TWENTYFOUR SELECT MONTHLY INCOME FUND
LIMITED
REPORT AND AUDITED FINANCIAL
STATEMENTS
For the year ended 30 September 2016
The Directors of TwentyFour Select Monthly Income Fund Limited
announce the results for the year ended 30
September 2016. The Report will shortly be available via the
Company's Portfolio Manager’s website www.twentyfouram.com and
will shortly be available for inspection online at
www.hemscott.com/nsm.do.
SUMMARY INFORMATION
The Company
TwentyFour Select Monthly Income Fund Limited (the “Company”)
was incorporated with limited liability in Guernsey, as a closed-ended investment company
on 12 February 2014. The Company’s
shares were listed with a Premium Listing on the Official List of
the UK Listing Authority and admitted to trading on the Main Market
of the London Stock Exchange (“LSE”) on 10
March 2014.
Investment Objective and Investment
Policy
The Company’s investment objective is to generate attractive
risk adjusted returns, principally through income
distributions.
The Company’s investment policy is to invest in a diversified
portfolio of credit securities.
The portfolio can be comprised of any category of credit
security, including, without prejudice to the generality of the
foregoing, bank capital, corporate bonds, high yield bonds,
leveraged loans, payment-in kind notes and asset backed securities.
The portfolio will include securities of a less liquid nature. The
portfolio will be dynamically managed by TwentyFour Asset
Management LLP (the “Portfolio Manager”) and, in particular, will
not be subject to any geographical restrictions.
The Company maintains a portfolio diversified by issuer; the
portfolio comprises at least 50 Credit Securities. No more than 5%
of the portfolio value will be invested in any single Credit
Security or issuer of Credit Securities, tested at the time of
making or adding to an investment in the relevant Credit Security.
Uninvested cash, surplus capital or assets may be invested on a
temporary basis in:
- Cash or cash equivalents, money market instruments, bonds,
commercial paper or other debt obligations with banks or other
counterparties having a “single A” or higher credit rating as
determined by any internationally recognised rating agency which,
may or may not be registered in the EU; and
- Any “government and public securities” as defined for the
purposes of the Financial Conduct Authority (the “FCA”) Rules.
Efficient portfolio management techniques are employed by the
Company, such as currency hedging, interest rate hedging and the
use of derivatives to manage key risks such as interest rate
sensitivity and to mitigate market volatility. The Company’s
currency hedging policy will only be used for efficient portfolio
management and not to attempt to enhance investment returns.
The Company will not employ gearing or derivatives for
investment purposes. The Company may use borrowing for short-term
liquidity purposes, which could be achieved through its loan
facility or other types of collateralised borrowing instruments
including repurchase transactions and stock lending. The Articles
restrict the borrowings of the Company to 10% of the Company’s Net
Asset Value (“NAV”) at the time of drawdown.
At launch the Company had a target net total return on the
original issue price of between 8% and 10% per annum. This
comprised a target dividend payment of 6p and a target capital
return of 2p-4p both based on the original issue amount of 100p.
There is no guarantee that this can or will be achieved,
particularly given the recent low interest rate environment. As
such the total return generated has been lower than initially
anticipated, although the 6p dividend per annum has consistently
been met and the Portfolio Manager is confident that this dividend
target will be maintained in the coming year. Refer to note 19 to
the Financial Statements for details of the Company’s dividend
policy.
Shareholder Information
Maitland Institutional Services Limited (“Maitland”)
(formerly Phoenix Fund Services (UK) Limited) is responsible
for calculating the NAV per share of the Company. Maitland
delegated this responsibility to Northern Trust International Fund
Administration Services (Guernsey)
Limited (the “Administrator”) however Maitland still performs an
oversight function. The unaudited NAV per Ordinary Share will be
calculated as at the close of business on every Wednesday that is
also a business day and the last business day of every month and
will be announced by a Regulatory Information Service the following
business day.
Financial Highlights
|
|
|
|
30.09.16 |
|
30.09.15 |
|
|
|
|
|
|
|
Total Net
Assets |
|
|
£136,821,841 |
|
£134,560,344 |
|
|
|
|
|
|
|
Net Asset
Value per Share |
|
|
89.97p |
|
92.59p |
|
|
|
|
|
|
|
Share
price |
|
|
92.00p |
|
96.63p |
|
|
|
|
|
|
|
Premium to
NAV |
|
|
2.27% |
|
4.36% |
|
|
|
|
|
|
|
Dividends
declared during the year |
|
|
6.85p |
|
6.53p |
|
|
|
|
|
|
|
Dividends
paid during the year |
|
|
6.53p |
|
7.07p |
As at 16 January 2017, the premium
had moved to 3.13%. The estimated NAV per share and share price
stood at 91.15p and 94.00p, respectively.
Ongoing Charges
Ongoing charges for the year ended 30
September 2016 of 1.21% (30 September
2015: 1.19%) have been calculated in accordance with the
Association of Investment Companies (the "AIC") recommended
methodology.
CHAIR’S STATEMENT
for the year ended 30 September
2016
The twelve month period to 30 September
2016 was a dramatic period for investors with surprising
political events, contradictory economic data and idiosyncratic
corporate events which led to some highly diverse periods of market
sentiment. As a result some investors retreated to cash and asset
price volatility was heightened.
In the final quarterly tender of the year, circa. 26m shares
were tendered. The majority of the tendered shares came from a
large shareholder for whom the investment was sub-scale. The
Portfolio Manager undertook a roadshow to visit existing
shareholders (and other potential investors), with the Company’s
broker, to explain the opportunity currently offered by the
Company. The response was very positive, with demand exceeding the
number of shares that were tendered, resulting in applicants being
scaled back to approximately 54% of demand. This was a very
encouraging result for the Company and its mandate.
By the close of the year the number of shares in issue had
increased from 149,335,881 at the start of the 12 months to
152,079,151. The Company’s NAV decreased by 2.62p and paid
dividends totalled 6.53p, creating a NAV total return of 3.91p.
The challenging market conditions, particularly in the first
half of the year, resulted in a period of high mark-to-market
volatility for the Company during the early months of 2016 but
prices saw a sharp recovery over the summer as central bank support
created a strong technical backdrop for asset prices. The
investment composition of the Company continues to meet an
acceptable level of diversity and target yield, and the Company has
achieved the target gross monthly dividend of 0.5p per share. The
Company’s policy is to pay a fixed 0.5p per share dividend on a
monthly basis, with any excess income paid out in the month
following the Company’s year-end, which for this year is 1.35p per
share.
The Portfolio Manager and the Company’s Board continue to adhere
to a strict discipline of only accepting new share issuance to meet
investor demand and only when there are suitable investment
opportunities. For the year in question the opportunities were
scarcer than previous periods as credit spreads were slowly
squeezed in Europe. Yield is
becoming a scarce commodity and this is likely to become more of an
issue as the central bank activity continues into 2017.
Mark-to-market performance is expected to continue to be
relatively volatile over the coming months, as the market is faced
with a number of significant political uncertainties, which could
weigh on market sentiment. However, the strong technical back-drop
is expected to remain and the demand for yield is expected to
continue. The Portfolio Manager is confident that the assets in the
portfolio will perform and that there remain sufficient
opportunities to offset the re-investment risk over the medium
term. The Portfolio Manager continually stress tests the portfolio
and remains confident that the dividend policy is maintainable over
the medium term.
Claire Whittet
Chair
18 January 2017
PORTFOLIO MANAGER’S REPORT
for the year ended 30 September
2016
Economic Background
The twelve month period to 30 September
2016 was dominated by central bank activity as market
sentiment threatened to be overwhelmed by a mixture of weak
economic fundamentals and political uncertainty.
The market started the period with a reasonably upbeat tone as
the market interpreted weak US payrolls being too low to allow the
Federal Open Market Committee (“FOMC”) to hike rates at the October
meeting, but this was short lived as the minutes inferred that the
Federal Reserve (“Fed”) members saw enough domestic consumer demand
to potentially warrant its first rate rise, setting a negative tone
as we approached the year end. The European Central Bank (“ECB”)
became more dovish, leading to strong market speculation of further
support at the Governing Council meeting in December. The mood
wasn’t helped as the recently appointed Portuguese government were
ousted by a left-wing coalition led by Antonio Costa, leading to initial fears of
anti-Eurozone policies and a reversal of austerity measures.
In the USA the high yield
(“HY”) sector took the brunt of the negative sentiment as a
combination of lower oil prices and the prospect of higher Fed
Funds Rate increased the expectation of a spike in the default
rate. The negative tone continued with the cancellation of a large
$2.45bn + €760m dual tranche deal for
Veritas (a large telecom operator) followed by the announcement
that Abengoa (a leading Spanish engineering/infrastructure group)
had filed for creditor protection while it looked to secure
additional capital.
Although the end of the year is usually quiet, December 2015 proved to be a dramatic and
challenging month for investors. As expected the ECB cut the
depo-rate to minus 30bp and extended the asset purchase programme
out to May 2017 but this was seen as
insufficient by market participants. The FOMC hiked Fed Funds Rate
to 0.25-0.50% although the following rhetoric from Janet Yellen was relatively dovish, and the
large outflows from US high yield bond funds gathered pace with
some managers unable to meet the outflow requests (due to poor
market liquidity). The downward spiral continued with Brent crude
oil down 17% in the month, taking 2015 losses to an eye-watering
44% which had the obvious knock-on effect in the energy sector of
US HY bonds. In Europe the
political turmoil continued with Spanish elections providing an
inconclusive result and the Bank of Portugal astonishingly deciding that one of
its leading banks, Novo Banco, should have a bail-in of senior debt
and to resolve this it would transfer 5 out of 52 bonds to the “bad
bank”, against the concept of pari passu. Legal
action was lodged by investors and the reputation of Portugal’s
Central Bank was severely impaired. The Company had exposure to one
of the 5 bonds and legal action has been pursued (see details in
Performance Review).
January 2016 was the most sombre
start to a year that we can recall; the weakness in oil prices
continued with West Texas Intermediate (“WTI”) crude testing new
lows of $28.50 p/barrel. China
released Q4 2015 GDP numbers of 6.8% which, even though this was
only 0.1% below consensus, sent the markets into decline with
concerns of a hard-landing for the world’s second largest
economy. At the first 2016 meeting of the FOMC, Janet Yellen mentioned the Fed had concerns
about the global economic outlook and kept rates on hold. The Bank
of Japan (“BoJ”) then shocked the
market by moving domestic interest rates into negative territory
while the ECB kept interest rates on hold but said they would
‘possibly reconsider’ their policy stance in March. In the
UK, Mark Carney added to the dovish central bank rhetoric by
ruling out any imminent rise in UK rates saying “the world is
weaker and UK growth has slowed” during a speech at Queen Mary
University in January 2016.
In February, the ‘rolling bear’ sentiment switched its attention
to the banking sector as Deutsche Bank and then Credit Suisse
announced sobering results, leading some commentators to question
the solvency of the banking system. Speculation that Deutsche Bank
(“DB”) would be the first bank not to pay AT1 coupons (denied by DB
management) was enough to result in heavy contagion spreading
throughout the whole bank hybrid sector, regardless of the credit
quality of the borrower. Asset Backed Securities (“ABS”),
particularly collateralised loan obligations (“CLOs”), also endured
sharp price declines in the month as comments from a couple of
investment banks announced their departure from the sector, leading
to a strong technical headwind for the ABS sector.
Slowly but surely a combination of relative value buyers and
professional short-covering reversed the generic selling pressure,
helped by a reasonable 2015 results season for corporates where
revenue growth was benign but bottom line profit generally beat
expectations and there were no signs of any impending solvency
crisis in European banking.
The political influence continued with the announcement that the
UK referendum was to take place on 23 June
2016, which had an immediate negative impact on Sterling and
Sterling assets. In March the market received a welcome boost with
the ECB announcing a raft of stimuli that exceeded all expectations
with 10bp cut in the deposit facility to -40bp, a €20bn per month
increase in the asset purchase program (including Investment Grade
(“IG”) non-bank corporates), and a new series of four targeted
longer-term refinancing operations (“TLTRO”) each with a 4-yr
maturity. Unsurprisingly this new facility, ensuring banks
unlimited liquidity support through to March
2021, with borrowing rates potentially as low as the deposit
facility rate, resulted in a significant relief rally in
subordinated bank paper across the whole Euro-region.
In the build up to the UK referendum the polls were all pointing
to the UK staying in the EU; as such the result to leave was a
major surprise to many, including market participants.
Understandably Sterling took the brunt of the early selling
pressure, falling over 10% against its major trading partners.
Credit followed suit with the iTraxx crossover index widening over
150bps in early trading on 24 June
2016. However, strong words from Mark Carney that the Bank of England (“BoE”) would intervene to stabilise
markets helped to stem the panic and with the assumption that the
exit vote would delay any Fed hikes together with the ongoing ECB
stimulus, credit spreads soon began to reverse their widening.
The July meeting of the Monetary Policy Committee (“MPC”) was
considered too soon after the referendum for any significant
changes but Mark Carney made amends
by delivering a round of stimuli that surprised even the most
expectant of investors. A cut in the base rate to 0.25%, a £60bn
increase in Gilt purchases to £435bn, a £10bn corporate bond
purchase programme and a bank ‘term-funding scheme’ (which provides
funding for banks at levels close to base rates) added considerable
weight to the already strong technical supporting markets. In
addition Carney announced the likelihood of rates being cut further
in the year to just 0.10% which did little for Sterling but
resulted in a strong fixed income rally (particularly Gilts and
Investment Grade (“IG”) corps). The aftermath of the UK
referendum remains the major political distraction for the UK (and
EU) with even the UK government warning of two years of potential
turmoil, following the signing of Article 50 in Q1 2017.
The ECB did little over the summer but the bank stress tests
were released which, with the exception of just two smaller
lenders, the results were viewed as a positive signal for the
European banking sector and put to bed any lasting predictions of a
potential solvency crisis looming. Short covering followed and
spreads tightened as a result. However, the market bears were given
a lifeline following an announcement that the US Department of
Justice claimed $14bn against
Deutsche Bank in settlement of misdemeanours in the German lender’s
US mortgage unit, which some commentators saw as a threat to the
solvency of Europe’s largest investment bank. While it seems
obvious that the final settlement figure will be substantially
below the initial $14bn being
claimed, the headline number led to significant falls in the value
of Deutsche Bank shares with the contagion being felt across the
whole financial sector.
In the US Janet Yellen continued a dovish stance highlighting
that ‘global economic and financial developments continue to pose
risks’. More latterly the US economic data has been mixed with poor
ISM Manufacturing data for August (49.4 vs. expected 52.0) and
weaker than expected Non-Farm-Payrolls of 151,000 (180k was
expected) pushing back expectations of the next Fed Fund hike to
December at the earliest, and the so called “Dot Plot” rate
estimates lowered, with the Fed only expecting two hikes in 2017
(down from three).
Performance Review
The Company’s aim is to produce an attractive level of income,
with an aim of generating a minimum monthly income of 0.5p, with
any excess income annually distributed to investors. This is a high
conviction strategy based on relative value bonds in the credit
markets, with an emphasis on the securities that exhibit a degree
of liquidity premium assets that are primarily buy-to-hold.
The 12-months in question have been particularly challenging for
higher beta credit, particularly the period of mid-Dec to
mid-February. As mentioned in the commentary above, significant
macro-economic events and political changes have created wild
swings in market sentiment. The considerable support shown by the
ECB and more latterly the BoE have had a dramatic effect on
government bonds and IG-credit but this should begin to have a
similar effect on higher beta product as the contagion effect
trickles along the credit curve. The main drag on the annual
performance came from the first 4-months of the year, with the
initial 6-weeks of January being the key period, with the general
‘rolling bear’ market sentiment that gripped the market. Fears of
an impending bank solvency crisis was never in the Portfolio
Manager’s base case scenario but a sharp decline in Additional Tier
1 (“AT1”) prices during this period had a significant impact on the
NAV. As an illustration one of the largest portfolio positions was
in COVBS 6.375% 19-49 (3% portfolio allocation) which declined from
a price of 97.375 at the end of December-15 to 84.50 in
mid-February (representing a 13% price decline) – this bond
steadily recovered throughout the rest of the year to close at
95.00. There were similar price actions across the whole of the AT1
sector (which was circa. 18% of the total portfolio) but the
Portfolio Manager refused to capitulate these positions,
recognising their relative value. Similarly there were some
significant volatile swings in the prices for the European CLO
sector around the same period, as a number of large banks announced
their withdrawal from the sector. Despite no change in the
fundamental credit quality these holdings impacted the NAV during
the first half of the year and have taken a considerable period to
fully recover 2015 levels. Also during that period, the Novo Banco
bonds that were transferred to Banco Espírito Santo (“BES”) saw a
price decline from 93.50 to 22.00 following the news of the
transfer. The portfolio held circa. 1.5% thereby impacting the
total NAV by just over 1%; the Company has joined a syndicate of
asset management companies pursuing a legal action to restore the
bonds’ standing or receive full compensation from the Portuguese
Central Bank – the action is ongoing.
The period has been challenging for higher beta credit,
particularly for the period from mid-December to mid-February.
Due to the challenging market conditions the NAV decreased by
2.62p during the period, however, declared dividends during the
period of 6.85p exceeded the 6.00p target.
Foreign Exchange Accounting
The Company’s policy is to hedge foreign currency risk. The
currency markets experienced significant volatility during the
year, with the EUR/GBP rate finishing higher by over 17%, in part
due to the referendum outcome in June which saw almost a 9% move on
the day. Large currency moves were also felt in the USD/GBP rate,
which similarly saw a movement during the period of 17%. Exposure
to Euro denominated assets represented 54% of the Portfolio at the
end of the period. The Company also had exposure to US Dollar,
Swedish Krona and Swiss Franc denominated assets during the year.
All currency exposures are hedged back to Sterling to minimise any
currency risk.
The net foreign currency gain on the portfolio (recorded within
net gain/(loss) on financial assets at fair value through profit or
loss) and the net foreign currency losses on the forward currency
contracts (included within net foreign currency (loss)/gain) are
recognised in accordance with the hedging policy and IFRS, within
the Statement of Comprehensive Income.
Investment Outlook
The Company was established to take advantage of the liquidity
premium that exists in the non-government sectors of the fixed
income universe, whilst only hedging excessive duration risk.
However, with the ongoing central bank support the Portfolio
Manager currently considers that interest rate hedging is an
unnecessary drag on performance and hence there are no interest
rate positions held by the Company in the current year.
Since the launch of the Company in early 2014 credit spreads in
the key sectors of CLOs, subordinated financials and high yield
corporates continue to trade wider. However, with the ongoing
central bank stimulus from the ECB and BoE the Portfolio Manager is
convinced that spreads will eventually tighten in line with 2014
levels, although they appreciate that there are likely to be some
periods of volatility along the way. There are a number of
uncertainties that face markets, suggesting that the coming 12
months will have its challenges but central bank activity will
continue to create strong technical support. The Portfolio Manager
sees this as an ongoing opportunity to add credit exposure during
the periods of market stress, which alleviates the concerns of
re-investment risk during this low interest rate
environment. The turnover of the Company during the period was
relatively unchanged and in line with previous periods, with any
issuance of shares able to be invested in a reasonable timeframe
and in line with the Company’s objectives. The Portfolio Manager
has no concerns on the overall liquidity of the Company, while
acknowledging there are still opportunities to be found in more
relatively illiquid securities, and that there are no significant
changes to default rate expectations.
The Portfolio Manager considers the medium outlook with a degree
of caution as there are a number of uncertain macro and political
events that could create periods of market uncertainty. The US
election, Italian Constitutional Referendum and the UK signing of
Article 50 all have the potential to destabilise markets, and there
are elections this year in Germany, France, Netherlands and Hungary which will also be closely watched.
This could result in some mark-to-market volatility but the PM is
confident that the underlying credits will, over the longer-term,
generate attractive returns in an environment where yield is
becoming an ever more scarce resource.
TwentyFour Asset Management LLP
18 January
2017
TOP TWENTY HOLDINGS
As at 30 September 2016
|
|
|
Credit |
|
|
Percentage of |
|
Nominal/ |
|
Security |
Fair
Value * |
|
Net
Asset |
|
Shares |
|
Sector |
£ |
|
Value |
Nationwide Bldg
Society 10.25 29/06/2049 |
30,000 |
|
Banks |
3,919,821 |
|
2.86 |
Coventry Bldg Society
6.375 29/12/2049 |
3,540,000 |
|
Banks |
3,364,887 |
|
2.46 |
Santander UK Group
10.375 31/12/2049 |
2,000,000 |
|
Banks |
3,274,973 |
|
2.39 |
Avoca CLO 11X F
15/07/2027 |
4,000,000 |
|
ABS |
2,958,734 |
|
2.16 |
Shawbrook Group 8.5
28/10/2025 |
2,800,000 |
|
Banks |
2,856,000 |
|
2.09 |
Bank of Ireland 7.375
29/12/2049 |
3,400,000 |
|
Banks |
2,823,775 |
|
2.06 |
Jubilee CDO BV
2014-12X F 15/07/2027 |
3,950,000 |
|
ABS |
2,723,905 |
|
1.99 |
Capital Bridging
Finance 1 MEZZ 05/07/2018 |
2,500,000 |
|
ABS |
2,512,500 |
|
1.84 |
Intralot Capital
Luxembourg SA 6 15/05/2021 |
2,800,000 |
|
High
Yield |
2,402,328 |
|
1.76 |
SC Germany Consumer
2015-1 E 13/12/2028 |
2,500,000 |
|
ABS |
2,260,435 |
|
1.65 |
Aquilae CLO 1X E
22/12/2016 |
2,800,000 |
|
ABS |
2,211,938 |
|
1.62 |
Credit Suisse Group AG
7.5 29/12/49 |
2,800,000 |
|
Financial |
2,201,309 |
|
1.61 |
Keystone Financing 9.5
15/10/2019 |
2,100,000 |
|
High
Yield |
2,186,730 |
|
1.60 |
Herbert Park BV Series
1X E 20/10/2026 |
3,000,000 |
|
ABS |
2,142,082 |
|
1.57 |
Ethias SA 5
14/01/2026 |
2,900,000 |
|
Insurance |
2,063,458 |
|
1.51 |
Barclays PLC 7.875
29/12/2049 |
2,065,000 |
|
Banks |
2,025,972 |
|
1.48 |
GHD Bondco PLC 7
15/04/2020 |
2,000,000 |
|
High
Yield |
2,003,200 |
|
1.46 |
Aldermore Group 11.875
29/12/2049 |
1,900,000 |
|
Banks |
1,998,563 |
|
1.46 |
Synlab Unsecured
Bondco PLC 8.25 01/07/2023 |
2,000,000 |
|
High
Yield |
1,849,209 |
|
1.35 |
Avoca CLO 13A F
16/12/2027 |
2,500,000 |
|
ABS |
1,838,395 |
|
1.34 |
Total |
|
|
|
49,618,214 |
|
36.26 |
* Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
The full portfolio listing as at 30
September 2016 can be obtained from the Administrator on
request.
BOARD MEMBERS
Biographical details of the Directors are as follows:
Claire
Whittet – (Chair) (age 61)
Ms Whittet is a resident of Guernsey and has nearly 40 years’ experience
in the banking industry. Until May
2016, she was Managing Director and Co-Head of Rothschild
Bank International Ltd and a Director of Rothschild Bank (CI) Ltd
and is now a Non-Executive Director of Rothschild Bank
International Ltd. She joined Rothschild as a Director in 2003
having begun her career at the Bank of Scotland where she was for 19 years in a
variety of personal and corporate finance roles. Subsequently, Ms
Whittet joined Bank of Bermuda and
was Global Head of Private Client Credit before joining
Rothschild.
Ms Whittet is a Non-Executive Director of 4 other listed,
Guernsey registered funds.
Ms Whittet holds an MA from Edinburgh
University, is a member of the Chartered Institute of
Bankers in Scotland, a member of
the Chartered Insurance Institute, a Chartered Banker, a member of
the Institute of Directors and holds the Institute of Directors
Diploma in Company Direction. Ms Whittet was appointed to the Board
on 12 February 2014.
Christopher F. L. Legge –
(Non-executive Director) (age 61)
Mr Legge is a Guernsey resident
and worked for Ernst & Young in Guernsey from 1983 to 2003. Having joined the
firm as an audit manager in 1983, he was appointed a partner in
1986 and managing partner in 1998. From 1990 to 1998, he was head
of Audit and Accountancy and was responsible for the audits of a
number of banking, insurance, investment fund, property fund and
other financial services clients. He also had responsibility for
the firm’s training, quality control and compliance functions. He
was appointed managing partner for the Channel Islands region in 2000 and merged the
business with Ernst & Young LLP in the United Kingdom. He retired from Ernst &
Young in 2003.
Mr Legge currently holds a number of non-executive directorships
in the financial services sector and also chairs the Audit
Committees of several UK listed companies. He is an FCA and holds a
BA (Hons) in Economics from the University of Manchester. Mr Legge was appointed to the
Board on 12 February 2014.
Thomas H. Emch –
(Non-executive Director) (age 73)
Mr Emch is an independent Board member and consultant. He
graduated from the University of Zurich (lic.oec.publ.) and IMD (PED) in
Lausanne. During his professional career he successively was
European Treasurer of Litton International, SVP of Banque Paribas
Suisse, EVP of Lombard Odier & Co. and CEO of Royal Bank of
Canada (Suisse), a position he
held for 11 years until his retirement in 1999. Throughout his
banking career, he served on the Boards of numerous companies and
professional associations in Switzerland and abroad. Mr Emch was appointed
to the Board on 12 February 2014.
Ian
Martin - (Non-executive Director) (age 53)
Ian Martin has over 30 years’
experience in finance gathered in a variety of multi asset
investment focused roles in the UK, Hong
Kong, Switzerland and
Uruguay. More recently he was the
CIO and Head of Asset Management and Research at Lloyds Bank in
Geneva and then Head of Bespoke
Portfolio Management and Advisory for key clients in UBP Bank in
Geneva. Previous roles have
included senior roles in equity derivatives and trading as well as
CIO and Managing Director of a Fund of Hedge fund company in the
UK. Currently he is a Director of Bedlam Family Office. Mr Martin
was appointed to the Board on 15 July
2014.
DISCLOSURE OF DIRECTORSHIPS IN PUBLIC
COMPANIES LISTED ON RECOGNISED EXCHANGES
The following summarises the Directors’ directorships in other
public listed companies:
Company
Name |
|
|
|
|
Stock
Exchange |
|
|
|
|
|
|
Claire
Whittet (Chair) |
|
|
|
|
BH Macro Limited |
|
|
|
|
London, Bermuda and
Dubai |
Eurocastle
Investment Limited |
|
|
|
Amsterdam |
International Public Partnerships Limited |
|
|
London |
Riverstone
Energy Limited |
|
|
|
London |
|
|
|
|
|
|
Christopher
Legge |
|
|
|
|
|
Ashmore
Global Opportunities Limited |
|
|
London |
John Laing
Environmental Assets Group Limited |
|
London |
Sherborne
Investors (Guernsey) B Limited |
|
|
London |
Third
Point Offshore Investors Limited |
|
|
London |
DIRECTORS’ REPORT
The Directors present their Annual Report and Audited Financial
Statements for the year ended 30 September
2016.
Business Review
The Company
TwentyFour Select Monthly Income Fund Limited (the “Company”)
was incorporated with limited liability in Guernsey, as a closed-ended investment company
on 12 February 2014. The Company’s
Shares were listed with a Premium Listing on the Official List of
the UK Listing Authority and admitted to trading on the Main Market
of the LSE on 10 March 2014.
Investment Objective and Policy
The investment objective and policy is set out in the Summary
Information.
Discount/Premium to Net Asset
Value
The Board monitors and manages the level of the share price
discount/premium to NAV. In managing this, the Company can operate
a share buyback facility whereby it may purchase, subject to
various terms as set out in its Articles and in accordance with The
Companies (Guernsey) Law, 2008, up
to 14.99% of the Company’s Ordinary Redeemable Shares in issue
immediately following Admission for trading in the LSE.
The Company also offers investors a Quarterly Tender, contingent
on certain factors, to provide Shareholders with a quarterly
opportunity to submit Ordinary Shares for placing or repurchase by
the Company at a price representing a discount of no more than 2%
to the then prevailing NAV. For additional information refer to
note 16 to the Financial Statements.
Shareholder Information
Shareholder information is set out in the Summary
Information.
Going Concern
The Directors believe that, having considered the Company’s
investment objective (see Summary Information), financial risk
management (see note 16 to the Financial Statements) and in view of
the Company’s holding in cash and cash equivalents, the liquidity
of investments and the income deriving from those investments, the
Company has adequate financial resources and suitable management
arrangements in place to continue as a going concern for at least
twelve months from the date of approval of the financial
statements.
Viability Statement
Under the UK Corporate Governance Code, the Board is required to
make a “viability statement” which considers the Company’s current
position and principal risks and uncertainties combined with an
assessment of the prospects of the Company in order to be able to
state that they have a reasonable expectation that the Company will
be able to continue in operation over the period of their
assessment. The Board considers that three years is an appropriate
period to assess the viability of the Company given the uncertainty
of the investment world and the strategy period. In selecting this
period the Board considered the environment within which the
Company operates and the risks associated with the Company.
The Company’s prospects are driven by its business model and
strategy. The Company’s aim is to provide investors with an
attractive level of income and a focus on capital preservation in
uncertain times, by investing in less liquid, high yielding credit
securities.
The Board confirms they have performed a robust assessment of
the principal risks facing the Company and the Board’s assessment
of the Company over the three year period has been made with
reference to the Company’s current position and prospects, the
Company’s strategy, and the Board’s risk appetite having considered
each of the Company’s principal risks and uncertainties summarised
in the Directors’ Report.
The Board has also considered the Company’s cash flows and
income flows, its likely ability to pay dividends and the portfolio
analysis, including but not limited to liquidity analysis, foreign
exchange analysis, credit analysis and valuation analysis. The
analysis has taken the form of stress tests on the Company as well
as cash flow modelling based on a range of different market
scenarios. All of the foregoing have been considered against the
background of the Company’s dividend target.
Key assumptions considered by the Board in relation to the
viability of the Company are as follows:
Dividend Target
The ongoing viability of the Company and the validity of the
going concern basis depend on the Company meeting its dividend
target annually during the three-year period. In the event that the
Company does not meet the dividend target as disclosed in note 19
to the Financial Statements, the Directors will convene a general
meeting in accordance with the Continuation Vote requirements set
out in note 16 to the Financial Statements.
Quarterly Tenders
The Company has incorporated into its structure a mechanism for
a quarterly tender to reduce the risk of Ordinary Shares trading at
a discount to NAV. It is anticipated that the Company will tender
on a quarterly basis for up to 20% of the Ordinary Shares in issue
as at the relevant Quarter Record Date, subject to an aggregate
limit of 50% of the Ordinary Shares in issue in any twelve month
period ending on the relevant Quarter Record Date. In the event
that quarterly tender applications, on any tender submission
deadline, exceed the 50% limit, the Directors will convene a
General Meeting in accordance with the Continuation Vote
requirements set out in note 16 to the Financial Statements. The
quarterly tenders will be at the discretion of the Board. Ordinary
Shares trading at a discount to NAV over a long period of time may
impact the viability of the Company.
The Board having considered the analysis above, have a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the three
year period to 30 September 2019.
Results
The results for the year are set out in the Statement of
Comprehensive Income. The Directors paid income distributions of
£10,314,251 for the year ended 30 September
2016, a breakdown of which can be found in note 19 to the
Financial Statements. The 30 September
2016 distribution which was declared on 12 October 2016 was paid on 31 October 2016.
Distributions made with respect to any income period comprise
(a) the total income of the portfolio for the period, and (b) an
additional amount paid out of capital to reflect any additional
income in the course of any share subscriptions that took place
during the period. Including additional income in this way ensures
that the income yield of the shares is not diluted as a consequence
of the issue of new shares during an income period and (c) any
income on the foreign exchange contracts caused by the libor
differentials between each foreign exchange currency pair.
Key Performance Indicators
(“KPIs”)
At each Board meeting, the Directors consider a number of
performance measures to assess the Company’s success in achieving
its objectives. Below are the main KPIs which have been identified
by the Board for determining the progress of the Company:
- Net Asset Value;
- Share Price;
- Discount/Premium;
- Ongoing Charges; and
- Monthly Dividends.
A record of these measures is disclosed in the Summary
Information.
Portfolio Manager
The portfolio management fee is payable to the Portfolio
Manager, TwentyFour Asset Management LLP, monthly in arrears at a
rate of 0.75% per annum of the lower of NAV, which is calculated
weekly on each valuation day and on the last business day of each
month, or market capitalisation of each class of share. For
additional information refer to note 14 to the Financial
Statements.
The Board considers that the interests of Shareholders, as a
whole, are best served by the ongoing appointment of the Portfolio
Manager to achieve the Company’s investment objectives.
Alternative Investment Fund Manager (“AIFM”)
Alternative investment fund management services are provided by
Maitland Institutional Services Limited (“Maitland”) (formerly
Phoenix Fund Services (UK) Limited). The AIFM fee is payable
quarterly in arrears at a rate of 0.07% of the NAV of the Company
below £50 million, 0.05% on Net Assets between £50 million and £100
million and 0.03% on Net Assets in excess of £100 million. For
additional information refer to note 15 to the Financial
Statements.
Custodian and Depositary
Custody and Depositary services are provided by Northern Trust
(Guernsey) Limited. The terms of
the Depositary agreement allow Northern Trust (Guernsey) Limited to receive professional fees
for services rendered. The Depositary agreement includes custodian
duties. For additional information refer to note 15 to the
Financial Statements.
Directors
The Directors of the Company during the year and at the date of
this Report are set out in the Corporate Information.
Directors' and Other Interests
The Directors of the Company held the following Ordinary Shares
beneficially:
|
|
|
|
|
|
|
30.09.16 |
|
30.09.15 |
|
|
|
|
|
|
|
Shares |
|
Shares |
|
|
|
|
|
|
|
|
|
|
Claire Whittet |
|
|
|
|
|
|
25,000 |
|
25,000 |
Christopher Legge |
|
|
|
|
|
50,000 |
|
50,000 |
Thomas Emch |
|
|
|
|
|
|
25,000 |
|
25,000 |
Ian Martin |
|
|
|
|
|
|
35,000 |
|
25,000 |
Corporate Governance
The Board is committed to high standards of corporate governance
and has implemented a framework for corporate governance which it
considers to be appropriate for an investment company in order to
comply with the principles of the UK Corporate Governance Code (the
“UK Code”). The Company is also required to comply with the Code of
Corporate Governance (the “GFSC Code”) issued by the Guernsey
Financial Services Commission.
The UK Listing Authority requires all UK premium listing
companies to disclose how they have complied with the provisions of
the UK Code. This Corporate Governance Statement, together with the
Going Concern Statement, Viability Statement and the Statement of
Directors’ Responsibilities set out in the Statement of Directors’
Responsibilities, indicates how the Company has complied with the
principles of good governance of the UK Code and its requirements
on Internal Control.
The Company is a member of the AIC and by complying with the AIC
Code of Corporate Governance (the “AIC Code”) is deemed to comply
with both the UK Code and the GFSC Code.
The Board has considered the principles and recommendations of
the AIC Code, by reference to the guidance notes provided by the
AIC Guide, and consider that reporting against these will provide
better information to shareholders. To ensure ongoing compliance
with these principles the Board reviews a report from the Corporate
Secretary at each quarterly meeting, identifying how the Company is
in compliance and identifying any changes that might be
necessary.
The AIC Code and the AIC Guide are available on the AIC’s
website, www.theaic.co.uk. The UK Code is available in the
Financial Reporting Council’s website, www.frc.org.uk.
Throughout the year ended 30 September
2016, the Company has complied with the recommendations of
the AIC Code and thus the relevant provisions of the UK Code,
except as set out below.
The UK Code includes provisions relating to:
- the role of the Chief Executive;
- Executive Directors’ remuneration;
- Annually assessing the need for an internal audit
function;
- the whistle blowing policy;
- Senior Independent Director;
- Remuneration Committee; and
- Nomination Committee.
For the reasons set out in the AIC Guide, and as explained in
the UK Code, the Board considers these provisions are not relevant
to the position of the Company as it is an externally managed
investment company. The Company has therefore not reported further
in respect of these provisions. The Directors are all non-executive
and the Company does not have employees, hence no Chief Executive
or whistle-blowing policy is required for the Company. The key
service-providers all have whistleblowing policies in place. The
Board is satisfied that any relevant issues can be properly
considered by the Board. The Board as a whole fulfills the function
of a Nomination and Remuneration Committee.
Details of compliance with the AIC Code are noted below and in
the succeeding sections. There have been no other instances of
non-compliance, other than those noted above.
Role, Composition and Independence of
the Board
The Board is the Company’s governing body and has overall
responsibility for maximising the Company’s success by directing
and supervising the affairs of the business and meeting the
appropriate interests of shareholders and relevant stakeholders,
while enhancing the value of the Company and also ensuring
protection of investors. A summary of the Board’s responsibilities
is as follows:
- statutory obligations and public disclosure;
- strategic matters and financial reporting;
- risk assessment and management including reporting compliance,
governance,
monitoring and control; and
- other matters having a material effect on the Company.
The Board’s responsibilities for the Annual Report and Audited
Financial Statements are set out in the Statement of Directors’
Responsibilities.
The Board currently consists of four non-executive Directors,
all of whom are considered to be independent of the Portfolio
Manager and as prescribed by the Listing Rules.
The Board does not consider it appropriate to appoint a Senior
Independent Director because they are all deemed to be independent
by the Company. The Board considers it has the appropriate balance
of diverse skills and experience, independence and knowledge of the
Company and the wider sector, to enable it to discharge its duties
and responsibilities effectively and that no individual or group of
individuals dominates decision making. The Chair is responsible for
leadership of the Board and ensuring its effectiveness.
Chair
The Chair is Claire Whittet. The
Chair of the Board must be independent for the purposes of Chapter
15 of the Listing Rules. Claire
Whittet is considered independent because she:
- has no current or historical employment with the Portfolio
Manager; and
- has no current directorships in any other investment funds
managed by the
Portfolio Manager.
Biographies for all the Directors can be found in the Board
Members section.
The Board needs to ensure that the Annual Report and Audited
Financial Statements, 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. In seeking to achieve this, the
Directors have set out the Company’s investment objective and
policy and have explained how the Board and its delegated
Committees operate and how the Directors review the risk
environment within which the Company operates and set appropriate
risk controls. Furthermore, throughout the Annual Report and
Audited Financial Statements the Board has sought to provide
further information to enable shareholders to have a fair, balanced
and understandable view.
The Board has contractually delegated responsibility for the
management of its investment portfolio, the arrangement of
custodial and depositary services and the provision of accounting
and company secretarial services.
The Board is responsible for the appointment and monitoring of
all service providers to the Company.
The Directors are kept fully informed of investment and
financial controls and other matters by all services providers that
are relevant to the business of the Company and should be brought
to the attention of the Directors.
The Company has adopted a policy that the composition of the
Board of Directors, which is required by the Company’s Articles to
comprise of at least two persons, is at all times such that a
majority of the Directors are independent of the Portfolio Manager
and any company in the same group as the Portfolio Manager; the
Chair of the Board of Directors is free from any conflicts of
interest and is independent of the Portfolio Manager and of any
company in the same group as the Portfolio Manager; and that no
more than one director, partner, employee or professional adviser
to the Portfolio Manager or any company in the same group as the
Portfolio Manager may be a Director of the Company at any one
time.
The Board has a breadth of experience relevant to the Company
and the Directors believe that any changes to the Board’s
composition can be managed without undue disruption. With any new
director appointment to the Board, consideration will be given as
to whether an induction process is appropriate.
The Board has also given careful consideration to the
recommendations of the Davies Review. The Board has reviewed its
composition and believes that the current appointments provide an
appropriate range of skills, experience and diversity. In order to
maintain its diversity, the Board is committed to continuing its
implementation of the recommendations of the Davies Review as part
of its succession planning over future years.
Directors’ Attendance at Meetings
The Board holds quarterly Board meetings, to discuss general
management, structure, finance, corporate governance, marketing,
risk management, compliance, asset allocation and gearing,
contracts and performance. The quarterly Board meetings are the
principal source of regular information for the Board enabling it
to determine policy and to monitor performance, compliance and
controls but these meetings are also supplemented by communication
and discussions throughout the year.
A representative from each of the Portfolio Manager, AIFM,
Administrator, Custodian and Depositary and Corporate Broker
attends each Board meeting either in person or by telephone thus
enabling the Board to fully discuss and review the Company’s
operation and performance. Each Director has direct access to the
Portfolio Manager and Company Secretary and may, at the expense of
the Company, seek independent professional advice on any
matter.
Both appointment and removal of these parties is to be agreed by
the Board as a whole.
The Audit Committee meets at least twice a year, Management
Engagement Committee meets at least once a year, a dividend meeting
is held monthly and there are additional meetings covering the
Quarterly Tender as and when necessary. In addition, ad hoc
meetings of the Board to review specific items between the regular
scheduled quarterly meetings can be arranged. Between formal
meetings there is regular contact with the Portfolio Manager, AIFM,
Administrator, Custodian and Depositary and the Corporate
Broker.
Attendance at the Board, Audit and Management Engagement
Committee meetings during the year was as follows:
|
|
Board Meetings |
Audit Committee Meetings |
Management Engagement Committee Meetings |
Ad hoc Committee Meetings |
|
|
Held |
Attended |
Held |
Attended |
Held |
Attended |
Held |
Attended |
|
|
|
|
|
|
|
|
|
|
Claire
Whittet |
4 |
4 |
3 |
3 |
1 |
1 |
15 |
11 |
Christopher Legge |
4 |
4 |
3 |
3 |
1 |
1 |
15 |
15 |
Thomas
Emch |
4 |
4 |
3 |
3 |
1 |
1 |
15 |
11 |
Ian Martin |
|
4 |
4 |
3 |
3 |
1 |
1 |
15 |
12 |
At the Board meetings the Directors review the management of the
Company’s assets and liabilities and all other significant matters
so as to ensure that the Directors maintain overall control and
supervision of the Company’s affairs.
Election of Directors
The election of Directors is set out in the Directors’
Remuneration Report.
Board Performance and Training
The Board undertook an annual self-evaluation and Chair
evaluation and discussed the results in September 2016. The Board assessed and discussed
their composition and balance of skills, board processes,
information flows, any areas for additional training, board
dynamics, accountability and their effectiveness. There were no
material findings from this evaluation. The Board will commission
an external evaluation in the first half of 2017.
On appointment to the Board, the Directors were offered relevant
training and induction. Training is an on-going matter as is
discussion on the overall strategy of the Company and the Board has
met with the Portfolio Manager during the year to discuss these
matters. Such meetings will be an on-going occurrence.
Retirement by Rotation
Under the terms of their appointment, each Director is required
to retire by rotation and be subject to re-election at least every
three years. The Directors are also required to seek re-election if
they have already served for more than nine years. The Company may
terminate the appointment of a Director immediately on serving
written notice and no compensation is payable upon termination of
office as a director of the Company becoming effective. All
Directors have agreed to stand for re-election annually.
Board Committees and their
Activities
Terms of Reference
All Terms of Reference of the Board’s Committees are available
from the Administrator upon request.
Management Engagement Committee
The Board has established a Management Engagement Committee with
formal duties and responsibilities. The Management Engagement
Committee commits to meeting at least once a year and comprises the
entire Board with Thomas Emch
appointed as Chair. These duties and responsibilities include the
regular review of the performance of and contractual arrangements
with the Portfolio Manager and other service providers and the
preparation of the Committee’s annual opinion as to the Portfolio
Manager’s services.
The Management Engagement Committee carried out its review of
the performance and capabilities of the Portfolio Manager at its
meeting during the year and the Board recommended the continued
appointment of TwentyFour Asset Management LLP as Portfolio Manager
as it is in the interest of shareholders.
Audit Committee
An Audit Committee has been established consisting of all
Directors with Christopher Legge
appointed as Chair. The terms of reference of the Audit Committee
provide that the committee shall be responsible, amongst other
things, for reviewing the Interim and Annual Financial Statements,
considering the appointment and independence of external auditors,
discussing with the external auditors the scope of the audit and
reviewing the Company’s compliance with the AIC Code.
Further details on the Audit Committee can be found in the Audit
Committee Report.
Nomination Committee
There is no separate Nomination Committee. The Board as a whole
fulfils the function of a Nomination Committee. Any proposal for a
new Director will be discussed and approved by all members of the
Board.
Remuneration Committee
In view of its non-executive and independent nature, the Board
considers that it is not appropriate for there to be a separate
Remuneration Committee as anticipated or recommended by the AIC
Code. The Board as a whole fulfils the functions of the
Remuneration Committee, although the Board has included a separate
Remuneration Report of these Financial Statements.
International Tax Reporting
For purposes of the US Foreign Account Tax Compliance Act, the
Company registered with the US Internal Revenue Service (“IRS”) as
a Guernsey reporting Foreign
Financial Institution (“FFI”), received a Global Intermediary
Identification Number (E5XSVA.99999.SL.831), and can be found on
the IRS FFI list.
The Common Reporting Standard (“CRS”) is a global standard for
the automatic exchange of financial account information developed
by the Organisation for Economic Co-operation and Development
(“OECD”), which has been adopted in Guernsey and which came into effect on
1 January 2016. The CRS has replaced
the inter-governmental agreement between the UK and Guernsey to improve international tax
compliance that had previously applied in respect of 2014 and
2015.
The Board ensures that the Company is compliant with
Guernsey regulations and guidance
in this regard.
Strategy
The strategy for the Company is to capture the illiquidity
premium that is associated with ‘off the run’ bond issues in the
secondary markets. As part of the general search for high
conviction, relative value securities the Portfolio Manager
continually came across interesting investment opportunities but
too often these bonds did not offer sufficient liquidity to use in
the typical daily mark-to-market UCITs funds, however they are
suitable for closed ended vehicles. By remaining highly selective
and without conceding on underlying credit quality, the strategy
expects to generate a minimum monthly distribution of 0.5p per
share, with all excess income being distributed to investors at the
year-end of the Company.
Internal Controls
The Board is ultimately responsible for establishing and
maintaining the Company’s system of internal financial and
operating control and for maintaining and reviewing its
effectiveness. The Company’s risk matrix continues to be the core
element of the Company’s risk management process in establishing
the Company’s system of internal financial and reporting control.
The risk matrix is prepared and maintained by the Board which
initially identifies the risks facing the Company and then
collectively assesses the likelihood of each risk, the impact of
those risks and the strength of the controls operating over each
risk. The system of internal financial and operating control is
designed to manage rather than to eliminate the risk of failure to
achieve business objectives and by their nature can only provide
reasonable and not absolute assurance against misstatement and
loss.
These controls aim to ensure that assets of the Company are
safeguarded, proper accounting records are maintained and the
financial information for publication is reliable. The Board
confirms that there is an ongoing process for identifying,
evaluating and managing the significant risks faced by the
Company.
This process has been in place for the year under review and up
to the date of approval of this Annual Report and Audited Financial
Statements and is reviewed by the Board and is in accordance with
the AIC Code.
The AIC Code requires Directors to conduct at least annually a
review of the Company’s system of internal financial and operating
control, covering all controls, including financial, operational,
compliance and risk management. The Board has evaluated the systems
of internal controls of the Company. In particular, it has prepared
a process for identifying and evaluating the significant risks
affecting the Company and the policies by which these risks are
managed. The Board also considers whether the appointment of an
internal auditor is required and has determined that there is no
requirement for a direct internal audit function.
The Board has delegated the day to day responsibilities for the
management of the Company’s investment portfolio, the provision of
depositary services and administration, registrar and corporate
secretarial functions including the independent calculation of the
Company’s NAV and the production of the Annual Report and Financial
Statements which are independently audited.
Formal contractual agreements have been put in place between the
Company and providers of these services. Even though the Board has
delegated responsibility for these functions, it retains
accountability for these functions and is responsible for the
systems of internal control. At each quarterly Board meeting,
compliance reports are provided by the Administrator, Company
Secretary, Portfolio Manager, AIFM and Depositary. The Board also
receives confirmation from the Administrator of its accreditation
under its Service Organisation Controls 1 report.
The Company’s risk exposure and the effectiveness of its risk
management and internal control systems are reviewed by the Audit
Committee at its quarterly meetings and annually by the Board. The
Board believes that the Company has adequate and effective systems
in place to identify, mitigate and manage the risks to which it is
exposed. Principal Risks and Uncertainties are set out below.
Principal Risks and Uncertainties
The Board is responsible for the Company’s system of internal
financial and reporting controls and for reviewing its
effectiveness. The Board is satisfied that by using the Company’s
risk matrix as its core element in establishing the Company’s
system, internal financial and reporting controls while monitoring
the investment limits and restrictions set out in the Company’s
investment objective and policy, that the Board has carried out a
robust assessment of the principal risks and uncertainties facing
the Company.
The principal risks which have been identified and the steps
which are taken by the Board to mitigate them are as follows:
Market risk
The underlying investments comprised in the Portfolio are
subject to market risk. The Company is therefore at risk that
market events may affect performance and in particular may affect
the value of the Company’s investments which are valued on a marked
to market basis. Market risk is the risk associated with changes in
market prices, including spreads, economic uncertainty, changes in
laws and political (national and international) circumstances such
as the recent UK vote to leave the EU. While the Company, through
its investments in Credit Securities, intends to hold a diversified
Portfolio of assets, any of these factors including specific market
events, such as the global financial crisis, levels of sovereign
debt and UK’s vote to leave the EU, may have a material impact
which could be materially detrimental to the performance of the
Company’s investments. The UK’s vote to leave the EU has introduced
new uncertainties and instability into the financial markets. As
the process of a major country leaving the EU has no precedent, the
Board and the Portfolio Manager expect an ongoing period of market
uncertainty as the implications are processed.
Under extreme market conditions the portfolio may not benefit
from diversification. For additional information refer to Note 16
to the Financial Statements.
Liquidity risk
Investments made by the Company may be illiquid and this may
limit the ability of the Company to realise its investments and in
turn pay dividends to Shareholders or buy back Ordinary Shares
under the Quarterly Tenders or in the market. Substantially all of
the assets of the Company are invested in Credit Securities. There
may be no active market in the Company’s interests in Credit
Securities and the Company may be required to provide liquidity to
fund Tender Requests or repay borrowings. The Company does not have
redemption rights in relation to any of its investments. As a
consequence, the value of the Company’s investments may be
materially adversely affected. For additional information refer to
note 16 to the Financial Statements.
Credit risk
The Company may not achieve the Dividend Target and investors
may not get back the full value of their investment because the
Company invests in Credit Securities issued by other companies,
trusts or other investment vehicles which, compared to bonds issued
or guaranteed by governments, are generally exposed to greater risk
of default in the repayment of the capital provided to the issuer
or interest payments due to the Company. The amount of credit risk
is indicated by the issuer’s credit rating which is assigned by one
or more internationally recognised rating agencies. This does not
amount to a guarantee of the issuer’s creditworthiness but
generally provides a good indicator of the likelihood of default.
Securities which have a lower credit rating are generally
considered to have a higher credit risk and a greater possibility
of default than more highly rated securities. There is a risk that
an internationally recognised rating agency may assign incorrect or
inappropriate credit ratings to issuers. Issuers often issue
securities which are ranked in order of seniority which, in the
event of default, would be reflected in the priority in which
investors might be paid back.
The level of defaults in the Portfolio and the losses suffered
on such defaults may increase in the event of adverse financial or
credit market conditions.
In the event of a default of a Credit Security, the Company’s
right to recover will depend on the ability of the Company to
exercise any rights that it has against the borrower under the
insolvency legislation of the jurisdiction in which the borrower is
incorporated. As a creditor, the Company’s level of protection and
rights of enforcement may therefore vary significantly from one
country to another, may change over time and may be subject to
rights and protections which the relevant borrower or its other
creditors might be entitled to exercise. Refer to Investment
Objective and Policy in the Summary Information for information
regarding investment restrictions currently in place in order to
manage credit risk. For additional information refer to note 16 to
the Financial Statements.
Foreign currency risk
The Company is exposed to foreign currency risk through its
investments denominated in currencies other than Sterling. The
Company’s share capital is denominated in Sterling and its expenses
are incurred in Sterling. The Company’s Financial Statements are
maintained and presented in Sterling. At year end, of the foreign
currency investments, approximately 54% are in Euros and 7% are in
US dollars. Amongst other factors affecting the foreign exchange
markets, events in the Eurozone may have an impact upon the value
of the Euro which in turn will impact the value of the Company’s
Euro denominated investments. The Company manages its exposure to
currency movements by using spot and forward foreign exchange
contracts, which are rolled forward periodically. For additional
information refer to note 16 to the Financial Statements.
Reinvestment risk
Quantitative easing resulted in lower yields across all fixed
income products and tightening credit spreads. This could pose a
challenge for the Portfolio Manager when it comes to reinvesting
any monies that result from portfolio asset redemptions and income
payments. The Portfolio Manager has recognised this potential
challenge and performed ongoing cashflow analysis on the current
portfolio; encouragingly the redemptions and expected income
payments over the coming 12 months do not pose a significant
challenge. Trying to predict market conditions years ahead is
notoriously difficult, however the Portfolio Manager recognises
there may be a requirement to be more opportunistic in terms of
timing for new investments i.e. aim to reinvest when the market is
most volatile and also to remain vigilant to requests for issuance
of new shares. For further information refer to note 16 to the
Financial Statements.
Other Risks and Uncertainties
The Board has identified the following other risks and
uncertainties along with steps taken to mitigate them:
Operational risks
The Company is exposed to the risk arising from any failures of
systems and controls in the operations of the Portfolio Manager,
Administrator, AIFM and the Custodian and Depositary amongst
others. The Board and its Audit Committee regularly review reports
from the Portfolio Manager, the AIFM, Administrator and Custodian
and Depositary on their internal controls. The Administrator will
report to the Portfolio Manager any valuation issues which will be
brought to the Board for final approval as required.
Accounting, legal and regulatory
risks
The Company is exposed to the risk that it may fail to maintain
accurate accounting records, fail to comply with requirements of
its Admission document and fail to meet listing obligations. The
accounting records prepared by the Administrator are reviewed by
the Portfolio Manager. The Portfolio Manager, Administrator, AIFM,
Custodian and Depositary and Corporate Broker provide regular
updates to the Board on compliance with the Admission document and
changes in regulation. Changes in legal or regulatory environment
can have a major impact on some classes of debt. The Portfolio
Manager monitors this and takes appropriate action.
Income recognition risk
The Board considers income recognition as another risk and
uncertainty of the Company. The Portfolio Manager estimates the
remaining life of the security and its likely terminal value, which
has an impact on the effective interest rate of the Credit
Securities which in turn impacts the calculation of interest
income. The Board asked the Audit Committee to consider this risk
with work undertaken by the Audit Committee as discussed in the
Audit Committee Report. As a result of this work, the Board is
satisfied that income is appropriately stated in all material
aspects in the Financial Statements.
Cyber security risks
The Company is exposed to the risk arising from a successful
cyber-attack through its service providers. The Company’s service
providers provide regular updates to the Board on any cyber
security issues and how they are mitigating this risk. The Board is
satisfied that the Company’s service providers have the relevant
controls in place to mitigate this risk.
Shareholder Engagement
The Board welcomes shareholders’ views and places great
importance on communication with its shareholders. Shareholders
wishing to meet with the Chair and other Board members should
contact the Company’s Administrator.
The Portfolio Manager and Listing Sponsor maintain a regular
dialogue with institutional shareholders, the feedback from which
is reported to the Board.
The Company’s Annual General Meeting (“AGM”) provides a forum
for shareholders to meet and discuss issues of the Company and
shareholders with the opportunity to vote on the resolutions as
specified in the Notice of AGM. The Notice of the AGM and the
results are released to the LSE in the form of an announcement.
In addition, the Company maintains a website which contains
comprehensive information, including links to regulatory
announcements, share price information, financial reports,
investment objective and investor contacts.
Significant Shareholdings
Shareholders with holdings of more than 3.0% of the Shares of
the Company at 16 January 2017 were
as follows:
|
Number of Shares |
Percentage of issued share capital |
|
|
|
Nortrust Nominees
Limited |
23,999,733 |
15.53% |
The Bank of New York
(Nominees) Limited |
20,546,332 |
13.29% |
Platform Securities
Nominees Limited |
13,559,533 |
8.77% |
Pershing Nominees
Limited |
13,059,501 |
8.45% |
State Street Nominees
Limited |
11,096,881 |
7.18% |
Ferlim Nominees
Limited |
8,088,556 |
5.23% |
W B Nominees
Limited |
7,132,160 |
4.61% |
Rock (Nominees)
Limited |
6,788,268 |
4.39% |
Vidacos Nominees
Limited |
5,515,242 |
3.57% |
HSBC Global Custody
Nominee (UK) Limited |
4,941,184 |
3.20% |
Smith & Williamson
Nominees Limited |
4,657,300 |
3.01% |
Those invested directly or indirectly in 3.0% or more of the
issued share capital of the Company will have the same voting
rights as other holders of the Shares.
Independent Auditors
A resolution for the reappointment of PricewaterhouseCoopers CI
LLP will be proposed at the forthcoming AGM.
Signed on behalf of the Board of Directors on 18 January 2017 by:
Claire
Whittet
Christopher Legge
Chair
Director
STATEMENT OF DIRECTORS’
RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report
and the Audited Financial Statements in accordance with applicable
Guernsey law and regulations.
Guernsey Company law requires the Directors to prepare Financial
Statements for each financial year. Under that law they have
elected to prepare the Financial Statements in accordance with
International Financial Reporting Standards (“IFRS”) and applicable
law.
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.
In preparing these Financial Statements, the Directors are
required to:
- select suitable accounting policies and then apply them
consistently;
- make judgements and estimates that are reasonable and
prudent;
- state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the Financial Statements; and
- prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors confirm that they have complied with these
requirements in preparing the Financial Statements.
The Directors are responsible for keeping proper accounting
records which disclose wit7h reasonable accuracy at any time the
financial position of the Company and to enable them to ensure that
the Financial Statements have been properly prepared in accordance
with The Companies (Guernsey) Law,
2008. They have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and
to prevent and detect fraud and other irregularities.
So far as the Directors are aware, there is no relevant audit
information of which the Company’s auditors are unaware, and each
Director has taken all the steps that he or she ought to have taken
as a Director in order to make himself or herself aware of any
relevant audit information and to establish that the Company’s
auditors are aware of that information.
The Directors are responsible for the oversight of the
maintenance and integrity of the corporate and financial
information in relation to the Company website; the work carried
out by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the financial statements since
they were initially presented on the website.
Legislation in Guernsey
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
The Directors confirm that to the best of their knowledge
- The Financial Statements have been prepared in accordance with
IFRS and give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company as at and for
the year ended 30 September
2016.
- The Annual Report includes information detailed in the Chair’s
Statement, Portfolio Manager’s Report, Directors’ Report,
Directors’ Remuneration Report, Audit Committee Report, Alternative
Investment Fund Manager’s Report and Depositary Statement provides
a fair review of the information required by:
(i) DTR 4.1.8
and DTR 4.1.9 of the Disclosure and Transparency Rules, being a
fair review of the Company business and a description of the
principal risks and uncertainties facing the Company; and
(ii) DTR
4.1.11 of the Disclosure and
Transparency Rules, being an indication of important events that
have occurred since the end of the financial year and the likely
future development of the Company.
In the opinion of the Board, the Financial Statements taken as a
whole, are fair, balanced and understandable and provide the
information necessary to assess the Company’s position and
performance, business model and strategy.
By order of the Board,
Claire
Whittet
Christopher Legge
Chair
Director
18 January
2017
DIRECTORS’ REMUNERATION REPORT
The Directors' remuneration report has been prepared in
accordance with the UK Code as issued by the UK Listing Authority.
An ordinary resolution for the approval of the annual remuneration
report was put to the shareholders at the AGM held on 7 July 2016.
Remuneration policy
The Company's policy in regard to Directors' remuneration is to
ensure that the Company maintains a competitive fee structure in
order to recruit, retain and motivate non-executive Directors of
excellent quality in the overall interests of shareholders.
The Directors do not consider it necessary for the Company to
establish a separate Remuneration Committee. All of the matters
recommended by the UK Code that would be delegated to such a
committee are considered by the Board as a whole.
It is the responsibility of the Board as a whole to determine
and approve the Directors' remuneration, following a recommendation
from the Chair who will have given the matter proper consideration,
having regard to the level of fees payable to non-executive
Directors in the industry generally, the role that individual
Directors fulfil in respect of Board and Committee responsibilities
and the time committed to the Company's affairs. The Chair's
remuneration is decided separately and is approved by the Board as
a whole.
No element of the Directors' remuneration is performance
related, nor does any Director have any entitlement to pensions,
share options or any long term incentive plans from the
Company.
Remuneration
The Directors of the Company are remunerated for their services
at such a rate as the Directors determine, provided that the
aggregate amount of such fees does not exceed £150,000 per
annum.
Directors are remunerated in the form of fees, payable quarterly
in arrears, to the Director personally. No Directors have been paid
additional remuneration by the Company outside their normal
Director’s fees and expenses.
In the year ended 30 September
2016 the Directors received the following annual
remuneration in the form of Directors’ fees:
Claire
Whittet (Chair of the Board) |
|
|
|
|
|
£35,000 |
Christopher Legge (Audit Committee Chairman) |
|
|
|
|
£32,500 |
Thomas
Emch |
|
|
|
|
|
|
|
£30,000 |
Ian
Martin |
|
|
|
|
|
|
|
£30,000 |
Total |
|
|
|
|
|
|
|
|
£127,500 |
|
|
|
|
|
|
|
|
|
|
With effect from 1 October 2015,
the Directors’ fees increased by £5,000 each. The remuneration
policy set out above is the one applied for the year ended
30 September 2016 and is not expected
to change in the foreseeable future.
Appropriate Directors' and Officers’ liability insurance cover
is maintained by the Company on behalf of the Directors.
The Directors were appointed as non-executive Directors by
letters issued in February and July
2014. Each Director’s appointment letter provides that, upon
the termination of his/her appointment, that he/she must resign in
writing and all records remain the property of the Company. The
Directors’ appointments can be terminated in accordance with the
Articles and without compensation.
There is no notice period specified in the Articles for the
removal of Directors. The Articles provide that the office of
Director shall be terminated by, among other things: (a) written
resignation; (b) unauthorised absences from board meetings for six
months or more; (c) unanimous written request of the other
Directors; and (d) an ordinary resolution of the Company.
Under the terms of their appointment, each Director is required
to retire by rotation and be subject to re-election at least every
three years but have opted for annual re-election. The Directors
are required to seek re-election if they have already served for
more than nine years. The Company may terminate the appointment of
a Director immediately on serving written notice and no
compensation is payable upon termination of office as a director of
the Company becoming effective.
The amounts payable to Directors shown in note 14 to the
Financial Statements are for services as non-executive
Directors.
No Director has a service contract with the Company, nor are any
such contracts proposed.
Signed on behalf of the Board of Directors on 18 January 2017 by:
Claire
Whittet
Christopher Legge
Chair
Director
AUDIT COMMITTEE REPORT
On the following sections, we present the Audit Committee's
Report, setting out the responsibilities of the Audit Committee and
its key activities for the year ended 30
September 2016.
The Audit Committee has scrutinised the appropriateness of the
Company’s system of risk management and internal financial and
operating controls, the robustness and integrity of the Company’s
financial reporting, along with the external audit process. The
Audit Committee has devoted time to ensuring that controls and
processes have been properly established, documented and
implemented.
During the course of the year, the information that the Audit
Committee has received has been timely and clear and has enabled
the Committee to discharge its duties effectively.
The Audit Committee is supportive of the latest UK Code
recommendations and other corporate governance organisations such
as the AIC, and believes that the revised AIC Code allows the Audit
Committee to further strengthen its role as a key independent
oversight Committee.
Role and responsibilities
The primary function of the Audit Committee is to assist the
Board in fulfilling its oversight responsibilities. This includes
reviewing the financial reports and other financial information and
any significant financial judgement contained therein, before
publication.
In addition, the Audit Committee reviews the systems of internal
financial and operating controls on a continuing basis that the
Administrator, Portfolio Manager, AIFM, and Custodian and
Depositary and the Board have established with respect to finance,
accounting, risk management, compliance, fraud and audit. The Audit
Committee also reviews the accounting and financial reporting
processes, along with reviewing the roles, independence and
effectiveness of the external auditor.
The ultimate responsibility for reviewing and approving the
Annual and Interim Financial Statements remain with the Board.
The Audit Committee's full terms of reference can be obtained by
contacting the Company's Administrator.
Risk management and internal
control
The Board, as a whole, consider the nature and extent of the
Company’s risk management framework and the risk profile that is
acceptable in order to achieve the Company’s strategic objectives.
As a result, it is considered that the Board has fulfilled its
obligations under the AIC Code.
The Audit Committee continues to be responsible for reviewing
the adequacy and effectiveness of the Company’s on-going risk
management systems and processes. Its system of internal controls,
along with its design and operating effectiveness, is subject to
review by the Audit Committee through reports received from the
Portfolio Manager, AIFM and Custodian and Depositary, along with
those from the Administrator and external auditor.
Fraud, Bribery and Corruption
The Board has relied on the overarching requirement placed on
the service providers under the relevant agreements to comply with
applicable law, including anti-bribery laws. A review of the
service provider policies took place at the Management Engagement
Committee Meeting on 1 July 2016. The
Board receives confirmation from all service providers that there
has been no fraud, bribery or corruption.
Financial reporting and significant
financial issues
The Audit Committee assesses whether suitable accounting
policies have been adopted and whether the Portfolio Manager has
made appropriate estimates and judgements. The Audit Committee
reviews accounting papers prepared by the Portfolio Manager and
Administrator which provides details on the main financial
reporting judgements.
The Audit Committee also reviews reports by the external
auditors which highlight any issues with respect to the work
undertaken on the audit.
The significant issues considered during the year by the Audit
Committee in relation to the Financial Statements and how they were
addressed are detailed below:
(i) Valuation of investments:
The Company’s investments had a fair value of £127,968,371 as at
30 September 2016 (30 September 2015: £128,802,069) and represent a
substantial portion of net assets of the Company. As such this is
the largest factor in relation to the consideration of the
Financial Statements. These investments are valued in accordance
with the Accounting Policies set out in note 2 and note 3 to the
Financial Statements. The Audit Committee considered the valuation
of the investments held by the Company as at 30 September 2016 to be reasonable based on
information provided by the Portfolio Manager, AIFM, Administrator,
Custodian and Depositary on their processes for the valuation of
these investments.
(ii) Income Recognition:
The Audit Committee considered the calculation of income from
investments recorded in the Financial Statements as at 30 September 2016. As disclosed in note 3(ii)(b)
of the Notes to the Financial Statements, the estimated life of
Credit Securities is determined by the Portfolio Manager, impacting
the effective interest rate of the Credit Securities which in turn
impacts the calculation of income from investments. The Audit
Committee has reviewed the Portfolio Manager's process for
determining the expected life of the Company's investments and
found it to be reasonable based on the explanations provided and
information obtained from the Portfolio Manager. The Audit
Committee was therefore satisfied that income was appropriately
stated in all material aspects in the Financial Statements.
Following a review of the presentations and reports from the
Portfolio Manager and Administrator and consulting where necessary
with the external auditor, the Audit Committee is satisfied that
the Financial Statements appropriately address the critical
judgements and key estimates (both in respect to the amounts
reported and the disclosures). The Audit Committee is also
satisfied that the significant assumptions used for determining the
value of assets and liabilities have been appropriately
scrutinised, challenged and are sufficiently robust.
The Company’s reporting currency is Sterling while a significant
proportion of the investments owned are denominated in foreign
currencies. The Company operates a hedging strategy designed to
mitigate the impact of foreign currency rate changes on the
performance of the Company. The Audit Committee has used
information from the Administrator and Portfolio Manager to satisfy
itself concerning the effectiveness of the hedging process, as well
as to confirm that realised and unrealised foreign currency gains
and losses have been correctly recorded.
At the request of the Audit Committee, the Administrator
confirmed that it was not aware of any material misstatements
including matters relating to Financial Statement presentation. At
the Audit Committee meeting to review the Annual Report and Audited
Financial Statements, the Audit Committee received and reviewed a
report on the audit from the external auditors. On the basis of its
review of this report, the Audit Committee is satisfied that the
external auditor has fulfilled its responsibilities with diligence
and professional scepticism. The Audit Committee advised the Board
that these Annual Financial Statements, taken as a whole, are fair,
balanced and understandable.
The Audit Committee is satisfied that the judgements made by the
Portfolio Manager and Administrator are reasonable, and that
appropriate disclosures have been included in the Financial
Statements.
External auditors
The Audit Committee has responsibility for making a
recommendation on the appointment, re-appointment and removal of
the external auditors. PricewaterhouseCoopers CI LLP (“PwC”) were
appointed as the first auditors of the Company. During the year the
Audit Committee received and reviewed audit plans and reports from
the external auditors. It is standard practice for the external
auditors to meet privately with the Audit Committee without the
Portfolio Manager and other service providers being present at each
Audit Committee meeting.
To assess the effectiveness of the external audit process, the
auditors were asked to articulate the steps that they have taken to
ensure objectivity and independence, including where the auditor
provides non-audit services. The Audit Committee monitors the
auditors’ performance, behaviour and effectiveness during the
exercise of their duties, which informs the decision to recommend
reappointment on an annual basis.
The Company generally does not utilise external auditors for
internal audit purposes, secondments or valuation advice. Services
which are in the nature of audit, such as tax compliance, private
letter rulings, accounting advice and disclosure advice are
normally permitted but will be pre-approved by the Audit
Committee.
The following table summarises the remuneration paid to PwC and
to other PwC member firms for audit and non-audit services during
the year ended 30 September 2016 and
for the period ended 30 September
2015.
|
|
|
|
|
Year
ended
30.09.16 |
Year
ended
30.09.15 |
PricewaterhouseCoopers CI LLP - Assurance work |
|
|
£ |
|
£ |
- Annual
audit of the Company |
|
|
|
47,500 |
|
45,700 |
- Annual
audit of the Company - additional scope |
|
- |
|
11,000 |
- Interim
review |
|
|
|
|
16,000 |
|
22,500 |
|
|
|
|
|
|
|
|
|
PricewaterhouseCoopers CI LLP - Non assurance work |
|
|
|
|
- Tax
consulting and compliance services |
|
|
15,000 |
|
3,000 |
For any questions on the activities of the Audit Committee not
addressed in the foregoing, a member of the Audit Committee remains
available to attend each AGM to respond to such questions.
The Audit Committee Report was approved by the Audit Committee
on 18 January 2017 and signed on
behalf by:
Christopher Legge
Chairman, Audit Committee
ALTERNATIVE INVESTMENT MANAGER’S
REPORT
Maitland Institutional Services Limited (formerly Phoenix Fund
Services (UK) Limited) acts as the Alternative Investment Fund
Manager (“AIFM”) of TwentyFour Select Monthly Income Fund Limited
(the “Company” or the “AIF”) providing portfolio management and
risk management services to the Company.
The AIFM has delegated the following of its alternative
investment fund management functions:
- It has delegated the portfolio management function for listed
investments to TwentyFour Asset Management LLP.
- It has delegated the portfolio management function for unlisted
investments to TwentyFour Asset Management LLP.
The AIFM is required by the Alternative Investment Fund Managers
Directive 2011, 61/EU (the “AIFM Directive”) and all applicable
rules and regulations implementing the AIFM Directive in the UK
(the “AIFM” Rules):
- to make the annual report available to investors and to ensure
that the annual report is prepared in accordance with applicable
accounting standards, the Company’s articles of incorporation and
the AIFM Rules and that the annual report is audited in accordance
with International Standards on Auditing;
- be responsible for the proper valuation of the Company’s
assets, the calculation of the Company’s net asset value and the
publication of the Company’s net asset value;
- to make available to the Company’s shareholders, a description
of all fees, charges and expenses and the amounts thereof, which
have been directly or indirectly borne by them; and
- ensure that the Company’s shareholders have the ability to
tender their share in the capital of the Company in a manner
consistent with the principle of fair treatment of investors under
the AIFM Rules and in accordance with the Company’s redemption
policy and its obligations.
The AIFM is required to ensure that the annual report contains a
report that includes a fair and balanced review of the activities
and performance of the Company, containing also a description of
the principal risks and investment or economic uncertainties that
the Company might face.
AIFM Remuneration
Under the AIFM Directive, acting as the AIFM, Maitland
Institutional Services Limited is required to disclose how those
whose actions have a material impact on the Company are
remunerated.
Due to the nature of the activities conducted by Maitland
Institutional Services Limited, it has deemed itself as a lower
risk firm in accordance with SYSC 19B and the Remuneration Code.
The only employees at Maitland Institutional Services Limited
permitted to have a material impact on the risk profile of the AIF
are the Board and the Head of Risk and Compliance.
The delegated Investment Manager, TwentyFour Asset Management
LLP, is subject to regulatory requirements that are broadly
equivalent to those detailed in the AIFM Directive, which include
the Capital Requirements Directive or Markets in Financial
Instruments Directive. While a portion of the remuneration paid by
the Investment Manager is variable and based, in part, on the
performance of the investment portfolio, the investment discretion
of the Investment Manager is strictly controlled within certain
pre-defined parameters as detailed in the prospectus of the
Company.
Under the AIFM Directive, the AIFM is required to stipulate how
much it pays to its staff, in relation to fixed and variable
remuneration and how much, in relation to the Company, is firstly
attributed to all staff and those that are deemed, under the
directive, to have an impact on the risk profile of the
Company. Maitland Institutional Services Ltd does not pay any
form of variable remuneration.
September 16 |
Number of
Beneficiaries |
Total remuneration
paid |
Fixed
remuneration |
Total remuneration paid by the AIFM
during the year for work performed on the AIF |
60 |
£69,204 |
£69,204 |
Remuneration paid to employees of
the AIFM who have a material impact on the risk profile of the
AIF |
5 |
£12,457 |
£12,457 |
In so far as the AIFM is aware:
- there is no relevant audit information of which the Company’s
auditors or the Company’s board of directors are unaware; and
- the AIFM has taken all steps that it ought to have taken to
make itself aware of any relevant audit information and to
establish that the auditors are aware of that information.
We hereby certify that this report is made on behalf of the
AIFM, Maitland Institutional Services Limited.
R.W. Leedham
D.Jones
Directors
Maitland Institutional Services Limited
18 January 2017
DEPOSITARY STATEMENT
for the year ended 30 September
2016
Report of the Depositary to the
Shareholders
Northern Trust (Guernsey)
Limited has been appointed as Depositary to TwentyFour Select
Monthly Income Fund Limited (the “Company”) in accordance with the
requirements of Article 36 and Articles 21(7), (8) and (9) of the
Directive 2011/61/EU of the European Parliament and of the Council
of 8 June 2011 on Alternative
Investment Fund Managers and amending Directives 2003/41/EC and
2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010
(the “AIFM Directive”).
We have enquired into the conduct of Maitland Institutional
Services Limited (the “AIFM”) and the Company for the year ended
30 September 2016, in our capacity as
Depositary to the Company.
This report including the review provided below has been
prepared for and solely for the Shareholders in the Company. We do
not, in giving this report, accept or assume responsibility for any
other purpose or to any other person to whom this report is
shown.
Our obligations as Depositary are stipulated in the relevant
provisions of the AIFM Directive and the relevant sections of
Commission Delegated Regulation (EU) No 231/2013 (collectively the
“AIFMD legislation”) and The Authorised Closed Ended Investment
Scheme Rules 2008.
Amongst these obligations is the requirement to enquire into the
conduct of the AIFM and the Company and their delegates in each
annual accounting period.
Our report shall state whether, in our view, the Company has
been managed in that period in accordance with the AIFMD
legislation. It is the overall responsibility of the AIFM and the
Company to comply with these provisions. If the AIFM, the Company
or their delegates have not so complied, we as the Depositary will
state why this is the case and outline the steps which we have
taken to rectify the situation.
The Depositary and its affiliates is or may be involved in other
financial and professional activities which may on occasion cause a
conflict of interest with its roles with respect to the Company.
The Depositary will take reasonable care to ensure that the
performance of its duties will not be impaired by any such
involvement and that any conflicts which may arise will be resolved
fairly and any transactions between the Depositary and its
affiliates and the Company shall be carried out as if effected on
normal commercial terms negotiated at arm’s length and in the best
interests of Shareholders.
Basis of Depositary Review
The Depositary conducts such reviews as it, in its reasonable
discretion, considers necessary in order to comply with its
obligations and to ensure that, in all material respects, the
Company has been managed (i) in accordance with the limitations
imposed on its investment and borrowing powers by the provisions of
its constitutional documentation and the appropriate regulations
and (ii) otherwise in accordance with the constitutional
documentation and the appropriate regulations. Such reviews vary
based on the type of Fund, the assets in which a Fund invests and
the processes used, or experts required, in order to value such
assets.
Review
In our view, the Company has been managed during the period, in
all material respects:
(i) in accordance with the limitations imposed on the investment
and borrowing powers of the Company by the constitutional
document; and by the AIFMD legislation; and
(ii) otherwise in accordance with the provisions of the
constitutional document; and the AIFMD legislation.
For and on behalf of
Northern Trust (Guernsey)
Limited
18 January 2017
INDEPENDENT AUDITORS’ REPORT
TO THE SHAREHOLDERS OF TWENTYFOUR SELECT MONTHLY INCOME FUND
LIMITED
Report on the Financial Statements
We have audited the accompanying financial statements of
TwentyFour Select Monthly Income Fund Limited (the “Company”) which
comprise the Statement of Financial Position as of
30 September 2016 and the Statement of Comprehensive Income,
the Statement of Changes in Equity and the Statement of Cash Flows
for the year then ended and a summary of significant accounting
policies and other explanatory information.
Directors’ Responsibility for the
Financial Statements
The Directors are responsible for the preparation of financial
statements that give a true and fair view in accordance with
International Financial Reporting Standards and with the
requirements of Guernsey law. The
Directors are also responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in accordance
with International Standards on Auditing. Those Standards require
that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance whether the financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors’ judgement, including
the assessment of the risks of material misstatement of the
financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the
financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting
estimates made by the Directors, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements give a true and fair
view of the financial position of the Company as of 30 September 2016, and of its financial
performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards and
have been properly prepared in accordance with the requirements of
The Companies (Guernsey) Law,
2008.
Report on other Legal and Regulatory
Requirements
We read the other information contained in the Annual Report and
consider the implications for our report if we become aware of any
apparent misstatements or material inconsistencies with the
financial statements. The other information is as per the table of
contents.
In our opinion the information given in the Directors’ Report is
consistent with the financial statements.
This report, including the opinion, has been prepared for, and
only for, the Company’s members as a body in accordance with
Section 262 of The Companies (Guernsey) Law, 2008 and for no other purpose.
We do not, in giving this opinion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
Matters on which we are required to
report by exception
We have nothing to report in respect of the following matters
which we are required to review under the Listing Rules:
- the Directors’ statement set out in the Directors’ Report in
relation to going concern. As noted in the Directors’ statement,
the Directors have concluded that it is appropriate to adopt the
going concern basis in preparing the financial statements. The
going concern basis presumes that the Company has adequate
resources to remain in operation, and that the Directors intend it
to do so, for at least one year from the date the financial
statements were signed. As part of our audit we have concluded that
the Directors’ use of the going concern basis is appropriate.
However, because not all future events or conditions can be
predicted, these statements are not a guarantee as to the Company’s
ability to continue as a going concern;
- the Directors’ statement that they have carried out a robust
assessment of the principal risks facing the Company and the
Directors’ statement in relation to the longer-term viability of
the Company. Our review was substantially less in scope than an
audit and only consisted of making inquiries and considering the
Directors’ process supporting their statements; checking that the
statements are in alignment with the relevant provisions of the UK
Corporate Governance Code; and considering whether the statements
are consistent with the knowledge acquired by us in the course of
performing our audit;
- the part of the Corporate Governance Statement relating to the
Company’s compliance with the ten further provisions of the UK
Corporate Governance Code specified for our review; and
- certain elements of the report to shareholders by the Board on
Directors’ remuneration.
Evelyn Brady
For and on behalf of
PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
18 January 2017
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September
2016
|
|
|
|
|
Year
ended 30.09.16 |
|
Year
ended 30.09.15 |
|
|
|
Notes |
|
|
|
£ |
|
£ |
Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
10,810,286 |
|
9,711,733 |
Net foreign currency
(loss)/gain |
|
|
8 |
|
|
|
(11,251,978) |
|
3,544,710 |
Net gain/(loss) on
financial assets |
|
|
|
|
|
|
|
|
|
at fair value through
profit or loss |
|
|
9 |
|
|
|
7,938,726 |
|
(9,914,061) |
Total
income |
|
|
|
|
|
|
7,497,034 |
|
3,342,382 |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio management
fees |
|
|
14 |
|
|
|
(995,849) |
|
(998,154) |
Directors' fees |
|
|
14 |
|
|
|
(127,500) |
|
(112,842) |
Administration
fees |
|
|
15 |
|
|
|
(101,667) |
|
(101,544) |
AIFM management
fees |
|
|
15 |
|
|
|
(68,036) |
|
(76,175) |
Audit fee |
|
|
|
|
|
|
(58,500) |
|
(45,700) |
Custody fees |
|
|
15 |
|
|
|
(16,368) |
|
(15,953) |
Broker fees |
|
|
15 |
|
|
|
(50,000) |
|
(50,000) |
Depositary fees |
|
|
15 |
|
|
|
(25,000) |
|
(23,183) |
Other expenses |
|
|
|
|
|
|
(163,206) |
|
(164,751) |
Total
expenses |
|
|
|
|
|
|
(1,606,126) |
|
(1,588,302) |
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income for the year |
|
|
|
|
5,890,908 |
|
1,754,080 |
|
|
|
|
|
|
|
|
|
|
Earnings per
Ordinary Share - |
|
|
|
|
|
|
|
|
|
Basic &
Diluted |
|
|
4 |
|
|
|
0.039 |
|
0.013 |
All items in the above statement derive from continuing
operations.
The accompanying notes are an integral part of these Financial
Statements.
STATEMENT OF FINANCIAL POSITION
as at 30 September 2016
|
|
|
30.09.16 |
|
30.09.15 |
Assets |
Notes |
|
£ |
|
£ |
Current
assets |
|
|
|
|
|
Financial assets at
fair value through profit and loss |
|
|
|
|
|
-
Investments |
9 |
|
127,968,371 |
|
128,802,069 |
- Derivative
assets: Forward currency contracts |
17 |
|
- |
|
480,209 |
Amounts due from
broker |
|
|
1,132,190 |
|
1,233,420 |
Other receivables |
10 |
|
2,477,965 |
|
2,794,811 |
Cash and cash
equivalents |
|
|
8,039,495 |
|
4,532,345 |
Total current
assets |
|
|
139,618,021 |
|
137,842,854 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
Amounts due to
broker |
|
|
2,297,691 |
|
1,889,571 |
Other payables |
11 |
|
219,031 |
|
245,140 |
Financial liabilities
at fair value through profit and loss |
|
|
|
|
|
- Derivative
liabilities: Forward currency contracts |
17 |
|
279,458 |
|
1,147,799 |
Total current
liabilities |
|
|
2,796,180 |
|
3,282,510 |
|
|
|
|
|
|
Total net
assets |
|
|
136,821,841 |
|
134,560,344 |
|
|
|
|
|
|
Equity |
|
|
|
|
|
Share capital
account |
12 |
|
148,691,163 |
|
142,609,447 |
Other reserves |
|
|
(11,869,322) |
|
(8,049,103) |
Total
equity |
|
|
136,821,841 |
|
134,560,344 |
|
|
|
|
|
|
Ordinary Shares in
issue |
12 |
|
152,079,151 |
|
145,335,881 |
|
|
|
|
|
|
Net Asset Value per
Ordinary Share (pence) |
6 |
|
89.97 |
|
92.59 |
The Financial Statements were approved by the Board of Directors
on
18 January 2017 and signed on its
behalf by:
Claire Whittet
Christopher Legge
Chair
Director
The accompanying notes are an integral part of these Financial
Statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September
2016
|
|
Share
Capital |
|
Other |
|
|
|
|
Account |
|
Reserves |
|
Total |
|
|
£ |
|
£ |
|
£ |
|
|
|
|
|
|
|
Balance
at 01 October 2015 |
142,609,447 |
|
(8,049,103) |
|
134,560,344 |
Reissue of
treasury shares |
6,193,760 |
|
- |
|
6,193,760 |
Share
issue costs |
(62,197) |
|
- |
|
(62,197) |
Income
equalisation on new issues |
(49,847) |
|
49,847 |
|
- |
Distributions paid |
- |
|
(9,760,974) |
|
(9,760,974) |
Total
comprehensive income for the year |
- |
|
5,890,908 |
|
5,890,908 |
Balance
at 30 September 2016 |
148,691,163 |
|
(11,869,322) |
|
136,821,841 |
|
|
Share
Capital |
|
Other |
|
|
|
|
Account |
|
Reserves |
|
Total |
|
|
£ |
|
£ |
|
£ |
|
|
|
|
|
|
|
Balance
at 01 October 2014 |
123,434,794 |
|
(240,328) |
|
123,194,466 |
Issue of
shares |
16,075,985 |
|
- |
|
16,075,985 |
Shares
issued for repurchase |
13,451,019 |
|
- |
|
13,451,019 |
Purchase
of own shares to hold in treasury |
(13,451,019) |
|
- |
|
(13,451,019) |
Reissue of
treasury shares |
3,551,432 |
|
- |
|
3,551,432 |
Share
issue costs |
(339,085) |
|
- |
|
(339,085) |
Income
equalisation on new issues |
(113,679) |
|
113,679 |
|
- |
Distributions paid |
- |
|
(9,676,534) |
|
(9,676,534) |
Total
comprehensive income for the year |
- |
|
1,754,080 |
|
1,754,080 |
Balance
at 30 September 2015 |
142,609,447 |
|
(8,049,103) |
|
134,560,344 |
The accompanying notes are an integral part of these Financial
Statements.
STATEMENT OF CASH FLOWS
for the year ended 30 September
2016
|
|
Year
ended 30.09.16 |
|
Year
ended 30.09.15 |
|
Notes |
£ |
|
£ |
Cash flows used in
operating activities |
|
|
|
|
Total comprehensive
income for the year |
|
5,890,908 |
|
1,754,080 |
Adjustments for: |
|
|
|
|
Net (gain)/loss on
investments |
|
(7,938,726) |
|
9,914,061 |
Amortisation
adjustment under effective interest rate method |
9 |
(1,087,382) |
|
(639,168) |
Unrealised (gain)/loss
on derivatives |
8 |
(388,127) |
|
2,172,266 |
Decrease/(increase) in
other receivables |
10 |
316,846 |
|
(529,278) |
Decrease in other
payables |
11 |
(26,109) |
|
(7,903) |
Purchase of
investments |
|
(75,295,581) |
|
(89,423,264) |
Sale of
investments |
|
85,664,732 |
|
66,767,578 |
Net cash
generated from/(used in) operating activities |
7,136,561 |
|
(9,991,628) |
|
|
|
|
|
Cash flows from
financing activities |
|
|
|
|
Proceeds from issue of
ordinary shares |
12 |
- |
|
16,075,985 |
Payment for shares
redeemed to hold in treasury |
12 |
- |
|
3,551,432 |
Proceeds from
re-issuance of treasury shares |
12 |
6,193,760 |
|
- |
Share issue costs |
12 |
(62,197) |
|
(339,085) |
Dividend
distribution |
19 |
(9,760,974) |
|
(9,676,534) |
Net cash
(outflow)/inflow from financing activities |
|
(3,629,411) |
|
9,611,798 |
|
|
|
|
|
Increase/(decrease)
in cash and cash equivalents |
|
3,507,150 |
|
(379,830) |
|
|
|
|
|
Cash and cash
equivalents at beginning of year |
|
4,532,345 |
|
4,912,175 |
|
|
|
|
|
Cash and cash
equivalents at end of year |
|
8,039,495 |
|
4,532,345 |
The accompanying notes are an integral part of these Financial
Statements.
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September
2016
1. General Information
TwentyFour Select Monthly Income Fund Limited (the “Company”)
was incorporated with limited liability in Guernsey, as a closed-ended investment company
on 12 February 2014. The Company’s
Shares were listed with a Premium Listing on the Official List of
the UK Listing Authority and admitted to trading on the Main Market
of the London Stock Exchange (“LSE”) on
10 March 2014.
The investment objective and policy is set out in the Summary
Information.
The Portfolio Manager of the Company is TwentyFour Asset
Management LLP (the “Portfolio Manager”).
2. Principal Accounting
Policies
a)
Basis of preparation and Statement of compliance
The Financial Statements have been prepared in accordance with
International Reporting Financial Standards (“IFRS”) as issued by
the International Accounting Standards Board (“IASB”) and are in
compliance with the Companies (Guernsey) Law, 2008.
b) Presentation of information
The Financial Statements have been prepared on a going concern
basis under the historical cost convention adjusted to take account
of the revaluation of the Company’s financial assets and
liabilities at fair value through profit or loss.
c) Standards, amendments and
interpretations issued but not yet effective
At the reporting date of these Financial Statements, the
following standards, interpretations and amendments, which have not
been applied in these Financial Statements, were in issue but not
yet effective:
- IFRS 9 Financial Instruments (Effective 1 January 2018)
- IFRS 15 Revenue from Contracts with Customers (Effective
1 January 2018)
- IFRS 7 Financial Instruments: Disclosures (Effective
1 January 2016)
- IAS 1 Disclosure Initiative (Effective 1 January 2016)
The Directors anticipate that the adoption of these standards
effective in a future period will not have a material impact on the
financial statements of the Company, other than IFRS 9. The Company
is currently evaluating the potential effect of IFRS 9.
IFRS 9 'Financial Instruments' amends IAS 39. IFRS 9 specifies
how an entity should classify and measure financial assets,
including some hybrid contracts. The standard requires all
financial assets to be classified on the basis of the entity’s
business model for managing the financial assets and the
contractual cash flow characteristics of the financial asset. This
classification includes financial assets initially measured at fair
value plus, in the case of a financial asset not at fair value
through profit or loss, particular transaction costs; subsequently
measured at amortised costs or fair value. These requirements
improve and simplify the approach for classification and
measurement of financial assets compared with the requirements of
IAS 39. The standard applies a consistent approach to classifying
financial assets and replaces the numerous categories of financial
assets in IAS 39, each of which had its own classification
criteria.
The standard also results in one impairment method, replacing
the numerous impairment methods in IAS 39 that arise from the
different classification.
No new accounting standards were effected or adopted during the
year having an effect on the financial statements.
d) Financial assets at fair value
through profit or loss
Classification
The Company classifies its investments in credit securities and
derivatives as financial assets at fair value through profit or
loss.
This category has two sub-categories: financial assets or
financial liabilities held for trading; and those designated at
fair value through profit or loss at inception.
(i) Financial assets and liabilities held for trading
A financial asset or financial liability is classified as held
for trading if it is acquired or incurred principally for the
purpose of selling or repurchasing in the near term or if on
initial recognition is part of a portfolio of identifiable
financial investments that are managed together and for which there
is evidence of a recent actual pattern of short-term profit taking.
Derivatives are categorised as held for trading. The Company does
not classify any derivatives as hedges in a designated hedging
relationship and therefore does not apply hedge accounting.
(ii) Financial assets and financial liabilities designated at
fair value through profit or loss
Financial assets and financial liabilities designated at fair
value through profit or loss at inception are financial instruments
that are not classified as held for trading but are managed, and
their performance is evaluated on a fair value basis in accordance
with the Company’s documented investment strategy.
The Company’s policy requires the Portfolio Manager and the
Board of Directors to evaluate the information about these
financial assets and liabilities on a fair value basis together
with other related financial information.
Recognition, derecognition and
measurement
Regular purchases and sales of investments are recognised on the
trade date, the date on which the Company commits to purchase or
sell the investment. Financial assets and financial liabilities at
fair value through profit or loss are initially recognised at fair
value. Transaction costs are expensed as incurred in the Statement
of Comprehensive Income. Financial assets are derecognised when the
rights to receive cash flows from the investments have expired or
the Company has transferred substantially all risks and rewards of
ownership.
The Company may invest in any category of credit security,
including, without prejudice to the generality of the foregoing,
bank capital, corporate bonds, high yield bonds, leveraged loans,
payment-in-kind notes and asset backed securities.
The Company records any principal repayments as they arise and
realises a gain or loss in the net gains on financial assets at
fair value through profit or loss in the Statement of Comprehensive
Income in the period in which they occur.
The interest income arising on these Credit Securities is
recognised on a time-proportionate basis using the effective
interest rate method and shown within income in the Statement of
Comprehensive Income.
Fair value estimation
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Investments in Credit
Securities are fair valued in accordance with either i) or ii)
below and the change in fair value, if any, is recorded as net
gains/(losses) on financial assets/(liabilities) at fair value
through profit or loss in the Statement of Comprehensive
Income.
(i) Credit Securities traded or dealt on an active market or
exchange
Credit Securities that are traded or dealt on an active market
or exchange are valued by reference to their quoted mid-market
price as at the close of trading on the reporting date as the
Directors deem the mid-market price to be a reasonable
approximation of an exit price.
(ii) Credit Securities not traded or dealt on an active market
or exchange
Credit Securities which are not traded or dealt on active
markets or exchanges are valued by reference to their mid-price, as
at the close of business on the reporting date as determined by an
independent price vendor. If a price cannot be obtained from an
independent price vendor, or where the Portfolio Manager determines
that the provided price is not an accurate representation of the
fair value of the Credit Security, the Portfolio Manager will
source mid-price quotes at the close of business on the reporting
date from independent third party brokers/dealers for the relevant
security. If no mid-price is available then a bid-price will be
used.
In cases where no third party price is available (either from an
independent price vendor or independent third party
brokers/dealers), or where the Portfolio Manager determines that
the provided price is not an accurate representation of the fair
value of the Credit Security, the Portfolio Manager will determine
the valuation based on the Portfolio Manager’s valuation policy.
This may include the use of a comparable arm’s length transaction,
reference to other securities that are substantially the same,
discounted cash flow analysis and other valuation techniques
commonly used by market participants making the maximum use of
market inputs and relying as little as possible on entity-specific
inputs.
Over-the-counter derivative contracts such as Interest Rate
Swaps are valued on a weekly basis. This may be done using
reference to data supplied from an independent data source or an
alternative vendor as deemed suitable by the Directors. Where data
from an independent data source is not available, the valuation may
be done by using the counterparty’s valuation provided that the
valuation is approved or verified by a party who is approved for
the purpose by the Directors and who is independent of the
counterparty.
Forward foreign currency
contracts
Forward foreign currency contracts are derivative contracts and
as such are recognised at fair value on the date on which they are
entered into and subsequently measured at their fair value. Fair
value is determined by rates in active currency markets. All
forward foreign currency contracts are carried as assets when fair
value is positive and as liabilities when fair value is negative.
Gains and losses on forward currency contracts are recognised as
part of net foreign currency gains in the Statement of
Comprehensive Income.
Interest rate swaps
Interest rate swaps are derivative contracts and as such are
recognised at fair value on the date on which they are entered into
and subsequently measured at their fair value. Fair value is
determined by rates provided by brokers. All interest rate swaps
are carried as assets when fair value is positive and as
liabilities when fair value is negative. Gains and losses on
interest rate swaps are recognised as part of net gains and losses
on financial assets at fair value through profit or loss in the
Statement of Comprehensive Income.
Impairment
Financial assets that are stated at cost or amortised cost are
reviewed at each reporting date to determine whether there is
objective evidence of impairment. If any such indication exists, an
impairment loss is recognised in the Statement of Comprehensive
Income as the difference between the asset’s carrying amount and
the present value of estimated future cash flows discounted at the
financial asset’s effective interest rate.
e) Offsetting financial
instruments
Financial assets and liabilities are offset and the net amount
reported in the Statement of Financial Position when there is a
legally enforceable right to offset the recognised amounts and
there is an intention to settle on a net basis or realise the asset
and settle the liability simultaneously. Derivatives are not
settled on a net basis and therefore derivative assets and
liabilities are shown gross.
f) Amounts due from and due to
brokers
Amounts due from and to brokers represent receivables for
securities sold and payables for securities purchased that have
been contracted for but not yet settled or delivered on the
statement of financial position date respectively. These amounts
are recognised initially at fair value and subsequently measured at
amortised cost using the effective interest rate method.
g) Income
Interest income is recognised on a time-proportionate basis
using the effective interest rate method. Discounts received or
premiums paid in connection with the acquisition of Credit
Securities are amortised into interest income using the effective
interest rate method over the expected life of the related
security.
The effective interest rate method is a method of calculating
the amortised cost of a financial asset or financial liability and
of allocating the interest income or interest expense over the
relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash payments or receipts
throughout the expected life of the financial instrument, or, when
appropriate, a shorter period, to the net carrying amount of the
financial asset or financial liability.
When calculating the effective interest rate, the Portfolio
Manager estimates cash flows considering the expected life of the
financial instrument, including future credit losses and deferred
interest payments. The calculation includes all fees and points
paid or received between parties to the contract that are an
integral part of the effective interest rate and all other premiums
or discounts.
h) Cash and cash equivalents
Cash and cash equivalents comprises deposits held at call with
banks and other short-term investments in an active market with
original maturities of three months or less and bank overdrafts.
Bank overdrafts are included in current liabilities in the
Statement of Financial Position.
i) Share capital
Ordinary Shares are classified as equity. Incremental costs
directly attributable to the issue of Ordinary Shares are shown in
equity as a deduction, net of tax, from the proceeds and disclosed
in the Statement of Changes in Equity.
Repurchased Tendered Shares are treated as a distribution of
capital and deducted from the Share Capital account.
j) Foreign currency translation
Functional and presentation
currency
Items included in the financial statements are measured using
Sterling, the currency of the primary economic environment in which
the Company operates (the “functional currency”). The Financial
Statements are presented in Sterling, which is the Company’s
presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign currency assets and liabilities are
translated into the functional currency using the exchange rate
prevailing at the Statement of Financial Position date.
Foreign exchange gains and losses relating to the financial
assets and liabilities carried at fair value through profit or loss
are presented in the Statement of Comprehensive Income.
k) Transaction costs
Transaction costs on financial assets at fair value through
profit or loss include fees and commissions paid to agents,
advisers, brokers and dealers. Transaction costs, when incurred,
are immediately recognised in the Statement of Comprehensive
Income.
l) Segment reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the chief operating decision-maker.
The chief operating decision-maker, who is responsible for
allocating resources and assessing performance of the operating
segments, has been identified as the Board. The Directors are of
the opinion that the Company is engaged in a single segment of
business, being investments in Credit Securities. The Directors
manage the business in this way. For additional information refer
to note 18.
m) Expenses
All expenses are included in the Statement of Comprehensive
Income on an accruals basis and are recognised through profit or
loss in the Statement of Comprehensive Income.
n) Other receivables
Other receivables are amounts due in the ordinary course of
business. If collection is expected in one year or less, they are
classified as current assets. If not, they are presented as
non-current assets. Other receivables are recognised initially at
fair value and subsequently measured at amortised cost using the
effective interest rate method, less provision for impairment.
o) Other payables
Other payables are obligations to pay for services that have
been acquired in the ordinary course of business. Other payables
are classified as current liabilities if payment is due within one
year or less. If not, they are presented as non-current
liabilities. Other payables are recognised initially at fair value
and subsequently measured at amortised cost using the effective
interest rate method.
p) Dividend distributions
Dividend distributions to the Company’s shareholders are
recognised as liabilities in the Company’s financial statements and
disclosed in the Statement of Changes in Equity in the period in
which the dividends are approved by the Board.
q) Income equalisation on new
issues
In order to ensure there are no dilutive effects on earnings per
share for current shareholders when issuing new shares, a transfer
is made between share capital and income to reflect that amount of
income included in the purchase price of the new shares.
r) Treasury Shares
The Company has the right to issue and purchase up to 14.99% of
the total number of its own shares, as disclosed in note 12.
Shares held in Treasury are excluded from calculations when
determining Earnings per Ordinary Share or Net Asset Value per
Ordinary Share as detailed in notes 4 and 6.
3. Significant
accounting judgements, estimates and assumptions
The preparation of the
Company’s Financial Statements requires management to make
judgements, estimates and assumptions that affect the reported
amounts of revenues, expenses, assets and liabilities and the
accompanying disclosures. Uncertainty about these assumptions and
estimates could result in outcomes that require a material
adjustment to the carrying amount of assets or liabilities affected
in future periods.
(i) Judgements
In the process of applying the Company’s accounting policies,
management has made the following judgements, which have the most
significant effect on the amounts recognised in the Financial
Statements:
Functional currency
As disclosed in note 2(j), the Company’s functional currency is
Sterling. Sterling is the currency in which the Company measures
its performance and reports its results, as well as the currency in
which it receives subscriptions from its investors. Dividends are
also paid to its investors in Sterling. The Directors believe that
Sterling best represents the functional currency.
(ii) Estimates and assumptions
The key assumptions
concerning the future and other key sources of estimation
uncertainty at the reporting date, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year, are described below.
The Company based its assumptions and estimates on parameters
available when the Financial Statements were prepared. Existing
circumstances and assumptions about future developments, however,
may change due to market changes or circumstances arising which are
beyond the control of the Company. Such changes are reflected in
the assumptions when they occur.
(a) Fair value of securities not
quoted in active markets
The Company carries its
investments in Credit Securities at fair value, with changes in
value being recognised in the Statement of Comprehensive Income. In
cases where prices of Credit Securities are not quoted in an active
market, the Portfolio Manager will obtain prices determined at the
close of business on the reporting date from an independent price
vendor. The Portfolio Manager exercises its judgement on the
quality of the independent price vendor and information provided.
If a price cannot be obtained from an independent price vendor or
where the Portfolio Manager determines that the provided price is
not an accurate representation of the fair value of the Credit
Security, the Portfolio Manager will source prices from independent
third party brokers or dealers for the relevant security, which may
be indicative rather than tradable.
Where no third party price
is available, or where the Portfolio Manager determines that the
third party quote is not an accurate representation of the fair
value, the Portfolio Manager will determine the valuation based on
the Portfolio Manager's valuation policy. This may include the use
of a comparable arm's length transaction, reference to other
securities that are substantially the same, discounted cash flow
analysis and other valuation techniques commonly used by market
participants making the maximum use of market inputs and relying as
little as possible on entity-specific inputs. No Credit Securities
were priced by the Portfolio Manager during the year or any
previous year.
(b) Estimated life of Credit
Securities
In determining the estimated life of the Credit Securities held
by the Company, the Portfolio Manager estimates the remaining life
of the security with respect to expected prepayment rates, default
rates and loss rates together with other information available in
the market underlying the security. The estimated life of the
Credit Securities, as determined by the Portfolio Manager, impacts
the effective interest rate of the Credit Securities which in turn
impacts the calculation of income as discussed in note 2(g).
(c) Determination of observable
inputs
As discussed in note 17,
when determining the levels of investments within the fair value
hierarchy, the determination of what constitutes ‘observable’
requires significant judgement by the Company. The Company
considers observable data to be market data that is readily
available, regularly distributed or updated, reliable and
verifiable, not proprietary, and provided by independent sources
that are actively involved in the relevant market.
4. Earnings per Ordinary
Share - Basic & Diluted
The earnings per Ordinary Share - Basic and Diluted of 3.9p
(30 September 2015: 1.3p) has been
calculated based on the weighted average number of Ordinary Shares
of 149,767,982 (30 September 2015:
138,712,320) and a net gain for the year of £5,890,908
(30 September 2015: £1,754,080).
5. Income on equalisation
of new issues
In order to ensure there
were no dilutive effects on earnings per share for current
shareholders when issuing new shares, earnings have been calculated
in respect of the accrued income at the time of purchase and a
transfer has been made from share capital to income to reflect
this. The transfer for the year amounted to £49,847 (30 September 2015: £113,679).
6. Net Asset Value
per Ordinary Share
The net asset value of each Share of 89.97p (30 September 2015: £92.59p) is determined by
dividing the net assets of the Company attributed to the Shares of
£136,821,841 (30 September 2015: £134,560,344) by the
number of Shares in issue at 30 September
2015 of 152,079,151 (30 September
2015: 145,335,881).
7. Taxation
The Company has been
granted Exempt Status under the terms of The Income Tax (Exempt
Bodies) (Guernsey) Ordinance, 1989
to income tax in Guernsey. Its
liability for Guernsey taxation is
limited to an annual fee of £1,200 (30
September 2015: £1,200).
8. Net foreign currency
(losses)/gains
|
|
|
|
|
|
|
Year
ended 30.09.16 |
|
Year
ended 30.09.15 |
|
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
|
Movement
in net unrealised gain/(loss) on forward currency contracts |
388,127 |
|
(2,172,266) |
Realised
(loss)/gain on forward currency contracts |
(11,954,408) |
|
5,657,181 |
Realised
currency gain/(loss) on receivables/payables |
304,581 |
|
(17,758) |
Unrealised
income exchange gain on receivables/payables |
9,722 |
|
77,553 |
|
|
|
|
|
|
|
(11,251,978) |
|
3,544,710 |
9. Investments
|
|
|
|
|
|
|
Year
ended 30.09.16 |
|
Year
ended 30.09.15 |
|
|
|
|
|
|
|
£ |
|
£ |
Financial assets at fair value through profit and loss: |
|
|
|
Unlisted Investments: |
|
|
|
|
|
|
|
Opening
amortised cost |
|
|
|
|
139,639,982 |
|
122,539,767 |
Purchases
at cost |
|
|
|
|
75,703,701 |
|
88,769,362 |
Proceeds
on sale/principal repayment |
|
(85,563,502) |
|
(68,000,998) |
Amortisation adjustment under effective interest rate method |
1,087,382 |
|
639,168 |
Realised
gain on sale/principal repayment |
|
3,162,474 |
|
1,461,103 |
Realised
loss on sale/principal repayment |
|
(5,926,052) |
|
(5,768,420) |
Closing
amortised cost |
|
|
|
|
128,103,985 |
|
139,639,982 |
|
|
|
|
|
|
|
|
|
|
Unrealised
gain on investments |
|
8,171,289 |
|
1,659,469 |
Unrealised
loss on investments |
|
(8,306,903) |
|
(12,497,382) |
Fair value |
|
|
|
|
|
|
127,968,371 |
|
128,802,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realised
gain on sale/principal repayment |
|
3,162,474 |
|
1,461,103 |
Realised
loss on sale/principal repayment |
|
(5,926,052) |
|
(5,768,420) |
Increase
in unrealised gain |
|
|
6,511,825 |
|
759,440 |
Decrease/(increase) in unrealised loss |
|
4,190,479 |
|
(6,366,184) |
Net
gain/(loss) on financial assets at fair value through profit or
loss |
7,938,726 |
|
(9,914,061) |
10. Other receivables
|
|
|
|
|
|
|
As at
30.09.16 |
|
As at
30.09.15 |
|
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
|
Interest
income receivable |
|
|
2,348,525 |
|
2,672,409 |
Prepaid
expenses |
|
|
|
|
14,413 |
|
15,175 |
Dividends
receivable |
|
|
|
|
115,027 |
|
107,227 |
|
|
|
|
|
|
|
2,477,965 |
|
2,794,811 |
11. Other payables
|
|
|
|
|
|
|
As at
30.09.16 |
|
As at
30.09.15 |
|
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
|
Portfolio
management fees payable |
|
84,266 |
|
92,094 |
Directors'
fees payable |
|
|
|
|
31,875 |
|
26,875 |
Administration fees payable |
|
|
25,705 |
|
26,050 |
AIFM
management fees payable |
|
17,706 |
|
18,369 |
Audit fees
payable |
|
|
|
|
|
47,500 |
|
45,700 |
General
expenses payable |
|
|
|
8,806 |
|
32,838 |
Depositary
fees payable |
|
|
|
|
2,049 |
|
2,260 |
Custody
fees payable |
|
|
|
|
1,124 |
|
954 |
|
|
|
|
|
|
|
219,031 |
|
245,140 |
12. Share Capital
Authorised Share Capital
The Directors may issue an unlimited number of Ordinary Shares
at no par value and an unlimited number of Ordinary Shares with a
par value.
Issued Share Capital
|
|
|
|
|
|
|
As at
30.09.16 |
|
As at
30.09.15 |
|
|
|
|
|
|
|
£ |
|
£ |
Ordinary
Shares |
|
|
|
|
|
|
|
|
|
Share
Capital at the beginning of the year |
|
|
142,609,447 |
|
123,434,794 |
Issue of shares |
|
|
|
|
|
|
- |
|
29,527,004 |
Share issue costs |
|
|
|
|
|
|
(62,197) |
|
(339,085) |
Purchase
of own shares into treasury |
|
|
|
- |
|
(13,451,019) |
Re-issuance of
treasury shares |
|
|
|
|
|
|
6,193,760 |
|
3,551,432 |
Income
equalisation on new issues |
|
(49,847) |
|
(113,679) |
Total
Share Capital at the end of the year |
|
|
148,691,163 |
|
142,609,447 |
|
|
|
|
|
|
|
30.09.16 |
|
30.09.15 |
|
|
|
|
|
|
|
£ |
|
£ |
Treasury
Shares |
|
|
|
|
|
|
|
|
|
Share
Capital at the beginning of the year |
|
9,899,587 |
|
- |
Purchased shares |
|
|
|
|
|
|
- |
|
13,451,019 |
Re-issued shares |
|
|
|
|
|
|
(6,193,760) |
|
(3,551,432) |
Total
Treasury Shares at the end of the year |
|
3,705,827 |
|
9,899,587 |
Reconciliation of number of Shares
|
|
|
|
|
|
|
30.09.16 |
|
30.09.15 |
|
|
|
|
|
|
|
Shares |
|
Shares |
Ordinary
Shares |
|
|
|
|
|
|
|
|
|
Shares at
the beginning of the year |
|
|
145,335,881 |
|
125,185,881 |
Issue of shares |
|
|
|
|
|
|
- |
|
30,723,887 |
Purchase
of own shares into treasury |
|
|
|
- |
|
(14,173,887) |
Re-issuance of treasury shares |
|
|
|
|
6,743,270 |
|
3,600,000 |
Total
Shares in issue at the end of the year |
|
|
152,079,151 |
|
145,335,881 |
The Ordinary Shares carry the following rights:
- the Ordinary Shares carry the right to receive all income of
the Company attributable to the Ordinary Shares.
- the Shareholders present in person or by proxy or present by a
duly authorised representative at a general meeting has, on a show
of hands, one vote and, on a poll, one vote for each Share
held.
Reconciliation of number of Treasury
Shares
|
|
|
|
|
|
|
30.09.16 |
|
30.09.15 |
|
|
|
|
|
|
|
Shares |
|
Shares |
Treasury
Shares |
|
|
|
|
|
|
|
|
|
Shares at
the beginning of the year |
|
|
10,573,887 |
|
- |
Purchase
of own shares to hold in treasury |
|
|
- |
|
14,173,887 |
Reissue of
treasury shares |
|
|
(6,743,270) |
|
(3,600,000) |
Total
Shares held in treasury at the end of the year |
|
3,830,617 |
|
10,573,887 |
The Company has the right to issue and purchase up to 14.99% of
the total number of its own shares at £0.01 each, to be classed as
Treasury Shares and may cancel those Shares or hold any such Shares
as Treasury Shares, provided that the number of Shares held as
Treasury Shares shall not at any time exceed 10% of the total
number of Shares of that class in issue at that time or such amount
as provided in the Companies Law.
On 13 February 2015 the Company
purchased 14,173,887 Ordinary Shares of £0.01 at a price of 94.90p
to be held in treasury. The total amount paid to purchase these
shares was £13,451,019 and has been deducted from the shareholders’
equity. The Company has the right to re-issue these shares at a
later date. All shares issued were fully paid. During the year
6,743,270 (30 September 2015: 3,600,000) treasury shares were
re-issued for a total consideration of £6,193,760 (30 September 2015: £3,551,432).
Shares held in Treasury are excluded from calculations when
determining Earnings per Ordinary Share or Net Asset Value per
Ordinary Share as detailed in notes 4 and 6.
13. Analysis of Financial Assets and Liabilities
by Measurement Basis as per Statement of Financial Position
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
assets at fair |
|
|
|
|
|
|
|
|
|
|
|
|
value
through |
|
Loans
and |
|
|
|
|
|
|
|
|
|
|
profit and loss |
|
receivables |
|
Total |
|
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
30
September 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets |
|
|
|
|
|
|
Financial
assets at fair value through profit and loss |
|
|
|
|
|
|
-Investments |
|
|
|
|
|
|
|
|
|
|
|
-Bonds |
|
|
|
|
|
|
|
83,880,600 |
|
- |
|
83,880,600 |
-Asset backed securities |
|
|
|
|
44,087,771 |
|
- |
|
44,087,771 |
Amounts
due from broker |
|
|
|
|
- |
|
1,132,190 |
|
1,132,190 |
Other
receivables (excluding prepaid expenses) |
|
- |
|
2,463,552 |
|
2,463,552 |
Cash and
cash equivalents |
|
|
|
|
- |
|
8,039,495 |
|
8,039,495 |
|
|
|
|
|
|
|
|
127,968,371 |
|
11,635,237 |
|
139,603,608 |
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
liabilities at fair |
|
Other |
|
|
|
|
|
|
|
|
|
|
value
through |
|
financial |
|
|
|
|
|
|
|
|
|
|
profit and loss |
|
liabilities |
|
Total |
|
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
30
September 2016 |
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities |
|
|
|
|
|
|
Amounts
due to broker |
|
|
|
|
|
|
- |
|
2,297,691 |
|
2,297,691 |
Other
payables |
|
|
|
|
|
|
- |
|
219,031 |
|
219,031 |
Financial
liabilities at fair value through profit and loss |
|
|
|
|
|
-Derivative liabilities: Forward currency contracts |
|
279,458 |
|
- |
|
279,458 |
|
|
|
|
|
|
|
|
279,458 |
|
2,516,722 |
|
2,796,180 |
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
assets at fair |
|
|
|
|
|
|
|
|
|
|
|
|
value
through |
|
Loans
and |
|
|
|
|
|
|
|
|
|
|
profit and loss |
|
receivables |
|
Total |
|
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
30
September 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets |
|
|
|
|
|
|
Financial
assets at fair value through profit and loss |
|
|
|
|
|
|
-Investments |
|
|
|
|
|
|
|
|
|
|
|
-Bonds |
|
|
|
|
|
|
|
94,262,743 |
|
- |
|
94,262,743 |
-Asset backed securities |
|
|
|
|
35,378,946 |
|
- |
|
35,378,946 |
-Interest rate swaps |
|
|
|
|
|
|
(839,620) |
|
- |
|
(839,620) |
-Derivative assets: Forward currency contracts |
|
480,209 |
|
- |
|
480,209 |
Amounts
due from broker |
|
|
|
|
- |
|
1,233,420 |
|
1,233,420 |
Other
receivables (excluding prepaid expenses) |
|
- |
|
2,779,636 |
|
2,779,636 |
Cash and
cash equivalents |
|
|
|
|
- |
|
4,532,345 |
|
4,532,345 |
|
|
|
|
|
|
|
|
129,282,278 |
|
8,545,401 |
|
137,827,679 |
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
liabilities at fair |
|
Other |
|
|
|
|
|
|
|
|
|
|
value
through |
|
financial |
|
|
|
|
|
|
|
|
|
|
profit and loss |
|
liabilities |
|
Total |
|
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
30
September 2015 |
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities |
|
|
|
|
|
|
Amounts
due to broker |
|
|
|
|
|
|
- |
|
1,889,571 |
|
1,889,571 |
Other
payables |
|
|
|
|
|
|
- |
|
245,140 |
|
245,140 |
Financial
liabilities at fair value through profit and loss |
|
|
|
|
|
-Derivative liabilities: Forward currency contracts |
|
1,147,799 |
|
- |
|
1,147,799 |
|
|
|
|
|
|
|
|
1,147,799 |
|
2,134,711 |
|
3,282,510 |
14. Related Parties
a) Directors’ Remuneration & Expenses
The Directors of the Company are remunerated for their services
at such a rate as the Directors determine. The aggregate fees of
the Directors will not exceed £150,000.
The Directors’ fees for the year and the outstanding fees at
year end are as follows.
|
|
|
|
|
|
|
Year
ended 30.09.16 |
|
Year
ended 30.09.15 |
|
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
|
Claire
Whittet (Chair of the Board) |
|
35,000 |
|
30,000 |
Christopher Legge (Audit Committee Chairman) |
32,500 |
|
27,500 |
Thomas Emch |
|
|
|
|
|
|
30,000 |
|
25,000 |
Ian Martin |
|
|
|
|
|
|
30,000 |
|
30,342 |
Total
Directors' fees |
|
|
|
|
127,500 |
|
112,842 |
|
|
|
|
|
|
|
As at
30.09.16 |
|
As at
30.09.15 |
|
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
|
Directors'
fee payable (note 11) |
|
31,875 |
|
26,875 |
The fees paid to Mr Martin for the year ended 30 September 2015 included unrecorded 2014 fees
of £5,342 that was expensed in 2015.
With effect from
1 October 2015, the Directors’ fees
increased by £5,000 each.
b) Shares held by related parties
The Directors of the Company held the following shares
beneficially:
|
|
|
|
|
|
|
30.09.16 |
|
30.09.15 |
|
|
|
|
|
|
|
Shares |
|
Shares |
|
|
|
|
|
|
|
|
|
|
Claire Whittet |
|
|
|
|
|
|
25,000 |
|
25,000 |
Christopher Legge |
|
|
|
|
|
50,000 |
|
50,000 |
Thomas Emch |
|
|
|
|
|
|
25,000 |
|
25,000 |
Ian Martin |
|
|
|
|
|
|
35,000 |
|
25,000 |
Directors are entitled to receive the dividends on any shares
held by them during the period. Dividends declared by the Company
are set out in note 19.
As at 30 September 2016, the
Portfolio Manager held no Shares (30
September 2016: no Shares) of the Issued Share Capital.
Partners and employees of the Portfolio Manager increased their
holdings during the year, and held 1,535,826 (30 September 2015: 883,227), which is 1.01%
(30 September 2015:
0.61%) of the Issued Share Capital.
c) Portfolio Manager
The portfolio management fee is payable to the Portfolio
Manager, TwentyFour Asset Management LLP, monthly in arrears at a
rate of 0.75% per annum of the lower of NAV, which is calculated
weekly on each valuation day, or market capitalisation of each
class of shares. Total investment management fees for the year
amounted to £995,849 (30 September
2015: £998,154) of which £84,266 (30
September 2015: £92,094) is payable at year end. The
Portfolio Management Agreement dated 17
February 2014 remains in force until determined by the
Company or the Portfolio Manager giving the other party not less
than twelve months' notice in writing. Under certain circumstances,
the Company or the Portfolio Manager is entitled to immediately
terminate the agreement in writing.
The Portfolio Manager is also entitled to a commission of 0.175%
of the aggregate gross offering proceeds plus any applicable VAT in
relation to any issue of new Shares, following admission, in
consideration of marketing services that it provides to the
Company. During the year, the Portfolio Manager received £8,589
(30 September 2015: £34,348) in
commission.
On 30 April 2015, the Portfolio
Manager entered into a strategic partnership with Vontobel Asset
Management, however the strategic partnership has had no impact on
the Portfolio Manager’s management activities or fees.
15. Material Agreements
a) Alternative Investment Fund Manager
(“AIFM”)
The Company’s AIFM is Maitland Institutional Services Limited
(formerly Phoenix Fund Services (UK) Limited). In
consideration for the services provided by the AIFM under the AIFM
Agreement the AIFM is entitled to receive from the Company a
minimum fee of £20,000 per annum and fees payable quarterly in
arrears at a rate of 0.07% of the Net Asset Value of the Company
below £50 million, 0.05% on Net Assets between £50 million and £100
million and 0.03% on Net Assets in excess of £100 million. During
the year, AIFM fees of £68,036 (30 September
2015: £76,175) were charged to the Company, of which £17,706
(30 September 2015: £18,369) remained
payable at the end of the year.
b) Administrator and Secretary
Administration fees are payable to Northern Trust International
Fund Administration Services (Guernsey) Limited monthly in arrears at a rate
of 0.06% of the Net Asset Value of the Company below £100 million,
0.05% on Net Assets between £100 million and £200 million and 0.04%
on Net Assets in excess of £200 million as at the last business day
of the month subject to a minimum of £75,000 for each year. In
addition, an annual fee of £25,000 will be charged for corporate
governance and company secretarial services. During the year,
administration and secretarial fees of £101,667 (30 September 2015: £101,544) were charged to the
Company, of which £25,705 (30 September
2015: £26,050) remained payable at the end of the year.
c) Broker
For its services as the Company’s broker, Numis Securites
Limited (the “Broker”) is entitled to receive a retainer fee of
£50,000 per annum and also a commission of 1% on all tap issues.
During the year, the Broker received £49,081 (30 September 2015: £196,274) in commission, which
is charged as a cost of issuance.
d) Depositary
Depositary’s fees are payable to Northern Trust (Guernsey) Limited monthly in arrears at a rate
of 0.0175% of the NAV of the Company below £100 million, 0.0150% on
Net Assets between £100 million and £200 million and 0.0125% on Net
Assets in excess of £200 million as at the last business day of the
month subject to a minimum of £25,000 for each year. During the
year, depositary fees of £25,000 (30
September 2015: £23,183) were charged to the Company, of
which £2,049 (30 September 2015:
£2,260) remained payable at the end of the year.
The Depositary is also entitled to a Global Custody fee of a
minimum of £8,500 per annum plus transaction fees. Total Global
Custody fees and charges for the year amounted to £16,368
(30 September 2015: £15,953) of which £1,124 (30 September 2015: £954) is due and payable at
the end of the year.
16. Financial Risk
Management
The Company’s activities expose it to a variety of financial
risks: Market risk (including price risk and reinvestment risk),
interest rate risk, credit risk, liquidity risk, foreign currency
risk and capital risk.
The Company’s financial instruments include financial
assets/liabilities at fair value through profit or loss, cash and
cash equivalents, amounts due to/from broker, other receivables and
other payables. The main risks arising from the Company’s financial
instruments are market price risk, interest rate risk, credit risk,
liquidity risk and currency risk. The techniques and instruments
utilised for the purposes of efficient portfolio management are
those which are reasonably believed by the Board to be economically
appropriate to the efficient management of the Company.
Market risk
Market risk embodies the potential for both losses and gains and
includes currency risk, interest rate risk and price risk. The
Company’s strategy on the management of market risk is driven by
the Company’s investment objective. The Company’s investment
objective is to generate attractive risk adjusted returns
principally through investment in Credit Securities.
(i) Price risk
The underlying investments comprised in the portfolio are
subject to price risk. The Company is therefore at risk that market
events may affect performance and in particular may affect the
value of the Company’s investments which are valued on a mark to
market and mark to model basis. Price risk is risk associated with
changes in market prices or rates, including interest rates,
availability of credit, inflation rates, economic uncertainty,
changes in laws, national and international political
circumstances. The Company’s policy is to manage price risk by
holding a diversified portfolio of assets, through its investments
in Credit Securities.
The Company’s policy also stipulates that at purchase no more
than 5% of the Portfolio value can be exposed to any single Credit
Security or issuer of Credit Securities.
The price of a Credit Security can be affected by a number of
factors, including: (i) changes in the market’s perception of the
underlying assets backing the security; (ii) economic and political
factors such as interest rates and levels of unemployment and
taxation which can have an impact on the arrears, foreclosures and
losses incurred with respect to the pool of assets backing the
security; (iii) changes in the market’s perception of the adequacy
of credit support built into the security’s structure to protect
against losses caused by arrears and foreclosures; (iv) changes in
the perceived creditworthiness of the originator of the security or
any other third parties to the transaction; (v) the speed at which
mortgages or loans within the pool are repaid by the underlying
borrowers (whether voluntary or due to arrears or
foreclosures).
(ii) Reinvestment risk
Reinvestment risk is the risk that future coupons from a bond
will not be reinvested at the prevailing interest rate when the
bond was initially purchased.
A key determinant of a bond’s yield is the price at which it is
purchased and, therefore, when the market price of bonds generally
increases, the yield of bonds purchased generally decreases. As
such, the overall yield of the portfolio, and therefore the level
of dividends payable to Shareholders, would fall to the extent that
the market prices of Credit Securities generally rise and the
proceeds of Credit Securities held by the Company that mature or
are sold are not able to be reinvested in Credit Securities with a
yield comparable to that of the portfolio as a whole.
Price sensitivity analysis
The following details the Company’s sensitivity to movement in
market prices. The analysis is based on a 10% and 5% (30 September 2015: 5%) increase or decrease in
market prices. This represents management’s best estimate of a
reasonable possible shift in market prices, having regard to
historical volatility.
At 30 September 2016, if the
market prices had been 10% and 5% (30
September 2015: 5%) higher with all other variables held
constant, the increase in the net assets attributable to equity
Shareholders would have been £12,796,837 and £6,398,419
respectively (30 September 2015:
£6,440,103). The total comprehensive income for the year would have
also increased by £12,796,837 and £6,398,419 (30 September 2015: £6,440,103). An equal change
in the opposite direction would have decreased the net assets
attributable to equity Shareholders and total comprehensive income
respectively.
Actual trading results may differ from the above sensitivity
analysis and those differences may be material.
Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect the fair value of financial assets at
fair value through profit or loss.
The tables below summarise
the Company’s exposure to interest rate risk:
|
|
|
|
|
Floating
rate |
|
Fixed
rate |
|
Non-interest bearing |
|
Total |
As at
30 September 2016 |
£ |
|
£ |
|
£ |
|
£ |
Investments |
|
48,625,988 |
|
79,342,383 |
|
- |
|
127,968,371 |
Amounts
due from broker |
|
|
- |
|
- |
|
1,132,190 |
|
1,132,190 |
Other
receivables |
|
|
|
- |
|
- |
|
2,477,965 |
|
2,477,965 |
Cash and
cash equivalents |
|
|
8,039,495 |
|
- |
|
- |
|
8,039,495 |
Derivative
liabilities: Forward currency contracts |
|
- |
|
- |
|
(279,458) |
|
(279,458) |
Amounts
due to broker |
|
|
|
- |
|
- |
|
(2,297,691) |
|
(2,297,691) |
Other
payables |
|
|
|
- |
|
- |
|
(219,031) |
|
(219,031) |
Net
current assets |
|
|
|
56,665,483 |
|
79,342,383 |
|
813,975 |
|
136,821,841 |
|
|
|
|
|
|
|
|
|
|
|
|
As at
30 September 2015 |
£ |
|
£ |
|
£ |
|
£ |
Investments |
|
45,203,982 |
|
83,598,087 |
|
- |
|
128,802,069 |
Amounts
due from broker |
|
|
- |
|
- |
|
1,233,420 |
|
1,233,420 |
Other
receivables |
|
|
|
- |
|
- |
|
2,794,811 |
|
2,794,811 |
Cash and
cash equivalents |
|
|
4,532,345 |
|
- |
|
- |
|
4,532,345 |
Derivative
assets: Forward currency contracts |
|
- |
|
- |
|
480,209 |
|
480,209 |
Derivative
liabilities: Forward currency contracts |
|
- |
|
- |
|
(1,147,799) |
|
(1,147,799) |
Amounts
due to broker |
|
|
|
- |
|
- |
|
(1,889,571) |
|
(1,889,571) |
Other
payables |
|
|
|
- |
|
- |
|
(245,140) |
|
(245,140) |
Net
current assets |
|
|
|
49,736,327 |
|
83,598,087 |
|
1,225,930 |
|
134,560,344 |
The Company holds fixed rate and floating rate financial
instruments which, based on current portfolio duration, have low
exposure to fair value interest rate risk as, when the short-term
interest rates increase, the interest rate on a floating rate note
will increase. The maximum time to re-fix interest rates is six
months and therefore the Company has low interest rate risk and, as
such it is not deemed necessary to perform sensitivity analysis
over interest rate risk. As at 30 September
2016, 65% of the Company was invested in fixed rate
securities, however overall duration of the Company was 2.9 years.
The value of Credit securities may be affected by interest rate
movements. Interest receivable on bank deposits or payable on bank
overdraft positions will be affected by fluctuations in interest
rates, however the underlying cash positions will not be
affected.
The Company’s continuing position in relation to interest rate
risk is monitored on a weekly basis by the Portfolio Manager as
part of its review of the weekly Net Asset Value calculations
prepared by the Company’s Administrator.
Credit risk
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in financial loss to the
Company. The Company has a credit policy in place and the exposure
to credit risk is monitored on an on-going basis.
The main concentration of credit risk to which the Company is
exposed arises from the Company’s investments in Credit Securities.
The Company is also exposed to counterparty credit risk on
forwards, cash and cash equivalents, amounts due from brokers and
other receivable balances.
The Company’s policy is to manage this risk by maintaining a
portfolio diversified by issuer. While the prospectus permits no
more than 5% of the portfolio value to be invested in any single
Credit Security or issuer of Credit Securities, the Portfolio
Manager operates to stricter exposures dependent on the credit
rating of each single Credit Security or issuer of Credit
Securities.
Portfolio of debt securities by ratings category using the
highest rating assigned by Standard and Poor’s (“S&P”), Moody’s
Analytics (“Moody’s”) or Fitch Ratings (“Fitch”):
|
|
|
|
|
|
|
|
|
30.09.16 |
|
30.09.15 |
BBB |
|
|
|
|
|
|
|
|
0.00% |
|
0.78% |
BBB- |
|
|
|
|
|
|
|
|
4.55% |
|
4.81% |
BB+ |
|
|
|
|
|
|
|
|
10.89% |
|
15.99% |
BB |
|
|
|
|
|
|
|
|
10.58% |
|
4.27% |
BB- |
|
|
|
|
|
|
|
|
4.93% |
|
7.21% |
B+ |
|
|
|
|
|
|
|
|
6.44% |
|
6.31% |
B |
|
|
|
|
|
|
|
|
28.01% |
|
27.87% |
B- |
|
|
|
|
|
|
|
|
10.52% |
|
9.50% |
CCC+ |
|
|
|
|
|
|
|
|
4.86% |
|
12.26% |
CCC |
|
|
|
|
|
|
|
|
0.00% |
|
0.74% |
CCC- |
|
|
|
|
|
|
|
|
0.13% |
|
0.00% |
CC |
|
|
|
|
|
|
|
|
1.41% |
|
0.96% |
Not
Rated |
|
|
|
|
|
|
|
17.68% |
|
9.30% |
|
|
|
|
|
|
|
|
|
100.00% |
|
100.00% |
To further understand credit risk, the Portfolio Manager
undertakes extensive due diligence procedures on investments in
Credit Securities and monitors the on-going investment in these
securities.
The Company manages its counterparty exposure in respect of cash
and cash equivalents and forwards by investing with counterparties
with a “single A” or higher credit rating. The majority of cash is
currently placed with The Northern Trust Company. The Company is
subject to credit risk to the extent that this institution may be
unable to return this cash. The Northern Trust Company is a wholly
owned subsidiary of The Northern Trust Corporation. The Northern
Trust Corporation is publicly traded and a constituent of S&P
500. The Northern Trust Corporation has a credit rating of A+ from
Standard & Poor's and A2 from Moody's.
The Company’s maximum credit exposure is limited to the carrying
amount of financial assets recognised as at the statement of
financial position date, as summarised below:
|
|
|
|
|
|
|
|
|
30.09.16 |
|
30.09.15 |
|
|
|
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
127,968,371 |
|
128,802,069 |
Amounts
due from broker |
|
|
|
|
|
|
1,132,190 |
|
1,233,420 |
Cash and
cash equivalents |
|
|
|
|
|
8,039,495 |
|
4,532,345 |
Derivative
assets: Forward currency contracts |
|
|
|
- |
|
480,209 |
Other
receivables |
|
|
|
|
|
|
|
2,477,965 |
|
2,794,811 |
|
|
|
|
|
|
|
|
|
139,618,021 |
|
137,842,854 |
Investments in Credit Securities that are not backed by
mortgages present certain risks that are not presented by
mortgage-backed securities (“MBS”). Primarily, these securities may
not have the benefit of the same security interest in the related
collateral. Therefore, there is a possibility that recoveries on
defaulted collateral may not, in some cases, be available to
support payments on these securities. The risk of investing in
these types of Credit Securities is ultimately dependent upon
payment of the underlying debt by the debtor.
Liquidity risk
Liquidity risk is the risk that the Company may not be able to
generate sufficient cash resources to settle its obligations in
full as they fall due or can only do so on terms that are
materially disadvantageous.
Investments made by the Company in Credit Securities may be
relatively illiquid and this may limit the ability of the Company
to realise its investments. Investments in Credit Securities may
also have no active market and the Company also has no redemption
rights in respect of these investments. The Company has the ability
to borrow to ensure sufficient cash flows.
The Portfolio Manager considers expected cash flows from
financial assets in assessing and managing liquidity risk, in
particular its cash resources and trade receivables. Cash flows
from trade and other receivables are all contractually due within
twelve months.
The Portfolio Manager shall maintain a liquidity management
policy to monitor the liquidity risk of the Company.
Shareholders have no right to have their shares redeemed or
repurchased by the Company, except as detailed under the Capital
Risk Management (Quarterly Tenders) section of this note.
Shareholders wishing to release their investment in the Company are
therefore required to dispose of their shares on the market.
The table below analyses the Company’s liabilities into relevant
maturity groupings based on the maturities at the statement of
financial position date. The amounts in the table are the
undiscounted net cash flows on the financial liabilities:
|
|
|
|
|
Up to
1 month |
|
1-6
months |
|
6-12
months |
|
Total |
As at
30 September 2016 |
|
£ |
|
£ |
|
£ |
|
£ |
Amounts
due to broker |
|
(2,297,691) |
|
- |
|
- |
|
(2,297,691) |
Derivative
liabilities: Forward currency contracts |
|
- |
|
(279,458) |
|
- |
|
(279,458) |
Other
payables |
|
|
|
(171,531) |
|
(47,500) |
|
- |
|
(219,031) |
Total |
|
|
|
|
(2,469,222) |
|
(326,958) |
|
- |
|
(2,796,180) |
|
|
|
|
|
|
|
|
|
|
|
|
As at
30 September 2015 |
|
£ |
|
£ |
|
£ |
|
£ |
Amounts
due to broker |
|
(1,889,571) |
|
- |
|
- |
|
(1,889,571) |
Derivative
liabilities: Forward currency contracts |
|
(1,147,799) |
|
- |
|
- |
|
(1,147,799) |
Other
payables |
|
|
|
(199,440) |
|
(45,700) |
|
- |
|
(245,140) |
Total |
|
|
|
|
(3,236,810) |
|
(45,700) |
|
- |
|
(3,282,510) |
Foreign currency risk
Foreign currency risk is the risk that the value of a financial
instrument will fluctuate due to changes in foreign exchange rates.
The Company invests predominantly in non-Sterling assets while its
Shares are denominated in Sterling, its expenses are incurred in
Sterling and its presentational currency is Sterling. Therefore the
Statement of Financial Position may be significantly affected by
movements in the exchange rate between foreign currencies and
Sterling. The Company manages the exposure to currency movements by
using spot and forward foreign exchange contracts, rolling forward
on a periodic basis.
At year end, the Company had two (30
September 2015: sixteen) open forward currency contracts and
nil (30 September 2015: five) open
spot currency contracts.
Open forward currency contracts
|
|
|
|
|
|
|
Outstanding contracts |
|
Mark to market equivalent |
|
Unrealised gains/(losses) |
|
|
|
|
|
Contract
values |
|
|
|
|
|
|
|
|
30.09.16 |
|
30.09.16 |
|
30.09.16 |
|
30.09.16 |
|
|
|
|
|
Currency |
|
£ |
|
£ |
|
£ |
Two
Sterling forward foreign currency |
|
|
|
|
|
|
|
contracts
totalling: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 EUR
forward foreign currency contract |
(79,187,520) |
|
(68,278,647) |
|
(68,552,759) |
|
(274,112) |
1 USD
forward foreign currency contract |
(12,087,442) |
|
(9,294,879) |
|
(9,300,225) |
|
(5,346) |
|
|
|
|
|
|
|
|
|
|
|
(279,458) |
|
|
|
|
|
|
|
Outstanding contracts |
|
Mark to market equivalent |
|
Unrealised gains/(losses) |
|
|
|
|
|
Contract
values |
|
|
|
|
|
|
|
|
30.09.15 |
|
30.09.15 |
|
30.09.15 |
|
30.09.15 |
|
|
|
|
|
Currency |
|
£ |
|
£ |
|
£ |
Sixteen
Sterling forward foreign currency |
|
|
|
|
|
|
contracts
totalling: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 CHF
forward foreign currency contract |
(8,550,000) |
|
(5,790,367) |
|
(5,779,563) |
|
10,804 |
3 EUR
forward foreign currency contract |
(89,400,000) |
|
(66,323,609) |
|
(65,914,740) |
|
408,869 |
2 USD
forward foreign currency contract |
4,400,000 |
|
2,876,274 |
|
2,904,770 |
|
28,496 |
|
|
|
|
|
|
|
|
|
|
|
448,169 |
|
|
|
|
|
|
|
|
|
|
|
|
4 EUR
forward foreign currency contract |
(96,400,000) |
|
(70,494,957) |
|
(71,038,466) |
|
(543,509) |
2 SEK
forward foreign currency contract |
(17,750,000) |
|
(1,376,568) |
|
(1,397,625) |
|
(21,057) |
2 USD
forward foreign currency contract |
(31,000,000) |
|
(20,265,914) |
|
(20,466,453) |
|
(200,539) |
1 CHF
forward foreign currency contract |
(200,000) |
|
(132,901) |
|
(135,128) |
|
(2,227) |
|
|
|
|
|
|
|
|
|
|
|
(767,332) |
Open spot currency contracts
|
|
|
|
|
|
|
Outstanding contracts |
|
Mark to market equivalent |
|
Unrealised gains/(losses) |
|
|
|
|
|
Contract
values |
|
|
|
|
|
|
|
|
30.09.15 |
|
30.09.15 |
|
30.09.15 |
|
30.09.15 |
|
|
|
|
|
Currency |
|
£ |
|
£ |
|
£ |
Five
Sterling spot currency |
|
|
|
|
|
|
|
|
contracts
totalling: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 EUR spot
currency contract |
|
(1,800,000) |
|
(1,328,850) |
|
(1,326,457) |
|
2,393 |
1 SEK spot
currency contract |
|
8,800,000 |
|
687,022 |
|
692,679 |
|
5,657 |
1 USD spot
currency contract |
|
13,300,000 |
|
8,756,337 |
|
8,780,327 |
|
23,990 |
|
|
|
|
|
|
|
|
|
|
|
32,040 |
|
|
|
|
|
|
|
|
|
|
|
|
1 EUR spot
currency contract |
|
93,800,000 |
|
69,496,420 |
|
69,123,125 |
|
(373,295) |
1 CHF spot
currency contract |
|
4,400,000 |
|
2,980,020 |
|
2,972,848 |
|
(7,172) |
|
|
|
|
|
|
|
|
|
|
|
(380,467) |
As at 30 September 2016 and 2015
the Company held the following assets and liabilities denominated
in currencies other than Pound Sterling:
|
|
|
|
|
|
|
|
|
30.09.16 |
|
30.09.15 |
|
|
|
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
77,113,129 |
|
77,667,796 |
Cash and
cash equivalents |
|
|
|
|
1,646,323 |
|
2,253,255 |
Other
receivables |
|
|
|
|
|
|
|
1,271,578 |
|
2,852,506 |
Less:
Amounts due to broker |
|
|
|
|
|
(1,297,691) |
|
- |
Less: Open
forward currency contracts |
|
|
|
|
(77,852,985) |
|
(161,827,206) |
Add: Open
spot currency contracts |
|
|
|
|
- |
|
80,242,525 |
|
|
|
|
|
|
|
|
|
880,354 |
|
1,188,876 |
The table below summarises the sensitivity of the Company’s
assets and liabilities to changes in foreign exchange movements
between Euro and Sterling as at 30 September
2016 and 2015. The analysis is based on the assumption that
the relevant foreign exchange rate increased/decreased by the
percentage disclosed in the table, with all other variables held
constant. This represents management’s best estimate of a
reasonable possible shift in the foreign exchange rates, having
regard to historical volatility of those rates.
|
|
|
|
|
|
|
|
|
30.09.16 |
|
30.09.15 |
|
|
|
|
|
|
|
|
|
£ |
|
£ |
Impact on
Statement of Comprehensive Income |
|
|
|
|
|
|
and Equity
in response to a: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 10%
(30.09.15: 5%) increase in EUR/GBP |
|
|
|
(25,230) |
|
(41,367) |
|
|
|
|
|
|
|
|
|
|
|
|
- 10%
(30.09.15: 5%) decrease in EUR/GBP |
|
|
|
123,352 |
|
115,958 |
|
|
|
|
|
|
|
|
|
|
|
|
Impact on
Statement of Changes in Equity in response to a: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 10%
(30.09.15: 5%) increase in EUR/GBP |
|
|
|
(25,230) |
|
(41,367) |
|
|
|
|
|
|
|
|
|
|
|
|
- 10%
(30.09.15: 5%) decrease in EUR/GBP |
|
|
|
123,352 |
|
115,958 |
Capital risk management
The Company manages its capital to ensure that it is able to
continue as a going concern while following the Company’s stated
investment policy. The capital structure of the Company consists of
Shareholders’ equity, which comprises share capital and other
reserves. To maintain or adjust the capital structure, the Company
may return capital to Shareholders or issue new Shares. There are
no regulatory requirements to return capital to Shareholders.
(i) Quarterly Tenders
With the objective of minimising the risk of the Ordinary Shares
trading at a discount to NAV and to assist in the narrowing of any
discount at which the Ordinary Shares may trade from time to time,
the Company has incorporated into its structure a mechanism (a
“Quarterly Tender”), contingent on certain factors as described
below, which can be exercised at the discretion of the Directors,
to provide Shareholders with a quarterly opportunity to submit
Ordinary Shares for placing or repurchase by the Company at a price
representing a discount of no more than 2% to the then prevailing
NAV.
Upon confirmation of the number of Tender Requests made in
respect of each Quarter Record Date, the Company intends first,
through its corporate broker acting on a reasonable endeavours
basis, to seek to satisfy Tender Requests by placing the Tendered
Shares with investors in the secondary market.
Second, subject to the Tender Restrictions, the Company intends
to repurchase for cancellation any Tendered Shares not placed in
the secondary market.
It is anticipated that the Company will tender on a quarterly
basis for up to 20% of the Ordinary Shares in issue as at the
relevant Quarter Record Date, subject to an aggregate limit of 50%
of the Ordinary Shares in issue in any twelve month period ending
on the relevant Quarter Record Date.
(ii)Share buybacks
The Company has been granted the authority to make market
purchases of up to a maximum of 14.99% of the aggregate number of
Ordinary Redeemable Shares in issue immediately following Admission
at a price not exceeding the higher of (i) 5% above the average of
the mid-market values of the Ordinary Redeemable Shares for the 5
business days before the purchase is made or, (ii) the higher of
the price of the last independent trade and the highest current
investment bid for the Ordinary Redeemable Shares.
In deciding whether to make any such purchases the Directors
will have regard to what they believe to be in the best interests
of Shareholders as a whole, to the applicable legal requirements
and any other requirements in its Articles. The making and timing
of any buybacks will be at the absolute discretion of the Board and
not at the option of the Shareholders, and is expressly subject to
the Company having sufficient surplus cash resources available
(excluding borrowed moneys).
The Listing Rules prohibit the Company from conducting any share
buybacks during close periods immediately preceding the publication
of annual and interim results.
(iii) Continuation votes
In the event that:
(i) the Dividend
Target, as disclosed in note 19, is not met; or
(ii) on any
Tender Submission Deadline, applications for the Company to
repurchase 50% or more of the Company’s issued Ordinary Shares,
calculated as at the relevant Quarter Record Date, are received by
the Company,
A General Meeting will be convened at which the Directors will
propose an Ordinary Resolution that the Company should continue as
an investment company. If any such Ordinary Resolution is not
passed, the Directors shall draw up proposals for the voluntary
liquidation, unitisation, reorganisation or reconstruction of the
Company for submission to the members of the Company at a General
Meeting to be convened by the Directors for a date not more than 6
months after the date of the meeting at which such Ordinary
Resolution was not passed.
17. Fair Value Measurement
All assets and liabilities are carried at fair value or at
carrying value which equates to fair value.
IFRS 13 requires the Company to classify fair value measurements
using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. The fair value hierarchy
has the following levels:
(i) Quoted prices (unadjusted) in active markets for
identical assets or
liabilities
(level 1).
(ii) Inputs other than quoted prices included within level 1
that are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from prices
including interest rates, yield curves, volatilities, prepayment
speeds, credit risks and default rates) or other market
corroborated inputs (level 2).
(iii) Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs) (level
3).
The following table analyses within the fair value hierarchy the
Company’s financial assets and liabilities (by class) measured at
fair value as at 30 September
2016.
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
|
|
|
|
|
Financial
assets at fair value |
|
|
|
|
|
|
|
|
through
profit or loss |
|
|
|
|
|
|
|
|
|
-Investments |
|
|
|
|
|
|
|
|
|
-Bonds |
|
- |
|
38,924,491 |
|
44,956,109 |
|
83,880,600 |
|
-Asset
backed securities |
|
- |
|
33,298,000 |
|
10,789,771 |
|
44,087,771 |
Total
assets as at 30 September 2016 |
|
- |
|
72,222,491 |
|
55,745,880 |
|
127,968,371 |
Liabilities |
|
|
|
|
|
|
|
|
Financial
liabilities at fair value |
|
|
|
|
|
|
|
|
through
profit or loss |
|
|
|
|
|
|
|
|
|
-Derivative liabilities: Forward currency |
|
|
|
|
|
|
|
|
contracts |
|
- |
|
279,458 |
|
- |
|
279,458 |
Total
liabilities as at 30 September 2016 |
|
- |
|
279,458 |
|
- |
|
279,458 |
The following table analyses within the fair value hierarchy the
Company’s financial assets and liabilities (by class) measured at
fair value as 30 September 2015.
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
|
|
|
|
|
Financial
assets at fair value |
|
|
|
|
|
|
|
|
through
profit or loss |
|
|
|
|
|
|
|
|
|
-Investments |
|
|
|
|
|
|
|
|
|
-Bonds |
|
- |
|
26,900,396 |
|
67,362,346 |
|
94,262,743 |
|
-Interest
rate swaps |
|
- |
|
- |
|
(839,620) |
|
(839,620) |
|
-Asset
backed securities |
|
- |
|
27,406,306 |
|
7,972,641 |
|
35,378,946 |
|
-Derivative
assets: Forward currency |
|
|
|
|
|
|
|
|
|
contracts |
|
- |
|
480,209 |
|
- |
|
480,209 |
Total
assets as at 30 September 2015 |
|
- |
|
54,786,911 |
|
74,495,367 |
|
129,282,278 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Financial
liabilities at fair value |
|
|
|
|
|
|
|
|
through
profit or loss |
|
|
|
|
|
|
|
|
|
-Derivative liabilities: Forward currency |
|
|
|
|
|
|
|
|
contracts |
|
- |
|
1,147,799 |
|
- |
|
1,147,799 |
Total
liabilities as at 30 September 2015 |
|
- |
|
1,147,799 |
|
- |
|
1,147,799 |
Credit Securities which have a value based on quoted market
prices in active markets are classified in level 1. At the end of
the year, no Credit Securities held by the Company are classified
as level 1.
Credit Securities which are not traded or dealt on organised
markets or exchanges are classified in level 2 or level 3. Credit
securities priced at cost are classified as level 3. Credit
securities with prices obtained from independent price vendors,
where the Portfolio Manager is able to assess whether the
observable inputs used for their modelling of prices is accurate
and the Portfolio Manager has the ability to challenge these
vendors with further observable inputs, are classified as level 2.
Prices obtained from vendors who are not easily challengeable or
transparent in showing their assumptions for the method of pricing
these assets, are classified as level 3. Credit Securities priced
at an average of two vendors’ prices are classified as level 3.
Where the Portfolio Manager determines that the price obtained
from an independent price vendor is not an accurate representation
of the fair value of the Credit Security, the Portfolio Manager may
source prices from third party broker or dealer quotes and if the
price represents a reliable and an observable price, the Credit
Security is classified in level 2. Any broker quote that is over 20
days old is considered stale and is classified as level 3.
There were no transfers between level 1 and 2 during the year,
however transfers from level 3 to level 2 occurred based on the
Portfolio Manager’s ability to obtain a reliable and observable
price as detailed above.
During the year the level classification policy employed by the
Portfolio Manager was updated following an exercise undertaken to
assess the transparency offered by third party price vendors, which
has enabled the Portfolio Manager to determine the appropriate
classification between level 2 and level 3 with greater
precision.
As such the comparative period level three information has been
restated to account for a reclassification from level 3 to level 2
amounting to £47,829,924, such that the comparative levelling table
is comparable and in line with the Company’s enhanced levelling
assessment.
Due to the inputs into the valuation of Credit Securities
classified as level 3 not being available or visible to the
Company, no meaningful sensitivity on inputs can be performed.
The following table presents the movement in level 3 instruments
for the year ended 30 September 2016 by class of financial
instrument.
|
|
Preferred Stock |
|
Bonds |
|
Interest Rate Swaps |
|
Asset
backed securities |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
|
|
Opening balance |
|
- |
|
67,362,346 |
|
(839,620) |
|
7,972,641 |
|
74,495,367 |
Net
(sales)/purchases |
|
- |
|
(17,159,353) |
|
1,076,632 |
|
(779,707) |
|
(16,862,428) |
Net realised
gain/(loss) for the year |
|
- |
|
391,035 |
|
(1,076,632) |
|
(331,193) |
|
(1,016,790) |
Net unrealised gain
for the year |
|
- |
|
165,750 |
|
839,620 |
|
912,547 |
|
1,917,917 |
Transfer into Level
3 |
|
- |
|
11,184,039 |
|
- |
|
5,619,998 |
|
16,804,037 |
Transfer out of Level
3 |
|
- |
|
(16,987,708) |
|
- |
|
(2,604,515) |
|
(19,592,223) |
Closing balance |
|
- |
|
44,956,109 |
|
- |
|
10,789,771 |
|
55,745,880 |
The following table presents the movement in level 3 instruments
for the year ended 30 September 2015 by class of financial
instrument.
|
|
Preferred Stock |
|
Bonds |
|
Interest Rate Swaps |
|
Asset
backed securities |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
|
|
Opening balance |
|
2,895,000 |
|
49,692,194 |
|
(252,574) |
|
10,988,865 |
|
63,323,485 |
Net purchases |
|
- |
|
20,131,811 |
|
- |
|
5,096,290 |
|
25,228,101 |
Investment
reclassification |
|
(2,895,000) |
|
2,895,000 |
|
- |
|
- |
|
- |
Net realised
(loss)/gain for the year |
|
- |
|
(326,034) |
|
- |
|
12,357 |
|
(313,677) |
Net unrealised
(loss)/gain for the year |
|
- |
|
(1,510,989) |
|
(587,046) |
|
24,123 |
|
(2,073,912) |
Transfer into Level
3 |
|
- |
|
6,660,081 |
|
- |
|
1,653,589 |
|
8,313,670 |
Transfer out of Level
3 |
|
- |
|
(10,179,717) |
|
- |
|
(9,802,583) |
|
(19,982,300) |
Closing balance |
|
- |
|
67,362,346 |
|
(839,620) |
|
7,972,641 |
|
74,495,367 |
The following table
analyses within the fair value hierarchy the Company’s assets and
liabilities not measured at fair value at 30
September 2016 but for which fair value is disclosed.
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
30
September 2016 |
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
|
|
|
|
|
|
Amounts
due from broker |
|
- |
|
1,132,190 |
|
- |
|
1,132,190 |
Other
receivables |
|
- |
|
2,477,965 |
|
- |
|
2,477,965 |
Cash and
cash equivalents |
|
8,039,495 |
|
- |
|
- |
|
8,039,495 |
Total |
|
|
8,039,495 |
|
3,610,155 |
|
- |
|
11,649,650 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Amounts
due to broker |
|
- |
|
2,297,691 |
|
- |
|
2,297,691 |
Other payables |
|
|
- |
|
219,031 |
|
- |
|
219,031 |
Total |
|
|
- |
|
2,516,722 |
|
- |
|
2,516,722 |
The following table analyses within the fair value hierarchy the
Company’s assets and liabilities not measured at fair value at
30 September 2015 but for which fair
value is disclosed.
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
30
September 2015 |
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
|
|
|
|
|
|
Amounts
due from broker |
|
- |
|
1,233,420 |
|
- |
|
1,233,420 |
Other
receivables |
|
- |
|
2,794,811 |
|
- |
|
2,794,811 |
Cash and
cash equivalents |
|
4,532,345 |
|
- |
|
- |
|
4,532,345 |
Total |
|
|
4,532,345 |
|
4,028,231 |
|
- |
|
8,560,576 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Amounts
due to broker |
|
- |
|
1,889,571 |
|
- |
|
1,889,571 |
Other payables |
|
|
- |
|
245,140 |
|
- |
|
245,140 |
Total |
|
|
- |
|
2,134,711 |
|
- |
|
2,134,711 |
The assets and liabilities included in the above tables are
carried at amortised cost; their carrying values are a reasonable
approximation of fair value.
Cash and cash equivalents include deposits held with banks.
Amounts due to brokers and other payables represent the
contractual amounts and obligations due by the Company for
settlement of trades and expenses. Amounts due from brokers and
other receivables represent the contractual amounts and rights due
to the Company for settlement of trades and income.
18. Segmental Reporting
The Board is responsible for reviewing the Company’s entire
portfolio and considers the business to have a single operating
segment. The Board’s asset allocation decisions are based on a
single, integrated investment strategy, and the Company’s
performance is evaluated on an overall basis.
The Company invests in a diversified portfolio of Credit
Securities. The fair value of the major financial instruments held
by the Company and the equivalent percentages of the total value of
the Company are reported in the Top Twenty Holdings.
Revenue earned is reported separately on the face of the Statement
of Comprehensive Income as investment income being interest income
received from Credit Securities.
19. Dividend Policy
The Board intends to distribute an amount at least equal to the
value of the Company’s net income arising each financial year to
the holders of Ordinary Shares. However, there is no guarantee that
the dividend target of 6.0 pence per
Ordinary Share for each financial year will be met or that the
Company will make any distributions at all.
Distributions made with respect to any income period comprise
(a) the accrued income of the portfolio for the period (for these
purposes, the Company’s income will include the interest payable by
the Credit Securities in the Portfolio and amortisation of any
discount or premium to par at which a Credit Security is purchased
over its remaining expected life), and (b) an additional amount to
reflect any income purchased in the course of any share
subscriptions that took place during the period. Including
purchased income in this way ensures that the income yield of the
shares is not diluted as a consequence of the issue of new shares
during an income period and (c) any gain / (loss) on the foreign
exchange contracts caused by the libor differentials between each
foreign exchange currency pair.
The Board expects that dividends will constitute the principal
element of the return to the holders of Ordinary Shares.
The Company declared the following dividends in respect of the
distributable profit for the year ended 30
September 2016:
Period to |
Dividend rate per Share (pence) |
|
Net
dividend paid
-Income
(£) |
|
Ex-dividend date |
|
Record date |
|
Pay
date |
31 October 2015 |
0.50 |
|
744,179 |
|
19
November 2015 |
|
20
November 2015 |
|
30
November 2015 |
30 November 2015 |
0.50 |
|
744,179 |
|
17
December 2015 |
|
18
December 2015 |
|
31
December 2015 |
31 December 2015 |
0.50 |
|
744,179 |
|
21
January 2016 |
|
22
January 2016 |
|
29
January 2016 |
31 January 2016 |
0.50 |
|
744,179 |
|
18
February 2016 |
|
19
February 2016 |
|
29
February 2016 |
29 February 2016 |
0.50 |
|
746,679 |
|
17 March
2016 |
|
18 March
2016 |
|
31 March
2016 |
31 March 2016 |
0.50 |
|
754,146 |
|
16 April
2016 |
|
17 April
2016 |
|
30 April
2016 |
30 April 2016 |
0.50 |
|
754,146 |
|
19 May
2016 |
|
20 May
2015 |
|
31 May
2016 |
31 May 2016 |
0.50 |
|
754,146 |
|
16 June
2016 |
|
17 June
2016 |
|
30 June
2016 |
30 June 2016 |
0.50 |
|
754,146 |
|
21 July
2016 |
|
22 July
2016 |
|
29 July
2016 |
31 July 2016 |
0.50 |
|
754,146 |
|
18
August 2016 |
|
19
August 2016 |
|
28
August 2016 |
31 August 2016 |
0.50 |
|
764,146 |
|
15
September 2016 |
|
16
September 2016 |
|
30
September 2016 |
30 September 2016 |
1.35 |
|
2,055,980 |
|
20
October 2016 |
|
21
October 2016 |
|
31
October 2016 |
Under the Companies (Guernsey)
Law, 2008, the Company can distribute dividends from capital and
revenue reserves, subject to the net asset and solvency test.
The net asset and solvency test considers whether a company is
able to pay its debts when they fall due, and whether the value of
a company’s assets is greater than its liabilities. The Board
confirms that the Company passed the net asset and solvency
test for each dividend paid.
20. Ultimate Controlling Party
In the opinion of the
Directors on the basis of shareholdings advised to them, the
Company has no ultimate controlling party.
21. Subsequent Events
These Financial Statements were approved for issuance by the
Board on 18 January 2017. Subsequent
events have been evaluated until this date.
Subsequent to the year end and up to the date of the Annual
Report and Audited Financial Statements, the following events took
place:
Dividend
declarations
Declaration
date |
|
|
|
|
|
|
|
|
Dividend rate per Share (pence) |
12 October 2016 |
|
|
|
|
|
|
|
|
1.35 |
10
November 2016 |
|
|
|
|
|
|
|
0.50 |
8 December 2016 |
|
|
|
|
|
|
|
|
0.50 |
11 January 2017 |
|
|
|
|
|
|
|
|
0.50 |
Re-issuance of
Treasury Shares
Date of
Re-issue |
|
|
|
|
|
|
Shares |
|
£ |
6 October 2016 |
|
|
|
|
|
|
2,500,000 |
|
2,294,500 |
As at the date of approval for issuance of the Annual Report and
Audited Financial Statements, the Company had 154,579,151 Ordinary
shares in issue and 1,330,617 held in treasury.
CORPORATE INFORMATION
Directors
Claire Whittet (Chair) |
|
Receiving Agent
Computershare Investor Services PLC |
Christopher Legge |
|
The Pavillions |
Thomas Emch |
|
Bridgewater Road |
Ian Martin |
|
Bristol, BS13 8AE |
|
|
|
Registered Office |
|
UK Legal Advisers to the
Company |
PO Box 255 |
|
Eversheds LLP |
Trafalgar Court |
|
One Wood Street |
Les Banques |
|
London, EC2V 7WS |
St Peter Port |
|
|
Guernsey, GY1 3QL |
|
|
|
|
|
Portfolio Manager |
|
Guernsey Legal Advisers to the
Company |
TwentyFour Asset Management LLP |
|
Carey Olsen |
8th Floor The Monument Building |
|
Carey House |
11 Monument Street |
|
Les Banques |
London, EC3R 8AF |
|
St Peter Port |
|
|
Guernsey, GY1 4BZ |
|
|
|
Alternative Investment Fund
Manager |
|
Independent Auditor |
Maitland Institutional Services
Limited |
|
PricewaterhouseCoopers CI LLP |
(formerly Phoenix Fund Services
(UK) Limited) |
|
PO Box 321 |
Springfield Lodge |
|
Royal Bank Place |
Colchester Road |
|
1 Glategny Esplanade |
Chelmsford, CM2 5PW |
|
St Peter Port |
|
|
Guernsey, GY1 4ND |
|
|
|
Custodian, Principal Banker and
Depositary |
|
Registrar |
Northern Trust
(Guernsey) Limited
PO Box 71 |
|
Computershare Investor Services
(Guernsey) Limited |
Trafalgar Court |
|
3rd Floor |
Les Banques |
|
NatWest House |
St Peter Port |
|
Le Truchot |
Guernsey, GY1 3DA |
|
St Peter Port |
|
|
Guernsey, GY1 1WD |
|
|
|
Administrator and Company
Secretary |
|
Broker and Financial
Adviser |
Northern Trust
International Fund Administration
Services (Guernsey) Limited |
|
Numis Securities
Limited
The London Stock Exchange Building |
PO Box 255 |
|
10 Paternoster Square |
Trafalgar Court |
|
London, EC4M 7LT |
Les Banques |
|
|
St Peter Port |
|
|
Guernsey, GY1 3QL |
|
|
|
|
|