New City High Yield Fund Ltd : Final Results

To:         THOMSON REUTERS
Date:         31 October 2013
From:         New City High Yield Fund Limited

Results for the year ended 30 June 2013

• Net asset value total return of +14.9 per cent since 1 July 2012. 

• Ordinary share price total return of +11.1 per cent since 1 July 2012. 

• Dividend yield of 6.7 per cent, based on dividends at an annual rate of 4.10 pence and a share price of 61.25 pence at 30 June 2013. 

• Ordinary share price at a premium of 1.2 per cent to net asset value at 30 June 2013. 

Chairman's Statement

Introduction
Your Company delivered strong performance during the year, consolidating the gains of the first six months in generating a total return of 14.9 per cent for the year.

Investment and Share Price Performance
Your Company's net asset value rose by 7.4 per cent to 60.53 pence during the year ended 30 June 2013; when this capital measure is adjusted for the payment of dividends totalling 4.1 pence per share for the year, the net asset value total return was 14.9 per cent.

The share price total return for the same period, whilst still healthy, was less than this at 11.1 per cent, reflecting some moderation in the premium rating that continues to attach to the Company.

Earnings and Dividends
Three interim dividends of 0.90 pence per share were paid during the year, each representing a 2.3 per cent increase on last year's corresponding dividend.  The fourth interim dividend was increased by 2.2 per cent from 1.37 pence to 1.40 pence per share; this was paid after the year end on 30 August 2013.  Based on an annualised rate of 4.10 pence and a share price of 63.25 pence at the time of writing, this represents a yield of 6.5 per cent.

The 4.10 pence dividend for the year represented the fifth successive year of dividend increases as illustrated below:

Financial Year	Total Dividend	% increase
2007/08	3.57	-
2008/09	3.65	2.2%
2009/10	3.75	2.7%
2010/11	3.87	3.2%
2011/12	4.01	3.6%
2012/13	4.10	2.2%

The application of the effective interest rate ("EIR") methodology for fixed interest securities required by International Financial Reporting Standards added £1.1m to the Company's earnings in the current year, increasing the earnings per share from 4.9 pence to 5.4 pence.  The Board is conscious of the volatility that this measure adds to the Company's earnings stream and, in the interests of delivering a sustainable and growing dividend, will continue to look at what it regards as the Company's "core" earnings number before the application of EIR when determining the level of dividend payments.

A first interim dividend of 0.92 pence per share in respect of the 2013/14 year was declared in October 2013; this represented a 2.2 per cent increase on last year's corresponding dividend.

Rating and Fund Raising
As I noted when I wrote to you in February 2013 your Company's shares have traded at a premium for a number of years.  This is testimony both to the strength of the investment proposition offered, and to the good work of the Company's investment manager, Ian Francis, and his team.
The continuing premium rating that the market attaches to the shares of your Company enabled it, for the fifth year in a row, to complete a share issue equivalent to 10 per cent of the Company's share capital.  £15.2 million was raised from new and existing shareholders.  As well as a modest increase in net asset value, continuing shareholders can look to benefit from a lower total expense ratio and greater liquidity in the Company's shares.  Although a resolution will be proposed at the Annual General Meeting ("AGM") to renew the Directors' authority to issue shares equivalent to 10 per cent of the Company's share capital, the Directors will not be able to exercise this authority until 14 February 2014 without first publishing a prospectus.  

The Board has noted the growing practice, among other investment companies whose shares consistently trade at a premium, of putting in place arrangements that allow them, subject to publishing a prospectus and shareholders approving the issue of further shares on a non-pre-emptive and net asset value accretive basis, to issue shares equivalent to more than 10 per cent of their share capital over a 12 month period.  Such arrangements are a cost-effective means of providing directors with greater flexibility to manage the premium to net asset value at which their company's shares trade.  Having regard to the benefits of enlarging the Company and the significant premium at which your Company's shares trade from time to time, the Directors intend to convene an extraordinary general meeting ("EGM"), to be held on the same day as the AGM, to seek authority to issue shares equivalent to 25 per cent of the Company's share capital.  If that authority is granted, the Company intends to publish a prospectus following the date of the EGM to enable the Directors to issue shares pursuant to that authority. A separate circular will be sent to shareholders convening the EGM and explaining how the issue of further shares will help the Directors manage the premium at which the Company's shares trade and why this is advantageous to shareholders.

The Directors consider the passing of the resolutions to be proposed at both the AGM and EGM to be in the best interests of the Company and its shareholders as a whole, and intend to vote in favour of all resolutions in respect of their own beneficial holdings of 5,559,104 shares, representing 2.3 per cent of the issued share capital.

Outlook
Economic recovery does appear to be solidly entrenched, perhaps especially in the United States, political paralysis notwithstanding, and the United Kingdom, while monetary policy looks poised to remain looser for longer than had seemed likely.  Your Company, and its shareholders, are well positioned to benefit from these trends.

James G West
Chairman
Investment Manager's Review

A very interesting year for markets globally; the first quarter was dominated by the European sovereign debt crisis, where Spain found itself in the forefront, with some of the regional governments and many of the small banks needing emergency funding.  This led to one of the most memorable statements by a central banker in recent times when Mario Draghi stated "within our mandate, the ECB is willing to do whatever it takes to preserve the Euro and, believe me, it will be enough ." plus "to the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmissions channel, they come within our mandate .".  It was thought at the time that this was the prequel for Spain to apply for a bail out which would allow a period of calm for European Markets.

This, however, was not to be when the Spanish Deputy Prime Minister asked in a public forum "how much the ECB intended to spend on the purchase of Spanish bonds if a bail out was requested?"  One may ask which part of the "unlimited" stated by Mario Draghi, did he not understand?

Across the Atlantic the third tranche of Quantitative Easing (QE3) also kicked in.  The first quarter of the financial year had a large positive outcome, initially at least, on commodity prices (Gold in particular) and a longer term effect on other risk assets such as equities and high yield markets.  

Although it seems a long time ago now, the second quarter was mostly about the USA; firstly the close run Presidential election which returned Barrack Obama for a second term, then almost immediately all eyes turned to the rapidly approaching "Fiscal Cliff" - markets had to put up with a lot of brinkmanship before an agreement was reached on the morning of 1^st January.  This, along with the extension  of the US debt ceiling, was like a starting pistol for equity markets, as illustrated by the FTSE All Share Index up 6.27% on the month, the most positive start to the calendar year in nearly a quarter of a century!

Then came February and the long awaited downgrade of the UK's sovereign credit rating by Moody's from AAA to Aa1.  Although expected, the effect on sterling was very negative, falling from $1.5758 at the end of January down to $1.5163 at the end of February.

The Europeans too added to the volatility of markets in March with the ongoing uncertainty as to who would govern Italy, while in France President Hollande refused to take any extra austerity measures this year to bring down the deficit, using the argument that this would further damage an already stressed economy.  The Cypriot bail out also came in March with its "haircuts on deposit" - a badly disguised tax! - which had a negative effect on the Euro, confidence in the deposit guarantee scheme and, most important of all, "trust".

Come April and we had an end to the political deadlock in Italy with the appointment of Enrico Letta as the new Prime Minister, his centre left Democratic Party forming a coalition with former Prime Minister Silvio Berlusconi's centre right "People of Freedom Party".  The importance of this union cannot be overstated; with Italy as the 3^rd largest economy in Europe, the ongoing perception by other sovereigns and markets globally is paramount.

Elsewhere, April was not great; data from China showing exports rising less than expected was not good news for its near neighbour and major provider of natural resources, Australia, where the March unemployment figures rose from 5.4% to 5.6% putting pressure on the Reserve Bank of Australia (RBA) to lower the benchmark rate.

In Japan, the stimulus announced in April (a promise of $1.4 trillion) over the next two years, saw a rapid weakening of the yen against all currencies, approximately -10% versus sterling since 3 April, and an even more rapid rise in the Nikkei 225 of 30% at its peak before falling back 12% in the last nine days of the month. A knock-on of the weaker yen was seen in the rapid response of Miele and VW from Germany and Apple and Tiffany from the US raising prices. This may not be the norm, as Japan has been deeply embedded in deflation; but, it may just be the first signs of inflation and a long awaited economic recovery.

At the end of the financial year in June the news was from Ben Bernanke, confirming that the US Federal Reserve was to taper its quantitative easing programme as the economy and job numbers improved.  Yet again this had been expected by markets for some time, but the effect that it had on global markets, bonds, equities and commodities was great.  The short term reaction was a tightening in US rates and the suggestion that global easing was over.  We cannot discount the fact that the world's second largest economy, China, is seeing a decrease in its growth rate and its government is discouraging excessive credit growth.  

Regarding the portfolio, early in the period we added to Moto Finance 10.25% 2017, increased holdings in Southern Water 8.5% 2019, House of Fraser 8.875% 2018, and Cable & Wireless 8.625% 2019, replacing Phones 4U 9.5% 2018, Tullett Prebon 7.04% 2016 and the Cable & Wireless 5.75% 2014 Convertible which was called in early July 2012.  Also in the first half of the period we participated in new issues by Arcelor Mittal 8.25% Perpetual, Louis Dreyfus 8.5% Perpetual and Tizir 9% 2017.

The Company continued to look for opportunities to take profits in bonds which had served their purpose, examples of which would be Alliance Pharma 8% 2013 Convertible and British Airways 8.75% 2016, and where possible reinvested in similar opportunities below par; in the case of British Airways its 6.75% Euro Preference Share.

Early in the fourth quarter we opened new positions in Co-Op Lower Tier 2 Bonds, namely the 7.875% 2022 and 9.25% 2021 before the Moodys downgrade; we have referred to this situation in the monthly fact sheets and continue to monitor the state of affairs closely.

The quest for income continued in the second half, switching out of AXA 6.6862% Perpetual into Phoenix Life 7.25% 2021 and continuing to add to Moto Finance 10.25% and Brit Insurance 6.625% 2030, also participating in new issues for Arquiva 9.5% 2020, AA 9.5% 2019 and our equity position in Newriver Retail.  Santos 8.5% 2070 was switched into Trafigura 7.625% perpetual on this basis and to decrease capital exposure over par.

Going forward the sentiment driving global markets will be very much driven by the recovery rate of the US and the true growth rate in China, and no doubt Europe, will be in the mix as well.

Ian Francis
New City Investment Managers

Audited Income Statement
For the year ended 30 June 2013

	Year ended 30 June 2013
		£ '000	£'000	£'000
	Notes	Revenue	Capital	Total
Capital gains on investments
Gains on investments		-	5,600	5,600
Exchange gains		-	54	54
Revenue
Income		14,176	-	14,176
		14,176	5,654	19,830
Expenses
Investment management fee		(916)	(305)	(1,221)
Other expenses		(518)	-	(518)
Total expenses		(1,434)	(305)	(1,739)
Profit before finance costs and taxation		12,742	5,349	18,091
Finance costs
Interest payable and similar charges		(196)	(65)	(261)
Profit before taxation		12,546	5,284	17,830
Irrecoverable withholding tax		(160)	-	(160)
Profit after taxation		12,386	5,284	17,670
Earnings per ordinary share (pence)	2	5.42	2.31	7.73

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS (refer to note 1).  The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement are derived from continuing operations.

No operations were acquired or discontinued in the year.

Audited Income Statement
For the year ended 30 June 2012

	Year ended 30 June 2012
		£ '000	£'000	£'000
	Notes	Revenue	Capital	Total
Capital losses on investments
Losses on investments		-	(7,350)	(7,350)
Exchange losses		-	(21)	(21)
Revenue
Income		11,916	-	11,916
		11,916	(7,371)	4,545
Expenses
Investment management fee		(776)	(259)	(1,035)
Other expenses		(464)	-	(464)
Total expenses		(1,240)	(259)	(1,499)
Profit before finance costs and taxation		10,676	(7,630)	3,046
Finance costs
Interest payable and similar charges		(157)	(52)	(209)
Profit before taxation		10,519	(7,682)	2,837
Irrecoverable withholding tax		(63)	-	(63)
Profit after taxation		10,456	(7,682)	2,774
Earnings per ordinary share (pence)	2	4.89	(3.59)	1.30

Audited Balance Sheet

		As at	As at
		30 June 2013	30 June 2012
	Notes	£'000	£'000
Non-current assets
Investments held at fair value		157,714	127,544
Current assets
Other receivables		3,918	4,739
Cash and cash equivalents		777	55
		4,695	4,794
Total assets		162,409	132,338
Current liabilities
Bank loan facility		(12,214)	(7,463)
Other payables		(2,346)	(726)
Total liabilities		(14,560)	(8,189)
Net assets		147,849	124,149
Stated capital and reserves
Stated capital account		81,890	66,680
Special distributable reserve		50,385	50,385
Capital reserve		3,071	(2,213)
Revenue reserve		12,503	9,297
Equity shareholders' funds		147,849	124,149
Net asset value per ordinary share (pence)	3	60.53	56.36

Audited Statement of Changes in Equity
For the year ended 30 June 2013

		Stated	Special
		capital	distributable	Capital	Revenue
		account*	reserve+	reserve*	reserve#	Total
		£'000	£'000	£'000	£'000	£'000
At 1 July 2012		66,680	50,385	(2,213)	9,297	124,149
Total comprehensive income for the year:
Profit for the year		-	-	5,284	12,386	17,670
Transactions with owners recognised directly in equity:
Dividends paid		-	-	-	(9,180)	(9,180)
Issue of shares		15,210	-	-	-	15,210
At 30 June 2013		81,890	50,385	3,071	12,503	147,849

Audited Statement of Changes in Equity
For the year ended 30 June 2012

		Stated	Special
		capital	distributable	Capital	Revenue
		account*	reserve+	reserve*	reserve#	Total
		£'000	£'000	£'000	£'000	£'000
At 1 July 2011		57,567	50,385	5,469	7,192	120,613
Total comprehensive income for the year:
(Loss)/profit for the year		-	-	(7,682)	10,456	2,774
Transactions with owners recognised directly in equity:
Dividends paid		-	-	-	(8,351)	(8,351)
Issue of shares		9,113	-	-	-	9,113
At 30 June 2012		66,680	50,385	(2,213)	9,297	124,149

* Following a change in Jersey Company Law effective 27 June 2008 dividends can be paid out of any capital account of the Company subject to certain solvency restrictions.  It is the Company's policy however to account for revenue items and pay dividends through a separate revenue reserve.

+ The balance on the special distributable reserve of £50,385,000 (2012: £50,385,000) is treated as distributable profits available to be used for all purposes permitted by Jersey Company Law including the buying back of ordinary shares, the payment of dividends and the payment of preliminary expenses.

# The balance on the revenue reserve of £12,503,000 (2012: £9,297,000) is available for paying dividends.

Audited Cash Flow Statement

	Year	Year
	Ended	Ended
	30 June 2013	30 June 2012
	£'000	£'000
Operating activities
Profit before finance costs and taxation	18,091	3,046
(Gains)/losses on investments	(5,600)	7,350
Exchange (gains)/losses	(54)	21
Increase in other receivables	(144)	(454)
Decrease in other payables	20	3
Net cash inflow from operating activities before interest and taxation	12,313	9,966
Interest paid	(252)	(226)
Irrecoverable withholding tax paid	(160)	(63)
Net cash inflow from operating activities	11,901	9,677
Investing activities
Purchases of investments	(77,918)	(45,347)
Sales of investments	55,904	40,433
Net cash outflow from investing activities	(22,014)	(4,914)
Financing
Equity dividends paid	(9,180)	(8,351)
Drawdown/(repayment) of bank loan facility	4,751	(5,464)
Issue of ordinary shares	15,210	9,113
Net cash inflow/(outflow) from financing	10,781	(4,702)
Increase in cash and cash equivalents	668	61
Net debt at the start of the year	(7,408)	(12,912)
(Drawdown)/repayment of bank loan facility	(4,751)	5,464
Exchange gains/(losses)	54	(21)
Net debt at the end of the year+	11,437	(7,408)

⁺ Net debt includes cash held at bank and bank loan facility.
Principal Risks and Uncertainties

The principal risks faced by the Company are: investment and strategy risk; market 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 2012, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 June 2013.  The report will be made available on the manager's website www.ncim.co.uk during October 2013.

Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable Jersey law and International Financial Reporting Standards ("IFRS") as adopted by the International Accounting Standards Board ("IASB").

Jersey law requires the Directors to prepare in accordance with generally accepted accounting principles, financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit and loss of the Company for that year. Under Jersey law they have elected to prepare the financial statements in accordance with IFRS as adopted by the IASB.
In preparing these financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable and prudent;

· state whether applicable International Financial Reporting 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 proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Jersey) Law 1991. 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 Corporate Governance Statement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. The financial statements are published on the www.ncim.co.uk website, which is a website maintained by the Company's Investment Manager. 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 their knowledge:

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

· the Report of the Directors includes 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.

On behalf of the Board

JG West
Chairman
31 October 2013
Notes (audited)

1. The annual results which cover the year to 30 June 2013 have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the International Accounting Standards Board ("IASB") and in accordance with the guidance set out in the Statement of Recommended Practice ("SORP") for investment trust companies and venture capital trusts issued by the Association of Investment Companies ('AIC') in January 2009. 

Standards and amendments not yet effective
The following standards have been issued but are not effective for this accounting period and have not been adopted early:

· In October 2010, the IASB issued IFRS 9 (2010) 'Financial Instruments' which, following an amendment in December 2011, becomes effective for accounting periods commencing on or after 1 January 2015. This represents part of a project to replace IAS 39 'Financial Instruments: Recognition and Measurement'.  The objective of the standard is to enhance the ability of investors and other users of financial information to understand the accounting of financial assets and to reduce complexity.
· In June 2011, the IASB issued 'Presentation of Items of Other Comprehensive Income' (Amendments to IAS 1 'Presentation of Financial Statements').  The amendments to IAS 1 change the grouping of items presented in Other Comprehensive Income.  Items that could be reclassified to profit or loss at a future point in time would be presented separately from items that will never be reclassified.  The amendment affects presentation only and has no impact on the Group's financial position or performance.  The amendment becomes effective for accounting periods beginning on or after 1 July 2012.
· In May 2011, the IASB issued IFRS 10 'Consolidated Financial Statements'. IFRS 10 establishes a single control model that applies to all entities including special purpose entities.  The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27.  This standard becomes effective in the EU for accounting periods beginning on or after 1 January 2014.
· In May 2011, the IASB issued IFRS 12 'Disclosure of Involvement with Other Entities'. IFRS 12 includes all the disclosures which were previously required by IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28.  These disclosures relate to an entity's interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required.  This standard becomes effective in the EU for accounting periods beginning on or after 1 January 2014.
· As a consequence of the new IFRS 10 and IFRS 12 above, what remains of IAS 27 'Separate Financial Statements (2011)' is limited to accounting for subsidiaries, jointly controlled entities and associates in separate financial statements.  The amendment becomes effective in the EU for accounting periods beginning on or after 1 January 2014.
· In May 2011, the IASB issued IFRS 13 'Fair Value Measurement'. IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements.  IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted.  A number of additional disclosures will be required.  This standard becomes effective for accounting periods beginning on or after 1 January 2013.
· On 31 October 2012, the IASB issued amendments to IFRS 10 'Consolidated Financial Statements', IFRS 12, 'Disclosure of Interests in Other Entities' and IAS 27, 'Separate Financial Statements'.  These Report and Accounts 30 June 2013 27 Notes to the Financial Statements (continued) amendments are expected to exempt the Company from consolidating controlled investees and allow the Company to fair value controlled investments, rather than having to consolidate them. The amendments to IFRS 12 introduce additional disclosures.

The amendments become effective in the EU for accounting periods beginning on or after 1 January 2014.

The Company does not consider that the future adoption of any new standards, in the form currently available, will have any material impact on the financial statements as presented.

2. Earnings per ordinary share 

        The revenue earnings per ordinary share is based on the net profit after taxation of £12,386,000 (2012: £10,456,000) and on 228,639,498 (2012: 213,909,275) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

        The capital earnings per ordinary share is based on a net capital gain of £5,284,000 (2012: net capital loss of £7,682,000) and on 228,639,498 (2012: 213,909,275) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

2. Net asset value per ordinary share 

        The net asset value per ordinary share is based on net assets of £147,849,000 (2012: £124,149,000) and on 244,239,339 (2012: 220,267,581) ordinary shares, being the number of ordinary shares in issue at the year end.

4.        Dividends

        A fourth interim dividend in respect of the year ended 30 June 2013 of 1.40p per ordinary share was paid on 30 August 2013 to shareholders on the register on 2 August 2013.  In accordance with IFRS this dividend has not been included as a liability in these accounts and will be recognised in the period in which it is paid.

5.     Financial Instruments

The Company's financial instruments comprise its investment portfolio, cash balances, bank loan and debtors and creditors that arise directly from its operations. As an investment company, the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company uses flexible borrowings for short term purposes, and to seek to enhance the returns to shareholders, when considered appropriate by the Investment Manager.

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 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 fair value of the loan is not materially different from the 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 exchange 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 repayment of the loan and or that the Company may 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.

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.

  Interest rate risk on fixed 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 interest bearing cash balances is the UK bank base rate, which was 0.5 per cent at 30 June 2013.

Financial liabilities
The Company may utilise the bank loan facility to meet any liabilities due. The Company has borrowed in sterling at a variable rate of interest 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.

At the year end, the Company had borrowings of £12,214,000 from HSBC Bank plc.

Fixed rate
The Company holds fixed interest investments.

Foreign currency risk
The Company invests in overseas securities and may hold foreign currency cash balances which give rise to currency risks. It is not the Company's policy to hedge this risk on a continuing basis but it may do so from time to 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 risk exposure at the balance sheet date. Credit risk on fixed interest instruments 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 acceptable 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 plc ('HSBC'), the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to the cash and 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 deteriorate significantly the Investment Manager will move the cash holdings to another bank.

The Company did not have any exposure to any financial assets which were past due or impaired at the year end.

There were no significant concentrations of credit risk to counterparties at 30 June 2013. No individual investment exceeded 4.0 per cent of the net assets attributable to the Company's shareholders at 30 June 2013.

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 listed securities are considered to be readily realisable.

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, has a short term bank loan facility 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 its overdraft facility.

6.    Related parties

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

Mr G Ross is a director of the Company Secretary and Administrators, R&H Fund Services (Jersey) Limited and also the UK Administrator, R&H Fund Services Limited, which receive fees from the Company.

All transactions with related parties are carried out at an arms length basis.

There are no other transactions with the Board other than aggregated remuneration for services as Directors and there are no outstanding balances to the Board at the year end.

7.    Bank loan facility

The Company has a short term loan facility with HSBC Bank Plc.  This facility allows up to 20 per cent of the value of shareholders' funds to be borrowed with the drawn down amount repayable on demand.  As at the year end the unsecured loan facility had a limit of £20.0 million of which £12.2 million was drawn down at the year end.

8.        Financial information

  These are not full statutory accounts for the year ended 30 June 2013.  The full audited annual report and accounts for the year ended 30 June 2013 will be sent to shareholders in October 2013 and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The full audited accounts for the period ended 30 June 2012, which were unqualified, have been lodged with the Registrar of Companies.

9.        The report and accounts for the year ended 30 June 2013 will be made available on the website www.ncim.co.uk.  Copies may also be obtained from the Company's registered office, Ordnance House, 31 Pier Road, St. Helier, Jersey, JE4 8PW, Channel Islands

Enquiries:
Ian Francis, New City Investment Managers:                020 7201 5366
Martin Cassels, UK Adminstrator                        0131 524 6140

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Source: New City High Yield Fund Ltd via Thomson Reuters ONE

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