Final Results

RNS Number : 1596Z

City Natural Res High Yield Tst PLC

16 September 2015

 



To:                    RNS

From:                City Natural Resources High Yield Trust plc

Date:                16 September 2015

Chairman's Statement

Introduction

The second half of your Company's financial year to 30 June 2015 saw relative stability after a very difficult six months to 31 December which saw oil prices halve. Unfortunately July and August saw a resumption of the commodity market retreat, exacerbating what was already a disappointing period of

performance.

Investment and Share Price Performance

At 30 June 2015 your Company's net asset value stood at 121.7 pence per share, giving a net asset value total return for the year of -20.9 per cent. The benchmark index returned -14.5 per cent.

Adding to the pain suffered by shareholders, the Company's ordinary share price total return of -24.6 per cent for the year was worse than this, reflecting a widening in the discount at which the Company's shares trade from 16.8 per cent to 22.1 per cent during the year. The average discount over the year to 30 June 2015 was 16 per cent, and over three years 15 per cent.

Since 30 June the net asset value has fallen a further 18 per cent, standing at 99.4 pence at the time of writing. The share price is 87.4 pence and the discount stands at 12 per cent.

It is small comfort, but some mitigation, that your Company performed well compared to its peers over the year, coming top out of the eight funds in its peer group in terms of share price total return. Your Company continues to provide a unique exposure to the less accessible areas of smaller mining and resource stocks, and so volatility during commodity downturns is inevitable. Will Smith and Ian Francis, our portfolio managers, report on investment performance in more detail below.

Over the long term, since the redirection of the Company in 2003 net asset value total return is 201.3 per cent, ordinary share price total return 141.2 per cent, and benchmark total return 157.1 per cent.

Income and Dividends

Income and dividends have been a focus of the Company since 2004, with dividends increasing by 280 per cent since then, and we believe they contribute an important element of stability in our volatile asset class. This year's fourth interim dividend of 3.02 pence per share brought the total dividend for the year to 5.60 pence. This was the same level as paid last year after nine consecutive years of dividend growth. Last year's dividend was uncovered and, although this year's earnings of 6.15 pence were, as anticipated, more than sufficient to cover the maintained dividend the Board concluded that a degree of caution was in shareholders' interests given the number of factors which influence the income which are currently hard to predict, including currency and interest rates.

The yield on the Company's shares of 6.4 per cent as I write also played a role in this decision.

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

The Company has £39.9 million nominal of CULS in issue. Gearing was generally maintained in the range of 20 per cent to 25 per cent of shareholders' funds during the year, 25 per cent being the upper limit allowed under the Company's investment policy. It was 19.0 per cent at the year end.

The Company's 3.5% Cumulative Unsecured Loan Stock 2018 ("CULS") price rose from 90.8 pence to 96.5 pence during the year, an increase of 6.3 per cent.

Board Changes

During the last year your Board has been discussing its development and succession, with the objective of refreshing it over the next two years. To this end Michael Coulson will not stand for re-election at this year's Annual General Meeting ("AGM"). I would like to record the extraordinary contribution Michael has made to your Company over the years, in particular his expertise on all things to do with gold. His contribution to Board discussions has been robust and invaluable. I am delighted to welcome Helen Green, who shareholders will be invited to elect at the forthcoming AGM. Helen has considerable experience in fund administration and governance through her work at Saffery Champness, has sat on a number of investment fund boards, and I am sure will have a vital input to your Board in the coming years. I will report to you further next year on our progress with the development of the Board.

Annual General Meeting

The Company's Annual General Meeting returns to London this year and will take place at 12.30pm on Thursday 26 November 2015. I do hope that as many shareholders as possible will join us and take the opportunity to meet the Directors and the investment managers over a buffet lunch after the meeting.

Outlook

The period since the year end has seen the Company's net asset value reduced to 99.4 pence per share, down some 75 per cent since its peak in December 2010, in a continuation of the veritable bloodbath that the last five years has represented for this sector. Even allowing for dividend payments this has been a traumatic time for shareholders, the Directors included.

In the short term the uncertainty continues. Oil continues to be priced around the $50/barrel level, and it remains true that this will put money into consumers' pockets. It is not obvious to what extent the low price level is a consequence of aggressive Saudi Arabian production, and to what extent a fear of economic slowdown, above all in China and the emerging economies. The recent rout in Chinese equity markets saw a frisson amongst world stock markets, and the decision by the Chinese Central Bank to weaken the yuan promises much more, with revived fears of currency wars and worse. Whether this will be enough to postpone the long trailed rate rise in the US remains to be seen, but bond markets continue to look exposed; their considerable correction and the substantial reduction in liquidity since 2008 increasing the risks of a liquidity crunch and spike up in yields.

On the other hand, fear in the bond markets could see asset allocations to equities being increased, and the lagging effect of commodity price falls in general, and oil in particular, may see growth expectations surprise on the upside.

What is certain, is that over the medium term the case for your Company remains as compelling as ever, with world population growth and increasing urbanisation underpinning a demand for commodities that can only expand. This was true when I last wrote to you in February, and it remains the case. The current period of financial retrenchment at producing companies and virtual abandonment of exploration projects, combined with the supply constraints that threaten all but bulk commodities, will make the recovery even more dramatic when it does arrive.

However, while it is tempting to call the bottom of this part of the commodity cycle, your Company continues to be as risk balanced as is possible given the constraints of our mandate, asset class and balance sheet.

Geoff Burns

Chairman

15 September 2015

Investment Manager's Review

Macro Backdrop

Commodity markets entered their fifth year of a bear market in May as the global economy maintained its low trajectory growth. China, the principal lead in the commodity supercycle, had its prospects consistently downgraded over the year and the Euro wrangle over Greece was another disruptive drag on the developed world's economy. The Euromoney Global Mining Index fell 32% over the year as generalist investors continued to shun the sector. Saudi Arabia's decision to seek market

share caused the price of oil to fall 43%, leading the commodity complex lower, the CRB Commodity Index losing 14%. Oil being the principal transportation fuel has been compared to a tax on economic activity, but the obvious benefit to the global economy of such a sharp reduction in price has been slow to emerge, although this can be partly explained by the reduction in oil subsidies in many developing countries. Good for reducing emerging government deficits, but not yet for the consumer.

Gold fell 11% over the period, absent from its safe haven role during this year's Euro crisis, but, given the onerous demands of the bailout fail to address the central problem of Greece's unserviceable debt burden, it may well be given another opportunity. Gold remained in strong demand by both the Central Banks of the developing world, who bought 477 tons in 2014 and also the public, as demonstrated by the robust sales of gold coins issued by the US and Australian Mints.

Income

Having the desire, but not the means is an unfortunate state to be in and this applies to many of our producing companies who know that increasing dividends is an exigency when it comes to attracting generalist investors back to the sector. Falling commodity prices have made this an arduous task for many, but the likes of Central Asian Metals, Sandfire Resources, APA Group, Mandalay Resources and BWLPG Ltd have all managed to expand their payouts against the trend.

The Company's largest holding is in the preference shares of R.E.A. Holdings, who operate palm oil plantations in Indonesia. The palm oil price has suffered over the last year, in common with other commodities, but the confirmation of an El Nino weather event has traditionally had a strong correlation with a better pricing environment. Greencoat Wind, a manager of wind farm projects, has performed well during a difficult period of renewable subsidy upheaval.

For the fixed income element of the portfolio, we sold £3.6m of capital allocated in the energy sector including, Golden Close Maritime 11% 2015, Petroamerica 11.5% and Chloe Marine 11% 2016, redeploying the proceeds into consumer focussed UK bonds such as Pizza Express 8 5/8% 2022 and Lloyds 7.875% perpetual to maintain diversity whilst awaiting a sustained recovery in the commodities sector.

Shareholders may note that there are a number of UK Treasury Stocks within the portfolio. We invest in these securities as an alternative to bank deposits when we have surplus cash awaiting investment.

Capital

In a year in which copper prices fell 18%, nickel 38% and silver 26%, the mining sector has been an arid environment for those seeking to grow capital. Weak demand is currently facing strong supply in many commodities, particularly the bulks, which is a result of a decade of capital investment inspired by forecasts of China's perpetual growth. Throughout the year, management teams of the major producers have continually endeavoured to reduce costs and future capex leading to the shelving and deferral of many projects. This will inevitably mean that when the cycle turns, growth will have to be bought, and we remain focussed on developers and explorers working on potential Tier 1 assets.

M&A, although reduced, remains a constant theme in the sector and the year saw takeover approaches for Newstrike Capital, Cayden Resources and Sirius Resources. The Tier 1 asset test, albeit in Agriculture, would also apply to a long standing member of the Company's portfolio, New Britain Palm Oil, who eventually succumbed to a bid by Sime Darby.

The junior exploration companies have been desiccated by the mining sector's capital drought, and the most exciting exploration successes have been made close to the existing operations of producing companies. Sandfire Resources, a copper producer in Western Australia, announced encouraging results from their Monty discovery which has the potential to extend the existing mine-life of their high grade Degrussa project.

As commodity prices declined, the battle for those miners in production has been to reduce costs accordingly. The weakness in many "commodity" currencies such as the Australian and Canadian dollars and the Mexican and Chilean peso relative to the US dollar in which all commodities are priced, has been to the great benefit of those companies operating within these jurisdictions. The Company's mining portfolio has prioritised such producers and the likes of Northern Star Resources, Saracen Minerals, Agnico Eagle Mines and Fortuna Silver have all managed to sharply reduce costs and improve margins.

The fall in oil prices compelled a change in weighting of the Company's oil and gas exposure, prioritising those companies less directly exposed to the oil price, such as BWLPG, as a leading LPG shipper, and a beneficiary of the glut of LPG on the Gulf Coast. It has been impressive to watch the North American onshore producers unveil remarkable productivity gains over the last six months to the extent that production has not fallen despite the fall in price. In the absence of a volte face from Saudi Arabia, it is likely that the oil price will remain lower for longer. Vermilion Energy, our largest position in the oil and gas sector, is exposed primarily to the European Gas market which has been one of the most relatively robust pricing markets.

The reduction, by acquisition of the Company's palm oil investments, of our agriculture weighting was offset by the performance of Plant Impact over the year. Although still a small company, they made great strides strengthening their relationship with Bayer, both in Brazil and elsewhere, as well as bolstering both their management and board.

Outlook

Less supply and more demand is the quick fix prescription for the ills of the resource sector, and one that is currently dismissed as credible by the wider market. Whilst acknowledging that the bulk commodities are well supplied, the base metals appear to be closer to equilibrium and the capital starvation that the sector has endured will exacerbate the effect of any positive shift in the supply and demand dynamic. The number of active exploration companies has dwindled and the number of projects being developed into mines has also shrunk as capital has deserted the sector. Commodities are cyclical but it is worth noting that demand for most metals, agricultural products and energy, is still rising in real terms and these products cannot be substituted. After five years of a downturn, many commodities are currently gouging deep into the cost curve and a sign that the turn is close would be for unprofitable operations to close. Since the juniors cannot run unprofitably for long, we await leadership on this from the majors.

We have commented above on the Company's top five largest holdings and we would note the diversified nature of these investments across the natural resources sector with securities in Palm Oil, Seed Technology, Oil & Gas Exploration and Production, Mineral Exploration and Production and Wind Energy. We will always look to invest in the traditional commodity resource sectors but it is encouraging that emerging technologies have been available to us and have provided a good source of capital growth and income.

We are conscious of many producers eager to increase dividends, when conditions allow, and remain cognizant of the significance of dividends to shareholders. The fixed interest holdings are still central to the provision of a robust income account, but as the tide returns to the resource sector, equity opportunities will again provide attractive yields. Despite the current gloom in the sector, we remain certain of the cyclical nature of the resources sector and given its recent abandonment by generalist investors, are also positive that the turn will be marked not with a whimper but a roar.

Will Smith

Ian Francis

New City Investment Managers

15 September 2015

 

 

Audited Income Statement

for the year ended 30 June 2015

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

Audited Income Statement

for the year ended 30 June 2014

			2014	2014	2014
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Gains on investments		-		202	202
Exchange gains		-		71	71
Income		5,399		-	5,399
Investment management fee		(318)		(955)	(1,273)
Other expenses		(485)		-	(485)
Net return before finance costs and taxation		4,596		(682)	3,914
Interest payable and similar charges		(393)		(1,872)	(2,265)
Net return on ordinary activities before taxation		4,203		(2,554)	1,649
Tax on ordinary activities		(560)		420	(140)
Net return attributable to equity shareholders		3,643		(2,134)	1,509
Return per ordinary share	1	5.45p		(3.19)p	2.26p

Audited Reconciliation of Movements in Shareholders' Funds

	Year ended 30 June 2015 £'000	Year ended 30 June 2014 £'000
Opening equity shareholders' funds	106,929	109,094
(Losses)/gains on investments	(23,454)	202
Net return attributable to ordinary shareholders	4,115	3,643
Costs charged to capital	(2,340)	(2,407)
Exchange (losses)/gains	(117)	71
Dividends paid	(3,745)	(3,678)
Issue of ordinary shares	10	4
Closing equity shareholders' funds	81,398	106,929

Audited Balance Sheet

as at 30 June 2015

	Notes	As at 30 June 2015	As at 30 June 2014
		£'000	£'000
Fixed assets
Investments		107,229	129,186
Current assets
Debtors		1,332	1,217
Cash at bank and on deposit		11,333	14,539
		12,665	15,756
Creditors: amounts falling due within one year		(1,226)	(1,554)
Net current assets		11,439	14,202
3.5% Convertible Unsecured Loan Stock 2018	4	(37,270)	(36,459)
Net assets		81,398	106,929
Capital and reserves
Called-up share capital		16,719	16,718
Special distributable reserve	5	30,386	30,386
Share premium	5	4,806	4,796
Equity component of 3.5% Convertible Unsecured Loan Stock 2018	4/5	2,248	2,973
Capital reserve	5	20,568	45,757
Revenue reserve	5	6,671	6,299
Equity shareholders' funds		81,398	106,929
Net asset value per share	2	121.72p	159.90p

Audited Cash Flow Statement

for the year to 30 June 2015

	Notes	Year ended 30 June 2015	Year ended 30 June 2014
		£'000	£'000
Operating activities
Investment income received		5,800	5,474
Deposit interest received		6	4
Other income received		-	35
Investment management fees paid		(1,120)	(1,274)
Other cash payments		(504)	(463)
Net cash inflow from operating activities		4,182	3,776
Servicing of finance
Interest on bank facility / overdraft		(26)	(42)
Interest on 3.5% Convertible Unsecured Loan Stock 2018		(1,398)	(1,398)
Net cash outflow from servicing of finance		(1,424)	(1,440)
Taxation
Tax refund		-	30
Capital expenditure and financial investment
Purchases of investments		(94,733)	(64,077)
Disposals of investments		92,631	68,962
Net cash (outflow)/inflow from capital expenditure and financial investment		(2,102)	4,885
Dividends
Equity dividends paid		(3,745)	(3,678)
Net cash (outflow)/inflow before financing		(3,089)	3,573
Financing
Issue expenses on ordinary shares		-	-
Net cash outflow from financing		-	-
(Decrease)/increase in net cash		(3,089)	3,573
Reconciliation of net cash flow to movement in net cash (Decrease)/increase in cash in the year		(3,089)	3,573
Exchange (losses)/gains		(117)	71
Movement in net cash in the year		(3,206)	3,644
Opening net cash at 1 July		14,539	10,895
Closing net cash at 30 June		11,333	14,539

Notes

1.         The revenue return per ordinary share is based on a net profit after taxation of £4,115,000 (2014: £3,643,000) and on a weighted average of 66,874,250 ordinary shares in issue during the year (2014: 66,872,434).

The capital return per ordinary share is based on a net capital loss of £25,911,000 (2014: a net capital loss of £2,134,000) and on a weighted average of 66,874,250 ordinary shares in issue during the year (2014: 66,872,434).

2.         The net asset value per ordinary share is based on net assets of £81.4 million (2014: £106.9 million) and on 66,875,765 (2014: 66,872,822) ordinary shares, being the number of ordinary shares in issue at the year end.

3.         The Board declared a fourth interim dividend of 3.02p per share which was paid on 28 August 2015 to shareholders on the register on 31 July 2015, having an ex-dividend date of 30 July 2015. 

4.         3.5% Convertible Unsecured Loan Stock 2018   

	Nominal number of CULS £'000	Liability component £'000	Equity component £'000
Balance at the beginning of the year	39,941	36,459	2,973
Amortisation of discount on issue and issue expenses	-	97	-
Transfer of CULS liability discount amortisation	-	724	(724)
Conversion during the year	(11)	(10)	(1)
Balance at the end of the year	39,930	37,270	2,248

On 26 September 2011, the Company issued a total of £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 16 October 2014, the Company issued 1,629 ordinary shares in connection with the exercise of £6,151 nominal of the Company's CULS.  On 13 April 2015, the Company issued 1,314 ordinary shares in connection with the exercise of £4,964 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 2015, there was £39,929,660 nominal of CULS in issue.

5.         Reserves

	Special reserve £'000	Share premium £'000	Equity element of CULS £'000	Capital reserve £'000	Revenue reserve £'000
At 30 June 2014	30,386	4,796	2,973	45,757	6,299
Exchange gains	-	-	-	(117)	-
Losses on investments	-	-	-	(23,454)	-
Management fees charged to capital	-	-	-	(822)	-
Finance costs charged to capital	-	-	-	(1,869)	-
Taxation credited to capital	-	-	-	349	-
Dividends paid	-	-	-	-	(3,745)
Retained net revenue for the year	-	-	-	-	4,117
Transfer of CULS liability discount amortisation	-	-	(724)	724	-
Issue of ordinary shares	-	10	(1)	-	-
At 30 June 2015	30,386	4,806	2,248	20,568	6,671

The special reserve is available for the buying back of shares. £6,671,000 is available for distribution as a dividend as represented in the revenue reserve.

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

As at 30 June 2015, the Company held shares in New City Energy Ltd and Golden Prospect Precious Metals Ltd, these two investment companies are also managed by the Investment Manager.

7.         The financial information set out above does not constitute the Company's statutory accounts for the year ended 30 June 2015. The financial information for 2014 is derived from the statutory accounts for 2014 which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2014 accounts, their report was unqualified and did not contain a statement under section 498 of the Companies Act 2006.  The statutory accounts for 2015 are audited and the Auditors have issued an unqualified opinion. The statutory accounts for 2015 will be finalised on the basis of the financial information presented in this announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

Principal Risks

The principal risks faced by the Company are: investment and strategy risk; market risk; sector risk; financial risk; earnings and dividend risk; operational risk and regulatory risk. These risks, which have not changed materially since the annual report for the year ended 30 June 2014, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 June 2015.  The report will be made available on the manager's website www.ncim.co.uk during September 2015.

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

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

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

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

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

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

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

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

Market price risk

Market price risk arises mainly from uncertainty about future prices of financial instruments held.  It represents the potential loss the Company might suffer through holding market positions in the face of price movements.  To mitigate the risk the Board's investment strategy is to select investments for their fundamental value.  Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments.  An appropriate spread of investments is held in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a country or sector.  The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy. 

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

If the investment portfolio valuation fell by 10 per cent at 30 June 2015, the impact on the profit or loss and the net asset value would have been negative £10.7 million (2014: negative £12.9 million).  If the investment portfolio valuation rose by 10 per cent the impact would have been equal and opposite. The calculations are based on the portfolio valuation as at the respective balance sheet dates are not representative of the year as a whole, and may not be reflective of future market conditions.

Interest rate risk

Financial assets

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

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

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

Floating rate

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

Financial liabilities

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

If the bank base rate had increased by 0.5 per cent, the impact on the profit or loss would have been a loss of £25,000 (2014: £42,000). If the bank base rate had decreased by 0.5 per cent, the impact on the profit or loss would have been equal and opposite. The calculations are based on borrowings as at the respective balance sheet dates and are not representative of the year as a whole.

Foreign Currency Risk

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

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

Credit Risk

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

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

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

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

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

There were no significant concentrations of credit risk to counterparties as at 30 June 2015 and as at 30 June 2014. No individual investment exceeded 8.6 per cent of net assets as at 30 June 2015 (2014: 7.4 per cent).

Liquidity risk

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

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

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

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

In accordance with Chapter 4 of the Disclosure and Transparency Rules, the Directors confirm, in respect of the Annual Report for the year ended 30 June 2015 of which this statement of results is an extract, that to the best of their knowledge:

• The financial statements contained within the Annual Report have been prepared in accordance with UK Generally Accepted Accounting Practice, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

• The Strategic Report and the Directors' Report include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces; and

• The Annual Report includes details of related party transactions, if any, that have taken place during the financial year.

On behalf of the Board

Geoff Burns, Chairman

15 September 2015

 

END

 

 

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