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Diverse Inc Trust (DIVI)

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Friday 12 August, 2016

Diverse Inc Trust

Annual Financial Report

THE DIVERSE INCOME TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2016

The Directors present the Annual Financial Report of The Diverse Income Trust plc (“The Company” or “Diverse”) for the year ended 31 May 2016. 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 2016

2.80p of dividends for the year The three interim dividends and the proposed final dividend for the year amount to 2.80p, compared with 2.50p on a rolling twelve month basis, an increase of 12.0%.

Revenue reserves increased to £11.3m Revenue reserves of the Group increased to £11.3m over the year. The reserves of the Company (£10.6m) are available to be used to smooth the dividend distributions to shareholders in future years. 

4.6% growth in capital The NAV per share rose from 87.03p to 91.02p over the year. This compares with a rise in the FTSE All-Share Index of 9.7% over the year to 31 May 2016.

SUMMARY OF RESULTS

At 31 May 2016    At 31 May 2015      Change   
NAV per ordinary share 91.02p  87.03p    4.6%
Ordinary share price (mid) 93.75p  87.00p    7.8%
Premium/(discount) to NAV 3.00% (0.03)% 
Revenue return per ordinary share 3.33p  3.58p   
Total dividends per ordinary share 2.80p  2.50p*   12.0%
Ongoing charges (further details below) 1.18% 1.20%  

* The first interim dividend has been excluded to provide a rolling twelve month comparison.


CHAIRMAN’S STATEMENT

This is the fifth Annual Report of The Diverse Income Trust plc and covers the year ended 31 May 2016.

Annual returns
Equity markets have been unsettled over the year under review, with the FTSE All-Share Index falling by 9.7%. In spite of a degree of market anxiety ahead of the EU Referendum vote in June 2016, smaller quoted companies actually outperformed over our financial year. The FTSE SmallCap (excluding Investment Companies) Index ended the year to 31 May 2016 down just 2.5% and the FTSE AIM All-Share Index fell 4.3%. The Company invests over the full range of quoted stocks and the advantages of this strategy, together with further positive stock selection, resulted in the NAV of the Company actually rising 4.6% in the period.

Dividends
The underlying revenues of the Company have grown progressively since issue. This year, the underlying dividends from stocks have continued to increase satisfactorily, although the total revenue for the year bears less favourable comparison, as there were fewer special dividends received than last year.

Three interim dividends have already been declared for the year and the Board has recommended a final dividend of 0.75p per share, subject to approval by shareholders at the forthcoming Annual General Meeting (“AGM”). If approved, the overall dividend for the year will amount to 2.8p, compared with the 2.5p paid via four dividends in the same time period last year, representing a 12.0% increase on a rolling twelve month basis.

Returns since issue
The Company has now been running for five years since issue in April 2011 and it therefore seems appropriate to review its overall returns over that longer time period. The NAV of the Company has increased by 82.0% over this period and is amongst the best performing of its peer group.

The FTSE All-Share Index suffered a major setback in August and September of 2011 soon after the Company’s launch and, although it subsequently recovered, the capital return on this Index has only been 8.7% in the period from 29 April 2011 to 31 May 2016. The makeup of the smaller quoted company stock market has evolved over the period, with many of the more speculative investments often running into difficulties and becoming a smaller part of the investment universe. In contrast, those with solid businesses generating a rising turnover and cashflow have attracted greater investor support, in part because of their rising dividend streams. The universe of these types of investments has been swelled further by a growing number of smaller companies that have come to market, offering attractive dividend yields. This period of flux within the smaller company universe is reflected in the divergent returns on the indices. The FTSE SmallCap (excluding Investment Companies) Index has risen 54.9% and the FTSE AIM All-Share Index has declined by 19.7% in the period from 29 April 2011 to 31 May 2016.

Over the five years since launch, the Company’s annual dividend has risen from 2.0p* in its first year to 2.8p this year (including the proposed final dividend).

The returns of the Company discussed above have been stated after the deduction of all costs. Those charged in the year under review have been set out below for shareholders to review.

* The aggregate dividends paid to shareholders in the year ended 31 May 2012 amounted to 2.19p. However, in order to give shareholders an understanding of the underlying dividend growth from the Company since issue, a figure of 2.0p has been used as this reflects the annualised dividend for that period.

The Board
Sadly, Tom Bartlam recently resigned as a non-executive Director of the Company. We will seek to appoint a successor in due course. It was a pleasure to work with Tom and I thank him for his service on the Board and his leadership of the Audit Committee. I also wish to thank Jane Tufnell for returning to the role of Chair of the Audit Committee.

Investment policy
At the forthcoming Annual General Meeting, the Board will be seeking shareholder approval of an amendment to the Company’s investment policy to allow the Manager to increase the maximum number of securities that may be held in the portfolio to 160 holdings. The Board believes that this change will allow the Manager greater flexibility to buy and sell stocks over a longer period of time and invest in more opportunities amongst the smallest companies in the portfolio, whilst diversifying risk.

Outlook
The Diverse Income Trust was designed with the intention of generating a good and growing dividend and ahead of its peers. The strategy accesses a wider opportunity set of stocks, including both larger and smaller quoted companies. As world growth has slowed, this factor has become more relevant given the greater vibrancy of smaller companies, which is more important at times when economic growth is subdued.

The UK’s decision to withdraw from the EU may lead to a period of uncertainty. However, Diverse has greater scope than many others to invest in the shares of those companies (be they big or small) where the potential opportunities have been improved by this prospective change. Ultimately, it is productivity improvements that are most often equated with long-term wealth creation. At a time when quite a few FTSE 100 stocks have been obliged to cut their dividends, we believe that our Company has greater scope to continue to generate good and growing dividend income going forward and hence premium returns for our shareholders.

Michael Wrobel
Chairman
11 August 2016


MANAGER’S REPORT

The Company first listed on the LSE on 28 April 2011. This Manager’s Report covers the twelve-month period ended 31 May 2016.

Portfolio
World growth continued to slow in the year, in spite of a boost from the reduction in the price of energy, and a further deferment of interest rate rises. However, as in previous years, inflationary pressures remained subdued and government bond yields have continued to fall, with those of Germany and Japan moving into negative territory.

However, a new trend has become apparent over the twelve-month period. There have been a growing number of dividend cuts within quoted companies in the UK, most particularly in the largest companies. Although the UK economy has continued to grow modestly, the revenue of some of the companies involved in the discovery and production of oil or commodities has fallen back sharply on lower resource prices. FTSE 100 companies, such as Glencore and Anglo American, have ceased to pay any dividend to their shareholders. Alongside this, some of the major supermarkets, banks and engineering companies have also greatly reduced their dividend payouts.

The higher dividend cover, a ratio that represents how much the annual earnings exceed the annual dividend payments, on many small cap stocks means their dividends are not necessarily quite as vulnerable to a downturn in their trading results as some of the largest quoted companies. Indeed, if anything, the vibrancy of small cap companies has meant that many have continued to buck the wider economic slowdown. This factor has been reflected via a better trend of dividend increases to shareholders.

The overall position of the Company’s portfolio reflects these trends. Around two-thirds of the portfolio is invested in quoted companies that are outside the largest 350 stocks, where we believe the dividend growth prospects are often more attractive. The contrasting trajectories of the dividend trends between some of the largest and some of the smallest quoted companies explains a good part of why the Company has outperformed in the period.

There have been some changes to the weightings of the portfolio within the FTSE 250 and FTSE 100. At the start of the period, 22.8% of the portfolio was invested in FTSE 250 stocks, but this fell back to 15.6% at the end of May 2016. In contrast, the weighting in FTSE 100 stocks rose from 10.7% at the beginning of the year to 16.4% as at 31 May 2016. These moves appear to be counter-intuitive given the number of FTSE 100 companies cutting their dividends last year.

In fact, a couple of the Company’s FTSE 250 holdings, BRIT and Cable & Wireless Communications, were acquired over the year. One or two holdings disappointed, such as TalkTalk, and were greatly reduced or exited entirely. Equally, when the oil price reached $27 a barrel, we were more confident than others that the dividends on several of the FTSE 100 integrated oil companies were sustainable, at least for a few years. Shell, BP and BHP Billiton were therefore purchased for the portfolio during the year. In addition, anxiety over the EU Referendum in the UK prompted many investors to sell down many of their FTSE 100 holdings with large operations in the UK. We used this opportunity to invest in Persimmon and Taylor Wimpey, two UK-based house builders, and ITV over the year.

Some holdings within the smaller quoted companies were trimmed, with BioVentix and Burford Holdings yielding substantial profits. These proceeds were reinvested into some promising new holdings, including Cerillion, a mobile telecom software company, and Motorpoint, a nearly-new retailer of cars, both of which listed during the year.

Capital returns over the year
Generally, mainstream equity markets have been unsettled over the year under review, with the FTSE All-Share Index falling by 9.7%. World growth expectations have continued to moderate and investors have been concerned by the first increases of interest rates in the US too.

As noted above, the small quoted companies sector has outperformed during the period. The FTSE SmallCap (excluding Investment Companies) Index fell 2.5% over the period under review. The FTSE AIM All-Share Index also did better than the FTSE 100 Index in the period, although it fell 4.3% in the twelve months to the end of May 2016. The Company’s NAV rose 4.6% over the year.

Revenue returns over the year
Underlying dividend income generated by the portfolio has continued to grow over the year. However, this position contrasts with that of one-off special dividends, which by their very nature tend to fluctuate over the years. Special dividends within the portfolio were especially bountiful in the last financial year and, although the portfolio still yielded some further special dividends in this financial period, they were less significant. Therefore, the overall revenue return for shareholders was marginally lower this year.

One of our aims as managers is to select a portfolio of holdings that has good prospects of growing their dividends (on an underlying basis) at a faster rate than most others. The underlying level of dividend growth has remained satisfactory in the year under review.

The Board has reweighted the four dividends paid to shareholders over the year so they are now more even in quantum. In addition, the Board has recommended a final dividend of 0.75p per share, subject to approval by shareholders at the forthcoming Annual General Meeting. On a rolling twelve month basis, this marks a 12.0% increase in annual dividend and, even at this level, the Company has still allocated £2.1m of revenue to the revenue reserve. This leaves the Company with £11.3m of unutilised revenue reserves available to smooth dividend distributions to shareholders in future years.

Outlook
Diverse was set up because we believed that, as the world economy moved beyond the credit boom, it was more advantageous for UK equity income investors to spread their capital over a wider opportunity set of holdings. The Company invests in both the largest and the smallest UK-quoted companies. Whilst smaller companies often have greater vibrancy than their larger competitors, during the credit boom this factor has become irrelevant. However, now that world growth expectations have moderated to previous norms, there are indications that institutional investors have a renewed interest in stepping up their capital allocation into the smallest quoted stocks.

The portfolio has favoured those companies that are investing risk capital for potential productivity improvements. It is anticipated that the cash flow payback on the capital expenditure and research and development will lead to a stream of growing cash profits in time, and this will continue to fund potential growth in dividend income in future. We remain confident that the Company can continue to generate premium returns going forward.

Following the Brexit vote, the share prices of many UK-quoted companies have become much more volatile. Many have been marked down considerably, even those where their underlying prospects may have improved after the devaluation of sterling.

Despite the short-term hiatus, we continue to believe the Company’s strategy is well-placed to generate premium returns going forward.

Diverse’s strategy for managing the portfolio through any potential market setbacks
Over the last few quarters, equity markets have become more volatile, with an outside risk that markets could surprise on the downside with a significant setback. As an investment trust, Diverse has two strategies that can help the Company to generate a better return for shareholders through any potential period of volatility.

A FTSE 100 Put Option
The first is via the purchase of a Put option. This means the Company can sell the FTSE 100 Index at a certain level (6,000 in our case) after the stock market has sold off. An option like this is not dissimilar to purchasing car or house insurance, in that it adds a degree of insurance to the Company’s portfolio so the Company itself could benefit from an additional capital sum with its size determined by the scale of the FTSE 100 setback.

However, options like this come with a cost – a bit like an insurance premium. Specifically, the time value of the Put option will gradually decay over the insured period (to June 2017 in our case), irrespective of whether the markets suffer any fluctuations or not. The initial cash cost of any Put option is therefore very important, since its resale value generally falls over time (assuming markets are relatively flat) and ultimately becomes worthless if the FTSE 100 Index does not fall significantly below 6,000.

With this in mind, the Company has been careful to find ways in which it could keep the initial cost of the Put option at the lowest possible level. It has done this in two ways:

  • The purchase of Put options is timed to coincide with moments when the FTSE 100 Index is already close to a high and investors are generally optimistic about the future. For example, the term of the Put option was extended during July 2015 when worries over a Greek exit from the EU seemed resolved. Although the FTSE 100 Index has not seen similar levels since that time, there was an opportunity for us to extend the term of the option a little further from March 2017 to June 2017 for a similar monthly decay cost just before the Company’s year end in May.
  • To date, the overall scale of the Put option has been limited to just one-third of the size of the Company in order to keep the time decay costs to modest levels. The cost of this option has amounted to around 0.06% of the NAV per month on average, were the option to expire worthless at the end of its term in June 2017.

The key advantage for shareholders is that, should the FTSE 100 suffer a significant setback, then the resale value of the Put option would be expected to rise proportionately. The full level of that appreciation would be related to the duration of the remaining term of the option as well as the scale of the market setback. If the Put option were to be sold, the cash proceeds could then be used to purchase additional equities for the portfolio at a time when share prices were depressed. The portfolio would then have greater recovery potential thereafter. In addition, the Company would benefit from extra income from the new holdings added during this period.

The Put option strategy means Diverse has greater scope to take advantage of any major market setback, albeit the strategy does have a modest adverse cost if markets do not drop back significantly in the period through to June 2017.

The Overdraft Facility
A second strategy to enhance returns through a period of elevated market volatility is the use of a debt facility. The Company has an agreed debt facility under which it can borrow up to 15% of its NAV. However, normally the Company does not utilise it. This is because the key risk with debt is that, if there was a severe market sell-off, then the covenants on the debt facility could force the Company to repay some, or potentially all, of the outstanding debt after the market had dropped. This has the disadvantage of obliging the Company to liquidate some of the portfolio just at a time when share prices would be depressed. In short, a geared fund can end up at a disadvantage during a setback, whereas an ungeared portfolio can at least continue to hold its portfolio throughout the period of volatility, and thereby fully participate in any subsequent market recovery.

Importantly, we believe the Company has plenty of scope to generate an attractive long-term return without relying on holding extra assets at most times funded by a debt facility. Therefore, we think that the Company is not likely to be significantly borrowed at the time of market sell-off.

It is therefore assumed that the debt facility of the Company would normally be unutilised during a market setback and, following the market bottom, a number of additional income stocks could be purchased for the portfolio ahead of the full market recovery – funded by the debt facility. If the market were to go on and recover, then shareholders would benefit from the appreciation of the extra shares purchased during the market setback, as well as the associated extra dividend income (offset in part by the interest costs on the debt).

Conclusions
Both the FTSE 100 Put option and the debt facility aim to help the Company to have additional strategies to buy extra shares close to a market bottom, so that the Company’s returns would be enhanced were the markets to recover after a period of severe volatility.

Gervais Williams and Martin Turner
Miton Asset Management Limited
11 August 2016


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 (“LSE”).

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.

Fund management fees 0.98 
Administration costs, including Company Secretarial fees 0.03 
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 1.18 

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 0.05 
Stamp duty, a Government tax on transactions 0.05 
Overall costs including charges on transactions 1.281

The annual costs can be compared to the overall returns generated by the Company in the year. The earnings comprise the appreciation of the portfolio, which amounted to 4.7%, and the income received from investing (including underwriting fees), which amounted to 4.3% (net of withholding tax that is near zero in our case). In the year under review, the overall costs therefore amounted to 1.28% compared with a total return before costs of 9.0%, and 7.7% 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 costs during the year to 31 May 2016 of 1.28% can be compared to an average annual return (after the deduction of costs) of 15.8% per annum since issue.

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 be very modest in comparison to the NAV.

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 2016

Rank Company Sector & main
activity
Valuation
£’000
% of net 
assets 
Yield¹
1 Charles Taylor Industrials 7,843 2.3 3.8 
2 Safestyle UK2 Consumer Services 5,728 1.7 3.7 
3 Stobart Industrials 5,479 1.6 4.7 
4 4Imprint Consumer Services 5,329 1.5 1.9 
5 Burford Capital2 Financials 5,324 1.5 2.5 
6 Shoe Zone2 Consumer Services 5,271 1.5 4.8 
7 Fairpoint2 Financials 5,028 1.4 5.4 
8 Macfarlane Industrials 4,896 1.4 3.0 
9 Esure Financials 4,796 1.4 4.0 
10 Powerflute2 Basic Materials 4,647 1.3 3.0 
Top 10 investments 54,341 15.6
11 Novae Financials 4,583 1.3 5.9 
12 Park2 Financials 4,555 1.3 3.5 
13 Conviviality2 Consumer Services 4,353 1.3 4.0 
14 Zotefoams Basic Materials 4,351 1.2 1.9 
15 Lok’n Store2 Financials 4,272 1.2 2.6 
16 Beazley Financials 4,267 1.2 7.8 
17 Aviva Financials 4,201 1.2 4.6 
18 Direct Line Insurance Financials 4,084 1.2 4.8 
19 Royal Mail Industrials 3,919 1.1 4.1 
20 IG Design (formerly International Greetings)2
Consumer Goods

3,912

1.1

1.0 
Top 20 investments 96,838 27.7
21 Provident Financial Financials 3,887 1.1 4.1 
22 Mucklow (A&J) Financials 3,759 1.1 4.5 
23 Segro Financials 3,707 1.1 3.6 
24 Imperial Brands Consumer Goods 3,696 1.1 3.9 
25 Taylor Wimpey Consumer Goods 3,616 1.1 5.9 
26 RPC Industrials 3,615 1.0 2.0 
27 Vodafone Telecommunications 3,596 1.0 5.0 
28 Kier Industrials 3,553 1.0 4.7 
29 Costain Industrials 3,549 1.0 3.0 
30 Hostelworld Consumer Services 3,549 1.0 1.5 
Top 30 investments 133,365 38.2
31 Go-Ahead Consumer Services 3,506 1.0 3.6 
32 Moneysupermarket.com Consumer Services 3,486 1.0 2.8 
33 Quartix2 Technology 3,479 1.0 1.8 
34 Personal2 Financials 3,468 1.0 4.3 
35 Legal & General Financials 3,464 1.0 5.6 
36 Dairy Crest Consumer Goods 3,457 1.0 4.0 
37 Phoenix Financials 3,451 1.0 6.1 
38 Bloomsbury Publishing Consumer Services 3,367 1.0 3.9 
39 BT Telecommunications 3,325 0.9 3.2 
40 Elegant Hotels 2 Consumer Services 3,322 0.9 3.4 
Top 40 investments 167,690 48.0
Balance held in 92 equity investments 165,614 47.5
Total equity investments 333,304 95.5
600 Group 8% Convertible Loan Notes 14/02/2020 2,356 0.7
Private & Commercial Finance 6% 30/09/2016 Notes 1,237 0.3
St. Modwen Properties 6.25% 07/11/2019 Bonds 846 0.2
Gable Holdings 7.5% 30/09/2018 Notes (unlisted) 570 0.2
William Sinclair 8% Convertible Loan Notes 17/12/2018 (unlisted) 535 0.2
Aggregated Micro Power 8% 31/03/2021 Notes 465 0.1
Fixed interest and convertible investments 6,009 1.7
Total investments 339,313 97.2
Listed Put option
            FTSE 100 – June 2017 6,000 Put 8,026 2.3
Other net assets 1,706 0.5
Net assets 349,045 100.0

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 2016 is available on the Company’s website, www.mitongroup.com/dit.
 

Invested portfolio capital by sector

%
Financials 26.5
Consumer Services 22.4
Industrials 18.1
Consumer Goods 8.2
Basic Materials 6.2
Cash/Fixed Interest and Other 5.6
Technology 5.1
Telecommunications 3.8
Oil & Gas 1.8
Health Care 1.4
Utilities 0.9
100.0

Invested portfolio capital by Index or Exchange

%
FTSE 100 Index 16.4
FTSE 250 Index 15.6
FTSE SmallCap Index 18.4
FTSE Fledgling Index 4.9
AIM/ISDX Exchanges 35.3
International Equities 0.9
Cash/Fixed Interest and Other 8.5
100.0

Portfolio investment income by Index or Exchange

%
FTSE 100 Index 18.0
FTSE 250 Index 16.1
FTSE SmallCap Index 17.4
FTSE Fledgling Index 4.6
AIM/ISDX Exchanges 33.7
International Equities -
Cash/Fixed Interest and Other 10.2
100.0

Estimated annual income by sector¹

%
Financials 30.8
Consumer Services 21.6
Industrials 18.1
Consumer Goods 6.9
Basic Materials 4.7
Telecommunications 4.6
Oil & Gas 4.4
Technology 3.7
Cash/Fixed Interest and Other 3.5
Health Care 1.0
Utilities 0.7
100.0

¹ Projected income based on portfolio as at 31 May 2016.
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 NAV (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.

* A resolution is being put to shareholders at the forthcoming AGM which, if approved, will increase the maximum expected size of the portfolio to 160 securities.


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 2016 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.

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.

As explained above, the Company will be seeking shareholder approval at the forthcoming Annual General Meeting (“AGM”) to change its investment policy by increasing the maximum number of securities that may be held in the portfolio.


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 2016 was 91.02p per share (2015: 87.03p). The total return of the Company over the year, including the dividend income from the portfolio, was 6.8%. This compares favourably with its peer group, where the average was a 2.7% decrease in total return terms. By comparison, the total return on the FTSE All-Share Index was -6.3% over the year, on the FTSE SmallCap Index (excluding Investment Companies) was 0.3% and on the FTSE AIM All-Share Index was -3.0%.
     
  • 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 2016, the Company’s NAV had a volatility of 6.8%. This compares to the peer group where the average was 17.2%.
     
  • Movements in the Company’s share price

    The Company’s share price increased by 11.1% over the year on a total return basis. This compares favourably with its peer group, where the average move was a decrease of 2.7%.
     
  • 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 2016, the Company has maintained an average premium to NAV of 1.6%.
     
  • The Company’s dividend growth rate

    The Company has an objective to deliver an attractive and growing dividend. Including the proposed final dividend, the Company has paid/declared dividends totalling 2.8p for the year, representing a yield of 3.1% (based on an average share price of 91.4p). The Company grew these dividends by 12.0% on a rolling twelve month basis. This compares to its peer group, where the average estimated growth rate was 2.7%*.
     
  • Ongoing charges

    The ongoing charges for the year to 31 May 2016 amounted to 1.18% (2015: 1.20%) 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 2.8p per ordinary share have been paid, declared or proposed in respect of the year ended 31 May 2016 as follows:

First interim dividend: 0.65p paid on 29 February 2016 (27 February 2015: 0.50p)
Second interim dividend: 0.65p paid on 31 May 2016 (29 May 2015: 0.50p)
Third interim dividend: 0.75p payable on 31 August 2016 (28 August 2015: 1.00p)
Final dividend 0.75p payable on 30 November 2016 (30 November 2015: 0.50p)

A final dividend of 0.75p per ordinary share has been recommended by the Board. Subject to shareholder approval at the forthcoming AGM, this dividend will be payable on 30 November 2016 to shareholders on the register at the close of business on 30 September 2016. The ex-dividend date will be 29 September 2016.

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 Board, through delegation to the Audit Committee, has undertaken a robust assessment and review of the principal risks facing the Company, together with a review of any new risks which may have arisen during the year, including those that would threaten its business model, future performance, solvency or liquidity. These risks are formalised within the Company’s risk matrix. Information regarding the Company’s internal control and risk management procedures can be found in the Corporate Governance Statement in the full Annual Report. The principal financial risks and the Company’s policies for managing these risks and the policy and practice with regard to 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 2016, the facility was undrawn.

The Company is limited to a maximum gearing of 15% of the net assets. There was no gearing at 31 May 2016 (2015: nil).
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.

SHARE CAPITAL

Share Issues
At the AGM held on 14 October 2015, the Directors were granted the authority to allot ordinary shares up to an aggregate nominal amount of £38,349. No shares have been issued under this authority. This authority is due to expire at the Company’s AGM to be held on 12 October 2016 and proposals for its renewal are set out in the Directors’ Report in the full Annual Report.

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 AGM held on 14 October 2015, the Directors were granted the authority to buy back up to 57,484,737 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
On 12 June 2015, 3,200,000 ordinary shares were redeemed and cancelled in respect of the 31 May 2015 Redemption Point.

Valid redemption requests were received under the Company’s redemption facility for the 31 May 2016 Redemption Point in relation to 265,744 ordinary shares, representing 0.07% of the issued share capital. As permitted under the Company’s Articles of Association, these shares were matched with buyers and sold at a calculated Redemption Price of 90.97p per share.

Current Share Capital
As at the year end and the date of this Report, there were 383,487,239 ordinary shares and 50,000 management shares (see note 8 to the financial statements) in issue.


MANAGEMENT, SOCIAL, ENVIRONMENTAL AND DIVERSITY MATTERS

Management Arrangements
The Company appointed Miton Trust Managers Limited (“MTM” or “Manager”) as its Alternative Investment Fund Manager (“AIFM”) with effect from 22 July 2014. 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.

The Manager receives a management fee 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. 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 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 is 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 a current annual fee of £113,000, 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. As the Manager has delegated the investment management function to the Investment Manager, the performance of the Investment Manager is also regularly reviewed. 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.

The Company is not within the scope of the Modern Slavery Act 2015 because it has insufficient turnover and is therefore not obliged to make a human trafficking statement.

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

On behalf of the Board
Michael Wrobel
Chairman
11 August 2016


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.

Viability Statement

The Directors have assessed the viability of the Company over a three-year period, taking account of the Company’s position and the risks as set out in the Strategic Report.

The period assessed balances the long-term aims of the Company, the Board’s view that the success of the Company is best assessed over a longer time period and the inherent uncertainty of looking out for too long a period.

As part of its assessment of the viability of the Company, the Board has considered the principal risks and uncertainties and the impact on the Company’s portfolio of a significant fall in UK markets.

To provide this assessment, the Board has considered the Company’s financial position and its ability to liquidate its portfolio to meet its expenses or other liabilities as they fall due.

  • The Company invests largely in companies listed and traded on stock exchanges. These are actively traded, and whilst perhaps less liquid than larger quoted companies, the portfolio is well diversified by both number of holdings and industry sector.
  • The expenses of the Company are predictable and modest in comparison with the assets in the portfolio. There are no commitments that would change that position.
  • The Company has an annual redemption facility whereby shareholders may request that their shares are redeemed at NAV. The Board has considered the possibility that shareholders holding a significant percentage of the Company’s shares request redemption. Firstly, the Board has flexibility over the method of redemption so to avoid disruption to the overall operation of the Company in this situation. Secondly, the Company’s investments comprise readily realisable securities which can be sold to meet funding requirements if necessary. The most significant of the Company’s expenses vary in proportion to the size of the Company.

In addition to considering the principal risks set out above and the financial position of the Company as described above, the Board has also considered the following further factors:

  • the continuing relevance of the Company’s investment objective in the current environment;
  • the level of demand for the Company’s shares and that since launch the Company has been able to issue further shares;
  • the gearing policy of the Company; and
  • that regulation will not increase to such extent that the costs of running the Company become uneconomical.

Accordingly, the Directors have formed the reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three years.
 

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 International Financial Reporting Standards (“IFRS”) as adopted by the European Union.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with IFRS. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss 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.

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 position and performance, business model and strategy.

On behalf of the Board
Michael Wrobel
Chairman
11 August 2016


NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company’s statutory accounts for the years ended 31 May 2016 and 31 May 2015 but is derived from those accounts. Statutory accounts for 2015 have been delivered to the Registrar of Companies, and those for 2016 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 2016
    Year ended
    31 May 2015

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




16,876 


16,876 




21,992 


21,992 
Foreign exchange gains/(losses)




(19)

(19)
Losses on derivative contracts
12


(1,087)

(1,087)


(3,106)

(3,106)
Income 2 14,368  14,368  14,540  14,540 
Management fee 3 (851) (2,554) (3,405) (771) (2,311) (3,082)
Other expenses 4 (667) (667) (656) (656)
Return on ordinary activities before finance costs and taxation


12,850 



13,240 



26,090 



13,113 



16,556 



29,669 
Finance costs (13) (39) (52) (3) (11) (14)
Return on ordinary activities before taxation

12,837 


13,201 


26,038 


13,110 


16,545 


29,655 
Taxation – irrecoverable withholding tax



(48)




(48)


(33)


-  


(33)
Return on ordinary activities after taxation



12,789 


13,201 


25,990 


13,077 


16,545 


29,622 
pence  pence  pence  pence  pence  pence 
Return per ordinary share

3.33 

3.44 

6.77 

3.58 

4.53 

8.11 

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 (“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



Note

Share 
capital 
£’000 
Share 
premium 
account 
£’000 

Special 
reserve 
£’000 

Capital
reserve
£’000

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2015 387  192,244  48,558  86,141 9,199  336,529 

Total comprehensive income:
Net return for the year 13,201 12,789  25,990 
Transactions with shareholders recorded directly to equity:
Management shares 8 50  - 50 
Cancellation of ordinary shares 8 (3) (2,783) - (2,786)
Equity dividends paid 7 - (10,738) (10,738)
As at 31 May 2016 434  192,244  45,775  99,342 11,250  349,045 

   




Group



Note

Share 
capital 
£’000 
Share 
premium 
account 
£’000 

Special
reserve
£’000

Capital
reserve
£’000

Revenue 
reserve 
£’000 


Total 
£’000 
As 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 7  -  - - (8,245) (8,245)
As at 31 May 2015 387  192,244  48,558 86,141 9,199  336,529 

The notes form part of these financial statements.
 

PARENT COMPANY STATEMENT OF CHANGES IN EQUITY




Company



Note

Share 
capital 
£’000 
Share 
premium 
account 
£’000 

Special 
reserve 
   £’000 
 
Capital

reserve
£’000

Revenue 
reserve 
£’000 


  Total 
   £’000 
As at 1 June 2015 387  192,244  48,558  86,141 8,792  336,122 

Total comprehensive income:
Net return for the year 13,201 12,550  25,751 
Transactions with shareholders recorded directly to equity:
Management shares 8 50  - 50 
Cancellation of ordinary shares

(3)


(2,783)

-


(2,786)
Equity dividends paid 7 - (10,738) (10,738)
As at 31 May 2016 434  192,244  45,775  99,342 10,604  348,399 

   




Company



Note

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 8 - (1,251) - (1,251)
Equity dividends paid 7 - - (8,245) (8,245)
As at 31 May 2015 387 192,244  48,558 86,141  8,792  336,122 

The notes form part of these financial statements.
 

CONSOLIDATED AND PARENT COMPANY BALANCE SHEETS



Note
Group 
31 May 2016 
£’000 
Group 
31 May 2015 
£’000 
Company 
31 May 2016 
£’000 
Company 
31 May 2015 
£’000 
Non-current assets:
Investments held at fair value through profit or loss
11

339,313 

326,243 

339,313 

326,243 
Current assets:
Financial instruments 12 8,026  2,107  8,026  2,107 
Trade and other receivables 15 2,064  2,065  2,064  2,065 
Cash and cash equivalents 2,983  7,073  2,348  7,073 
13,073  11,245  12,438  11,245 

Current liabilities:
Bank overdraft 16 (2) (2)
Trade and other payables 16 (3,341) (957) (3,352) (1,364)
(3,341) (959) (3,352) (1,366)

Net current assets

9,732 

10,286 

9,086 

9,879 
Total net assets 349,045  336,529  348,399  336,122 

Capital and reserves:
Share capital – ordinary shares 8 384  387  384  387 
Share capital – management shares

50 


50 

Share premium account 9 192,244  192,244  192,244  192,244 
Special reserve 9 45,775  48,558  45,775  48,558 
Capital reserve 9 99,342  86,141  99,342  86,141 
Revenue reserve 9 11,250  9,199  10,604  8,792 
Shareholders’ funds 349,045  336,529  348,399  336,122 

pence 

pence 
Net asset value per ordinary share
10

91.02 

87.03 

These financial statements were approved by the Board of The Diverse Income Trust plc on 11 August 2016 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 2016 
£’000 
Group 
31 May 2015 
£’000 
Company 
31 May 2016 
£’000 
Company 
31 May 2015 
£’000 
Operating activities:
Net return before taxation 26,038  29,655  25,799  29,635 
Increase in investments and financial instruments (15,789) (18,886) (15,789) (18,886)
Purchase of investments (62,216) (92,866) (62,216) (92,866)
Sales of investments 66,022 55,864  66,022  55,864 
Purchase of financial instruments (17,243) (4,776) (17,243) (4,776)
Sale of financial instruments 10,237  856  10,237  856 
Exchange (gains)/losses on capital items (5) 19  (5) 19 
Decrease/(increase) in trade and other receivables

(296)


(296)
Increase in trade and other payables 2,384  643  1,988  793 
Withholding tax paid (48) (33) (48) (33)
Net cash inflow/(outflow) from operating activities
9,381 

(29,820)

8,746 

(29,690)
Financing:
Management shares 50  50 
C shares issued 50,000  50,000 
Expenses of share issues (1,251) (1,251)
Cancellation of shares (2,786) (2,786) -
Equity dividend paid (10,738) (8,245) (10,738) (8,245)
Net cash (outflow)/ inflow  from financing (13,474) 40,504  (13,474) 40,504 
(Decrease)/increase in cash and cash equivalents (4,093) 10,684  (4,728) 10,814 
Reconciliation of net cash flow movements in funds:
Cash and cash equivalents at the start of the year 7,071  (3,594) 7,071  (3,724)
Exchange movements (19) (19)
Net cash (outflow)/inflow from cash and cash equivalents
(4,093)

10,684 

(4,728)

10,814 
Cash at the end of the year 2,983  7,071  2,348  7,071 
Cash and cash equivalents
Comprise the following:
Cash at bank 2,983  7,073  2,348  7,073 
Bank overdraft (2) (2)
2,983  7,071  2,348  7,071 
Cash and cash equivalents received/(paid) during the period include:
Dividend received 10,624  10,258  10,624  10,258 
Interest and unfranked dividend income received 3,617  4,289  3,379  4,269 
Interest paid (40) (3) (40) (3)

The notes form part of these financial statements.
 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 General Information and Significant Accounting Policies
Diverse 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 2016 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 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, being a period of at least 12 months from the date that these financial statements were approved, 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 Group’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 2016.

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 £25,751,000 (2015: £29,602,000).

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. The following accounting standards and their amendments were in issue at the period end but will not be in effect until after this financial year. They are not expected to significantly impact the financial statements.

International Financial Reporting Standards Effective date*
IFRS 9 Financial Instruments 1 January 2018
IFRS 15 Revenue from Contracts with Customers 1 January 2018
IFRS 16 Leases 1 January 2019
*Years beginning on or after

The Directors do not anticipate that the initial adoption of the above standards will have a material impact in the period of initial application.

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 significant accounting estimates or significant judgements in the current period.

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.

Upon initial recognition, the investments held by the Company, except for the investment in the subsidiary, are designated 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 Stock Exchange Electronic Trading Service – quotes and crosses (“SETSqx”).

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) (2015: £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 (2015: 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.

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. Items that are 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.

Financial Instruments
Derivatives, including Index Put options, which are listed investments are classified as financial instruments being 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 capital column of the Income Statement.

Cash and Cash Equivalents
For the purposes of the Balance Sheet, 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 purposes 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.

Trade Receivables, Trade Payables and Short-term Borrowings
Trade receivables, trade payables and short-term borrowings are measured at fair value through profit or loss.

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 using the effective interest method.

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 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 using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes at the reporting date. 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. 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 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 2016 
£’000 
Year ended
31 May 2015
£’000
Income from investments:
UK dividends 10,816  10,235
UK REIT dividend income 256  176
Unfranked dividend income 2,746  3,597
UK fixed interest 274  365
14,092  14,373
Other income:
Bank deposit interest 1
Exchange losses (5)
Net dealing profit of subsidiary* 238  20
Underwriting income 43  80
Other income 66
Total income 14,368  14,540

* Represents realised trading gains and losses from trading transactions. There are no other expenses/income in respect of the subsidiary.


3 Management Fee

Year ended
31 May 2016
Year ended
31 May 2015
Revenue
£’000
Capital
£’000
Total
£’000
 Revenue
£’000
 Capital
£’000 
       Total
£’000
Management fee 851 2,554 3,405 771 2,311  3,082

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 one-twelfth of 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 above.

At 31 May 2016, an amount of £283,000 (2015: £266,000) was outstanding and due to Miton Trust Managers Limited in respect of management fees.
 

4 Other Expenses

Year ended
31 May 2016
£’000
Year ended
31 May 2015
£’000
Secretarial services 113 120
Auditor’s remuneration for:
Audit of the Group’s financial statements (payable by the Company only)
30

30
Other assurance related services - 11
Directors’ fees (see the Directors’ Remuneration Report in the full Annual Report)
132

135
Other expenses 392 360
667 656

The audit of the Group's financial statements includes the cost of the audit of DIT Income Services Limited of £2,000 (2015: £2,000), which is paid by the parent company.
 

5 Taxation

Year ended
31 May 2016
Year ended
31 May 2015
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Overseas withholding tax suffered 48 - 48 33 - 33

   

Year ended
31 May 2016
Year ended
31 May 2015
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Return on ordinary activities before taxation
12,837 

13,201 

26,038 

13,110 

16,545 

29,655 
Theoretical tax at UK corporation tax rate of 20% (2015: 20.83%)

2,567 


2,640 


5,207 


2,731 


3,446 


6,177 
Effects of:
- UK dividends that are not taxable
(2,150)


(2,150)

(2,132)


(2,132)
- Overseas dividends that are not taxable
(562)


(562)

 (747)


 (747)
- Realised dealing gains (48) (48) (4) (4)
- Non-taxable investment gains (3,159) (3,159) (3,930) (3,930)
- Overseas taxation suffered 48  48  33  33 
- Unrelieved expenses 193  519  712  152  484  636 
Total tax charge 48  48  33  33 

Factors That May Affect Future Tax Charges
The Company has excess management expenses of £10,605,000 (2015: £7,292,000) that are available to offset future taxable revenue. At 31 May 2016, the Company has not recognised a deferred tax asset of £2,121,000 (2015: £1,458,000), 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.

The income from the subsidiary subject to taxation was £238,000 (2015: £20,000) and was offset against excess management expenses held by the Company using group relief.

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 £25,990,000 (2015: £29,622,000) and on 383,583,414 (2015: 364,836,135) 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 2016
Year ended
31 May 2015
Revenue Capital Total Revenue Capital Total
Basic and diluted
Net profit (£’000) 12,789 13,201 25,990 13,077 16,545 29,622
Weighted average number of ordinary shares in issue

383,583,414


64,836,135
Return per ordinary share (pence)

3.33


3.44


6.77


3.58


4.53


8.11


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

Year ended
31 May 2016
Year ended
31 May 2015

£’000
pence
per share

£’000
pence
per share
In respect of the previous period:
Fourth interim dividend 3,835 1.00 3,082 0.95
Final dividend 1,917 0.50 - -
In respect of the year under review:
First interim dividend 2,493 0.65 1,297 0.40
Second interim dividend 2,493 0.65 1,933 0.50
Third interim dividend - - 1,933 0.50
Dividends distributed during the year 10,738 2.80 8,245 2.35

The Directors have declared a third interim dividend in respect of the year ended 31 May 2016 of 0.75p per ordinary share payable on 31 August 2016 to all shareholders on the register at close of business on 24 June 2016. A final dividend of 0.75p 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 2016 to shareholders on the register at close of business on 30 September 2016. The ex-dividend date will be 29 September 2016.

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 2016 
£’000 
Year ended
31 May 2015
£’000
Revenue available for distribution by way of dividends for the year 12,789  13,077 
First interim dividend of 0.65p (2015: 0.40p) per ordinary share (2,493) (1,297)
Second interim dividend of 0.65p (2015: 0.50p) per ordinary share (2,493) (1,933)
Declared third interim dividend of 0.75p (2015: 0.50p) per ordinary share
(2,876)

(1,933)
Fourth interim dividend of nil (2015: 1.00p) per ordinary share (3,835)
Proposed final dividend of 0.75p (2015: 0.50p) per ordinary share (2,876) (1,197)
Estimated revenue reserve retained for the year 2,051  2,162 


8 Called Up Share Capital

31 May 2016  31 May 2015
number  £’000  number £’000
Ordinary shares 0.1p each:
Opening balance 386,687,239  387  324,377,450 325
Issue of ordinary shares 62,309,789 62
Cancellation of ordinary shares
(3,200,000)

(3)


383,487,239  384  386,687,239 387

The rights and restrictions attached to shares, together with the capital structure of the Company, are set out in the full Annual Report.

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 received redemption requests for 5,713,632 ordinary shares in respect of the 31 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.

The Company had received redemption requests for 265,744 ordinary shares in respect of the 31 May 2016 Redemption Point. All of these shares were matched with buyers at a calculated Redemption Price of 90.97 pence per share. Following this and at the date of this Report, the issued share capital and voting rights remain unchanged at 383,487,239 ordinary shares.

Details of the redemption facility are set out in the full Annual Report.

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 2016, £12,500 had been paid up (2015: £nil).


9 Reserves




2016
    Share 
premium 
 account 
    £’000 

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

Revenue  reserve 
      £’000 
Opening balance 192,244  48,558  19,821  66,320  9,199 
Cancellation of ordinary shares

(2,783)



Net gain on realisation of investments


18,213 


Exchange gains on settlements and currency accounts









Unrealised net decrease in value of investments



(1,337)

Movement in value of derivative instruments


(286)

(801)

Management fees/finance costs charged to capital


(2,593)


Equity dividends paid (10,738)
Revenue return on ordinary activities after tax




12,789 
Closing balance 192,244  45,775  35,160  64,182  11,250 

The distributable reserves of the Company are £91,539,000 (2015: £77,171,000).




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


8,634 


Exchange 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)


Revenue return on ordinary activities after tax




13,077 
Equity dividends paid   -  (8,245)
Closing balance 192,244  48,558  19,821  66,320  9,199 

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 2016
pence
Net assets
attributable
31 May 2016
£’000
Net asset value
per share
31 May 2015
pence
Net assets
attributable
31 May 2015
£’000
Ordinary shares
- Basic and diluted

91.02

349,045

87.03

336,529

Net asset value per ordinary share is based on net assets at the year end and 383,487,239 ordinary shares (2015: 386,687,239), being the number of ordinary shares in issue at the year end.

The net asset value of £1 (2015: £1) per management share is based on net assets at the year end of £50,000 (2015: £50,000) and 50,000 (2015: 50,000) management shares. The shareholders have no right to any surplus capital or assets of the Company.


11 Investments


Company
31 May 2016
£’000
31 May 2015
£’000
Investment portfolio summary:
Opening book cost 257,254 211,888 
Opening investment holding gains 68,989 55,361 
Total opening investments designated at fair value
326,243

267,249 

   


Company
31 May 2016 
£’000 
31 May 2015 
£’000 
Analysis of investment portfolio movements
Opening valuation 326,243  267,249 
Movements in the period:
Purchases at cost 62,216  92,866 
Sales - proceeds (66,022) (55,864)
          - gains on sales 18,213  8,364 
(Decrease)/increase in investment holding gains (1,337) 13,628 
Closing valuation 339,313  326,243 
Closing book cost 271,661  257,254 
Closing investment holding gains 67,652  68,989 
Total closing investments designated at fair value 339,313  326,243 

   

Year ended
31 May 2016
£’000
Year ended
31 May 2015
£’000
Transaction costs:
Costs on acquisitions 235 341
Costs on disposals 95 98
330 439

   

Year ended 
31 May 2016 
£’000 
Year ended
31 May 2015
£’000
Analysis of capital gains
Realised gains on sales 18,213  8,364
Movement in unrealised gains (1,337) 13,628
16,876  21,992

Fair Value Hierarchy
The Group is required to classify fair value measurements using a fair value hierarchy that reflects the subjectivity of the inputs used in measuring the fair value of each asset. The fair value hierarchy has the following levels:

Investments whose values are based on quoted market prices in active markets are classified within Level 1 and include active listed equities. The Group does not adjust the quoted price for these instruments.

Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information.

Level 3 instruments include private equity, as observable prices are not available for these securities the Group has used valuation techniques to derive the fair value. In respect of 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 IPEVC Valuation Guidelines.

The level in the fair value hierarchy within which the fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value of the investment.

The following table analyses within the fair value hierarchy the Group’s financial assets and liabilities (by class) measured at fair value at 31 May 2016.

Financial assets at fair value through profit or loss at 31 May 2016 Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Equity investments 330,342 2,962 - 333,304
Derivative contracts 8,026 - - 8,026
Fixed interest bearing securities 846 1,237 3,926 6,009
339,214 4,199 3,926 347,339
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
Derivative contracts 2,107 - - 2,107
Fixed interest bearing securities 1,292 - 3,142 4,434
325,208 - 3,142 328,350

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 2016, 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 the Accrol Group (Placing Shares) and Private and Commercial Finance 6% Notes, which are classified as Level 2 investments (2015: none) and William Sinclair, 600 Group, Aggregated Micro Power and Gable Holdings Loan Notes, which are all classified as Level 3 investments (2015: same with the exception of the Aggregated Micropower and Gable Holdings Loan Notes).

The value of the subsidiary held at fair value is £1 (2015: £1) and is classified as a Level 3 investment. The value of the investments held for trading in the subsidiary at 31 May 2016 are £nil (2015: nil).

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).

The Group has four Level 3 investments, being the holdings in William Sinclair, 600 Group, Aggregated Micro Power and Gable Holdings 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 following table summarises the Company’s Level 3 investments that were accounted for at fair value in the year ended 31 May 2016.

Year ended 
31 May 2016 
Level 3 
£’000 
Year ended 
31 May 2015 
Level 3 
£’000 
Opening fair value investments 3,142  2,650 
Purchase at cost 2,548  1,112 
Sales proceeds (1,608)
Movement in investment holding gains
movement in unrealised (156) (620)
Closing fair value of investments 3,926  3,142 

Trading Income
The Company’s subsidiary completes trading transactions. The value of assets held by the subsidiary as at 31 May 2016 was £nil (2015: £nil). The difference between the sale and purchase of assets is trading income recognised in the Income Statement.


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 2016, 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 2016 5,800 Put option, purchased and sold a FTSE 100 – March 2017 6,000 Put option, and purchased a FTSE 100 – June 2017 6,000 Put option. At the Balance Sheet date, the Put option had a fair value of £8,026,000 with a notional portfolio exposure of £50,830,000. Unrealised holding losses of £3,470,000 are detailed in the table below.

During the prior 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 2016
Year ended 
31 May 2016 
£’000 
Year ended 
31 May 2015 
£’000 
Opening book cost 4,776  4,060 
Opening investment holding gains (2,669) (2,767)
Total opening investments designated at fair value 2,107  1,293 
Analysis of investment portfolio movements
Opening valuation 2,107  1,293 
Movements in the period:
Purchases at cost 17,243  4,776 
Sales – proceeds (10,237) (856)
– losses on sales (286) (3,204)
Movement in unrealised loss (801) 98 
Closing fair valuation 8,026  2,107 
Closing book cost 11,496  4,776 
Closing unrealised loss (3,470) (2,669)
Total closing investments designated at fair value 8,026  2,107 

   

As at 
31 May 2016 
£’000 
As at 
31 May 2015 
£’000 
Analysis of capital gains/(losses) on options
Realised losses on sales (286) (3,204)
Movement in unrealised losses (801) 98 
(1,087) (3,106)


13 Substantial Share Interests
The Company has notified interests in 3% or more of the voting rights of 28 (2015: 35) investee companies (none of which are closed-end investment funds). 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 £11,000 at 31 May 2016 (2015: £407,000).


15 Trade and Other Receivables

Group Company
31 May 2016
£’000
31 May 2015
£’000
31 May 2016
£’000
31 May 2015
£’000
Amounts due from brokers 255 434 255 434
Dividends receivable 1,586 1,458 1,586 1,458
Accrued income 54 119 54 119
Taxation recoverable 103 39 103 39
Prepayments and other debtors
66

15

66

15
2,064 2,065 2,064 2,065


16 Trade and Other Payables

Group Company
31 May 2016 £’000 31 May 2015
£’000
31 May 2016
£’000
31 May 2015
£’000
Bank overdraft - 2 - 2
Amounts due to brokers 2,962 586 2,962 586
Other creditors 379 371 379 371
Amounts due to subsidiary - - 11 407
3,341 959 3,352 1,366

As at 31 May 2016, 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
  1. 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 2016 (31 May 2015: undrawn).
 

17 Capital Commitments and Contingent Liabilities
As at 31 May 2016, there were no outstanding commitments or contingent liabilities (2015: 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 risk), liquidity risk and credit and counterparty risk. The Group may enter into derivative contracts to manage risk. The Group has held, sold and taken out listed Put options 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 2016 on its equity and debt investments and listed Put index option held at fair value through profit or loss was £347,339,000 (2015: £328,350,000).

A 10% increase in the market value of its listed equity investments at 31 May 2016 would have increased net assets attributable to shareholders by £34,734,000 (2015: £32,835,000). 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 2016 (2015: 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 (2015: undrawn).

As detailed above, at 31 May 2016 the Company held six (2015: four) fixed income securities representing 1.7% of the total investment portfolio (2015: 1.3%).

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





As at 31 May 2016
Weighted
average
interest
rate
%


Floating  rate 
£’000 



Fixed rate
£’000
Assets and liabilities
Fixed interest securities 6.58 - 6,009
Cash at bank - 2,983 -
Bank overdraft - - -
2,983 6,009

   





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

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 2.60 years (2015: 3.80 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 2016 would decrease/increase by £15,000 (2015: decrease/increase by £35,000). 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 2016, 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 £3,341,000 (2015: £5,935,000) 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 2016 was £13,073,000 (2015: £15,679,000). The calculation is based on the Group’s credit risk exposure as at 31 May 2016 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 (2015: 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 (2015: 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 6,000, and would not materially impact the portfolio returns if a large market movement did occur. The Group also entered and exited a March 2017 6,000 Put option during the year (2015: none).

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 no borrowings as at 31 May 2016 (2015: £2,000). Also, as a public company the minimum share capital is £50,000.

2016   
£’000   
2015   
£’000   
The Company’s capital at 31 May comprised:
Debt:
Bank overdraft facility -    2   
Equity:
Equity share capital 434    387   
Retained earnings and other reserves 348,611    336,142   
Total shareholders’ funds 349,045    336,529   
Debt as a % of net assets 0.00% 0.00%

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 pursuant to the management agreement are disclosed in note 3. Management fees for the year amounted to £3,405,000 (2015: £3,082,000).

As at the year end, the following amounts were outstanding in respect of management fees: £283,000 (2015: £266,000).

Fees paid to the Company’s Directors are disclosed in the Directors' Remuneration Report in the full Annual Report. At the year end, there were no outstanding fees payable to Directors (2015: £6,250).

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

ANNUAL GENERAL MEETING
The Company’s Annual General Meeting will be held on Wednesday, 12 October 2016 at 11.30am, 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.


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