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Diverse Inc Trust (DIVI)

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Tuesday 18 August, 2015

Diverse Inc Trust

Annual Financial Report

THE DIVERSE INCOME TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2015

The Directors present the Annual Financial Report of The Diverse Income Trust plc (“The Company” or “Diverse”) for the year ended 31 May 2015. The full Annual Report and Accounts can be accessed via the Company’s website, www.mitongroup.com/dit, or by contacting the Company Secretary on 01392 477500.

STRATEGIC REPORT

RESULTS FOR THE YEAR TO 31 MAY 2015

Increased dividend per share The total of the four interim dividends paid to shareholders during the year increased from 2.25p last year to 2.40p this year, representing an increase of 6.7%. A final dividend of 0.50p is also being proposed.

Revenue reserves increased to £9.2m During the year, the Company generated £13.1m of revenue. After the £8.2m paid in dividends to shareholders this year, the remaining £4.9m has been added to Group revenue reserves, boosting them from £4.3m to £9.2m. 

6.0% growth in capital The NAV per share rose from 82.13p to 87.03p over the year. This compares with a rise in the FTSE All-Share Index of 3.9% over the year to 31 May 2015.

Increase in total net assets Total net assets in the Company increased from £266m to £337m in the year to 31 May 2015. £50m of additional capital was raised via a C share issue in June 2014. The increased scale of the Company further dilutes the fixed costs of running the Group and also adds to market liquidity in the shares for shareholders.

SUMMARY OF RESULTS

At 31 May 2015      At 31 May 2014    Change    
Net asset value per ordinary share 87.03p    82.13p  6.0%
Ordinary share price (mid) 87.00p    83.25p  4.5%
(Discount)/premium to net asset value
(0.03)% 

1.36%
Revenue return per ordinary share 3.58p    2.70p 
Total dividends per ordinary share* 2.40p*   2.25p  6.7%
Ongoing charges (further details below)
1.20%  

1.27%

* Note: only the four interim dividends have been included for comparative purposes. The new final dividend to be paid this year has been excluded because it is merely the first interim dividend for the forthcoming year that has been redesignated. A full explanation of the change is outlined in the Chairman’s Statement below.
 

CHAIRMAN’S STATEMENT

This is the fourth Annual Report of The Diverse Income Trust plc and covers the year ended 31 May 2015.

Annual returns
Although markets were volatile during the year, the mainstream indices continued to generate an attractive return when compared with the very low level of inflation. The FTSE All-Share Index appreciated by 3.9% and, when dividend income is included, the total return in the year to 31 May was 7.5%. Returns on smaller quoted stocks were more varied over the year, with the FTSE SmallCap (excluding Investment Companies) Index rising by 6.0% to deliver a total return of 8.6%, whilst the AIM All-Share Index fell by 5.2% and delivered a total return including dividend income of minus 4.0%. The net asset value of the Company’s shares rose 6.0% in the year, and the total return including the four dividends that have been paid/declared to date was 8.9%.

Dividends
In the year under review, the revenue received by the Company has grown from 2.70p to 3.58p, and the total of the four interim dividends paid/declared to shareholders has increased from 2.25p to 2.40p, an increase of 6.7%.

At the time of the launch, the Company proposed to pay four quarterly dividends a year, declared as interim dividends so that they could be paid soon after they were declared, without the need to await formal approval at the Annual General Meeting.

The Board is aware that some shareholders would prefer that the last dividend of each year be approved formally by shareholders at the Annual General Meeting, prior to its payment. Unfortunately, if the fourth interim dividend were to be redesignated as a final dividend, then its payment date would have to be held back for several weeks until after the AGM.

The Board is now proposing that what would have been the first interim for the forthcoming year is redesignated as a final dividend for this financial year. This will not interrupt the timing of the ongoing stream of dividends paid to shareholders. The effect of this change would be that five dividends would be paid to shareholders in this year’s accounting period and that in future years there would be four dividends, comprising the three interim dividends as previously together with the newly redesignated final dividend (see timetable below).

The Board is seeking approval of this change at the AGM. A final dividend of 0.50p per share, payable on 30 November 2015, will also be proposed at the AGM. I re-emphasise that this will not change the existing pattern of dividend payments to shareholders.

The overall scale of the Company
In June 2014, £50m of new capital was raised via a C share issue with full pre-emption rights offered to shareholders. Over 90% of this new capital was invested by the end of September, and the C share portfolio was merged with the core portfolio on 8 October 2014.

In terms of scale, now that the Company has reached over £300m of assets, the Board considers it unlikely that it will carry out any further C share issues in order to avoid the portfolio becoming too large and so compromise an investment strategy that encompasses a sizeable portion invested in the smallest quoted companies. The Company still has the scope to issue small parcels of stock via tap issues, if the Board considered the investment opportunities were sufficiently attractive, and if future returns were not likely to be impeded by the scale of the overall portfolio becoming too large.

Outlook
Smaller quoted companies tend to have greater growth potential than larger companies. During the recent decades of global economic expansion, this differential has not been especially relevant. Investor expectations for the trajectory of growth appear to have changed, evidenced for example by the scale of the fall in the oil price. If this is the case, then the extra growth potential of smaller quoted companies may become more important once again.

Of course, all companies (including smaller quoted companies) may find the reduction in world growth a greater challenge. However, many of the smaller companies in the portfolio have unusually strong balance sheets, and therefore if their cashflow grows, then these companies are better positioned to pay out good and growing dividends. In addition, many smaller quoted companies also have better dividend cover than many of the largest companies, again offering greater opportunity for them to increase dividends by meaningful percentages. So the Company’s strategy of investing in a wider opportunity set of multi cap holdings means the portfolio may have greater potential of outperforming even at times when markets are less buoyant.

Currently, around two-thirds of the portfolio is invested in the smaller quoted stocks which have these dividend growth advantages. In addition, each holding forms a relatively modest part of the portfolio, so stock specific risk remains well diversified too. The Board is confident that the Company remains well-placed to continue to deliver premium total returns in the future.

Michael Wrobel
Chairman
17 August 2015
 

MANAGER’S REPORT

Portfolio
Although the UK economy continued to expand, the trend during the year was one of slowing growth worldwide. The US central bank gradually phased out their policy of Quantitative Easing but this was offset later in the period when European central banks initiated their own form of QE. Even so, inflationary pressures remained very low throughout the year and the yields on Government bonds fell to multi-decade lows. Given the changing market background, equities have been somewhat volatile during the year. The FTSE All-Share Index ultimately finished the period much unchanged as the attractions of its dividend yield overcame the inclination for investors to take profits after the valuation on the market had risen following four years of market appreciation.

Although it was an unsettled year in markets, the current stance of the portfolio remains unchanged.

  • The key criterion for stock selection is assessed on the ability for individual holdings to generate good and growing dividends.
  • Secondly, the make-up of the Company’s portfolio is not aligned with mainstream stock market indices – only 10% or so of the portfolio is invested in FTSE 100 companies. The portfolio invests in stocks with a lower market capitalisation where dividend growth prospects are anticipated to be more attractive.
  • There is greater scope for active managers to add value within the smaller companies holdings due to the fact they are often less well researched.

Over the year, we believe that the valuations on many holdings have become even more compelling versus mainstream stocks, given their ongoing dividend prospects are now distinctly better than many of the mainstream benchmark stocks where earnings growth has become more limited.

Star portfolio performers in the year were Moneysupermarket, Powerflute, Amino Technologies and 4Imprint. In addition, International Greetings, which was highlighted amongst the best performers last year, once again appreciated well. The stand-out best performer in the year was Victoria plc, a recovering carpet business, that generated so much cash that they paid out a special dividend exceeding the market capitalisation of the company at the start of the period. However, the valuation has risen to a premium to the market so a large part of the profits on this holding has now been taken.

Naturally, there were stocks that did not perform as well. The oil price setback is likely to impede the ability of many of these kinds of stocks to grow dividends. The portfolio had little oil exposure but the limited number of holdings in this sector were sold into share price weakness as the oil price declined. In contrast, the holding in Gable Holdings has been retained in spite of the fact that the company greatly increased its insurance reserving. We note the growth of its operations remains strong and expect these earnings to justify a recovery of the share price in time. In the case of Ibex, whose share price fell on rising costs and the consequent profit downgrades, we believe this is a transitory effect as the costs were incurred in meeting strong growth in demand from their customers.

Performance over the last year
Share prices of smaller companies were rather more mixed during the year under review, as attention mainly focused on mainstream equities and their yield premium to bonds. However, dividend growth amongst the largest companies has become more uneven, with dividend cuts being made by some of the supermarket companies, commodity stocks and Severn Trent after their regulatory review. These stocks are not represented in the portfolio.

In contrast, dividend growth amongst many of the smallest stocks continued to be good in general – many have better dividend cover, strong balance sheets with little need to repay debt and many also continue to report ongoing growth in their operations. Attribution analysis suggests that it is the portfolio’s bias towards income stocks, and particularly the bias towards smaller companies with good and growing dividends, that was the key driver to the premium returns in the year. In addition, there was also a good contribution from active stock selection too. The trend in the growth of the Company’s revenue was boosted a little further in the year by the payment of some special dividends on top of the growth of ordinary payments.

Overall, the Company’s NAV rose 6.0% during the year and this was improved by a further 4.6% generated through revenue receipts.

Current market trends and outlook
In March and April, prior to the UK election, around £1.7bn of capital was redeemed from the Open Ended Investment Companies (“OEIC”) in the UK All Companies OEIC universe of funds. This rate of redemptions actually exceeded the worst months in the middle of the financial crisis in 2008. With a UK election result that was rather clearer cut than anticipated, UK investors can look forward to a stable, business-friendly Government for the coming five years. In contrast, the polls and the result of regional elections in mainland Europe suggest that their direction of travel is more uncertain.

All this suggests that there may be room for renewed allocation of investment capital into UK equities, most particularly into stock with attractive valuations such as many within the small/micro caps universe. The valuation differential between the mainstream stocks and the micro caps appears particularly wide at present. Whilst the smaller companies sector has been somewhat less favoured over the year to May, it is interesting to note that those generating good and growing dividends have continued to enjoy premium performance. The strategy of The Diverse Income Trust appears well-positioned to continue outperforming given the multi cap focus of the portfolio and the ongoing growth of dividend income these stocks are generating.

Gervais Williams and Martin Turner
Miton Asset Management Limited
17 August 2015
 

The Rationale for Holding the FTSE 100 Put Option

During the year, the Company held a Put option to sell the FTSE 100 Index at 5,800 covering around one-third of the capital value of the portfolio. This option initially lasted to the middle of June 2015, but was extended early in the year to June 2016. Our view is that an option like this should only be purchased when its cost appears modest by historical standards. This tends to occur after markets have appreciated for some years, and at times when confidence in further appreciation is at a cyclical high.

The key advantage for shareholders of holding a Put option is that, should markets suffer a significant setback, then the market value of the Put option tends to rise. In part this is proportional to the scale of the market setback, and in part it is related to the duration of the remaining term of the option. It is possible that the market value of the option might be a multiple of its initial cost at such a time. The advantage for shareholders is that the option could then be sold to bring in additional capital in the Company at a time when share prices were depressed. This could be used to buy additional income stocks, at a time when their prices were abnormally low, on hopefully more attractive dividend yields. The effect would be to boost the dividend income generated by the Company, as well as increasing the portfolio’s ability to participate in any subsequent market recovery.

Some may question why a FTSE 100 Put option should be purchased, given that the portfolio has a multi cap focus. Around a third of the portfolio is held in mid and larger companies, so there is a relatively good overlap, with a FTSE 100 option covering around one-third of the portfolio. In addition, a FTSE 100 Put option is regularly traded, so the daily NAV fully reflects the market value of the option each day. Finally, being a popular instrument, the cost of a Put option is much lower than a specialist instrument covering other indices such as the FTSE All-Share or the FTSE SmallCap Indices. Furthermore, at times of market distress when the option might want to be sold at a considerable profit, market volume in the FTSE 100 Put options tends to be better than other more obscure instruments.

However, an option like this should only be purchased when its cost appears modest by historical standards because markets pull back abruptly infrequently. The best moments to buy such options tend to occur after markets have appreciated for some years and at times when confidence in further appreciation is at a cyclical high. These factors came together again in July 2015 just after the EU and the Greeks agreed a deal to keep them in the Euro. Therefore, the Company was able to extend the term of the option out to March 2017 and increase the exercise price from 5,800 to 6,000 on the FTSE 100 at that time. In this case, the average monthly decay cost works out at 0.06% versus 0.07% previously.
 

A summary of the total costs involved in managing Diverse

Investment trusts differ from some other forms of collective funds in that they are set up as independent corporations with their operations overseen by a board that is separate from and independent of the fund management group that manages the capital. In addition, they are listed, with their shares traded on an approved exchange – which, in our case, is the London Stock Exchange.

Running costs are deducted from the total assets of the Company on a pro forma basis so the NAV published each day is expressed after costs. The figures below are the costs paid by the Company over the year under review and are expressed as a percentage of the average asset value of the Company over the year. The costs exclude any charges related to the C share issue during the year as the C shareholders paid all of these charges prior to converting to ordinary shares.

Fund management fees 0.99 
Administration costs, including Company Secretarial fees 0.04 
Directors/Auditor/Depositary/Registrar/Custodian and Stockbroker fees 0.11 
All other direct costs, including VAT on the fees above, plus marketing, legal, printing, insurance and bank charges
0.06 
Ongoing charges 1.20 

In addition, the Company also pays transaction charges that are levied when shares are bought or sold in the portfolio. These are dealing commissions paid to stockbrokers and stamp duty, a Government tax paid on transactions (which is zero when dealing on the AIM/ISDX exchanges).

Costs paid in dealing commissions 0.07 
Stamp duty, a Government tax on transactions 0.07 
Overall costs including charges on transactions 1.341

1 Transactions conducted by the Company also involve some loss of value due to the dealing spread in stock exchange prices. Spreads range from less than 1% in the most actively traded large cap stocks to more than 3% in the smallest, most infrequently traded stocks. The exact loss of value is difficult to determine precisely, but is normally less than half of the dealing spread at the time of the transaction. In a large percentage of the transactions, especially in the smallest stocks, the stock is passed through from sizeable seller to sizeable buyer on a ‘put through’ basis with potentially no loss of value through the spread. During the year under review, this cost is believed to amount to less than 0.01%.

The annual costs can be compared to the overall returns generated by the Company in the year. The returns comprise the appreciation of the portfolio, which amounted to 6.2%, and the income received from investing (including underwriting fees), which amounted to 4.6% (net of withholding tax that is near zero in our case). In the year under review, the overall costs therefore amounted to 1.34% compared with a total return before costs of 10.8%, and 9.4% after all costs had been deducted.2

Given that stock markets fluctuate over the years, the running costs of the Company should perhaps be considered in the context of the average annual returns generated by the Company. The overall total return has been 93.2% in the four years and one month since Diverse was first listed. The overall costs during the year to 31 May 2015 of 1.34% can therefore be equated to an average annual return (after the deduction of costs) of 7.5% per annum since issue.

2 Returns based upon capital appreciation and income received/receivable by the Company, divided by average net assets, excluding dividends paid to shareholders and costs of share issues.
 

PORTFOLIO INFORMATION AS AT 31 MAY 2015

Rank Company Sector & main
activity
Valuation 
£’000 
% of net 
assets 
Yield¹
1 Charles Taylor Consulting Industrials 6,807  2.0  4.7 
2 Powerflute2 Basic Materials 5,719  1.7  1.6 
3 Safestyle2 Consumer Services 5,536  1.6  4.5 
4 Fairpoint2 Financial Services 5,229  1.5  4.9 
5 Provident Financial Services 4,946  1.5  3.3 
6 Aviva Insurance Services 4,889  1.5  3.5 
7 Shoe Zone2 Consumer Services 4,882  1.5  1.9 
8 Direct Line Insurance Insurance Services 4,831  1.4  16.2 
9 Novae Insurance Services 4,734  1.4  6.2 
10 Burford Capital2 Financial Services 4,731  1.4  3.2 
Top 10 investments 52,304  15.5 
11 Zotefoams Basic Materials 4,714  1.4  1.7 
12 Cable & Wireless Communications Telecommunications 4,616  1.4  3.8 
13 Go-Ahead Consumer Services 4,577  1.4  3.2 
14 SQS Software2 Technology 4,574  1.4  2.1 
15 Amino Technologies2 Technology 4,505  1.3  3.6 
16 International Greetings2 Consumer Goods 4,455  1.3 
17 Esure Insurance Services 4,372  1.3  6.5 
18 4Imprint Consumer Services 4,270  1.3  1.9 
19 Amlin Insurance Services 4,172  1.2  5.5 
20 TalkTalk Telecom Telecommunications 3,981  1.2  3.5 
Top 20 investments 96,540  28.7 
21 Vodafone Telecommunications 3,977  1.2  4.4 
22 Moneysupermarket Consumer Services 3,936  1.2  2.6 
23 A & J Mucklow Financial Services 3,922  1.2  4.2 
24 Beazley Insurance Services 3,888  1.1  7.1 
25 Legal & General Insurance Services 3,846  1.1  4.2 
26 Conviviality Retail2 Consumer Services 3,838  1.1  5.7 
27 Sky Consumer Services 3,790  1.1  3.1 
28 Lok’n Store2 Financial Services 3,680  1.1  2.6 
29 Randall & Quilter Investment Holdings2
Insurance Services

3,670 

1.1 

7.2 
30 Park2 Financial Services 3,655  1.1  4.5 
Top 30 investments 134,742  40.0 
31 Personal2 Insurance Services 3,651  1.1  4.1 
32 Macfarlane Industrials 3,638  1.1  3.9 
33 Bloomsbury Publishing Consumer Services 3,634  1.1  3.5 
34 Interserve Industrials 3,611  1.1  3.7 
35 Segro Financial Services 3,608  1.1  3.7 
36 St Ives Industrials 3,593  1.1  4.0 
37 RPC Industrials 3,506   1.0  2.6 
38 Brit Insurance Services 3,445  1.0  6.7 
39 Playtech Consumer Services 3,423  1.0  2.3 
40 BT Telecommunications 3,354  1.0  2.8 
Top 40 investments 170,205  50.6 
Balance held in 90 equity investments 151,604  45.0 
Total equity investments 321,809  95.6 
     William Sinclair 8% Convertible Loan      Notes 17/12/2018 (unlisted)
2,030 

0.6 

     600 Group 8% Convertible Loan Notes      14/02/2020 (unlisted)
1,112 

0.3 

8.0 
     St. Modwen Properties 6.25% 07/11/2019      Bonds
864 

0.3 

5.8 
     Private & Commercial Finance 6%             30/06/2016 Notes
428 

0.1 

5.0 
Fixed interest investments 4,434  1.3 
Total investments 326,243  96.9 
Listed Put option
            FTSE 100 – June 2016 5,800 Put  2,107  0.6 
Other net assets 8,179  2.5 
Net assets 336,529  100.0 

¹ Source: Interactive Data. Based on historical yields and therefore not representative of future yield.
² AIM/ISDX listed.

A copy of the full portfolio of investments as at 31 May 2015 is available on the Company’s website, www.mitongroup.com/dit.
 

Invested portfolio capital by sector

%
Industrials 20.1
Consumer Services 18.7
Insurance Services 15.3
Financial Services 14.5
Telecommunications 6.1
Basic Materials 6.0
Technology 5.9
Consumer Goods 5.0
Cash/Fixed Interest and Other 4.4
Health Care 3.1
Utilities 0.9
100.0

Estimated annual income by sector¹

%
Insurance Services 26.4
Industrials 17.8
Financial Services 16.7
Consumer Services 15.6
Telecommunications 6.1
Basic Materials 5.2
Technology 3.6
Consumer Goods 3.0
Cash/Fixed Interest and Other 2.9
Health Care 2.1
Utilities 0.6
100.0

Invested portfolio capital by Index or Exchange

%
FTSE 100 Index 10.7
FTSE 250 Index 22.8
FTSE SmallCap Index 19.4
FTSE Fledgling Index 4.7
AIM/ISDX Exchanges 36.6
Cash/Fixed Interest and Other 5.8
100.0

Portfolio investment income by Index or Exchange

%
FTSE 100 Index 13.4
FTSE 250 Index 28.2
FTSE SmallCap Index 16.5
FTSE Fledgling Index 3.6
AIM/ISDX Exchanges 34.8
Cash/Fixed Interest and Other 3.5
100.0

¹ Projected income based on portfolio as at 31 May 2015.
Source: Interactive Data
 

Investment Objective
The Company’s investment objective is to provide shareholders with an attractive and growing level of dividends coupled with capital growth over the long term.

Investment Policy
The Company invests primarily in quoted or traded UK companies with a wide range of market capitalisations, but a long-term bias toward small and mid cap equities. The Company may also invest in large cap companies, including FTSE 100 constituents, where it is believed that this may increase shareholder value.

The Manager adopts a stock specific approach in managing the Company’s portfolio and therefore sector weightings are of secondary consideration. As a result of this approach, the Company’s portfolio does not track any benchmark index.

The Company may utilise derivative instruments including index-linked notes, contracts for differences, covered options and other equity-related derivative instruments for efficient portfolio management, gearing and investment purposes. Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Company’s direct investments, as described below. The Company will not enter into uncovered short positions.

Risk Diversification
Portfolio risk is mitigated by investing in a diversified spread of investments. Investments in any one company shall not, at the time of acquisition, exceed 15% of the value of the Company’s investment portfolio. Typically it is expected that the Company will hold a portfolio of between 80 and 140 securities, predominantly most of which will represent no more than 1.5% of the value of the Company’s investment portfolio as at the time of acquisition.

The Company will not invest more than 10% of its gross assets, at the time of acquisition, in other listed closed-ended investment funds, whether managed by the Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds. In addition to this restriction, the Directors have further determined that no more than 15% of the Company’s gross assets will, at the time of acquisition, be invested in other listed closed-ended investment funds (including investment trusts) notwithstanding whether or not such funds have stated policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.

Unquoted Investments
The Company may invest in unquoted companies from time to time subject to prior Board approval. Investments in unquoted companies in aggregate will not exceed 5% of the value of the Company’s investment portfolio as at the time of investment.

Borrowing and Gearing Policy
The Board considers that long-term capital growth can be enhanced by the use of gearing which may be through bank borrowings and the use of derivative instruments such as contracts for differences. The Company may borrow (through bank facilities and derivative instruments) up to 15% of net asset value (calculated at the time of borrowing).

The Board oversees the level of gearing in the Company, and reviews the position with the Manager on a regular basis.

In the event of a breach of the investment policy set out above and the investment and gearing restrictions set out therein, the Manager shall inform the Board upon becoming aware of the same and if the Board considers the breach to be material, notification will be made to the London Stock Exchange.

No material change will be made to the investment policy without the approval of shareholders by ordinary resolution.
 

BUSINESS MODEL

Diverse was launched on 28 April 2011. It is registered in England as a public limited company and is an investment company in accordance with the provisions of Sections 832 and 833 of the Companies Act 2006.

The principal activity of the Company is to carry on business as an investment trust. The Company intends at all times to conduct its affairs so as to enable it to qualify as an investment trust for the purposes of Sections 1158/1159 of the Corporation Tax Act 2010 (“S1158/1159”). The Directors do not envisage any change in this activity in the foreseeable future.

The Company has been granted approval from HM Revenue & Customs (“HMRC”) as an investment trust under S1158/1159 and will continue to be treated as an investment trust company, subject to there being no serious breaches of the conditions for approval.

The principal conditions that must be met for continuing approval by HMRC as an investment trust are that the Company’s business should consist of “investing in shares, land or other assets with the aim of spreading investment risk and giving members of the company the benefit of the results” and the Company must distribute a minimum of 85% of all its income as dividend payments. The Company must also not be a close company. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 May 2015 so as to be able to continue to qualify as an investment trust.

The Company’s status as an investment trust allows it to obtain an exemption from paying taxes on the profits made from the sale of its investments and all other net capital gains. Investment trusts offer a number of advantages for investors, including access to investment opportunities that might not be open to private investors and to professional stock selection skills at lower cost.

The Company has a wholly owned subsidiary, DIT Income Services Limited. The purpose of the subsidiary is to invest in shorter-term holdings, where the gains after corporation tax can be passed up to the parent company by way of dividends, thus improving the position of the Company’s revenue account.

Investment Policy
The Company’s full investment policy set out above contains information on the policies which the Company follows relating to asset allocation, risk diversification and gearing, and includes maximum exposures, where relevant.

The Company invests primarily in quoted or traded UK companies with a wide range of market capitalisations but a long-term bias toward small and mid cap equities with a view to achieving the Company’s investment objective.

The Manager adopts a stock specific approach in managing the Company’s portfolio and therefore sector weightings will be of secondary consideration. As a result of this approach, the Company’s portfolio will not track any benchmark index.
 

PERFORMANCE AND RISKS

Key Performance Indicators
The Board reviews the Company’s performance by reference to a number of Key Performance Indicators (“KPIs”) and considers that the most relevant KPIs are those that communicate the financial performance and strength of the Company as a whole. The Board and the Manager monitor the following KPIs:

  • NAV performance, relative to the UK Equity Income sector and other comparable investment trusts and open-ended funds and to various UK stock market indices.

    The NAV at 31 May 2015 was 87.03p per share (2014: 82.13p). The total return of the Company over the year, including the dividend income from the portfolio, was 8.9%. This compares favourably with its peer group, where the average was a 6.3% increase in total return terms. By comparison, the total return on the FTSE All-Share Index was 7.5% over the year, on the FTSE SmallCap Index (excluding Investment Companies) was 8.6% and on the AIM All-Share Index was -4.0%.
     
  • NAV volatility

    The Company has an objective to deliver attractive returns whilst having an eye to constraining volatility relative to other similar investment trusts. For the year to 31 May 2015, the Company’s NAV had a volatility of 5.8%. This compares to the peer group where the average was 11.1%.
     
  • Movements in the Company’s share price

    The Company’s share price increased by 4.5% over the year on a total return basis. This compares favourably with its peer group, where the average increase was 2.9%.
     
  • The discount of the share price in relation to the NAV

    The Company has an objective to keep the discount to NAV at a minimum. Over the year to 31 May 2015, the Company has maintained an average premium to NAV of 1.2%.
     
  • The Company’s dividend growth rate

    The Company has an objective to deliver an attractive and growing dividend. In the year, the Company paid/declared four interim dividends totalling 2.40p, representing a yield of 2.9% (based on an average share price of 81.4p). The Company grew this dividend by 6.7% compared to the previous year. This compares to its peer group, where the average estimated growth rate was 4.5%*.
     
  • Ongoing charges

    The ongoing charges for the year to 31 May 2015 amounted to 1.20% (2014: 1.27%) of total assets. A summary of the total costs involved in managing the Company can be found above.

* Average of the other UK Equity Trusts that have reported over the previous twelve months.

Dividends
Dividends totalling 2.90p per ordinary share have been paid, declared or proposed in respect of the year ended 31 May 2015 as follows:

First interim dividend:       0.40p paid on 28 November 2014
Second interim dividend: 0.50p paid on 27 February 2015
Third interim dividend:      0.50p paid on 29 May 2015
Fourth interim dividend:    1.00p payable on 28 August 2015
Final dividend: 0.50p payable on 30 November 2015

A final dividend of 0.50p per ordinary share has been recommended by the Board. Subject to shareholder approval at the forthcoming Annual General Meeting (“AGM”), this dividend will be payable on 30 November 2015 to shareholders on the register at the close of business on 25 September 2015. The ex-dividend date will be 24 September 2015.

As explained in the Chairman’s Statement above, shareholders will also have the option to vote on the change to the Company’s dividend payment policy at the AGM. Subject to shareholder approval at the forthcoming AGM, the dividend timetable for future years will be as follows:

Year ended 31 May 2015 Declared Paid Year to 31 May 2016 (and future years)
First interim dividend September November
Second interim dividend October February First interim dividend
Third interim dividend January May Second interim dividend
Fourth interim dividend April August Third interim dividend
Final dividend August November Final dividend

Principal Risks and Uncertainties
The Company is exposed to a variety of risks and uncertainties that could cause its asset price or the income from the investment portfolio to reduce, possibly by a sizeable percentage in the most adverse circumstances. The principal financial risks and the Company’s policies for managing these risks and the policy and practice with regard to the financial instruments are summarised in note 18 to the financial statements.

The Board has also identified the following additional risks and uncertainties:

Investment and strategy
Risk: There can be no guarantee that the investment objective of the Company will be achieved.

The Company does not follow any benchmark. Accordingly, the portfolio of investments held by the Company will not mirror the stocks and weightings that constitute any particular index or indices, which may lead to the Company’s shares failing to follow either the direction or extent of any moves in the financial markets generally (which may or may not be to the advantage of shareholders).
Mitigation: The Manager has in place a dedicated investment management process which is designed to maximise the chances of the investment objective being achieved. The Board reviews regular investment and financial reports from the Manager to monitor this.
Smaller companies
Risk: The Company will invest primarily in quoted UK companies with a wide range of market capitalisations but a long-term bias toward small and mid cap equities. Smaller companies can be expected, in comparison to larger companies, to be less mature businesses, have more restricted depth of management and a higher risk profile. In addition, the relatively small market capitalisation of such companies can make the market in their shares illiquid. Prices of smaller capitalisation stocks are often more volatile than prices of larger capitalisation stocks and the risk of insolvency of many smaller companies (with the attendant losses to investors) is higher.
Mitigation: The Board looks to mitigate this risk by ensuring the Company holds a spread of investments, achieved through limiting the size of new holdings at the time of investment to typically between 1% and 1.5% of the portfolio. All potential investee companies are researched by the Manager prior to investment.
Sectoral diversification
Risk: The Company is not constrained from weighting to any sector. This may lead to the Company having significant exposure to portfolio companies from certain business sectors from time to time. Greater concentration of investments in any one sector may result in greater volatility in the value of the Company’s investments and consequently its NAV.
Mitigation: The Company seeks to achieve attractive returns by investing in weightings that are different from the overall market, yet also seeks to ensure that individual variances are not so extreme as to leave shareholders at risk of portfolio volatility that is unreasonably poor. Even though there may be significant exposures to a single sector, this will be achieved by holding a number of different stocks in the portfolio.
Dividends
Risk: The Company’s investment objective includes the aim of providing shareholders with an attractive and growing dividend. There is no guarantee that any dividends will be paid in respect of any financial year or period. The ability to pay dividends is dependent on a number of factors, including the level of dividends earned from the portfolio and the net revenue profits available for that purpose.

The redemption of shares pursuant to the redemption facility may also reduce distributable reserves to the extent that the Company is unable to pay dividends.
Mitigation: The Company maintains accounting records and produces forecasts that are designed to reduce the likelihood that the Company will not have sufficient distributable resources to meet its dividend objective.
Share price volatility and liquidity/marketability risk
Risk: The market price of the Company’s shares, like shares in all investment companies, may fluctuate independently of the NAV and thus may not reflect the underlying NAV of the shares. The shares could trade at a discount or premium to NAV at different times, depending on factors such as supply and demand for the shares, market conditions and general investor sentiment.
Mitigation: The Company has in place an annual redemption facility whereby shareholders can voluntarily tender their shares. The Board monitors the relationship between the share price and the NAV. The Company has taken powers to re-purchase shares should there be an imbalance in the supply and demand leading to a discount. Since launch, however, the Company’s shares have tended to trade at a premium to NAV. The Company has powers to issue shares (only at a premium to NAV) should there be good investment opportunities and the size of the Company had not become too large to continue to meet its objectives.
Gearing
Risk: The Company’s investment strategy may involve the use of gearing to enhance investment returns, which exposes the Company to risks associated with borrowings. Gearing may be generated through the use of options, futures, options on futures, swaps and other synthetic or derivative financial instruments. Such financial instruments inherently contain much greater leverage than a non-margined purchase of the underlying security or instrument.

While the use of borrowings should enhance the total return on the shares where the return on the Company’s underlying assets is rising and exceeds the cost of borrowing, it will have the opposite effect where the return on the Company’s underlying assets is rising at a lower rate than the cost of borrowing or falling, further reducing the total return on the shares.

As a result, the use of borrowings by the Company may increase the volatility of the NAV per share.
Mitigation: The Company has a revolving credit facility in place, as detailed in note 16 to the financial statements. At 31 May 2015, the Company had drawn down £nil of the available facility.

The Company is limited to a maximum gearing of 15% of the net assets. There was no gearing at 31 May 2015 (2014: 1.4%).
Key Man Risk
Risk: The Company depends on the diligence, skill, judgement and business contacts of the Manager’s investment professionals and its future success could depend on the continued service of these individuals, in particular Gervais Williams.
Mitigation: The Company may terminate the Management Agreement should Gervais Williams cease to be an employee of the Manager’s group and is not replaced by a person whom the Company considers to be of equal or satisfactory standing within three months of his departure.
Redemption Facility
Risk: The operation of the annual redemption facility may lead to a more concentrated and less liquid portfolio which may adversely affect the Company’s performance and value. Further, redemptions may also adversely affect the secondary market liquidity of the ordinary shares.
Mitigation: The Board would seek to mitigate the risk of substantial redemptions being requested by maintaining a regular flow of communication with shareholders and the achievement of the investment objectives of the Company. Under the Articles of Association, the Board may, at its absolute discretion, elect not to operate the redemption facility on any given Redemption Point, although the Board does not generally expect to exercise this discretion, save in the interests of shareholders as a whole.


SHARE CAPITAL

Share Issues
At the Annual General Meeting held on 21 October 2014, the Directors were granted the authority to allot ordinary shares up to an aggregate nominal amount of £32,428. No shares have been issued under this authority. This authority is due to expire at the Company’s Annual General Meeting to be held on 14 October 2015. Proposals for its renewal are set out in the Directors’ Report in the full Annual Report.

At a General Meeting held on 22 October 2013, the Directors were granted the authority to allot C shares on a fully pre-emptive basis up to an aggregate nominal amount of £2,380,000, representing 238,000,000 C shares. Pursuant to a prospectus dated 30 May 2014, on 23 June 2014, 100,000,000 C shares of 1p each were issued at an issue price of 50p each, raising an aggregate of £50 million of gross proceeds for the Company, as follows:

  • 27,742,524 C shares were issued on a fully pre-emptive basis to existing ordinary shareholders under an Open Offer, under which they were entitled to subscribe on the basis of one C share for every three ordinary shares held;
  • 68,630,656 C shares were issued under a Placing to institutional investors and professionally-advised private investors; and
  • 3,626,820 C shares were issued under an Offer for Subscription, which was available to UK private and retail investors.

The C shares commenced trading on the London Stock Exchange on 26 June 2014.

On 8 October 2014, the C shares were converted into ordinary shares at the ratio of 0.6231 ordinary shares for every C share, resulting in the issue of 62,309,789 new ordinary shares. The ordinary shares were allotted to the holders of C shares, which comprised institutional investors, professionally-advised private investors and UK retail investors. Following the conversion and as at the year end, there were 386,687,239 ordinary shares and 50,000 management shares (see note 8 to the financial statements) in issue.

Subsequent to the year end, 3,200,000 ordinary shares were redeemed and cancelled in respect of the May 2015 Redemption Point. As at the date of this Report, there were 383,487,239 ordinary shares in issue.

There are no restrictions concerning the transfer of securities in the Company or on voting rights; no special rights with regard to control attached to securities; no agreements between holders of securities regarding their transfer known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid.

Purchase of Own Shares
At the Annual General Meeting of the Company held on 21 October 2014, the Directors were granted the authority to buy back up to 48,624,179 ordinary shares. No ordinary shares have been bought back under this authority. The authority will expire at the next Annual General Meeting when a resolution for its renewal will be proposed.

Treasury Shares
Shares bought back by the Company may be held in treasury, from where they could be re-issued at a premium to NAV quickly and cost effectively. This provides the Company with additional flexibility in the management of its capital base. No shares were purchased for, or held in, treasury during the year or since the year end.

Share Redemptions
Valid redemption requests were received under the Company’s redemption facility for the 31 May 2015 Redemption Point in relation to 5,713,632 ordinary shares, representing 1.48% of the issued share capital. As permitted under the Company’s Articles of Association, 2,513,632 of these shares were matched with buyers and sold. The remaining 3,200,000 shares were redeemed and cancelled by the Company with effect from 12 June 2015. All shareholders who validly applied to have shares redeemed received a calculated Redemption Price of 87.08 pence per share.

MANAGEMENT, SOCIAL, ENVIRONMENTAL AND DIVERSITY MATTERS

Management Arrangements
In order to comply with the Alternative Investment Fund Managers’ Directive (“AIFMD”), the Company appointed PSigma Unit Trust Managers Limited (“PUTM”) as its Alternative Investment Fund Manager (“AIFM”) with effect from 22 July 2014 on the terms of and subject to the conditions of a new management agreement (the “Management Agreement”). The previous agreement between the Company and Miton Asset Management Limited dated 7 April 2011 was terminated. PUTM subsequently changed its name to Miton Trust Managers Limited (“MTM”). MTM has been approved as an AIFM by the UK’s Financial Conduct Authority. Miton Asset Management Limited has been appointed by MTM as Investment Manager to the Company pursuant to a delegation agreement. There has therefore been no change to the day-to-day portfolio management arrangements. The arrangements in respect of the management fee and notice period remain unchanged.

With effect from 26 June 2014, the management fee has been calculated at the rate of 1.0% per annum on the average market capitalisation of the Company up to £300m and 0.8% per annum on the average market capitalisation above £300m. Prior to this, it had been calculated at the rate of 1.0% of the average market capitalisation of the Company’s shares. The management fee is calculated and payable monthly in arrears.

In addition to the basic management fee, and for so long as a Redemption Pool (see below for details) is in existence, the Manager is entitled to receive from the Company a fee calculated at the rate of one-twelfth of 1.0% per calendar month of the NAV of the Redemption Pool on the last business day of the relevant calendar month.

In accordance with the Directors’ policy on the allocation of expenses between income and capital, in each financial year 75% of the management fee payable is charged to capital and the remaining 25% to revenue.

The Management Agreement is terminable by either the Manager or the Company giving to the other not less than 12 months’ written notice. The Management Agreement may be terminated earlier by the Company with immediate effect on the occurrence of certain events, including the liquidation of the Manager or appointment of a receiver or administrative receiver over the whole or any substantial part of the assets or undertaking of the Manager or a material breach by the Manager of the Management Agreement which is not remedied. The Company may also terminate the Management Agreement should Gervais Williams cease to be an employee of the Manager’s group and is not replaced by a person whom the Company considers to be of equal or satisfactory standing within three months of his departure.

The Company has given certain market standard indemnities in favour of the Manager in respect of the Manager’s potential losses in carrying on its responsibilities under the Management Agreement.

The Board appointed Bank of New York Mellon as its Depositary and Custodian under an agreement dated 22 July 2014. The annual fee for depositary services due to Bank of New York Mellon will be 0.025% of gross assets, subject to a minimum fee of £15,000 per annum. The Company and the Depositary may terminate the Depositary Agreement with three months’ written notice.

Company secretarial and administrative services are provided by Capita Sinclair Henderson Limited, under an agreement dated 7 April 2011, for an annual fee of £108,000, increasing annually in line with the UK Retail “all items” Index. The fees are paid in equal monthly instalments in arrears. This agreement may be terminated by 12 months’ written notice subject to provisions for earlier termination as provided therein.

Continuing Appointment of the Manager
The Board, through the Management Engagement Committee, keeps the performance of the Manager under continual review, and the Management Engagement Committee conducts an annual appraisal of the Manager’s performance, and makes a recommendation to the Board about the continuing appointment of the Manager. It is the opinion of the Directors that the continuing appointment of the Manager is in the interests of shareholders as a whole. The reasons for this view are that the Manager has executed the investment strategy according to the Board’s expectations and has demonstrated superior risk-adjusted returns relative to the broader market and the peer group.

The Directors also believe that by paying the investment management fee calculated on a market capitalisation basis, rather than a percentage of assets basis, the interests of the Manager are more closely aligned with those of shareholders.

Environmental, Human Rights, Employee, Social and Community Issues
The Company does not have any employees and the Board consists entirely of non-executive Directors. Day-to-day management of the business is delegated to the Manager. As an investment trust, the Company has no direct impact on the community or the environment, and as such has no environmental, human rights, social or community policies. In carrying out its investment activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly.

Gender Diversity
The Board of Directors of the Company comprises two female and three male Directors.

On behalf of the Board
Michael Wrobel
Chairman
17 August 2015


Going Concern
The Directors consider that it is appropriate to adopt the going concern basis in preparing the financial statements. After making enquiries, and bearing in mind the nature of the Company’s business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. In arriving at this conclusion the Directors have considered the liquidity of the portfolio and the Company’s ability to meet obligations as they fall due for a period of at least 12 months from the date that these financial statements were approved.

Cash flow projections have been reviewed and show that the Company has sufficient funds to meet both its contracted expenditure and its discretionary cash outflows in the form of the dividend policy.

The full Annual Report contains the following statements regarding responsibility for the financial statements.
 

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards (“IFRS”) as adopted by the European Union.

Under company law the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the Group for that year.

In preparing the Group financial statements, the Directors are required to:

  • select suitable accounting policies in accordance with IAS 8: ‘Accounting Policies, Changes in Accounting Estimates and Errors’ 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 IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;
  • state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and
  • make judgements and estimates that are reasonable and prudent.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group 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 Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations, and for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.

The financial statements are published on the Company’s website, www.mitongroup.com/dit, which is maintained on behalf of the Company by the Manager. Under the Management Agreement, the Manager has agreed to maintain, host, manage and operate the Company’s website and to ensure that it is accurate and up-to-date and operated in accordance with applicable law. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and accordingly, the Auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom covering the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction.

We confirm that to the best of our knowledge:

  • the Group financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and
  • this Annual Report includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces; and

The Directors consider that the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy.

On behalf of the Board
Michael Wrobel
Chairman
17 August 2015
 

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company’s statutory accounts for the years ended 31 May 2015 and 31 May 2014 but is derived from those accounts. Statutory accounts for 2014 have been delivered to the Registrar of Companies, and those for 2015 will be delivered in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor’s report can be found in the Company’s full Annual Report at: www.mitongroup.com/dit.
 

CONSOLIDATED INCOME STATEMENT

 Year ended
31 May 2015
Year ended
31 May 2014

Note
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Gains on investments held at fair value through profit or loss

11




21,992 


21,992 




48,603 


48,603 
Foreign exchange losses

(19)

(19)



Derivatives 12 (3,106) (3,106) (2,767) (2,767)
Income 2 14,540  14,540  8,953  8,593 
Management fee 3 (771) (2,311) (3,082) (583) (1,750) (2,333)
Other expenses 4 (656) (656) (577) (577)
Return on ordinary activities before finance costs and taxation


13,113 



16,556 



29,669 



7,793 



44,086 



51,879 
Finance costs - overdraft interest paid
(3)

(11)

(14)

(6)

(19)

(25)
Return on ordinary activities before taxation

13,110 


16,545 


29,655 


7,787 


44,067 


51,854 
Taxation – irrecoverable withholding tax



(33)




(33)


(73)


-  


(73)
Return on ordinary activities after taxation

13,077 

16,545 

29,622 

7,714 

44,067 

51,781 
pence  pence  pence  pence  pence  pence 
Return per ordinary share

3.58 

4.53 

8.11

2.70 

15.41 

18.11 

The total column of this statement is the Income Statement of the Group prepared in accordance with IFRS, as adopted by the European Union. The supplementary revenue and capital columns are presented in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies in January 2009 (“AIC SORP”).

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.

There is no other comprehensive income, and therefore the return on ordinary activities after tax is also the total comprehensive income.

The notes form part of these financial statements.
 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY




Group

Share
capital
£’000
Share 
premium 
account 
£’000 

Special 
reserve 
£’000 

Capital 
reserve 
£’000 

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2014 325 143,557  48,558  69,596  4,367  266,403 

Total comprehensive income:
Net return for the year - 16,545  13,077  29,622 
Transactions with shareholders recorded directly to equity:
Issue of ordinary shares 62 49,938  50,000 
Expenses of share issue - (1,251) (1,251)
Equity dividends paid - (8,245) (8,245)
As at 31 May 2015 387 192,244  48,558  86,141  9,199  336,529 

   




Group

Share
capital
£’000
Share 
premium 
account 
£’000 

Special 
reserve 
£’000 

Capital 
reserve 
£’000 

Revenue 
reserve 
£’000 


Total 
£’000 
As 1 June 2013 209 59,337  48,558  25,529  2,276  135,909 

Total comprehensive income:
Net return for the year - 44,067  7,714  51,781 
Transactions with shareholders recorded directly to equity:
Issue of ordinary shares 116 85,000  85,116 
Expenses of share issue - (780) (780)
Equity dividends paid -  -  (5,623) (5,623)
As at 31 May 2014 325 143,557  48,558  69,596  4,367  266,403 

The notes form part of these financial statements.
 

PARENT COMPANY STATEMENT OF CHANGES IN EQUITY




Company

Share
capital
£’000
Share 
premium 
account 
£’000 

Special 
reserve 
      £’000 
 
Capital 

reserve 
£’000 

Revenue 
reserve 
£’000 


  Total 
   £’000 
As at 1 June 2014 325 143,557  48,558  69,596  3,980  266,016 

Total comprehensive income:
Net return for the year - 16,545  13,057  29,602 
Transactions with shareholders recorded directly to equity:
Issue of ordinary shares 62 49,938  50,000 
Expenses of share issue
-

(1,251)




(1,251)
Equity dividends paid - (8,245) (8,245)
As at 31 May 2015 387 192,244  48,558  86,141  8,792  336,122 

   




Company

Share
capital
£’000
Share 
premium 
account 
£’000 

Special 
reserve 
£’000 

Capital 
reserve 
£’000 

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2013 209 59,337  48,558 25,529  2,276  135,909 

Total comprehensive income:
Net return for the year - - 44,067  7,327  51,394 
Transactions with shareholders recorded directly to equity:
Issue of ordinary shares 116 85,000  - 85,116 
Expenses of share issue - (780) - (780)
Equity dividends paid - - (5,623) (5,623)
As at 31 May 2014 325 143,557  48,558 69,596  3,980  266,016 

The notes form part of these financial statements.
 

CONSOLIDATED AND PARENT COMPANY BALANCE SHEETS



Note
Group 
31 May 2015 
£’000 
Group 
31 May 2014 
£’000 
Company 
31 May 2015 
£’000 
Company 
31 May 2014 
£’000 
Non-current assets:
Investments held at fair value through profit or loss
11

326,243 

267,249 

326,243 

267,249 

Current assets:
Derivative instruments 12 2,107  1,293  2,107  1,293 
Trade and other receivables 15 2,065  1,769  2,065  1,769 
Cash and cash equivalents 7,073  130  7,073 
11,245  3,192  11,245  3,062 

Current liabilities:
Bank overdraft 16 (2) (3,724) (2) (3,724)
Trade and other payables 16 (957) (314) (1,364) (571)
(959) (4,038) (1,366) (4,295)

Net current assets/(liabilities)

10,286 

(846)

9,879 

(1,233)
Total net assets 336,529  266,403  336,122  266,016 

Capital and reserves:
Share capital 8 387  325  387  325 
Share premium account 9 192,244  143,557  192,244  143,557 
Special reserve 9 48,558  48,558  48,558  48,558 
Capital reserve 9 86,141  69,596  86,141  69,596 
Revenue reserve 9 9,199  4,367  8,792  3,980 
Shareholders’ funds 336,529  266,403  336,122  266,016 

pence 

pence 
Net asset value per ordinary share
10

87.03 

82.13 

These financial statements were approved by the Board of The Diverse Income Trust plc on 17 August 2015 and were signed on its behalf by:

Michael Wrobel
Chairman

Company no.: 7584303

The notes form part of these financial statements.
 

CONSOLIDATED AND PARENT COMPANY CASH FLOW STATEMENTS

Group 
31 May 2015 
£’000 
Group 
31 May 2014 
£’000 
Company 
31 May 2015 
£’000 
Company  
31 May 2014 
£’000 
Operating activities:
Net return before taxation 29,655  51,854  29,635  51,467 
Gains on investments and derivatives held at fair value
(18,883)

(45,836)

(18,883)

(45,836)
Purchase of investments 92,888  (76,311) (92,888) (76,311)
Sales of investments 55,864  72,370  55,864  72,370 
Purchase of derivative instruments (4,776) (4,060) (4,776) (4,060)
Sale of derivative instruments 856  856 
Exchange losses/(gains) on capital items 19  19 
Increase in accrued income 33  (95) 33  (95)
Increase in other receivables (329) (644) (329) (644)
Increase in other payables 643  17  643  17 
Movement in investments by subsidiary
Net Cash outflow from operating activities before taxation
(29,806)

(2,705)

(29,826)

(3,092)
Taxation:
Withholding tax paid (33) (73) (33) (73)
Financing:
C shares issued 50,000  50,000 
Expenses of share issue (1,251) (780) (1,251) (780)
Equity dividends paid (8,245) (5,623) (8,245) (5,623)
Cash received from acquisition of MIOT 4,694  4,694 
Movement in loan from subsidiary 150  257 
Net cash inflow/(outflow) from financing and taxation
40,471 

(1,782)

40,621 

(1,525)
Increase/(decrease) in cash and cash equivalents 10,665  (4,487) 10,795  (4,617)
Reconciliation of net cash flow to movements in net funds:
Cash and cash equivalents at the start of the year (3,594) 893  (3,724) 893 
Net cash inflow/(outflow) from cash and cash equivalents
10,665 

(4,487)

10,795 

(4,617)
Cash and cash equivalents at the end of the year 7,071  (3,594) 7,071  (3,724)
Cash and cash equivalents
Comprise the following:
Cash at bank 7,073  130  7,073 
Bank overdraft (2) (3,724) (2) (3,724)
7,071  (3,594) 7,071  (3,724)
Cash and cash equivalents received/(paid) during the period include:
- dividends received 10,258  5,301  10,258  5,635 
- investment income and interest received 4,289  2,553  4,269  2,219 
- interest paid

The notes form part of these financial statements.
 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 General Information and Significant Accounting Policies
The Diverse Income Trust plc is a company incorporated and registered in England and Wales. The principal activity of the Company is that of an investment trust company within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010.

The Group’s annual financial statements for the year ended 31 May 2015 have been prepared in conformity with IFRS as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board (“IASB”), and as applied in accordance with the provisions of the Companies Act 2006. The annual financial statements have also been prepared in accordance with the AIC SORP issued in January 2009 for the financial statements of investment trust companies and venture capital trusts, except to any extent where it is not consistent with the requirements of IFRS.

Basis of Preparation
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been prepared alongside the Income Statement.

The financial statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue to be met.

The Directors have made an assessment of the Group’s ability to continue as a going concern and are satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern, having taken into account the liquidity of the Company’s investment portfolio and the Group’s financial position in respect of its cash flows, borrowing facilities and investment commitments (of which there are none of significance). Therefore, the consolidated financial statements have been prepared on the going concern basis.

The financial statements are presented in sterling, which is the Group’s functional currency as the UK is the primary environment in which it operates, rounded to the nearest £’000, except where otherwise indicated.

Basis of Consolidation
The Company’s wholly-owned subsidiary, DIT Income Services Limited, is an extension of the fund through which it provides investment management services, and is not an investment entity. The Group financial statements therefore consolidate the financial statements of the Company and its subsidiary, drawn up to 31 May 2015.

The subsidiary is consolidated from the date of its acquisition, being the date on which the Company obtained control, and will continue to be consolidated until the date that such control ceases. Control comprises being exposed, or having rights, to variable returns from the company’s involvement with the investee and having the ability to affect those returns through its power over the investee. The financial statements of the subsidiary are prepared for the same reporting year as the parent Company, using consistent accounting policies. All inter-company balances and transactions, including unrealised profits arising from them, are eliminated.

As permitted by Section 408 of the Companies Act 2006, the Company has not presented its own Income Statement. The amount of the Company’s return for the financial year dealt with in the financial statements of the Group is a profit after tax of £29,602,000 (2014: £51,394,000).

Segmental Reporting
The Directors are of the opinion that the Group is engaged in a single segment of business, being investment business. The Group primarily invests in companies listed in the UK.

Accounting Developments
The accounting policies adopted are consistent with those of the previous financial year, except that the following new standards have been adopted in the current year:

IFRS 10 Consolidated Financial Statements
IFRS 10 sets out the principles for the presentation and preparation of consolidated financial statements and establishes a single control model that applies to all entities including special purpose entities. In addition, IFRS 10 includes an exception from consolidation for entities which meet the definition of an investment entity, and requires such entities to recognise substantially all investments at fair value through profit or loss. The Group does meet the definition of an investment entity and the implementation of this standard is not expected to have a significant impact on the financial statements.

IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 sets out the requirements for disclosures relating to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. The requirements in IFRS 12 are more comprehensive than the previously existing disclosure requirements. The standard is not expected to have a significant impact on the financial statements of the Group.

Critical Accounting Judgements and Key Sources of Estimation Uncertainty
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts in the Balance Sheet, the Income Statement and the disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future period if the revision affects both current and future periods. There were no accounting estimates or significant judgements in the current period.

Valuation of Investments
The Group’s business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Group’s Board of Directors.

Accordingly, upon initial recognition the Group designates the investments ‘at fair value through profit or loss’. They are included initially at fair value, which is taken to be their cost (excluding expenses incidental to the acquisition which are written off in the Income Statement, and allocated to ‘capital’ at the time of acquisition).  When a purchase or sale is made under a contract, the terms of which require delivery within the time-frame of the relevant market, the investments concerned are recognised or derecognised on the trade date. Subsequent to initial recognition, investments are valued at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE 100 constituents and the most liquid constituents of the FTSE 250 Index along with some other securities. Changes in fair value of investments not designated as held for trading are recognised in the Income Statement as a capital item. On disposal, realised gains and losses are also recognised in the Income Statement as capital items.

The investment in the subsidiary company, DIT Income Services Limited, is held at cost £1 (2014: £1). Investments held as current assets by the subsidiary undertaking are classified as ‘held for trading’, and are at fair value. Profits or losses on investments held for trading are taken to revenue in the Income Statement. There were no investments held by the subsidiary at the year end (2014: none).

All investments for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy in note 11, described as follows, based on the lowest significant applicable input:

Level 1 reflects financial instruments quoted in an active market.

Level 2 reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets.

Level 3 reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data. For investments that are recognised in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing the categorisation (based on the lowest significant applicable input) at the date of the event that caused the transfer.

Foreign currency
The Financial Statements have been prepared in sterling, rounded to the nearest £’000, which is the functional and reporting currency of the Company.

Transactions denominated in foreign currencies are converted to sterling at the actual exchange rate as at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are reported at the rate of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the capital reserve or the revenue account depending on whether the gain or loss is of a capital or revenue nature.

Derivative Instruments – held for Trading
Derivatives, including Index Put options, which are listed investments are classified as financial assets or liabilities held for trading. They are initially recorded at cost (being the premium paid to purchase the option) and are subsequently valued at fair value at the close of business at the year end and included in fixed assets or current assets/liabilities depending on their maturity date.

Changes in the fair value of derivative instruments are recognised as they arise in the Income Statement.

Cash and Cash Equivalents
Cash comprises cash in hand, overdrafts and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

For the purpose of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts when applicable.

Income
Dividends received from UK registered companies are accounted for net of imputed tax credits. Dividends from overseas companies are shown gross of any non-recoverable withholding taxes which are described separately in the Income Statement.

Dividends receivable on quoted equity shares are taken to revenue on an ex-dividend basis. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company’s right to receive payment is established. Fixed returns on non-equity shares are recognised on a time-apportioned basis.

Special dividends are taken to revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the Board reviews all relevant information as to the reasons for the sources of the dividend on a case by case basis.

When the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend forgone is recognised as income. Any excess in the value of the cash dividend is recognised in the capital column.

All other income is accounted for on a time-apportioned accruals basis using the effective interest rate method and is recognised in the Income Statement.

Expenses and Finance Costs
All expenses are accounted for on an accruals basis. On the basis of the Board’s expected long-term split of total returns in the form of capital and revenue returns of 75% and 25% respectively, the Company charges 75% of its investment management fee and finance costs to capital. All other administrative expenses are charged through the revenue column in the Income Statement.

Expenses incurred directly in relation to placings and offers for subscription of shares are deducted from equity and charged to the share premium account.

Taxation
Deferred tax is provided on an undiscounted basis in accordance with IAS 19 on all timing differences that have originated, but not reversed, by the Balance Sheet date based on tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax assets are only recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of timing differences can be deducted. In line with the recommendations of the SORP, the allocation method used to calculate the tax relief on expenses charged to capital is the “marginal” basis. Under this basis, if taxable income is capable of being offset entirely by expenses charged through the revenue account, then no tax relief is transferred to the capital account.

No taxation liability arises on gains from sales of fixed asset investments by the Company by virtue of its investment trust status. However, the net revenue (excluding UK dividend income) accruing to the Company is liable to corporation tax at the prevailing rates.

Dividends Payable to Shareholders
Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the Statement of Changes in Equity. Dividends declared and approved by the Company after the Balance Sheet date have not been recognised as a liability of the Company at the Balance Sheet date.

Special Reserve
The special reserve was created by a cancellation of the share premium account by order of the High Court in February 2012. It can be used for the repurchase of the Company’s ordinary shares and for other corporate purposes. Its main purpose is to allow the Company to meet annual redemption requests for ordinary shares. The costs of repurchasing ordinary shares and meeting annual redemption requests, including related stamp duty and transaction costs, are also charged to the special reserve.

Share Capital
The Company classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. The share capital of the Company comprises of redeemable ordinary shares (“ordinary shares”), C shares, when in issue, and management shares.

The Company is a closed-ended investment company with an unlimited life. The ordinary shares are not puttable instruments because redemption is conditional upon certain market conditions and/or Board approval. As such, they are not required to be classified as debt under IAS 32 ‘Financial Instruments: Disclosure and Presentation’.

As defined in the Articles of Association, redemption of ordinary shares is at the sole discretion of the Directors, therefore the ordinary shares have been classified as equity.

The issuance, acquisition and resale of ordinary shares are accounted for as equity transactions and no gain or loss is recognised in the Income Statement.
 

2 Income

Year ended
31 May 2015
£’000
Year ended
31 May 2014
£’000
Income from investments:
UK dividends 10,235 5,784
UK REIT dividend income 176 133
Unfranked dividend income 3,597 2,457
UK fixed interest 365 166
14,373 8,540
Other income:
Bank deposit interest 1 -
Net dealing profit of subsidiary 20 387
Underwriting income 80 26
Other income 66 -
Total income 14,540 8,953


3 Management Fee

Year ended
31 May 2015
Year ended
31 May 2014
Revenue
£’000
Capital
£’000
Total
£’000
 Revenue
£’000
 Capital
£’000
       Total
£’000
Management fee 771 2,311 3,082 583 1,750 2,333

With effect from 26 June 2014, the basic management fee payable to the AIFM is calculated at the rate of one-twelfth of 1.0% of the adjusted market capitalisation of the Company up to £300m and 0.8% on the market capitalisation in excess of £300m on the last business day of each calendar month. Prior to this, the fee was calculated at the rate of one-twelfth of 1.0% of the adjusted market capitalisation. The basic management fee accrues daily and is payable in arrears in respect of each calendar month. For the purpose of calculating the basic fee, the ‘adjusted market capitalisation’ of the Company is defined as the average daily mid-market price for an ordinary share and C share (when in issue), multiplied by the number of relevant shares in issue, excluding those held by the Company in treasury, on the last business day of the relevant month. In addition, the AIFM is entitled to receive a management fee on any Redemption Pool, as detailed in the Strategic Report on above.

At 31 May 2015, an amount of £266,000 (2014: £227,000) was outstanding and due to Miton Trust Managers Limited in respect of management fees.
 

4 Other Expenses

Year ended
31 May 2015
£’000
Year ended
31 May 2014
£’000
Secretarial services 120 108
Auditor’s remuneration for:
Audit of the Group’s financial statements (payable by the Company only)
30

31
Other assurance related services* 11 -
Directors’ fees (see the Directors’ Remuneration Report in the full Annual Report)
135

122
Other expenses 360 316
656 577

* Amounts paid to the Company’s Auditor in connection with review of C share conversion ratios (2014: amounts paid to the Company’s Auditor in connection with the calculation of the formula asset values and resulting conversion ratios for the acquisition of Miton Income Opportunities Trust plc of £21,000 inclusive of VAT are included in share issue costs).
 

5 Taxation

Year ended
31 May 2015
Year ended
31 May 2014
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Overseas withholding tax suffered
33

-

33

73


73

The current taxation charge for the year is lower than the standard rate of corporation tax in the UK of 20%. The differences are explained below.

Year ended
31 May 2015
Year ended
31 May 2014
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Return on ordinary activities before taxation
13,110 

16,545 

29,655 

7,787 

44,067 

51,854
Theoretical tax at UK corporation tax rate of 20.83% (2014: 22.67%)

2,731 


3,446 


6,177 


1,765 


9,990 


11,755 
Effects of:
- UK dividends that are not taxable (2,132) (2,132) (1,310) (1,310)
- Overseas dividends that are not taxable (747) (747)  (515)  (515)
- Realised dealing gains (4) (4) (88) (88)
- Non-taxable investment gains (3,930) (3,930) (10,391) (10,391)
- Overseas taxation suffered 33  33  73  73 
- Unrelieved expenses 152  484  636  148  401  549 
Actual current tax charge 33  33  73  73 


Factors That May Affect Future Tax Charges
The Company has excess management expenses of £7,292,000 (2014: £4,257,000) that are available to offset future taxable revenue. At 31 May 2015, the Group has not recognised a deferred tax asset of £1,458,000 (2014: £851,000), calculated using the standard rate of corporation tax in the UK of 20%, in respect of these accumulated expenses as they will only be recoverable to the extent that there is sufficient future taxable revenue. It is unlikely that the Company will generate sufficient taxable income in the future to utilise these expenses to reduce future tax charges and therefore no deferred tax charge has been recognised.

In addition, deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company under HMRC rules.
 

6 Return per Share

Ordinary Shares
The return per ordinary share is based on the net profit after taxation of £29,622,000 (2014: £51,781,000) and on 364,836,135 (2014: 286,027,365) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

The return per ordinary share detailed above can be further analysed between revenue and capital as follows:

Year ended
31 May 2015
Year ended
31 May 2014
Revenue Capital Total Revenue Capital Total
Basic and diluted
Net profit (£’000) 13,077 16,545 29,622 7,714 44,067 51,781
Weighted average number of ordinary shares in issue

364,836,135


286,027,365
Return per ordinary share (pence)

3.58


4.53


8.11


2.70


15.41


18.11


7 Dividends per Ordinary Share
Amounts recognised as distributions to equity holders in the year.

Year ended
31 May 2015
Year ended
31 May 2014

£’000
pence
per share

£’000
pence
per share
In respect of the previous period:
Fourth interim dividend 3,082 0.95 1,753 0.84
In respect of the year under review:
First interim dividend 1,297 0.40 626 0.30
Second interim dividend 1,933 0.50 1,622 0.50
Third interim dividend 1,933 0.50 1,622 0.50
Dividends distributed during the year 8,245 2.35 5,623 2.14

The Directors have declared a fourth interim dividend in respect of the year ended 31 May 2015 of 1.00p per ordinary share payable on 28 August 2015 to all shareholders on the register at close of business on 26 June 2015. A final dividend of 0.50p per ordinary share has also been recommended by the Board. Subject to shareholder approval at the forthcoming AGM, this dividend will be payable on 30 November 2015 to shareholders on the register at close of business on 25 September 2015. The ex-dividend date will be 24 September 2015.

The total dividends payable in respect of the financial year for the purposes of the income retention test for Section 1158 of the Corporation Tax Act 2010 are set out below.

Year ended  31 May 2015 
£’000 
Year ended
31 May 2014
£’000
Revenue available for distribution by way of dividends for the year 13,077  7,714 
First interim dividend of 0.40p (2014: 0.30p) per ordinary share (1,297) (626)
Second interim dividend of 0.50p (2014: 0.50p) per ordinary share (1,933) (1,622)
Third interim dividend of 0.50p (2014: 0.50p) per ordinary share (1,933) (1,622)
Declared fourth interim dividend of 1.00p (2014: 0.95p) per ordinary share
(3,835)

(3,082)
Proposed final dividend of 0.50p (2014: nil) per ordinary share (1,197)
Estimated revenue reserve retained for the year 2,162  762 


8 Called Up Share Capital

31 May 2015 31 May 2014
number £’000 number £’000
Ordinary shares 0.1p each:
Opening balance 324,377,450 325 208,693,307 209
Issue of ordinary shares 62,309,789 62 115,684,143 116
386,687,239 387 324,377,450 325

C Shares
On 30 May 2014, the Company published a prospectus in relation to proposals to raise in excess of £30 million (before expenses) by way of an open offer, placing and offer for subscription of C shares. Applications were received under the open offer for 27,742,524 C shares, under the placing for 68,630,656 C shares and under the offer for subscription for 3,626,820 C shares, raising an aggregate of £50 million of gross proceeds for the Company and resulting in the issue of 100,000,000 C shares on 26 June 2014.

On 8 October 2014, the C shares were converted into ordinary shares in the ratio of 0.6231 ordinary shares for every C share, resulting in the issue of 62,309,789 new ordinary shares.

Redemption of Ordinary Shares
The Company, which is a closed-ended investment company with an unlimited life, has a redemption facility through which shareholders are entitled to request the redemption of all or part of their holding of ordinary shares on an annual basis on 31 May in each year. As set out in the Articles of Association, the Board may, at its absolute discretion, elect not to operate the annual redemption facility in whole or in part. Accordingly, the ordinary shares have been classified as equity.

The Company had received redemption requests for 5,713,632 ordinary shares in respect of the 29 May 2015 Redemption Point. 2,513,632 of these shares were matched with buyers and were settled on 12 June 2015. The remaining 3,200,000 shares were redeemed and cancelled by the Company with effect from 12 June 2015. All shareholders who validly applied to have shares redeemed received a calculated Redemption Price of 87.08 pence per share. Following this and at the date of this Report, the issued share capital and voting rights were 383,487,239 ordinary shares.

Management Shares
The 50,000 management shares with a nominal value of £1 each were allotted to Miton Group plc on 30 March 2011, the parent company of the Manager, on the basis of an undertaking to pay one-quarter of their nominal value on or before 30 March 2016 and the balance on demand. The management shares are non-voting and non-redeemable and, upon a winding-up or on a return of capital of the Company, shall only receive the fixed amount of capital paid up on such shares and shall confer no right to any surplus capital or assets of the Company.

As at 31 May 2015, no amounts had been paid up (2014: £nil).
 

9 Reserves




2015
    Share 
premium 
 account 
    £’000 

Special
reserve
£’000
Capital    reserve 
realised 
     £’000  
Capital 
reserve 
unrealised 
         £’000 

Revenue  reserve 
      £’000 
Opening balance 143,557  48,558 17,002  52,594  4,367 
Issue of ordinary shares 49,938  -
Expenses of share issue (1,251) -
Net gains on realisation of investments

-

8,364 


Exchange gains/(losses) on settlements and currency accounts





(19)




Unrealised net increase in value of investments

-


13,628 

Movement in value of derivative instruments

-

(3,204)

98 

Management fees/finance costs charged to capital

-

(2,322)


Equity dividends paid - (8,245)
Revenue return on ordinary activities after tax

-



13,077 
Closing balance 192,244  48,558 19,821  66,320  9,199 

   




2014
Share 
premium 
account 
£’000 

Special 
reserve 
£’000 
Capital    reserve 
realised 
£’000 
Capital 
reserve 
unrealised 
£’000 

Revenue 
reserve 
£’000 
Opening balance 59,377  48,558  (295) 25,824  2,276 
Premium on issue of ordinary shares
85,000 




Expenses of share issue (780)
Net gains on realisation of investments


19,066 


Unrealised net increase in value of investments



29,537 

Unrealised net decrease in value of derivative instruments







(2,767)


Management fees/finance costs charged to capital


(1,769)


Equity dividends paid (5,623)
Revenue return on ordinary activities after tax




7,714 
Closing balance 143,557  48,558  17,002  52,594  4,367 

At a General Meeting of the Company held on 6 April 2011, a resolution was passed approving the cancellation of the Company’s share premium account.

The Court subsequently confirmed this cancellation on 22 February 2012 and an amount of £48,558,000 was transferred from the Company’s share premium account to its special reserve. This amount can be treated as a distributable reserve for all purposes permitted by the Companies Act 2006 (as amended), and will enhance substantially the ability of the Company to meet annual redemption requests and to buy-back its own shares either into treasury or for cancellation.
 

10 Net Asset Value per Ordinary Share
The net asset value per ordinary share and the net asset values attributable at the year end were as follows:

Net asset value
per share
31 May 2015
pence
Net assets
attributable
31 May 2015
£’000
Net asset value
per share
31 May 2014
pence
Net assets
attributable
31 May 2014
£’000
Ordinary shares
- Basic and diluted

87.03

336,529

82.13

266,403

Net asset value per ordinary share is based on net assets at the year end and 386,687,239 ordinary shares (2014: 324,377,450), being the number of ordinary shares in issue at the year end.
 

11 Investments



Group and Company

31 May 2015 
£’000 

31 May 2014
£’000
Investment portfolio summary:
Opening book cost 211,888  103,073 
Opening investment holding gains/(losses) 55,361  25,824 
Total investments designated at fair value 267,249  128,897 

   

Group and Company 31 May 2015 
£’000 
31 May 2014 
£’000 
Analysis of investment portfolio movements
Opening valuation 267,249  128,897 
Movements in the period:
Purchases at cost 92,866  75,749 
Acquisition of the MIOT portfolio 80,374 
Stamp duty thereon 369 
Sales - proceeds (55,864) (66,743)
          - gains on sales 8,364  19,066 
Increase in investment holding gains 13,628  29,537 
Closing valuation 326,243  267,249 
Closing book cost 257,254  211,888 
Closing investment holding gains 68,989  55,361 
326,243  267,249 

A list of the largest portfolio holdings by their fair value is shown above.

Included in the Balance Sheet at fair value, with the exception of the Company’s investment in William Sinclair Holdings 8% Convertible Loan Notes (purchased during the year ended 31 May 2014 and valued at £2,030,000 at 31 May 2015) and in 600 Group 8% Convertible Loan Notes (purchased during the year and valued at £1,112,000 at 31 May 2015) the investments are all equities or bonds which are listed either on the Official List or quoted on AIM/ISDX in the UK.

The William Sinclair Loan Note is an unlisted investment held at its written down cost, which is its fair value as at 31 May 2015, representing approximately 0.6% of total net assets. The 600 Group Loan note is an unlisted investment held at its original cost, which is its fair value as at 31 May 2015, representing approximately 0.3% of total net assets. These investments have been classified as ‘Level 3’ investments in the fair value hierarchy as disclosed below.

As at 31 May 2015, the investments were registered in the name of BONY OCS Nominees Ltd, as custodian to the Company. There were no contingent liabilities in respect of the investments held at the end of the year. On 22 July 2014, following the arrangements to implement AIFMD, the Company terminated the previous Custody Agreement with HSBC.


 
Year ended
31 May 2015
£’000
Year ended
31 May 2014
£’000
Transaction costs:
Costs on acquisitions

341

70
Costs on disposals 98 119
439 189

   

Year ended
31 May 2015
£’000
Year ended
31 May 2014
           £’000
Analysis of capital gains/(losses)
Gains on sales of investments 8,364 19,066
Movement in investment holding gains 13,628 29,537
21,992 48,603

Fair Value Hierarchy
IFRS 13 requires classification of financial instruments measured at fair value at one of three levels according to the relative reliability of the inputs used to estimate the fair values.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset as follows:

Level 1 – valued using quotes prices, unadjusted in active markets for identical assets or liabilities.

Level 2 – valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted prices included in level 1.

Level 3 – valued by reference to valuation techniques using inputs that are not based on observable market data or the asset or liability.

The table below set out fair value measurements of financial instruments as at 31 May 2015, by the level in the fair value hierarchy into which the fair value measurement is categorised.

Financial assets at fair value through profit or loss at 31 May 2015 Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Equity investments 321,809 - - 321,809
Fixed interest bearing securities 1,292 - 3,142 4,434
323,101 - 3,142 326,243
Financial assets at fair value through profit or loss at 31 May 2014 Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Equity Investments 263,380 - - 263,380
Fixed interest bearing securities 1,219 - 2,650 3,869
264,599 - 2,650 267,249

The valuation techniques used by the Company are explained in the accounting policies in note 1 under the heading ‘Valuation of Investments’. At 31 May 2015, all the Company’s financial assets at fair value through profit or loss (including the listed Put option) are included in Level 1 with the exception of William Sinclair and 600 Group Loan Notes, as described above, and the investment in the subsidiary, which are all classified as Level 3 investments (2014: same with the exception of 600 Group Loan Notes).

Valuation Process for Level 3 Investments
Investments classified within level 3 have significant unobservable inputs. Level 3 investments can typically include unlisted equity and corporate debt securities and over the counter (“OTC”) derivative instruments. As observable prices are not available for these securities, the Group has used valuation techniques to derive the fair value. In respect of the unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital (“IPEVC”) Valuation Guidelines. New investments are initially carried at cost, for a limited period, being the price of the most recent investment in the investee. This is in accordance with IPEVC Guidelines as the cost of recent investments will generally provide a good indication of fair value. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e an exit price).

Other than the investment in its trading subsidiary (DIT Income Services Limited) the Group has two other Level 3 investments, being the holdings in William Sinclair Convertible Loan Notes and 600 Group Loan Notes. There are no other significant unobservable inputs with the measurement of its fair value at this stage and there have been no changes in valuation techniques during the year.

The valuation for the 600 Group Loan notes is based upon price of recent investment. The William Sinclair Convertible Loan Notes are valued on the anticipated return of capital to the company. During the period William Sinclair issued additional loan stock in lieu of interest, in order to retain the cash within their business. The coupon is currently accrued at 8%, and there is an additional incentive interest of 3% rolled-up semi-annually.

The following table summarises the Company’s level 3 investments that were accounted for at fair value in the year ended 31 May 2015.

As at
31 May 2015
Level 3
£’000
As at
31 May 2014
Level 3
£’000
Opening fair value investments 2,650  -
Purchase at cost 1,112  2,650
Sales proceeds -
Movement in investment holding gains
            movement in unrealised (620) -
Closing fair value of investments 3,142  2,650


12 Derivative Contracts
Typically, derivative contracts serve as components of the Company’s investment strategy and are utilised primarily to structure and hedge investments, to enhance performance and reduce risk to the Group (the Company does not designate any derivative as a hedging instrument for hedge accounting purposes). The derivative contracts that the Company may hold from time to time or issue include: index-linked notes, contracts for differences, covered options and other equity-related derivative instruments.

Derivatives often reflect, at their inception, only a mutual exchange of promises with little or no transfer of tangible consideration. However, these instruments can involve a high degree of leverage and are very volatile. A relatively small movement in the underlying value of a derivative contract may have a significant impact on the profit and loss and net assets of the Group.

The Company’s investment objective sets limits on investments in derivatives with a high risk profile. The Manager is instructed to closely monitor the Company’s exposure under derivative contracts and any use of the derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Company’s direct investments. The Company will not enter into uncovered short positions.

As at 31 May 2015, the Group has positions in the following type of derivative:

Options
Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period.

The Company purchases either Put or Call options through regulated exchanges and OTC markets. Options purchased by the Company provide the Company with the opportunity to purchase (Call options) or sell (Put options) the underlying asset at an agreed-upon value either on or before the expiration of the option. The Company is exposed to credit risk on purchased options only to the extent of their carrying value, which is their fair value.

During the year, the Company sold the FTSE 100 – June 2015 5,800 Put option and purchased a FTSE 100 – June 2016 5,800 Put option. At the Balance Sheet date, the Put option had a fair value of £2,107,000 with a notional portfolio exposure of £87,800,000. Unrealised holding losses of £2,669,000 are detailed in the table below.


Listed Put options at fair value through profit or loss at 31 May 2015
As at 
31 May 2015 
£’000 
As at 
31 May 2014 
£’000 
Opening book cost 4,060 
Opening unrealised loss (2,767)
Opening fair value 1,293 
Sales proceeds (856)
Realised loss on sale (3,204)
Purchases at cost 4,776  4,060 
Movements in unrealised gain/(loss) 98  (2,767)
Closing fair valuation 2,107  1,293 
Closing book cost 4,776  4,060 
Closing unrealised loss (2,669) (2,767)
Closing fair value 2,107  1,293 
Analysis of capital (losses)/gains on options
Realised (losses)/gains on sales (3,204)
Movement in unrealised gains/(losses) 98  (2,767)
(3,106) (2,767)


13 Substantial Share Interests
The Company has notified interests in 3% or more of the voting rights of 35 (2014: 34) investee companies (none of which are closed-end investment funds). However, the Board does not consider any of the Company’s other equity investments to be individually material in the context of the financial statements.
 

14 Investment in Subsidiary
The Company owns the whole of the issued ordinary share capital (£1) of DIT Income Services Limited, an investment dealing company registered in England and Wales. The subsidiary is held at cost of £1 and has provided loans to the Company amounting to £407,000 at 31 May 2015 (2014: £257,000).
 

15 Trade and Other Receivables

Group Company
31 May 2015
£’000
31 May 2014
£’000
31 May 2015
£’000
31 May 2014
£’000
Amounts due from brokers 434 59 434 59
Dividends receivable 1,458 1,508 1,458 1,508
Accrued income 119 102 119 102
Taxation recoverable 39 30 39 30
Cash due from MIOT - 48 - 48
Prepayments and other debtors 15 22 15 22
2,065 1,769 2,065 1,769


16 Trade and Other Payables

Group Company
31 May 2015 £’000 31 May 2014
£’000
31 May 2015
£’000
31 May 2014
£’000
Bank overdraft 2 3,724 2 3,724
Amounts due to brokers 586 - 586 -
Other creditors 371 314 371 314
Amounts due to subsidiary - - 407 257
959 4,038 1,366 4,295

As at 31 May 2015, the Company had an uncommitted revolving credit facility agreement with Bank of New York Mellon (“BNY Mellon”), under which the bank made available an aggregate amount equal to the lesser of:

  1. £7,500,000; and
  2. 15% of net assets.

A covenant of the agreement is that the Group’s consolidated financial indebtedness must not exceed 15% of net assets. The purpose of the facility is for short-term liquidity and it has no fixed term but is subject to review from time to time, at least on an annual basis. Interest is payable monthly in arrears on the amount of the facility outstanding at the rate of 1.75% above LIBOR. In addition, a fee of £12,500 per annum is payable in quarterly instalments.

The facility is secured by a floating charge over the Company’s assets. The facility was undrawn at 31 May 2015 (31 May 2014, facility with HSBC Bank Plc: £3,724,000 drawn down).
 

17 Capital Commitments and Contingent Liabilities
As at 31 May 2015, there were no outstanding commitments or contingent liabilities (2014: none).
 

18 Analysis of Financial Assets and Liabilities

Investment Objective and Policy
The Group’s investment objective and policy are detailed above.

The Group’s investing activities in pursuit of its investment objective involve certain inherent risks.

The Group’s financial instruments comprise:

  • shares and debt securities held in accordance with the Group’s investment objective and policies;
  • derivative instruments for efficient portfolio management, gearing and investment purposes;
  • cash, liquid resources and short-term debtors and creditors that arise from its operations; and
  • current asset investments held by its subsidiary.

The risks identified arising from the Group’s financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency exposure), liquidity risk and credit and counterparty risk. The Group may enter into derivative contracts to manage risk, and has taken out a listed Put option against the FTSE 100 Index during the year. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies have remained unchanged since the beginning of the accounting year.

Market Risk
Market risk arises mainly from uncertainty about future prices of financial instruments used in the Group’s business. It represents the potential loss the Group might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Manager on a regular basis and the Board at quarterly meetings with the Manager.

Market price risk
Market price risk (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.

The Board manages the risks inherent in the investment portfolio by ensuring full and timely reporting of relevant information from the Manager. Investment performance and exposure are reviewed at each Board meeting.

The Group’s exposure to other changes in market prices as at 31 May 2015 on its equity and debt investments and listed Put index option held at fair value through profit or loss was £323,916,000 (2014: £264,673,000).

A 10% increase in the market value of its listed equity investments at 31 May 2015 would have increased net assets attributable to shareholders by £32,392,000 (2014: £26,467,000). An equal change in the opposite direction would have decreased the net assets and net profit available to shareholders by an equal and opposite amount. The analysis is based on closing balances only and is not representative of the year as a whole.

Interest rate risk
Interest rate movements may affect the level of income receivable on cash deposits and payable on its revolving credit facility. The Group’s financial assets and liabilities, excluding short-term debtors and creditors, may include investment in fixed interest securities, such as UK corporate debt stock, whose fair value may be affected by movements in interest rates. The majority of the Group’s financial assets and liabilities, however, are non-interest bearing. As a result, the Group’s financial assets and liabilities are not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. There was limited exposure to interest bearing liabilities during the year ended 31 May 2015 (2014: same).

The possible effects on the fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions.

As disclosed in note 16, during the year the Company had an uncommitted revolving credit facility with BNY Mellon. The facility was undrawn as at the Balance Sheet date (2014, HSBC Bank plc: £3,724,000).

As detailed above, at 31 May 2015 the Company held four (2014: three) fixed income securities representing 1.3% of the total investment portfolio (2014: 1.4%).

The interest rate profile of the Group (excluding short-term debtors and creditors) was as follows:

As at 31 May 2015 Weighted
average
interest
rate
%


Floating  rate 
£’000 



Fixed rate
£’000
Assets and liabilities
Fixed interest securities 7.47 4,434
Cash at bank - 7,073  -
Bank overdraft - (2) -
7,071  4,434

   

As at 31 May 2014 Weighted
average
interest
rate
Floating  rate 
£’000 
Fixed rate
£’000
Assets and liabilities
Fixed interest securities 7.43 3,869
Cash at bank - 130  -
Bank overdraft - (3,724) -
(3,594) 3,869

The weighted average interest rate is based on the current yield of each asset, weighted by its market value.

The weighted average fixed interest rate is based on the current yield of each asset, weighted by its current market value. The maturity dates and nominal interest rates on these investments held at fair value through profit or loss are shown in the portfolio information above. The weighted average years to maturity are 3.80 years (2014: 4.55 years).

The floating rate assets and liabilities consist of cash deposits on call earning interest at the prevailing market rates and the bank overdraft, with interest payable at the rate of 1.75% above the prevailing bank base rate (currently 0.50%).

The interest rate risk sensitivity of the Group on its floating rate assets and liabilities is given below:

If interest rates had been 50 basis points higher or lower and all other variables were held constant, the Group’s net assets and profit for the year ended 31 May 2015 would decrease/increase by £35,400 (2014: decrease/increase by £18,100). This is attributable to the Group's exposure to interest rates on its floating rate cash balances and bank overdraft as at the year ended 31 May 2015, and is not considered by the Directors to be representative for the year as a whole.

Foreign currency risk
Although the Company’s performance is measured in sterling, a proportion of the Group’s assets may be either denominated in other currencies or are in investments with currency exposure. Any income denominated in a foreign currency is converted into sterling upon receipt. At the Balance Sheet date, all the Group’s assets were denominated in sterling and accordingly the only currency exposure the Group has is through the trading activities of its investee companies.

Liquidity Risk
Liquidity risk is not considered to be significant as the Group’s assets primarily comprise cash and readily realisable securities, which can under normal conditions be sold to meet funding commitments if necessary. They may, however, be difficult to realise in adverse market conditions. The Group can achieve short-term flexibility by the use of its overdraft facility.

The maturity profile of the Group’s financial liabilities of £5,935,000 (2014: £4,038,000) are all due in one year or less.

Credit and Counterparty Risk
Credit risk is the risk of financial loss to the Group if the contractual party to a financial instrument fails to meet its contractual obligations

The maximum exposure to credit risk as at 31 May 2015 was £15,679,000 (2014: £7,061,000). The calculation is based on the Group’s credit risk exposure as at 31 May 2015 and this may not be representative for the whole year.

The Group’s listed investments are held on its behalf by Bank of New York Mellon acting as the Group’s custodian. Bankruptcy or insolvency of the custodian may cause the Group’s rights with respect to securities held by the custodian to be delayed. The Board monitors the Group’s risk by reviewing the custodian’s internal controls report.

Where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Group of default.

Investment transactions are carried out with a number of brokers whose creditworthiness is reviewed by the Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Group’s custodian bank ensures that the counterparty to any transaction entered into by the Group has delivered on its obligations before any transfer of cash or securities away from the Group is completed.

Cash is only held at banks that have been identified by the Board as reputable and of high credit quality.

None of the Group’s assets are past due or impaired (2014: same).

Derivatives
The Manager may use derivative instruments in order to ‘hedge’ the market risk of part of the portfolio. The Manager reviews the risks associated with individual investments and, where they believe it appropriate, may use derivatives to mitigate the risk of adverse market (or currency) movements. The Manager discusses regularly the hedging strategy with the Board.

At the year end, there was one derivative contract open (2014: one). The FTSE 100 Put option aims to provide a limited degree of protection from a fall in the value of the FTSE 100 Index and has a strike price of 5,800, and would not materially impact the portfolio returns if a large market movement did occur. There were no other derivative contracts entered into during the year (2014: same).

Fair Values of Financial Assets and Financial Liabilities
All financial assets and liabilities of the Group are either carried in the Balance Sheet at fair value through profit or loss, or the Balance Sheet amount is a reasonable approximation of fair value (2014: same).

Capital Management Policies
The Company’s capital management objectives are:

  • to ensure that it will be able to continue as a going concern; and
  • to maximise the income and capital return over the long-term to its equity shareholders through an appropriate balance of equity capital and ‘debt’.

As stated in the investment policy, the Company has authority to borrow up to 15% of net asset value through a mixture of bank facilities and certain derivative instruments. There were borrowings of £2,000 as at 31 May 2015 (2014: £3,724,000). Also, as a public company the minimum share capital is £50,000.

2015   
£’000   
2014   
£’000   
The Company’s capital at 31 May comprised:
Debt:
     Bank overdraft facility 2    3,724   
Equity:
     Equity share capital 387    325   
     Retained earnings and other reserves 336,142    266,078   
Total shareholders’ funds 336,529    266,403   
Debt as a % of net assets 0.00% 1.40%

The Board, with the assistance of the Manager, monitors and reviews the broad structure of the Company’s capital on an ongoing basis. This review includes:

  • the planned level of gearing, which takes into account the Manager’s view of the market;
  • the need to buy back shares for cancellation or treasury, which takes account of the difference between the net asset value per share and the share price (i.e. the level of share price discount or premium);
  • the need for new issues of equity shares; and
  • the extent to which revenue in excess of that which is required to be distributed should be retained.

The Company’s objectives, policies and processes for managing capital have remained unchanged since its launch.
 

19 Transactions with the Manager and Related Parties
The amounts paid to the Manager, together with details of the Management Agreement, are disclosed in note 3. The existence of an independent Board of Directors demonstrates that the Company is free to pursue its own financial and operating policies and therefore, under the AIC SORP, the Manager is not considered to be a related party.

The Company’s related parties are its Directors. Fees paid to the Company’s Board are disclosed in the Directors’ Remuneration Report in the full Annual Report. At the year end, £6,250 was outstanding due to Directors (2014: £nil).

There are no other identifiable related parties at the year end.
 

20 Post Balance Sheet Events
On 12 June 2015, 3,200,000 shares were redeemed and cancelled at 87.08 pence per share, amounting to £2,787,000, in respect of the May 2015 Redemption Point. As a result of this and as at the date of this Report, there were 383,487,239 ordinary shares in issue (see note 8 for further details).
 

ANNUAL GENERAL MEETING
The Company’s Annual General Meeting will be held on Wednesday, 14 October 2015 at 11.30 am, at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH.
 

NATIONAL STORAGE MECHANISM
A copy of the Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at:www.morningstar.co.uk/uk/nsm 

ENDS

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.


a d v e r t i s e m e n t