Annual Financial Report

RNS Number : 7907Y

Investors Capital Trust PLC

20 May 2016

 

To:                    RNS

From:                Investors Capital Trust plc

Date:                20 May 2016

Results for the year ended 31 March 2016

·      Total distributions for the year to 31 March 2016 of 4.60p per share, an increase of 2.7 per cent compared to the prior year

·      Distribution yield of 5.1 per cent on A shares and 5.0 per cent on B shares at 31 March 2016, compared to the yield on the FTSE All-Share Capped 5% Index of 3.7 per cent

·      Net asset value total return per share for the year was -2.8 per cent, compared to the FTSE All-Share Capped 5% Index total return of -3.8 per cent

·      Net asset value total return per share since launch on 1 March 2007 was 60.4 per cent, compared to the FTSE All-Share Capped 5% Index total return of 51.3 per cent

Chairman's Statement as follows:

Introduction

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.

The Company's investment portfolio is managed in two parts. The first part comprises investments in UK equities and equity related securities (the Equities Portfolio) and the second part investments in fixed interest and other higher yielding securities (the Higher Yield Portfolio). At 31 March 2016, 85.2 per cent. of total assets was allocated to the Equities Portfolio and 9.7 per cent. to the Higher Yield Portfolio. The remaining 5.1 per cent. was held as cash and cash equivalents.

Investment Performance

The pace of global economic recovery over the past year has remained lacklustre, uneven and lacking in momentum. Despite a slower start to 2016, the US and UK economies have remained amongst the faster growing developed economies. Indeed, the improvement in economic conditions in the US during the year was such that, in December, the Federal Reserve announced a small, but significant increase in interest rates. This was the first move since the benchmark Federal Funds rate had been reduced to close to zero in 2008 at the height of the worst financial crisis of the post war era, signalling the beginning of the end of an extraordinary period of monetary support from the US Central Bank.

In contrast, economic recovery in the Eurozone has remained elusive with that region beset by economic, structural and political challenges. In recent months, in a further effort to increase inflation and stimulate growth, the European Central Bank (ECB) reduced interest rates to an all-time low, expanded the size and the scope of its quantitative easing programme and lowered a key bank deposit rate further into negative territory. By setting negative deposit rates on commercial banks excess funds, a policy also recently adopted in Japan, the ECB hopes that banks will be more inclined to lend and thereby stimulate growth.

Concerns over the slowdown in emerging market economies, most notably China, Brazil and Russia, together with slumping commodity prices and rising geopolitical risks have weighed on investor sentiment over the past year and contributed to a rise in market volatility. Against that background, financial markets have proven to be quite resilient, supported by reasonable corporate sector fundamentals and plentiful global liquidity.

The Company's Equities Portfolio produced a total return of -2.4 per cent. during the year to 31 March 2016, while the Higher Yield Portfolio returned 1.1 per cent. Returns from the Equities Portfolio and the Higher Yield Portfolio, combined with the effect of gearing and expenses, resulted in a net asset value total return for the A shares and B shares of -2.8 per cent. for the year. This return was ahead of the -3.8 per cent. total return for the FTSE All-Share Capped 5% Index, the Company's benchmark. Performance is covered in more detail in the Manager's Review in the Annual Report.

Since the Company's launch on 1 March 2007 to 31 March 2016, the net asset value per share total return performance has been 60.4 per cent. which compares favourably with the 51.3 per cent. total return from the benchmark FTSE All-Share Capped 5% Index.

Earnings

The Company achieved total revenue income of £5.4m for the year. The yield on the Equities Portfolio was 4.0 per cent. as at 31 March 2016, compared to the yield on the FTSE All-Share Capped 5% Index of 3.7 per cent.

The Company's revenue decreased by 5.2 per cent compared with the previous year which is primarily due to the lower level of one-off special dividends in the Equities Portfolio. Special dividends totaled £74,000 during the year (2015: £405,000). The level of income from the Higher Yield Portfolio, also decreased as the level of assets allocated to fixed interest securities further reduced during the year.

While the majority of investee companies continued to demonstrate good dividend growth during the year, the outlook for dividends from the UK market as a whole has deteriorated. Over the coming year, dividends from the UK market may come under pressure as dividend cuts from some of the UK's largest companies are likely to overshadow good progress elsewhere. In my interim report, I suggested that if the weakness in commodity prices persisted, the high level of dividend yields offered by the shares of the integrated oil and mining companies would prove unsustainable. During the second half of the Company's financial year, the rout in commodity prices continued. In February, both Rio Tinto and BHP Billiton, two of the largest players in the mining industry, both confirmed substantial dividend cuts with their full year's results. Despite the weakness in crude oil prices, both Royal Dutch Shell and BP have thus far chosen to maintain their dividend payments, however at prevailing crude oil prices these dividends remain very much at risk.

Over one third of the income from the Equities Portfolio comes from UK-listed companies that declare dividends in US dollars. Over the course of the financial year, the US dollar appreciated slightly relative to sterling to the modest benefit of the level of dividend income from the Equities Portfolio as a whole.

After deducting the fourth quarter dividend, the Company had revenue reserves of £4.3m at 31 March 2016. This is now equivalent to approximately 105% of the current annual dividend cost, which affords the Company the ability to sustain dividend payments, if a more difficult environment develops.

Dividends and Capital Repayments

Dividends to A shareholders and capital repayments to B shareholders are paid quarterly in August, November, February and May each 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 1.14p per share. A fourth quarter dividend of 1.18p per share was paid to A shareholders, and a capital repayment of the same amount paid to B shareholders, on 6 May 2016. This gives a total dividend/capital repayment of 4.60p per share in respect of the year to 31 March 2016, which represents an increase of 2.7 per cent. compared to the previous year.

Based on the share prices for both share classes at 31 March 2016 this represents a distribution yield for the A shareholders and B shareholders of 5.1 per cent. and 5.0 per cent respectively. These yields compare favourably with the yield on the FTSE All-Share Capped 5% Index of 3.7 per cent at that date. For shareholders that hold units, the distribution yield was 5.2 per cent. based on a unit price of 354.0 pence as at 31 March 2016.

Capital Structure

The Company has two classes of shares: A shares and B shares. The net asset value attributable to the A shares and to the B shares is the same. The rights of each class are identical, save that only the A shares are entitled to receive dividends, while the B shares instead receive a capital repayment at the same time as, and in an equal amount to, each dividend. The 'Capital Structure' section of the Annual Report provides further information on the A shares and B shares.

The Company has a £18 million loan facility for a term to 28 September 2017 at a fixed rate of interest of 3.15 per cent. per annum.

Discount and buy backs

The price of the Company's A shares and B shares were at a discount to net asset value of 6.7 per cent. and 5.0 per cent. respectively, at 31 March 2016. Over the year, the price of the Company's A shares traded at an average discount to net asset value per share of 8.0 per cent. and the Company's B shares traded at an average discount of 6.5 per cent.

During the year, the Company bought back 850,000 A shares and 650,000 B shares, representing 0.9 per cent and 2.0 per cent 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 7.6 per cent and 8.1 per cent respectively, to the prevailing net asset value at the time of purchase.

Outlook

Looking to the year ahead, headwinds from the slowdown in emerging market economies, the collapse of commodity prices and elevated geopolitical tensions are likely to dampen economic growth prospects. This suggests the modest, below-trend and divergent economic recovery of recent years may well continue. In the UK, uncertainty over the outcome of the forthcoming EU referendum is likely to weigh on investor sentiment in the near term. Notwithstanding the rise in US interest rates, with inflation in developed economies well below Central Banks' targets, global monetary conditions are likely to remain supportive for financial markets while at the same time corporate sector fundamentals remain reasonable.

Iain McLaren

Chairman

19 May 2016

For further information, please contact:

Rodger McNair                                                                           Tel:        [phone]

Fund Manager to Investors Capital Trust plc

Ian Ridge

For F&C Investment Business Limited

Company Secretary to Investors Capital Trust plc             Tel:        [phone]

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

Consolidated Statement of Comprehensive Income (audited)

		Year to 31 March 2015
	Note	Revenue	Capital	Total
		£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value through profit or loss		-	2,597	2,597
Exchange differences		-	342	342
Revenue
Investment income		5,721	-	5,721
Total income		5,721	2,939	8,660
Expenditure
Investment management fee		(283)	(660)	(943)
Other expenses		(391)	-	(391)
Total expenditure		(674)	(660)	(1,334)
Profit before finance costs and tax		5,047	2,279	7,326
Finance costs
Interest on bank loan		(177)	(414)	(591)
Total finance costs		(177)	(414)	(591)
Profit before tax		4,870	1,865	6,735
Tax		(22)	22	-
Profit for the year		4,848	1,887	6,735
Total comprehensive income for the year		4,848	1,887	6,735
Earnings per share	2	3.95p	1.54p	5.49p

Balance Sheets (audited)

as at 31 March 2016

		2016		2015
		Company	Group	Company	Group
	Note	£'000	£'000	£'000	£'000
Non-current assets
Investments held at fair value through profit or loss		127,855	127,605	137,071	136,821
Current assets
Receivables		1,690	1,690	1,517	1,517
Cash and cash equivalents		7,264	7,264	7,309	7,309
		8,954	8,954	8,826	8,826
Total assets		136,809	136,559	145,897	145,647
Current liabilities
Payables		(2,281)	(2,031)	(1,011)	(761)
		(2,281)	(2,031)	(1,011)	(761)
Non-current liabilities
Bank loan		(18,000)	(18,000)	(18,000)	(18,000)
		(18,000)	(18,000)	(18,000)	(18,000)
Total liabilities		(20,281)	(20,031)	(19,011)	(18,761)
Net assets		116,528	116,528	126,886	126,886
Share capital	6	134	134	134	134
Share premium	6	153	153	153	153
Capital redemption reserve		5	5	5	5
Buy back reserve	6	85,092	85,092	86,425	86,425
Special capital reserve		21,058	21,058	22,524	22,524
Capital reserves		4,719	4,719	12,723	12,723
Revenue reserve		5,367	5,367	4,922	4,922
Equity shareholders' funds		116,528	116,528	126,886	126,886
Net asset value per A share	7	96.42p	96.42p	103.70p	103.70p
Net asset value per B share	7	96.42p	96.42p	103.70p	103.70p

Consolidated and Company Cash Flow Statement (audited)

for the year to 31 March 2016

	Year to 31 March 2016	Year to 31 March 2015
	£'000	£'000
Cash flows from operating activities
(Loss)/profit before tax	(3,433)	6,735
Adjustments for:
Losses/(gains) on investments held at fair value through profit or loss	6,640	(2,597)
Exchange differences	325	(342)
Interest income	(29)	(15)
Interest received	29	15
Investment interest	(761)	(938)
Investment interest received	806	968
Dividend income	(4,626)	(4,766)
Dividend income received	4,565	4,667
Increase in receivables	(2)	(3)
Increase/(decrease) in payables	1	(436)
Purchases of investments	(17,540)	(13,501)
Sales of investments	20,510	17,553
Finance costs	594	591
Net cash inflow from operating activities	7,079	7,931
Cash flows from financing activities
Dividends paid on A shares	(4,126)	(4,042)
Capital returns paid on B shares	(1,466)	(1,428)
Interest on bank loan	(594)	(591)
Shares purchased for treasury	(658)	(931)
Shares issued from treasury	-	133
Net cash outflow from financing activities	(6,844)	(6,859)
Net increase in cash and cash equivalents	235	1,072
Currency (losses)/gains	(280)	333
Opening net cash and cash equivalents	7,309	5,904
Closing net cash and cash equivalents	7,264	7,309

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

Consolidated and Company Statement of Changes in Equity (audited)

for the year to 31 March 2015

	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 2014	134	153	5	87,356	23,952	(16,187)	27,023	4,116	126,552
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	343	1,544	4,848	6,735
Total comprehensive income for the year	-	-	-	-	-	343	1,544	4,848	6,735
Transactions with owners of the Company recognised directly in equity
Shares bought back for treasury	-	-	-	(931)	-	-	-	-	(931)
Dividends paid on A shares	-	-	-	-	-	-	-	(4,042)	(4,042)
Capital returns paid on B shares	-	-	-	-	(1,428)	-	-	-	(1,428)
Balance as at 31 March 2015	134	153	5	86,425	22,524	(15,844)	28,567	4,922	126,886

Investors Capital Trust plc

Principal Risks

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 meeting is also held each year to consider strategic issues.  Marketing intelligence is maintained via the Company's Broker and the Manager meets with major shareholders. The Board regularly considers ongoing charges and underlying dividends from portfolio companies, and 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: 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 receives regular internal control and risk reports from the Manager 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, the BMO Group, and through its stated commitment to the future of F&C's investment trust management business.  The Manager continues to strengthen its Risk, Compliance and Internal Control functions as part of the integration of its operations following the acquisition of F&C by Bank of Montreal and continues to invest in IT security.

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.

Investors Capital Trust plc

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 2016 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 and Strategy, Key Performance Indicators, Manager's Review, Classification of Investments, Equities Portfolio, Higher Yield Portfolio and Principal Risks) 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 2016                                                      

Notes (audited)

1.            The financial statements of the Group which are the responsibility of, and were approved by, the Board on 19 May 2016, 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 loss for the year of £3,443,000 (year to 31 March 2015 profit: £6,735,000) and on 90,263,253 A shares (2015: 90,716,500) and 31,887,076 B shares (2015: 32,076,703), 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 £4,571,000 (year to 31 March 2015: £4,848,000) and on the weighted average number of shares in issue as above.

The Company's capital earnings per share are based on the capital loss for the year of £8,004,000 (year to 31 March 2015: £1,887,000) 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 deals in securities.

4.            The fourth interim dividend of 1.18p per A share, was paid on 6 May 2016 to A shareholders on the register at close of business on 8 April 2016, having an ex-dividend date of 7 April 2016. The fourth capital repayment of 1.18p per B share was paid on 6 May 2016 to B shareholders on the register on 8 April 2016.

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 £18,156,000 at 31 March 2016 (2015: £18,103,000).

6.            During the year the Company bought back 850,000 (2015: 1,000,000) A Shares to hold in treasury at a cost of £758,000 (2015: £931,000) and 650,000 (2015: nil) B Shares to hold in treasury at a cost of £575,000 (2015: nil). The Company did not buy back any shares for cancellation during the year (2015: nil).

At 31 March 2016 the Company held 12,639,000 (2015: 11,789,000) A Shares and 650,000 (2015: nil) B Shares in treasury.

7.            The Company's basic net asset value per share of 96.42p (2015: 103.70p) is based on the equity shareholders' funds of £116,528,000 (2015: £126,886,000) and on 120,854,847 equity shares, consisting of 89,428,144 A Shares and 31,426,703 B Shares (2015: 122,354,847 equity shares, consisting of 90,278,144 A Shares and 32,076,703 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 2016 was therefore 385.68p (2015: 414.80p).

The Company's treasury net asset value per share, incorporating the 12,639,000 A Shares and 650,000 B shares held in treasury at the year end, was 95.95p (2015: 103.44p). The Company's treasury net asset value per unit at the end of the year was 383.80p (2015: 413.76p). 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 2016 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 0.5 per cent at 31 March 2016 (2015: 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 2016, 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 2016 or 31 March 2015.

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 2016 will be sent to shareholders in May 2016 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.investorscapital.co.uk .

The audited accounts for the year to 31 March 2016 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 27 June 2016.

 

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