City Merchants High Yield Trust Limited
Annual Financial Report Announcement
For the year ended 31 December
2016
.
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
|
AT
31 DECEMBER
2016 |
AT
31 DECEMBER
2015 |
| Total Return |
|
|
| Net Asset Value |
+11.8% |
+2.7% |
| Share price |
+11.6% |
+0.7% |
| Ongoing Charges |
1.01% |
1.01% |
| Dividend for the year |
10p |
10p |
Year End Information
|
31 DECEMBER
2016 |
31 DECEMBER
2015 |
%
CHANGE |
| Net asset value per share |
189.32p |
178.34p |
+6.2 |
| Share price |
191.00p |
180.75p |
+5.7 |
| Premium |
0.9% |
1.4% |
|
| Gearing |
|
|
|
| Gross gearing |
nil |
nil |
|
| Net cash |
8.4% |
7.0% |
|
.
CHAIRMAN’S STATEMENT
The Company continued to perform well in 2016 despite persistent
volatility in bond markets and the increasing difficulty of
sourcing quality high yield paper. For the year ended 31 December 2016, the NAV total return was +11.8%
which compares very favourably with +7.1% for the Investment
Management Association Sterling Strategic Bond sector. The
Company’s share price total return for the year was +11.6%. The
Manager’s Investment Report summarises the market background and
portfolio strategy for the year, including how the portfolio is
positioned and outlook.
In my statement in the half yearly report, I highlighted the
uncertain period following the aftermath of the UK’s decision to
leave the European Union, the full outcome of which remains
unknown. Uncertainty continued around the globe with the success of
Donald Trump in the US presidential
election and Italy’s rejection of constitutional reform. Despite
market volatility caused by these events, the Company continued to
produce an attractive level of income for shareholders. We were
able to meet our dividend target of 10p in respect of the financial
year, matching last year’s total, and aim to achieve this again in
the coming year.
The Board believes the portfolio remains well positioned to
continue to provide an attractive level of income for shareholders,
with some limited potential for capital appreciation.
Demand for the Company’s shares continued to be strong and
shares traded at a premium to NAV for most of the year. I am
pleased to report that 5,673,745 ordinary shares (approximately
6.6% of share capital) were issued at an average premium to NAV of
1.6%. This compared favourably to the average premium the shares
traded at in the year of 1.3%. Just over £10.4 million of capital
was raised in the year.
A further 475,000 ordinary shares have been issued since the
year end. Given the continuing demand for shares, the Directors are
asking shareholders to renew the 10% issuance authority at the
forthcoming AGM.
Borrowings
As set out in the Strategic Report, the Company’s borrowing
policy is determined by the Board. The maximum amount of borrowings
permitted is 30% of total assets, and remains unchanged. The
decision to use borrowings to gear the portfolio rests with the
portfolio managers and a credit facility from The Bank of New York
Mellon is in place to facilitate this, although it has not been
utilised in recent years. We are also putting in place the facility
to use repo financing should the portfolio managers wish to do so.
This is explained further in the Strategic Report on page 8.
Board Composition
The Board is unchanged since the Company’s re-domicile to Jersey
in 2012 and whilst this stability has been beneficial for the
Company, the Board is mindful of the importance of having a
suitably mapped board succession and renewal process in line with
corporate governance best practice. Thus, following the
recommendation of the external Board evaluation carried out in
2015, the Board has decided to put in motion the process to recruit
a new non-executive director to join the Board in 2017.
Having served the Company and its predecessor for a combined
total of twelve years and thus being the longest serving member of
the Board, I shall retire as Chairman and Director of the Company
during the course of 2017, in accordance with our succession plan.
The exact timing of my retirement is subject to ensuring it
facilitates a smooth transition to my successor after the new
Director is appointed. The services of Trust Associates have been
engaged for the recruitment process and, together with the
nomination of my successor, this process will be led by
John Boothman, Chairman of the
Nomination Committee.
Annual General Meeting (AGM)
The Company’s 2017 AGM will once again be held in London at The Oriental Club, Stratford House, Stratford Place, London W1C 1ES at 3.30pm on 15 June
2017. Shareholders attending will have an opportunity to
pose questions on the annual financial report and hear from one of
the portfolio managers.
The resolutions to be put to shareholders at the meeting are
described in detail in the Directors’ Report on page 55. They
consist of the usual ordinary resolutions to receive this annual
financial report and re-appoint the auditor. In addition, as
introduced for the first time last year, ordinary resolutions on
Directors’ Remuneration and the Company’s Dividend Payment Policy
are included once again. Items of special business comprise items
approved in past years by shareholders: continuation of the
Company; authority to issue shares up to 10% of the existing share
capital; renewal of the buy-back authority; and authority to call
general meetings on 14 days’ notice. The Board has considered all
the resolutions proposed in the notice and believe all are in the
interest of shareholders as a whole. We therefore recommend
shareholders vote in favour of the each resolution.
Clive Nicholson
Chairman
28 March 2017
STRATEGIC REPORT
FOR THE YEAR ENDED 31 DECEMBER
2016
MANAGER’S INVESTMENT REPORT
Portfolio Return
Over the year to 31 December 2016
the NAV total return for the Company was 11.8%. The NAV increased
by 11p per share to 189.3p per share. A total dividend of 10p per
share has been paid for the year.
Market Background
High yield bonds delivered strong returns over the course of
2016 amid central bank corporate bond purchase programmes and
rising commodity prices.
The challenges of late 2015 (weak commodity prices and concerns
about economic growth) continued into 2016, providing a volatile
start to the year for high yield bonds. The financial sector came
under additional pressure amidst concerns about the strength of the
European banking sector. Two of the most significant factors
weighing on the market were questions about the certainty of
Additional Tier 1 coupon payments and the treatment of senior bond
holders following the bail-in at Portuguese bank Novo Banco.
The European Central Bank launched a massive stimulus package in
the spring. The package included plans to purchase corporate bonds
directly. The plans were well received, with corporate bonds
rallying strongly and issuance soaring in response. Although the
programme is targeted at investment grade bonds, the demand for
yield and the boost to sentiment meant its effects were felt across
the European high yield bond market.
The UK’s vote for Brexit in the summer provided a second spike
in volatility for high yield bonds. The sell-off was, however,
limited and much lower than many had expected before the vote.
Markets soon recovered their losses with high yield bonds rallying
strongly over the summer. Monetary policy easing measures announced
by the Bank of England (BoE) in
August provided a further boost to sentiment. Amongst the measures
announced was a Corporate Bond Purchase Scheme similar to the
programme already underway in the Eurozone. As in the Eurozone, the
effects of the BoE’s purchases were felt across the wider sterling
bond market.
Following their initial weakness, commodity markets strengthened
through much of the year. Brent crude oil, for example, hit a low
of $28 a barrel in early January
before then rising to $57 a barrel at
31 December 2016. This strength in
commodities was particularly supportive of the US high yield bond
market, which has a high concentration of energy related
companies.
The uncertainty at the start of the year saw issuance levels in
the European high yield market fall dramatically, with just €3.3
billion issued in January and February
2016. By comparison, during the same two months in 2015,
€22.8 billion was issued. Supply picked up through the year,
particularly following the central bank corporate bond purchase
programmes. However, redemptions were also high during the year,
resulting in very low net issuance. This positive supply dynamic
provided further support to the market. Overall, the slow start to
the year meant total gross issuance levels were 19% lower than
2015, with Barclays reporting a total of €55.7 billion new European
currency high yield bonds issued in 2016.
According to index data from Merrill Lynch, European currency
high yield bonds had a total return for the year of 10.2%. The
aggregate yield to maturity for European currency high yield bonds
fell to 4.3%. Breaking this figure down, by 31 December 2016 euro high yield bonds had a
yield to maturity of 3.9%. The much smaller sterling high yield
bond market had a yield to maturity of 6.3%.
Portfolio Strategy
We maintained a defensive stance in the portfolio throughout the
year. This defensive position helped to lessen the credit risk in
the portfolio while also enabling us to quickly exploit any
investment opportunities that arose in periods of market stress.
For example, at the start of the year we took the opportunity to
add some bonds that we thought had become attractively priced,
particularly within the financial sector. Some of the bonds we
added included two contingent convertible bank bonds, one issued by
Barclays with a coupon of 8% and the other by RBS also with a
coupon of 8%.
The portfolio holds a range of high yield bonds along with an
allocation to investment grade corporate bonds. Security selection
is focused on well-seasoned issuers that we believe provide a good
balance of risk and return. In addition, we have significant
exposure to other areas of the market that we believe still offer
relatively attractive yields. One such area is bank capital, in
particular the subordinated debt of large European banks. The
creditworthiness of the banking sector has improved significantly
since the global financial crisis and we find these securities
continue to provide a reasonable level of income for the risk. It
should be noted that the cash balance at the end of 2016 was
relatively high at 8.4% as a result of the sale of the Company’s
holding in GM warrants during December. The cash balance has
subsequently been reduced.
We also have holdings in corporate hybrid bonds. We believe the
subordination risk of these junior debt instruments is attractive
in the context of the issuers’ relatively strong balance sheets.
Many of the corporate hybrid bonds we hold are issued by investment
grade companies.
We continue to seek opportunities to add yield to the portfolio
where we consider that the balance of reward to risk is attractive.
The Company has the ability to utilise borrowings in order to gear
the portfolio, up to 30% of NAV. As long as borrowing facilities
are available, we can employ borrowings as a form of additional
liquidity during a market sell-off or during an extended period of
low yields, or to take advantage of market opportunities. At
present the Company has a £20m borrowing facility and this has been
in place, though unused, for a number of years. Having this
facility incurs costs, such as an annual renewal fee and
non-utilisation costs. Alternative borrowing sources are currently
being considered, taking into account cost and suitability,
including any associated risks. Sources include repo financing, a
form of secured, short-term lending which we have extensive
experience of using.
Outlook
Valuations within many parts of the high yield market have
become stretched and in Europe the
high yield bond market finished 2016 with historically low yields.
That said, there are still some areas of the market that we think
are attractive. Our strategy is to be cautious and to focus on
higher quality companies that we think provide an appropriate level
of yield. We also continue to look at the non-traditional areas of
the high yield bond market. Subordinated financials, for example,
provide substantially higher levels of yield than comparable bonds
in other areas, following some underperformance for the financial
sector in 2016. We continue to search out such opportunities as we
seek to deliver a consistent and attractive level of income against
a market backdrop of historically low yields.
Paul Read Paul
Causer Rhys
Davies
Portfolio Managers
28 March 2017
STRATEGIC REPORT
BUSINESS REVIEW
Strategy and Business Model
City Merchants High Yield Trust Limited is a Jersey domiciled
investment company and its investment objective is set out below.
The strategy the Board follows to achieve that objective is to set
investment policy and risk guidelines, together with investment
limits, and to monitor how they are applied.
The business model the Company has adopted to achieve its
objective has been to contract investment management and
administration to appropriate external service providers, who are
subject to oversight by the Board. The principal service providers
are:
– Invesco
Fund Managers Limited (the ‘Manager’) to manage the portfolio in
accordance with the Board’s strategy; and
– R&H
Fund Services (Jersey) Limited to provide company secretarial and
general administration services.
The Company also has contractual arrangements with third parties
to act as registrar, corporate broker and depositary.
Investment Management
As noted above, the Manager provides investment management and
certain administrative services to the Company. The agreement is
terminable by either party giving no less than three months’ prior
written notice and subject to earlier termination without
compensation in the event of a material breach of the agreement or
the insolvency of either party. The management fee is payable
quarterly in arrears and is equal to 0.1875% of the value of the
Company’s total assets under management less current liabilities at
the end of the relevant quarter. In addition, the Manager is paid a
fee of £22,500 plus RPI per annum for administrative services.
The portfolio managers responsible for the day-to-day management
of the portfolio are Paul Read,
Paul Causer and Rhys Davies.
The Manager’s Responsibilities
The Directors have delegated to the Manager the responsibility
for the investment management activities of the Company, for
seeking and evaluating investment opportunities and for analysing
the accounts of investee companies. The Manager has full discretion
to manage the assets of the Company in accordance with the
Company’s stated objectives and policies as determined from time to
time by the Board and approved by shareholders. Within the
guidelines specified by the Board, the Manager has discretion to
make purchases and sales, make and withdraw cash deposits, enter
into underwriting commitments and exercise all rights over the
investment portfolio. The Manager also advises on currency
exposures and borrowings.
Assessment of the Manager
The performance of the Manager is reviewed continuously by the
Board and the ongoing requirements of the Company and services
received are assessed annually with reference to key performance
indicators as set out on pages 8 to 10.
Based on its recent review of activities, the Board believes
that the continuing appointment of Invesco Fund Managers Limited
remains in the best interests of the Company and its
shareholders.
Investment Objective and Policy
Investment Objective
The Company’s investment objective is to seek to obtain both
high income and capital growth from investment, predominantly in
high-yielding fixed-interest securities.
Investment Policy
The Company seeks to provide a high level of dividend income
relative to prevailing interest rates mainly through investment in
bonds and other fixed-interest securities. The Company also invests
in equities and other equity-like instruments consistent with the
overall objective.
This Investment Policy should be read in conjunction with the
descriptions of Investment Style, Investment Limits, Derivatives
and Currency Hedging, and Borrowings set out below.
Investment Style
The Manager, seeks to ensure that the portfolio is diversified,
having regard to the nature and type of securities (including
duration, credit rating, performance and risk measures and
liquidity) and the geographic and industry sector composition of
the portfolio. The Company may hold both illiquid securities (for
example, securities where trading volumes are relatively low and
unlisted securities) and concentrated positions (for example, where
a high proportion of the Company’s total assets is comprised of a
relatively small number of investments).
Investment Limits
– the Company may invest in fixed-interest
securities, including but not restricted to preference shares, loan
stocks (convertible and redeemable), corporate bonds and government
stocks, up to 100% of total assets;
– investments in equities may be made up to an
aggregate limit of 20% of total assets;
– the aggregate value of holdings of shares and
securities in a single issuer or company, including a listed
investment company or trust, will not exceed 15% of the value of
the Company’s investments; and
– investments in unlisted investments will not
exceed 10% of the Company’s total assets for individual holdings
and 25% in aggregate.
All the above limits are measured at the time a new investment
is made.
Derivatives and Currency Hedging
The Company may enter into derivative transactions (including
options, futures, contracts for difference, credit derivatives and
interest rate swaps) for the purposes of efficient portfolio
management. The Company will not enter into derivative transactions
for speculative purposes.
Efficient portfolio management may include reduction of risk,
reduction of cost and enhancement of capital or income through
transactions designed to hedge all or part of the portfolio, to
replicate or gain synthetic exposure to a particular investment
position where this can be done more effectively or efficiently
through the use of derivatives than through investment in physical
securities or to transfer risk or obtain protection from a
particular type of risk which might attach to portfolio
investments.
The Company may hedge against exposure to changes in currency
rates to the full extent of any such exposure.
Borrowings
The Company’s borrowing policy is determined by the Board. The
level of borrowing may be varied from time to time in the light of
prevailing circumstances subject to a maximum of 30% of the
Company’s total assets at any time. Any borrowings are covered by
investments in matching currencies to manage exposure to exchange
rate fluctuations.
The Board has reviewed the methods of financing available to the
Company including repo financing whereby a company participates in
sale and repurchase arrangements in connection with its portfolio.
Under these arrangements, a company sells fixed interest securities
and is contractually obliged to repurchase them at a fixed price on
a fixed date, whilst retaining economic exposure to securities
sold. The difference between the (lower) sale price and the later
purchase price is the cost (effectively interest) of the repo
financing. Repo financing agreements are currently being put in
place by the Company to ensure these are available to the Manager
if it is agreed by both the Manager and Board to use this method of
financing, either alongside or in place of the Company’s current
credit facility.
Key Performance Indicators
The Board reviews performance by reference to a number of Key
Performance Indicators which include the following:
•
Performance
•
Dividends
•
Premium/Discount
• Ongoing
Charges
Performance
As the Company’s objective is to achieve both high income and
capital growth, the performance is best measured in terms of total
return. There is no stock market index against which the Company’s
performance may be measured with any degree of relevance.
Therefore, the Board refers to a variety of relevant data and this
is reflected in both the Chairman’s Statement and the Manager’s
Investment Report on pages 3 to 6. The Board is satisfied with the
portfolio performance in the year.
When considering historical returns, the terms of the
reconstruction in 2012 allow direct comparison of the Company’s
financial information with that of its predecessor, City Merchants
High Yield Trust plc. It is therefore appropriate to combine the
information from both companies, and the graph that follows shows
the performance of the share price and net asset value (both on a
total return basis) for the last ten years.
Dividends and Dividend Payment Policy
Dividends form a key component of the total return to
shareholders and the Board currently targets dividends of 10p per
year. This target has been met in the year under review. Dividends
paid over the last ten years are shown in the table on page 2.
The Board’s Dividend Payment Policy is to pay dividends on a
regular quarterly basis in May, August, November and February in
respect of each accounting year. The timing of these regular
three-monthly payments means that shareholders do not have an
opportunity to vote on a final dividend. Recognising the importance
of shareholder engagement, and although not required by any
regulation, shareholders are given an opportunity to vote on this
policy at the forthcoming AGM.
Premium/Discount
The Board monitors the price of the Company’s shares in relation
to their net asset value and the premium/discount at which the
shares trade. The Board has limited influence on the price at which
the Company’s shares trade, which is mostly a function of investor
sentiment and demand for the shares. The ideal would be for the
shares to trade close to their net asset value. The following graph
shows the premium/discount through the year, ending with a premium
of 0.9%. As explained in the Chairman’s Statement, demand for
shares during the year resulted in the issue of 5,673,745 shares at
an average price of 184.5p. Subsequent to the year end, a further
475,000 shares have been issued.
Ongoing Charges
The expenses of managing the Company are carefully monitored by
the Board. The standard measure of these ongoing charges is
calculated by dividing the sum of such expenses over the course of
the year, including those charged to capital, by the average net
asset value. This ongoing charges figure provides a guide to the
effect on performance of annual operating costs. The Company’s
ongoing charges figure for the current year remained the same as
for the previous year, at 1.01%. The Board is satisfied with the
level of ongoing charges.
Financial Position
The Company’s balance sheet on page 37 shows the assets and
liabilities at the year end. A £20 million revolving credit
facility is available, though it was not used during the year.
Details of this facility, including applicable covenants, are shown
in note 7 to the financial statements.
Performance and Future Development
The performance and future development of the Company depend on
the success of the Company’s investment strategy. A review of the
Company’s performance, market background, investment activity and
strategy during the year, together with the investment outlook are
provided in the Chairman’s Statement and Manager’s Investment
Report on pages 3 to 6.
Annual Continuation Vote
The Articles of Association of the Company require that unless
an ordinary resolution is passed at or before the Annual General
Meeting (AGM) each year releasing the Directors from the obligation
to do so, the Directors shall convene a general meeting within six
months of the AGM at which a special resolution would be proposed
to wind up the Company. Having made enquiries, the Directors have
no reason to believe that the resolution to release them from that
obligation, which is included in the notice for the forthcoming AGM
on page 59, will not be passed.
Internal Control and Risk Management
The Directors acknowledge that they are responsible for ensuring
that the Company maintains a system of internal financial and
non-financial controls (internal controls) to safeguard
shareholders’ investments and the Company’s assets.
The Directors have robustly assessed the risks to which the
Company is exposed by reference to a risk control summary, which
maps the risks, mitigating controls in place and relevant
information reported to them. The resultant ratings of the
mitigated risks, in the form of a risk heat map, allow the
Directors to concentrate on those risks that are most significant
and also forms the basis of the list of principal risks and
uncertainties that follows this section. The ratings take into
account the Directors’ risk appetite and the ongoing monitoring by
the Manager.
The effectiveness of the Company’s internal control and risk
management system is reviewed at least twice a year by the Audit
Committee. The Audit Committee has received satisfactory reports on
both the Manager’s and the custodian’s operations and systems of
internal control from the Manager’s Compliance and Internal Audit
Officers. The Committee also received a comprehensive, and
satisfactory, report from the depositary at the year end Audit
Committee meeting. The Manager regularly reviews, against agreed
service standards, the performance of all third party providers
through formal and informal meetings, and by reference to
independently audited control reports issued by third parties. The
results of the Manager’s reviews are reported to and reviewed by
the Audit Committee. These various reports did not identify any
significant failings or weaknesses during the year and up to the
date of this annual financial report. If any had been identified,
the required remedial action would have been taken.
Reporting to the Board at each board meeting comprises, but is
not limited to: financial reports, including hedging and gearing;
performance against stock market indices and the Company’s peer
group; portfolio managers’ review, including of the market, the
portfolio, transactions and prospects; revenue forecasts; and
investment monitoring against guidelines.
The Board formally reviews the performance of the Manager
annually and informally at every board meeting. The Board has
reviewed and accepted the Manager’s ‘Whistleblowing’ policy under
which staff of Invesco Fund Managers Limited can, in confidence,
raise concerns about possible improprieties or irregularities in
matters affecting the Company.
Principal Risks and Uncertainties
The internal control and risk management system, identifies the
key risks to the Company. These principal risks are considered to
be:
Investment Objective
There can be no guarantee that the Company will meet its
investment objective. The Board has established investment
guidelines to ensure that investments are made in accordance with
the investment policy.
Investment Risk
The Company invests primarily in fixed interest securities and
equities, the majority of which are traded on the world’s major
securities markets. A significant fall in the markets and/or a
prolonged period of decline relative to other forms of investment
pose a significant risk to investors. The Board cannot mitigate the
effect of such external influences on the portfolio.
Other investment risks include market risk (currency, interest
rate and other risk) and credit risk, including counterparty risk.
A significant portion of the Company’s portfolio consists of
non-investment grade securities which by their nature have a higher
risk of default as well as the likelihood of price volatility. An
explanation of market risk and how this is addressed is given in
note 18 to the financial statements.
For a discussion of the economic and market conditions facing
the Company and the current and future performance of the portfolio
of the Company, see the Chairman’s Statement and the Manager’s
Investment Report. The investment style employed by the Manager is
set out under Investment Objective and Policy on pages 7 and 8.
Foreign Exchange Risk
The movement of exchange rates may have an unfavourable or
favourable impact on returns as the majority of the assets are
non-sterling denominated. This risk is mitigated by the use of
hedging and by the availability of using non-sterling denominated
borrowing. The foreign currency exposure of the Company is
monitored by the Manager on a daily basis and reviewed at each
Board meeting.
Derivatives
The Company may enter into derivative transactions for efficient
portfolio management. Derivative instruments can be highly volatile
and expose investors to a high risk of loss. Where used to hedge
risk there is a risk that the return on a derivative does not
exactly correlate to the returns on the underlying investment,
obligation or market sector being hedged against. If there is an
imperfect correlation, the Company may be exposed to greater loss
than if the derivative had not been entered into. During the year
the only derivatives entered into were forward currency
contracts.
Dividends
The dividends declared by the Board are based on income
generated from the portfolio and this is monitored regularly by the
Board. There can be no guarantee that any dividend target set by
the Board will be met.
Ordinary Shares and Discount
Past performance of the Company is not necessarily indicative of
future performance. The Company’s share price may go down as well
as up and investors may not get back the full value of their
investment. The share price may not reflect the NAV per share and
therefore trade at a discount. The Board, the Manager and the
Company’s corporate broker maintain an active dialogue with the aim
of ensuring that the market rating of the Company’s shares reflects
the underlying NAV. Buy back and issuance facilities help the
management of this process.
Although the shares trade on the London Stock Exchange, it is
possible that there may be times when there is not a liquid market
in the shares and shareholders may have difficulty selling
them.
Gearing of Returns through Borrowings
Performance may be geared by means of the Company’s credit
facility, which was available during the year, although not
used.
There is no guarantee that this facility will be renewable at
maturity on terms acceptable to the Company and any amounts owing
by the Company would then need to be funded by the sale of
investments. Both the Manager and Board monitor this position
closely.
Gearing and borrowing levels are managed by the portfolio
managers using their assessment of risk versus reward. Levels must
be within the guidelines set strategically by the Board. Gearing
for investment purposes will amplify the reduction in NAV in a
falling market, which in turn is likely to adversely affect the
Company’s share price.
If the Company were to enter into repo financing, there is no
guarantee that it will be possible to re-finance the financing at
maturity either at all or on terms that are acceptable to the
Company. In addition, repo financing introduces an element of
counterparty risk. In adverse market conditions, the risk of
counterparty default will be greater than at other times.
Operational Risk, including Reliance on Third Party
Providers
Disruption to, or failure of, any third party provider to carry
out its obligations could have a materially detrimental impact on
the effective operation of the Company, prevent accurate reporting
and monitoring of the Company’s financial position or affect the
ability of the Company to pursue its investment policy
successfully. Such failure could also expose the Company to
reputational risk. In addition, any damage to the reputation of the
Manager could result in potential counterparties and third parties
being unwilling to deal with the Manager and by extension the
Company.
Details of how the Board monitors the services provided by the
Manager and the other third party providers, and the key elements
designed to provide effective internal control, are included in the
internal control and risk management section on pages 10 and
11.
The risk that one of the portfolio managers might be
incapacitated or otherwise unavailable is mitigated by the fact
that they work within and are supported by the wider Invesco Fixed
Interest team.
Regulatory and Tax Related
The Company is subject to various laws and regulations including
from it being registered under the Companies (Jersey) Law 1991, its
status as a collective investment fund registered under the
Collective Investment Funds (Jersey) Law 1988, its listing on the
Official List of the UK Listing Authority, its admission to trading
on the London Stock Exchange and being an Alternative Investment
Fund under the Alternative Investment Fund Managers Directive. A
serious breach of regulatory rules may lead to suspension from the
Official List and from trading on the London Stock Exchange, a fine
or a qualified audit report.
Failure by the Company to maintain its non-UK tax resident
status may subject the Company to additional taxes which may
materially adversely affect the Company’s business and therefore
its share value.
The Board relies on the ongoing monitoring by its company
secretary, Manager and other professional advisers to ensure
compliance and reviews their regular reports to the Board.
Viability Statement
This Company is an investment company whose business consists of
investing the pooled funds of its shareholders to provide them with
a high income and capital growth over the long term, predominantly
from a portfolio of high yielding fixed income securities. Long
term for this purpose is considered to be at least five years and
the Directors have assessed the Company’s viability over that
period. However, the life of the Company is not intended to be
limited to that or any other period.
The main risk to the Company’s continuation is shareholder
dissatisfaction through failure to meet the Company’s investment
objective, through poor investment performance or the investment
policy not being appropriate in prevailing market conditions,
either of which could affect the demand for and liquidity of the
Company’s shares. Accordingly, failure to meet the Company’s
investment objective, and contributory market and investment risks,
are deemed by the Board to be principal risks of the Company and
are given particular consideration in the continuing assessment of
its long term viability.
The Company’s investment objective and policy are kept under
review. In essence they are the same as they have been since the
Company commenced trading in 2012, which in turn were unchanged
from those of the Company’s UK based predecessor, City Merchants
High Yield Trust plc. The continued relevance of the investment
objective and policy are underlined by the Company’s annual
continuation vote. Last year 99.5% of the votes registered were in
favour of continuation and the Board has no reason to believe that
the continuation resolution will not be passed at the forthcoming
and subsequent AGMs, particularly in view of the premium rating of
the shares throughout most of the year and the continued demand for
new shares as described on page 9.
Performance derives from returns for risk taken. The Manager’s
Investment Report on pages 5 and 6 sets out the current investment
strategy of the portfolio managers. The portfolio contains a high
level of relatively high–yielding non-investment grade bonds and
these carry a higher risk of default than investment grade paper.
This is discussed further in note 18 to the financial statements.
The Board has adopted investment limits within which the portfolio
managers operate. The Directors and the portfolio managers
constantly monitor the portfolio, its ratings and default risk. A
bond rating analysis of the portfolio at the year-end is shown on
page 16. Exposure is weighted towards higher quality issuers where
the risk of default is considered to be more remote.
The terms of the Company’s corporate transition in 2012 allow
direct comparison of the Company’s financial information with its
UK predecessor. Taking the two together, performance has been
strong for many years through different, and difficult, market
cycles – as shown by the ten year total return performance graph on
page 9. The investment policy has effectively been stress tested by
market events in 2007/8 and earlier cycles, and again in 2016 by
market volatility around the UK referendum vote (amongst other
things); these events affected performance but did not threaten the
viability of the Company. Whilst past performance may not be
indicative of performance in the future, the investment policy has
been consistent and the Company’s portfolio managers, overseen by
the Board, have been in place throughout those past periods.
Performance and demand for the Company’s shares are not things
that can be forecast, but there are no current indications that
either or both of these may falter materially over the next five
years so as to affect the Company’s viability.
As described in note 18.2 to the financial statements liquidity
risk is not viewed by the Directors as a significant risk. The
majority of the Company’s assets are readily realisable and amount
to many times the value of its short term liabilities and annual
operating costs. The Company is permitted to borrow up to a maximum
of 30% of the Company’s total assets but currently has no long term
debt obligations.
Based on the above analysis, the Directors confirm that they
have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due
over the five year period of their assessment.
Substantial Holdings in the Company
The Company has been notified of the following holdings of 3%
and over of the Company’s ordinary share capital carrying
unrestricted voting rights:
|
AT
28 FEBRUARY 2017 |
AT
31 DECEMBER 2016 |
AT
31 DECEMBER 2015 |
|
HOLDING |
% |
HOLDING |
% |
HOLDING |
% |
|
|
|
|
|
|
|
|
|
| Charles Stanley, stockbrokers |
9,163,221 |
9.9 |
8,997,138 |
9.8 |
8,233,962 |
9.5 |
|
| Invesco Perpetual |
6,881,470 |
7.5 |
7,101,392 |
7.7 |
7,101,392 |
8.2 |
|
| Hargreaves Lansdown, stockbrokers
(EO) |
6,745,975 |
7.3 |
6,427,195 |
7.0 |
5,066,796 |
5.8 |
|
| Alliance Trust Savings |
4,715,538 |
5.1 |
4,741,902 |
5.1 |
4,365,952 |
5.0 |
|
| EFG Harris Allday, stockbrokers |
4,456,275 |
4.8 |
4,507,865 |
5.0 |
4,140,553 |
4.8 |
|
| Redmayne Bentley, stockbrokers |
3,535,318 |
3.8 |
3,438,608 |
3.7 |
3,158,295 |
3.7 |
|
| Smith & Williamson |
3,187,445 |
3.5 |
3,259,026 |
3.5 |
3,206,880 |
3.7 |
|
| WH Ireland, stockbrokers |
2,964,029 |
3.2 |
2,918,126 |
3.1 |
2,402,864 |
2.8 |
|
| Court Funds Office |
2,649,959 |
2.9 |
2,716,995 |
3.0 |
3,068,352 |
3.6 |
|
| Rathbones |
2,640,283 |
2.9 |
2,682,259 |
2.9 |
2,650,458 |
3.1 |
|
| Brewin Dolphin, stockbrokers |
2,500,475 |
2.7 |
2,575,574 |
2.8 |
3,020,024 |
3.5 |
|
Board Diversity
The Company’s policy on diversity is set out on page 24. The
Board considers diversity, including the balance of skills,
knowledge, experience and gender amongst other factors when
reviewing its composition and appointing new directors, but does
not consider it appropriate to establish targets or quotas in this
regard. The Board comprises five non-executive directors of whom
one is a woman, thereby constituting 20% female representation.
Summary biographical details of the Directors are set out on page
21. The Company has no employees.
Social and Environmental Matters
As an investment company with no property or activities outside
investment, environmental policy has limited application. The
Manager considers various factors when evaluating potential
investments. While an investee company’s policy towards the
environment and social responsibility, including with regard to
human rights and the risk of involvement in human trafficking, is
considered as part of the overall assessment of risk and
suitability for the portfolio, the Manager does not necessarily
decide to, or not to, make an investment on environmental and
social grounds alone. The Manager applies the United Nations
Principles for Responsible Investment.
The Company is an investment vehicle and does not provide goods
or services in the normal course of business, or have customers.
Accordingly, the Directors consider that the Company is not
required to make any slavery or human trafficking statement under
the Modern Slavery Act 2015.
This Strategic Report was approved by the Board of Directors on
28 March 2017.
R&H Fund Services (Jersey) Limited
Company Secretary
.
INVESTMENTS IN ORDER OF VALUATION
at 31 December 2016
| ISSUER |
ISSUE |
MOODY/S&P RATING |
INDUSTRY |
COUNTRY OF INCORPORATION |
MARKET VALUE
£’000 |
% OF PORTFOLIO |
| Lloyds
Banking Group |
7.875% Perpetual |
NR/BB- |
Financials |
UK |
4,135 |
2.6 |
|
|
|
|
| 7% Var Perpetual |
NR/BB- |
3,098 |
2.0 |
|
|
|
|
|
7,233 |
4.6 |
| Aviva |
6.125% Perpetual |
Baa1/BBB |
Financials |
UK |
3,756 |
2.4 |
| General Accident |
8.875% Preference |
NR/NR |
|
|
1,645 |
1.1 |
|
|
|
|
|
5,401 |
3.5 |
| Société Genérale |
8.875% FRN Perpetual |
Ba2/BB+ |
Financials |
France |
4,322 |
2.8 |
| Telefonica Europe |
6.75% Perpetual |
Ba2/BB+ |
Telecommunications |
Netherlands |
2,184 |
1.4 |
|
5.875% Perpetual |
Ba2/BB+ |
|
|
1,257 |
0.8 |
|
4.9% Cnv 25 Sep 2017 |
NR/BB+ |
|
|
749 |
0.5 |
|
|
|
|
|
4,190 |
2.7 |
| US Treasury |
2.5% 15 Feb 2046 |
Aaa/AA+ |
Government Bonds |
USA |
4,162 |
2.7 |
| Intesa Sanpaolo |
8.375% FRN Perpetual |
Ba3/B+ |
Financials |
Italy |
3,106 |
2.0 |
|
7% Perpetual |
Ba3/B+ |
|
|
928 |
0.6 |
|
|
|
|
|
4,034 |
2.6 |
| Credit Agricole |
7.589% FRN Perpetual |
Ba1/BB+ |
Financials |
France |
2,347 |
1.5 |
|
7.5% Var Perpetual |
NR/NR |
|
|
920 |
0.6 |
|
8.125% FRN Perpetual |
Ba1/BB+ |
|
|
557 |
0.4 |
|
|
|
|
|
3,824 |
2.5 |
| Standard Chartered |
5.125% 06 Jun 2034 |
A3/BBB– |
Financials |
UK |
1,891 |
1.2 |
|
5.7% 26 Mar 2044 |
A3/BBB– |
|
|
1,588 |
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
3,479 |
2.2 |
| Balfour Beatty |
10.75p Cnv Preference |
NR/NR |
Industrials |
UK |
2,856 |
1.8 |
| Barclays |
9.25% Perpetual |
Ba1/BB+ |
Financials |
UK |
1,160 |
0.7 |
|
7% Perpetual |
NR/B+ |
|
|
949 |
0.6 |
|
8% Perpetual |
NR/B+ |
|
|
316 |
0.2 |
|
7.875% Var Perpetual |
Ba2/B+ |
|
|
231 |
0.2 |
|
|
|
|
|
2,656 |
1.7 |
| Premier Foods Finance |
6.5% 15 Mar 2021 (SNR) |
B2/B |
Consumer Goods |
UK |
2,567 |
1.6 |
| Marfrig |
8.375% 09 May 2018 |
B2/B+ |
Consumer Goods |
Netherlands |
1,775 |
1.1 |
|
9.5% 04 May 2020 (SNR) |
B2/B+ |
|
|
402 |
0.3 |
|
6.875% 24 June 2019 (SNR) |
B2/B+ |
|
|
334 |
0.2 |
|
|
|
|
|
2,511 |
1.6 |
| Enel |
7.75% 10 Sep 2075 |
Ba1/BB+ |
Utilities |
Italy |
1,568 |
1.0 |
|
6.625% Var 15 Sep 2076 |
Ba1/BB+ |
|
|
797 |
0.5 |
|
|
|
|
|
2,365 |
1.5 |
| Pizza Express |
8.625% 01 Aug 2022 |
Caa1/CCC+ |
Consumer Services |
UK |
1,151 |
0.7 |
|
6.625% 01 Aug 2021 |
B2/B |
|
|
1,015 |
0.7 |
|
|
|
|
|
2,166 |
1.4 |
| Koninklijke KPN |
6.875% FRN 14 Mar 2073 |
Ba2/BB |
Telecommunications |
Netherlands |
2,134 |
1.4 |
| Catlin Insurance |
7.249% FRN Perpetual |
NR/BBB+ |
Financials |
USA |
2,125 |
1.4 |
| Iron Mountain |
6.125% 15 Sep 2022 |
Ba3/BB- |
Financials |
USA |
2,083 |
1.3 |
| Citigroup Capital |
6.829% FRN 28 Jun 2067 |
Ba1/BB+ |
Financials |
USA |
2,033 |
1.3 |
| BHP Billiton |
6.75% FRN 19 Oct 2075 |
Baa2/BBB+ |
Basic Materials |
Australia |
1,099 |
0.7 |
|
6.5% Var 22 Oct 2077 |
Baa2/BBB+ |
|
|
890 |
0.6 |
|
|
|
|
|
1,989 |
1.3 |
| Greenko |
8% 01 Aug 2019 |
NR/B+ |
Utilities |
Netherlands |
1,985 |
1.3 |
| Origin Energy |
7.875% 16 Jun 2071 |
Ba2/BB |
Utilities |
Australia |
1,820 |
1.2 |
| Constellium |
7% 15 Jan 2023 (SNR) |
Caa1/CCC+ |
Basic Materials |
Netherlands |
861 |
0.6 |
|
4.625% 15 May 2021 |
Caa1/CCC+ |
|
|
574 |
0.4 |
|
5.75% 15 May 2024 |
Caa1/CCC+ |
|
|
379 |
0.2 |
|
|
|
|
|
1,814 |
1.2 |
| Electricite De France |
6% Perpetual |
Baa3/BB |
Utilities |
France |
1,245 |
0.8 |
|
5.875% Perpetual |
Baa3/BB |
|
|
549 |
0.4 |
|
|
|
|
|
1,794 |
1.2 |
| Santos Finance |
8.25% FRN 22 Sep 2070 |
NR/BB+ |
Oil and Gas |
Australia |
1,779 |
1.1 |
| REA Finance |
8.75% 31 Aug 2020 |
NR/NR |
Consumer Goods |
Netherlands |
1,773 |
1.1 |
| Pension Insurance |
8% 23 Nov 2016 |
NR/NR |
Financials |
UK |
1,768 |
1.1 |
| HSBC |
5.25% 14 Mar 2044 |
A2/BBB+ |
Financials |
UK |
527 |
0.3 |
|
4.25% 14 Mar 2024 |
A2/BBB+ |
|
|
526 |
0.3 |
|
6.375% FRN Perpetual |
Baa3/NR |
|
|
492 |
0.3 |
|
6.375% Cnv Perpetual |
Baa3/NR |
|
|
207 |
0.1 |
|
|
|
|
|
1,752 |
1.0 |
| J. C. Penney |
8.125% 01 Oct 2019 (SNR) |
B3/B– |
Consumer Services |
USA |
1,050 |
0.7 |
|
6.375% 15 Oct 2036 (SNR) |
B3/B– |
|
|
681 |
0.4 |
|
|
|
|
|
1,731 |
1.1 |
| Alcatel-Lucent |
6.45% 15 Mar 2029 |
WR/BB+ |
Technology |
USA |
843 |
0.5 |
|
6.5% 15 Jan 2028 |
WR/BB+ |
|
|
837 |
0.5 |
|
|
|
|
|
1,680 |
1.0 |
| Thames Water |
7.75% 01 Apr 2019 |
B1/NR |
Financials |
UK |
1,124 |
0.7 |
|
5.875% 15 Jul 2022 (SNR) |
B1/NR |
|
|
525 |
0.3 |
|
|
|
|
|
1,649 |
1.0 |
| Enterprise Inns |
6.375% 15 Feb 2022 (SNR) |
NR/BB– |
Consumer Services |
UK |
1,325 |
0.9 |
|
6.5% 06 Dec 2018 (SNR) |
NR/BB– |
|
|
259 |
0.2 |
|
|
|
|
|
1,584 |
1.1 |
| VRX Escrow |
4.5% 15 May 2023 (SNR) |
Caa1/B– |
Health Care |
Canada |
853 |
0.5 |
|
5.375% 29 Feb 2020 |
Caa1/B– |
|
|
459 |
0.3 |
|
6.125% 15 Apr 2025 |
Caa1/B– |
|
|
248 |
0.2 |
|
|
|
|
|
1,560 |
1.0 |
| Obrascon Huarte Lain |
5.5% 15 Mar 2023 (SNR) |
Caa1/NR |
Industrials |
Spain |
1,507 |
1.0 |
| Standard Life |
6.75% Perpetual |
A3/A– |
Financials |
UK |
1,108 |
0.7 |
|
5.5% 04 Dec 2042 |
Baa2/BBB+ |
|
|
366 |
0.2 |
|
|
|
|
|
1,474 |
0.9 |
| Bombardier |
6% 15 Oct 2022 |
B3/B– |
Industrials |
Canada |
1,143 |
0.7 |
|
7.5% 15 Mar 2025 |
B3/B– |
|
|
319 |
0.2 |
|
|
|
|
|
1,462 |
0.9 |
| UniCredit International Bank |
8.125% FRN
Perpetual
8.5925% FRN Perpetual |
B1/B+ B1/B+ |
Financials |
Luxembourg |
927
519 |
0.6
0.3 |
|
|
|
|
|
1,446 |
0.9 |
| UBS |
7% Perpetual |
NR/BB+ |
Financials |
Switzerland |
731 |
0.5 |
|
6.875% Var Perpetual |
NR/BB+ |
|
|
692 |
0.4 |
|
|
|
|
|
1,423 |
0.9 |
| Solvay Finance |
5.869% Var Perpetual |
Ba1/BB |
Basic Materials |
France |
961 |
0.6 |
|
5.425% Perpetual |
Ba1/BB |
|
|
436 |
0.3 |
|
|
|
|
|
1,397 |
0.9 |
| Ecclesiastical Insurance Office |
8.625% Preference |
NR/NR |
Financials |
UK |
1,345 |
0.9 |
| Galapagos |
7% 15 Jun 2022 |
Caa2/CCC |
Industrials |
Luxembourg |
1,317 |
0.8 |
| TVL Finance |
8.5% 15 May 2023 (SNR) |
B3/B- |
Consumer Services |
UK |
1,274 |
0.8 |
| Virgin Money |
8.75% Perpetual |
NR/NR |
Financials |
UK |
1,231 |
0.8 |
| Tesco |
6.15% 15 Nov 2037 (SNR) |
Ba1/BB+ |
Consumer Goods |
UK |
775 |
0.5 |
|
5.2% 05 Mar 2057 |
Ba1/BB+ |
|
|
446 |
0.3 |
|
|
|
|
|
1,221 |
0.8 |
| Vougeot Bidco |
7.875% 15 Jul 2020 |
B2/B |
Consumer Services |
UK |
1,186 |
0.8 |
| Beazley |
5.875% 04 Nov 2026 |
NR/NR |
Financials |
Ireland |
1,176 |
0.8 |
| Orange |
5.875% Perpetual |
Baa3/BBB– |
Telecommunications |
France |
1,175 |
0.8 |
| Trinseo |
6.75% 01 May 2022 (SNR) |
B3/B+ |
Industrials |
Luxembourg |
630 |
0.4 |
|
6.375% 01 May 2022 |
B3/NR |
|
|
526 |
0.3 |
| Time Warner Cable |
5.25% 15 Jul 2042 |
Ba1/BBB– |
Consumer Services |
USA |
1,146 |
0.7 |
| Southern Water |
|
|
|
|
|
|
| (Greensands) |
8.5% 15 Apr 2019 |
NR/BB- |
Utilities |
UK |
1,139 |
0.7 |
| Chemours |
6.625% 15 May 2023 (SNR) |
B1/B+ |
Basic Materials |
USA |
1,035 |
0.7 |
|
7% 15 May 2025 |
B1/B+ |
|
|
96 |
0.1 |
|
|
|
|
|
1,131 |
0.8 |
| AA Bond Co |
5.5% Var 31 Jul 2043 (SNR) |
NR/B+ |
Industrials |
UK |
1,125 |
0.7 |
| Direct Line Insurance |
9.25% FRN 27 Apr 2042 |
Baa1/BBB+ |
Financials |
UK |
1,105 |
0.7 |
| Deutsche Bank |
7.125% Perpetual |
B1/B+ |
Financials |
Germany |
1,054 |
0.7 |
| Ladbrokes |
5.125% 8 Aug 2023 (SNR) |
NR/BB |
Consumer Services |
UK |
1,039 |
0.7 |
| Codere Finance 2 |
|
|
|
|
|
|
| (Luxembourg) S.A. |
7.625% 01 Nov 2021 |
B2/B |
Consumer Services |
Luxembourg |
1,020 |
0.7 |
| Stretford 79 |
6.25% 15 Jul 2021 (SNR) |
B2/B |
Consumer Services |
UK |
1,014 |
0.7 |
| BBVA |
9% Perpetual |
NR/NR |
Financials |
Spain |
1,013 |
0.7 |
| JRP Group |
9% 26 Oct 2026 |
NR/NR |
Financials |
UK |
1,008 |
0.6 |
| SFR |
7.375% 01 May 2026 (SNR) |
B1/B+ |
Telecommunications |
France |
954 |
0.6 |
| William Hill |
4.875% 07 Sep 2023 (SNR) |
Ba1/BB+ |
Consumer Services |
UK |
947 |
0.6 |
| XPO Logistics |
6.5% 15 Jun 2022 (SNR) |
B2/B+ |
Industrials |
USA |
834 |
0.5 |
|
6.125% 01 Sep 2023 |
B2/B+ |
|
|
102 |
0.1 |
|
|
|
|
|
936 |
0.6 |
| Paprec |
7.375% 01 Apr 2023 (SNR) |
B2/B– |
Consumer Services |
France |
926 |
0.6 |
| Stonegate Pub |
|
|
|
|
|
|
| Company |
5.75% 15 Apr 2019 |
B2/B |
Consumer Services |
UK |
917 |
0.6 |
| Royal Bank Of Scotland |
8% Cnv FRN Perpetual |
B1u/B |
Financials |
UK |
543 |
0.3 |
|
8.625% FRN Perpetual |
B1u/B |
|
|
362 |
0.2 |
|
|
|
|
|
905 |
0.5 |
| Virgin Media Finance |
6.25% 28 Mar 2029 |
Ba3/BB– |
Consumer Services |
UK |
503 |
0.3 |
|
6% 15 Apr 2021 |
Ba3/BB– |
|
|
393 |
0.3 |
|
|
|
|
|
896 |
0.6 |
| Manutencoop Facility |
|
|
|
|
|
|
| Management |
8.5% 01 Aug 2020 |
B2/B |
Consumer Services |
Italy |
887 |
0.6 |
| Boparan Finance |
5.5% 15 Jul 2021 |
B2/B+ |
Consumer Goods |
UK |
878 |
0.6 |
| Bormioli Rocco |
10% 01 Aug 2018 |
B3/B |
Consumer Goods |
Luxembourg |
878 |
0.6 |
| AXA |
6.379% FRN Perpetual |
Baa1/BBB |
Financials |
France |
864 |
0.6 |
| Banco Popular Espanol |
11.5% Perpetual |
NR/NR |
Financials |
Spain |
860 |
0.6 |
| Scottish Widows |
5.5% 16 Jun 2023 |
Baa1/BBB+ |
Financials |
UK |
859 |
0.6 |
| Zobele |
7.875% 01 Feb 2018 |
B2/B+ |
Consumer Goods |
Italy |
857 |
0.6 |
| Diamond 1 |
5.45% 15 Jun 2023 |
Baa3/BBB– |
Technology |
USA |
850 |
0.5 |
| Rapid |
6.625% 15 Nov 2020 (SNR) |
B2/B+ |
Oil and Gas |
Germany |
835 |
0.5 |
| BNP Paribas Fortis |
Cnv FRN Perpetual |
Ba3/BB+ |
Financials |
Belgium |
835 |
0.5 |
| Paternoster |
8.5% 15 Feb 2023 (SNR) |
Caa2/CCC+ |
Industrials |
Germany |
821 |
0.5 |
| Phoenix Life |
7.25% Perpetual |
WR/NR |
Financials |
UK |
795 |
0.5 |
| PrestigeBidCo |
6.25% 15 Dec 2023 (SNR) |
B2/B |
Consumer Services |
Germany |
794 |
0.5 |
| OHL Investments |
4% Cnv 25 Apr 2018 |
NR/NR |
Industrials |
Luxembourg |
785 |
0.5 |
| Owens-Brockway |
5.875% 15 Aug 2023 |
B1/BB– |
Industrials |
USA |
777 |
0.5 |
| Peel Land & Property |
|
|
|
|
|
|
| Investments |
8.375% Var 30 Apr 2040 |
NR/BBB |
Financials |
UK |
723 |
0.5 |
| Play Topco |
7.75% 28 Feb 2020 |
Caa1/B- |
Telecommunications |
Luxembourg |
713 |
0.5 |
| CGG Veritas |
6.875% 15 Jan 2022 |
Caa2/CCC |
Oil and Gas |
France |
523 |
0.3 |
|
6.5% 01 Jun 2021 (SNR) |
Caa2/CCC |
|
|
187 |
0.1 |
|
|
|
|
|
710 |
0.4 |
| Altice |
7.5% 15 May 2026 |
B1/BB– |
Telecommunications |
Luxembourg |
532 |
0.3 |
|
6.625% 15 Feb 2023 |
B1/BB– |
|
|
167 |
0.1 |
|
|
|
|
|
699 |
0.4 |
| Takko |
9.875% 15 Apr 2019 |
Caa1/CCC+ |
Consumer Goods |
Luxembourg |
692 |
0.4 |
| InterGen Services |
7.5% 30 Jun 2021 |
B1/B |
Utilities |
Netherlands |
676 |
0.4 |
| Mercury Bondco |
8.25% 30 May 2021 (SNR) |
B3/B |
Consumer Goods |
UK |
673 |
0.4 |
| ESAL |
6.25% 05 Feb 2023 (SNR) |
NR/BB |
Consumer Goods |
Austria |
650 |
0.4 |
| BNP Paribas |
7.375% Var Perpetual |
Ba1/BBB– |
Financials |
France |
630 |
0.4 |
| Unitymedia Hessen |
5.625% 15 Apr 2023 |
Ba3/BB– |
Consumer Services |
Germany |
586 |
0.4 |
| Wagamama Finance |
7.875% 01 Feb 2020 (SNR) |
B2/B |
Consumer Services |
UK |
586 |
0.4 |
| La Financiere Atalian |
7.25% 15 Jan 2020 |
B2/B |
Industrials |
France |
579 |
0.4 |
| General Motors |
Wts 10 Jul 2019 |
NR/NR |
Consumer Goods |
USA |
564 |
0.4 |
| First Quantum Minerals |
7.25% 15 May 2022 |
Caa1/B– |
Basic Materials |
Canada |
559 |
0.4 |
| Commerzbank |
8.125% 19 Sep 2023 |
Ba1/BBB– |
Financials |
Germany |
546 |
0.4 |
| Bracken Midco One |
10.5% 15 Nov 2021 |
NR/B |
Financials |
Ireland |
523 |
0.3 |
| Legal & General |
6.385% FRN Perpetual |
Baa2/BBB+ |
Financials |
UK |
500 |
0.3 |
| AMC Entertainment |
6.375% 15 Nov 2024 |
B2/B+ |
Financials |
USA |
498 |
0.3 |
| M&G Finance |
7.5% FRN Perpetual |
NR/NR |
Industrials |
Luxembourg |
494 |
0.3 |
| Principality Building |
|
|
|
|
|
|
| Society |
7% Perpetual |
Ba3/NR |
Financials |
UK |
490 |
0.3 |
| Arqiva Broadcast |
|
|
|
|
|
|
| Finance |
9.5% 31 Mar 2020 |
B3/NR |
Telecommunications |
UK |
487 |
0.3 |
| New Look |
6.5% 01 Jul 2022 (SNR) |
B1/B |
Consumer Goods |
UK |
476 |
0.3 |
| Thomas Cook |
6.25% 15 Jun 2022 (SNR) |
B1/B |
Consumer Services |
UK |
476 |
0.3 |
| UniCredit |
8% FRN Perpetual |
NR/NR |
Financials |
Italy |
446 |
0.3 |
| J Sainsbury |
6.5% Var Perpetual |
NR/NR |
Consumer Services |
UK |
435 |
0.3 |
| Eco Services Operations |
8.5% 01 Nov 2022 (SNR) |
Caa2/B– |
Basic Materials |
USA |
431 |
0.3 |
| Credit Suisse |
6.25% Var Perpetual |
NR/BB |
Financials |
Switzerland |
418 |
0.3 |
| Snai Spa |
6.375% 7 Nov 2021 (SNR) |
B2/B |
Consumer Services |
Italy |
407 |
0.3 |
| Inovyn Finance |
6.25% 15 May 2021 (SNR) |
B2/B |
Basic Materials |
UK |
399 |
0.3 |
| Rothschilds |
|
|
|
|
|
|
| Continuation
Finance |
FRN Perpetual |
NR/NR |
Financials |
Netherlands |
392 |
0.3 |
| CEMEX SAB |
6.125% 05 May 2025 |
NR/B+ |
Industrials |
Mexico |
381 |
0.2 |
| Cognita Financing |
7.75% 15 Aug 2021 (SNR) |
B2/B |
Consumer Services |
UK |
381 |
0.2 |
| Nationale-Nederlanden |
4.625% 08 Apr 2044 |
Baa3/BBB |
Financials |
Netherlands |
375 |
0.2 |
| Puma Energy |
6.75% 01 Feb 2021 |
Ba2/NR |
Oil and Gas |
Luxembourg |
325 |
0.2 |
| Novae |
6.5% 27 Apr 2017 |
Baa3/NR |
Financials |
UK |
314 |
0.2 |
| Cable Communication |
5% 15 Oct 2023 |
B1/B+ |
Telecommunications |
Netherlands |
298 |
0.2 |
| Whitbread |
3.375% 16 Oct 2025 (SNR) |
NR/NR |
Consumer Services |
UK |
266 |
0.2 |
| Rothesay Life |
8% 30 Oct 2025 |
NR/NR |
Financials |
UK |
260 |
0.2 |
| Spectrum Brands |
4% 01 Oct 2026 (SNR) |
B2/BB– |
Consumer Goods |
USA |
203 |
0.1 |
| Peabody Energy |
4.75% Cnv 15 Dec 2066 |
WR/NR |
Basic Materials |
USA |
191 |
0.1 |
| Picard Bondco |
7.75% 01 Feb 2020 |
B3/B– |
Consumer Goods |
Luxembourg |
187 |
0.1 |
| Enquest |
7% 15 Apr 2022 |
Caa2/CCC+ |
Oil and Gas |
UK |
179 |
0.1 |
| FAGE International |
5.625% 15 Aug 2026 (SNR) |
B1/BB– |
Consumer Goods |
Luxembourg |
163 |
0.1 |
| Charter Communications |
|
|
|
|
|
|
| Operating |
6.484% 23 Oct 2045 |
Ba1/BBB– |
Telecommunications |
USA |
117 |
0.1 |
| CIS General Insurance |
12% FRN 08 May 2025 |
NR/NR |
Financials |
UK |
109 |
0.1 |
| Abengoa |
8.875% 05 Feb 2018 (SNR) |
Ca/CCC– |
Oil and Gas |
Spain |
34 |
— |
|
7.75% 01 Feb 2020 (SNR) |
Ca/CCC– |
|
|
18 |
— |
|
|
|
|
|
52 |
— |
|
|
|
|
|
155,718 |
100.0 |
Abbreviations used in the above valuation:
Cnv:
Convertible
FRN: Floating Rate Note
SNR: Senior
Var: Variable
Wts: Warrants
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
in respect of the preparation of financial statements
The Directors are responsible for preparing the annual financial
report in accordance with applicable laws and regulations.
Company law requires the Directors to prepare financial
statements for each financial period. Under that law the Directors
have elected to prepare the financial statements in accordance with
International Financial Reporting Standards as adopted by the
European Union (IFRSs). The financial statements are required by
law to give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that
period.
International Accounting Standard 1 requires that financial
statements present fairly for each financial year the Company’s
financial position, financial performance and cash flows. This
requires the faithful representation of the effects of
transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities,
income and expenses set out in the International Accounting
Standards Board’s ‘Framework for the preparation and presentation
of financial statements’. In virtually all circumstances, a fair
presentation will be achieved by compliance with all applicable
IFRSs.
In preparing these financial statements, the Directors are
required to:
• properly select and apply accounting policies and
then apply them consistently;
• present information, including accounting
policies, in a manner that provides relevant, reliable, comparable
and understandable information;
• provide additional disclosures when compliance
with specific requirements in IFRSs are insufficient to enable
users to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and
financial performance; and
• make an assessment of the Company’s ability to
continue as a going concern.
The financial statements have been prepared on a going concern
basis. When considering this, the Directors took into account the
annual shareholders’ continuation vote (as explained in detail on
page 10) and the following: the Company’s investment objective and
risk management policies, the nature of the portfolio and
expenditure and cash flow projections. As a result, they determined
that the Company has adequate resources, an appropriate financial
structure and suitable management arrangements in place to continue
in operational existence for the foreseeable future.
The Directors are responsible for keeping proper accounting
records that disclose with reasonable accuracy at any time the
financial position of the Company and which enable them to ensure
that the accounts comply with the Companies (Jersey) Law 1991. They
are also responsible for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Corporate Governance Statement and a
Directors’ Report that comply with that law and those
regulations.
The Directors of the Company, who are listed on page 21, each
confirm to the best of their knowledge that:
• the financial statements, which have been prepared
in accordance with applicable accounting standards, give a true and
fair view of the assets, liabilities, financial position and profit
or loss of the Company;
• this annual financial report includes a fair
review of the development and performance of the business and the
position of the Company, together with a description of the
principal risks and uncertainties that it faces; and
• they consider that this annual financial report,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Company’s
position and performance, business model and strategy.
Clive Nicholson
Chairman
Signed on behalf of the Board of
Directors
28 March 2017
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December
|
2016 |
2015 |
|
|
|
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
|
NOTES |
|
|
|
|
|
|
| Profit/(loss) on investments at fair
value |
11 |
— |
19,088 |
19,088 |
— |
(5,662) |
(5,662) |
| Exchange differences |
|
— |
(60) |
(60) |
— |
(216) |
(216) |
| (Loss)/profit on derivative
instruments |
|
|
|
|
|
|
|
| – currency hedges |
|
— |
(9,213) |
(9,213) |
— |
1,487 |
1,487 |
| Income |
4 |
10,695 |
— |
10,695 |
10,009 |
— |
10,009 |
| Investment management fees |
5 |
(794) |
(428) |
(1,222) |
(745) |
(401) |
(1,146) |
| Other expenses |
6 |
(404) |
— |
(404) |
(410) |
(1) |
(411) |
| Profit/(loss) before finance
costs |
|
|
|
|
|
|
|
| and taxation |
|
9,497 |
9,387 |
18,884 |
8,854 |
(4,793) |
4,061 |
| Finance costs |
7 |
(29) |
(15) |
(44) |
(28) |
(15) |
(43) |
| Profit/(loss) before taxation |
|
9,468 |
9,372 |
18,840 |
8,826 |
(4,808) |
4,018 |
| Taxation |
8 |
(171) |
— |
(171) |
(127) |
— |
(127) |
| Profit/(loss) after taxation |
|
9,297 |
9,372 |
18,669 |
8,699 |
(4,808) |
3,891 |
| Return per ordinary share |
9 |
10.5p |
10.5p |
21.0p |
10.4p |
(5.8)p |
4.6p |
|
|
|
|
|
|
|
|
|
The total column of this statement represents the Company’s
statement of comprehensive income, prepared in accordance with
International Financial Reporting Standards as adopted by the EU.
The profit after tax is the total comprehensive income. The
supplementary revenue and capital columns are both prepared in
accordance with the Statement of Recommended Practice issued by the
Association of Investment Companies. All items in the above
statement derive from continuing operations. No operations were
acquired or discontinued in the year.
.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
|
|
STATED CAPITAL
£’000 |
CAPITAL
RESERVE
£’000 |
REVENUE RESERVE
£’000 |
TOTAL
£’000 |
|
NOTES |
|
|
|
|
| At 31 December 2014 |
|
128,209 |
17,610 |
2,392 |
148,211 |
| Net proceeds from issue of new
shares |
15 |
10,190 |
— |
— |
10,190 |
| Total comprehensive income for the
year |
|
— |
(4,808) |
8,699 |
3,891 |
| Dividends paid |
10 |
(76) |
— |
(8,240) |
(8,316) |
|
|
|
|
|
|
| At 31 December 2015 |
|
138,323 |
12,802 |
2,851 |
153,976 |
| Net proceeds from issue of new
shares |
15 |
10,401 |
— |
— |
10,401 |
| Total comprehensive income for the
year |
|
— |
9,372 |
9,297 |
18,669 |
| Dividends paid |
10 |
(115) |
— |
(8,738) |
(8,853) |
|
|
|
|
|
|
| At 31 December 2016 |
|
148,609 |
22,174 |
3,410 |
174,193 |
.
BALANCE SHEET
AT 31 DECEMBER
|
NOTES |
2016
£’000 |
2015
£’000 |
|
|
|
|
| Non-current assets |
|
|
|
| Investments held at fair
value through profit or loss |
11 |
155,718 |
141,833 |
|
|
|
|
| Current assets |
|
|
|
| Other receivables |
12 |
3,056 |
2,936 |
| Derivative financial
instruments – unrealised net profit |
13 |
1,251 |
— |
| Cash and cash
equivalents |
|
14,593 |
10,730 |
|
|
18,900 |
13,666 |
| Current liabilities |
|
|
|
| Other payables |
14 |
(425) |
(432) |
| Derivative financial
instruments – unrealised net loss |
13 |
— |
(1,091) |
|
|
|
|
|
|
(425) |
(1,523) |
|
|
|
|
| Net current assets |
|
18,475 |
12,143 |
| Net assets |
|
174,193 |
153,976 |
| Capital and reserves |
|
|
|
| Stated capital |
15 |
148,609 |
138,323 |
| Capital reserve |
16 |
22,174 |
12,802 |
| Revenue reserve |
16 |
3,410 |
2,851 |
|
|
|
|
| Shareholders’ funds |
|
174,193 |
153,976 |
|
|
|
|
| Net asset value per ordinary
share |
17 |
189.32p |
178.34p |
These financial statements were approved and authorised for
issue by the Board of Directors on 28 March
2017.
Signed on behalf of the Board of
Directors
Clive Nicholson
Chairman
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER
|
2016
£’000 |
2015
£’000 |
| Cash flows from operating
activities |
|
|
| Profit before tax |
18,840 |
4,018 |
| Taxation |
(171) |
(127) |
| Adjustment for: |
|
|
| Purchases of
investments |
(36,697) |
(38,740) |
| Sales of
investments |
41,900 |
26,994 |
|
|
|
|
5,203 |
(11,746) |
|
|
|
| (Profit)/loss on
investments at fair value |
(19,088) |
5,662 |
| Exchange
differences |
(5) |
(71) |
| Net cash movement from
derivative instruments – |
|
|
| currency
hedges |
(2,342) |
1,557 |
| Finance costs |
44 |
43 |
| Operating cash flows before
movements in working capital |
2,481 |
(664) |
| Increase in receivables |
(120) |
(103) |
| (Decrease)/increase in payables |
(7) |
14 |
| Net cash flows from operating
activities after taxation |
2,354 |
(753) |
| Cash flows from financing
activities |
|
|
| Finance cost paid |
(44) |
(43) |
| Net proceeds from issue of
shares |
10,401 |
10,194 |
| Net equity dividends paid – note
10 |
(8,853) |
(8,316) |
| Net cash generated from financing
activities |
1,504 |
1,835 |
| Net increase in cash and cash
equivalents |
3,858 |
1,082 |
| Exchange differences |
5 |
71 |
| Movement in cash and cash
equivalents |
3,863 |
1,153 |
| Cash and cash equivalents at
beginning of year |
10,730 |
9,577 |
| Cash and cash equivalents at end of
the year |
14,593 |
10,730 |
| Reconciliation of cash and cash
equivalents to the |
|
|
| Balance Sheet is as
follows: |
|
|
| Cash held at custodian |
4,543 |
1,640 |
| Short-Term Investment Company
(Global Series) plc, |
|
|
| money market fund |
10,050 |
9,090 |
| Cash and cash equivalents |
14,593 |
10,730 |
| Cash flows from operating activities
includes: |
|
|
| Dividends received |
596 |
684 |
| Interest received |
9,809 |
9,153 |
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December
2016
1. Principal
Activity
The Company is a closed-end investment company incorporated in
Jersey and operates under the Companies (Jersey) Law 1991. The
principal activity of the Company is investment in a diversified
portfolio of high-yielding fixed-interest securities as set out in
the Company’s Investment Objective and Policy.
2. Principal
Accounting Policies
Accounting policies describe the Company’s approach to
recognising and measuring transactions during the year and the
position of the Company at the year end.
The principal accounting policies adopted in the preparation of
these financial statements are set out below.
(a) Basis of
Preparation
(i) Accounting Standards Applied
The financial statements have been prepared on an historical
cost basis, except for the measurement at fair value of investments
and derivatives, and in accordance with the applicable
International Financial Reporting Standards (IFRS) and
interpretations issued by the International Financial Reporting
Interpretations Committee as adopted by the European Union. The
standards are those endorsed by the European Union and effective at
the date the financial statements were approved by the Board.
Where presentational guidance set out in the Statement of
Recommended Practice (SORP) ‘Financial Statements of Investment
Trust Companies and Venture Capital Trusts’, issued by the
Association of Investment Companies in November 2014, is consistent with the
requirements of IFRS, the Directors have sought to prepare the
financial statements on a basis compliant with the recommendations
of the SORP. The supplementary information which analyses the
statement of comprehensive income between items of a revenue and a
capital nature is presented in accordance with this.
(ii) Going Concern
As explained under ‘Annual Continuation Vote’ on page 10, the
Company has an annual continuation vote. However, as also explained
in that note the Directors believe shareholders will vote for the
Company to continue. Accordingly, the financial statements have
been prepared on a going concern basis and the accounts do not
include any adjustments which might arise from cessation of the
Company.
(iii) Adoption of New and Revised Standards
New and revised standards and interpretations that became
effective during the year had no significant impact on the amounts
reported in these financial statements but may impact accounting
for future transactions and arrangements.
At the date of authorising these financial statements, the
following standards and interpretations which have not been applied
in these financial statements were in issue but not yet effective
(and in some cases had not yet been adopted by the EU).
• IFRS 9: Financial Instruments (2014) (effective 1 January 2018).
• Amendment to IAS 7: Disclosure initiative — Statement of
Cashflows (effective 1 January
2017).
The Directors do not expect the adoption of the above standards
and interpretations (or any other standards and interpretations
which are in issue but not effective) will have a material impact
on the financial statements of the Company in future periods.
(iv) Critical Accounting Estimates and Judgements
The preparation of the financial statements may require the
Directors to make estimations where uncertainty exists. It also
requires the Directors to exercise judgement in the process of
applying the accounting policies.
2. Principal
Accounting Policies (continued)
(b) Foreign
Currency
(i) Functional and Presentation Currency
The financial statements are presented in sterling, which is the
Company’s functional and presentation currency and the currency in
which the Company’s stated capital and expenses are denominated, as
well as certain of its income, assets and liabilities.
(ii) Transactions and Balances
Transactions in foreign currency, whether of a revenue or
capital nature, are translated to sterling at the rate of exchange
ruling on the date of such transactions. Foreign currency assets
and liabilities are translated to sterling at the rates of exchange
ruling at the balance sheet date. All profits and losses, whether
realised or unrealised, are recognised in the statement of
comprehensive income and are taken to capital reserve or revenue
reserve, depending on whether the gain or loss is capital or
revenue in nature.
(c) Financial
Instruments
(i) Recognition of Financial Assets and
Financial Liabilities
Financial assets and financial liabilities are recognised when
the Company becomes a party to the contractual provisions of the
instrument. These are offset if the Company has a legally
enforceable right to set off the recognised amounts and interests
and intends to settle on a net basis.
(ii) Derecognition of Financial Assets
Financial assets are derecognised when the contractual rights to
the cash flows from the asset expire, or it transfers the right to
receive the contractual cash flows on the financial asset in a
transaction in which substantially all the risks and rewards of
ownership of the financial asset are transferred. Any interest in
the transferred financial asset that is created or retained by the
Company is recognised as an asset.
(iii) Derecognition of Financial Liabilities
Financial liabilities are derecognised when the Company’s
obligations are discharged, cancelled or expired.
(iv) Trade Date Accounting
Purchases and sales of financial assets are recognised on trade
date, being the date on which the Company commits to purchase or
sell the assets.
(v) Classification of Financial Assets and Financial
Liabilities
Financial Assets
Investments are classified as held at fair value through profit
or loss as the investments are managed and their performance
evaluated on a fair value basis in accordance with the Company’s
documented investment strategy and this is also the basis on which
information about investments is provided internally to the
Board.
Financial assets held at fair value through profit or loss are
initially recognised at fair value, which is taken to be their
cost, with transaction costs expensed in the statement of
comprehensive income, and are subsequently valued at fair
value.
For investments that are actively traded in organised financial
markets, fair value is determined by reference to stock exchange
quoted bid prices at the balance sheet date. For investments that
are not actively traded or where active stock exchange quoted bid
prices are not available, fair value is determined by reference to
a variety of valuation techniques including broker quotes and price
modelling.
Financial Liabilities
Financial liabilities, including borrowings, are initially
measured at fair value, net of transaction costs and are
subsequently measured at amortised cost using the effective
interest method.
(d) Derivatives and
Hedging
Derivative instruments are valued at fair value in the balance
sheet. Hedge accounting has not been adopted.
Forward currency contracts entered into for hedging purposes are
valued at the appropriate forward exchange rate ruling at the
balance sheet date and any profits and losses are recognised in the
statement of comprehensive income and taken to capital.
(e) Cash and Cash
Equivalents
Cash and cash equivalents may comprise cash (including short
term deposits which are readily convertible to a known amount of
cash and are subject to an insignificant risk of change in value)
as well as cash equivalents, including money market funds.
(f) Revenue
Recognition
All income is recognised in the statement of comprehensive
income. Interest income arising from fixed income securities is
recognised using the effective interest method. Dividend income
arises from equity investments held and is recognised on the date
investments are marked ‘ex-dividend’. Deposit interest is taken
into account on an accruals basis.
(g) Expenses and
Finance Costs
All expenses are accounted for on an accruals basis and are
recognised in the statement of comprehensive income. Investment
management fees and finance costs are allocated 35% to capital and
65% to revenue in accordance with the Board’s expected long-term
split of returns, in the form of capital gains and income
respectively, from the investment portfolio. Except for custodian
dealing costs, all other expenses are charged through revenue.
(h) Tax
Overseas interest and dividends are shown gross of withholding
tax and the corresponding irrecoverable tax is shown as a charge in
the statement of comprehensive income.
3. Segmental
Reporting
No segmental reporting is provided as the Directors are of the
opinion that the Company is engaged in a single segment of business
of investing in debt and, to a significantly lesser extent, equity
securities.
4. Income
This note shows the income generated from the portfolio
(investment assets) of the Company and income received from any
other source.
|
2016
£’000 |
2015
£’000 |
|
|
|
| Income from investments |
|
|
| UK dividends |
507 |
656 |
| UK investment income – interest |
3,688 |
3,526 |
| Overseas investment income –
interest |
6,470 |
5,794 |
| Overseas dividends |
26 |
31 |
|
|
|
|
10,691 |
10,007 |
| Other income |
|
|
| Deposit interest |
4 |
2 |
|
|
|
| Total income |
10,695 |
10,009 |
5. Investment
Management Fee
This note shows the fees paid to the Manager, which are
calculated quarterly on the basis of the value of the assets being
managed.
|
2016 |
2015 |
|
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
|
|
|
|
|
|
|
|
|
| Investment management fee |
794 |
428 |
1,222 |
745 |
401 |
1,146 |
|
Details of the investment management agreement are disclosed in
the Directors’ Report. At the period end the management fee accrued
was £327,000 (2015: £289,000).
6. Other
Expenses
The other expenses of the Company are presented below; those
paid to the Directors and the auditor are separately
identified.
|
2016 |
2015 |
|
|
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
| General expenses (i) |
256 |
— |
256 |
265 |
1 |
266 |
| Directors’ fees (ii) |
119 |
— |
119 |
114 |
— |
114 |
| Auditor’s remuneration: |
|
|
|
|
|
|
| – for the audit of
the |
|
|
|
|
|
|
| financial
statements |
|
|
|
|
|
|
| (including
any expenses) |
29 |
— |
29 |
31 |
— |
31 |
|
|
|
|
|
|
|
|
404 |
— |
404 |
410 |
1 |
411 |
|
|
|
|
|
|
|
|
(i) General expenses include £39,000 (2015: £38,700) due
to R&H Fund Services (Jersey) who act as administrator and
company secretary to the Company under an agreement dated
19 December 2011. This agreement is
terminable at any time by either party giving no less than three
months’ notice. The fee is payable quarterly in arrears and is
revised with effect from 1 January each year, by the application of
a formula based on the Retail Price Index for the month of December
of the previous year applied to the initial rate of £37,500 per
annum.
General expenses also include an administration fee due to
Invesco Perpetual of £25,000 (2015: £25,000). It is based on an
initial fee of £22,500 plus RPI increases in May.
Custodian dealing costs of £455 (2015: £798) are charged wholly
to capital.
(ii) The maximum Directors’ fees authorised by the Articles of
Association are £150,000 per annum.
7. Finance
Costs
Finance costs arise on any borrowing facilities the Company has
and comprise commitment fees on any unused facility as well as
interest when the facility is used.
|
2016 |
2015 |
|
|
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
| Commitment fees due on |
|
|
|
|
|
|
| loan facility |
26 |
14 |
40 |
26 |
14 |
40 |
| Bank charges |
3 |
1 |
4 |
2 |
1 |
3 |
|
29 |
15 |
44 |
28 |
15 |
43 |
|
|
|
|
|
|
|
|
The Company has a 364 day committed £20 million multi-currency
revolving credit facility with Bank of New York Mellon which is
renewable on 5 May 2017. Available
currencies are sterling, euros or US dollars. Drawings under this
facility are subject to the restriction that the Company’s total
financial indebtedness must not exceed 30% of total assets and that
the assets must be in excess of £50 million. At the balance sheet
date the Company had no drawdowns (2015: none).
Interest payable is based on the interbank offered rate for the
currency drawn down. The commitment fee is based on 0.20% of the
average undrawn amount each quarter.
8. Taxation
As a Jersey investment company no tax is payable on capital
gains and, as the Company principally invests in assets which do
not suffer tax on income, the only overseas tax arises on the few
assets domiciled in countries with which Jersey has no
double-taxation treaty, e.g. Italy
and Portugal.
|
2016
£’000 |
2015
£’000 |
|
|
|
| Overseas taxation |
171 |
127 |
The Company is subject to Jersey income tax at the rate of 0%
(2015: 0%). The overseas tax charge consists of irrecoverable
withholding tax.
9. Return per
Ordinary Share
Return per share is the amount of gain generated for the
financial year divided by the weighted average number of ordinary
shares in issue.
The basic revenue, capital and total return per ordinary share
is based on each of the profit after tax and on 88,902,058 (2015:
83,705,678) ordinary shares, being the weighted average number of
ordinary shares in issue throughout the year.
10. Dividends on Ordinary
Shares
Dividends are paid from the income less expenses. Dividends are
paid as an amount per ordinary share held.
|
2016 |
2015 |
|
|
|
Pence |
£’000 |
Pence |
£’000 |
| Dividends paid and recognised in the
year: |
|
|
|
|
|
| Fourth interim |
|
2.5 |
2,158 |
2.5 |
2,020 |
| First interim |
|
2.5 |
2,182 |
2.5 |
2,064 |
| Second interim |
|
2.5 |
2,224 |
2.5 |
2,102 |
| Third interim |
|
2.5 |
2,289 |
2.5 |
2,130 |
|
|
|
|
|
|
|
|
10.0 |
8,853 |
10.0 |
8,316 |
|
|
|
|
|
|
|
Dividends paid in the year have been charged to revenue except
for £115,000 (2015: £76,000) which was charged to stated capital.
This amount is equivalent to the income accrued on the new shares
issued in the year (see note 15).
Set out below are the dividends that have been declared in
respect of the financial period 31 December:
|
2016 |
2015 |
|
|
|
Pence |
£’000 |
Pence |
£’000 |
| Dividends in respect of the
year: |
|
|
|
|
|
| First interim |
|
2.5 |
2,182 |
2.5 |
2,064 |
| Second interim |
|
2.5 |
2,224 |
2.5 |
2,102 |
| Third interim |
|
2.5 |
2,289 |
2.5 |
2,130 |
| Fourth interim |
|
2.5 |
2,300 |
2.5 |
2,158 |
|
|
|
|
|
|
|
|
10.0 |
8,995 |
10.0 |
8,454 |
|
|
|
|
|
|
|
The fourth interim dividend for 2016 was paid on 24 February 2017 to shareholders on the register
on 27 January 2017.
11. Investments Held at Fair
Value Through Profit or Loss
The portfolio is principally made up of investments which are
listed and traded on regulated stock exchanges. Profits and losses
are either:
• realised,
usually arising when investments are sold; or
• unrealised,
being the difference from cost of those investments still held at
the year end.
(a) Analysis of
investment profits
|
2016
£’000 |
2015
£’000 |
| Opening book cost |
139,161 |
127,649 |
| Opening investment holding
profits |
2,672 |
8,100 |
|
|
|
| Opening valuation |
141,833 |
135,749 |
| Movements in the year: |
|
|
| Purchases at cost |
36,697 |
38,740 |
| Sales – proceeds |
(41,900) |
(26,994) |
| Sales – net realised
profit/(loss) |
7,083 |
(234) |
| Movement in investment holding
profit |
12,005 |
(5,428) |
|
|
|
| Closing valuation |
155,718 |
141,833 |
|
|
|
| Closing book cost |
141,041 |
139,161 |
| Closing investment holding
profit |
14,677 |
2,672 |
|
|
|
| Closing valuation |
155,718 |
141,833 |
|
|
|
| Realised profit/(loss) in the
year |
7,083 |
(234) |
| Movement in investment holding
profit in the year |
12,005 |
(5,428) |
|
|
|
|
19,088 |
(5,662) |
(b) Transaction
costs
The transaction costs on investments amount to £4,000 on sales and
£nil on purchases (2015: £nil on sales and £nil on purchases).
(c) Registration of
investments
The investments of the Company are registered in the name of the
Company or in the name of nominees and held to the account of the
Company.
12. Other Receivables
Other receivables are amounts which are due to the Company, such
as income which has been earned (accrued) but not yet received and
monies due from brokers for investments sold.
|
2016
£’000 |
2015
£’000 |
| Prepayments and accrued income |
3,056 |
2,936 |
|
|
|
|
3,056 |
2,936 |
13. Derivative Financial
Instruments
Derivative financial instruments are financial instruments that
derive their value from the performance of another item, such as an
asset or exchange rates. They are used to manage the risk
associated with fluctuations in the value of certain assets and
liabilities. The Company can use derivatives to manage its exposure
to fluctuations in foreign exchange rates.
Derivative financial instruments comprise forward currency
contracts.
|
2016
£’000 |
2015
£’000 |
| Forward currency contracts – net
unrealised profit/(loss) |
1,251 |
(1,091) |
|
|
|
|
1,251 |
(1,091) |
14. Other Payables
Other payables are amounts which must be paid by the Company,
and include amounts owed to suppliers, such as the Manager and
auditor, and any amounts due to brokers for the purchase of
investments.
|
2016
£’000 |
2015
£’000 |
| Accruals |
425 |
432 |
|
425 |
432 |
15. Stated Capital
The stated capital represents the total number of shares in
issue, for which dividends accrue. Stated capital can be used for
distributions under Jersey law.
|
2016 |
2015 |
2016 |
2015 |
|
NUMBER |
NUMBER |
£’000 |
£’000 |
| Allotted ordinary shares of no par
value |
|
|
|
|
| Brought forward |
86,337,459 |
80,812,459 |
138,323 |
128,209 |
| Net issue proceeds |
5,673,745 |
5,525,000 |
10,401 |
10,190 |
| Dividends paid from stated
capital |
— |
— |
(115) |
(76) |
|
|
|
|
|
| Carried forward |
92,011,204 |
86,337,459 |
148,609 |
138,323 |
Details of the stated capital and rights attaching to the
Company’s ordinary shares are shown in the Directors’ Report on
page 54.
For the year to 31 December 2016,
5,673,745 (2015: 5,525,000) new ordinary shares were issued to the
Company’s corporate broker, Winterflood Securities Limited, for
onward transmission to their clients. These shares were issued in
tranches of various quantities throughout the year to satisfy
secondary market demand. The gross issue proceeds were £10,469,000
(2015: £10,310,000), at an average price of 184.51p (2015: 186.60p)
per share, and the net proceeds after issue costs were £10,401,000
(2015: £10,190,000). The net proceeds included an aggregate amount
of £115,000 (2016: £76,000) which arose from the income accrued
component of the net asset value at the date of issue of the new
shares.
Subsequent to the year end 475,000 ordinary shares have been
issued, at an average price of 194.93p.
Because the criteria in paragraphs 16C and 16D of IAS 32
Financial Instruments: Presentation, have been met, the stated
capital of the Company is classified as equity even though there is
a continuation vote.
16. Reserves
This note explains the different reserves attributable to
shareholders. The aggregate of the reserves and stated capital (see
previous note) make up total shareholders’ funds.
The capital reserve includes unrealised investment holding
profits and losses, being the difference between cost and market
value at the balance sheet date, as well as realised profits and
losses on disposals of investments. The revenue reserve shows the
net revenue after payment of any dividend from this reserve. Both
the capital and revenue reserves are distributable.
17. Net Asset Value per
Ordinary Share
The Company’s total net assets (total assets less total
liabilities) are often termed shareholders’ funds and are converted
into net asset value per ordinary share by dividing by the number
of shares in issue.
The net asset value per ordinary share and the net assets
attributable at the period end were as follows:
|
NET ASSET
VALUE
PER ORDINARY SHARE |
NET
ASSETS ATTRIBUTABLE |
|
|
2016 |
2015 |
2016 |
2015 |
|
Pence |
Pence |
£’000 |
£’000 |
| Ordinary shares |
189.32 |
178.34 |
174,193 |
153,976 |
|
|
|
|
|
|
Net asset value per ordinary share is based on net assets at the
year end and on 92,011,204 (2015: 86,337,459) ordinary shares,
being the number of ordinary shares in issue at the year end.
18. Financial
Instruments
Financial instruments comprise the Company’s investment
portfolio and derivative financial instruments (for the latter see
note 13) as well as any cash, borrowings, other receivables and
other payables. The following note explains the risks that affect
the Company’s financial instruments and looks at the Company’s
exposure to these various risks.
Risk Management Policies and Procedures
The Strategic Report details the Company’s approach to
investment risk management on page 11 and the accounting policies
in note 2 explain the Company’s valuation basis for investments and
currency.
As an investment company, the Company invests in loan stocks,
corporate bonds, government stocks, preference shares and equities
which are held for the long-term in order to achieve the Company’s
Investment Objective in accordance with its Investment Policy. In
pursuing these, the Company is exposed to a variety of risks that
could result in either a reduction in the Company’s net assets or a
reduction in the profits available for payment as dividends.
The Company’s principal financial instruments at risk comprise
its investment portfolio. Other financial instruments at risk
include cash and cash equivalents, borrowings, other receivables
and other payables that arise directly from the Company’s
operations. These risks and the Directors’ approach to managing
them are set out below, and have not changed from those applying in
the comparative year.
Risk management is an integral part of the investment management
process. The Manager controls risk by ensuring that the Company’s
portfolio is appropriately diversified and the portfolio managers
actively monitor both the ratings and liquidity of the
fixed-interest securities taking into account the Company’s
financing requirements. In-depth and continual analysis of market
and stock fundamentals give the portfolio managers the best
possible understanding of the risks associated with a particular
stock. The portfolio managers assess the exposure to market risk
when making each investment decision, and monitor the overall level
of market risk on the whole of the portfolio on an ongoing
basis.
High-yield fixed-interest securities are subject to a variety of
risks, including credit risk (18.3). Borrowing using the Company’s
credit facility increases the Company’s exposure to interest rate
risk and this is explained under interest rate risk (18.1.2).
The day to day management of the investment activities,
borrowings and hedging of the Company has been delegated to the
Manager, and is the responsibility of the portfolio managers to
whom the Board has given wide discretion to operate within set
guidelines. Any proposed variation outside those guidelines is
referred to the Board and the guidelines themselves are reviewed at
every board meeting.
18.1 Market Risk
Market risk arises from changes in the fair value or future cash
flows of a financial instrument because of movements in market
prices. Market risk comprises three types of risk: currency risk
(18.1.1), interest rate risk (18.1.2) and other price risk
(18.1.3).
18.1.1 Currency Risk
The Company has assets, liabilities and income which are
denominated in currencies other than sterling and movements in
exchange rates will affect the sterling value of those items.
Management of the Currency Risk
The Board meets at least quarterly to assess risk and review
investment performance. The portfolio managers monitor the
Company’s exposure to foreign currencies on a daily basis and
report to the Board. Drawings in foreign currencies on the
borrowing facility can be used to limit the Company’s currency
exposure and to achieve the portfolio characteristics that assist
the Company in meeting its investment objective and policy. The
Company may use forward currency contracts to mitigate currency
risk. All facility drawings and derivative contracts are limited to
currencies and amounts commensurate with asset exposure to those
currencies.
Income denominated in foreign currencies is converted to
sterling on receipt. The Company does not use financial instruments
to mitigate the currency exposure in the period between the time
that income is included in the financial statements and its
receipt.
Currency Exposure
The fair values of the Company’s monetary items that have
foreign currency exposure at 31 December follow. Where the
Company’s investments (which are not monetary items) are priced in
a foreign currency, they have been included separately in the
analysis to show the overall level of exposure.
|
EURO
£’000 |
US DOLLAR
£’000 |
SWISS FRANC
£’000 |
| 31 December 2016 |
|
|
|
| Investments at fair value through
profit or loss that are monetary items (fixed and floating
interest) |
32,512 |
40,719 |
— |
| Cash and cash equivalents |
941 |
706 |
2 |
| Other receivables (due from brokers
and dividends) |
582 |
729 |
— |
| Forward currency contracts |
(32,091) |
(25,514) |
— |
|
|
|
|
| Foreign currency exposure on net
monetary items |
1,944 |
16,640 |
2 |
| Investments at fair value through
profit or |
|
|
|
| loss that are
equities |
— |
564 |
— |
|
|
|
|
| Total net foreign currency |
1,944 |
17,204 |
2 |
|
|
|
|
|
EURO
£’000 |
US DOLLAR
£’000 |
SWISS FRANC
£’000 |
| 31 December 2015 |
|
|
|
| Investments at fair value through
profit or loss that are monetary items (fixed and floating
interest) |
32,254 |
23,755 |
— |
| Cash and cash equivalents |
267 |
83 |
1 |
| Other receivables (due from brokers
and dividends) |
602 |
506 |
— |
| Forward currency contracts |
(33,457) |
(13,225) |
— |
|
|
|
|
| Foreign currency exposure on net
monetary items |
(334) |
11,119 |
1 |
| Investments at fair value through
profit or loss that are equities |
— |
4,472 |
— |
|
|
|
|
| Total net foreign currency
exposure |
(334) |
15,591 |
1 |
The above may not be representative of the exposure to risk
during the period reported because the levels of monetary foreign
currency exposure may change significantly throughout the
period.
Currency Sensitivity
The effect on the income statement and the net asset value that
changes in exchange rates have on the Company’s financial assets
and liabilities is based on the following exchange rates. These
rates have been calculated by reference to the volatility of
exchange rates during the period using the standard deviation of
currency fluctuations against the mean.
|
2016 |
2015 |
| £/Euro |
±5.4% |
±2.4% |
| £/US Dollar |
±6.2% |
±1. |
8%
The following sensitivity analysis is based on the Company’s
monetary foreign currency financial instruments held at the balance
sheet date and takes account of any forward foreign exchange
contracts that offset the effects of changes in currency exchange
rates.
If sterling had strengthened by the changes in exchange rates
shown above, this would have had the following effect:
|
EURO
£’000 |
US DOLLAR
£’000 |
| 2016 |
|
|
| Effect on Statement of Comprehensive
Income – profit/(loss) after taxation |
|
|
| Revenue loss |
(139) |
(148) |
| Capital loss |
(74) |
(1,021) |
|
|
|
| Total return after taxation for the
year |
(213) |
(1,169) |
|
|
|
| Effect on net asset value |
–0.1% |
–0.7% |
|
|
|
|
|
|
|
EURO
£’000 |
US DOLLAR
£’000 |
| 2015 |
|
|
| Effect on Statement of Comprehensive
Income – profit/(loss) after taxation |
|
|
| Revenue loss |
(63) |
(30) |
| Capital
profit/(loss) |
22 |
(272) |
|
|
|
| Total return after taxation for the
year |
(41) |
(302) |
|
|
|
| Effect on net asset value |
0.0% |
–0.2% |
If sterling had weakened by the changes in exchange rates shown
above this would have an equal and opposite effect.
In the opinion of the Directors, the above sensitivity analysis
is not representative of the period as a whole, since the level of
exposure changes frequently as part of the currency risk management
process of the Company.
18.1.2 Interest Rate Risk
The Company is exposed to interest rate risk in a number of
ways. Movements in interest rates may affect the fair value of
fixed-interest rate securities, income receivable on cash deposits
and floating rate securities, and interest payable on variable rate
borrowings. Interest rate risk is related above all to long-term
financial instruments.
Management of Interest Rate Risk
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account as part of the portfolio management and borrowings
processes of the Manager. The Board reviews on a regular basis the
investment portfolio and borrowings. This encompasses the valuation
of fixed-interest and floating rate securities.
When the Company has cash balances, they are held in variable
rate bank accounts yielding rates of interest dependant on the base
rate of the custodian.
The Company has a credit facility with which it can finance
investment activity, details of which are shown in note 7. The
Company uses the facility at levels approved and monitored by the
Board.
Interest Rate Exposure
The following table shows the Company’s exposure to interest
rate risk at the balance sheet date arising from its monetary
financial assets and liabilities.
|
WITHIN
ONE YEAR
£’000 |
MORE THAN
ONE YEAR
£’000 |
TOTAL
£’000 |
| 2016 |
|
|
|
| Exposure to floating interest
rates: |
|
|
|
| Investments held at fair value
through profit or loss |
— |
27,089 |
27,089 |
| Cash and cash equivalents |
14,593 |
— |
14,593 |
|
|
|
|
|
14,593 |
27,089 |
41,682 |
| Exposure to fixed-interest
rates: |
|
|
|
| Investments held at fair value
through profit or loss |
1,063 |
121,156 |
122,219 |
|
|
|
|
| Net exposure to interest rates |
15,656 |
148,245 |
163,901 |
|
|
|
|
|
WITHIN
ONE YEAR
£’000 |
MORE THAN
ONE YEAR
£’000 |
TOTAL
£’000 |
| 2015 |
|
|
|
| Exposure to floating interest
rates: |
|
|
|
| Investments at fair value through
profit or loss |
— |
54,702 |
54,702 |
| Cash and cash equivalents |
10,730 |
— |
10,730 |
|
|
|
|
|
10,730 |
54,702 |
65,432 |
| Exposure to fixed-interest
rates: |
|
|
|
| Investments at fair value through
profit or loss |
— |
72,863 |
72,863 |
|
|
|
|
| Net exposure to interest rates |
10,730 |
127,565 |
138,295 |
The nominal interest rates on the investments at fair value
through profit or loss are shown in the portfolio list on pages 17
to 20. The weighted average effective interest rate on these
investments is 6.9% (2015: 7.0%). The weighted average effective
interest rate on cash and cash equivalents is 0.34% (2015:
0.33%).
Interest Rate Sensitivity
The following table illustrates the sensitivity of the profit
after taxation for the year to a 1% increase in interest rates in
regard to the Company’s financial assets and financial liabilities.
As future changes cannot be estimated with any degree of certainty,
the sensitivity analysis is based on the Company’s financial
instruments held at the balance sheet date, with all other
variables held constant.
|
2016
£’000 |
2015
£’000 |
| Effect on Statement of Comprehensive
Income – profit/(loss) |
|
|
| after taxation |
|
|
| Revenue profit |
146 |
107 |
| Capital loss |
(6,883) |
(5,421) |
|
|
|
| Total loss after taxation for the
year |
(6,737) |
(5,314) |
|
|
|
| Effect on NAV |
(7.3)p |
(6.2)p |
If interest rates had decreased by 1%, this would have had an
equal and opposite effect.
The above exposure and sensitivity analysis are not
representative of the period as a whole, since the level of
exposure changes frequently as borrowings can be drawn down and
repaid as required throughout the period. In particular, for the
year under review there has been limited interest rate movements
and as a consequence little change in interest rate
sensitivity.
18.1.3 Other Price Risk
Other price risk includes changes in market prices, other than
those arising from currency risk or interest rate risk, which may
affect the value of the investment portfolio, whether by factors
specific to an individual investment or its issuer, or by factors
affecting the wider market.
Management of Other Price Risk
It is the portfolio managers’ responsibility to manage the
portfolio and borrowings in accordance with the investment
objective and policy, and in accordance with the investment policy
guidelines set by the Board. The Board manages the market price
risks inherent in the investment portfolio by meeting regularly to
monitor on a formal basis compliance with these. The Board also
reviews investment performance. Because the Company’s portfolio is
the result of the portfolio managers’ investment process,
performance may not correlate with the markets in which the Company
invests.
The Company’s exposure to other changes in market prices at 31
December on its investments is shown in the fair value hierarchy
table on page 52.
Concentration of Exposure to Other
Price Risks
The Company’s investment portfolio is not concentrated in any
single country of domicile, however, it is recognised that an
investment’s country of domicile or listing does not necessarily
equate to its exposure to the economic conditions in that
country.
Other Price Risk Sensitivity
Excluding fixed interest securities and convertibles, at the
year end the Company held other investments of £6,410,000 (2015:
£14,268,000). The effect of a 10% increase or decrease in the fair
values of these investments (including any exposure through
derivatives) on the profit after taxation for the year is £641,000
(2015: £1,427,000). This level of change is considered to be
reasonably possible based on the observation of current market
conditions. The sensitivity analysis is based on the Company’s
other investments (including equity exposure through derivatives)
at the balance sheet date with all other variables held
constant.
18.2 Liquidity
Risk
This is the risk that the Company may encounter difficulty in
meeting its obligations associated with financial liabilities i.e.
when realising assets or raising finance to meet financial
commitments. A lack of liquidity in the portfolio may make it
difficult for the Company to realise assets at or near their
purported value in the event of a forced sale.
Management of Liquidity Risk
Liquidity risk is not viewed by the Directors as a significant
risk because a majority of the Company’s assets comprise readily
realisable securities, although a lack of liquidity in
non-investment grade securities may make it difficult to rebalance
the Company’s investment portfolio as and when the portfolio
managers believe it would be advantageous to do so. On a daily
basis the portfolio managers ascertain the Company’s cash and
borrowing requirements by reviewing future cash flows arising from
purchases and sales of investments, interest and dividend receipts,
expenses and dividend payments, and available financing.
Liquidity Risk Exposure
The contractual maturities of the financial liabilities at the
balance sheet, based on the earliest date on which payment can be
required follow:
|
2016 |
2015 |
|
LESS THAN THREE
MONTHS
£’000 |
LESS THAN THREE
MONTHS
£’000 |
| Other payables |
425 |
432 |
| Unrealised loss on forward currency
contracts |
— |
1,091 |
|
|
|
|
425 |
1,523 |
18.3 Credit Risk
Credit risk is the risk that the failure of the counterparty to
a transaction to discharge its obligation under that transaction
could result in a loss to the Company. This risk also includes
transactions in derivatives.
At the year end 65.7% (2015: 63.8%) of the Company’s portfolio
consisted of non-investment grade securities. To the extent that
the Company invests in non-investment grade securities, the Company
may realise a higher current yield than the yield offered by
investment grade securities. On the other hand, investments in such
securities involve a greater volatility of price and a greater risk
of default by the issuers of such securities, with consequent loss
of interest payments and principal. Non-investment grade securities
are likely to be subject to greater uncertainties from exposure to
adverse conditions and will be speculative with respect to an
issuer’s capacity to meet interest payments and repay principal in
accordance with its obligations.
Investment grade and non-investment grade securities totalled
83% (2015: 80%) of the portfolio at the year end. Adverse changes
in the financial position of an issuer of such high-yield
fixed-interest securities or in general economic conditions may
impair the ability of the issuer to make payments of principal
and/or interest or may cause the liquidation or insolvency of an
issuer.
The portfolio may be adversely affected if the Company’s
custodian suffers insolvency or other financial difficulties. The
appointment of a depositary has substantially lessened this risk.
The Board reviews the custodian’s annual control report and the
Manager’s management of the relationship with the custodian.
Management of and Exposure to Credit Risk
All of the Company’s assets are subject to credit risk. The
Company’s principal credit risk is the risk of default of the
non-investment grade debt. Where the portfolio managers make an
investment in a bond, corporate or otherwise, the credit rating of
the issuer is also considered when assessing the risk of defaults.
Investments in bonds are across a variety of industrial sectors and
geographical markets to avoid concentration of credit risk.
Counterparties for derivative transactions are also a source of
credit risk. Transactions involving derivatives are entered into
only with banks whose credit ratings are taken into account to
minimise default risk. The credit ratings of the derivatives
counterparties were mostly A3 with one at Ba1.
Details of the Company’s investments, including their credit
ratings, are shown on pages 17 to 20. Credit risk for transactions
involving derivatives and equity investments is minimised as the
Company only uses approved counterparties.
Cash balances are held with approved deposit takers only and are
limited to a maximum of 4% of the Company’s net asset value with
any one deposit taker. Balances held with Short-Term Investments
Company (Global Series) plc, a triple-A rated money market fund
(STIC), are limited to a maximum of 6% of the Company’s net asset
value. At the balance sheet date the Company had £4.5 million
(2015: £1.6 million) held at the custodian and £10.1 million (2015:
£9.1 million) held in STIC.
There are no financial assets that are past due or impaired
during the year (2015: none).
Fair Values of Financial Assets and Financial Liabilities
Financial assets are either carried in the balance sheet at
their fair value (investments and derivatives), or the balance
sheet amount is a reasonable approximation of fair value (due from
brokers, dividends receivable, accrued income, due to brokers,
accruals and cash).
Financial liabilities are carried at amortised cost except for
derivatives, which as stated above are carried at fair value.
19. Classification Under
Fair Value Hierarchy
The valuation techniques used by the Company are explained in
the accounting policies note. The table that follows sets out the
fair value of the financial instruments. The three levels set out
in IFRS 7 hierarchy follow:
Level 1 – The unadjusted quoted price in an active
market for identical assets or liabilities that the entity can
access at the measurement date.
Level 2 – Inputs other than quoted prices included
within Level 1 that are observable (i.e. developed using market
data) for the asset or liability, either directly or
indirectly.
Level 3 – Inputs are unobservable (i.e. for which
market data is unavailable) for the asset or liability.
Categorisation within the hierarchy is determined on the basis
of the lowest level input that is significant to the fair value
measurement of each relevant asset/liability.
There were no transfers in the year between any of the
levels.
Normally investments would be valued using stock market active
prices, with investments disclosed as Level 1 and this is the case
for the quoted equity investments that the Company holds. However,
the majority of the Company’s investments are non-equity
investments. Evaluated prices from a third party pricing vendor are
used to price these securities, together with a price comparison
made to secondary and tertiary evaluated third party sources.
Evaluated prices are in turn based on a variety of sources
including broker quotes and benchmarks. As a result, the Company’s
non-equity investments have been shown as Level 2 – recognising
that the fair values of these investments are not as visible as
quoted equity investments and their higher inherent pricing risk.
However, this does not mean that the fair values shown in the
portfolio valuation are not achievable at point of sale. No Level 3
investments were held during the year (2015: none held).
|
LEVEL 1
£’000 |
LEVEL 2
£’000 |
TOTAL
£’000 |
| 2016 |
|
|
|
| Financial assets designated at fair
value |
|
|
|
| through profit or
loss: |
|
|
|
| Quoted securities: |
|
|
|
| – Fixed interest
securities(1) |
— |
145,998 |
145,998 |
| – Convertibles |
— |
3,310 |
3,310 |
| – Preference |
2,990 |
— |
2,990 |
| – Convertible
preference |
2,856 |
— |
2,856 |
| – Warrants |
564 |
— |
564 |
|
|
|
|
| Total for financial assets |
6,410 |
149,308 |
155,718 |
|
|
|
|
| Financial liabilities designated
at fair value |
|
|
|
| through profit or
loss: |
|
|
|
| Derivative financial
instruments: |
|
|
|
| Currency hedges |
— |
1,251 |
1,251 |
|
|
|
|
| Total for financial liabilities |
— |
1,251 |
1,251 |
|
LEVEL 1
£’000 |
LEVEL 2
£’000 |
TOTAL
£’000 |
| 2015 |
|
|
|
| Financial assets designated at
fair value |
|
|
|
| through profit or
loss: |
|
|
|
| Quoted securities: |
|
|
|
| – Fixed interest
securities |
— |
124,977 |
124,977 |
| – Convertibles |
— |
2,588 |
2,588 |
| – Preference |
2,930 |
— |
2,930 |
| – Convertible
preference |
6,866 |
— |
6,866 |
| – Warrants |
4,472 |
— |
4,472 |
|
|
|
|
|
14,268 |
127,565 |
141,833 |
|
|
|
|
| Total for financial assets |
14,268 |
127,565 |
141,833 |
|
|
|
|
| Financial liabilities designated at
fair value |
|
|
|
| through profit or
loss: |
|
|
|
| Derivative financial
instruments: |
|
|
|
| Currency hedges |
— |
1,091 |
1,091 |
|
|
|
|
| Total for financial liabilities |
— |
1,091 |
1,091 |
20. Capital Management
The Company’s capital, or equity, is represented by its net
assets which are managed to achieve the Company’s investment
objective set out on page 11.
The main risks to the Company’s investments are shown in the
Strategic Report under the ‘Principle Risks and Uncertainties’
section on pages 11 and 12. These also explain that the Company is
able to borrow and that any resultant gearing will amplify the
effect on equity of changes in the value of the portfolio.
The Board can also manage the capital structure directly since
it has taken the powers, which it is seeking to renew, to issue and
buy-back shares and it also determines dividend payments.
The Company is subject to externally imposed capital
requirements with respect to the availability of the borrowing
facility, by the terms imposed by the lender. The Board regularly
monitors, and has complied with, the externally imposed capital
requirements throughout the period.
Total equity at the balance sheet date, the composition of which
is shown on the balance sheet on page 37, was £174,193,000 (2015:
£153,976,000).
21. Contingencies,
Guarantees and Financial Commitments
Liabilities the Company is committed to honour but which are
dependent on a future circumstance or event occurring would be
disclosed in this note if any existed.
There were no contingencies, guarantees or financial commitments
outstanding at the balance sheet date.
22. Related Party
Transactions and Transactions with the Manager
A related party is a company or individual who has direct or
indirect control or who has significant influence over the
Company.
Under International Financial Reporting Standards, the Company
has identified the Directors as related parties and Directors fees
paid have been disclosed in the Report on Directors’ Remuneration
and Interests on page 28 with additional disclosure in note 6. Full
details of Directors’ interests are set out in the Director's
Report on page 29. No other related parties have been
identified.
Invesco Fund Managers Limited and Invesco Asset Management
Limited, both of which are wholly owned subsidiaries of Invesco
Limited, provided investment management and administration services
to the Company. Details of the services and fees are disclosed in
the Directors’ Report and management fees payable are shown in note
5.
23. Post Balance Sheet
Events
Any significant events that occurred after the end of the
reporting period but before the signing of the balance sheet will
be shown here.
There are no significant events after the end of the reporting
period requiring disclosure.
This annual financial report announcement is not the Company’s
statutory accounts. The statutory accounts for the period
ended 31 December 2016 have been
audited and approved but are not yet filed. They received an
audit report which is unqualified and does not include a reference
to any matters to which the auditors drew attention by way of
emphasis without qualifying the report.
The audited annual financial report will be posted to
shareholders shortly. Copies may be obtained during normal
business hours from the Company’s Registered Office, Ordnance
House, 31 Pier Road, St.Helier, Jersey, JE4 8PW or the Manager’s
website via the directory found at the following link:
www.invescoperpetual.co.uk/citymerchants.
The Annual General Meeting of the Company will be held at
3.30 pm on 15
June 2017 at The Oriental Club, Stratford House, Stratford Place, London W1C 1ES.