Final Results

RNS Number : 2108H

Investors Capital Trust PLC

15 May 2014

 



To:                    RNS

From:                Investors Capital Trust plc

Date:                15 May 2014

Results for the year ended 31 March 2014

·      Total distributions for the year to 31 March 2014 of 4.37p per share, an increase of 2.1 per cent compared to the prior year

·      Distribution yield of 4.6 and 4.3 per cent on A and B shares respectively at 31 March 2014, compared to the yield on the FTSE All-Share Capped 5% Index of 3.4 per cent

·      Net asset value total return per share for the year was 9.7 per cent, compared to the FTSE All-Share Capped 5% Index total return of 9.1 per cent

·      Net asset value total return per share since launch on 1 March 2007 was 56.8 per cent, compared to the FTSE All-Share Capped 5% Index total return of 47.0 per cent

Chairman's Statement as follows:

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 2014, 83.2 per cent. of total assets was allocated to the Equities Portfolio and 13.4 per cent. to the Higher Yield Portfolio. The remaining 3.4 per cent. was held as cash and cash equivalents.

Investment Performance

In my interim report to shareholders last year I was of the view that while it would take some time for economic conditions to normalise in the wake of the worst financial crisis of the post-war era, the outlook appeared to have brightened. Indeed the combination of improving economic growth prospects and diminishing macro-economic concerns, particularly in relation to the Eurozone, together with ongoing support from Central Banks, provided a generally constructive backdrop for risk assets and, in particular, equities. Throughout the year there were periods of acute investor nervousness, most notably relating to the timing and extent of the winding down of the US Quantitative Easing programme and concerns over the health of the Chinese economy. The US budget impasse, which resulted in a partial shutdown of the federal government in October last year, also took its toll on sentiment while at the same time doing little for the credibility of US policymakers around the world. More recently, the rise in global geopolitical tensions as a result of Russia's intervention in Ukraine cast a shadow over financial markets.

The Company's Equities Portfolio produced a total return of 10.5 per cent. during the year to 31 March 2014, while the Higher Yield Portfolio returned 6.9 per cent. Returns from the Equities Portfolio and the Higher Yield Portfolio, combined with the effect of gearing, resulted in a net asset value total return for the A and B shares of 9.7 per cent. for the year.  This return is ahead of the 9.1 per cent. total return for the FTSE All-Share Capped 5% Index, the Company's benchmark.

Since the launch of the Company on 1 March 2007 to 31 March 2014, the Company has outperformed its benchmark index. The net asset value per share total return performance of the Company has been 56.8 per cent. which compares favourably with the 47.0 per cent. return from the benchmark FTSE All-Share Capped 5% Index.

Earnings

The Company achieved total revenue income of £5.5m for the year. The yield on the Equities Portfolio was 3.5 per cent. as at 31 March 2014, compared to the yield on the FTSE All-Share Capped 5% Index of 3.4 per cent.

The Company's revenue was broadly unchanged over the previous year. The income from the Equities Portfolio increased over the year with the majority of investee companies continuing to deliver good dividend growth. This was, however, offset by a lower level of income from the Higher Yield Portfolio, partially due to the reduction in the level of the Company's bank borrowings in September 2012 which resulted in a commensurate reduction in the absolute size of this portfolio. The low level of deposit interest reflects the continued low level of interest rates receivable on cash balances.

Notwithstanding the increase in income from the Equities Portfolio, the pace of dividend growth from the UK market as a whole has continued to slow over the past couple of years reflecting a lacklustre corporate earnings performance from the market as a whole. Much of the earnings disappointment relates to the energy and resource sectors where profits have been under pressure and foreign exchange headwinds have been unhelpful.

The US dollar exchange rate has an important influence on the Company's revenue as 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 year the US dollar depreciated relative to sterling by 9.7 per cent. This had the impact of tempering the rate of growth in dividend income from the Equities Portfolio as a whole.  

After deducting the fourth quarter dividend, the Company had revenue reserves of £3.1m at 31 March 2014.

Management Fee

I am pleased to report that with effect from the end of the Company's financial year, the Company has agreed terms with the Manager for a reduction in the level of the base management fee combined with the removal of the performance fee. 

The base management fee payable during the year to 31 March 2014 was 0.9 per cent. per annum of the net asset value of the Company. Under the new arrangements, with effect from 1 April 2014, the management fee will be reduced to 0.75 per cent. per annum on the net asset value of the Company.

It was also agreed that the current period for the performance fee, previously calculated over a five year period, would terminate on 31 March 2014.  On this basis, the Company's performance fee was measured for the period from 1 April 2012 to 31 March 2014. Due to the outperformance by the Company of its benchmark over this two year period, a performance fee of £395,000 was payable at 31 March 2014. The performance fee will cease to apply from 1 April 2014 onwards.

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. In respect of the distributions for the Company's first three quarters, the dividends paid on the A shares and capital repayments on the B shares were 1.0825p per share for each quarter. A fourth quarter dividend of 1.1225p per share was paid to A shareholders, and a capital repayment of the same amount to B shareholders, on 2 May 2014. This results in a dividend/capital repayment of 4.37p per share in respect of the year to 31 March 2014. This represents an increase of 2.1 per cent. compared to the distribution for the previous year and a distribution yield for A shareholders of 4.6 per cent. and for B shareholders of 4.3 per cent., based on the A share price of 95.0 pence and the B share price of 102.3 pence as at 31 March 2014. These yields compare favourably with the yield on the FTSE All-Share Capped 5% Index of 3.4 per cent at that date.  For shareholders that hold units, the distribution yield was 4.7 per cent. based on a unit price of 375.0 pence as at 31 March 2014.

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 and B shares. 

The Company has a £18m 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 Company's A share price was at a discount to net asset value of 7.6 per cent. at 31 March 2014. The Company's B shares were at a discount to net asset value of 0.5 per cent. at the same date. Over the year, the price of the Company's A shares traded at an average discount to net asset value per share of 6.6 per cent. and the Company's B shares traded at an average discount of 2.6 per cent. The Company has a stated buy back policy and, in accordance with this policy, the Company bought back 1,250,000 A shares during the year at an average discount of over 5 per cent. to net asset value, thereby adding value for existing shareholders. The Company also resold 655,000 B shares out of treasury at a premium to the prevailing net asset value at the time of resale.

Alternative Investment Fund Managers (AIFM) Directive

As highlighted in the Company's interim report, the AIFM Directive is European legislation which creates a European-wide framework for regulating managers of alternative investment funds. Closed-ended investment companies fall within the remit of these new regulations. The Company has until July 2014, the end of the transitional period, to register and comply with the provisions of the AIFM Directive. The Board is pleased to announce that it expects to enter into arrangements with the Manager, F&C Investment Business Limited, shortly to act as the Company's Alternative Investment Fund Manager, at no additional cost to the Company. As required under the Directive, the Company will also appoint a Depositary, JPMorgan, with such appointment to commence from July 2014. This appointment will result in an additional cost to the Company, although the Board does not expect this cost to be significant.

Scottish Independence

As a Scottish-registered Company, the Board is aware that there is uncertainty arising amongst investors in relation to the referendum on Scottish independence to be held on 18 September 2014.  The Board has taken advice and has given consideration to the implications that this might have for the Company.  However, it considers that it is too early at this stage to prejudge the outcome of a vote, or of any subsequent negotiations or how they may affect the Company and its shareholders. The Board is committed to acting in the best interests of shareholders going forward.

Outlook

The UK equity market has recovered strongly since the lows of 2009. However, over the past two years, equity market returns have been driven by a re-rating of the market rather than through underlying growth in corporate earnings. While valuation metrics are not unduly stretched, the valuation gap between equities and other asset classes has narrowed. Against this background it is encouraging that the corporate sector remains in good health and the economic outlook continues to improve.

Iain McLaren

14 May 2014

For further information, please contact:

Rodger McNair                                                                           Tel:        [phone]

Fund Manager to Investors Capital Trust plc

Donald Cameron

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

Consolidated Statement of Comprehensive Income (audited)

		Year to 31 March 2014
	Note	Revenue	Capital	Total
		£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value through profit or loss		-	7,741	7,741
Exchange differences		-	227	227
Revenue
Investment income		5,466	-	5,466
Total income		5,466	7,968	13,434
Expenditure
Investment management fee		(278)	(1,232)	(1,510)
Other expenses		(386)	-	(386)
Total expenditure		(664)	(1,232)	(1,896)
Profit before finance costs and tax		4,802	6,736	11,538
Finance costs
Interest on bank loan		(178)	(415)	(593)
Total finance costs		(178)	(415)	(593)
Profit before tax		4,624	6,321	10,945
Tax		(26)	26	-
Profit for the year		4,598	6,347	10,945
Other comprehensive income
Movement in fair value of interest rate swap		-	-	-
Total comprehensive income for the year		4,598	6,347	10,945
Earnings per share	2	3.73p	5.14p	8.87p

Consolidated Statement of Comprehensive Income (audited)

		Year to 31 March 2013
	Note	Revenue	Capital	£'000
		£'000	£'000	Total
Capital gains on investments
Gains on investments held at fair value through profit or loss		-	16,309	16,309
Exchange differences		-	(28)	(28)
Revenue
Investment income		5,478	-	5,478
Total income		5,478	16,281	21,759
Expenditure
Investment management fee		(250)	(583)	(833)
Other expenses		(445)	-	(445)
Total expenditure		(695)	(583)	(1,278)
Profit before finance costs and tax		4,783	15,698	20,481
Finance costs
Interest on bank loan and interest rate swap		(384)	(897)	(1,281)
Total finance costs		(384)	(897)	(1,281)
Profit before tax		4,399	14,801	19,200
Tax		(8)	244	236
Profit for the year		4,391	15,045	19,436
Other comprehensive income
Movement in fair value of interest rate swap		-	749	749
Total comprehensive income for the year		4,391	15,794	20,185
Earnings per share	2	3.52p	12.06p	15.58p

Balance Sheets (audited)

as at 31 March 2014

		2014		2013
		Company	Group	Company	Group
	Note	£'000	£'000	£'000	£'000
Non-current assets
Investments held at fair value through profit or loss		139,816	139,566	133,861	133,611
Current assets
Receivables		1,280	1,280	1,045	1,045
Cash and cash equivalents		5,904	5,904	5,146	5,146
		7,184	7,184	6,191	6,191
Total assets		147,000	146,750	140,052	139,802
Current liabilities
Payables		(2,448)	(2,198)	(554)	(304)
		(2,448)	(2,198)	(554)	(304)
Non-current liabilities
Bank loan		(18,000)	(18,000)	(18,000)	(18,000)
		(18,000)	(18,000)	(18,000)	(18,000)
Total liabilities		(20,448)	(20,198)	(18,554)	(18,304)
Net assets		126,552	126,552	121,498	121,498
Share capital	6	134	134	134	134
Share premium	6	153	153	22	22
Capital redemption reserve		5	5	5	5
Buy back reserve	6	87,356	87,356	88,010	88,010
Special capital reserve		23,952	23,952	25,328	25,328
Capital reserves		10,836	10,836	4,489	4,489
Revenue reserve		4,116	4,116	3,510	3,510
Equity shareholders' funds		126,552	126,552	121,498	121,498
Net asset value per A share	7	102.59p	102.59p	98.02p	98.02p
Net asset value per B share	7	102.59p	102.59p	98.02p	98.02p

Consolidated and Company Cash Flow Statement (audited)

for the year to 31 March 2014

	Year to 31 March 2014	Year to 31 March 2013
	£'000	£'000
Cash flows from operating activities
Profit before tax	10,945	19,200
Adjustments for:
Gains on investments held at fair value through profit or loss	(7,741)	(16,309)
Exchange differences	(227)	28
Decrease in receivables	37	242
Increase in payables	474	100
Purchases of investments	(21,096)	(15,006)
Sales of investments	24,167	28,651
Finance costs	593	1,281
Net cash inflow from operating activities	7,152	18,187
Cash flows from financing activities
Bank loan drawn down	-	18,000
Bank loan repaid	-	(33,500)
Dividends paid on A shares	(3,992)	(3,991)
Capital returns paid on B shares	(1,376)	(1,354)
Interest on bank loan and interest rate swap	(598)	(1,272)
Shares purchased for treasury	(1,180)	(2,255)
Shares issued for treasury	524	-
Net cash outflow from financing activities	(6,622)	(24,372)
Net increase/(decrease) in cash and cash equivalents	530	(6,185)
Currency gains	228	2
Opening net cash and cash equivalents	5,146	11,329
Closing net cash and cash equivalents	5,904	5,146

Consolidated and Company Statement of Changes in Equity (audited)

for the year to 31 March 2014

	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 2013	134	22	5	88,010	25,328	(17,334)	21,823	3,510	121,498
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	1,147	5,200	4,598	10,945
Total comprehensive income for the year	-	-	-	-	-	1,147	5,200	4,598	10,945
Transactions with owners of the Company recognised directly in equity
Shares bought back for treasury	-	-	-	(1,180)	-	-	-	-	(1,180)
Shares issued from treasury	-	131	-	526	-	-	-	-	657
Dividends paid on A shares	-	-	-	-	-	-	-	(3,992)	(3,992)
Capital returns paid on B shares	-	-	-	-	(1,376)	-	-	-	(1,376)
Balance as at 31 March 2014	134	153	5	87,356	23,952	(16,187)	27,023	4,116	126,552

Consolidated and Company Statement of Changes in Equity (audited)

for the year to 31 March 2013

	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 2012	134	22	5	90,265	26,682	(20,366)	9,061	3,110	108,913
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	3,032	12,013	4,391	19,436
Movement in fair value of interest rate swap	-	-	-	-	-	-	749	-	749
Total comprehensive income for the year	-	-	-	-	-	3,032	12,762	4,391	20,185
Transactions with owners of the Company recognised directly in equity
Shares bought back for treasury	-	-	-	(2,255)	-	-	-	-	(2,255)
Dividends paid on A shares	-	-	-	-	-	-	-	(3,991)	(3,991)
Capital returns paid on B shares	-	-	-	-	(1,354)	-	-	-	(1,354)
Balance as at 31 March 2013	134	22	5	88,010	25,328	(17,334)	21,823	3,510	121,498

Investors Capital Trust plc

Principal Risks and Risk Management

The Company's assets consist mainly of listed equity and fixed interest securities and its principal risks are therefore market-related. More detailed explanations of these risks and the way in which they are managed are contained in the notes to the accounts.

Other risks faced by the Company include the following:

·      External - events such as terrorism, protectionism, inflation or deflation, economic recessions and movements in interest rates and exchange rates could affect share prices in particular markets.

·      Investment and strategic - incorrect strategy, asset allocation, stock selection and the use of gearing could all lead to poor returns for shareholders.

·      Regulatory - breach of regulatory rules could lead to 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.

·      Operational - failure of the Manager's accounting systems or disruption to the Manager's business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.

·      Financial - inadequate controls by the Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations. Breaching loan covenants could lead to a loss of shareholders' confidence and financial loss for shareholders.

·      Referendum on Scottish Independence - the Company is a Scottish registered company and the Board is mindful that there is uncertainty arising in relation to the referendum on Scottish Independence which is due to take place on 18 September 2014. Such matters of uncertainty include jurisdiction and taxation of savings and pension plans, financial services regulation, investment trust status, currency and membership of the European Union. The Board considers that, should the vote be in favour of independence, there will be a transitional period during which there will be an opportunity to assess the new situation and take any appropriate action.

The Board seeks to mitigate and manage these risks through continual review, policy setting and reliance upon contractual obligations. It also regularly monitors the investment environment and the management of the Company's investment portfolio, and applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

Investors Capital Trust plc

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

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge:

·      The financial statements contained within the Annual Report for the year ended 31 March 2014, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Chairman's Statement and Manager's Review include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      'Principal Risks and Risk Management' includes a description of the Company's principal risks and uncertainties; and

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

On behalf of the Board

Iain McLaren

Chairman                                                           

Notes (audited)

1.            The financial statements of the Group which are the responsibility of, and were approved by, the Board on 14 May 2014, 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 January 2009 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 £10,945,000 (year to 31 March 2013: £19,436,000) and on 91,679,614 A shares (2013: 93,157,459) and 31,755,730 B shares (2013: 31,610,525), 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 £4,598,000 (year to 31 March 2013: £4,391,000) 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 £6,347,000 (year to 31 March 2013: £15,045,000) 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 1.1225p per A share, was paid on 2 May 2014 to A shareholders on the register at close of business on 4 April 2014, having an ex-dividend date of 2 April 2014. The fourth capital repayment of 1.1225p per B share was paid on 2 May 2014 to B shareholders on the register on 4 April 2014.

5.            On 28 September 2012 the Company repaid its existing £33.5m term loan and drew down a new facility with a five year term to 28 September 2017. The term loan with JPMorgan Chase Bank is secured on the majority of the assets of the Company and carries interest at a fixed rate of 3.15 per cent per annum. Interest on the term loan is payable quarterly. 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 £18m term loan, on a marked to market basis, was £17,692,000 at 31 March 2014 (2013: £18,186,000).

6.            During the year the Company bought back 1,250,000 (2013: 2,150,000) A Shares to hold in treasury at a cost of £1,180,000 (2013: £1,754,000) and nil (2013: 630,000) B Shares to hold in treasury at a cost of nil (2013: £501,000). During the year the Company issued 655,000 (2013: nil) B shares from treasury for proceeds of £657,000 (2013: £nil). The Company did not buy back any shares for cancellation during the year (2013: nil).

At 31 March 2014 the Company held 10,789,000 (2013: 9,539,000) A Shares and nil (2013: 655,000) B Shares in treasury.

7.            The Company's basic net asset value per share of 102.59p (2013: 98.02p) is based on the equity shareholders' funds of £126,552,000 (2013: £121,498,000) and on 123,354,847 equity shares, consisting of 91,278,144 A Shares and 32,076,703 B Shares (2013: 123,949,847 equity shares, consisting of 92,528,144 A Shares and 31,421,703 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 2014 was therefore 410.36p (2013: 392.08p).

The Company's treasury net asset value per share, incorporating the 10,789,000 A Shares held in treasury at the year end, was 102.18p (2013: 97.68p). The Company's treasury net asset value per unit at the end of the year was 408.72p (2013: 390.72p). 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 and the Company also used the interest rate swap on the bank loan which expired on 28 September 2012. The Company may also write call options over some investments held in the Equities Portfolio.

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 2014 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 investments, which 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. 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 2014 (2013: 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 2014, 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 the year or the prior year nor the net asset value as at 31 March 2014 or 31 March 2013.

10.        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 2014 will be sent to shareholders in May 2014 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 2014 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 27 June 2014.

 

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