Annual Financial Report

RNS Number : 8343F

F&C UK High Income Trust PLC

22 May 2017

 

To:                    RNS

From:                F&C UK High Income Trust plc

Date:                22 May 2017

Results for the year ended 31 March 2017

·      A share price total return per share for the year was 21.8 per cent, compared to the FTSE All-Share Capped 5% Index total return of 21.8 per cent.

·      B share price total return per share for the year was 19.7 per cent, compared to the FTSE All-Share Capped 5% Index total return of 21.8 per cent.

·      Distribution yield of 4.5 per cent on A shares and B shares at 31 March 2017, based on total distributions for the financial year of 4.72p per share, compared to the yield on the FTSE All-Share Capped 5% Index of 3.4 per cent. Total distributions increased by 2.6% compared to the prior year.

·      Net asset value total return per share for the year was 20.8 per cent, compared to the FTSE All-Share Capped 5% Index total return of 21.8 per cent.

Chairman's Statement as follows:

Performance

For the Company's financial year ended 31 March 2017, the share price total return for the A shares and the B shares was 21.8% and 19.7% respectively.

The past year has been a good one for financial markets despite a background of political upheaval across many developed economies. In the UK, it quickly became evident that fears of a post-Brexit economic rout were unfounded. After some early weakness, the UK Equity market regained its composure and went on to end the financial year close to all-time record high levels, supported by improving economic news, the beneficial impact of a weak pound and the pro-business rhetoric of the incoming US administration. The Company's net asset value total return for both the A shares and B shares over the financial year was 20.8%, marginally behind the 21.8% total return from the Company's benchmark, the FTSE All-Share Capped 5% Index.

The principal contributors to the performance and additional information is covered in more detail in the Manager's Review in the Annual Report.

As the Company is intended as a long-term investment vehicle, it does not have a fixed life. However, in the event that the net asset value total return performance of the Company is less than that of the benchmark index over the relevant five year period, shareholders are given the opportunity to vote on whether the Company should continue, by ordinary resolution, at the Company's Annual General Meeting.

The latest five year period for this purpose ran from 1 April 2012 to 31 March 2017. Over this period, the Company outperformed its benchmark index. The NAV per share total return was 62.1% which compares favourably with the 60.2% total return from the benchmark. Under the Company's constitution, this outperformance means that there will not be a vote at the 2017 annual general meeting on whether the Company should continue.

The next such performance period will run for the five years from 1 April 2017 to 31 March 2022.

The Company's longer-term performance is shown within the Key Performance Indicators in the Annual Report. The NAV total return has outperformed the benchmark index over 5 years to 31 March 2017 and from launch to 31 March 2017.

Earnings, Dividends and Capital Repayments

The Company achieved net income of £4.6m for the year which was in line with the previous year.

Over the past year, Sterling has fallen in value against the US dollar which benefits the Company's revenue as over a third of the Company's equity income comes from UK-listed companies that declare dividends in US dollars. The majority of investee companies have continued to generate good growth in dividends during the year. However, against a backdrop of anaemic global economic growth and weak commodity prices, several of the higher yielding more mature businesses, such as HSBC and Royal Dutch Shell have seen profitability come under pressure, dividend cover erode and have therefore chosen to maintain, rather than increase their dividends. A number of these higher-yielding holdings have been reduced during the year, the overall impact of which is to maintain income at broadly the same level as the previous year.

For each of the Company's first three quarters, the dividends paid on the A shares and capital repayments on the B shares were 1.17p per share. A fourth quarter dividend and a capital repayment of 1.21p per share was paid to A shareholders and B shareholders respectively, after the year end, on 5 May 2017.

The total dividend/capital repayment in respect of the year ended 31 March 2017 amounted to 4.72p per share, an increase of 2.6% on the previous year and ahead of the 2.3% increase in the Consumer Price Index.

The total dividend/capital repayment for the year represents a yield of 4.5% on both the A and B year end share prices, a premium of around 30% to the 3.4% yield from the Company's benchmark at that date.

After deducting the fourth quarter dividend, (which was paid after the year-end), the Company has a revenue reserve of £4.7m equivalent to approximately 115% of the current annual dividend cost. This revenue reserve affords the Company the ability to sustain the level of dividend payments if a more difficult environment develops.

Borrowing

The Company currently has a £18 million loan facility for a term to 28 September 2017 at a fixed rate of interest of 3.15% per annum. The Board intends to secure further borrowing at an appropriate level.

Discount and buy backs

The share price of the Company's A shares and B shares ended the year at a discount to net asset value of 6.4% and 6.1% respectively. The average discount level at which the Company's A and B shares traded relative to net asset value in the year was 7.4% and 7.1% respectively.

During the year, the Company bought back 2,000,000 A shares and 450,000 B shares, representing 2.2% and 1.4% of the A shares and B shares respectively, in issue at the previous year end. The shares were bought back in line with the Company's stated policy, which is to repurchase shares of either class, at the Directors' discretion, when there are net sellers and the market price stands at a discount to net asset value of 5 per cent or more. The price paid for these A shares and B shares represented discounts of approximately 8.3% and 7.7% respectively, to the prevailing net asset value at the time of purchase.

Investment Policy

In order to meet the Company's investment objective, since launch, its investment portfolio has been managed in two parts. The first part comprises investments in UK equities and equity related securities (the Equities Portfolio) and the second part comprises investments in fixed interest and other higher yielding securities (the Higher Yield Portfolio). As referred to in my interim statement there has been a continued reduction in assets allocated to the Higher Yield Portfolio in light of the low level of yields available on corporate bonds, particularly higher quality, investment grade corporate bonds.

At 31 March 2017, 89.0% of total assets was allocated to the Equities Portfolio and 1.9% to the Higher Yield Portfolio. The remaining 9.1% was held in cash or cash equivalents.

Following a strategic review, the Board has concluded that it would be beneficial to remove the Higher Yield Portfolio from the Company's Investment Policy thereby simplifying the Company's overall structure. The Board is proposing at the Annual General Meeting that shareholders approve the requisite amendment to the Investment Policy.

The Board believes that this change will enhance the attractiveness of the Company by simplifying the Company's structure and focusing your Manager on an all equity offering for the benefit of all shareholders.

New Fund Manager

Shortly after the year end we announced, that having successfully achieved the five year performance hurdle, noted earlier, Rodger McNair, the Company's Fund Manager had indicated his intention to step down from this role and that Philip Webster would succeed Rodger as your Fund Manager. Philip has worked closely with Rodger since joining F&C from Aberdeen Asset Management in May 2016 and is a senior member of the F&C investment team with 11 years' experience in managing investment companies. The Board believes that he is very well suited to the role and therefore to continue the delivery of strong investment performance for the Company. I would like to take this opportunity to thank Rodger for his careful stewardship of the Company's investments since launch, which included some difficult and turbulent markets.

I look forward to introducing Philip to Shareholders at the forthcoming Annual General Meeting.

Name changes

The Company's investment objective is to provide an attractive return to shareholders in the form of dividends and/or capital repayments, together with prospects for capital growth.

As such, with effect from 31 January 2017, the Board resolved to change the name of the Company to F&C UK High Income Trust plc. The Board considers that this name more clearly reflects the Company's investment objective, enabling both current and prospective shareholders to identify more easily with the Company.

The Board is also proposing to change the name of the Company's A shares to Ordinary shares to clarify their nature and a resolution to amend the Company's Articles to implement this change will be proposed at the Annual General Meeting.

Board changes

Mr Kenneth Shand will retire as a Director of the Company following the conclusion of the Annual General Meeting on Thursday 29 June 2017. He has served as a Director since the Company's launch in 2007 and was a Director of the predecessor company, the original Investors Capital Trust plc. I would like to thank Kenneth for the contribution he has provided as a Director over many years.

The Board has begun the process of recruiting a new Director to replace Kenneth and an announcement in this regard will be made in due course.

Following the retirement of Kenneth Shand, James Williams will become Senior Independent Director and chairman of the Remuneration Committee.

Annual General Meeting ("AGM")

The AGM will be held at 2pm on Thursday 29 June 2017 in the offices of BMO Global Asset Management, Exchange House, Primrose Street, London. It will be followed by a presentation from our new Fund Manager Philip Webster. This is a good opportunity for shareholders to meet the Board and the Fund Manager and I would encourage you to attend.

Outlook

The past year has been witness to some profound political developments. The surge in populist, nationalist and anti-establishment sentiment has disrupted the political order across many western developed economies. Despite a series of shocks, not least Brexit and a Donald Trump presidency, the health of the global economy appears to be improving, possibly signaling that the era of unconventional central bank policy stimulus may be drawing to a close. Against a background of elevated political and policy uncertainty, it is encouraging that corporate sector fundamentals remain reasonably sound. Stock selection will remain especially important in the year ahead.

Iain McLaren

Chairman

19 May 2017

For further information, please contact:

Philip Webster                                                                          

Fund Manager to F&C UK High Income Trust plc                          Tel:        [phone]

Ian Ridge

For F&C Investment Business Limited

Company Secretary to F&C UK High Income Trust plc                  Tel:        [phone]

Consolidated Statement of Comprehensive Income (audited)

		Year to 31 March 2017
	Note	Revenue	Capital	Total
		£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value through profit or loss		-	20,184	20,184
Exchange differences		-	(545)	(545)
Revenue
Investment income		5,447	-	5,447
Total income		5,447	19,639	25,086
Expenditure
Investment management fee		(287)	(670)	(957)
Other expenses		(397)	-	(397)
Total expenditure		(684)	(670)	(1,354)
Profit before finance costs and tax		4,763	18,969	23,732
Finance costs
Interest on bank loan		(178)	(415)	(593)
Total finance costs		(178)	(415)	(593)
Profit before tax		4,585	18,554	23,139
Tax		-	-	-
Profit for the year		4,585	18,554	23,139
Total comprehensive income for the year		4,585	18,554	23,139
Earnings per share	2	3.82p	15.48p	19.30p

Consolidated Statement of Comprehensive Income (audited)

		Year to 31 March 2016
	Note	Revenue	Capital	Total
		£'000	£'000	£'000
Capital losses on investments
Losses on investments held at fair value through profit or loss		-	(6,640)	(6,640)
Exchange differences		-	(325)	(325)
Revenue
Investment income		5,424	-	5,424
Total income		5,424	(6,965)	(1,541)
Expenditure
Investment management fee		(267)	(623)	(890)
Other expenses		(408)	-	(408)
Total expenditure		(675)	(623)	(1,298)
Profit/(loss) before finance costs and tax		4,749	(7,588)	(2,839)
Finance costs
Interest on bank loan		(178)	(416)	(594)
Total finance costs		(178)	(416)	(594)
Profit/(loss) before tax		4,571	(8,004)	(3,433)
Tax		-	-	-
Profit/(loss) for the year		4,571	(8,004)	(3,433)
Total comprehensive income for the year		4,571	(8,004)	(3,433)
Earnings per share	2	3.74p	(6.55)p	(2.81)p

Balance Sheets (audited)

as at 31 March

		2017		2016
		Company	Group	Company	Group
	Note	£'000	£'000	£'000	£'000
Non-current assets
Investments held at fair value through profit or loss		136,291	136,041	127,855	127,605
Current assets
Receivables		979	979	1,690	1,690
Cash and cash equivalents		12,982	12,982	7,264	7,264
		13,961	13,961	8,954	8,954
Total assets		150,252	150,002	136,809	136,559
Current liabilities
Payables		(603)	(353)	(2,281)	(2,031)
Bank loan		(18,000)	(18,000)	-	-
		(18,603)	(18,353)	(2,281)	(2,031)
Non-current liabilities
Bank loan		-	-	(18,000)	(18,000)
		-	-	(18,000)	(18,000)
Total liabilities		(18,603)	(18,353)	(20,281)	(20,031)
Net assets		131,649	131,649	116,528	116,528
Share capital		134	134	134	134
Share premium		153	153	153	153
Capital redemption reserve		5	5	5	5
Buy back reserve		82,711	82,711	85,092	85,092
Special capital reserve		19,589	19,589	21,058	21,058
Capital reserves		23,273	23,273	4,719	4,719
Revenue reserve		5,784	5,784	5,367	5,367
Equity shareholders' funds		131,649	131,649	116,528	116,528
Net asset value per A share	7	111.19p	111.19p	96.42p	96.42p
Net asset value per B share	7	111.19p	111.19p	96.42p	96.42p

The Company's profit for 2017 was £23,139,000 (2016: loss £3,433,000).

Consolidated and Company Cash Flow Statement (audited)

for the year to 31 March

	Year to 31 March 2017	Year to 31 March 2016
	£'000	£'000
Cash flows from operating activities
Profit/(loss) before tax	23,139	(3,433)
Adjustments for:
(Gains)/losses on investments held at fair value through profit or loss	(20,184)	6,640
Exchange differences	545	325
Interest income	(21)	(29)
Interest received	21	29
Investment interest	(426)	(761)
Investment interest received	587	806
Dividend income	(5,000)	(4,626)
Dividend income received	4,958	4,565
Increase in receivables	(10)	(2)
Increase in payables	15	1
Purchases of investments	(25,097)	(17,540)
Sales of investments	36,456	20,510
Finance costs	593	594
Net cash inflow from operating activities	15,576	7,079
Cash flows from financing activities
Dividends paid on A shares	(4,168)	(4,126)
Capital returns paid on B shares	(1,469)	(1,466)
Interest on bank loan	(593)	(594)
Shares purchased for treasury	(3,056)	(658)
Net cash outflow from financing activities	(9,286)	(6,844)
Net increase in cash and cash equivalents	6,290	235
Currency losses	(572)	(280)
Opening net cash and cash equivalents	7,264	7,309
Closing net cash and cash equivalents	12,982	7,264

Consolidated and Company Statement of Changes in Equity (audited)

for the year to 31 March 2017

	Share Capital	Share Premium	Capital Redemption Reserve	Buy Back Reserve	Special Capital Reserve	Capital Reserve - Investments sold	Capital Reserve - Investments held	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 1 April 2016	134	153	5	85,092	21,058	(14,777)	19,496	5,367	116,528
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	4,867	13,687	4,585	23,139
Total comprehensive income for the year	-	-	-	-	-	4,867	13,687	4,585	23,139
Transactions with owners of the Company recognised directly in equity
Shares bought back for treasury	-	-	-	(2,381)	-	-	-	-	(2,381)
Dividends paid on A shares	-	-	-	-	-	-	-	(4,168)	(4,168)
Capital returns paid on B shares	-	-	-	-	(1,469)	-	-	-	(1,469)
Balance as at 31 March 2017	134	153	5	82,711	19,589	(9,910)	33,183	5,784	131,649

Consolidated and Company Statement of Changes in Equity (audited)

for the year to 31 March 2016

	Share Capital	Share Premium	Capital Redemption Reserve	Buy Back Reserve	Special Capital Reserve	Capital Reserve - Investments sold	Capital Reserve - Investments held	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 1 April 2015	134	153	5	86,425	22,524	(15,844)	28,567	4,922	126,886
Total comprehensive income for the year
Profit/(loss) for the year	-	-	-	-	-	1,067	(9,071)	4,571	(3,433)
Total comprehensive income for the year	-	-	-	-	-	1,067	(9,071)	4,571	(3,433)
Transactions with owners of the Company recognised directly in equity
Shares bought back for treasury	-	-	-	(1,333)	-	-	-	-	(1,333)
Dividends paid on A shares	-	-	-	-	-	-	-	(4,126)	(4,126)
Capital returns paid on B shares	-	-	-	-	(1,466)	-	-	-	(1,466)
Balance as at 31 March 2016	134	153	5	85,092	21,058	(14,777)	19,496	5,367	116,528

F&C UK High Income Trust plc

Principal Risks and Viability Statement

In accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, issued by the Financial Reporting Council, the Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. It has also regularly reviewed the effectiveness of the Company's risk management and internal control systems for the period.

The principal risks and uncertainties faced by the Company, and the Board's mitigation approach are described below.

Financial Risk.

The Company's assets consist mainly of listed equity and fixed interest securities and its principal risks are therefore market-related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk.

Mitigation:  

An explanation of these risks and the way in which they are managed are contained in the notes to the accounts.  The Board regularly considers the composition and diversification of the Equity and Higher Yield Portfolios together with purchases and sales of investments.  Investments and markets are discussed with the Manager and a Strategy meeting is held annually.

Investment and strategic risk.

Incorrect strategy, asset allocation, stock selection, inappropriate capital structure, insufficient monitoring of costs, failure to maintain an appropriate level of discount/premium and the use of gearing could all lead to poor returns for shareholders.

Mitigation: 

The Equity and Higher Yield Portfolios are diversified and comprise listed securities and their composition are reviewed regularly with the Board. The investment policy and performance against peers and benchmark are considered by the Board at each meeting.  A separate Board meeting is also held each year to consider strategic issues.  Marketing intelligence is maintained via the Company's Broker and the effectiveness of the marketing strategy is also reviewed at each meeting. The Manager also meets with major shareholders. The Board regularly considers operating costs combined with underlying dividend income from portfolio companies and the consequent dividend paying capacity of the Company.

Regulatory. 

Breach of regulatory rules could lead to the suspension of the Company's Stock Exchange listing, financial penalties, or a qualified audit report. Breach of section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains. Changes to tax regulations could alter the market competitiveness of the Company's B Shares.

Mitigation: 

The Board liaises with advisors to ensure compliance with laws or regulations. F&C's Business Risk department provide regular reports to the Board and Audit Committee on their monitoring and oversight.  The Board has access to F&C's Head of Business Risk and requires any significant issues directly relevant to the Company to be reported immediately.

Operational. 

Failure of the Manager's systems or disruption to its business, or that of an outsourced or third party service provider, could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets leading to a potential breach of the Company's investment mandate or loss of shareholders' confidence. External cyber attacks could cause such failure or could lead to the loss or sabotage of data.

Mitigation:

The Board meets regularly with the management of F&C and meets their Risk Management team to review internal control and risk reports which includes oversight of third party service providers. The Manager's appointment is reviewed annually.  The contract can be terminated with six months' notice.  The Manager now benefits from the long-term financial strength and policies of its new owner, Bank of Montreal, and through its stated commitment to the future of F&C's investment trust management business. The Manager continues to strengthen and develop its Risk, Compliance and Internal Control functions as part of the integration of its operations with Bank of Montreal including IT security. Supervision of third party service providers has been maintained by F&C and includes the review of IT security and cyber threat.

Custody Risk.

Safe custody of the Company's assets may be compromised through control failures by the custodian.

Mitigation: 

The Board receives quarterly reports from the Depositary confirming safe custody of the Company's assets and cash and holdings are reconciled to the Custodian's records. The Custodian's internal controls reports are also reviewed by the Manager and key points reported to the Audit Committee.  The Depositary is specifically liable for loss of any of the Company's securities and cash held in custody.

Viability assessment and statement

In accordance with the UK Corporate Governance Code, the Board is required to assess the future prospects for the Company, and has considered that a number of characteristics of its business model and strategy were relevant to this assessment:

·      The Board looks to long-term outperformance rather than short-term opportunities.

·      The Company's investment objective, strategy and policy, which are subject to regular Board monitoring, mean that the Company is invested mainly in liquid listed securities and that the level of borrowing is restricted.

·      The Company is a closed-end investment trust, whose shares are not subject to redemptions by shareholders.

·      Subject to shareholder continuation votes, in the event that the net asset value total return performance of the Company is less than that of the FTSE All-Share Capped 5% Index over the relevant five year period, the Company's business model and strategy is not time limited.

Also relevant were a number of aspects of the Company's operational arrangements:

·      The Company retains title to all assets held by the Custodian under the terms of the formal agreement with the Custodian and Depositary.

·      The borrowing facility, which remains available until September 2017, is also subject to a formal agreement, including financial covenants with which the Company complied in full during the year.

·      Revenue and expenditure forecasts are reviewed by the Directors at each Board Meeting.

·      Cash is held with banks approved and regularly reviewed by the Manager.

In considering the viability of the Company, the Directors carried out a robust assessment of the principal risks and uncertainties which could threaten the Company's objectives and strategy, future performance, liquidity and solvency.  These risks, their mitigations and the processes for monitoring them are set out above within Principal Risks and in the Report of the Audit Committee and in Note 21 on the accounts within the Annual Report.

The Directors have also considered:

·      the level of ongoing charges incurred by the Company which are modest and predictable and total 1.11% of average net assets,

·      future revenue and expenditure projections,

·      the Company's borrowing and liquidity in the context of the fixed rate loan which is due to mature in September 2017 and that the Board does not anticipate any difficulty either extending or replacing this with an appropriate level of borrowing,

·      its ability to meet liquidity requirements given the Company's investment portfolio consists mainly of listed equity and fixed interest securities which can be realised to meet liquidity requirements if required,

·      the ability to undertake share buybacks if required,

·      the effect of significant future falls in investment values and the ability to maintain dividends and capital repayments.

These matters were assessed over a five year period to May 2022, and the Board will continue to assess viability over five year rolling periods, taking account of severe but plausible scenarios.  A rolling five year period represents the horizon over which the Directors believe they can form a reasonable expectation of the Company's prospects, balancing the Company's financial flexibility and scope with the current outlook for longer-term economic conditions affecting the Company and its shareholders.

Based on their assessment, and in the context of the Company's business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period to May 2022.

Statement of Directors' Responsibilities in Respect of the Financial Statements

In accordance with Chapter 4 of the Disclosure and Transparency Rules, the Directors confirm, in respect of the Annual Report and accounts for the year ended 31 March 2017 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 applicable International Financial Reporting Standards as adopted by the European Union, and give a true and fair view of the assets, liabilities, financial position and return of the Group and the undertakings included in the consolidation taken as a whole;

·      the Strategic Report (comprising the Chairman's Statement, Business Model, Strategy and Policies, Key Performance Indicators, Manager's Review, Classification of Investments, Equities Portfolio and Principal Risks and Viability Statement) and the Report of the Directors include a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole together with a description of the principal risks that they face;

·      taken as a whole, the annual report and accounts are fair, balanced and understandable and provide the information necessary for shareholders to assess the performance, business model and strategy of the Group;

·      the financial statements include details on related party transactions; and

·      having assessed the principal risks and other matters discussed in connection with the Viability Statement, it is appropriate to adopt the going concern basis in preparing the financial statements.

On behalf of the Board

Iain McLaren

Chairman

19 May 2017                                                      

Notes (audited)

1.            The financial statements of the Group which are the responsibility of, and were approved by, the Board on 19 May 2017, have been prepared in accordance with the Companies Act 2006, International Financial Reporting Standards (''IFRS''), which comprise standards and interpretations approved by the International Accounting Standards Board (''IASB''), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee (''IASC'') that remain in effect, and to the extent that they have been adopted by the European Union.

Where presentational guidance set out in the Statement of Recommended Practice (''SORP'') for investment trusts issued by the Association of Investment Companies (''AIC'') in November 2014 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

2.            The Company's earnings per share are based on the profit for the year of £23,139,000 (year to 31 March 2016 loss: £3,443,000) and on 88,644,856 A shares (2016: 90,263,253) and 31,262,045 B shares (2016: 31,887,076), being the weighted average number of shares in issue of each share class during the year. 

The Company's revenue earnings per share are based on the revenue profit for the year of £4,585,000 (year to 31 March 2016: £4,571,000) and on the weighted average number of shares in issue as above.

The Company's capital earnings per share are based on the capital profit for the year of £18,554,000 (year to 31 March 2016 loss: £8,004,000) and on the weighted average number of shares in issue as above.

3.            The Group results comprise those of the Company and those of Investors Securities Company Limited, a wholly owned subsidiary which is dormant.

4.            The fourth interim dividend of 1.21p per A share, was paid on 5 May 2017 to A shareholders on the register at close of business on 7 April 2017, having an ex-dividend date of 6 April 2017. The fourth capital repayment of 1.21p per B share was paid on 5 May 2017 to B shareholders on the register on 7 April 2017.

5.            The Company has drawn down an £18 million term loan facility with a five year term to 28 September 2017. The term loan with JPMorgan Chase Bank is currently secured on investments and cash held by JPMorgan Chase Bank as custodian which constitutes the majority of the assets of the Company. The term loan carries interest at a fixed rate of 3.15 per cent per annum payable quarterly in arrears. An administration fee of £18,000 is payable annually in addition.

The term loan contains certain financial covenants with which the Company must comply. These include a financial covenant to the effect that the percentage of the total amounts drawn down under the term loan (together with any other borrowings) should not exceed 45 per cent of the Company's Eligible Total Secured Assets. The Company complied with the required financial covenants throughout the period since drawdown.

The fair value of the fixed rate £18 million term loan, on a marked to market basis, was £18,078,000 at 31 March 2017 (2016: £18,156,000).

6.            During the year the Company bought back 2,000,000 (2016: 850,000) A Shares to hold in treasury at a cost of £1,941,000 (2016: £758,000) and 450,000 (2016: 650,000) B Shares to hold in treasury at a cost of £440,000 (2016: £575,000). The Company did not buy back any shares for cancellation during the year (2016: nil).

At 31 March 2017 the Company held 14,639,000 (2016: 12,639,000) A Shares and 1,100,000 (2016: 650,000) B Shares in treasury.

7.            The Company's basic net asset value per share of 111.19p (2016: 96.42p) is based on the equity shareholders' funds of £131,649,000 (2016: £116,528,000) and on 118,404,847 equity shares, consisting of 87,428,144 A Shares and 30,976,703 B Shares (2016: 120,854,847 equity shares, consisting of 89,428,144 A Shares and 31,426,703 B Shares), being the number of shares in issue at the year end.

The Company's shares may also be traded as units, each unit consisting of three A Shares and one B Share. The basic net asset value per unit as at 31 March 2017 was therefore 444.76p (2016: 385.68p).

The Company's treasury net asset value per share, incorporating the 14,639,000 A Shares and 1,100,000 B Shares held in treasury at the year end (2016: 12,639,000 A Shares and 650,000 B Shares), was 110.54p (2016: 95.95p). The Company's treasury net asset value per unit at the end of the year was 442.15p (2016: 383.80p). The Company's policy is to only re-sell shares held in treasury at a price representing a discount of not more than 5 per cent to net asset value at the time of sale, together with other conditions. Accordingly, for the purpose of the calculation, such treasury shares are valued at the higher of net asset value less 5 per cent and the mid market share price at each year end.

8.            Financial Instruments

The Company's financial instruments comprise equity and fixed interest investments, cash balances, receivables and payables that arise directly from its operations and borrowings. As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company makes use of borrowings to achieve enhanced returns. The downside risk of borrowings can be mitigated by raising the level of cash balances held.

The Company may use derivatives for efficient portfolio management from time to time. The only derivatives used in the year were forward foreign exchange currency contracts to hedge currency movements.  These were also used in the prior year. The Company may also write call options over some investments held in the Equities Portfolio. There were no call options written during the current year or prior year.

Apart from the fair value of the fixed-rate term loan as disclosed in note 5, the fair value of the financial assets and liabilities of the Company at 31 March 2017 is not materially different from their carrying value in the financial statements.

The Company is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, market price risk, liquidity risk, interest rate risk and foreign currency risk.

The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and have remained unchanged for the year under review.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Company.

The Company's principal financial assets are bank balances and cash, other receivables and fixed interest investments, whose carrying amounts in the balance sheet represent the Company's maximum exposure to credit risk in relation to financial assets. The Company did not have any exposure to any financial assets which were past due or impaired at the current or prior year end.

The Company is exposed to potential failure by counterparties to deliver securities for which the Company has paid, or to pay for securities which the Company has delivered. A list of pre-approved counterparties used in such transactions is maintained and regularly reviewed by the Manager, and transactions must be settled on a basis of delivery against payment. Broker counterparties are selected based on a combination of criteria, including credit rating, balance sheet strength and membership of a relevant regulatory body. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the acceptable quality of the brokers used. The rate of default in the past has been insignificant.

All of the assets of the Company, other than the dealing subsidiary, are held by JPMorgan Chase Bank, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to the 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.

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings, normally rated A or higher, assigned by international credit rating agencies. Bankruptcy or insolvency of such financial institutions may cause the Company's ability to access cash placed on deposit to be delayed, limited or lost. The Company has no significant concentration of credit risk with exposure spread over a number of counterparties and financial institutions.

Market price risk

The fair value of equity and other financial securities held in the Company's portfolio fluctuates with changes in market prices. Prices are themselves affected by movements in currencies and interest rates and by other financial issues, including the market perception of future risks. Other external events such as protectionism, inflation or deflation, economic recessions and terrorism could also affect share prices in particular markets. The Group's strategy for the management of market price risk is driven by the Company's investment policy. The Board sets policies for managing this risk and meets regularly to review full, timely and relevant information on investment performance and financial results. The management of market price risk is part of the fund management process and is typical of equity and fixed interest investment. The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with an objective of maximising overall returns to shareholders. Investment and portfolio performance are discussed in more detail in the Manager's Review in the Annual Report.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments. The risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given the liquid nature of the portfolio of investments and the level of cash and cash equivalents ordinarily held. However, where there has been a deterioration in credit quality or an event of default the Company may not be able to liquidate quickly, at fair value, some of its investments in the Higher Yield Portfolio. Cash balances are held with a spread of reputable banks with a credit rating of normally A or higher, usually on overnight deposit. The Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.

In certain circumstances, the terms of the Company's bank loan entitle the lender to demand early repayment and, in such circumstances, the Company's ability to maintain dividend levels and the net asset value attributable to equity shareholders could be adversely affected. Such early repayment may be required in the event of a change of control of the Company or on the occurrence of certain events of default which are customary for facilities of this type. These include events of non payment, breach of other obligations, misrepresentations, insolvency and insolvency proceedings, illegality and a material adverse change in the financial condition of the Company.

Interest rate risk

Some of the Company's financial instruments are interest bearing. They are a mix of both fixed and variable rate instruments with differing maturities. As a consequence, the Company is exposed to interest rate risk due to fluctuations in the prevailing market rate. The Company's exposure to floating interest rates gives cashflow interest rate risk and its exposure to fixed interest rates gives fair value interest rate risk.

Floating rate

When the Company retains cash balances the majority of the cash is held in deposit accounts. The benchmark rate which determines the interest payments received on cash balances is the bank base rate, which was 0.25 per cent at 31 March 2017 (2016: 0.5 per cent).

Fixed rate

Movements in the fair value of investments held in the Higher Yield Portfolio due to a movement in the market interest rate is viewed to form part of the market price risk. The Company's Equities Portfolio does not contain any fixed interest or floating rate interest assets.

The £18 million term loan carries a fixed interest rate of 3.15 per cent per annum.

Foreign currency risk

In order to achieve a diversified portfolio of higher yielding securities the Company invests partly in overseas securities which gives rise to currency risks. In the year to 31 March 2017, the Company entered into US Dollar and Euro foreign exchange currency contracts with a view to hedging these currency risks.

Given the policy to hedge currency risk on non-sterling denominated assets by entering into forward foreign exchange currency contracts, the weakening or strengthening of Sterling against either the US Dollar or Euro would not have had a significant net impact on the total column of the Consolidated Statement of Comprehensive Income for either the year or the prior year nor the net asset value as at 31 March 2017 or 31 March 2016.

9.         These are not full statutory accounts in terms of Section 434 of the Companies Act 2006. The full audited annual report and accounts for the year ended 31 March 2017 will be sent to shareholders in May 2017 and will be available for inspection at 80 George Street, Edinburgh, the registered office of the Company.  The full annual report and accounts will be available on the website maintained on behalf of the Company at www.fandcukhit.co.uk .

The audited accounts for the year to 31 March 2017 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 29 June 2017.

 

END

 

 

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