's Statement and the Investment Manager's Review, which give a detailed review of the investment activities for the year and look to the future.

Business Model

The business model of the Company is described below.

Investment Objective

The Company seeks to provide shareholders with capital growth and income predominantly from a portfolio of mining and resource equities and of mining, resource and industrial fixed interest securities.

Investment Policy

The Company invests predominantly in mining and resource equities and mining, resource and industrial fixed interest securities (including, but not limited to, preference shares, loan stocks and corporate bonds, which may be convertible and/or redeemable). The Company may invest in companies regardless of country, sector or size and the Company's portfolio is constructed without reference to the composition of any stock market index or benchmark. Exposure to higher yielding securities may also be obtained by investing in other sectors, including closed-end investment companies and open-ended collective investment schemes.

The Company may, but is not obliged to, invest in derivatives, financial instruments, money market instruments and currencies for the purpose of efficient portfolio management.

The Company may acquire securities that are unquoted at the time of investment but which are about to be, or are immediately convertible at the option of the Company into securities which are, listed or traded on a stock exchange, and may continue to hold securities that cease to be quoted or listed if the Investment Manager considers this appropriate. In addition, the Company may invest up to 10 per cent of its gross assets in other securities that are unlisted or unquoted at the time of investment.

The Company will not invest more than 15 per cent in aggregate of the value of its total assets (measured at the time of investment) in other investment trusts or investment companies which are listed on the Official List except that this restriction does not apply to investments in other investment trusts or investment companies which themselves have published investment policies to invest no more than 15 per cent of their total assets in other investment trusts or investment companies which are listed on the Official List.

The Company may borrow up to 25 per cent of shareholders' funds (measured at the time of drawdown).

The Investment Manager expects that the Company will normally be fully invested. However, during periods in which changes in economic circumstances, market conditions or other factors so warrant, the Company may reduce its exposure to securities and increase its position in cash, money market instruments and derivative instruments in order to seek protection from stock market falls.

The Company's performance in meeting its objectives is measured against key performance indicators ('KPIs'). The primary KPI against which shareholders' returns are measured is a composite benchmark weighted two-thirds to the Euromoney Global Mining Index (sterling adjusted) and one-third to the Credit Suisse High Yield Index (sterling adjusted).

Principal Risks and Uncertainties and Risk Mitigation

Risks are inherent in the investment process, but it is important that their nature and magnitude are understood so that risks, particularly those which the Company does not wish to take, can be identified and either avoided or controlled. The Board has established a detailed framework of the key risks that the business is exposed to, with associated policies and processes devised to mitigate or manage those risks.

The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company including those that would threaten its business model, future performance, solvency or liquidity. The Board is closely monitoring the potential impact of Brexit as part of the Company's investment risk. The Board and Investment Manager will continue to keep developments under review.

The principal risks faced by Company remain unchanged since last year and are set out below.

Investment and Strategy Risk - The Board is responsible for deciding the investment strategy to fulfil the Company's objectives and monitoring the performance of the Investment Manager. Inappropriate strategy, including country and sector allocation, stock selection and the use of gearing, could lead to poor returns for shareholders. To manage this risk the Board requires the Investment Manager to provide an explanation of significant stock selection decisions and the rationale for the composition of the investment portfolio at each Board meeting, when gearing levels are also reviewed. The Board monitors the spread of investments to ensure that it is adequate to minimise the risk associated with particular countries or factors specific to particular sectors. The Investment Manager also provides the Board and shareholders with monthly factsheets which include an investment commentary.

Market Risk - The Company's assets consist principally of listed equities and fixed interest securities and its greatest risks are in consequence market-related. In addition to ordinary movements in the prices of the Company's investments and the loss that the Company might suffer through holding investments in the face of negative market movements, the Company's investment strategy necessarily amplifies this risk (see Sector Risk below). The Board seeks to mitigate this risk through the processes described in the paragraph above, monitoring the implementation and results of the investment process with the Investment Manager.

Sector Risk - The largest part of the Company's assets consist of equity-related investments in companies, usually mid-and small-cap companies, with a wide range of commodity exposures. The prices of the underlying commodities are often volatile and the companies can be located in countries at risk of political instability and vulnerable to natural disasters. The liquidity in the shares of the companies is often restricted, meaning that it can be difficult to buy or sell volumes of shares at the quoted price. The Board seeks to mitigate this risk through the processes described in the paragraph above on Investment and Strategy Risk. In addition, the closed-ended structure of the Company is an essential part of the Board's management of this risk, ensuring that parts of the portfolio do not have to be sold to raise liquidity to fund redemptions at short notice.

Financial Risk - The Company's investment activities expose it to a variety of financial risks that include market price risk, foreign currency risk, interest rate risk and liquidity and credit risk. Further details of these risks and the ways in which they are managed are disclosed in note 17 of the financial statements.

Earnings and Dividend Risk - Earnings do not underpin dividends declared, with the portfolio being managed on a total return basis. Future dividends are expected to be uncovered over the short to medium term and will be funded from distributable reserves as necessary.

Operational Risk - The Company relies upon the services provided by third parties and is reliant on the control systems of the Investment Manager and the Company's other service providers. The security and/or maintenance of, inter alia, the Company's assets, dealing and settlement procedures, and accounting records depend on the effective operation of these systems. These are regularly tested and monitored and are reported on at each Board meeting. An internal control report, which includes an assessment of risks, together with the procedures to mitigate such risks, is prepared by Maitland Administration Services (Scotland) Limited, whose systems and processes the Administrator relies upon. These are reviewed by the Audit Committee, as a minimum, once a year. CQS delivers a risk based internal audit plan across the CQS Group which covers different areas of front, middle and infrastructure audits; any areas of concern are discussed with the Audit Committee when it meets.

Regulatory Risk - The breach of regulatory rules could lead to a suspension of the Company's stock exchange listing or financial penalties. Breach of Sections 1158 to 1159 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on chargeable gains. The Company Secretary monitors the Company's compliance with the Listing Rules of the UK Listing Authority and Sections 1158 to 1159 of the Corporation Tax Act 2010. Compliance with the principal rules is reviewed by the Directors at each Board meeting.

Political risk - Political developments are closely monitored and considered by the Board. The Board has noted the continued uncertainty as to the terms on which the UK will leave the European Union, and also the apparent increase in protectionist threats to world trade. The Board will continue to monitor developments as they occur and assess the potential consequences for the Company's future activities.

Viability Statement

In accordance with the provisions of the UK Corporate Governance Code, the Directors have assessed the viability of the Company over a period longer than the 12 months required in the 'Going Concern' guidance. The Board conducted this viability review for a period of three years. The Board considers that this period reflects the long term objectives of the Company whilst taking into account the impact of uncertainties in the markets.

In making this statement the Board carried out a robust assessment of the principal risks facing the Company. These risks and their mitigations are set out on pages 13 and 14 of the Annual Report and Financial Statements. The principal risks identified as most relevant to the assessment of the viability of the Company were those relating to potential under-performance of the portfolio and its effect on the ability to pay dividends.

When considering the risk of under-performance, the Board carried out a series of stress tests including the effects of any substantial future falls in investment value on the ability to re-pay and re-negotiate borrowings, potential breaches of loan covenants and the maintenance of dividend payments.

The Board also considered the impact of potential regulatory change and the controls in place surrounding significant third party providers, including the Investment Manager.

The Board also noted the liquidity risk in the portfolio where the percentage of Level 1 listed investments held at the year end was 78.9%.

Based on the Company's processes for monitoring revenue and costs and the Investment Manager's compliance with the investment objective and policies, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meets its liabilities as they fall due for a period of three years from the date of approval of this Report.

Performance Measurement and Key Performance Indicators

The Board uses a number of performance measures to assess the Company's success in meeting its objectives. The tables and data on page 2 of the Annual Report and Financial Statements show how the Company has performed against those KPIs, and a glossary of terms and alternative performance measures is included on page 50 of the Annual Report and Financial Statements. The key performance indicators (KPIs) used to measure progress and performance over time, and which are comparable to those reported by other investment trusts are as follows:

·     Performance measured against the benchmark, relevant indices and peers

The Board reviews and compares, at each meeting, the performance of the portfolio, the Company's NAV and share price, its benchmark and peers. (see inside front cover of the Annual Report and Financial Statements)

·          Discount / premium to net asset value ('NAV')

At each Board meeting, the Board monitors the level of the Company's discount or premium to NAV. The Company publishes a NAV per share figure on a daily basis, through the official newswire of the London Stock Exchange.

In the year to 30 June 2019, the Company's share price to NAV traded in the range of a discount of 25.4% to discount of 10.0%. The average discount for the year was 17.2%.

Further details of how the discount at which the Company's shares trade is calculated are provided in the glossary in the Annual Report and Financial Statements.

·     Dividends per share

The Board currently intends to at least maintain the level of dividend paid by the Company in respect of subsequent financial years. The continuing ability of the Company to do so is monitored on a quarterly basis. During the year under review dividends per share totalling 5.60 pence per share were declared (2018: 5.60 pence).

·     Ongoing charges

The ongoing charges are a measure of the total expenses incurred by the Company expressed as a percentage of the average shareholders' funds over the year. The Board regularly reviews the ongoing charges and monitors all Company expenses. For the year under review ongoing charges were 1.9% (2018: 1.8%).

These KPIs fall within the definition of "Alternative Performance Measures" (APMs) under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary on page 50 of the Annual Report and Financial Statements.

Future Prospects

The Chairman's Statement and the Investment Manager's Report include a review of developments during the year as well as information on investment activity within the Company's portfolio and the factors likely to affect the future performance of the Company.

Social, Community, Employee Responsibilities and Environmental Policy

The Directors recognise that their first duty is to act in the best financial interests of the Company's shareholders and to achieve good financial returns against acceptable levels of risk, in accordance with the objectives of the Company.

In asking the Company's Investment Manager to deliver against these objectives, they have also requested that the Investment Manager take into account the broader social, ethical and environmental issues of companies within the Company's portfolio, acknowledging that companies failing to manage these issues adequately run a long term risk to the sustainability of their businesses.

More specifically, they expect companies to demonstrate ethical conduct, effective management of their stakeholder relationships, responsible management and mitigation of social and environmental impacts, as well as due regard for wider societal issues.

The Company's Investment Manager, CQS (UK) LLP, has stated that they view environmental, social and governance ("ESG") factors as a key driver of financing costs, valuations and performance, while also being capable of acting as a lever to shape and influence the world for generations to come. The integration and assessment of ESG factors is a crucial part of this commitment, and a key factor in their decision-making. Through embedding ESG into the investment process the Investment Manager seeks to enhance their ability to identify value, investment opportunities and, critically, to generate the best possible returns for their clients. CQS (UK) LLP is signatory to the internationally recognised Principles for Responsible Investment ("PRI"), fully supporting all of the PRIs.

As an investment trust with its current structure the Company has no direct social, community, employee or environmental responsibilities of its own.

Modern Slavery Act 2015

As an investment vehicle the Company does not provide goods or services in the normal course of business and does not have customers. Accordingly, the Directors consider that the Company does not fall within the scope of the Modern Slavery Act 2015 and is not, therefore, obliged to make a slavery and human trafficking statement.

Directors and Gender Representation

Details of the Directors of the Company on 30 June 2019, all of whom held office throughout the year are set out on pages 16 and 17 of the Annual Report and Financial Statements.

The Board consists of three male Directors and two female Directors.

By order of the Board

Richard Prickett

Chairman

14 October 2019

STATEMENT OF COMPREHENSIVE INCOME

		Year ended 30 June 2019			Year ended 30 June 2019
	Notes	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
(Losses)/gains on investments	9	-	(13,967)	(13,967)	-	10,009	10,009
Exchange gains		-	176	176	-	334	334
Income	2	2,839	-	2,839	3,700	-	3,700
Investment management fee	3	(234)	(702)	(936)	(290)	(869)	(1,159)
Other expenses	4	(578)	-	(578)	(506)	(18)	(524)
Net return before finance costs and taxation		2,027	(14,493)	(12,466)	2,904	9,456	12,360
Interest payable and similar charges	5	(123)	(588)	(711)	(303)	(1,393)	(1,696)
Net return on ordinary activities before taxation		1,904	(15,081)	(13,177)	2,601	8,063	10,664
Tax on ordinary activities	6	(117)	106	(11)	(404)	284	(120)
Net return attributable to equity shareholders		1,787	(14,975)	(13,188)	2,197	8,347	10,544
Return per ordinary share	8	2.67p	(22.39)p	(19.72)p	3.28p	12.48p	15.76p

The 'total' column of this statement represents the Company's profit and loss account, prepared in accordance with UK GAAP.

All revenue and capital items in this statement derive from continuing operations. All of the profit/(loss) for the year is attributable to the owners of the Company.

No operations were acquired or discontinued in the year.

A statement of other comprehensive income is not presented as all gains and losses of the Company have been reflected in the above Statement of Comprehensive Income.

The accompanying notes are an integral part of the financial statements.

BALANCE SHEET

	Notes	As at 30 June 2019 £'000	As at 30 June 2018 £'000
Fixed assets
Investments	9	87,547	123,420
Current assets
Debtors	10	414	681
Cash and cash equivalent		1,466	7,722
		1,880	8,403
Creditors: amounts falling due within one year	11	(678)	(2,314)
3.5% Convertible Unsecured Loan Stock 2018	13	-	(34,292)
Net current liabilities/assets		1,202	(28,203)
Loan	12	(11,000)	-
Net assets		77,749	95,217
Capital and reserves
Called-up share capital	14	16,722	16,722
Special distributable reserve		30,386	30,386
Share premium		4,851	4,850
Capital reserve		24,125	39,100
Revenue reserve		1,665	4,159
Equity shareholders' funds		77,749	95,217
Net asset value per share	15	116.24p	142.35p

Company number: 02978531

The financial statements on pages 32 to 49 of the Annual Report and Financial Statements were approved by the Board of Directors and authorised for issue on 14 October 2019 and were signed on its behalf by:

Richard Prickett

Chairman

The accompanying notes are an integral part of the financial statements.

STATEMENT OF CHANGES IN EQUITY

For the year to 30 June 2019

	Share capital £'000	Share premium account £'000		Special Distributable reserve £'000		CULS Equity Component £'000			Capital Reserve £'000		Revenue Reserve £'000			Total £'000
Balance at 30 June 2018	16,722	4,850		30,386		-			39,100		4,159			95,217
Return on ordinary activities after taxation	-	-		-		-			(14,975)		1,787			(13,188)
Dividends paid (see note 7)	-	-		-		-			-		(4,281)			(4,281)
Issue of shares	-	1		-		-			-		-			1
Balance at 30 June 2019	16,722	4,851		30,386		-			24,125		1,665			77,749
For the year ended 30 June 2018
	Share capital		Share premium account		Special Distributable reserve	CULS Equity Component		Capital reserve				Revenue reserve			Total
	£'000		£'000		£'000	£'000		£'000				£'000			£'000
Balance at 30 June 2017	16,721		4,832		30,386	488		30,347				5,975			88,749
CULS conversion	1		18		-	(488)		488				-			19
Return on ordinary activities after taxation	-		-		-	-		8,265				2,197			10,462
Dividends paid (see note 7)	-		-		-	-		-				(4,013)			(4,013)
Balance at 30 June 2018	16,722		4,850		30,386	-		39,100				4,159			95,217

The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.

The accompanying notes are an integral part of the financial statements.

CASH FLOW STATEMENT

	Notes	Year ended 30 June 2019 £'000	Year ended 30 June 2018 £'000
Operating activities
Investment income received		3,056	3,756
Deposit interest received		19	11
Other income received		-	36
Investment management fees paid		(957)	(1,154)
Other payments		(516)	(518)
Net cash inflow from operating activities	16	1,602	2,131
Investing activities
Purchases of investments		(24,368)	(52,768)
Disposals of investments		44,918	55,875
Net cash inflow from investing activities		20,550	3,107
Financing activities
Equity dividends paid		(4,281)	(4,013)
Interest on bank facility/overdraft		-	(1)
Interest on 3.5% Convertible Unsecured Loan Stock 2018		-	(1,207)
Repayment of 3.5% Convertible Unsecured Loan Stock 2018		(606)	-
Loan funding		11,000	-
Loan interest		(187)	-
Convertible Unsecured Loan Stock repaid		(34,510)	-
Net cash outflow from financing activities		(28,584)	(5,221)
(Decrease)/increase in net cash		(6,432)	17
Reconciliation of net cash flow to movement in net cash
(Decrease)/increase in cash in the year		(6,432)	17
Exchange gains		176	334
Movement in net cash in the year		(6,256)	351
Opening net cash at 1 July		7,722	7,371
Closing net cash at 30 June		1,466	7,722

The accompanying notes are an integral part of the financial statements.

NOTES TO THE FINANCIAL STATEMENTS

for the year to 30 June 2019

1 Accounting Policies

CQS Natural Resources Growth and Income PLC is a company limited by shares, it was incorporated in accordance with the Laws of England and Wales, details of the registered office are included on page 56 of the Annual Report and Financial Statements.

A summary of the principal accounting policies adopted is set out below.

(a) Basis of Accounting

The financial statements have been prepared in accordance with Financial Reporting Standard 102 and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued 2014 and amended in 2017 ('SORP'). They have also been prepared on a going concern basis and on the assumption that approval as an investment trust will continue to be granted.

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is included in the Directors' Report in the Annual Report and Financial Statements on page 19.

Presentation of the Statement of Comprehensive Income

In order to reflect better the activities of an investment trust company and in accordance with the SORP, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue return is the measure the Directors believe to be appropriate in assessing the Company's compliance with certain requirements set out in Chapter 4 of Part 24 of the Corporation Tax Act 2010 (previously Section 842 of the Income and Corporation Taxes Act 1988).

The notes and financial statements are presented in pounds sterling and are rounded to the nearest thousand except where otherwise indicated.

(b) Financial assets

All financial assets are initially recognised at fair value net of transactions costs incurred. All financial assets are recorded at the date on which the Company became party to the contractual requirements of the financial asset. Subsequently, they are measured at fair value through profit or loss except for those equity investments that are not publicly traded and whose fair value cannot otherwise be measured reliably which are recognised at cost less impairment until a reliable measure of fair value becomes available.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

(c) Financial liabilities

All financial liabilities are initially recognised at fair value net of transaction costs incurred. All financial liabilities are recorded on the date on which the Company becomes party to the contractual requirements of the financial liability.

Non-derivative financial liabilities such as loans, loan equivalents, trade and other payables with fixed and determinable payments and not quoted in an active market, are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition and are subsequently carried at amortised cost.

(d) Fixed asset investments

Purchases or sales of investments are recognised/derecognised on the date the Company commits to purchase/sell the investments. Investments are classified at fair value through profit and loss on initial recognition with any resultant gain or loss recognised in the Statement of Comprehensive Income. Listed securities are valued at bid price or last traded price, depending on the convention of the exchange on which the investment is listed, adjusted for accrued income where it is reflected in the market price. Investments which are not listed or where trading in the securities of an investee company is suspended are valued at the Board's best estimate of fair value. Unquoted investments are valued by the Directors on the basis of all the information available to them at the time of valuation. This includes a review of: the financial and trading information of the Company, covenant compliance, ability to repay the interest and cash balances. For convertible bonds this includes consideration of the discounted cash flows of the interest and principal and underlying equity value, based on the information provided by the Investment Manager. Where no reliable fair value can be estimated, equity investments may be carried at cost less any provision for impairment.

The Directors believe that the applied valuation techniques and assumptions used are appropriate in determining the fair value of unlisted investments. Further details are provided in note 9.

Realised gains or losses on the disposal of investments and permanent impairments in the value of investments are taken to capital reserve. Gains and losses arising from changes in the fair value of investments are included in the Statement of Comprehensive Income as a capital item.

(e) Income

Dividends receivable on equity shares are recognised as income on the date that the related investments are marked ex-dividend. Dividends receivable on equity shares where no ex-dividend date is quoted are recognised as income when the Company's right to receive payment is established.

Fixed returns on non-equity shares are recognised on a time apportioned basis so as, if material, to reflect the effective interest rate on those instruments. Any difference between acquisition cost and maturity value is recognised as revenue over the life of the security using the effective yield basis of calculating amortisation. Other returns on non-equity shares are recognised when the right to the return is established. The fixed return on a debt security is recognised on a time apportioned basis so as to reflect the effective interest rate on each such security.

Income from deposit interest and underwriting commission is recognised on an accruals basis.

(f)  Taxation

The charge for taxation is based on net revenue for the year. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue on the same basis as the particular item to which it relates.  Deferred tax balances are recognised in respect of all timing differences that have originated but not reversed by the balance sheet date, except:

-   The recognition of deferred tax assets is limited to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits; and

-   Any deferred tax balances are reversed if and when all conditions for retaining associated tax allowances have been met.

Deferred tax balances are not recognised in respect of permanent differences.

Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the reporting date.

Because the Company intends each year to qualify as an investment trust under Chapter 4 of Part 24 of the Corporation Tax Act 2010 (previously S842 of the Income and Corporation Taxes Act 1988), no provision is made for deferred taxation in respect of the capital gains that have been realised, or are expected in the future to be realised, on the sale of fixed asset investments.

(g) Expenses

All expenses are accounted for on an accruals basis. Expenses are charged through the Statement of Comprehensive Income as a revenue item except the following which are charged to capital:

- expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment; and

- the Company charges 75 per cent of investment management fees to capital, in line with the Board's expected long term return in the form of capital gains and income respectively from the investment portfolio of the Company. For further details refer to note 3.

(h) Foreign currency

Transactions denominated in foreign currencies are recorded in the local currency at actual exchange rates at the date of the transaction. Overseas assets and liabilities denominated in foreign currencies at the year end are reported at the rates of exchange prevailing at the year end. Instruments held at fair value are translated at the rate prevailing at the time the fair value is determined. Any gain or loss arising from a change in exchange rates subsequent to the date of a transaction and before the settlement date is included as an exchange gain or loss in capital reserves. The functional currency of the Company, being its statutory reporting currency, is sterling.

(i)  Finance costs

Finance costs are accounted for on an accruals basis. Finance costs of debt, insofar as they relate to the financing of the Company's investments or to financing activities aimed at maintaining or enhancing the value of the Company's investments, are allocated between revenue and capital in accordance with the Board's expected long-term split of returns, in the form of income and capital gains respectively, from the Company's investment portfolio. For further details refer to note 5.

(j)  3.5% Convertible Unsecured Loan Stock 2018

3.5% Convertible Unsecured Loan Stock 2018 issued by the Company is regarded as a compound instrument, comprising of a liability component and an equity component. At the date of issue, the fair value of the liability component was estimated by assuming that an equivalent non-convertible obligation of the Company would have a coupon rate of 5.75%. The fair value of the equity component, representing the option to convert liability into equity, is derived from the difference between the issue proceeds of the CULS and the fair value assigned to the liability. The liability component is subsequently measured at amortised cost using the effective cost interest rate.

Direct expenses associated with the CULS issue are allocated to the liability and equity components in proportion to the split of the proceeds of the issue. Expenses allocated to the liability component are amortised over the life of the instrument.

The interest expense on the CULS is calculated according to the effective interest rate method by applying the assumed rate of 5.75% at initial recognition to the liability component of the instrument. The difference between this amount and the actual interest paid is added to the carrying amount of the CULS.

While this additional 'notional' interest is charged to the capital account it is not considered to be a true loss and so this is transferred against the CULS equity as a reserve movement.

The CULS were repaid on 28 September 2018.

(k) Reserves

(a) Share premium - the surplus of net proceeds received from the issuance of new shares over their par value is credited to this account and the related issue costs are deducted from this account. The reserve is non-distributable.

(b) Capital reserve - The following are accounted for in this reserve:

- gains and losses on the realisation of investments;

- realised and unrealised exchange differences on transactions of a capital nature;

- capitalised expenses and finance costs, together with the related taxation effect; and

- increases and decreases in the valuation of investments held.

(c) Special reserve - created from the Court cancellation of the share premium account which had arisen from premiums paid at launch. Available as distributable profits.

(d) Revenue reserve - the net profit/(loss) arising in the revenue column of the Statement of Comprehensive Income is added to or deducted from this reserve. Available for paying dividends.

(e) CULS equity component reserve -this balance represents the equity component of the CULS, provided in relation to the Separation of the CULS between its debt and equity components.

(l)  Single Segmental Reporting

The company is engaged in a Single Segment of business, being investment business, consequently no business segmental analysis is provided.

(m)  Critical accounting estimates and judgements

The preparation of the financial statements necessarily requires the exercise of judgement both in application of accounting policies which are set out above and in the selection of assumptions used in the calculation of estimates. These estimates and judgements are reviewed on an ongoing basis and are continually evaluated based on historical experience and other factors. However, actual results may differ from these estimates. The only significant accounting estimate and judgement is the valuation of the unquoted and level 2 investments which is described in note 1(d) above.

The main judgements and estimates used in calculating the price of the Warrants are:

Firstly, the derivative valuation model used to value the warrants. The Investment Manager has selected the Black Scholes Model to value the unlisted warrants as this is a widely accepted warrant valuation model to use.

Secondly, the inputs into the Black-Scholes model as outlined below.

For any unlisted securities the time to maturity to estimate the historic volatility required in the calculations underpinning the Black Scholes Pricing Model is used. The volatility of the underlying equity is obtained, and if this is not available or is not reflective, due to a lack of liquidity etc., then we will look to use the volatility of the parent company or an appropriate proxy.

For any securities with a maturity greater than 1 year the 90 day Volatility is used and for any securities with a maturity less than 1 year the 60 days Volatility is used. These have been deemed appropriate periods to use, as often using the time to expiry has captured market or firm events that have artificially inflated the volatility which has in turn inflated the valuation. If the period used still yields an unreflective level of volatility, then the volatility period used is overridden. When appropriate to extend the period the time to maturity is used, up to a maximum of 400 days, which is in line with Bloomberg's option and warrant valuation model assumptions.

In determining the risk free rate, the swap price discount curve is used for the relevant currency which is derived from data retrieved from Bloomberg.

The swap curve in the Warrant Currency is deemed an appropriate method for approximating the yield curve for the following reasons:

- There is sufficient liquidity and depth of pricing to provide reliable valuations for the Swap curves for the points and currencies that we currently require.

- Using Swaps allows for the same discount rate methodology to be used across the range of maturities of our Warrant portfolio, whereas using other instruments to construct a yield curve would typically be more limited across different tenors. This is relevant to our current portfolio as there is a wide range of time-to-maturities.

- Using Swaps allows for the same discount rate methodology to be used across different currencies, which is applicable to our current portfolio which contain Warrants listed and traded in a range of currencies.

2 Income

	2019 £'000	2018 £'000
Income from investments*
UK dividend income	143	270
UK unfranked investment income	239	265
Preference share income	579	801
Overseas dividend income	625	518
Overseas fixed interest	1,234	1,800
	2,820	3,654
Other income†
Deposit interest	19	11
Other income	-	35
	19	46
Total income	2,839	3,700
Total income comprises:
Dividends	1,347	1,589
Fixed interest securities	1,473	2,065
Deposit interest	19	11
Other income	-	35
	2,839	3,700

*All investment income arises on investments valued at fair value through Profit or Loss.

†Other income on financial assets not valued at fair value through Profit or Loss.

3 Investment Management Fee

	2019 Revenue £'000	2019 Capital £'000	2019 Total £'000	2018 Revenue £'000	2018 Capital £'000	2018 Total £'000
Investment management fee	234	702	936	290	869	1,159

The Company's Investment Manager is CQS which in turn has delegated this function to NCIM. The contract between the Company and CQS may be terminated by either party giving not less than six months' notice of termination.

Until 3 April 2018 the Company's annual management fee was 1.2 per cent of net assets. Since 3 April the Company's annual management fee has been 1.2 per cent on net assets up to £150m; 1.1 per cent on net assets above £150m and up to £200m; 1.0 per cent on net assets above £200m and up to £250m; and, 0.9 per cent on net assets above £250m.

The balance due to CQS for management fees at the year end was £73,313 (2018: £94,470).

Investment management fees have been allocated 75 per cent to capital and 25 per cent to revenue (2018: 75% capital, and 25% revenue).

4 Other Expenses (including irrecoverable VAT)

	2019 Revenue	2019 Capital	2019 Total	2018 Revenue	2018 Capital	2018 Total
	£'000	£'000	£'000	£'000	£'000	£'000
Secretarial and administration fees	106	-	106	93	-	93
Directors' fees	105	-	105	115	-	115
Directors' NI	4	-	4	7	-	7
Auditor remuneration for statutory audit	24	-	24	24	-	24
Tax advisor remuneration for tax services	24	-	24	10	-	10
Directors' and Officers' liability insurance	11	-	11	11	-	11
Registrar fees	25	-	25	29	-	29
Custody fees	33	-	33	49	-	49
Depositary fees	21	-	21	27	-	27
Other	225	-	225	141	18	159
	578	-	578	506	18	524

The Company has an agreement with Maitland Administration Services (Scotland) Limited ("Maitland") for the provision of secretarial and administration services. During the year the total fees paid and payable were £106,406 (2018: £93,000). The balance due to Maitland for secretarial services at the year end was £21,542 (2018: £Nil).

No pension contributions were payable in respect of any of the Directors.

The Company does not have any employees.

5 Interest Payable and Similar Charges

	2019 Revenue £'000	2019 Capital £'000	2019 Total £'000	2018 Revenue £'000	2018 Capital £'000	2018 Total £'000
Interest on 3.5% Convertible Unsecured Loan Stock 2018	75	227	302	302	905	1,207
Interest on bank loan	47	140	187	-	-	-
Notional interest on 3.5% Convertible Unsecured Loan Stock 2018	-	-	-	-	487	487
Amortisation of issue expenses	-	221	221	-	1	1
Bank overdraft	1	-	1	1	-	1
	123	588	711	303	1,393	1,696

Interest payable on the CULS has been allocated 75 per cent to capital and 25 per cent to revenue (2018: 75% capital, and 25% revenue).

6 Tax on Ordinary Activities

	2019 Revenue	2019 Capital	2019 Total	2018 Revenue	2018 Capital	2018 Total
	£'000	£'000	£'000	£'000	£'000	£'000
Corporation tax	106	(106)	-	284	(284)	-
Overseas taxation	11	-	11	120	-	120
Total tax charge/(credit)	117	(106)	11	404	(284)	120

Reconciliation of Tax Charge

The tax assessed for the year is the current standard rate of corporation tax in the UK. A reconciliation of the total tax charge is set out below:

	2019 Total £'000	2018 Total £'000
Return on ordinary activities before taxation	(13,177)	10,664
Corporation tax at standard rate of 19.00% (2018: 19.00%)	(2,504)	2,026
Effects of:
Non taxable income	(256)	(210)
Non taxable losses	2,654	(1,902)
Overseas withholding tax	11	120
Excess management expenses (deferred tax not recognised)	139	149
Non taxable exchange gains	(33)	(63)
Current year tax charge	11	120

Due to the Company's status as an Investment Trust, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided for deferred tax on capital gains and losses arising on the revaluation or disposal of investments.

At 30 June 2019 the Company had surplus management expenses of £7,731,000 (2018: £6,419,000) on which no deferred tax asset has been recognised.

7 Dividends	2019 Revenue £'000	2018 Revenue £'000
Amounts recognised as distributions to equity holders in the year:
- Fourth interim dividend for the year ended 30 June 2018 of 2.62p (2017 - 3.02p) per ordinary share	1,752	2,020
- First interim dividend for the year ended 30 June 2019 of 1.26p (2017 - 0.86p) per ordinary share	843	575
- Second interim dividend for the year ended 30 June 2019 of 1.26p (2018 - 0.86p) per ordinary share	843	575
- Third interim dividend for the year ended 30 June 2019 of 1.26p (2018 - 1.26p) per ordinary share	843	843
	4,281	4,013
Amounts relating to the year but not paid at the year end:
- Fourth interim dividend for the year ended 30 June 2019 of 1.82p (2018 - 2.62p) per ordinary share	1,217	1,752

In accordance with FRS 102 the fourth interim dividend has not been included as a liability in these accounts and will be recognised in the period in which it is paid.

8 Return per Ordinary Share

Return per ordinary share attributable to shareholders reflects the overall performance of the Company in the year.

	Year ended 30 June 2019 £'000	Year ended 30 June 2018 £'000
Revenue return	1,787	2,197
Capital return	(14,975)	8,347
Total return	(13,188)	10,544
	Number	Number
Weighted average ordinary shares in issue	66,888,408	66,884,094
Revenue return per ordinary share (pence)	2.67	3.28
Capital return per ordinary share (pence)	(22.39)	12.48
Total return per ordinary share (pence)	(19.72)	15.76

For the years ended 30 June 2019 and 30 June 2018 there was no dilution to the revenue return per ordinary share. Additionally, for the year ended 30 June 2019 and 30 June 2018 there was no dilution to the capital return per ordinary share.

9 Investments

	2019 £'000	2018 £'000
Equity shares	64,347	80,368
Fixed income securities	15,583	21,358
Preference shares	6,257	10,095
Treasury stock	-	10,485
Placings	902	419
Warrants	458	695
	87,547	123,420

Included above are unquoted investments of value £2,664,186 (2018: £180,223).

The Company does not intend to acquire securities that are unquoted or unlisted at the time of investment with the exception of securities which, at the time of acquisition, are intending to list on a stock exchange or securities which are convertible into quoted securities. However, the Company may continue to hold securities that cease to be quoted or listed if the Investment Manager considers this to be appropriate.

All investments are designated fair value through profit or loss at initial recognition, therefore all gains and losses arise on investments designated at fair value through profit or loss.

FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland requires an analysis of investments valued at fair value based on the reliability and significance of information used to measure their fair value. The level is determined by the lowest (that is the least reliable or independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

·  Level 1 - investments quoted in an active market;

·  Level 2 - investments whose fair value is based directly on observable current market prices or indirectly being derived from market prices; and

·  Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or based on observable market data.

If the market value of the Level 3 investments fell by 5 per cent, the impact on the profit or loss and the net asset value would have been negative £0.133 million (2018: negative £0.009 million). If the value of the Level 3 investments rose by the same amount, the effect would have been equal and opposite. 5% has been selected as this level of change is considered to be reasonable based on observations of current market conditions.

	Level 1 Listed in UK	Level 1 Listed overseas	Level 2*	Level 3	2019 Total	2018 Total
	£'000	£'000	£'000	£'000	£'000	£'000
Opening book cost	25,365	62,966	23,302	14,762	126,395	130,350
Opening fair value adjustment	2,354	10,596	(1,343)	(14,582)	(2,975)	(17,448)
Opening valuation	27,719	73,562	21,959	180	123,420	112,902
Purchases at cost	10,893	12,302	712	-	23,907	54,286
Conversions/transfers	-	(1,089)	(2,471)	3,560	-	-
Sales - proceeds	(24,966)	(16,675)	(4,148)	(30)	(45,819)	(53,777)
Sales - gains/(losses)	933	2,038	(1,715)	(6,743)	(5,487)	(4,464)
Effective yield	(1)	67	(13)	(40)	13	(25)
Increase in fair value adjustment	(3,830)	(11,849)	1,455	5,737	(8,487)	14,498
Closing valuation	10,748	58,356	15,779	2,664	87,547	123,420
Closing book cost	12,224	59,609	15,667	11,509	99,009	126,395
Closing fair value adjustment	(1,476)	(1,253)	112	(8,845)	(11,462)	(2,975)
Closing valuation	10,748	58,356	15,779	2,664	87,547	123,420

The fair value of Level 3 financial assets has been determined by reference to valuation techniques described in note 1(d) of these financial statements. Judgement has been exercised in each of these valuations in determining the most appropriate valuation methodology and inputs into the valuation models used

The Level 3 investments at the year end, along with the respective valuation methods utilised are as follows:

Agriculture Investment Group Corp Common, which has been valued to rights issue price of $0.5.

Goodbulk Ltd Common USD, which has been values at last traded price of NOK110.

Odyssey Energy Ltd Common NPV, which has been valued using the last price (cash) available before suspension of AUD 0.043.

Pan American Silver Corp CVR's (USD), which has been valued using the price of the underlying security multiplied by the contingency value right.

Satimola (Placement) which has been priced using the last trade price of USD0.2

All other level 3 securities have been price at nil, in the absence of any indicators of higher value.

These securities are priced using evaluated prices from a third party vendor, together with a price comparison made to secondary and tertiary evaluated third party sources. Evaluated prices are in turn based on a variety of sources, including broker quotes and benchmarks.

As a result these investments are disclosed as Level 2 - recognising that the fair values of these investments are not as visible as quoted equity investments and their higher inherent pricing risk. However, this does not mean that the fair values shown in the portfolio valuation are not achievable at point of sale.

The gains and losses included in the above table have all been recognised within gains/(losses) on investments in the Statement of Comprehensive Income. The Directors believe that the use of reasonable possible alternative assumptions for its Level 3 holdings would not result in a valuation significantly different from the valuation included in these financial statements.

Gains/(losses) on investments	2019 £'000	2018 £'000
Realised losses on sale	(5,487)	(4,464)
Movement in fair value	(8,487)	14,498
Realised other	(6)	-
Effective yield	13	(25)
Gains on investments	(13,967)	10,009

During the year the Company incurred transaction costs on the purchases of £8,930 (2018: £15,468) and transaction costs on sales of £17,598 (2018: £26,130).

10 Debtors

		2019 £'000	2018 £'000
Amounts due from brokers		-	-
Prepayments and accrued income		404	671
VAT recoverable		10	10
		414	681
11 Creditors: Amounts Falling Due Within One Year
				2019 £'000			2018 £'000
Amounts due to brokers				336			1,698
Corporation tax				163			163
Other creditors				179			152
Interest on 3.5% Convertible Unsecured Loan Stock 2018				-			301
				678			2,314
Included within other creditors is £73,313 (2018: £94,470) due to CQS in respect of management fees.
12   Bank Loan Facility
					2019			2018
					£'000			£'000
Bank loan facility					11,000			-

The Company has a short term unsecured loan facility with Scotiabank Europe Plc ("Scotiabank"). The facility is due to expire on 20 September 2020 after which it is anticipated the Company will take out a new facility on comparable terms.

As at the year end the unsecured loan facility had a limit of £20 million of which £11 million was drawn down at the year end at an interest rate of 1.82535%.

During the year the covenants of the loan facility have been met. The following are the covenants for the facility:

· the borrower shall not permit the adjusted asset coverage to be less than 3.5 to 1

· the borrower shall not permit the net asset value to be less than £45,000,000

· the loan facility is rolled over every three months and can be cancelled at any time

Reconciliation of Bank loan facility (excluding interest

	At 30 June 2018 £'000	Cash flow £'000	Currency movements £'000	At 30 June 2019 £'000
Bank facility	-	11,000	-	11,000

13 3.5% Convertible Unsecured Loan Stock 2018

	Nominal number of CULS £'000		Liability Component £'000		Equity Component £'000
Balance at 30 June 2018	34,511		34,292		-
Amortisation of discount on issue and issue expenses	-		219		-
Transfer of CULS liability discount amortisation	-		-		-
Conversion during the year	(1)		(1)		-
3.5% CULS Repayment	(34,510)		(34,510)		-
Balance at 30 June 2019	-		-		-
Balance at 30 June 2017	34,530		33,824		488
Amortisation of discount on issue and issue expenses	-		-		-
Transfer of CULS liability discount amortisation	-		488		(488)
Conversion during the year	(19)		(20)		-
Balance at 30 June 2018	34,511		34,292		-

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 13 October 2017, the Company issued 17 ordinary shares in connection with the exercise of £65 nominal of the Company's CULS. On 5 April 2018, the Company issued 5,120 ordinary shares in connection with the exercise of £19,319 nominal of the Company's CULS.

On 2 October 2018, the Company issued 398 ordinary shares in connection with the exercise of £1,508 nominal of the Company's CULS.

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 2018, there was £34,511,074 nominal of CULS in issue of which £34,509,566 was repaid on 28 September 2018.

14 Share Capital
	2019 Shares	2019 £'000
Authorised at 30 June
Ordinary shares of 25p each	100,000,000	25,000
Allotted, called up and fully-paid
Total issued ordinary shares of 25p each as at 1 July 2018	66,888,111	16,722
Conversion of 3.5% Convertible Unsecured Loan Stock 2019
- Issue of 398 ordinary shares on 2 October 2018	398	-
Total issued ordinary shares of 25p each as at 30 June 2019	66,888,509	16,722

On 2 October 2018, the Company issued 398 Ordinary Shares in connection with the exercise of £1,508 nominal of the Company's CULS.

Capital management policies and procedures

The Company's capital management objectives are:

-   to ensure that the Company will be able to continue as a going concern; and

-   to maximise the capital return to its equity shareholders through an appropriate balance of equity capital and debt. The Board normally seeks to limit gearing to 25% of net assets.

The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Investment Manager's views on the market, and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company has no externally imposed capital requirements.

The capital of the Company is managed in accordance with its investment policy detailed in the Strategic Review.

15 Net Asset Value per Ordinary Share

The net asset value per ordinary share is based on net assets of £77.7 million (2018: £95.2 million) and on 66,888,509 (2018: 66,888,111) ordinary shares, being the number of ordinary shares in issue at the year end.

16 Reconciliation of Net Return before Finance Costs and Taxation, to Net Cash Inflow from Operating Activities

	2019 £'000	2018 £'000
Net return before finance costs and taxation	(12,466)	12,360
Gains on investments	13,967	(10,009)
Effective yield	(13)	(25)
Withholding tax suffered	(11)	(120)
Decrease in accrued income	260	248
Decrease/(increase) in other debtors	7	(1)
Increase in other creditors	27	12
Other realised gains	7	-
Exchange gains	(176)	(334)
Net cash inflow from operating activities	1,602	2,131

17 Financial Instruments

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 (see note 9) 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. Unquoted investments are valued by the Directors on the basis of all the 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 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 a 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 may not be able to quickly liquidate its investments.

The Company held the following categories of financial instruments as at 30 June 2019:
		2018 £'000
	2019 £'000
Financial assets
Investment portfolio	87,547	123,420
Cash at bank and on deposit	1,466	7,722
Accrued income	398	648
Other debtors	16	33
Financial liabilities
3.5% Convertible Unsecured Loan Stock 2018	-	33,292
Loan	11,000	-
Amounts due to brokers	336	1,698
CULS interest due	-	301
Other creditors	179	152

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 and further information on the investment portfolio is set out on pages 8 to 12 of the Annual Report and Financial Statements.

If the investment portfolio valuation fell by 10 per cent at 30 June 2019, the impact on the profit or loss and the net asset value would have been negative £8.8 million (2018: negative £12.3 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 and are not representative of the year as a whole, and may not be reflective of future market conditions.

10% sensitivity has been selected as this level of change is considered to be reasonable based on observations of current 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.

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 £48,000 (2018: £39,000). 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.

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.

Fixed rate

The Company holds fixed interest investments and has fixed interest liabilities. The fixed interest liabilities are disclosed in note 12.

			2019 Weighted			2018 Weighted
		2019	average		2018	average
		Weighted	period for		Weighted	period for
		average	which the		average	which the
	2019	interest	rate is fixed	2018	interest	rate is fixed
	£'000	rate (%)*	(years)	£'000	rate(%)*	(years)
Assets:
Fixed income and convertible securities	15,583	8.0	5.9	21,358	5.6	3.8
Preference shares	6,257	9.6	n/a	10,095	9.4	n/a

* The "weighted average interest rate" is based on the current yield of each asset, weighted by their market value.

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.

Foreign currency exposure at 30 June was as follows:

					Sensitivity Impact
30 June 2019	Investments £'000	Cash £'000	Net current assets £'000	Total £'000	+5% £'000	-5% £'000
Canadian Dollar	33,345	1	(333)	33,013	1,650		(1,650)
US Dollar	17,487	13	231	17,731	886		(886)
Australian Dollar	16,607	52	-	16,659	833		(833)
Norwegian Krone	5,537	-	-	5,537	277		(277)
European Euro	1,650	5	-	1,655	83		(83)
Hong Kong Dollar	-	-	-	-	-		-
Swiss Franc	-	-	-	-	-		-
Brazilian Real	-	14	-	14	1		(1)
	74,626	85	(102)	74,609	3,730		(3,730)
30 June 2018			Net		Sensitivity
			current		Impact
	Investments	Cash	assets	Total	+5%		-5%
	£'000	£'000	£'000	£'000	£'000		£'000
Canadian Dollar	44,445	1,052	(833)	44,664	2,233		(2,233)
US Dollar	19,137	5,571	213	24,921	1,246		(1,246)
Australian Dollar	20,956	1,063	-	22,019	1,101		(1,101)
Norwegian Krone	5,463	31	-	5,494	275		(275)
European Euro	3,090	69	30	3,189	159		(159)
Hong Kong Dollar	-	1	-	1	-		-
Swiss Franc	-	1	-	1	-		-
Brazilian Real	-	9	-	9	-		-
	93,091	7,797	(590)	100,298	5,014		(5,014)

If the value of the currencies had strengthened against the pound in the portfolio by 5 per cent, the impact on the profit or loss and the net asset value would have been negative 3.7 million (2018: positive £5.0 million). If the value of sterling had strengthened by the same amount the effect would have been equal and opposite. The calculations are based on the portfolio valuation, cash balances and net current assets/(liabilities) as at the respective balance sheet dates and are not representative of the year as a whole, and may not be reflective of future market conditions.

5% sensitivity has been selected as this level of change is considered to be reasonable based on observations of current market conditions. 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.

At the reporting date, the Company's financial assets exposed to credit risk amounted to the following:
	2019	2018
	£'000	£'000
Fixed interest investments	15,583	21,358
Cash and cash equivalents	1,466	7,722
Balances due from brokers	-	-
Interest, dividends and other receivables	414	681
	17,463	29,761

Credit risk on fixed interest investments is considered to be part of market price risk. As at 30 June 2019 and as at 14 October 2019 there were no debtors that were past due.

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 2019 and as at 30 June 2018. No individual investment exceeded 7.8 per cent of net assets as at 30 June 2019 (2018: 16.4 per cent).

As at 30 June 2019, for equity investments representing >1% of the total investments, the Company held 3 per cent or more of issued share capital of the following companies:

	Value per CQS £	Percentage held
REA Holdings 9% 31/12/49	3,300	3.77%
Ascendant Resources	3,167	3.61%

Liquidity risk

The Company's liquidity risk is managed on an ongoing basis by the Investment Manager in accordance with policies and procedures in place as described in the Directors' Report. 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 contractual maturities of the financial liabilities at each Balance Sheet date, based on the earliest date on which payment can be required, were as follows:

30 June 2019	Three months or less £'000	More than three months but less than one year £'000	More than one year £'000	Total £'000
Current liabilities	515	_	163	678
Short-term liabilities - CULS	-	-	-	-
Loan	-	-	(11,000)	(11,000)
	515	-	(10,837)	(10,322)
30 June 2018		More than three
	Three months	months but less	More than
	or less	than one year	one year	Total
	£'000	£'000	£'000	£'000
Current liabilities	1,850	163	-	2,013
Short-term liabilities - CULS	34,593	-	-	34,593
	36,443	163	-	36,606

18 Related Party Transactions

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

Details of the fee arrangement with the Investment Manager is included within the Directors' Report under the heading Management and Management Fees and is disclosed in note 3.

There are no other transactions with the Board other than aggregated remuneration for services as Directors as disclosed in the Directors' Remuneration Report on pages 26 and 27 of the Annual Report and Financial Statements, and as set out in the note 4 to the accounts. The beneficial interests of the Directors in the ordinary shares of the Company are disclosed on page 27 of the Annual Report and Financial Statements.

The balance due to Directors for fees at the year end was £12,791 (2018: £Nil).

19 Post Balance Sheet Events

There were no significant post balance sheet events to disclose at the time of signing of this Annual Report.

 

END

 

 

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