Annual Financial Report
City Merchants High Yield Trust Limited
Annual Financial Report Announcement
For the year ended 31 December 2016
.
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
| AT 31 DECEMBER 2016 |
AT 31 DECEMBER 2015 |
|
| Total Return | ||
| Net Asset Value | +11.8% | +2.7% |
| Share price | +11.6% | +0.7% |
| Ongoing Charges | 1.01% | 1.01% |
| Dividend for the year | 10p | 10p |
Year End Information
| 31 DECEMBER 2016 |
31 DECEMBER 2015 |
% CHANGE |
|
| Net asset value per share | 189.32p | 178.34p | +6.2 |
| Share price | 191.00p | 180.75p | +5.7 |
| Premium | 0.9% | 1.4% | |
| Gearing | |||
| Gross gearing | nil | nil | |
| Net cash | 8.4% | 7.0% |
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CHAIRMAN’S STATEMENT
The Company continued to perform well in 2016 despite persistent volatility in bond markets and the increasing difficulty of sourcing quality high yield paper. For the year ended 31 December 2016, the NAV total return was +11.8% which compares very favourably with +7.1% for the Investment Management Association Sterling Strategic Bond sector. The Company’s share price total return for the year was +11.6%. The Manager’s Investment Report summarises the market background and portfolio strategy for the year, including how the portfolio is positioned and outlook.
In my statement in the half yearly report, I highlighted the uncertain period following the aftermath of the UK’s decision to leave the European Union, the full outcome of which remains unknown. Uncertainty continued around the globe with the success of Donald Trump in the US presidential election and Italy’s rejection of constitutional reform. Despite market volatility caused by these events, the Company continued to produce an attractive level of income for shareholders. We were able to meet our dividend target of 10p in respect of the financial year, matching last year’s total, and aim to achieve this again in the coming year.
The Board believes the portfolio remains well positioned to continue to provide an attractive level of income for shareholders, with some limited potential for capital appreciation.
Demand for the Company’s shares continued to be strong and shares traded at a premium to NAV for most of the year. I am pleased to report that 5,673,745 ordinary shares (approximately 6.6% of share capital) were issued at an average premium to NAV of 1.6%. This compared favourably to the average premium the shares traded at in the year of 1.3%. Just over £10.4 million of capital was raised in the year.
A further 475,000ordinary shares have been issued since the year end. Given the continuing demand for shares, the Directors are asking shareholders to renew the 10% issuance authority at the forthcoming AGM.
Borrowings
As set out in the Strategic Report, the Company’s borrowing policy is determined by the Board. The maximum amount of borrowings permitted is 30% of total assets, and remains unchanged. The decision to use borrowings to gear the portfolio rests with the portfolio managers and a credit facility from The Bank of New York Mellon is in place to facilitate this, although it has not been utilised in recent years. We are also putting in place the facility to use repo financing should the portfolio managers wish to do so. This is explained further in the Strategic Report on page 8.
Board Composition
The Board is unchanged since the Company’s re-domicile to Jersey in 2012 and whilst this stability has been beneficial for the Company, the Board is mindful of the importance of having a suitably mapped board succession and renewal process in line with corporate governance best practice. Thus, following the recommendation of the external Board evaluation carried out in 2015, the Board has decided to put in motion the process to recruit a new non-executive director to join the Board in 2017.
Having served the Company and its predecessor for a combined total of twelve years and thus being the longest serving member of the Board, I shall retire as Chairman and Director of the Company during the course of 2017, in accordance with our succession plan. The exact timing of my retirement is subject to ensuring it facilitates a smooth transition to my successor after the new Director is appointed. The services of Trust Associates have been engaged for the recruitment process and, together with the nomination of my successor, this process will be led by John Boothman, Chairman of the Nomination Committee.
Annual General Meeting (AGM)
The Company’s 2017 AGM will once again be held in London at The Oriental Club, Stratford House, Stratford Place, London W1C 1ES at 3.30pm on 15 June 2017. Shareholders attending will have an opportunity to pose questions on the annual financial report and hear from one of the portfolio managers.
The resolutions to be put to shareholders at the meeting are described in detail in the Directors’ Report on page 55. They consist of the usual ordinary resolutions to receive this annual financial report and re-appoint the auditor. In addition, as introduced for the first time last year, ordinary resolutions on Directors’ Remuneration and the Company’s Dividend Payment Policy are included once again. Items of special business comprise items approved in past years by shareholders: continuation of the Company; authority to issue shares up to 10% of the existing share capital; renewal of the buy-back authority; and authority to call general meetings on 14 days’ notice. The Board has considered all the resolutions proposed in the notice and believe all are in the interest of shareholders as a whole. We therefore recommend shareholders vote in favour of the each resolution.
Clive Nicholson
Chairman
28 March 2017
STRATEGIC REPORT
FOR THE YEAR ENDED 31 DECEMBER 2016
MANAGER’S INVESTMENT REPORT
Portfolio Return
Over the year to 31 December 2016 the NAV total return for the Company was 11.8%. The NAV increased by 11p per share to 189.3p per share. A total dividend of 10p per share has been paid for the year.
Market Background
High yield bonds delivered strong returns over the course of 2016 amid central bank corporate bond purchase programmes and rising commodity prices.
The challenges of late 2015 (weak commodity prices and concerns about economic growth) continued into 2016, providing a volatile start to the year for high yield bonds. The financial sector came under additional pressure amidst concerns about the strength of the European banking sector. Two of the most significant factors weighing on the market were questions about the certainty of Additional Tier 1 coupon payments and the treatment of senior bond holders following the bail-in at Portuguese bank Novo Banco.
The European Central Bank launched a massive stimulus package in the spring. The package included plans to purchase corporate bonds directly. The plans were well received, with corporate bonds rallying strongly and issuance soaring in response. Although the programme is targeted at investment grade bonds, the demand for yield and the boost to sentiment meant its effects were felt across the European high yield bond market.
The UK’s vote for Brexit in the summer provided a second spike in volatility for high yield bonds. The sell-off was, however, limited and much lower than many had expected before the vote. Markets soon recovered their losses with high yield bonds rallying strongly over the summer. Monetary policy easing measures announced by the Bank of England (BoE) in August provided a further boost to sentiment. Amongst the measures announced was a Corporate Bond Purchase Scheme similar to the programme already underway in the Eurozone. As in the Eurozone, the effects of the BoE’s purchases were felt across the wider sterling bond market.
Following their initial weakness, commodity markets strengthened through much of the year. Brent crude oil, for example, hit a low of $28 a barrel in early January before then rising to $57 a barrel at 31 December 2016. This strength in commodities was particularly supportive of the US high yield bond market, which has a high concentration of energy related companies.
The uncertainty at the start of the year saw issuance levels in the European high yield market fall dramatically, with just €3.3 billion issued in January and February 2016. By comparison, during the same two months in 2015, €22.8 billion was issued. Supply picked up through the year, particularly following the central bank corporate bond purchase programmes. However, redemptions were also high during the year, resulting in very low net issuance. This positive supply dynamic provided further support to the market. Overall, the slow start to the year meant total gross issuance levels were 19% lower than 2015, with Barclays reporting a total of €55.7 billion new European currency high yield bonds issued in 2016.
According to index data from Merrill Lynch, European currency high yield bonds had a total return for the year of 10.2%. The aggregate yield to maturity for European currency high yield bonds fell to 4.3%. Breaking this figure down, by 31 December 2016 euro high yield bonds had a yield to maturity of 3.9%. The much smaller sterling high yield bond market had a yield to maturity of 6.3%.
Portfolio Strategy
We maintained a defensive stance in the portfolio throughout the year. This defensive position helped to lessen the credit risk in the portfolio while also enabling us to quickly exploit any investment opportunities that arose in periods of market stress. For example, at the start of the year we took the opportunity to add some bonds that we thought had become attractively priced, particularly within the financial sector. Some of the bonds we added included two contingent convertible bank bonds, one issued by Barclays with a coupon of 8% and the other by RBS also with a coupon of 8%.
The portfolio holds a range of high yield bonds along with an allocation to investment grade corporate bonds. Security selection is focused on well-seasoned issuers that we believe provide a good balance of risk and return. In addition, we have significant exposure to other areas of the market that we believe still offer relatively attractive yields. One such area is bank capital, in particular the subordinated debt of large European banks. The creditworthiness of the banking sector has improved significantly since the global financial crisis and we find these securities continue to provide a reasonable level of income for the risk. It should be noted that the cash balance at the end of 2016 was relatively high at 8.4% as a result of the sale of the Company’s holding in GM warrants during December. The cash balance has subsequently been reduced.
We also have holdings in corporate hybrid bonds. We believe the subordination risk of these junior debt instruments is attractive in the context of the issuers’ relatively strong balance sheets. Many of the corporate hybrid bonds we hold are issued by investment grade companies.
We continue to seek opportunities to add yield to the portfolio where we consider that the balance of reward to risk is attractive. The Company has the ability to utilise borrowings in order to gear the portfolio, up to 30% of NAV. As long as borrowing facilities are available, we can employ borrowings as a form of additional liquidity during a market sell-off or during an extended period of low yields, or to take advantage of market opportunities. At present the Company has a £20m borrowing facility and this has been in place, though unused, for a number of years. Having this facility incurs costs, such as an annual renewal fee and non-utilisation costs. Alternative borrowing sources are currently being considered, taking into account cost and suitability, including any associated risks. Sources include repo financing, a form of secured, short-term lending which we have extensive experience of using.
Outlook
Valuations within many parts of the high yield market have become stretched and in Europe the high yield bond market finished 2016 with historically low yields. That said, there are still some areas of the market that we think are attractive. Our strategy is to be cautious and to focus on higher quality companies that we think provide an appropriate level of yield. We also continue to look at the non-traditional areas of the high yield bond market. Subordinated financials, for example, provide substantially higher levels of yield than comparable bonds in other areas, following some underperformance for the financial sector in 2016. We continue to search out such opportunities as we seek to deliver a consistent and attractive level of income against a market backdrop of historically low yields.
Paul Read Paul Causer Rhys Davies
Portfolio Managers
28 March 2017
STRATEGIC REPORT
BUSINESS REVIEW
Strategy and Business Model
City Merchants High Yield Trust Limited is a Jersey domiciled investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied.
The business model the Company has adopted to achieve its objective has been to contract investment management and administration to appropriate external service providers, who are subject to oversight by the Board. The principal service providers are:
– Invesco Fund Managers Limited (the ‘Manager’) to manage the portfolio in accordance with the Board’s strategy; and
– R&H Fund Services (Jersey) Limited to provide company secretarial and general administration services.
The Company also has contractual arrangements with third parties to act as registrar, corporate broker and depositary.
Investment Management
As noted above, the Manager provides investment management and certain administrative services to the Company. The agreement is terminable by either party giving no less than three months’ prior written notice and subject to earlier termination without compensation in the event of a material breach of the agreement or the insolvency of either party. The management fee is payable quarterly in arrears and is equal to 0.1875% of the value of the Company’s total assets under management less current liabilities at the end of the relevant quarter. In addition, the Manager is paid a fee of £22,500 plus RPI per annum for administrative services.
The portfolio managers responsible for the day-to-day management of the portfolio are Paul Read, Paul Causer and Rhys Davies.
The Manager’s Responsibilities
The Directors have delegated to the Manager the responsibility for the investment management activities of the Company, for seeking and evaluating investment opportunities and for analysing the accounts of investee companies. The Manager has full discretion to manage the assets of the Company in accordance with the Company’s stated objectives and policies as determined from time to time by the Board and approved by shareholders. Within the guidelines specified by the Board, the Manager has discretion to make purchases and sales, make and withdraw cash deposits, enter into underwriting commitments and exercise all rights over the investment portfolio. The Manager also advises on currency exposures and borrowings.
Assessment of the Manager
The performance of the Manager is reviewed continuously by the Board and the ongoing requirements of the Company and services received are assessed annually with reference to key performance indicators as set out on pages 8 to 10.
Based on its recent review of activities, the Board believes that the continuing appointment of Invesco Fund Managers Limited remains in the best interests of the Company and its shareholders.
Investment Objective and Policy
Investment Objective
The Company’s investment objective is to seek to obtain both high income and capital growth from investment, predominantly in high-yielding fixed-interest securities.
Investment Policy
The Company seeks to provide a high level of dividend income relative to prevailing interest rates mainly through investment in bonds and other fixed-interest securities. The Company also invests in equities and other equity-like instruments consistent with the overall objective.
This Investment Policy should be read in conjunction with the descriptions of Investment Style, Investment Limits, Derivatives and Currency Hedging, and Borrowings set out below.
Investment Style
The Manager, seeks to ensure that the portfolio is diversified, having regard to the nature and type of securities (including duration, credit rating, performance and risk measures and liquidity) and the geographic and industry sector composition of the portfolio. The Company may hold both illiquid securities (for example, securities where trading volumes are relatively low and unlisted securities) and concentrated positions (for example, where a high proportion of the Company’s total assets is comprised of a relatively small number of investments).
Investment Limits
– the Company may invest in fixed-interest securities, including but not restricted to preference shares, loan stocks (convertible and redeemable), corporate bonds and government stocks, up to 100% of total assets;
– investments in equities may be made up to an aggregate limit of 20% of total assets;
– the aggregate value of holdings of shares and securities in a single issuer or company, including a listed investment company or trust, will not exceed 15% of the value of the Company’s investments; and
– investments in unlisted investments will not exceed 10% of the Company’s total assets for individual holdings and 25% in aggregate.
All the above limits are measured at the time a new investment is made.
Derivatives and Currency Hedging
The Company may enter into derivative transactions (including options, futures, contracts for difference, credit derivatives and interest rate swaps) for the purposes of efficient portfolio management. The Company will not enter into derivative transactions for speculative purposes.
Efficient portfolio management may include reduction of risk, reduction of cost and enhancement of capital or income through transactions designed to hedge all or part of the portfolio, to replicate or gain synthetic exposure to a particular investment position where this can be done more effectively or efficiently through the use of derivatives than through investment in physical securities or to transfer risk or obtain protection from a particular type of risk which might attach to portfolio investments.
The Company may hedge against exposure to changes in currency rates to the full extent of any such exposure.
Borrowings
The Company’s borrowing policy is determined by the Board. The level of borrowing may be varied from time to time in the light of prevailing circumstances subject to a maximum of 30% of the Company’s total assets at any time. Any borrowings are covered by investments in matching currencies to manage exposure to exchange rate fluctuations.
The Board has reviewed the methods of financing available to the Company including repo financing whereby a company participates in sale and repurchase arrangements in connection with its portfolio. Under these arrangements, a company sells fixed interest securities and is contractually obliged to repurchase them at a fixed price on a fixed date, whilst retaining the economic exposure of securities sold. The difference between the (lower) sale price and the later purchase price is the cost (effectively interest) of the repo financing. Repo financing agreements are currently being put in place by the Company to ensure these are available to the Manager if it is agreed by both the Manager and Board to use this method of financing, wither alongside or in place of the Company’s current credit facility.
Key Performance Indicators
The Board reviews performance by reference to a number of Key Performance Indicators which include the following:
• Performance
• Dividends
• Premium/Discount
• Ongoing Charges
Performance
As the Company’s objective is to achieve both high income and capital growth, the performance is best measured in terms of total return. There is no stock market index against which the Company’s performance may be measured with any degree of relevance. Therefore, the Board refers to a variety of relevant data and this is reflected in both the Chairman’s Statement and the Manager’s Investment Report on pages 3 to 6. The Board is satisfied with the portfolio performance in the year.
When considering historical returns, the terms of the reconstruction in 2012 allow direct comparison of the Company’s financial information with that of its predecessor, City Merchants High Yield Trust plc. It is therefore appropriate to combine the information from both companies, and the graph that follows shows the performance of the share price and net asset value (both on a total return basis) for the last ten years.
Dividends and Dividend Payment Policy
Dividends form a key component of the total return to shareholders and the Board currently targets dividends of 10p per year. This target has been met in the year under review. Dividends paid over the last ten years are shown in the table on page 2.
The Board’s Dividend Payment Policy is to pay dividends on a regular quarterly basis in May, August, November and February in respect of each accounting year. The timing of these regular three-monthly payments means that shareholders do not have an opportunity to vote on a final dividend. Recognising the importance of shareholder engagement, and although not required by any regulation, shareholders are given an opportunity to vote on this policy at the forthcoming AGM.
Premium/Discount
The Board monitors the price of the Company’s shares in relation to their net asset value and the premium/discount at which the shares trade. The Board has limited influence on the price at which the Company’s shares trade, which is mostly a function of investor sentiment and demand for the shares. The ideal would be for the shares to trade close to their net asset value. The following graph shows the premium/discount through the year, ending with a premium of 0.9%. As explained in the Chairman’s Statement, demand for shares during the year resulted in the issue of 5,673,745 shares at an average price of 184.5p. Subsequent to the year end, a further 475,000 shares have been issued.
Ongoing Charges
The expenses of managing the Company are carefully monitored by the Board. The standard measure of these ongoing charges is calculated by dividing the sum of such expenses over the course of the year, including those charged to capital, by the average net asset value. This ongoing charges figure provides a guide to the effect on performance of annual operating costs. The Company’s ongoing charges figure for the current year remained the same as for the previous year, at 1.01%. The Board is satisfied with the level of ongoing charges.
Financial Position
The Company’s balance sheet on page 37 shows the assets and liabilities at the year end. A £20 million revolving credit facility is available, though it was not used during the year. Details of this facility, including applicable covenants, are shown in note 7 to the financial statements.
Performance and Future Development
The performance and future development of the Company depend on the success of the Company’s investment strategy. A review of the Company’s performance, market background, investment activity and strategy during the year, together with the investment outlook are provided in the Chairman’s Statement and Manager’s Investment Report on pages 3 to 6.
Annual Continuation Vote
The Articles of Association of the Company require that unless an ordinary resolution is passed at or before the Annual General Meeting (AGM) each year releasing the Directors from the obligation to do so, the Directors shall convene a general meeting within six months of the AGM at which a special resolution would be proposed to wind up the Company. Having made enquiries, the Directors have no reason to believe that the resolution to release them from that obligation, which is included in the notice for the forthcoming AGM on page 59, will not be passed.
Internal Control and Risk Management
The Directors acknowledge that they are responsible for ensuring that the Company maintains a system of internal financial and non-financial controls (internal controls) to safeguard shareholders’ investments and the Company’s assets.
The Directors have robustly assessed the risks to which the Company is exposed by reference to a risk control summary, which maps the risks, mitigating controls in place and relevant information reported to them. The resultant ratings of the mitigated risks, in the form of a risk heat map, allow the Directors to concentrate on those risks that are most significant and also forms the basis of the list of principal risks and uncertainties that follows this section. The ratings take into account the Directors’ risk appetite and the ongoing monitoring by the Manager.
The effectiveness of the Company’s internal control and risk management system is reviewed at least twice a year by the Audit Committee. The Audit Committee has received satisfactory reports on both the Manager’s and the custodian’s operations and systems of internal control from the Manager’s Compliance and Internal Audit Officers. The Committee also received a comprehensive, and satisfactory, report from the depositary at the year end Audit Committee meeting. The Manager regularly reviews, against agreed service standards, the performance of all third party providers through formal and informal meetings, and by reference to independently audited control reports issued by third parties. The results of the Manager’s reviews are reported to and reviewed by the Audit Committee. These various reports did not identify any significant failings or weaknesses during the year and up to the date of this annual financial report. If any had been identified, the required remedial action would have been taken.
Reporting to the Board at each board meeting comprises, but is not limited to: financial reports, including hedging and gearing; performance against stock market indices and the Company’s peer group; portfolio managers’ review, including of the market, the portfolio, transactions and prospects; revenue forecasts; and investment monitoring against guidelines.
The Board formally reviews the performance of the Manager annually and informally at every board meeting. The Board has reviewed and accepted the Manager’s ‘Whistleblowing’ policy under which staff of Invesco Fund Managers Limited can, in confidence, raise concerns about possible improprieties or irregularities in matters affecting the Company.
Principal Risks and Uncertainties
The internal control and risk management system, identifies the key risks to the Company. These principal risks are considered to be:
Investment Objective
There can be no guarantee that the Company will meet its investment objective. The Board has established investment guidelines to ensure that investments are made in accordance with the investment policy.
Investment Risk
The Company invests primarily in fixed interest securities and equities, the majority of which are traded on the world’s major securities markets. A significant fall in the markets and/or a prolonged period of decline relative to other forms of investment pose a significant risk to investors. The Board cannot mitigate the effect of such external influences on the portfolio.
Other investment risks include market risk (currency, interest rate and other risk) and credit risk, including counterparty risk. A significant portion of the Company’s portfolio consists of non-investment grade securities which by their nature have a higher risk of default as well as the likelihood of price volatility. An explanation of market risk and how this is addressed is given in note 18 to the financial statements.
For a discussion of the economic and market conditions facing the Company and the current and future performance of the portfolio of the Company, see the Chairman’s Statement and the Manager’s Investment Report. The investment style employed by the Manager is set out under Investment Objective and Policy on pages 7 and 8.
Foreign Exchange Risk
The movement of exchange rates may have an unfavourable or favourable impact on returns as the majority of the assets are non-sterling denominated. This risk is mitigated by the use of hedging and by the availability of using non-sterling denominated borrowing. The foreign currency exposure of the Company is monitored by the Manager on a daily basis and reviewed at each Board meeting.
Derivatives
The Company may enter into derivative transactions for efficient portfolio management. Derivative instruments can be highly volatile and expose investors to a high risk of loss. Where used to hedge risk there is a risk that the return on a derivative does not exactly correlate to the returns on the underlying investment, obligation or market sector being hedged against. If there is an imperfect correlation, the Company may be exposed to greater loss than if the derivative had not been entered into. During the year the only derivatives entered into were forward currency contracts.
Dividends
The dividends declared by the Board are based on income generated from the portfolio and this is monitored regularly by the Board. There can be no guarantee that any dividend target set by the Board will be met.
Ordinary Shares and Discount
Past performance of the Company is not necessarily indicative of future performance. The Company’s share price may go down as well as up and investors may not get back the full value of their investment. The share price may not reflect the NAV per share and therefore trade at a discount. The Board, the Manager and the Company’s corporate broker maintain an active dialogue with the aim of ensuring that the market rating of the Company’s shares reflects the underlying NAV. Buy back and issuance facilities help the management of this process.
Although the shares trade on the London Stock Exchange, it is possible that there may be times when there is not a liquid market in the shares and shareholders may have difficulty selling them.
Gearing of Returns through Borrowings
Performance may be geared by means of the Company’s credit facility, which was available during the year, although not used.
There is no guarantee that this facility will be renewable at maturity on terms acceptable to the Company and any amounts owing by the Company would then need to be funded by the sale of investments. Both the Manager and Board monitor this position closely.
Gearing and borrowing levels are managed by the portfolio managers using their assessment of risk versus reward. Levels must be within the guidelines set strategically by the Board. Gearing for investment purposes will amplify the reduction in NAV in a falling market, which in turn is likely to adversely affect the Company’s share price.
If the Company were to enter into repo financing, there is no guarantee that it will be possible to re-finance the financing at maturity either at all or on terms that are acceptable to the Company. In addition, repo financing introduces an element of counterparty risk. In adverse market conditions, the risk of counterparty default will be greater than at other times.
If one or more of the counterparties decided to stop accepting non-investment grade bonds as collateral for repo financing or decided otherwise to restrict the repo financing provided then the Company might be unable, or it might be impracticable, to continue utilising repo financing and/or to replace it as it expires.
Operational Risk, including Reliance on Third Party Providers
Disruption to, or failure of, any third party provider to carry out its obligations could have a materially detrimental impact on the effective operation of the Company, prevent accurate reporting and monitoring of the Company’s financial position or affect the ability of the Company to pursue its investment policy successfully. Such failure could also expose the Company to reputational risk. In addition, any damage to the reputation of the Manager could result in potential counterparties and third parties being unwilling to deal with the Manager and by extension the Company.
Details of how the Board monitors the services provided by the Manager and the other third party providers, and the key elements designed to provide effective internal control, are included in the internal control and risk management section on pages 10 and 11.
The risk that one of the portfolio managers might be incapacitated or otherwise unavailable is mitigated by the fact that they work within and are supported by the wider Invesco Fixed Interest team.
Regulatory and Tax Related
The Company is subject to various laws and regulations including from it being registered under the Companies (Jersey) Law 1991, its status as a collective investment fund registered under the Collective Investment Funds (Jersey) Law 1988, its listing on the Official List of the UK Listing Authority, its admission to trading on the London Stock Exchange and being an Alternative Investment Fund under the Alternative Investment Fund Managers Directive. A serious breach of regulatory rules may lead to suspension from the Official List and from trading on the London Stock Exchange, a fine or a qualified audit report.
Failure by the Company to maintain its non-UK tax resident status may subject the Company to additional taxes which may materially adversely affect the Company’s business and therefore its share value.
The Board relies on the ongoing monitoring by its company secretary, Manager and other professional advisers to ensure compliance and reviews their regular reports to the Board.
Viability Statement
This Company is an investment company whose business consists of investing the pooled funds of its shareholders to provide them with a high income and capital growth over the long term, predominantly from a portfolio of high yielding fixed income securities. Long term for this purpose is considered to be at least five years and the Directors have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.
The main risk to the Company’s continuation is shareholder dissatisfaction through failure to meet the Company’s investment objective, through poor investment performance or the investment policy not being appropriate in prevailing market conditions, either of which could affect the demand for and liquidity of the Company’s shares. Accordingly, failure to meet the Company’s investment objective, and contributory market and investment risks, are deemed by the Board to be principal risks of the Company and are given particular consideration in the continuing assessment of its long term viability.
The Company’s investment objective and policy are kept under review. In essence they are the same as they have been since the Company commenced trading in 2012, which in turn were unchanged from those of the Company’s UK based predecessor, City Merchants High Yield Trust plc. The continued relevance of the investment objective and policy are underlined by the Company’s annual continuation vote. Last year 99.5% of the votes registered were in favour of continuation and the Board has no reason to believe that the continuation resolution will not be passed at the forthcoming and subsequent AGMs, particularly in view of the premium rating of the shares throughout most of the year and the continued demand for new shares as described on page 9.
Performance derives from returns for risk taken. The Manager’s Investment Report on pages 5 and 6 sets out the current investment strategy of the portfolio managers. The portfolio contains a high level of relatively high–yielding non-investment grade bonds and these carry a higher risk of default than investment grade paper. This is discussed further in note 18 to the financial statements. The Board has adopted investment limits within which the portfolio managers operate. The Directors and the portfolio managers constantly monitor the portfolio, its ratings and default risk. A bond rating analysis of the portfolio at the year-end is shown on page 16. Exposure is weighted towards higher quality issuers where the risk of default is considered to be more remote.
The terms of the Company’s corporate transition in 2012 allow direct comparison of the Company’s financial information with its UK predecessor. Taking the two together, performance has been strong for many years through different, and difficult, market cycles – as shown by the ten year total return performance graph on page 9. The investment policy has effectively been stress tested by market events in 2007/8 and earlier cycles, and again in 2016 by market volatility around the UK referendum vote (amongst other things); these events affected performance but did not threaten the viability of the Company. Whilst past performance may not be indicative of performance in the future, the investment policy has been consistent and the Company’s portfolio managers, overseen by the Board, have been in place throughout those past periods.
Performance and demand for the Company’s shares are not things that can be forecast, but there are no current indications that either or both of these may falter materially over the next five years so as to affect the Company’s viability.
As described in note 18.2 to the financial statements liquidity risk is not viewed by the Directors as a significant risk. The majority of the Company’s assets are readily realisable and amount to many times the value of its short term liabilities and annual operating costs. The Company is permitted to borrow up to a maximum of 30% of the Company’s total assets but currently has no long term debt obligations.
Based on the above analysis, the Directors confirm that they 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 of their assessment.
Substantial Holdings in the Company
The Company has been notified of the following holdings of 3% and over of the Company’s ordinary share capital carrying unrestricted voting rights:
| AT 28 FEBRUARY 2017 |
AT 31 DECEMBER 2016 |
AT 31 DECEMBER 2015 |
|||||
| HOLDING | % | HOLDING | % | HOLDING | % | ||
| Charles Stanley, stockbrokers | 9,163,221 | 9.9 | 8,997,138 | 9.8 | 8,233,962 | 9.5 | |
| Invesco Perpetual | 6,881,470 | 7.5 | 7,101,392 | 7.7 | 7,101,392 | 8.2 | |
| Hargreaves Lansdown, stockbrokers (EO) | 6,745,975 | 7.3 | 6,427,195 | 7.0 | 5,066,796 | 5.8 | |
| Alliance Trust Savings | 4,715,538 | 5.1 | 4,741,902 | 5.1 | 4,365,952 | 5.0 | |
| EFG Harris Allday, stockbrokers | 4,456,275 | 4.8 | 4,507,865 | 5.0 | 4,140,553 | 4.8 | |
| Redmayne Bentley, stockbrokers | 3,535,318 | 3.8 | 3,438,608 | 3.7 | 3,158,295 | 3.7 | |
| Smith & Williamson | 3,187,445 | 3.5 | 3,259,026 | 3.5 | 3,206,880 | 3.7 | |
| WH Ireland, stockbrokers | 2,964,029 | 3.2 | 2,918,126 | 3.1 | 2,402,864 | 2.8 | |
| Court Funds Office | 2,649,959 | 2.9 | 2,716,995 | 3.0 | 3,068,352 | 3.6 | |
| Rathbones | 2,640,283 | 2.9 | 2,682,259 | 2.9 | 2,650,458 | 3.1 | |
| Brewin Dolphin, stockbrokers | 2,500,475 | 2.7 | 2,575,574 | 2.8 | 3,020,024 | 3.5 | |
Board Diversity
The Company’s policy on diversity is set out on page 24. The Board considers diversity, including the balance of skills, knowledge, experience and gender amongst other factors when reviewing its composition and appointing new directors, but does not consider it appropriate to establish targets or quotas in this regard. The Board comprises five non-executive directors of whom one is a woman, thereby constituting 20% female representation. Summary biographical details of the Directors are set out on page 21. The Company has no employees.
Social and Environmental Matters
As an investment company with no property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While an investee company’s policy towards the environment and social responsibility, including with regard to human rights and the risk of involvement in human trafficking, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to, or not to, make an investment on environmental and social grounds alone. The Manager applies the United Nations Principles for Responsible Investment.
The Company is an investment vehicle and does not provide goods or services in the normal course of business, or have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.
This Strategic Report was approved by the Board of Directors on 28 March 2017.
R&H Fund Services (Jersey) Limited
Company Secretary
.
INVESTMENTS IN ORDER OF VALUATION
at 31 December 2016
| ISSUER | ISSUE | MOODY/S&P RATING | INDUSTRY | COUNTRY OF INCORPORATION | MARKET VALUE £’000 |
% OF PORTFOLIO |
| Lloyds Banking Group | 7.875% Perpetual | NR/BB- | Financials | UK | 4,135 | 2.6 |
| 7% Var Perpetual | NR/BB- | 3,098 | 2.0 | |||
| 7,233 | 4.6 | |||||
| Aviva | 6.125% Perpetual | Baa1/BBB | Financials | UK | 3,756 | 2.4 |
| General Accident | 8.875% Preference | NR/NR | 1,645 | 1.1 | ||
| 5,401 | 3.5 | |||||
| Société Genérale | 8.875% FRN Perpetual | Ba2/BB+ | Financials | France | 4,322 | 2.8 |
| Telefonica Europe | 6.75% Perpetual | Ba2/BB+ | Telecommunications | Netherlands | 2,184 | 1.4 |
| 5.875% Perpetual | Ba2/BB+ | 1,257 | 0.8 | |||
| 4.9% Cnv 25 Sep 2017 | NR/BB+ | 749 | 0.5 | |||
| 4,190 | 2.7 | |||||
| US Treasury | 2.5% 15 Feb 2046 | Aaa/AA+ | Government Bonds | USA | 4,162 | 2.7 |
| Intesa Sanpaolo | 8.375% FRN Perpetual | Ba3/B+ | Financials | Italy | 3,106 | 2.0 |
| 7% Perpetual | Ba3/B+ | 928 | 0.6 | |||
| 4,034 | 2.6 | |||||
| Credit Agricole | 7.589% FRN Perpetual | Ba1/BB+ | Financials | France | 2,347 | 1.5 |
| 7.5% Var Perpetual | NR/NR | 920 | 0.6 | |||
| 8.125% FRN Perpetual | Ba1/BB+ | 557 | 0.4 | |||
| 3,824 | 2.5 | |||||
| Standard Chartered | 5.125% 06 Jun 2034 | A3/BBB– | Financials | UK | 1,891 | 1.2 |
| 5.7% 26 Mar 2044 | A3/BBB– | 1,588 | 1.0 | |||
| 3,479 | 2.2 | |||||
| Balfour Beatty | 10.75p Cnv Preference | NR/NR | Industrials | UK | 2,856 | 1.8 |
| Barclays | 9.25% Perpetual | Ba1/BB+ | Financials | UK | 1,160 | 0.7 |
| 7% Perpetual | NR/B+ | 949 | 0.6 | |||
| 8% Perpetual | NR/B+ | 316 | 0.2 | |||
| 7.875% Var Perpetual | Ba2/B+ | 231 | 0.2 | |||
| 2,656 | 1.7 | |||||
| Premier Foods Finance | 6.5% 15 Mar 2021 (SNR) | B2/B | Consumer Goods | UK | 2,567 | 1.6 |
| Marfrig | 8.375% 09 May 2018 | B2/B+ | Consumer Goods | Netherlands | 1,775 | 1.1 |
| 9.5% 04 May 2020 (SNR) | B2/B+ | 402 | 0.3 | |||
| 6.875% 24 June 2019 (SNR) | B2/B+ | 334 | 0.2 | |||
| 2,511 | 1.6 | |||||
| Enel | 7.75% 10 Sep 2075 | Ba1/BB+ | Utilities | Italy | 1,568 | 1.0 |
| 6.625% Var 15 Sep 2076 | Ba1/BB+ | 797 | 0.5 | |||
| 2,365 | 1.5 | |||||
| Pizza Express | 8.625% 01 Aug 2022 | Caa1/CCC+ | Consumer Services | UK | 1,151 | 0.7 |
| 6.625% 01 Aug 2021 | B2/B | 1,015 | 0.7 | |||
| 2,166 | 1.4 | |||||
| Koninklijke KPN | 6.875% FRN 14 Mar 2073 | Ba2/BB | Telecommunications | Netherlands | 2,134 | 1.4 |
| Catlin Insurance | 7.249% FRN Perpetual | NR/BBB+ | Financials | USA | 2,125 | 1.4 |
| Iron Mountain | 6.125% 15 Sep 2022 | Ba3/BB- | Financials | USA | 2,083 | 1.3 |
| Citigroup Capital | 6.829% FRN 28 Jun 2067 | Ba1/BB+ | Financials | USA | 2,033 | 1.3 |
| BHP Billiton | 6.75% FRN 19 Oct 2075 | Baa2/BBB+ | Basic Materials | Australia | 1,099 | 0.7 |
| 6.5% Var 22 Oct 2077 | Baa2/BBB+ | 890 | 0.6 | |||
| 1,989 | 1.3 | |||||
| Greenko | 8% 01 Aug 2019 | NR/B+ | Utilities | Netherlands | 1,985 | 1.3 |
| Origin Energy | 7.875% 16 Jun 2071 | Ba2/BB | Utilities | Australia | 1,820 | 1.2 |
| Constellium | 7% 15 Jan 2023 (SNR) | Caa1/CCC+ | Basic Materials | Netherlands | 861 | 0.6 |
| 4.625% 15 May 2021 | Caa1/CCC+ | 574 | 0.4 | |||
| 5.75% 15 May 2024 | Caa1/CCC+ | 379 | 0.2 | |||
| 1,814 | 1.2 |
| Electricite De France | 6% Perpetual | Baa3/BB | Utilities | France | 1,245 | 0.8 |
| 5.875% Perpetual | Baa3/BB | 549 | 0.4 | |||
| 1,794 | 1.2 | |||||
| Santos Finance | 8.25% FRN 22 Sep 2070 | NR/BB+ | Oil and Gas | Australia | 1,779 | 1.1 |
| REA Finance | 8.75% 31 Aug 2020 | NR/NR | Consumer Goods | Netherlands | 1,773 | 1.1 |
| Pension Insurance | 8% 23 Nov 2016 | NR/NR | Financials | UK | 1,768 | 1.1 |
| HSBC | 5.25% 14 Mar 2044 | A2/BBB+ | Financials | UK | 527 | 0.3 |
| 4.25% 14 Mar 2024 | A2/BBB+ | 526 | 0.3 | |||
| 6.375% FRN Perpetual | Baa3/NR | 492 | 0.3 | |||
| 6.375% Cnv Perpetual | Baa3/NR | 207 | 0.1 | |||
| 1,752 | 1.0 | |||||
| J. C. Penney | 8.125% 01 Oct 2019 (SNR) | B3/B– | Consumer Services | USA | 1,050 | 0.7 |
| 6.375% 15 Oct 2036 (SNR) | B3/B– | 681 | 0.4 | |||
| 1,731 | 1.1 | |||||
| Alcatel-Lucent | 6.45% 15 Mar 2029 | WR/BB+ | Technology | USA | 843 | 0.5 |
| 6.5% 15 Jan 2028 | WR/BB+ | 837 | 0.5 | |||
| 1,680 | 1.0 | |||||
| Thames Water | 7.75% 01 Apr 2019 | B1/NR | Financials | UK | 1,124 | 0.7 |
| 5.875% 15 Jul 2022 (SNR) | B1/NR | 525 | 0.3 | |||
| 1,649 | 1.0 | |||||
| Enterprise Inns | 6.375% 15 Feb 2022 (SNR) | NR/BB– | Consumer Services | UK | 1,325 | 0.9 |
| 6.5% 06 Dec 2018 (SNR) | NR/BB– | 259 | 0.2 | |||
| 1,584 | 1.1 | |||||
| VRX Escrow | 4.5% 15 May 2023 (SNR) | Caa1/B– | Health Care | Canada | 853 | 0.5 |
| 5.375% 29 Feb 2020 | Caa1/B– | 459 | 0.3 | |||
| 6.125% 15 Apr 2025 | Caa1/B– | 248 | 0.2 | |||
| 1,560 | 1.0 | |||||
| Obrascon Huarte Lain | 5.5% 15 Mar 2023 (SNR) | Caa1/NR | Industrials | Spain | 1,507 | 1.0 |
| Standard Life | 6.75% Perpetual | A3/A– | Financials | UK | 1,108 | 0.7 |
| 5.5% 04 Dec 2042 | Baa2/BBB+ | 366 | 0.2 | |||
| 1,474 | 0.9 | |||||
| Bombardier | 6% 15 Oct 2022 | B3/B– | Industrials | Canada | 1,143 | 0.7 |
| 7.5% 15 Mar 2025 | B3/B– | 319 | 0.2 | |||
| 1,462 | 0.9 | |||||
| UniCredit International | ||||||
| Bank | 8.125% FRN Perpetual | B1/B+ | Financials | Luxembourg | 927 | 0.6 |
| 8.5925% FRN Perpetual | B1/B+ | 519 | 0.3 | |||
| 1,446 | 0.9 | |||||
| UBS | 7% Perpetual | NR/BB+ | Financials | Switzerland | 731 | 0.5 |
| 6.875% Var Perpetual | NR/BB+ | 692 | 0.4 | |||
| 1,423 | 0.9 | |||||
| Solvay Finance | 5.869% Var Perpetual | Ba1/BB | Basic Materials | France | 961 | 0.6 |
| 5.425% Perpetual | Ba1/BB | 436 | 0.3 | |||
| 1,397 | 0.9 | |||||
| Ecclesiastical Insurance Office | 8.625% Preference | NR/NR | Financials | UK | 1,345 | 0.9 |
| Galapagos | 7% 15 Jun 2022 | Caa2/CCC | Industrials | Luxembourg | 1,317 | 0.8 |
| TVL Finance | 8.5% 15 May 2023 (SNR) | B3/B- | Consumer Services | UK | 1,274 | 0.8 |
| Virgin Money | 8.75% Perpetual | NR/NR | Financials | UK | 1,231 | 0.8 |
| Tesco | 6.15% 15 Nov 2037 (SNR) | Ba1/BB+ | Consumer Goods | UK | 775 | 0.5 |
| 5.2% 05 Mar 2057 | Ba1/BB+ | 446 | 0.3 | |||
| 1,221 | 0.8 | |||||
| Vougeot Bidco | 7.875% 15 Jul 2020 | B2/B | Consumer Services | UK | 1,186 | 0.8 |
| Beazley | 5.875% 04 Nov 2026 | NR/NR | Financials | Ireland | 1,176 | 0.8 |
| Orange | 5.875% Perpetual | Baa3/BBB– | Telecommunications | France | 1,175 | 0.8 |
| Trinseo | 6.75% 01 May 2022 (SNR) | B3/B+ | Industrials | Luxembourg | 630 | 0.4 |
| 6.375% 01 May 2022 | B3/NR | 526 | 0.3 | |||
| Time Warner Cable | 5.25% 15 Jul 2042 | Ba1/BBB– | Consumer Services | USA | 1,156 | 0.7 |
| Southern Water | ||||||
| (Greensands) | 8.5% 15 Apr 2019 | NR/BB- | Utilities | UK | 1,139 | 0.7 |
| Chemours | 6.625% 15 May 2023 (SNR) | B1/B+ | Basic Materials | USA | 1,035 | 0.7 |
| 7% 15 May 2025 | B1/B+ | 96 | 0.1 | |||
| 1,131 | 0.8 | |||||
| AA Bond Co | 5.5% Var 31 Jul 2043 (SNR) | NR/B+ | Industrials | UK | 1,125 | 0.7 |
| Direct Line Insurance | 9.25% FRN 27 Apr 2042 | Baa1/BBB+ | Financials | UK | 1,105 | 0.7 |
| Deutsche Bank | 7.125% Perpetual | B1/B+ | Financials | Germany | 1,054 | 0.7 |
| Ladbrokes | 5.125% 8 Aug 2023 (SNR) | NR/BB | Consumer Services | UK | 1,039 | 0.7 |
| Codere Finance 2 | ||||||
| (Luxembourg) S.A. | 7.625% 01 Nov 2021 | B2/B | Consumer Services | Luxembourg | 1,020 | 0.7 |
| Stretford 79 | 6.25% 15 Jul 2021 (SNR) | B2/B | Consumer Services | UK | 1,014 | 0.7 |
| BBVA | 9% Perpetual | NR/NR | Financials | Spain | 1,013 | 0.7 |
| JRP Group | 9% 26 Oct 2026 | NR/NR | Financials | UK | 1,008 | 0.6 |
| SFR | 7.375% 01 May 2026 (SNR) | B1/B+ | Telecommunications | France | 954 | 0.6 |
| William Hill | 4.875% 07 Sep 2023 (SNR) | Ba1/BB+ | Consumer Services | UK | 947 | 0.6 |
| XPO Logistics | 6.5% 15 Jun 2022 (SNR) | B2/B+ | Industrials | USA | 834 | 0.5 |
| 6.125% 01 Sep 2023 | B2/B+ | 102 | 0.1 | |||
| 936 | 0.6 | |||||
| Paprec | 7.375% 01 Apr 2023 (SNR) | B2/B– | Consumer Services | France | 926 | 0.6 |
| Stonegate Pub | ||||||
| Company | 5.75% 15 Apr 2019 | B2/B | Consumer Services | UK | 917 | 0.6 |
| Royal Bank Of Scotland | 8% Cnv FRN Perpetual | B1u/B | Financials | UK | 543 | 0.3 |
| 8.625% FRN Perpetual | B1u/B | 362 | 0.2 | |||
| 905 | 0.5 | |||||
| Virgin Media Finance | 6.25% 28 Mar 2029 | Ba3/BB– | Consumer Services | UK | 503 | 0.3 |
| 6% 15 Apr 2021 | Ba3/BB– | 393 | 0.3 | |||
| 896 | 0.6 | |||||
| Manutencoop Facility | ||||||
| Management | 8.5% 01 Aug 2020 | B2/B | Consumer Services | Italy | 887 | 0.6 |
| Boparan Finance | 5.5% 15 Jul 2021 | B2/B+ | Consumer Goods | UK | 878 | 0.6 |
| Bormioli Rocco | 10% 01 Aug 2018 | B3/B | Consumer Goods | Luxembourg | 878 | 0.6 |
| AXA | 6.379% FRN Perpetual | Baa1/BBB | Financials | France | 864 | 0.6 |
| Banco Popular Espanol | 11.5% Perpetual | NR/NR | Financials | Spain | 860 | 0.6 |
| Scottish Widows | 5.5% 16 Jun 2023 | Baa1/BBB+ | Financials | UK | 859 | 0.6 |
| Zobele | 7.875% 01 Feb 2018 | B2/B+ | Consumer Goods | Italy | 857 | 0.6 |
| Diamond 1 | 5.45% 15 Jun 2023 | Baa3/BBB– | Technology | USA | 850 | 0.5 |
| Rapid | 6.625% 15 Nov 2020 (SNR) | B2/B+ | Oil and Gas | Germany | 835 | 0.5 |
| BNP Paribas Fortis | Cnv FRN Perpetual | Ba3/BB+ | Financials | Belgium | 835 | 0.5 |
| Paternoster | 8.5% 15 Feb 2023 (SNR) | Caa2/CCC+ | Industrials | Germany | 821 | 0.5 |
| Phoenix Life | 7.25% Perpetual | WR/NR | Financials | UK | 795 | 0.5 |
| PrestigeBidCo | 6.25% 15 Dec 2023 (SNR) | B2/B | Consumer Services | Germany | 794 | 0.5 |
| OHL Investments | 4% Cnv 25 Apr 2018 | NR/NR | Industrials | Luxembourg | 785 | 0.5 |
| Owens-Brockway | 5.875% 15 Aug 2023 | B1/BB– | Industrials | USA | 777 | 0.5 |
| Peel Land & Property | ||||||
| Investments | 8.375% Var 30 Apr 2040 | NR/BBB | Financials | UK | 723 | 0.5 |
| Play Topco | 7.75% 28 Feb 2020 | Caa1/B- | Telecommunications | Luxembourg | 713 | 0.5 |
| CGG Veritas | 6.875% 15 Jan 2022 | Caa2/CCC | Oil and Gas | France | 523 | 0.3 |
| 6.5% 01 Jun 2021 (SNR) | Caa2/CCC | 187 | 0.1 | |||
| 710 | 0.4 |
| Altice | 7.5% 15 May 2026 | B1/BB– | Telecommunications | Luxembourg | 532 | 0.3 |
| 6.625% 15 Feb 2023 | B1/BB– | 167 | 0.1 | |||
| 699 | 0.4 | |||||
| Takko | 9.875% 15 Apr 2019 | Caa1/CCC+ | Consumer Goods | Luxembourg | 692 | 0.4 |
| InterGen Services | 7.5% 30 Jun 2021 | B1/B | Utilities | Netherlands | 676 | 0.4 |
| Mercury Bondco | 8.25% 30 May 2021 (SNR) | B3/B | Consumer Goods | UK | 673 | 0.4 |
| ESAL | 6.25% 05 Feb 2023 (SNR) | NR/BB | Consumer Goods | Austria | 650 | 0.4 |
| BNP Paribas | 7.375% Var Perpetual | Ba1/BBB– | Financials | France | 630 | 0.4 |
| Unitymedia Hessen | 5.625% 15 Apr 2023 | Ba3/BB– | Consumer Services | Germany | 586 | 0.4 |
| Wagamama Finance | 7.875% 01 Feb 2020 (SNR) | B2/B | Consumer Services | UK | 586 | 0.4 |
| La Financiere Atalian | 7.25% 15 Jan 2020 | B2/B | Industrials | France | 579 | 0.4 |
| General Motors | Wts 10 Jul 2019 | NR/NR | Consumer Goods | USA | 564 | 0.4 |
| First Quantum Minerals | 7.25% 15 May 2022 | Caa1/B– | Basic Materials | Canada | 559 | 0.4 |
| Commerzbank | 8.125% 19 Sep 2023 | Ba1/BBB– | Financials | Germany | 546 | 0.4 |
| Bracken Midco One | 10.5% 15 Nov 2021 | NR/B | Financials | Ireland | 523 | 0.3 |
| Legal & General | 6.385% FRN Perpetual | Baa2/BBB+ | Financials | UK | 500 | 0.3 |
| AMC Entertainment | 6.375% 15 Nov 2024 | B2/B+ | Financials | USA | 498 | 0.3 |
| M&G Finance | 7.5% FRN Perpetual | NR/NR | Industrials | Luxembourg | 494 | 0.3 |
| Principality Building | ||||||
| Society | 7% Perpetual | Ba3/NR | Financials | UK | 490 | 0.3 |
| Arqiva Broadcast | ||||||
| Finance | 9.5% 31 Mar 2020 | B3/NR | Telecommunications | UK | 487 | 0.3 |
| New Look | 6.5% 01 Jul 2022 (SNR) | B1/B | Consumer Goods | UK | 476 | 0.3 |
| Thomas Cook | 6.25% 15 Jun 2022 (SNR) | B1/B | Consumer Services | UK | 476 | 0.3 |
| UniCredit | 8% FRN Perpetual | NR/NR | Financials | Italy | 446 | 0.3 |
| J Sainsbury | 6.5% Var Perpetual | NR/NR | Consumer Services | UK | 435 | 0.3 |
| Eco Services Operations | 8.5% 01 Nov 2022 (SNR) | Caa2/B– | Basic Materials | USA | 431 | 0.3 |
| Credit Suisse | 6.25% Var Perpetual | NR/BB | Financials | Switzerland | 418 | 0.3 |
| Snai Spa | 6.375% 7 Nov 2021 (SNR) | B2/B | Consumer Services | Italy | 407 | 0.3 |
| Inovyn Finance | 6.25% 15 May 2021 (SNR) | B2/B | Basic Materials | UK | 399 | 0.3 |
| Rothschilds | ||||||
| Continuation Finance | FRN Perpetual | NR/NR | Financials | Netherlands | 392 | 0.3 |
| CEMEX SAB | 6.125% 05 May 2025 | NR/B+ | Industrials | Mexico | 381 | 0.2 |
| Cognita Financing | 7.75% 15 Aug 2021 (SNR) | B2/B | Consumer Services | UK | 381 | 0.2 |
| Nationale-Nederlanden | 4.625% 08 Apr 2044 | Baa3/BBB | Financials | Netherlands | 375 | 0.2 |
| Puma Energy | 6.75% 01 Feb 2021 | Ba2/NR | Oil and Gas | Luxembourg | 325 | 0.2 |
| Novae | 6.5% 27 Apr 2017 | Baa3/NR | Financials | UK | 314 | 0.2 |
| Cable Communication | 5% 15 Oct 2023 | B1/B+ | Telecommunications | Netherlands | 298 | 0.2 |
| Whitbread | 3.375% 16 Oct 2025 (SNR) | NR/NR | Consumer Services | UK | 266 | 0.2 |
| Rothesay Life | 8% 30 Oct 2025 | NR/NR | Financials | UK | 260 | 0.2 |
| Spectrum Brands | 4% 01 Oct 2026 (SNR) | B2/BB– | Consumer Goods | USA | 203 | 0.1 |
| Peabody Energy | 4.75% Cnv 15 Dec 2066 | WR/NR | Basic Materials | USA | 191 | 0.1 |
| Picard Bondco | 7.75% 01 Feb 2020 | B3/B– | Consumer Goods | Luxembourg | 187 | 0.1 |
| Enquest | 7% 15 Apr 2022 | Caa2/CCC+ | Oil and Gas | UK | 179 | 0.1 |
| FAGE International | 5.625% 15 Aug 2026 (SNR) | B1/BB– | Consumer Goods | Luxembourg | 163 | 0.1 |
| Charter Communications | ||||||
| Operating | 6.484% 23 Oct 2045 | Ba1/BBB– | Telecommunications | USA | 117 | 0.1 |
| CIS General Insurance | 12% FRN 08 May 2025 | NR/NR | Financials | UK | 109 | 0.1 |
| Abengoa | 8.875% 05 Feb 2018 (SNR) | Ca/CCC– | Oil and Gas | Spain | 34 | — |
| 7.75% 01 Feb 2020 (SNR) | Ca/CCC– | 18 | — | |||
| 52 | — | |||||
| 155,718 | 100.0 |
Abbreviations used in the above valuation:
Cnv: ConvertibleÂ
FRN: Floating Rate Note
SNR: Senior
Var: Variable
Wts: Warrants
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
in respect of the preparation of financial statements
The Directors are responsible for preparing the annual financial report in accordance with applicable laws and regulations.
Company law requires the Directors to prepare financial statements for each financial period. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation and presentation of financial statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs.
In preparing these financial statements, the Directors are required to:
• properly select and apply accounting policies and then apply them consistently;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and
• make an assessment of the Company’s ability to continue as a going concern.
The financial statements have been prepared on a going concern basis. When considering this, the Directors took into account the annual shareholders’ continuation vote (as explained in detail on page 10) and the following: the Company’s investment objective and risk management policies, the nature of the portfolio and expenditure and cash flow projections. As a result, they determined that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the accounts comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Corporate Governance Statement and a Directors’ Report that comply with that law and those regulations.
The Directors of the Company, who are listed on page 21, each confirm to the best of their knowledge that:
• the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;
• this annual financial report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and
• they consider that this annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Clive Nicholson
Chairman
Signed on behalf of the Board of Directors
28 March 2017
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December
| 2016 | 2015 | |||||||
| REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
|||
| NOTES | ||||||||
| Profit/(loss) on investments at fair value | 11 | — | 19,088 | 19,088 | — | (5,662) | (5,662) | |
| Exchange differences | — | (60) | (60) | — | (216) | (216) | ||
| (Loss)/profit on derivative instruments | ||||||||
| – currency hedges | — | (9,213) | (9,213) | — | 1,487 | 1,487 | ||
| Income | 4 | 10,695 | — | 10,695 | 10,009 | — | 10,009 | |
| Investment management fees | 5 | (794) | (428) | (1,222) | (745) | (401) | (1,146) | |
| Other expenses | 6 | (404) | — | (404) | (410) | (1) | (411) | |
| Profit/(loss) before finance costs | ||||||||
| and taxation | 9,497 | 9,387 | 18,884 | 8,854 | (4,793) | 4,061 | ||
| Finance costs | 7 | (29) | (15) | (44) | (28) | (15) | (43) | |
| Profit/(loss) before taxation | 9,468 | 9,372 | 18,840 | 8,826 | (4,808) | 4,018 | ||
| Taxation | 8 | (171) | — | (171) | (127) | — | (127) | |
| Profit/(loss) after taxation | 9,297 | 9,372 | 18,669 | 8,699 | (4,808) | 3,891 | ||
| Return per ordinary share | 9 | 10.5p | 10.5p | 21.0p | 10.4p | (5.8)p | 4.6p | |
The total column of this statement represents the Company’s statement of comprehensive income, prepared in accordance with International Financial Reporting Standards as adopted by the EU. The profit after tax is the total comprehensive income. The supplementary revenue and capital columns are both prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
| STATED CAPITAL £’000 |
CAPITAL RESERVE £’000 |
REVENUE RESERVE £’000 |
TOTAL £’000 |
||
| NOTES | |||||
| At 31 December 2014 | 128,209 | 17,610 | 2,392 | 148,211 | |
| Net proceeds from issue of new shares | 15 | 10,190 | — | — | 10,190 |
| Total comprehensive income for the year | — | (4,808) | 8,699 | 3,891 | |
| Dividends paid | 10 | (76) | — | (8,240) | (8,316) |
| At 31 December 2015 | 138,323 | 12,802 | 2,851 | 153,976 | |
| Net proceeds from issue of new shares | 15 | 10,401 | — | — | 10,401 |
| Total comprehensive income for the year | — | 9,372 | 9,297 | 18,669 | |
| Dividends paid | 10 | (115) | — | (8,738) | (8,853) |
| At 31 December 2016 | 148,609 | 22,174 | 3,410 | 174,193 |
.
BALANCE SHEET
AT 31 DECEMBER
| NOTES | 2016 £’000 |
2015 £’000 |
|
| Non-current assets | |||
| Investments held at fair value through profit or loss | 11 | 155,718 | 141,833 |
| Current assets | |||
| Other receivables | 12 | 3,056 | 2,936 |
| Derivative financial instruments – unrealised net profit | 13 | 1,251 | — |
| Cash and cash equivalents | 14,593 | 10,730 | |
| 18,900 | 13,666 | ||
| Current liabilities | |||
| Other payables | 14 | (425) | (432) |
| Derivative financial instruments – unrealised net loss | 13 | — | (1,091) |
| (425) | (1,523) | ||
| Net current assets | 18,475 | 12,143 | |
| Net assets | 174,193 | 153,976 | |
| Capital and reserves | |||
| Stated capital | 15 | 148,609 | 138,323 |
| Capital reserve | 16 | 22,174 | 12,802 |
| Revenue reserve | 16 | 3,410 | 2,851 |
| Shareholders’ funds | 174,193 | 153,976 | |
| Net asset value per ordinary share | 17 | 189.32p | 178.34p |
These financial statements were approved and authorised for issue by the Board of Directors on 28 March 2017.
Signed on behalf of the Board of Directors
Clive Nicholson
Chairman
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER
| 2016 £’000 |
2015 £’000 |
|
| Cash flows from operating activities | ||
| Profit before tax | 18,840 | 4,018 |
| Taxation | (171) | (127) |
| Adjustment for: | ||
| Purchases of investments | (36,697) | (38,740) |
| Sales of investments | 41,900 | 26,994 |
| 5,203 | (11,746) | |
| (Profit)/loss on investments at fair value | (19,088) | 5,662 |
| Exchange differences | (5) | (71) |
| Net cash movement from derivative instruments – | ||
| currency hedges | (2,342) | 1,557 |
| Finance costs | 44 | 43 |
| Operating cash flows before movements in working capital | 2,481 | (664) |
| Increase in receivables | (120) | (103) |
| (Decrease)/increase in payables | (7) | 14 |
| Net cash flows from operating activities after taxation | 2,354 | (753) |
| Cash flows from financing activities | ||
| Finance cost paid | (44) | (43) |
| Net proceeds from issue of shares | 10,401 | 10,194 |
| Net equity dividends paid – note 10 | (8,853) | (8,316) |
| Net cash generated from financing activities | 1,504 | 1,835 |
| Net increase in cash and cash equivalents | 3,858 | 1,082 |
| Exchange differences | 5 | 71 |
| Movement in cash and cash equivalents | 3,863 | 1,153 |
| Cash and cash equivalents at beginning of year | 10,730 | 9,577 |
| Cash and cash equivalents at end of the year | 14,593 | 10,730 |
| Reconciliation of cash and cash equivalents to the | ||
| Balance Sheet is as follows: | ||
| Cash held at custodian | 4,543 | 1,640 |
| Short-Term Investment Company (Global Series) plc, | ||
| money market fund | 10,050 | 9,090 |
| Cash and cash equivalents | 14,593 | 10,730 |
| Cash flows from operating activities includes: | ||
| Dividends received | 596 | 684 |
| Interest received | 9,809 | 9,153 |
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2016
1. Principal Activity
The Company is a closed-end investment company incorporated in Jersey and operates under the Companies (Jersey) Law 1991. The principal activity of the Company is investment in a diversified portfolio of high-yielding fixed-interest securities as set out in the Company’s Investment Objective and Policy.
2. Principal Accounting Policies
Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.
The principal accounting policies adopted in the preparation of these financial statements are set out below.
(a) Basis of Preparation
(i) Accounting Standards Applied
The financial statements have been prepared on an historical cost basis, except for the measurement at fair value of investments and derivatives, and in accordance with the applicable International Financial Reporting Standards (IFRS) and interpretations issued by the International Financial Reporting Interpretations Committee as adopted by the European Union. The standards are those endorsed by the European Union and effective at the date the financial statements were approved by the Board.
Where presentational guidance set out in the Statement of Recommended Practice (SORP) ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’, issued by the Association of Investment Companies 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. The supplementary information which analyses the statement of comprehensive income between items of a revenue and a capital nature is presented in accordance with this.
(ii) Going Concern
As explained under ‘Annual Continuation Vote’ on page 10, the Company has an annual continuation vote. However, as also explained in that note the Directors believe shareholders will vote for the Company to continue. Accordingly, the financial statements have been prepared on a going concern basis and the accounts do not include any adjustments which might arise from cessation of the Company.
(iii) Adoption of New and Revised Standards
New and revised standards and interpretations that became effective during the year had no significant impact on the amounts reported in these financial statements but may impact accounting for future transactions and arrangements.
At the date of authorising these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU).
• IFRS 9: Financial Instruments (2014) (effective 1 January 2018).
• Amendment to IAS 7: Disclosure initiative — Statement of Cashflows (effective 1 January 2017).
The Directors do not expect the adoption of the above standards and interpretations (or any other standards and interpretations which are in issue but not effective) will have a material impact on the financial statements of the Company in future periods.
(iv) Critical Accounting Estimates and Judgements
The preparation of the financial statements may require the Directors to make estimations where uncertainty exists. It also requires the Directors to exercise judgement in the process of applying the accounting policies.
2. Principal Accounting Policies (continued)
(b) Foreign Currency
(i) Functional and Presentation Currency
The financial statements are presented in sterling, which is the Company’s functional and presentation currency and the currency in which the Company’s stated capital and expenses are denominated, as well as certain of its income, assets and liabilities.
(ii) Transactions and Balances
Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rate of exchange ruling on the date of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. All profits and losses, whether realised or unrealised, are recognised in the statement of comprehensive income and are taken to capital reserve or revenue reserve, depending on whether the gain or loss is capital or revenue in nature.
(c) Financial Instruments
(i) Recognition of Financial Assets and Financial Liabilities
Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument. These are offset if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.
(ii) Derecognition of Financial Assets
Financial assets are derecognised when the contractual rights to the cash flows from the asset expire, or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.
(iii) Derecognition of Financial Liabilities
Financial liabilities are derecognised when the Company’s obligations are discharged, cancelled or expired.
(iv) Trade Date Accounting
Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.
(v) Classification of Financial Assets and Financial Liabilities
Financial Assets
Investments are classified as held at fair value through profit or loss as the investments are managed and their performance evaluated on a fair value basis in accordance with the Company’s documented investment strategy and this is also the basis on which information about investments is provided internally to the Board.
Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the statement of comprehensive income, and are subsequently valued at fair value.
For investments that are actively traded in organised financial markets, fair value is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including broker quotes and price modelling.
Financial Liabilities
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
(d) Derivatives and Hedging
Derivative instruments are valued at fair value in the balance sheet. Hedge accounting has not been adopted.
Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date and any profits and losses are recognised in the statement of comprehensive income and taken to capital.
(e) Cash and Cash Equivalents
Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds.
(f) Revenue Recognition
All income is recognised in the statement of comprehensive income. Interest income arising from fixed income securities is recognised using the effective interest method. Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’. Deposit interest is taken into account on an accruals basis.
(g) Expenses and Finance Costs
All expenses are accounted for on an accruals basis and are recognised in the statement of comprehensive income. Investment management fees and finance costs are allocated 35% to capital and 65% to revenue in accordance with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio. Except for custodian dealing costs, all other expenses are charged through revenue.
(h) Tax
Overseas interest and dividends are shown gross of withholding tax and the corresponding irrecoverable tax is shown as a charge in the statement of comprehensive income.
3. Segmental Reporting
No segmental reporting is provided as the Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt and, to a significantly lesser extent, equity securities.
4. Income
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
| 2016 £’000 |
2015 £’000 |
|
| Income from investments | ||
| UK dividends | 507 | 656 |
| UK investment income – interest | 3,688 | 3,526 |
| Overseas investment income – interest | 6,470 | 5,794 |
| Overseas dividends | 26 | 31 |
| 10,691 | 10,007 | |
| Other income | ||
| Deposit interest | 4 | 2 |
| Total income | 10,695 | 10,009 |
5. Investment Management Fee
This note shows the fees paid to the Manager, which are calculated quarterly on the basis of the value of the assets being managed.
| 2016 | 2015 | ||||||
| REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
||
| Investment management fee | 794 | 428 | 1,222 | 745 | 401 | 1,146 | |
Details of the investment management agreement are disclosed in the Directors’ Report. At the period end the management fee accrued was £327,000 (2015: £289,000).
6. Other Expenses
The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.
| 2016 | 2015 | ||||||
| REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
||
| General expenses (i) | 256 | — | 256 | 265 | 1 | 266 | |
| Directors’ fees (ii) | 119 | — | 119 | 114 | — | 114 | |
| Auditor’s remuneration: | |||||||
| – for the audit of the | |||||||
| financial statements | |||||||
| (including any expenses) | 29 | — | 29 | 31 | — | 31 | |
| 404 | — | 404 | 410 | 1 | 411 | ||
(i) General expenses include £39,000 (2015: £38,700) due to R&H Fund Services (Jersey) who act as administrator and company secretary to the Company under an agreement dated 19 December 2011. This agreement is terminable at any time by either party giving no less than three months’ notice. The fee is payable quarterly in arrears and is revised with effect from 1 January each year, by the application of a formula based on the Retail Price Index for the month of December of the previous year applied to the initial rate of £37,500 per annum.
General expenses also include an administration fee due to Invesco Perpetual of £25,000 (2015: £25,000). It is based on an initial fee of £22,500 plus RPI increases in May.
Custodian dealing costs of £455 (2015: £798) are charged wholly to capital.
(ii) The maximum Directors’ fees authorised by the Articles of Association are £150,000 per annum.
7. Finance Costs
Finance costs arise on any borrowing facilities the Company has and comprise commitment fees on any unused facility as well as interest when the facility is used.
| 2016 | 2015 | ||||||
| REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
||
| Commitment fees due on | |||||||
| loan facility | 26 | 14 | 40 | 26 | 14 | 40 | |
| Bank charges | 3 | 1 | 4 | 2 | 1 | 3 | |
| 29 | 15 | 44 | 28 | 15 | 43 | ||
The Company has a 364 day committed £20 million multi-currency revolving credit facility with Bank of New York Mellon which is renewable on 5 May 2017. Available currencies are sterling, euros or US dollars. Drawings under this facility are subject to the restriction that the Company’s total financial indebtedness must not exceed 30% of total assets and that the assets must be in excess of £50 million. At the balance sheet date the Company had no drawdowns (2015: none).
Interest payable is based on the interbank offered rate for the currency drawn down. The commitment fee is based on 0.20% of the average undrawn amount each quarter.
8. Taxation
As a Jersey investment company no tax is payable on capital gains and, as the Company principally invests in assets which do not suffer tax on income, the only overseas tax arises on the few assets domiciled in countries with which Jersey has no double-taxation treaty, e.g. Italy and Portugal.
| 2016 £’000 |
2015 £’000 |
|
| Overseas taxation | 171 | 127 |
The Company is subject to Jersey income tax at the rate of 0% (2015: 0%). The overseas tax charge consists of irrecoverable withholding tax.
9. Return per Ordinary Share
Return per share is the amount of gain generated for the financial year divided by the weighted average number of ordinary shares in issue.
The basic revenue, capital and total return per ordinary share is based on each of the profit after tax and on 88,902,058 (2015: 83,705,678) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.
10. Dividends on Ordinary Shares
Dividends are paid from the income less expenses. Dividends are paid as an amount per ordinary share held.
| 2016 | 2015 | |||||
| Pence | £’000 | Pence | £’000 | |||
| Dividends paid and recognised in the year: | ||||||
| Fourth interim | 2.5 | 2,158 | 2.5 | 2,020 | ||
| First interim | 2.5 | 2,182 | 2.5 | 2,064 | ||
| Second interim | 2.5 | 2,224 | 2.5 | 2,102 | ||
| Third interim | 2.5 | 2,289 | 2.5 | 2,130 | ||
| 10.0 | 8,853 | 10.0 | 8,316 | |||
Dividends paid in the year have been charged to revenue except for £115,000 (2015: £76,000) which was charged to stated capital. This amount is equivalent to the income accrued on the new shares issued in the year (see note 15).
Set out below are the dividends that have been declared in respect of the financial period 31 December:
| 2016 | 2015 | |||||
| Pence | £’000 | Pence | £’000 | |||
| Dividends in respect of the year: | ||||||
| First interim | 2.5 | 2,182 | 2.5 | 2,064 | ||
| Second interim | 2.5 | 2,224 | 2.5 | 2,102 | ||
| Third interim | 2.5 | 2,289 | 2.5 | 2,130 | ||
| Fourth interim | 2.5 | 2,300 | 2.5 | 2,158 | ||
| 10.0 | 8,995 | 10.0 | 8,454 | |||
The fourth interim dividend for 2016 was paid on 24 February 2017 to shareholders on the register on 27 January 2017.
11. Investments Held at Fair Value Through Profit or Loss
The portfolio is principally made up of investments which are listed and traded on regulated stock exchanges. Profits and losses are either:
• realised, usually arising when investments are sold; or
• unrealised, being the difference from cost of those investments still held at the year end.
(a) Analysis of investment profits
| 2016 £’000 |
2015 £’000 |
|
| Opening book cost | 139,161 | 127,649 |
| Opening investment holding profits | 2,672 | 8,100 |
| Opening valuation | 141,833 | 135,749 |
| Movements in the year: | ||
| Purchases at cost | 36,697 | 38,740 |
| Sales – proceeds | (41,900) | (26,994) |
| Sales – net realised profit/(loss) | 7,083 | (234) |
| Movement in investment holding profit | 12,005 | (5,428) |
| Closing valuation | 155,718 | 141,833 |
| Closing book cost | 141,041 | 139,161 |
| Closing investment holding profit | 14,677 | 2,672 |
| Closing valuation | 155,718 | 141,833 |
| Realised profit/(loss) in the year | 7,083 | (234) |
| Movement in investment holding profit in the year | 12,005 | (5,428) |
| 19,088 | (5,662) |
(b) Transaction costs
The transaction costs on investments amount to £4,000 on sales and £nil on purchases (2015: £nil on sales and £nil on purchases).
(c) Registration of investments
The investments of the Company are registered in the name of the Company or in the name of nominees and held to the account of the Company.
12. Other Receivables
Other receivables are amounts which are due to the Company, such as income which has been earned (accrued) but not yet received and monies due from brokers for investments sold.
| 2016 £’000 |
2015 £’000 |
|
| Prepayments and accrued income | 3,056 | 2,936 |
| 3,056 | 2,936 |
13. Derivative Financial Instruments
Derivative financial instruments are financial instruments that derive their value from the performance of another item, such as an asset or exchange rates. They are used to manage the risk associated with fluctuations in the value of certain assets and liabilities. The Company can use derivatives to manage its exposure to fluctuations in foreign exchange rates.
Derivative financial instruments comprise forward currency contracts.
| 2016 £’000 |
2015 £’000 |
|
| Forward currency contracts – net unrealised profit/(loss) | 1,251 | (1,091) |
| 1,251 | (1,091) |
14. Other Payables
Other payables are amounts which must be paid by the Company, and include amounts owed to suppliers, such as the Manager and auditor, and any amounts due to brokers for the purchase of investments.
| 2016 £’000 |
2015 £’000 |
|
| Accruals | 425 | 432 |
| 425 | 432 |
15. Stated Capital
The stated capital represents the total number of shares in issue, for which dividends accrue. Stated capital can be used for distributions under Jersey law.
| 2016 | 2015 | 2016 | 2015 | |
| NUMBER | NUMBER | £’000 | £’000 | |
| Allotted ordinary shares of no par value | ||||
| Brought forward | 86,337,459 | 80,812,459 | 138,323 | 128,209 |
| Net issue proceeds | 5,673,745 | 5,525,000 | 10,401 | 10,190 |
| Dividends paid from stated capital | — | — | (115) | (76) |
| Carried forward | 92,011,204 | 86,337,459 | 148,609 | 138,323 |
Details of the stated capital and rights attaching to the Company’s ordinary shares are shown in the Directors’ Report on page 54.
For the year to 31 December 2016, 5,673,745 (2015: 5,525,000) new ordinary shares were issued to the Company’s corporate broker, Winterflood Securities Limited, for onward transmission to their clients. These shares were issued in tranches of various quantities throughout the year to satisfy secondary market demand. The gross issue proceeds were £10,469,000 (2015: £10,310,000), at an average price of 184.51p (2015: 186.60p) per share, and the net proceeds after issue costs were £10,401,000 (2015: £10,190,000). The net proceeds included an aggregate amount of £115,000 (2016: £76,000) which arose from the income accrued component of the net asset value at the date of issue of the new shares.
Subsequent to the year end • ordinary shares have been issued, at an average price of •p.
Because the criteria in paragraphs 16C and 16D of IAS 32 Financial Instruments: Presentation, have been met, the stated capital of the Company is classified as equity even though there is a continuation vote.
16. Reserves
This note explains the different reserves attributable to shareholders. The aggregate of the reserves and stated capital (see previous note) make up total shareholders’ funds.
The capital reserve includes unrealised investment holding profits and losses, being the difference between cost and market value at the balance sheet date, as well as realised profits and losses on disposals of investments. The revenue reserve shows the net revenue after payment of any dividend from this reserve. Both the capital and revenue reserves are distributable.
17. Net Asset Value per Ordinary Share
The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue.
The net asset value per ordinary share and the net assets attributable at the period end were as follows:
| NET ASSET VALUE PER ORDINARY SHARE |
NET ASSETS ATTRIBUTABLE | ||||
| 2016 | 2015 | 2016 | 2015 | ||
| Pence | Pence | £’000 | £’000 | ||
| Ordinary shares | 189.32 | 178.34 | 174,193 | 153,976 | |
Net asset value per ordinary share is based on net assets at the year end and on 92,011,204 (2015: 86,337,459) ordinary shares, being the number of ordinary shares in issue at the year end.
18. Financial Instruments
Financial instruments comprise the Company’s investment portfolio and derivative financial instruments (for the latter see note 13) as well as any cash, borrowings, other receivables and other payables. The following note explains the risks that affect the Company’s financial instruments and looks at the Company’s exposure to these various risks.
Risk Management Policies and Procedures
The Strategic Report details the Company’s approach to investment risk management on page 11 and the accounting policies in note 2 explain the Company’s valuation basis for investments and currency.
As an investment company, the Company invests in loan stocks, corporate bonds, government stocks, preference shares and equities which are held for the long-term in order to achieve the Company’s Investment Objective in accordance with its Investment Policy. In pursuing these, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction in the profits available for payment as dividends.
The Company’s principal financial instruments at risk comprise its investment portfolio. Other financial instruments at risk include cash and cash equivalents, borrowings, other receivables and other payables that arise directly from the Company’s operations. These risks and the Directors’ approach to managing them are set out below, and have not changed from those applying in the comparative year.
Risk management is an integral part of the investment management process. The Manager controls risk by ensuring that the Company’s portfolio is appropriately diversified and the portfolio managers actively monitor both the ratings and liquidity of the fixed-interest securities taking into account the Company’s financing requirements. In-depth and continual analysis of market and stock fundamentals give the portfolio managers the best possible understanding of the risks associated with a particular stock. The portfolio managers assess the exposure to market risk when making each investment decision, and monitor the overall level of market risk on the whole of the portfolio on an ongoing basis.
High-yield fixed-interest securities are subject to a variety of risks, including credit risk (18.3). Borrowing using the Company’s credit facility increases the Company’s exposure to interest rate risk and this is explained under interest rate risk (18.1.2).
The day to day management of the investment activities, borrowings and hedging of the Company has been delegated to the Manager, and is the responsibility of the portfolio managers to whom the Board has given wide discretion to operate within set guidelines. Any proposed variation outside those guidelines is referred to the Board and the guidelines themselves are reviewed at every board meeting.
18.1 Market Risk
Market risk arises from changes in the fair value or future cash flows of a financial instrument because of movements in market prices. Market risk comprises three types of risk: currency risk (18.1.1), interest rate risk (18.1.2) and other price risk (18.1.3).
18.1.1 Currency Risk
The Company has assets, liabilities and income which are denominated in currencies other than sterling and movements in exchange rates will affect the sterling value of those items.
Management of the Currency Risk
The Board meets at least quarterly to assess risk and review investment performance. The portfolio managers monitor the Company’s exposure to foreign currencies on a daily basis and report to the Board. Drawings in foreign currencies on the borrowing facility can be used to limit the Company’s currency exposure and to achieve the portfolio characteristics that assist the Company in meeting its investment objective and policy. The Company may use forward currency contracts to mitigate currency risk. All facility drawings and derivative contracts are limited to currencies and amounts commensurate with asset exposure to those currencies.
Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.
Currency Exposure
The fair values of the Company’s monetary items that have foreign currency exposure at 31 December follow. Where the Company’s investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis to show the overall level of exposure.
| EURO £’000 |
US DOLLAR £’000 |
SWISS FRANC £’000 |
|
| 31 December 2016 | |||
| Investments at fair value through profit or loss that are monetary items (fixed and floating interest) | 32,512 | 40,719 | — |
| Cash and cash equivalents | 941 | 706 | 2 |
| Other receivables (due from brokers and dividends) | 582 | 729 | — |
| Forward currency contracts | (32,091) | (25,514) | — |
| Foreign currency exposure on net monetary items | 1,944 | 16,640 | 2 |
| Investments at fair value through profit or | |||
| loss that are equities | — | 564 | — |
| Total net foreign currency | 1,944 | 17,204 | 2 |
| EURO £’000 |
US DOLLAR £’000 |
SWISS FRANC £’000 |
|
| 31 December 2015 | |||
| Investments at fair value through profit or loss that are monetary items (fixed and floating interest) | 32,254 | 23,755 | — |
| Cash and cash equivalents | 267 | 83 | 1 |
| Other receivables (due from brokers and dividends) | 602 | 506 | — |
| Forward currency contracts | (33,457) | (13,225) | — |
| Foreign currency exposure on net monetary items | (334) | 11,119 | 1 |
| Investments at fair value through profit or loss that are equities | — | 4,472 | — |
| Total net foreign currency exposure | (334) | 15,591 | 1 |
The above may not be representative of the exposure to risk during the period reported because the levels of monetary foreign currency exposure may change significantly throughout the period.
Currency Sensitivity
The effect on the income statement and the net asset value that changes in exchange rates have on the Company’s financial assets and liabilities is based on the following exchange rates. These rates have been calculated by reference to the volatility of exchange rates during the period using the standard deviation of currency fluctuations against the mean.
| 2016 | 2015 | |
| £/Euro | ±5.4% | ±2.4% |
| £/US Dollar | ±6.2% | ±1. |
8%
The following sensitivity analysis is based on the Company’s monetary foreign currency financial instruments held at the balance sheet date and takes account of any forward foreign exchange contracts that offset the effects of changes in currency exchange rates.
If sterling had strengthened by the changes in exchange rates shown above, this would have had the following effect:
| EURO £’000 |
US DOLLAR £’000 |
|
| 2016 | ||
| Effect on Statement of Comprehensive Income – profit/(loss) after taxation | ||
| Revenue loss | (139) | (148) |
| Capital loss | (74) | (1,021) |
| Total return after taxation for the year | (213) | (1,169) |
| Effect on net asset value | –0.1% | –0.7% |
| EURO £’000 |
US DOLLAR £’000 |
|
| 2015 | ||
| Effect on Statement of Comprehensive Income – profit/(loss) after taxation | ||
| Revenue loss | (63) | (30) |
| Capital profit/(loss) | 22 | (272) |
| Total return after taxation for the year | (41) | (302) |
| Effect on net asset value | 0.0% | –0.2% |
If sterling had weakened by the changes in exchange rates shown above this would have an equal and opposite effect.
In the opinion of the Directors, the above sensitivity analysis is not representative of the period as a whole, since the level of exposure changes frequently as part of the currency risk management process of the Company.
18.1.2 Interest Rate Risk
The Company is exposed to interest rate risk in a number of ways. Movements in interest rates may affect the fair value of fixed-interest rate securities, income receivable on cash deposits and floating rate securities, and interest payable on variable rate borrowings. Interest rate risk is related above all to long-term financial instruments.
Management of Interest Rate Risk
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account as part of the portfolio management and borrowings processes of the Manager. The Board reviews on a regular basis the investment portfolio and borrowings. This encompasses the valuation of fixed-interest and floating rate securities.
When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependant on the base rate of the custodian.
The Company has a credit facility with which it can finance investment activity, details of which are shown in note 7. The Company uses the facility at levels approved and monitored by the Board.
Interest Rate Exposure
The following table shows the Company’s exposure to interest rate risk at the balance sheet date arising from its monetary financial assets and liabilities.
| WITHIN ONE YEAR £’000 |
MORE THAN ONE YEAR £’000 |
TOTAL £’000 |
|
| 2016 | |||
| Exposure to floating interest rates: | |||
| Investments held at fair value through profit or loss | — | 27,089 | 27,089 |
| Cash and cash equivalents | 14,593 | — | 14,593 |
| 14,593 | 27,089 | 41,682 | |
| Exposure to fixed-interest rates: | |||
| Investments held at fair value through profit or loss | 1,063 | 121,156 | 122,219 |
| Net exposure to interest rates | 15,656 | 148,245 | 163,901 |
| WITHIN ONE YEAR £’000 |
MORE THAN ONE YEAR £’000 |
TOTAL £’000 |
|
| 2015 | |||
| Exposure to floating interest rates: | |||
| Investments at fair value through profit or loss | — | 54,702 | 54,702 |
| Cash and cash equivalents | 10,730 | — | 10,730 |
| 10,730 | 54,702 | 65,432 | |
| Exposure to fixed-interest rates: | |||
| Investments at fair value through profit or loss | — | 72,863 | 72,863 |
| Net exposure to interest rates | 10,730 | 127,565 | 138,295 |
The nominal interest rates on the investments at fair value through profit or loss are shown in the portfolio list on pages 17 to 20. The weighted average effective interest rate on these investments is 6.9% (2015: 7.0%). The weighted average effective interest rate on cash and cash equivalents is 0.34% (2015: 0.33%).
Interest Rate Sensitivity
The following table illustrates the sensitivity of the profit after taxation for the year to a 1% increase in interest rates in regard to the Company’s financial assets and financial liabilities. As future changes cannot be estimated with any degree of certainty, the sensitivity analysis is based on the Company’s financial instruments held at the balance sheet date, with all other variables held constant.
| 2016 £’000 |
2015 £’000 |
|
| Effect on Statement of Comprehensive Income – profit/(loss) | ||
| after taxation | ||
| Revenue profit | 146 | 107 |
| Capital loss | (6,883) | (5,421) |
| Total loss after taxation for the year | (6,737) | (5,314) |
| Effect on NAV | (7.3)p | (6.2)p |
If interest rates had decreased by 1%, this would have had an equal and opposite effect.
The above exposure and sensitivity analysis are not representative of the period as a whole, since the level of exposure changes frequently as borrowings can be drawn down and repaid as required throughout the period. In particular, for the year under review there has been limited interest rate movements and as a consequence little change in interest rate sensitivity.
18.1.3 Other Price Risk
Other price risk includes changes in market prices, other than those arising from currency risk or interest rate risk, which may affect the value of the investment portfolio, whether by factors specific to an individual investment or its issuer, or by factors affecting the wider market.
Management of Other Price Risk
It is the portfolio managers’ responsibility to manage the portfolio and borrowings in accordance with the investment objective and policy, and in accordance with the investment policy guidelines set by the Board. The Board manages the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis compliance with these. The Board also reviews investment performance. Because the Company’s portfolio is the result of the portfolio managers’ investment process, performance may not correlate with the markets in which the Company invests.
The Company’s exposure to other changes in market prices at 31 December on its investments is shown in the fair value hierarchy table on page 52.
Concentration of Exposure to Other Price Risks
The Company’s investment portfolio is not concentrated in any single country of domicile, however, it is recognised that an investment’s country of domicile or listing does not necessarily equate to its exposure to the economic conditions in that country.
Other Price Risk Sensitivity
Excluding fixed interest securities and convertibles, at the year end the Company held other investments of £6,410,000 (2015: £14,268,000). The effect of a 10% increase or decrease in the fair values of these investments (including any exposure through derivatives) on the profit after taxation for the year is £641,000 (2015: £1,427,000). This level of change is considered to be reasonably possible based on the observation of current market conditions. The sensitivity analysis is based on the Company’s other investments (including equity exposure through derivatives) at the balance sheet date with all other variables held constant.
18.2 Liquidity Risk
This is the risk that the Company may encounter difficulty in meeting its obligations associated with financial liabilities i.e. when realising assets or raising finance to meet financial commitments. A lack of liquidity in the portfolio may make it difficult for the Company to realise assets at or near their purported value in the event of a forced sale.
Management of Liquidity Risk
Liquidity risk is not viewed by the Directors as a significant risk because a majority of the Company’s assets comprise readily realisable securities, although a lack of liquidity in non-investment grade securities may make it difficult to rebalance the Company’s investment portfolio as and when the portfolio managers believe it would be advantageous to do so. On a daily basis the portfolio managers ascertain the Company’s cash and borrowing requirements by reviewing future cash flows arising from purchases and sales of investments, interest and dividend receipts, expenses and dividend payments, and available financing.
Liquidity Risk Exposure
The contractual maturities of the financial liabilities at the balance sheet, based on the earliest date on which payment can be required follow:
| 2016 | 2015 | |
| LESS THAN THREE MONTHS £’000 |
LESS THAN THREE MONTHS £’000 |
|
| Other payables | 425 | 432 |
| Unrealised loss on forward currency contracts | — | 1,091 |
| 425 | 1,523 |
18.3 Credit Risk
Credit risk is the risk that the failure of the counterparty to a transaction to discharge its obligation under that transaction could result in a loss to the Company. This risk also includes transactions in derivatives.
At the year end 65.7% (2015: 63.8%) of the Company’s portfolio consisted of non-investment grade securities. To the extent that the Company invests in non-investment grade securities, the Company may realise a higher current yield than the yield offered by investment grade securities. On the other hand, investments in such securities involve a greater volatility of price and a greater risk of default by the issuers of such securities, with consequent loss of interest payments and principal. Non-investment grade securities are likely to be subject to greater uncertainties from exposure to adverse conditions and will be speculative with respect to an issuer’s capacity to meet interest payments and repay principal in accordance with its obligations.
Investment grade and non-investment grade securities totalled 83% (2015: 80%) of the portfolio at the year end. Adverse changes in the financial position of an issuer of such high-yield fixed-interest securities or in general economic conditions may impair the ability of the issuer to make payments of principal and/or interest or may cause the liquidation or insolvency of an issuer.
The portfolio may be adversely affected if the Company’s custodian suffers insolvency or other financial difficulties. The appointment of a depositary has substantially lessened this risk. The Board reviews the custodian’s annual control report and the Manager’s management of the relationship with the custodian.
Management of and Exposure to Credit Risk
All of the Company’s assets are subject to credit risk. The Company’s principal credit risk is the risk of default of the non-investment grade debt. Where the portfolio managers make an investment in a bond, corporate or otherwise, the credit rating of the issuer is also considered when assessing the risk of defaults. Investments in bonds are across a variety of industrial sectors and geographical markets to avoid concentration of credit risk. Counterparties for derivative transactions are also a source of credit risk. Transactions involving derivatives are entered into only with banks whose credit ratings are taken into account to minimise default risk. The credit ratings of the derivatives counterparties were mostly A3 with one at Ba1.
Details of the Company’s investments, including their credit ratings, are shown on pages 17 to 20. Credit risk for transactions involving derivatives and equity investments is minimised as the Company only uses approved counterparties.
Cash balances are held with approved deposit takers only and are limited to a maximum of 4% of the Company’s net asset value with any one deposit taker. Balances held with Short-Term Investments Company (Global Series) plc, a triple-A rated money market fund (STIC), are limited to a maximum of 6% of the Company’s net asset value. At the balance sheet date the Company had £4.5 million (2015: £1.6 million) held at the custodian and £10.1 million (2015: £9.1 million) held in STIC.
There are no financial assets that are past due or impaired during the year (2015: none).
Fair Values of Financial Assets and Financial Liabilities
Financial assets are either carried in the balance sheet at their fair value (investments and derivatives), or the balance sheet amount is a reasonable approximation of fair value (due from brokers, dividends receivable, accrued income, due to brokers, accruals and cash).
Financial liabilities are carried at amortised cost except for derivatives, which as stated above are carried at fair value.
19. Classification Under Fair Value Hierarchy
The valuation techniques used by the Company are explained in the accounting policies note. The table that follows sets out the fair value of the financial instruments. The three levels set out in IFRS 7 hierarchy follow:
Level 1 – The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.
Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.
There were no transfers in the year between any of the levels.
Normally investments would be valued using stock market active prices, with investments disclosed as Level 1 and this is the case for the quoted equity investments that the Company holds. However, the majority of the Company’s investments are non-equity investments. Evaluated prices from a third party pricing vendor are used to price these securities, together with a price comparison made to secondary and tertiary evaluated third party sources. Evaluated prices are in turn based on a variety of sources including broker quotes and benchmarks. As a result, the Company’s non-equity investments have been shown as Level 2 – recognising that the fair values of these investments are not as visible as quoted equity investments and their higher inherent pricing risk. However, this does not mean that the fair values shown in the portfolio valuation are not achievable at point of sale. No Level 3 investments were held during the year (2015: none held).
| LEVEL 1 £’000 |
LEVEL 2 £’000 |
TOTAL £’000 |
|
| 2016 | |||
| Financial assets designated at fair value | |||
| through profit or loss: | |||
| Quoted securities: | |||
| – Fixed interest securities(1) | — | 145,998 | 145,998 |
| – Convertibles | — | 3,310 | 3,310 |
| – Preference | 2,990 | — | 2,990 |
| – Convertible preference | 2,856 | — | 2,856 |
| – Warrants | 564 | — | 564 |
| Total for financial assets | 6,410 | 149,308 | 155,718 |
| Financial liabilities designated at fair value | |||
| through profit or loss: | |||
| Derivative financial instruments: | |||
| Currency hedges | — | 1,251 | 1,251 |
| Total for financial liabilities | — | 1,251 | 1,251 |
| LEVEL 1 £’000 |
LEVEL 2 £’000 |
TOTAL £’000 |
|
| 2015 | |||
| Financial assets designated at fair value | |||
| through profit or loss: | |||
| Quoted securities: | |||
| – Fixed interest securities | — | 124,977 | 124,977 |
| – Convertibles | — | 2,588 | 2,588 |
| – Preference | 2,930 | — | 2,930 |
| – Convertible preference | 6,866 | — | 6,866 |
| – Warrants | 4,472 | — | 4,472 |
| 14,268 | 127,565 | 141,833 | |
| Total for financial assets | 14,268 | 127,565 | 141,833 |
| Financial liabilities designated at fair value | |||
| through profit or loss: | |||
| Derivative financial instruments: | |||
| Currency hedges | — | 1,091 | 1,091 |
| Total for financial liabilities | — | 1,091 | 1,091 |
20. Capital Management
The Company’s capital, or equity, is represented by its net assets which are managed to achieve the Company’s investment objective set out on page 11.
The main risks to the Company’s investments are shown in the Strategic Report under the ‘Principle Risks and Uncertainties’ section on pages 11 and 12. These also explain that the Company is able to borrow and that any resultant gearing will amplify the effect on equity of changes in the value of the portfolio.
The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy-back shares and it also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect to the availability of the borrowing facility, by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements throughout the period.
Total equity at the balance sheet date, the composition of which is shown on the balance sheet on page 37, was £174,193,000 (2015: £153,976,000).
21. Contingencies, Guarantees and Financial Commitments
Liabilities the Company is committed to honour but which are dependent on a future circumstance or event occurring would be disclosed in this note if any existed.
There were no contingencies, guarantees or financial commitments outstanding at the balance sheet date.
22. Related Party Transactions and Transactions with the Manager
A related party is a company or individual who has direct or indirect control or who has significant influence over the Company.
Under International Financial Reporting Standards, the Company has identified the Directors as related parties and Directors fees paid have been disclosed in the Report on Directors’ Remuneration and Interests on page 28 with additional disclosure in note 6. Full details of Directors’ interests are set out in the Director's Report on page 29. No other related parties have been identified.
Invesco Fund Managers Limited and Invesco Asset Management Limited, both of which are wholly owned subsidiaries of Invesco Limited, provided investment management and administration services to the Company. Details of the services and fees are disclosed in the Directors’ Report and management fees payable are shown in note 5.
23. Post Balance Sheet Events
Any significant events that occurred after the end of the reporting period but before the signing of the balance sheet will be shown here.
There are no significant events after the end of the reporting period requiring disclosure.
This annual financial report announcement is not the Company’s statutory accounts. The statutory accounts for the period ended 31 December 2016 have been audited and approved but are not yet filed. They received an audit report which is unqualified and does not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.
The audited annual financial report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the Company’s Registered Office, Ordnance House, 31 Pier Road, St.Helier, Jersey, JE4 8PW or the Manager’s website via the directory found at the following link: www.invescoperpetual.co.uk/citymerchants.
The Annual General Meeting of the Company will be held at 3.30 pm on 15 June 2017 at The Oriental Club, Stratford House, Stratford Place, London W1C 1ES.
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