Final Results

RNS Number : 0097S

City Natural Res High Yield Tst PLC

28 September 2017

 

To:                    RNS

From:                City Natural Resources High Yield Trust plc

LEI:                  549300ES8CNIK2CQR054

Date:                28 September 2017

Chairman's Statement

Introduction

A year of consolidation, which saw the progress made in the year to 30 June 2016 built upon and shareholders' patience further rewarded.

Investment and Share Price Performance and Discount Control

At 30 June 2017 your Company's net asset value stood at 132.7 pence per share, giving a net asset value total return for the year of 7.9 per cent. The benchmark index returned 17.7 per cent.

The Company's net asset value pushed ahead strongly until February 2017, before giving up some of its gains in the face of market weakness; however, it has been resilient over recent months and stands at 138.3 pence per share as I write.

The Company's ordinary share price total return of 17.8 per cent for the year to 30 June 2017 was better than its net asset value total return, reflecting a narrowing of the discount at which the Company's shares trade from 22.7 per cent to 17.0 per cent during the year. The average discount over the year to 30 June 2017 was 17.3 per cent and over three years it was 18.2 per cent. 

I wrote at some length in September 2016 on discount control, and it remains the Board's aim to mitigate the discount at which the Company's shares trade by good long term performance. Over the long term, since the redirection of the Company in 2003, the net asset value total return is 260.9 per cent, ordinary share price total return 211.4 per cent, and benchmark total return 245.5 per cent.

The share price is 110.88 pence and the discount stands at 19.8 per cent at the time of writing.

Income and Dividends

Income and dividends have been a focus of the Company, with dividends per share now 2.8 times the amount paid in 2004. The Board believes they contribute an important element of stability in our volatile asset class.

This year's fourth interim dividend of 3.02 pence per share brought the total dividend for the year to 5.60 pence, the same level as was paid last year and the year before. Earnings per share of 5.08 pence were at the same level as last year and mean that the dividend for the year was again uncovered. I would repeat that the Board has no qualms about utilising revenue reserves to maintain current dividend levels, so long as longer term income generation is deemed safe. The revenue reserve, which stands at 5.9 pence per share after the payment of the fourth interim dividend, has been built up against just this sort of eventuality. 

The yield on the Company's shares is 5.1 per cent as I write.

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

Gearing was generally maintained in the range of 20 per cent to 25 per cent of shareholders' funds during the year, 25 per cent being the upper limit allowed under the Company's investment
policy. It was 23 per cent at the year end. 

The Company had £34.5 million nominal of CULS in issue at 30 June 2017. The CULS price rose from 95.5 pence to 99.8 pence during the year.

The CULS mature at the end of September next year and the Board has begun the task of considering how this will be best managed in the interests of Shareholders.

Board Changes

There have been no changes to the Board during the year, but Adrian Collins has announced that he will not be standing for re-election at the Annual General Meeting this year. Adrian has been on the Board for 22 years and represents the last link with the Company's previous existence as Aberdeen Latin American Securities Trust plc before its change of name and direction in 2003. He was Chairman of the Company in 2004/5. Adrian has made an extraordinary contribution to your Board. His advice and experience has been invaluable, not least in some of the particularly difficult situations this sector has faced, and he will be greatly missed. I am sure I can speak for all shareholders in expressing our appreciation. 

In continuation of the previously advised Board development programme, we utilised an independent search entity to find new directors. I am pleased to say that we propose to appoint two new Directors with effect from 1^st October, after the annual results have been announced. They are Christopher Casey and Carole Cable. Christopher was a KPMG partner until 2010 since when he has carried out a number of non-executive board roles including chairman of China Polymetallic Mining Ltd. Carole has had a career connected to the mining and commodities sector, initially on the sell side at JP Morgan and Credit Suisse, and currently as a partner and co-head of the Energy and Resources division at Brunswick Group LLP, where she advises clients in the mining sector. Between them they complement and deepen the Board's natural resources sector experience and I am sure they will make a vital contribution to our deliberations and decisions. We are delighted they have chosen to join us. Both will stand for election at the forthcoming AGM and fuller biographies are included for both in the Notice of Annual General Meeting.

Auditor
Following an audit tender process, BDO LLP was appointed auditor to the Company, replacing KPMG LLP, who had been the Company's auditors for more than 20 years.

Outlook
The result of the UK general election in June was another demonstration of both the uncertainty that characterises our public world, and the central position that political risk has come to assume in any assessment of the outlook generally, and of our investment portfolio more particularly.  If the Conservatives' loss of a majority in the face of the forthcoming Brexit negotiations might be dismissed as a little local difficulty, the instability of President Trump's United States cannot be. The US administration's notification of intent to withdraw from the 2015 Paris climate change agreement and the threat to start an investigation over Chinese intellectual property rights abuses and policies under the punitive Section 301 of the 1974 Trade Act could hardly be more directly relevant to us, while tensions mount concerning relations with Iran and the Middle East. Then, there are North Korea's nuclear ambitions, and related aggressive posturing, which have had a positive effect on our gold holdings of late.

In spite of this increased geo-political risk, equity markets continue to move ahead, with few signs that the post Financial Crash bull market is done. The most important factor underpinning it is the ever growing level of global debt, which is now in excess of $150 trillion, well over twice the size of the global economy, more than one third of which is government debt. The extraordinarily low interest rates that have allowed this expansion of debt are something that I have written about before; they cannot continue for ever, but it is futile to guess when the day of reckoning will dawn.

In the meantime, there are a number of positive indicators for commodity markets, not least increasing confidence as to Chinese stability and its continued solid growth rate, alongside a determined focus on the $5 trillion Belt and Road initiative, which will be an important driver of commodity demand for the next decade.

At a portfolio level, our exposure to energy in general, and to oil and gas in particular, remains low. Cheap gas for power generation and abundant oil supplies are combining with the plunging costs of renewable power and electricity storage, and the rise of electric cars, pointing to a brave new world in which Tesla's place as the most valuable car manufacturer in the United States is symbolic. A number of metals processed by companies in our portfolio are sensitive to the increasing demand for electricity storage. This fact, along with signs of the continued developed world economic recovery, and the prospect for increased infrastructure spend with growing urbanisation, confirms our confidence in the future of your Company.

Geoff Burns

Chairman

27 September 2017

Investment Manager's Review

The year to June 2017 was marked by a slowing trajectory in commodity price appreciation. The Company's net asset value ("NAV"), having risen over 35% at its peak in the March quarter, subsequently retreated with a broader pull-back in the resources markets towards the year-end. Similarly Sterling's post Brexit weakness, helpful to first half NAV performance, reversed. As a result the Company returned 7.9% over the year. The effect of currency fluctuations on income was mitigated by hedging and the Company maintained its dividend which contributed appreciably to full year shareholder returns.

Economic trends encouraging

Improving economic conditions among major economies and the boost to US growth prospects promised by President Trump flowed through into the New Year, allowing investors to look through the belated succession of post-election rate increases by the Federal Reserve and sustaining commodity price rises into the March quarter. However, investor risk appetite and commodity prices subsequently fell back after Chinese authorities implemented another bout of measures to reduce financial sector risks and cool property prices, whilst Trump's growth plans stalled having failed to gain Senate funding approval. Neither factor, we believe, alter the resilient underlying picture; China's pre-emptive measures reflected a belief that regional growth could accommodate the moves which help reduce future systemic risks from overleverage while post-election fund flows appeared to exaggerate the incremental benefit of proposed United States infrastructure investment.

While exuberance has dissipated we remain encouraged by improvement in the macro environment trends. Notably, China is managing to sustain better-than-expected economic growth despite the dampening effect of earlier interventions and credit growth is rebounding. Elsewhere the United States continues to recover without contribution from Trump policy while the New Year also saw improving European economic trends. The latter two points should lead more hawkish central bank policy over the next 12 months including a further US rate rise and a reduction of European Central Bank stimulus. In the longer-term, we also highlight that China's underlying consumption growth of higher value metals such as copper has been incredibly resilient despite financial market volatility.

Supply side discipline

Of equal importance, following years of declining investment from the mining major's, many commodities are feeling the effects of a drop-off in the rate of new supply additions. This is especially the case for base metals which led gains. Zinc, a key exposure within the Company, saw the LME price rise over 30% during the year to June and it continues to rise, helping strong performance for stocks such as Trevali. The zinc market looks increasingly tight following the closure of large mines such as Century and Lisheen, and environmental audits are limiting domestic Chinese output. Warehouse inventories continue to be drawn down to levels approaching 10 days-worth of demand and prices are responding accordingly. Copper was the next best base metal performer rising over 20% through the year. Nickel was weighed down by easing export legislation by the two largest producers, Indonesia and the Philippines, though we remain optimistic on its outlook due to its increasing usage to produce higher quality stainless steel and possible use in developing battery technologies. The holding in low cost Russian producer Norilsk also provides significant dividend income.
 

Encouragingly, major mining corporations are showing restraint, with management instead focussing on free cash flow generation, debt pay down and shareholder returns. Expenditure budgets for greenfield development projects remain minimal. China also continues to tighten domestic mining regulations and where necessary is forcing a consolidation to form national champions. At current valuations we believe future growth would more sensibly focus on acquisitions of existing output, which ultimately would not add incremental supply, and would favour the more attractively valued smaller capitalised stocks to which the Company is exposed.

Bulk commodities also performed well, though proved markedly more volatile than base metal prices, with environmentally focused closures in China the major driver. Coal fed power stations and metal refiners continue to favour higher grade inputs to reduce polluting emissions. Coking coal prices were highly volatile against this backdrop, highlighting a market that is clearly much tighter than many had anticipated, with Australian benchmark product trading from below $100/t to a high of $300/t before settling around $200/t at the time of writing. This dynamic is also reflected within iron ore, with higher grade iron imports up significantly at the expense of lower grade domestic Chinese iron ore. This was evident with the 62% Fe benchmark trading a $10-20/t premium to the 58% Fe benchmark. The Company has little exposure to iron ore, preferring instead to focus on metals like zinc and nickel which also benefit from a steel quality upgrade cycle in China and which have less potential for significant growth in supply.

Insurance still has value

Gold lagged industrial metals' performance with prices declining 4% over the financial year. Cyclical "risk" assets were the clear beneficiary of fund flows at the expense of safe haven assets during the period. Donald Trump's surprise election as US President was a significant driver behind this. His pro-US growth stance and prospect of rising rates saw a rapid and significant withdrawal of funds from precious metal funds. Gold's lagging performance has subsequently played catch up and precious metals prices have latterly garnered support from US dollar weakness as stubbornly low US inflation prompted more dovish commentary from the Federal Reserve, reducing expectations of further US rate rises.  At the same time the European Central Bank flagged a willingness to taper its programme of quantitative easing. Equally importantly, recent escalating tensions with North Korea have provided further boost to safe haven assets and therefore gold prices. Notwithstanding geo-political risks the ever rising US debt ceiling, expected to be reached in October, provides a reminder to the still high debt levels globally and value of insurance in such an environment.  Consequently, the Fund retains material precious metals exposure, currently around 15% of assets.

Energy opportunities less obvious

Oil also lagged other commodities with prices remaining very much range bound, as expected. Despite prices responding relatively well to OPEC and Russian production quotas introduced around the turn of the calendar year, a rise in US onshore production has usurped the mantle of swing producer. In-so-doing, US production has raised questions as to the strategic sense in OPEC and Russia continuing or deepening output cuts. Oil remains capped in the mid $50's per barrel by a wall of 2018 forward selling from US shale producers, highlighting their economic incentive level. Saudi's 2-3 year programme of fiscal reform, targeting a neutral budget based on a $40 per barrel crude price, represents a reasonable floor. Though oil prices ended the period unchanged at $46 a barrel, related equities declined.

Thematic investment and valuation process key

Thematic investing continues to make a very important contribution to Company returns. In particular, China's commitment to environmental reform has been a considerable driver of zinc prices as China seeks to reduce water pollution resulting from the lead which is geologically associated, and therefore mined, with zinc. With a share price rise of over 100% during the year, zinc miner Trevali made a stand-out contribution to performance, which has continued into the current financial year. Exposure to energy remains minimal and is principally via shippers who should benefit from improving day rates given the outlook of more positive US-Asia arbitrage and higher US export volumes against a background of capacity reductions, as surplus ageing fleet is retired.

Valuation remains key to our process. Recently the GDXJ gold equity ETF relaxed its market cap restrictions to incorporate midcap producers and reduce the weighting towards smaller-cap stocks. Illustrative of the growth of passive investment, this technical rebalancing caused considerable underperformance among smaller capitalised stocks that the Company typically invests in and consequently some relative value switching was undertaken which we believe will favourably unwind as the adjustment is digested.

Mandated income focus

The Company's payment of its dividend from income continues to require careful consideration in the balance of the portfolio as bonds remain the backbone of revenue. Representing around 30% of assets they currently generate over 60% of income. The low interest rate environment and low levels of dividend yield within the sector has led to a greater proportion of the Company's assets being allocated toward income generating positions. The Company's portfolio is being managed to optimise capital growth exposure against income generation within the Company, preferring a minimal drawdown of the healthy income reserves in order to best achieve this.

Ian Francis, Keith Watson, Rob Crayfourd

New City Investment Managers

27 September 2017

Audited Income Statement

for the year ended 30 June 2017

			2017	2017	2017
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Gains on investments		-		6,438	6,438
Exchange gains		-		18	18
Income		4,892		-	4,829
Investment management fee		(293)		(878)	(1,171)
Other expenses		(521)		-	(521)
Net return before finance costs and taxation		4,078		5,578	9,656
Interest payable and similar charges		(305)		(1,729)	(2,034)
Net return on ordinary activities before taxation		3,773		3,849	7,622
Tax on ordinary activities		(378)		211	(167)
Net return attributable to equity shareholders		3,395		4,060	7,455
Return per ordinary share	1	5.08p		6.07p	11.15p

Audited Income Statement

for the year ended 30 June 2016

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

Audited Balance Sheet

as at 30 June 2017

	Notes	As at 30 June 2017	As at 30 June 2016
		£'000	£'000
Fixed assets
Investments		112,902	113,525
Current assets
Debtors		3,027	576
Cash at bank and on deposit		7,371	4,738
		10,398	5,314
Creditors: amounts falling due within one year		(727)	(627)
Net current assets		9,671	4,687
3.5% Convertible Unsecured Loan Stock 2018	4	(33,824)	(33,025)
Net assets		88,749	85,187
Capital and reserves
Called-up share capital		16,721	16,719
Special distributable reserve		30,386	30,386
Share premium		4,832	4,810
Equity component of 3.5% Convertible Unsecured Loan Stock 2018	4	488	1,213
Capital reserve		30,347	25,734
Revenue reserve		5,975	6,325
Equity shareholders' funds		88,749	85,187
Net asset value per share	2	132.69p	127.38p

Audited Statement of Changes in Equity

For the year ended 30 June 2017

			Share	Special	CULS
		Share	premium	distributable	equity	Capital	Revenue
		capital	account	reserve	component	reserve	reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 June 2016	16,719		4,810	30,386	1,213	25,734	6,325	85,187
CULS conversion	2		22	-	(725)	724	-	23
Return on ordinary activities after taxation	-		-	-	-	4,060	3,395	7,455
Effective yield	-		-	-	-	(171)	-	(171)
Dividends paid	-		-	-	-	-	(3,745)	(3,745)
At 30 June 2017	16,721		4,832	30,386	488	30,347	5,975	88,749

Audited Statement of Changes in Equity

For the year ended 30 June 2016

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

Audited Cash Flow Statement

for the year to 30 June 2017

		Year ended 30 June 2017	Year ended 30 June 2016
		£'000	£'000
Operating activities
Investment income received		4,155	4,536
Deposit interest received		4	2
Other income received		6	65
Investment management fees paid		(1,167)	(853)
Other cash payments		(519)	(473)
Net cash inflow from operating activities		2,479	3,277
Investing activities
Purchases of investments		(65,630)	(113,165)
Disposals of investments		70,722	113,696
Net cash inflow from investing activities		5,092	531
Financing activities
Equity dividends paid		(3,745)	(3,745)
Interest on bank facility/overdraft		(2)	(2)
Interest on 3.5% Convertible Unsecured Loan Stock 2018		(1,209)	(1,315)
Buyback of CULS		-	(5,372)
Net cash outflow from financing activities		(4,956)	(10,434)
Increase/decrease in net cash		2,615	(6,626)
Reconciliation of net cash flow to movement in net cash Increase/(decrease) in cash in the year		2,615	(6,626)
Exchange gains		18	31
Movement in net cash in the year		2,633	(6,595)
Opening net cash at 1 July		4,738	11,333
Closing net cash at 30 June		7,371	4,738

Notes

1.         The revenue return per ordinary share is based on a net profit after taxation of £3,395,000 (2016: £3,399,000) and on a weighted average of 66,880,724 ordinary shares in issue during the year (2016: 66,875,991).

The capital return per ordinary share is based on a net capital return of £4,060,000 (2016: a net capital return of £4,629,000) and on a weighted average of 66,880,724 ordinary shares in issue during the year (2016: 66,875,991).

2.         The net asset value per ordinary share is based on net assets of £88.7 million (2016: £85.2 million) and on 66,882,974 (2016: 66,876,768) 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 31 August 2017 to shareholders on the register on 28 July 2017, having an ex-dividend date of 27 July 2017. 

4.         3.5% Convertible Unsecured Loan Stock 2018

	Nominal number of CULS £'000	Liability component £'000	Equity component £'000
Balance at 30 June 2016	34,554	33,025	1,213
Amortisation of discount on issue and issue expenses	-	97	-
Transfer of CULS liability discount amortisation	-	724	(724)
Conversion during the year	(24)	(22)	(1)
Balance at 30 June 2017	34,530	33,824	488

	Nominal number of CULS £'000	Liability component £'000	Equity component £'000
Balance at 30 June 2015	39,930	37,270	2,248
Amortisation of discount on issue and issue expenses	-	97	-
Transfer of CULS liability discount amortisation	-	724	(724)
Conversion during the year	(4)	(3)	-
Buyback of CULS	(5,372)	(5,063)	(311)
Balance at 30 June 2016	34,554	33,025	1,213

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

On 14 October 2016, the Company issued 5,274 ordinary shares in connection with the exercise of £19,896 nominal of the Company's CULS.

On 13 April 2017, the Company issued 932 ordinary shares in connection with the exercise of £3,518 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 2017, there was £34,530,458 nominal of CULS in issue, which are due for repayment on 26 September 2018.

5.         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 2017, 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.

6.         These are not full statutory accounts for the year ended 30 June 2017.  The full audited annual report and accounts for the year ended 30 June 2017 will be sent to shareholders in October 2017 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 2016, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 June 2017.  The report will be made available on the manager's website www.ncim.co.uk during October 2017.

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.  Unquoted 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 2017, the impact on the profit or loss and the net asset value would have been negative £11.3 million (2016: negative £11.4 million).  If the investment portfolio valuation rose by 10 per cent the impact would have been equal and opposite. The calculations are based on the portfolio valuation as at the respective balance sheet dates are not representative of the year as a whole, and may not be reflective of future market conditions.

Interest rate risk

Financial assets

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

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

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

Floating rate

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

Financial liabilities

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

If the bank base rate had increased by 0.5 per cent, the impact on the profit or loss would have been a loss of £2,000 (2016: £2,000). 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 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 2017 and as at 30 June 2016. No individual investment exceeded 17.1 per cent of net assets as at 30 June 2017 (2016: 6.7 per cent).

Liquidity risk

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

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

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

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

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

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

• select suitable accounting policies and then apply them consistently;

• make judgments and estimates that are reasonable and prudent;

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

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

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
 

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

The Directors confirm that to the best of our knowledge:
 

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

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

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

On behalf of the Board

Geoff Burns,

Chairman

27 September 2017

 

END

 

 

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