WEISS KOREA OPPORTUNITY FUND LTD.
ANNUAL REPORT AND AUDITED FINANCIAL
STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016
The Company has today, released its Annual Report and Audited
Financial Statements for the year ended
31 December 2016. The Report will
shortly be available from the Company's website
www.weisskoreaopportunityfund.com.
For further information, please contact:
N+1 Singer
James Maxwell – Nominated Adviser
James Waterlow – Sales |
+44 20 7496 3000 |
Northern Trust
International Fund Administration Services (Guernsey)
Limited
Samuel Walden |
+44 1481 745323 |
Summary Information
The Company
Weiss Korea Opportunity Fund Ltd. (“WKOF” or the “Company”) was
incorporated with limited liability in Guernsey, as a closed-ended
investment company on 12 April 2013.
The Company’s Shares were admitted to trading on the AIM Market of
the London Stock Exchange (the “LSE”) on 14
May 2013.
The Company is managed by Weiss Asset Management LP (the
“Investment Manager”), a Boston-based investment management company
registered with the Securities and Exchange Commission in
the United States of America.
Investment Objective and Dividend
Policy
The Company's investment objective is to provide Shareholders
with an attractive return on their investment, predominantly
through long-term capital appreciation. The Company is
geographically focussed on Korean companies, specifically investing
primarily in listed preferred shares issued by companies
incorporated in Korea, which in many cases have traded and continue
to trade at a discount to the corresponding common shares of the
same companies. Since the Company's Admission to AIM, the
Investment Manager has assembled a portfolio of Korean preferred
shares that it believes are undervalued and could appreciate based
on the criteria that it selects. The Company may, in accordance
with its investment policy, also invest some portion of its assets
in other securities, including exchange-traded funds, futures
contracts and other types of options, swaps and derivatives related
to Korean equities, as well as cash and cash equivalents.
The Company intends to return to Shareholders all dividends
received, net of withholding tax on an annual basis.
Investment Policy
The Company is geographically focused on South Korean companies.
Specifically, the Company invests primarily in listed preferred
shares issued by companies incorporated in South Korea, which in many cases are currently
trading at a discount to the corresponding common shares of the
same companies. The Investment Manager has assembled a portfolio of
Korean preferred shares that it believes are undervalued and could
appreciate based on criteria it selects. Some of the considerations
that affect the Investment Manager’s choice of securities to buy
and sell may include the discount at which a preferred share is
trading relative to its respective common shares, its dividend
yield, its liquidity and its common shares weighting (if any) in
the MSCI Korea 25/50 Net Total Return Index (the “Korea Index”),
among other factors. Not all of these factors will necessarily be
satisfied for particular investments. The Investment Manager will
not generally make decisions based on corporate fundamentals or its
view of the commercial prospects of the issuer. Preferred shares
are selected by the Investment Manager at its sole discretion,
subject to the overall control of the Board.
The Company invests primarily in Korean preferred shares, but it
may invest some portion of its assets in other securities,
including exchange-traded funds, futures contracts and other types
of options, swaps and derivatives related to Korean equities, as
well as cash and cash equivalents. The Company does not have any
concentration limits.
The Company has not hedged its exposure to foreign currency
during the year ended 31 December
2016 (2015: Nil).
Share Buy-backs
At the Annual General Meeting (“the AGM”) on 27 July 2016, Shareholders granted the Company a
general buy-back authority of up to 40% of the Company's issued
share capital. In addition, on 12 February
2016, the Company appointed N+1 Singer Advisory LLP to
manage an irrevocable programme during the close period leading up
to the publication of the Company’s full year results (the “Close
Period Buy-Back Programme”) to buy back ordinary shares within
certain pre-set parameters. Any shares purchased in the Close
Period Buy- Back Programme will count towards the Company's general
buy-back authority of 40% of the Company's issued share capital, as
approved at the Company's AGM.
On 5 August 2016, the Company
re-appointed N+1 Singer Advisory LLP to manage the Close Period
Buy- Back Programme to buy back ordinary shares within certain
pre-set parameters during the close period leading up to the
publication of the year-end results. Any shares purchased in the
Close Period Buy-Back Programme will count towards the Company's
share buy-back authority of 40% of the Company's issued share
capital, as approved at the Company's AGM.
For additional information on share buy-backs refer to Note
15.
Shareholder Information
Northern Trust International Fund Administration Services
(Guernsey) Limited (the “Administrator”) is responsible for
calculating the Net Asset Value (“NAV”) per Share of the Company.
The unaudited NAV per ordinary share is calculated on a weekly
basis and at the month end by the Administrator,
which is announced by a Regulatory News Service and
is available through the Company’s website
www.weisskoreaopportunityfund.com.
Company financial highlights and
performance summary for the year ended 31
December 2016
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As
at |
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As
at |
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31
December 2016 |
|
31
December 2015 |
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£ |
|
£ |
Total Net Assets |
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|
|
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146,374,699 |
|
131,142,778 |
NAV per share |
|
|
|
|
1.5027 |
|
1.3449 |
Basic and
diluted earnings per share |
|
|
|
0.1800 |
|
0.1561 |
Mid-Market Share
price |
|
|
|
|
1.42 |
|
1.28 |
Discount to NAV |
|
|
|
|
(5.5%) |
|
(4.8%) |
As at close of business on 25 April
2017, the latest published NAV per share had increased to
£1.5442 (as at 18 April 2017) and the
share price stood at £1.485.
Total expense ratio
The annualised total expense ratio for the year ended
31 December 2016 was 1.80%
(31 December 2015: 1.81%).
Chairman’s Review
We are pleased to provide the 2016 Annual Financial Report on
the Company. During the period from 31
December 2015 to 31 December
2016 (the “Period”), the Company’s NAV increased by
11.61%,[1] underperforming the reference MSCI Korea 25/50 Capped
Index, which returned 28.48% in pounds sterling.[2] Since the
admission of the Company to AIM in May
2013 the NAV has increased by 42.25% compared to Index
returns of 23.18%. A report from the Investment Manager
follows.
In accordance with the commitment in the Company’s Admission
Document, the Company has announced that it is offering
Shareholders the opportunity to elect to realise all or a part of
their shareholding in the Company (the “Realisation
Opportunity”).[3] A circular with full details of the Realisation
Opportunity was published on 20 March
2017.
If any Shareholders elect for realisation, then the Company will
be reorganized, with the Company’s current portfolio divided into
two pools: a Continuation Pool and a Realisation Pool. As the
Company detailed in its circular for the Realisation Opportunity,
the mechanism for returning cash to the shareholders that elect for
realisation will be decided by the Board, in consultation with its
advisors, once the results of the realisation elections are
available. We note that the cash distributed to realising
shareholders will likely be different than the net asset value of
the Company on the date of such reorganisation. Also, while the
Realisation Pool will be managed in accordance with an orderly
realisation with the aim of making progressive returns of cash to
holders of Realisation Shares, if the Realisation Pool is of
significant size, it is likely that a full cash distribution may
take some considerable time.
All of the Directors and personnel associated with the
Investment Manager (who collectively own approximately 10% of the
Company's issued share capital as at __ April 2017) intend to continue their investment
in the Company and do not intend to participate in the Realisation
Opportunity in respect of all or any part of their respective
shareholdings. Indeed, Andrew Weiss,
the CEO and CIO of the Investment Manager, recently increased his
shareholding in the Company.
The Directors also declared a final dividend to distribute the
income received by the Company in respect of the year ended
31 December 2016. This dividend will
be payable to all Shareholders regardless of any election they make
under the Realisation Opportunity.
In addition to the Realisation Opportunity, the Company has an
active share repurchase program as part of its discount management
strategy. The Board is authorised to repurchase up to 40% of the
Company's outstanding Ordinary Shares in issue as at 27 July 2016 (on which date the Company had
97,409,750 shares). Since Admission, and as at the date of this
document, the Company has repurchased 7,590,250 Ordinary Shares of
the original 105,000,000 Ordinary Shares issued at Admission at a
weighted average discount to the Company's net asset value per
Ordinary Share of 5.69%. In 2016 the Company traded very
infrequently at a significant discount and therefore the Directors
only repurchased 100,000 shares in the period at a discount of
6.9%. The Board also has in place standing instructions with the
Company’s broker, N+1 Singer Advisory LLP, for the repurchase of
the Company’s shares during closed periods when the Board is not
permitted to give individual instructions, typically around the
preparation of the Annual and Half-Yearly Financial Reports. The
Board intends to continue to aggressively repurchase shares of the
Company if the Company’s discount is greater than 5 per cent. of
the Company’s net asset value. We believe that the share
repurchase program is an excellent discount control mechanism and
that it is mutually beneficial for continuing and exiting
shareholders. We will continue to keep Shareholders informed
of any share repurchases through public announcements.
The Annual General Meeting will be held on 19 July 2017, and a notice circulated in advance.
If you are unable to attend in person, the Board is always happy to
answer questions or to meet with Shareholders directly if required.
Additionally, if you would like to speak with the Investment
Manager or learn about potential opportunities to meet with them,
please contact the Company’s broker, N+1 Singer.
I would like to thank Shareholders for their support, and look
forward to the continued success of the Company in the future. The
discount that Korean preference shares trade to the comparable
ordinary shares has indeed narrowed significantly since 2013.
However, the weighted average discount of preferred shares held in
the portfolio still currently stands at 38.4%[4] and the Directors
believe that many of the steps needed to be taken in Korea to
narrow discounts further have already been put in place. I would
also like to thank Weiss Asset Management LP, as well as the other
service providers, all of whom have contributed greatly to the
Company.
Sincerely,
Norman Crighton
Chairman
26 April 2017
[1] This return includes all dividends paid to the Company’s
Shareholders, but does not assume such dividends are
reinvested.
[2] MSCI total return indices are calculated as if any dividends
paid by constituents are reinvested at their respective closing
prices on the ex-date of the distribution.
[3] Additionally, unless it has already been determined that the
Company will be wound-up, the Company will offer shareholders
subsequent opportunities to realise all or part of their
shareholding every two years after the Realisation Opportunity, on
or prior to the anniversary of Admission (14 May).
[4] As at 31 December 2016.
Investment Manager’s Report
For the year ended 31 December 2016
WKOF is a long-only fund that invests in Korean preference
shares, which generally trade at a discount to their corresponding
ordinary shares. The Company’s net asset value was up in 2016, but
underperformed the MSCI South Korea Index, returning 11.61%
compared to 28.48% for the MSCI South Korea Index. Two factors
contributed roughly equally to the Company’s short-term
underperformance in 2016: widening of discounts of preference
shares to their corresponding ordinary shares, and the
outperformance of companies that have not issued preference
shares.
Short time frames often contain more noise than long time
frames, and it is generally easier to make predictions about the
long-run. As investors, we seek to invest in value and maintain a
long-term orientation irrespective of short-term volatility. We
believe this is the most prudent way to compound capital. As of
31 December 2016, the net asset value
of the Company (“WKOF”) is up 42% from inception.[1] Over this
period, the Company outperformed the MSCI South Korea Index[2] by
19.07%.
Commentary
There are several reasons for our optimism about the future
prospects of WKOF:
1) The “Double Discount” – Korean
preference shares trade at a discount to their corresponding
ordinary shares which, in turn, trade at a discount to comparable
markets. WKOF’s weighted average discount of 38.4% is significantly
wider than the median discount of 2.6% for other non-voting share
classes around the world.[3]
2) Soft Catalysts for the Double
Discount to Narrow – Korean companies are beginning to return more
capital. Samsung and Hyundai, WKOF’s two largest holdings, have
made extraordinary commitments to increase dividend payout ratios.
The National Pension Service is working hard to improve corporate
governance for the benefit of Korean retirees. If this general
trend continues, it will be good for both ordinary and preference
shares.
3) Hard to Replicate Portfolio – WKOF
enables access to a portfolio of discounted Korean preferred
shares, within a structure with effective discount-control
mechanisms. The Company owns a portfolio with discounts as wide as
65%. These securities represent a smaller percent of net asset
value but offer extraordinary upside. The portfolio took nearly one
year to construct and the unique characteristics are not duplicable
by most market participants.
These reasons have motivated senior management to increase their
holdings in the Company. Since the inception of WKOF, Andrew Weiss has owned over 6% of the
outstanding shares of the Company. Over the course of December 2016 and January
2017, he bought 550,000 shares in WKOF bringing his holdings
to over 7 million shares (7.2% of outstanding shares). An entity
controlled by Paul Sherman also
bought additional shares of WKOF in December
2015. Total ownership by employees and affiliates of the
Investment Manager is around 10% of shares outstanding. None of the
members of the Weiss Asset Management team have sold any shares
since inception.
Valuation of Korean Preferred
Shares
While the discounts of Korean preferred shares to their
respective ordinary shares have narrowed significantly from
inception, they are still far greater than the discounts for
equivalent shares in other countries. Germany, Sweden, Russia, Italy
and Brazil all have non-voting
shares. Across all those countries the median discount for
non-voting shares with at least £10 million annualized trading
volume was 2.6%. In contrast, the median discount for Korean
preference shares with at least £10 million annualized volume was
39.6%[4] as of
31 December 2016. The weighted
average discount for the preference shares in the WKOF portfolio
was 38.4% as of 31 December 2016.
In addition to the preferred shares’ discounts relative to their
corresponding ordinary shares, on almost all metrics Korean
ordinary shares continue to be cheaper than their global peers on
an absolute basis. As of
31 December 2016, the KOSPI 200 Index
traded at an 11.6x price-to-earnings multiple, which is lower than
other South East Asian stock indices, as shown below.
Figure 1. Comparison of Equity Index Fundamentals in
Asia[5]
Index Name |
Dividend Payout
Ratio |
P/E Ratio |
P/B Ratio |
TAIEX (Taiwan) |
62.2% |
14.6x |
1.61x |
Shanghai Composite
(China) |
32.1% |
15.3x |
1.72x |
Nikkei 225
(Japan) |
37.4% |
21.7x |
1.83x |
Nifty (India) |
29.0% |
19.4x |
2.62x |
KOSPI 200 (South
Korea) |
19.8% |
11.6x |
0.94x |
Many Korean companies have accumulated large cash balances. The
price-to-earnings ratios above are not adjusted for the low returns
on those cash holdings: if cash was subtracted from the price and
interest received on the cash subtracted from earnings
price-to-earnings would be significantly lower. Similarly, the
reported return on equity in Korea at 8.46% for the KOSPI 200 (as
of year-end) is artificially depressed by the large cash holdings
of Korean companies. These numbers look even better for the
preference shares that are trading at discounts to their ordinary
shares.
Soft Catalysts
We believe that an important catalyst for Korean share prices is
the improving efficiency of capital allocation. Companies that
distribute cash in the form of dividends and share buybacks do not
tend to trade at single digit price-to-earnings multiples in
perpetuity. If firms retain earnings and invest them in high return
projects, that will also be positive for long-term investors since
the value of shareholder equity will grow.
In particular, we believe the prospects for Korean preference
shares have been improved by recent actions by Samsung Electronics
Co. Ltd. (“Samsung”), which has set a positive example. Samsung has
announced that 50% of 2016 free cash flow will be
distributed as either dividends or on buybacks of preference and
ordinary shares. From 2015 to 2016, Samsung increased its per share
dividend by 36%. According to its guidance, Samsung will be
investing ?9.3 trillion (approximately £6.2 billion) on share
repurchases in the next year. Based on Samsung’s past behavior, we
anticipate that at current discounts the ratio of repurchases of
preference shares to ordinary as a fraction of outstanding
preference and ordinary shares respectively will be approximately
1.7 to 1. At current prices, we are forecasting that Samsung will
repurchase just under 5% of its preference shares, which amounts to
33 days of volume.[6] This is in addition to the October 2015 to October
2016 period, in which Samsung repurchased over 10% of its
preference shares. Disproportionate repurchases of preference
shares are accretive to all shareholders; at about a 20% discount,
Samsung Electronics can repurchase 1.25 preference shares for the
price of each ordinary share. Based on its initial repurchase
ratios in early 2016, if discounts on the preference shares were to
expand, we believe Samsung would be more aggressive in buying back
preference shares. These actions by Samsung indicate that it is
focused on increasing shareholder value, and acting in the interest
of all shareholders.
Samsung also increased its dividend from ?21,050 in 2015 to
?28,550 per share. Across the universe of Korean preference shares
with at least £10 million of annualised volume, companies that pay
higher dividends tend to trade at lower discounts, as shown below.
The subset of these preference shares with a common share dividend
yield less than 1% had an average discount of 46%, compared to a
35% average discount for those shares with a common share dividend
yield greater than 2%.[7]
What is most important about the Samsung payout policy is not
what it means for Samsung—that is likely to already be reflected in
its share price—but the possible effect on other companies. Korea
has perhaps the lowest payout ratio of any advanced country. As by
far the largest firm in Korea, Samsung serves as a model for other
firms.
If other firms were to follow the Samsung payout policy, we
would expect large increases in the prices of Korean preference
shares. A corporate culture and mindset that cares about increasing
shareholder value benefits all shareholders, but preference shares
are likely to benefit disproportionately from increased dividends
and constructing buybacks in ways that are accretive to the value
of the firm.
While it’s not clear whether they were influenced by Samsung’s
announcements, the management of Hyundai Motor Company has also
given guidance on increased capital return. In January 2017, they announced that they will
return 30-50% of free cash flow to shareholders.
Another force pushing for higher dividend payouts is the Korean
National Pension Fund, which has been urging Korean companies to
increase dividend payouts. Recent events may also induce it to
resist political pressures if they are not conducive to maximising
shareholder value. In January 2017,
Moon Hyung-pyo was charged with
illegally pressing the National Pension Fund to back the merger of
Cheil Industries and Samsung C&T. At the time of the merger,
Mr. Moon was South Korea’s health and welfare minister. At the time
of his indictment Moon was the chairman of the National Pension
Fund. These actions to hold the pension fund accountable to
shareholders rather than captive to political pressures are a
strong positive sign. The potential influence of the National
Pension Fund continues to grow as it increases its purchases of
equities. (The National Pension Fund has already exerted its
influence on increasing dividend payouts.) We are optimistic that
the indictment of Mr. Moon will induce the Company to be a strong
advocate for interests of shareholders over the interest of
insiders.
Comments on the Distribution of
Discounts in the Portfolio
The largest discounts in WKOF’s portfolio tend to be in the
least liquid preference shares. The widest discount of any
preference shares in the portfolio at 31
December 2016 was 65%. To avoid having an inordinately large
market impact, the Company slowly accumulated shares in the
preference shares with the widest discounts.
Most investors are probably aware that if a preferred share
discount narrows from 50% to 40%, the value of the preferred share
increases by 20% (assuming all else equal), although it is easy to
overlook the magnitude of the difference between discount and gain
from narrowing of discount when discounts are large. What may be
less apparent is that if the weighted-average discount of a
portfolio of preferred shares narrows from 50% to 40%, the increase
in value of the preferred shares depends on the distribution of
discounts within the portfolio. In particular, the more spread out
the discounts are from the average, the greater the increase in
value.
While we often describe our portfolio in terms of its
weighted-average discount, this one metric does not tell the whole
story. Indeed, the most discounted shares in the portfolio have an
effect on potential future returns that is outsized compared to
their effect on the weighted average discount.
To take a simple example, let’s compare the return from a
hypothetical portfolio (Portfolio A) with a single stock trading at
a 40% discount with the return from an equally weighted portfolio
of two stocks one at 20% discount and the other at a 60% discount
(Portfolio B). Both portfolios have an initial weighted average
discount of 40% (see figure 2). Now suppose all discounts on
preferred shares in the two portfolios move halfway to the value of
the ordinary shares: the single stock trades at a 20% discount, the
more expensive stock in the two stock portfolio trades at a 10%
discount and the less expensive stock trades at a 30% discount. The
excess return (over the return on the ordinary shares) of the
single stock portfolio (Portfolio A) would be 33%. The excess
return for the two-stock portfolio (Portfolio B) stocks would be
44%. In this example, as detailed in figure 4 below, although the
weighted average discount of Portfolio B narrows by only about 18%
(less than the 20% narrowing of Portfolio A), the excess
return of Portfolio B is about 11% greater than that of
Portfolio A.
Figure 2. Illustrative Example of the Effect of Discount
Dispersion on Potential Returns[8]
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Before: |
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After: |
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Portfolio A |
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Portfolio A |
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|
Security |
Value |
Discount |
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|
Security |
Value[9] |
Discount |
Preferred Share 1 |
100 |
40% |
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Preferred Share 1 |
133.3 |
20% |
|
Total Value: |
Weighted Avg...
Discount: |
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|
|
Total Value: |
Weighted Avg.
Discount: |
|
100 |
40% |
|
|
|
133.3 |
20% |
|
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|
|
|
|
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|
Portfolio B |
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Portfolio B |
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|
Security |
Value |
Discount |
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|
Security |
Value |
Discount |
Preferred Share 2 |
50 |
60% |
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Preferred Share 2 |
87.5 |
30% |
Preferred Share 3 |
50 |
20% |
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Preferred Share 3 |
56.3 |
10% |
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Total Value: |
Weighted Avg.
Discount: |
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Total Value: |
Weighted Avg.
Discount: |
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100 |
40% |
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143.8 |
22.2% |
WKOF Buyback Program
As the Investment Manager and as shareholders of the Company, we
are pleased that the WKOF board has been aggressive in its
repurchase of the Company’s shares when the WKOF discount has been
in the 5-7% range. We believe that the Company’s own shares are our
best investment when they are trading at significant discounts.
Since its inception, the Company has bought back 7,590,250 shares,
or about £9.27 million worth of shares, at an average discount of
5.69%.[10] We pride ourselves on the Company’s corporate
governance, and the unusually large share buyback program
(shareholders have authorized the Board to repurchase up to 40% of
WKOF’s shares per annum). The buyback program has been accretive to
the Company’s continuing shareholders, and it provides a near
continuous exit mechanism to shareholders who need liquidity. If
the Board continues to exercise its buyback authority, the Company
is unlikely to trade at a large discount to its net asset value,
but could trade at a significant premium.
Comments on Political and Economic
Conditions
Under current economic conditions, Korean preference shares are
undervalued; however, the election of Donald Trump creates considerable uncertainty
about global economic conditions. South
Korea is heavily dependent on international trade. According
the World Bank data for 2015, South Korea’s exports of goods and
services were around 45% of GDP; by comparison China’s exports were
22% of GDP, Japan’s were 18% and the United States’ exports were
less than 13%. Consequently, Korea is thus especially vulnerable to
a global increase in protectionism. President Trump has been
consistent in his support of protectionism. If the U.S. were to
impose tariffs or border adjustments that were declared to be in
violation of the WTO rules, Trump might pull the U.S. out of the
WTO.[11] This would have serious adverse consequences on global
trade. On the other hand, if U.S. protectionism took the form of
tariffs against China and
China were to retaliate with
tariffs against U.S. goods and services, that might create
opportunities for Korea to increase its exports to both the U.S.
and China.
The Korean economy is also vulnerable to the political
uncertainty surrounding the impeachment trial of President Park
Geun-hye. Even if she gets the four out of nine votes needed to
avoid impeachment by the Constitutional Court, her term expires no
later than December 20, 2017 and she
cannot run for re-election. While the trial proceeds, the Prime
Minister Hwang Kyo-ahn will act as
interim president. The Korean political parties and the public seem
united in their opposition to President Park; however, there is no
clear frontrunner in the race to succeed her.
There is no particular reason to expect a new administration to
make radical changes in economic policy. Corporate tax rates in
Korea have been fairly stable at 24%. Corporate tax revenues as a
percentage of GDP are higher than in most other countries. The
budget is in rough balance, the national debt is low, and Korea
runs a trade surplus. Korea has bilateral trade agreements with
almost all the participants in the Trans-Pacific Partnership so the
U.S. withdrawal from the TPP will have little adverse consequences
for Korea. To the extent that the TPP would have improved
protections for U.S. intellectual property rights, the U.S.
withdrawal from TPP may make it easier for Korean companies to
circumvent U.S. patent and copyright law. The main macro-economic
risks for Korea seem most likely to the effects on the global
economy of protectionist trade policies coming out of the U.S., and
responses by China to those policies. If trade wars were to trigger
a global recession this could be devastating to the profits of
Korean firms. However, if selective tariffs against imports of
Chinese products by the U.S. and corresponding tariffs against
imports of U.S. products by China did not trigger a global
recession, Korean firms could benefit from the opportunities to
gain market share vis a vis Chinese and American firms.
Korea is also vulnerable to military conflicts between the U.S.
and China. As early as
May 2017 the U.S. will be deploying a
Terminal High Altitude Area Defense system “THAAD” in South Korea. THAAD radar covers much of
China and parts of Eastern Siberia. Both Russia and China have voiced strong opposition to its
deployment: Chinese foreign minister Wang
Yi has said the deployment of THAAD “has undermined the
foundations of trust between the two countries.” The retaliation
has thus far been minor - confined to discouraging Chinese tourists
from going to South Korea and some
incidental discrimination against Korean pop cultural exports.
More importantly, Rex Tillerson,
the new U.S. Secretary of State, has said that China’s access to
the artificial islands that it is developing in the South China Sea
“is not going to be allowed.” Since it is hard to see how the U.S.
can stop access without triggering a military confrontation with
China, the incentive for
China to stop deployment of THAAD
has greatly increased. This may cause China to increase its economic pressure on
South Korea to stop THAAD.
Korea’s main export market is China. If Korea were denied access to the
Chinese market as a means of thwarting THAAD this would have
serious adverse consequence for the Korean economy. If instead
Korea were to side with China, the
U.S. might retaliate with tariffs against imports from Korea. The
most recent available data had monthly Korean exports to
China of around $10 billion and exports to the U.S. of around
$51/2 billion
out of total exports of around $45
billion. Korea may have to choose between exports to
China or U.S. Of course, if there
is a war between China and the
U.S. we will have more serious problems to worry about than the
value of Korean preference shares.
The greatest long run threat to Korea comes from North Korea. The development of long range
missiles that are capable of carrying nuclear warheads is
especially problematic. It is difficult to envision why
North Korea would want to be able
to attack the U.S. mainland with nuclear weapons except as a means
of deterring the U.S. from intervening on behalf of South Korea in a military conflict with
North Korea. The change in
leadership of North Korea and the
U.S., and the leadership vacuum in South
Korea, as well as the growth in the nuclear capabilities of
North Korea make it exceptionally
difficult to forecast geo-political events in North-east
Asia. But the risk of war on the
Korean peninsula seems greater than at any time in recent
years.
Summary
“Unexpected” events occur much more frequently than people
estimate. 2016 was no exception, with “Brexit” and the election of
Donald Trump. Indeed, we believe
that the greatest risk to the preservation of capital from an
investment in WKOF is geo-political. Given the erratic nature of
the leadership in the U.S., and the potential for a break-up of the
E.U. it is beyond the scope of this report to give an adequate
treatment of how we would suggest hedging these risks.
In a complex world, it is important to remain disciplined and
adhere to principles. As value investors, we believe that WKOF
remains attractive over the long-run. We cannot predict when Korean
preferred share discounts will narrow, but we expect to be
handsomely rewarded and will sleep well in the meantime because of
the portfolio’s low look through leverage and price-to-earnings
ratio. Thank you for your continued support.
Weiss Asset Management LP
26 April 2017
[1] MSCI total return indices are calculated as if any dividends
paid by constituents are reinvested at their respective closing
prices on the ex-date of the distribution. WKOF's
performance figures include such distributions, but the
distributions are not assumed to be reinvested in WKOF when
calculating WKOF's performance.
[2] MSCI Korea 25/50 Net Total Return Index, denominated in
British pounds sterling.
[3] As of 31 December 2016. Median
discount is of the basket of German, Russian, Swedish, Italian, and
Brazilian non-voting shares shown in figure 1 and described in the
footnote for figure 1. The median is for informational purposes
only. One cannot invest in the median discount.
[4] Median discounts computed using Bloomberg data for the
basket of non-voting shares shown in figure 1 and described in the
footnote for figure 1. The median is displayed for informational
purposes only. One cannot invest in the median discount.
[5] Bloomberg, as of 31 December
2016. Dividend payout ratios are the trailing 12-month
weighted averages using the weighting method of each respective
index as of 31 December 2016.
[6] Using 90-day average volume from the 4th quarter
of 2016 and the end-2016 Samsung preferred share price.
[7] Recall that at these levels, differences in discounts are
considerably smaller than the corresponding difference in valuation
of the preferred share.
[8] This example is provided as an illustration of the
arithmetical properties of discount dispersion and weighted average
discounts, and should not be interpreted as a forecast of future
changes in Korean preferred share discounts generally or of the
discounts of securities in the Company’s portfolio. In particular,
the assumption in the example that preferred share discounts all
decrease by half is entirely arbitrary.
[9] The value shown after the preferred share discounts are
halved assumes that there has not been any change in the value of
the ordinary shares.
[10] These discounts are approximations since the net asset
value is only announced weekly, and the trades may have occurred
during hours in which the Korean market was closed. Since shares
are repurchased at a discount the share buybacks are accretive to
the NAV. However, because the discounts were small and the number
of shares repurchased was only around 8% of outstanding shares the
effect on the returns for WKOF was minor.
[11] For instance, legal experts have disagreed about whether
the border adjustment tariffs would be a violation of WTO rules.
Trump came out against Border Adjustments as being too complicated
and then several days later came out in support of them; he may
reverse positions again. But charging taxes on imports and
exempting exports from computation of corporate profits tax could
trigger sanctions under WTO. Trump’s most typical reaction to
opposition seems to be to attack, so U.S. withdrawal from
multilateral trade agreements, including the WTO, is more likely
than at any time in U.S. history.
Directors
The Company has three non-executive Directors, all of whom are
considered independent of the Investment Manager and details are
set out below.
Norman
Crighton (aged 50)
Mr Crighton is Chairman of the Company. He is also a
non-executive director of Global Fixed Income Realisation Limited
and RM Secured Direct Lending plc. Norman was, until May 2011, an investment manager at Metage Capital
Limited where he was responsible for the management of a portfolio
of closed-ended funds and has more than 25 years’ experience in
closed-ended funds having worked at Olliff and Partners, LCF Edmond
de Rothschild, Merrill Lynch, Jefferies International Limited and
latterly Metage Capital Limited. His experience covers analysis and
research as well as sales and corporate finance. Norman is British
and resident in the United
Kingdom. Mr Crighton was appointed to the Board in 2013.
Stephen
Charles Coe (aged 51)
Stephen is currently Chairman of European Real Estate Investment
Trust Limited and TOC Property Backed Lending Trust plc. He
is also director (and Chairman of the Audit Committee) of Raven
Russia Limited, Leaf Clean Energy Company, Weiss Korean
Opportunities Fund Limited and Trinity Capital PLC. He has been
involved with offshore investment funds and managers since 1990
with significant exposure to property, debt, emerging markets and
private equity investments.
He qualified as a Chartered Accountant with Price Waterhouse
Bristol in 1990 and remained in audit practice, specialising in
financial services, until 1997. From 1997 to 2003 he was a
director of the Bachmann Group of fiduciary companies and Managing
Director of Bachmann Fund Administration Limited, a specialist
third party fund administration company. From 2003 to 2006
Stephen was a director with Investec in Guernsey and Managing
Director of Investec Trust (Guernsey) Limited and Investec
Administrastion Services Limited. He became self employed in
August 2006 providing services to
financial services clients.
Robert Paul
King (aged 53)
Mr King is a non-executive director for a number of open and
closed-ended investment funds including Chenavari Capital Solutions
Limited and Threadneedle UK Select Trust Limited. He was a director
of Cannon Asset Management Limited and their associated companies,
from 2007 to 2011. Prior to this, he was a director of Northern
Trust International Fund Administration Services (Guernsey) Limited
(formerly Guernsey International Fund Managers Limited) where he
had worked from 1990 to 2007. He has been in the offshore finance
industry since 1986 specialising in administration and structuring
offshore open and closed-ended investment funds. Robert is British
and resident in Guernsey. Mr King was appointed to the Board in
2013.
Report of the Directors
The Directors of the Company present their Annual Report and
Audited Financial Statements for the year ended 31 December 2016.
Principal Activity
The Company was incorporated with limited liability in Guernsey
on 12 April 2013 as a company limited
by shares and as an authorised closed-ended investment company. The
Company’s Shares were admitted to trading on the AIM Market of the
LSE on 14 May 2013. As an existing
closed-ended fund, the Company is deemed to be granted an
authorised declaration in accordance with Section 8 of the
Protection of Investors (Bailiwick of Guernsey) Law, 1987, as
amended and Rule 6.02 of the Authorised Closed-ended Investment
Schemes Rules 2008 on the same date as the Company obtained consent
under the Control of Borrowing (Bailiwick of Guernsey) Ordinance
1959 to 1989.
Investment Objective and Investment
Policy
The investment objective and investment policy of the Company is
to provide Shareholders with an attractive return on their
investment, predominantly though long-term capital appreciation, by
investing primarily in listed Korean preferred shares. The full
investment objective and investment policy is detailed in the
Summary Information of the Annual Report.
Going Concern
In accordance with the Company’s Articles of Association and
Prospectus, the Company shall offer all Shareholders the right to
elect to realise some or all of the value of their ordinary shares
(the “Realisation Opportunity”), less applicable costs and
expenses, on or prior to the fourth anniversary of Admission,
being
15 May 2017 (the “Realisation Date”).
See Note 17 for further details.
On 20 March 2017, the Company
announced that pursuant to the Realisation Opportunity,
Shareholders who are on the register as at the record date may
elect, during the election period, to redesignate all or part
(provided that such part be rounded up to the nearest whole
ordinary share) of their ordinary shares as Realisation Shares.
Subject to the aggregate NAV of the continuing ordinary shares
at the close of business on the last Business Day before the
Realisation Date being not less than £50 million, the ordinary
shares held by the Shareholders who have elected for Realisation
will be redesignated as Realisation Shares and the Portfolio will
be split into two separate and distinct Pools namely the
Continuation Pool (comprising the assets attributable to the
continuing ordinary shares) and the Realisation Pool (comprising
the assets attributable to the Realisation Shares). If one or more
Realisation Elections are duly made and the NAV of the continuing
ordinary shares at the close of business on the last Business Day
before the Reorganisation Date is less than £50 million, the
Directors may propose an ordinary resolution for the winding up of
the Company and may pursue a liquidation of the Company instead of
splitting the Portfolio into the Continuation Pool and the
Realisation Pool.
Currently, the Board does not know the number of shareholders
(or related shares), who will take up the Realisation Opportunity.
Based on the uncertainty of the offer and the fact that the assets
of the Company consist mainly of securities that are readily
realisable, whilst the Directors acknowledge that the liquidity of
these assets needs to be managed, the Directors believe that the
Company has adequate financial resources to meet its liabilities as
they fall due in the foreseeable future and for at least twelve
months from the date of this report, and that it is appropriate for
the Financial Statements to be prepared on a going concern basis,
given that the Board believes the Company will continue in
existence post the Realisation Opportunity.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate
Governance Code (the “UK Code”), published by the Financial
Reporting Council in September 2014,
the Board has assessed the prospects of the Company over the three
year period to 26 April 2020 (the
“viability period”). On 20 March
2017, the Company announced to offer all Shareholders the
right to elect, during the election period, to realise some or all
of the value of their ordinary shares, less applicable costs and
expenses, on or prior to the Realisation Date. Currently, the Board
does not know the number of shareholders (or related shares), who
will take up the Realisation Opportunity. The Board, however,
believes that the Company will continue in existence post
Realisation Opportunity and consider that three years is an
appropriate period of assessment of the viability of the Company
for the purpose of giving assurance to Shareholders.
The Board and the Investment Manager believe that the investment
opportunity provided by the Company remains compelling, but the
viability of the Company is clearly contingent on the investment
opportunity remaining in place, a matter which the Board monitors
on an on-going basis. As the South Korean preference shares held by
the Company trade at a discount compared with ordinary shares for
the same companies, the Company remains attractive to long term
investors over the viability period.
The Board’s assessment of the Company over the
viability period has been made with reference to the Company’s
current financial position and prospects, the Company’s strategy
and risk appetite having considered the Company’s principal risks
and uncertainties detailed below. The Board has also considered the
Company’s likely cash flows and the liquidity of its
portfolio.
It is noted that the Company currently has no gearing, though
borrowing is permitted under its constitution. In the event that
the Company did consider taking on debt, the Board would carefully
assess the Company’s ability to meet the debt obligations as they
become due.
It is possible to imagine a number of scenarios, such as war or
political events, which could severely impact the liquidity of the
Company’s investments. The Board maintains cash balances (outside
of South Korea) sufficient to meet
the Company’s running costs for at least two years.
Also the Board has assumed that the regulatory and fiscal
regimes under which the Company operates will continue in broadly
the same form during the viability period. The Board speaks with
its broker and legal advisers on a regular basis to understand
issues impacting on the Company’s regulatory and fiscal
structure.
The Board considers the principal risks affecting the viability
of the Company are as follows:
Notice period of Investment
Manager
The Board has assumed that the Investment Manager will remain in
place during the viability period; however, the Board acknowledges
the risk of the Investment Manager serving a twelve month notice
period under the Management Agreement. To mitigate this risk, the
Board meets and communicates regularly with the Investment Manager
to review its performance and the relationship with the Investment
Manager.
Failure of the Custodian to carry out
its obligations to the Company
The Company’s assets are held in accounts maintained by the
Company’s Custodian. Failure by the Custodian to carry out its
obligations to the Company in accordance with the terms of the
Custodian agreement could have an impact on the viability of the
Company. To mitigate this risk, the Board regularly receives
reports from the Custodian, and through the Management and
Engagement Committee they monitor the relationship with the
Custodian.
Loss of license or listing
The Board has assumed that the Company will retain its
regulatory status and listing throughout the viability period. The
Company Secretary, Administrator and Broker report to the Board at
least quarterly on regulatory matters and confirm compliance with
listing and other regulatory requirements.
Based on the Company’s processes for monitoring operating costs,
share price discount, the Investment Manager’s compliance with the
investment objective, asset allocation, the portfolio risk profile,
liquidity risk and the robust assessment of the principal risks and
uncertainties facing the Company, the Board has concluded that
there is a reasonable expectation that the Company will be able to
continue in operation, post Realisation Opportunity and meet its
liabilities as they fall due over the viability period to 2020.
International Tax Reporting
For purposes of the US Foreign Accounts Tax Compliance Act, the
Company registered with the US Internal Revenue Service (“IRS”) as
a Guernsey reporting Foreign Financial Institution (“FFI”) in
November 2014, received a Global
Intermediary Identification Number (2A7KNV.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 by Guernsey and which came into
effect on 1 January 2016. The CRS
replaced the intergovernmental agreement between the UK and
Guernsey to improve international tax compliance that had
previously applied in respect of 2014 and 2015.
The Board will take necessary actions to ensure that the Company
is compliant with Guernsey regulations and guidance in this
regard.
Results and Dividends
The results for the year ended 31
December 2016 are set out in the Statement of Comprehensive
Income. An annual dividend of 2.2416
pence per share (£2,183,536) was approved on 2 June
2016 and paid on
28 June 2016, in respect of the year ended 31 December 2015. An annual dividend of
1.8580 pence per share (£1,868,474)
was approved on 4 June 2015 and paid
on 26 June 2015, in respect of the
year ended 31 December 2014.
The Board intendeds to declare an interim dividend on
4 May 2017 with a record date on
12 May 2017 for the year ended
31 December 2016, based on dividends
from investments in Korean preferred shares.
Shareholder Information
Further Shareholder information can be found in the Summary
Information.
Investment Management
The Investment Manager of the Company is Weiss Asset Management
LP, a Delaware limited partnership
formed on 10 June 2003, (the
“Investment Manager”). The key terms of the Investment Management
Agreement and specifically the fee charged by the Investment
Manager are set out in Note 16 of the Financial Statements. The
Board believes that the investment management fee is competitive
with other investment companies with similar investment
mandates.
The Board reviews, on an on-going basis, the performance of the
Investment Manager and considers whether the investment strategy
utilised is likely to achieve the Company’s investment
objective.
Having considered the portfolio performance and investment
strategy, the Board has unanimously agreed that the interests of
the Shareholders as a whole are best served by the continuing
appointment of the Investment Manager on the terms agreed.
Directors
The details of the Directors of the Company during the year and
at the date of this Report are set out in the Directors
section.
Directors’ Interests
The Directors who held office at 31
December 2016 and up to the date of this Report held the
following numbers of ordinary shares beneficially:
|
|
As at 31 December 2016 |
|
As at 31 December 2015 |
|
|
Ordinary |
|
% of
issued |
|
Ordinary |
|
% of
issued |
|
|
Shares |
|
share
capital |
|
Shares |
|
share
capital |
Norman Crighton |
|
20,000 |
|
0.02% |
|
20,000 |
|
0.02% |
Stephen Coe |
|
10,000 |
|
0.01% |
|
10,000 |
|
0.01% |
Robert King |
|
15,000 |
|
0.02% |
|
15,000 |
|
0.02% |
There have been no changes in the interests of the above
Directors during the year.
Substantial Interests
Disclosure and Transparency Rules (“DTRs”) are now comprised in
the Financial Conduct Authority handbook. Section 5, the only
section of the DTRs which applies to AIM listed companies, requires
substantial Shareholders to make relevant holding notifications to
the Company. The Company must then disseminate this information to
the wider market. Details of major Shareholders in the Company can
be found in Note 10.
Corporate Governance
The Company is a Guernsey registered company, and is not premium
listed; the Company is not required to comply with the UK Corporate
Governance Code (the “UK Code”), however, 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
main principles of the UK Code. By complying with the UK Code, the
Company is deemed to comply with the Code of Corporate Governance
(the “GFSC Code”) issued by the Guernsey Financial Services
Commission.
The UK Code is publicly available on the Financial Reporting
Council’s (the “FRC”) website. The FRC issued a revised UK Code in
April 2016, for reporting periods
beginning on or after 1 May 2016. The
Board has adopted the revised code.
The Board has considered the principles and recommendations of
the UK Code, and considers that reporting against the UK Code will
provide better information to Shareholders. To ensure on-going
compliance with these principles the Board receives a report from
the Company Secretary, at each quarterly meeting, identifying how
the Company is in compliance and identifying any changes that might
be necessary.
The Board, having reviewed the UK Code, considers that it has
maintained procedures during the year ended 31 December 2016 and up to the date of this
report to ensure that it complies with the UK Code except as
explained elsewhere in the Report.
Role 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 are set out
in the Statement of Directors’ Responsibilities.
The Board has engaged external companies to undertake the
investment management, administrative and custodial activities of
the Company. Documented contractual arrangements are in place with
these companies which define the areas where the Board has
delegated responsibility to them.
The Board needs to ensure that the Annual Report and Financial
Statements, taken as a whole, are fair, balanced and understandable
and provide the information necessary for Shareholders to assess
the Company’s performance, business model and strategy.
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 Financial Statements, the Board has sought to
provide further information to enable Shareholders to better
understand the Company’s business and financial performance.
Composition and Independence of the
Board
The Board currently comprises three non-executive Directors, all
of whom are considered independent of the Investment Manager. The
Directors of the Company are listed in the Directors section.
The Chairman is Mr Crighton. A biography for Mr Crighton and all
other Directors appears in the Directors section. In considering
the independence of the Chairman, the Board has taken note of the
provisions of the UK Code relating to independence, and has
determined that Mr Crighton is an Independent Director.
The Board believes it has a good balance of skills and
experience to ensure it operates effectively. The Chairman is
responsible for leadership of the Board and ensuring its
effectiveness.
As the Chairman is an Independent Director, no appointment of a
Senior Independent Director has been made. The Company has no
employees and therefore there is no requirement for a Chief
Executive, or whistleblowing policy.
The Company holds a minimum of four Board Meetings per year 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. These meetings are
supplemented by communication and discussions throughout the
year.
A representative of the Investment Manager, Administrator and
Company Secretary may attend each Board Meeting either in person or
by telephone thus enabling the Board to fully discuss and review
the Company’s operations and performance. Each Director has direct
access to the Investment Manager and Company Secretary and may at
the expense of the Company seek independent professional advice on
any matter.
Attendance at the Board and other Committee Meetings during the
year was as follows:
|
|
Number
of |
|
Norman |
|
Robert |
|
Stephen |
|
|
Meetings held |
|
Crighton |
|
King |
|
Coe |
Board Meetings |
|
6 |
|
6 |
|
6 |
|
6 |
Audit Committee
Meetings |
|
4 |
|
4 |
|
4 |
|
4 |
Management
Engagement Committee Meetings |
1 |
|
1 |
|
1 |
|
1 |
Board Diversity
The Board considers the composition of the Board on an on-going
basis.
Re-election
The Articles of Incorporation provide that one-third of the
Directors retire by a voluntary rotation basis at each AGM.
However, in order to meet the highest standards of corporate
governance, the Directors have agreed to stand for election
annually.
The Directors may at any time appoint any person to be a
Director either to fill a casual vacancy or as an addition to the
existing Directors. Any Director so appointed shall hold office
only until, and shall be eligible for re-election at, the next AGM
following their appointment but shall not be taken into account in
determining the Directors or the number of Directors who are to
retire by a voluntary rotation basis, at that meeting, if it is an
AGM.
Board Performance
The Board undertake an evaluation of their own performance and
that of individual Directors on an annual basis. In order to review
their effectiveness, the Board carry out a process of formal
self-appraisal. The Board consider how they function as a whole and
also review the individual performance of its members. This process
is conducted by the respective Chairman reviewing each members’
performance, contribution and commitment to the Company by
reviewing a questionnaire each Board member has completed. This
last took place in the board meeting held on 5 December 2016.
The Board considers it 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.
During the Board Meeting held on 5
December 2016, the Board agreed that Directors’ fees, along
with all fees associated with the Company would be reviewed post
Realisation Opportunity in May
2017.
Committees of the Board
The Board has established Audit and Management and Engagement
Committees. All Terms of Reference for Committees are available
from the Company Secretary upon request or on the Company’s
website, www.weisskoreaopportunityfund.com.
Audit Committee
The Company has established an Audit Committee, with formally
delegated duties and responsibilities within written terms of
reference. The Audit Committee is chaired by Mr Coe. The Audit
Committee’s other members are Mr Crighton and Mr King. The Audit
Committee meets formally at least twice a year.
Appointment to the Audit Committee is for a period up to three
years which may be extended for two further three year periods.
The table in this report sets out the number of Audit Committee
Meetings held during the year ended 31 December 2016 and the
number of such meetings attended by each Audit Committee
member.
A report of the Audit Committee detailing responsibilities and
activities is presented in the Audit Committee Report.
Management and Engagement
Committee
The Company has established a Management and Engagement
Committee, with formally delegated duties and responsibilities
within written terms of reference. The Management and Engagement
Committee is chaired by Mr King. The Management and Engagement
Committee’s other members are Mr Crighton and Mr Coe. The
Management and Engagement Committee meets formally once a year.
The principal duties of the Management and Engagement Committee
are to review the performance of and contractual arrangements with
the Investment Manager and all other service providers to the
Company (other than the External Auditor).
During the year, the Management and Engagement Committee has
reviewed the services provided by the Investment Manager as well as
the other service providers and have recommended to the Board that
their continuing appointments are in the best interests of the
Shareholders. During the last meeting, held on 5 December
2016, the Management and Engagement Committee confirmed that all
service providers’ fees would be reviewed post Realisation
Opportunity in May 2017.
Nomination Committee
The Board does not have a 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
the Board. The Board will determine whether in future an external
search consultancy or open advertising is used in the appointments
of non-executive Directors.
Remuneration Committee
In view of its non-executive and independent nature, the Board
considers that it is not appropriate for there to be a Remuneration
Committee as anticipated by the UK Code because this function is
carried out as part of the regular Board business. A Remuneration
Report prepared by the Board is contained in the Annual Report.
Directors’ remuneration is considered on an annual basis.
Environmental Policy
Due to the Company’s listing on AIM, the Company is required to
disclose its Environmental Policy, but this is not applicable due
to the nature of its operations.
Internal Controls
The Board is ultimately responsible for establishing and
maintaining the Company’s system of internal controls and for
maintaining and reviewing its effectiveness. The Company’s risk
matrix continues to be the basis of the Company’s risk management
process in establishing the Company’s system of internal financial
and reporting controls. 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 Company’s system of internal controls
is designed to manage rather than to eliminate the risk of failure
to achieve the Company’s 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 UK Code requires Directors to conduct at least annually a
review of the Company’s system of internal controls, covering all
controls, including financial, operational, compliance and risk
management. The Board has evaluated the Company’s systems of
internal controls. 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 and
resulted in a low to medium risk assessment.
The Board has delegated the management of the Company’s
investment portfolio and the 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.
Whilst the Board delegates these functions, it remains responsible
for the functions it delegates and for the systems of internal
control. Formal contractual agreements have been put in place
between the Company and providers of these services. On an on-going
basis, Board reports are provided at each quarterly Board Meeting
from the Investment Manager, Administrator, Registrar, Company
Secretary and a representative from the Investment Manager is asked
to attend these meetings.
In common with most investment companies, the Company does not
have an internal audit function. All of the Company’s management
functions are delegated to the Investment Manager, Administrator,
Registrar and Company Secretary which have their own internal audit
and risk assessment functions.
The Company’s risk exposure and the effectiveness of its risk
management and internal control systems are reviewed by the Audit
Committee at its 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
In respect to the Company’s system of internal controls and
reviewing its effectiveness, the Directors:
- are satisfied that they have carried out a robust assessment of
the principal risks facing the Company, including those that would
threaten its business model, future performance, solvency or
liquidity; and
- have reviewed the effectiveness of the risk management and
internal control systems including material financial, operational
and compliance controls (including those relating to the financial
reporting process) and no significant failings or weaknesses were
identified.
The principal risks and uncertainties which have been identified
and the steps which are taken by the Board to mitigate them are as
follows:
Investment Risks
The Company is exposed to the risk that its portfolio fails to
perform in line with its investment objective and policy if markets
move adversely or if the Investment Manager fails to comply with
the investment policy. The Board reviews reports from the
Investment Manager at the quarterly Board Meetings, with a focus on
the performance of the portfolio in line with its investment
policy. The Administrator is responsible for ensuring that all
transactions are in accordance with the investment
restrictions.
Operational Risks
The Company is exposed to the risk arising from any failures of
systems and controls in the operations of the Investment Manager,
Administrator and the Custodian. The Board and its Committees
regularly review reports from the Investment Manager and the
Administrator on their internal controls. The Administrator will
report to the Investment 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 Investment Manager. The Administrator, Broker and Investment
Manager provide regular updates to the Board on compliance with the
Admission Document and changes in regulation.
Discount Management
The Company is exposed to Shareholder dissatisfaction through
inability to manage the share price discount to NAV. The Board and
its Broker monitor share price discount (and premium) continuously
and has engaged in share buy-backs from time to time to help
minimise any such discount. The Board believes that it has
access to sufficiently liquid assets to help manage share price
discount. The Company’s discount management programme is described
within Note 17.
Liquidity of Investments
The Korean preferred shares typically purchased by the Company
generally have smaller market capitalisations and lower levels of
liquidity than their common share counterparts. These factors,
among others, may result in more volatile price changes in the
Company’s assets as compared to the Korean stock market or other
more liquid asset classes. This volatility could cause the NAV to
go up or down dramatically.
In order to realise its investments, the Company will likely
need to sell its holdings in the secondary market, which could
prove difficult if adequate liquidity does not exist at the time,
and could result in the values received by the Company being
significantly less than their holding values. The liquidity of the
market for preferred shares may vary materially over time. There
can be no guarantee that a liquid market for the Company’s assets
will exist or that the Company’s assets can be sold at prices
similar to the published NAV. Illiquidity could also make it
difficult or costly for the Company to purchase securities, and
this could result in the Company holding more cash than
anticipated. Furthermore, it is possible that South Korea could impose currency-exchange or
capital controls on foreign investors, making it difficult or
impossible for the Company to repatriate funds. The Investment
Manager considers the liquidity of secondary trading in assessing
and managing the liquidity of the Company’s investments. The Board
reviews the Company’s resources and obligations on a regular basis
with a view to ensuring that sufficient liquid assets are held for
the expected day to day operations of the Company. However, if the
Company were required to liquidate a substantial portion of its
assets at a single time, it is likely that the market impact of the
necessary sale transactions would impact the value of the portfolio
materially.
Fraud Risk
The Company is exposed to fraud risk. The Audit Committee
continues to monitor the fraud, bribery and corruption policies of
the Company. The Board receives an annual confirmation from all
service providers that there have been no instances of fraud or
bribery.
Financial Risks
The financial risks, including market, credit and liquidity risk
faced by the Company, are set out in Note 17 of the Financial
Statements. These risks and the controls in place to reduce the
risks, are reviewed at the quarterly Board Meetings.
Shareholder Engagement
The Directors welcome Shareholders’ views and places great
importance on communication with its Shareholders. Shareholders
wishing to meet with the Chairman and other Board members should
contact the Company’s Administrator.
The Investment Manager and Broker maintain a regular dialogue
with institutional Shareholders, the feedback from which is
reported to the Board.
The Company’s AGM provides a forum for Shareholders to meet and
discuss issues of the Company and provides Shareholders with the
opportunity to vote on the resolutions as specified in the Notice
of AGM. The Notice of AGM and the results are released to the
London Stock Exchange 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.
Auditor
The Auditor, KPMG Channel Islands Limited, has indicated their
willingness to continue in office. Accordingly, a resolution for
their reappointment will be proposed at the forthcoming AGM.
Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report
and Financial Statements, in accordance with applicable law and
regulations.
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”) as adopted by
the European Union and applicable law.
The Directors are responsible for preparing the Annual Report
and Financial Statements, in accordance with applicable law and
regulations.
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”) as adopted by
the European Union 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 a going concern basis
unless it is inappropriate to assume that the Company will continue
in business.
The Directors are responsible for keeping proper accounting
records which disclose with 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.
The Directors confirm that they have complied with the above
requirements in preparing the Annual Report and Financial
Statements and that to the best of their knowledge and belief:
- the Annual Report and Financial Statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for the Shareholders to assess the Company’s performance,
business model and strategy; and
- the Financial Statements have been prepared in accordance with
IFRS as adopted by the European Union, give a true and fair view of
the assets, liabilities, financial position and profit of the
Company.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website and for the preparation and dissemination of
Financial Statements.
Legislation in Guernsey governing the preparation and
dissemination of Financial Statements may differ from legislation
in other jurisdictions.
Disclosure of information to the
Auditor
So far as they are each aware, there is no relevant audit
information of which the Company’s Auditor is unaware, and each
Director has taken all the steps that they ought to have taken as a
Director to make themselves aware of any relevant audit information
and to establish that the Company’s Auditor is aware of that
information.
The Directors recognise their responsibilities stated above.
Signed on behalf of the Board by:
Norman Crighton
Chairman
Stephen Coe
Director
26 April 2017
Directors’ Remuneration Report
Introduction
An ordinary resolution for the approval of the Directors’
Remuneration Report will be put to the Shareholders at the AGM to
be held on 19 July 2017.
Remuneration Policy
All Directors are non-executive and a Remuneration Committee has
not been established. The Board as a whole considers matters
relating to the Directors’ remuneration. No advice or services were
provided by any external person in respect of its consideration of
the Directors’ remuneration.
The Company’s policy is that the fees payable to the Directors
should reflect the time spent by the Directors on the Company’s
affairs and the responsibilities borne by the Directors and be
sufficient to attract, retain and motivate directors of a quality
required to run the Company successfully. The Chairman of the Board
is paid a higher fee in recognition of his additional
responsibilities, as is the Chairman of the Audit Committee. The
policy is to review fee rates periodically, although such a review
will not necessarily result in any changes to the rates, and
account is taken of fees paid to Directors of comparable companies.
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 £200,000 per annum.
There are no long term incentive schemes provided by the Company
and no performance fees are paid to Directors.
None of the Directors have a service contract with the Company,
but each of the Directors is appointed by a letter of appointment
which sets out the main terms of their appointment. Directors hold
office until they retire by rotation or cease to be a Director in
accordance with the Articles of Incorporation, by operation of law,
or until they resign.
During the Board Meeting held on 5
December 2016, the Board agreed that Directors’ fees, along
with all fees associated with the Company would be reviewed post
Realisation Opportunity in May
2017.
Remuneration
Directors are remunerated in the form of fees, payable quarterly
in arrears, to the Director personally. No Directors have been paid
additional remuneration outside their normal Directors’ fees and
expenses.
The annual Directors’ fees comprise £26,000 payable to Mr
Crighton, the Chairman, £22,000 to Mr Coe as Chairman of the Audit
Committee and £20,000 to Mr King.
For the year ended 31 December
2016, Directors’ fees were:
|
|
For the year ended |
|
For the year ended |
|
|
31 December 2016 |
|
31 December 2015 |
|
|
|
|
£ |
|
|
|
£ |
Norman Crighton |
|
|
|
26,000 |
|
|
|
26,000 |
Stephen Coe |
|
|
|
22,000 |
|
|
|
22,000 |
Robert King |
|
|
|
20,000 |
|
|
|
20,000 |
Signed on behalf of the Board by:
Norman Crighton
Chairman
26 April 2017
Stephen Coe
Director
26 April 2017
Audit Committee Report
Dear Shareholders,
We present the Audit Committee’s Report for 2016, setting out
the responsibilities of the Audit Committee and its key activities
in 2016.
The Audit Committee has reviewed the Company’s financial
reporting, significant areas of judgement and estimation within the
Company’s Financial Statements, the independence and effectiveness
of the External Auditor and the internal control and risk
management systems of the Company’s service providers. The Audit
Committee considered whether the Annual Report and Financial
Statements are fair, balanced and understandable and whether they
provided the necessary information for Shareholders to assess the
Company’s performance, business model and strategy before
recommending them to the Board for approval. In order to assist the
Audit Committee in discharging these responsibilities, regular
reports are received from the Investment Manager, Administrator and
External Auditor. Following its review of the independence and
effectiveness of the Company’s External Auditor, the Audit
Committee has recommended to the Board that KPMG Channel Islands
Limited be reappointed as Auditor, which the Board has submitted
for approval to the Company’s Shareholders.
A member of the Audit Committee will continue to be available at
each AGM to respond to any Shareholder questions on the activities
of the Audit Committee.
Responsibilities
The Audit Committee reviews and recommends the approval of the
Financial Statements of the Company to the Board and is the forum
through which the External Auditor reports to the Board of
Directors. The External Auditor and the Audit Committee will meet
together without representatives of either the Administrator or
Investment Manager being present if either considers this to be
necessary.
The role of the Audit Committee includes:
- monitoring the integrity of the published Financial Statements
of the Company;
- review and report to the Board on the significant issues and
judgements and estimates made in the preparation of the Company’s
published Financial Statements;
- monitor and review the quality and effectiveness of the
External Auditor and their independence;
- consider and make recommendations to the Board on the
appointment, reappointment, replacement and remuneration to the
Company’s External Auditor;
- review the Company’s procedures for prevention, detection and
reporting of fraud, bribery and corruption; and
- monitor and review the internal control and risk management
systems of the service providers.
The Audit Committee’s full terms of reference can be obtained by
contacting the Company’s Secretary or on the Company’s website,
www.weisskoreaopportunityfund.com.
Key Activities of the Audit
Committee
The following sections discuss the assessments made by the Audit
Committee during the year:
Financial Reporting
The Audit Committee’s review of the Annual Report and Audited
Financial Statements focused on the following significant area:
Valuation of investments
The Company’s investments had a fair value of £141,956,597 as at
31 December 2016 and represent the
majority of the net assets of the Company. The investments are all
listed and traded and the valuation is by reference to the fair
value measurement required by IFRS. The Audit Committee considered
the fair value of the investments held by the Company as at
31 December 2016 to be reasonable
from a review of information provided by the Investment Manager and
Administrator. All prices have been confirmed by the Administrator,
to independent pricing sources as at 31
December 2016.
The Investment Manager and Administrator confirmed to the Audit
Committee that they were not aware of any material misstatements
including matters relating to the Financial Statements’
presentation, nor were they aware of any fraud or bribery relating
to the Company’s activities. Furthermore, the External Auditor
reported to the Audit Committee that no material misstatements were
found in the course of their work.
Following a review of the presentations and reports from the
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 made in the preparation of the Financial Statements (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.
Risk Management
The Audit Committee continued to consider the process for
managing the risk of the Company and its service providers. Risk
management procedures for the Company, as detailed in the Company’s
risk assessment matrix, were reviewed and approved by the Audit
Committee and a full review will take place post Realisation
Opportunity in May 2017.
Fraud, Bribery and Corruption
The Audit Committee continues to monitor the fraud, bribery and
corruption policies of the Company. The Board receives a
confirmation from all service providers that there have been no
instances of fraud or bribery.
The External Auditor
Independence, objectivity and
fees
The independence and objectivity of the External Auditor is
reviewed by the Audit Committee which also reviews the terms under
which the External Auditor is appointed to perform non-audit
services. The Audit Committee has established pre-approval policies
and procedures for the engagement of the Auditor to provide audit
and assurance services.
These are that the External Auditor may not provide a service
which:
- places them in a position to audit their own work;
- creates a mutuality of interest;
- results in the External Auditor developing close relationships
with service providers of the Company;
- results in the External Auditor functioning as a manager or
employee of the Company; and
- puts the External Auditor in the role of advocate of the
Company.
As a general rule, the Company does not utilise the External
Auditor for internal audit purposes, secondments or valuation
advice. Services such as tax compliance, tax structuring, private
letter rulings, accounting advice, quarterly reviews and disclosure
advice are normally permitted but will be pre-approved by the Audit
Committee.
The following table summarises the remuneration payable to KPMG
Channel Islands Limited and to other KPMG member firms for audit
and non-audit services.
|
|
For the year ended |
|
For the year ended |
|
|
31 December 2016 |
|
31 December 2015 |
KPMG
Channel Islands Limited |
|
£ |
|
|
|
£ |
Annual audit |
|
|
|
24,500 |
|
|
|
24,000 |
Tax fees
(UK Reporting Fund Status) |
|
|
3,750 |
|
|
|
3,750 |
|
|
|
|
28,250 |
|
|
|
27,750 |
The Audit Committee does not consider KPMG Channel Islands
Limited’s independence to be under threat. In making this
assessment, the Audit Committee has concluded that the non-audit
fees do not relate to prohibited services identified by the Audit
Committee. In approving the non-audit services the Audit Committee
considered the safeguards put in place by KPMG Channel Islands
Limited to reduce the threats to independence and objectivity to an
acceptable level.
KPMG Channel Islands Limited has been the External Auditor from
the date of the initial listing on the London Stock Exchange. The
recent revisions to the UK Corporate Governance Code introduced a
recommendation that the external audit be put out to tender every
ten years. The Audit Committee has noted this and will develop a
plan for tendering at the appropriate time.
The Audit Committee has examined the scope and results of the
audit, its cost effectiveness and the independence and objectivity
of the External Auditor, with particular regard to non-audit fees,
and considers KPMG Channel Islands Limited, as External Auditor, to
be independent of the Company.
Performance and effectiveness
During the year, when considering the effectiveness of the
External Auditor, the Audit Committee has taken into account the
following factors:
- The audit plan presented to them before the audit;
- The post audit report including variations from the original
plan;
- Changes in audit personnel;
- The External Auditor’s report on independence; and
- Feedback from both the Investment Manager and
Administrator.
Further to the above, at the conclusion of the 2016 audit
fieldwork, the Audit Committee performed specific evaluation of the
performance of the External Auditor through discussion with the
Administrator, Investment Manager and the Auditor, themselves.
There were no significant adverse findings from this
evaluation.
Reappointment of External Auditor
Consequent to this review process, the Audit Committee has
recommended to the Board that a resolution be put to the 2017 AGM
for the reappointment of KPMG Channel Islands Limited as External
Auditor. The Board has accepted this recommendation.
Internal control and risk management
systems
After consultation with the Investment Manager, Administrator
and External Auditor, the Audit Committee has considered the impact
of the risk of the override of controls by its service providers,
the Investment Manager and Administrator.
The Audit Committee reviews externally prepared assessments of
the control environment in place at the Administrator, with the
Administrator providing a Service Organisation Controls Report on a
bi-annual basis. The Audit Committee noted that the Management and
Engagement Committee received a self-assessment from the Investment
Manager and no issues were identified in this. Additionally,
representatives of the portfolio managers meet with the Board of
Directors annually to discuss and review the controls in place at
the Investment Manager. No significant failings or weaknesses were
identified in these reviews.
The Audit Committee has also reviewed the need for an internal
audit function. The Audit Committee has decided that the systems
and procedures employed by the Investment Manager and the
Administrator’s internal audit function provide sufficient
assurance that a sound system of internal control, which safeguards
the Company’s assets, is maintained. An internal audit function
specific to the Company is therefore considered unnecessary.
In finalising the Financial Statements for recommendation to the
Board for approval, the Audit Committee is satisfied that, taken as
a whole, the Annual Report and Financial Statements are fair,
balanced and understandable.
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 Board on
26 April 2017 and signed on behalf of
the Audit Committee by:
Norman Crighton
Chairman, Audit Committee
26 April 2017
Independent Auditor’s Report
To the Members of Weiss Korea Opportunity Fund Ltd.
Opinions and conclusions arising from
our audit
Opinion on
financial statements
We have audited the financial statements of Weiss Korea
Opportunity Fund Ltd. (the “Company”) for the year ended
31 December 2016 which comprise the
statement of financial position, the statement of comprehensive
income, the statement of changes in equity, the statement of cash
flows and the related notes. The financial reporting framework that
has been applied in their preparation is applicable law and
International Financial Reporting Standards as adopted by the
European Union (‘EU’). In our opinion, the financial
statements:
- give a true and fair view of the state of the Company’s affairs
as at 31 December 2016 and of its
total comprehensive income for the year ended 31 December 2016;
- have been properly prepared in accordance with International
Financial Reporting Standards as adopted by the EU; and
- comply with the Companies (Guernsey) Law, 2008.
Emphasis of matter
- going concern
In forming our opinion on the financial statements, which is not
modified, we have considered the adequacy of the disclosure made in
Note 2c to the financial statements concerning the Company’s
ability to continue as a going concern.
In accordance with the Company’s Articles of Association and
Prospectus, the Company shall offer all shareholders the right to
elect to realise some or all of the value of their Ordinary Shares.
Subject to the aggregate net asset value of the continuing Ordinary
Shares falling below the viable threshold disclosed in note 2c to
the financial statements, the Directors may propose an ordinary
resolution for the winding up of the Company and may pursue the
liquidation of the Company.
This condition indicates the existence of a material uncertainty
that may cast doubt about the Company’s ability to continue as a
going concern. The financial statements do not include the
adjustments that would result if the Company was unable to continue
as a going concern.
Our assessment of
risks of material misstatement
The risks of material misstatement detailed in this section of
this report are those risks that we have deemed, in our
professional judgement, to have had the greatest effect on: the
overall audit strategy; the allocation of resources in our audit;
and directing the efforts of the engagement team. Our audit
procedures relating to these risks were designed in the context of
our audit of the financial statements as a whole. Our opinion on
the financial statements is not modified with respect to any of
these risks, and we do not express an opinion on these individual
risks.
In arriving at our audit opinion above on the financial
statements, the risks of material misstatement that had the
greatest effect on our audit were as follows:
1.
Valuation of investments (£141,956,597 or 97% of NAV)
Refer to the Report of the Audit Committee, Note 2e (accounting
policies) and Note 11 and 18 (financial instrument
disclosures).
- The risk – The Company invests primarily in listed preferred
shares issued by companies incorporated and listed in South Korea, which in certain cases may trade
at a discount to the corresponding common shares of the same
companies. As highlighted in the Report of the Audit Committee, the
valuation of the Company’s investments, given they represent the
majority of the Company’s net assets as at 31 December 2016, is a significant area of our
audit. Fair value of investments traded in active markets are based
on the bid price at the close of business of the relevant stock
exchange on the reporting date. As disclosed in Note 18 to the
financial statements, 100% of the Company’s investments are traded
in an active market.
- Our response – Our procedures with respect to the Company’s
valuation of investments included, but were not limited to,
evaluating the design, implementation and operating effectiveness
of controls at the administrator in relation to valuation of
investments, and using our own financial instruments valuation
specialist to perform a comparison of the latest available bid
prices from an independent third party pricing provider to the bid
prices utilised by the Company. In addition our own financial
instruments valuation specialist assessed the quality of the
available bid prices used as at 31 December
2016 for evidence of stale prices and reviewed volumes
traded on preference shares held by the Company to assess their
liquidity.
We also considered the Company’s valuation policies adopted and
fair value disclosures in Note 2e, 11 and 18 for compliance with
International Financial Reporting Standards as adopted by the
EU.
2.
Going concern
Refer to the Report of the Directors and Note 2c accounting
policies.
- The risk – In accordance with the Company’s Articles of
Association and Prospectus, the Company shall offer all
shareholders the right to elect to realise some or all of the value
of their Ordinary Shares, less applicable costs and expenses, on or
prior to the realisation date, being 15 May
2017. Subject to the aggregate net asset value of the
continuing Ordinary Shares at the close of business on the last
business date before the realisation date being not less than £50
million, the Ordinary Shares held by the shareholders who have
elected for realisation will be re-designated as realisation shares
and the Portfolio of Investments will be split into two separate
and distinct pools namely the Continuation Pool and the Realisation
Pool. If one or more Realisation Elections are duly made and the
net asset value of the continuing ordinary shares at the close of
business on the last Business Day before the Realisation Date is
less than £50 million, the Directors may propose an ordinary
resolution for the winding up of the Company and may pursue a
liquidation of the Company instead of splitting the Portfolio of
Investments into the Continuation Pool and the Realisation Pool.
The outcome of the realisation offer is uncertain; this indicates
the existence of a material uncertainty that may cast doubt about
the Company’s ability to continue as a going concern as described
in note 2c to the financial statements.
- Our response – Our procedures with respect to going
concern included, but were not limited to, holding discussions with
the administrator, the Investment Manager and the Audit Committee
with regards to the status of the realisation offer process and
their assessment of the impact of such an event, if any, on the
going concern basis of preparation for the financial statements. We
also discussed with the Investment Manager the outcome of feedback,
if any, from significant shareholders as to the likelihood of their
voting intentions and outlook for the Company. In addition, we
compared management’s assessment of the Company’s ability to
continue as a going concern against our other audit findings.
We also considered the Company’s going concern disclosure in
Note 2c to the financial statements for compliance with
International Financial Reporting Standards as adopted by the EU
and other appropriate technical guidance.
Our application of materiality and an
overview of the scope of our audit
Materiality is a term used to describe the acceptable level of
precision in financial statements. Auditing standards describe a
misstatement or an omission as “material” if it could reasonably be
expected to influence the economic decisions of users taken on the
basis of the financial statements. The auditor has to apply
judgement in identifying whether a misstatement or omission is
material and to do so the auditor identifies a monetary amount as
“materiality for the financial statements as a whole”.
The materiality for the financial statements as a whole was set
at £4,391,000. This has been calculated using a benchmark of
the Company’s net asset value (of which it represents approximately
3%) which we believe is the most appropriate benchmark as net asset
value is considered as the prime driver of returns to the members
and to be one of the principal considerations for members of the
Company in assessing the financial performance of the Company.
We agreed with the Audit Committee to report to it all corrected
and uncorrected misstatements we identified through our audit with
a value in excess of £219,000, in addition to other audit
misstatements below that threshold that we believe warranted
reporting on qualitative grounds.
Our audit of the Company was undertaken to the materiality level
specified above, which has informed our identification of
significant risks of material misstatement and the associated audit
procedures performed in those areas as detailed above. The
audit was performed at the offices of the administrator.
Whilst the audit process is designed to provide reasonable
assurance of identifying material misstatements or omissions it is
not guaranteed to do so. Rather we plan the audit to determine the
extent of testing needed to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected
misstatements does not exceed materiality for the financial
statements as a whole. This testing requires us to conduct
significant depth of work on a broad range of assets, liabilities,
income and expense as well as devoting significant time of the most
experienced members of the audit team, in particular the
Responsible Individual, to subjective areas of the accounting and
reporting process.
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies are
appropriate to the Company’s circumstances and have been
consistently applied and adequately disclosed; the reasonableness
of significant accounting estimates made by the Board of Directors;
and the overall presentation of the financial statements. In
addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that
is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of
performing the audit. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for
our report.
Disclosures of principal risks
Based on the knowledge we acquired during our audit, we have
nothing material to add or draw attention to in relation to:
- the directors’ Viability Statement, concerning the principal
risks, their management, and, based on that, the directors’
assessment and expectations of the Company’s continuing in
operation over the 3 years to 26 April
2020; or
- the disclosures in Note 2c of the financial statements
concerning the use of the going concern basis of accounting.
Matters on which
we are required to report by exception
Under International Standards on Auditing (“ISAs”) (UK and
Ireland) we are required to report
to you if, based on the knowledge we acquired during our audit, we
have identified other information in the Annual Report that
contains a material inconsistency with either that knowledge or the
financial statements, a material misstatement of fact, or that is
otherwise misleading.
In particular, we are required to report to you if:
- we have identified material inconsistencies between the
knowledge we acquired during our audit and the directors’ statement
that they consider that the Annual Report and financial statements
taken as a whole is fair, balanced and understandable and provides
the information necessary for members to assess the Company’s
performance, business model and strategy; or
- the Audit Committee Report does not appropriately address
matters communicated by us to the Audit Committee.
Under the Companies (Guernsey) Law, 2008, we are required to
report to you if, in our opinion:
- the Company has not kept proper accounting records; or
- the financial statements are not in agreement with the
accounting records; or
- we have not received all the information and explanations,
which to the best of our knowledge and belief are necessary for the
purpose of our audit.
We have nothing to report in respect of the above
responsibilities.
Scope of report
and responsibilities
The purpose of this report and restrictions on its use by
persons other than the Company’s members as a body
This report is made solely to the Company’s members, as a body,
in accordance with section 262 of the Companies (Guernsey) Law,
2008 and, in respect of any further matters on which we have agreed
to report, on terms we have agreed with the Company. Our audit work
has been undertaken so that we might state to the Company’s members
those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members, as a body, for our audit
work, for this report, or for the opinions we have formed.
Respective
responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities
Statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view. Our responsibility is to audit, and express an
opinion on, the financial statements in accordance with applicable
law and ISAs (UK and Ireland).
Those standards require us to comply with the UK Ethical Standards
for Auditors.
KPMG Channel Islands Limited
Chartered Accountants
Glategny Court,
Glategny Esplanade,
St. Peter Port,
Guernsey
GY1 1WR
26 April 2017
Statement of Financial Position
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
31
December |
|
31
December |
|
|
|
|
|
|
2016 |
|
2015 |
|
|
|
|
|
Notes |
£ |
|
£ |
Assets |
|
|
|
|
|
|
|
|
Financial
assets at fair value through profit or loss |
11,18 |
141,956,597 |
|
122,775,669 |
Other
receivables |
|
|
|
13 |
3,536,330 |
|
2,358,893 |
Cash and
cash equivalents |
|
|
12 |
2,240,481 |
|
6,360,135 |
Due from
broker |
|
|
|
2(o) |
- |
|
481,717 |
Total
assets |
|
|
|
|
147,733,408 |
|
131,976,414 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
|
|
Due to
broker |
|
|
|
2(o) |
151,910 |
|
- |
Other
payables |
|
|
|
14 |
1,206,799 |
|
833,636 |
Total
liabilities |
|
|
|
|
1,358,709 |
|
833,636 |
Net assets |
|
|
|
|
|
146,374,699 |
|
131,142,778 |
|
|
|
|
|
|
|
|
|
Represented by: |
|
|
|
|
|
|
|
Shareholders' equity and reserves |
|
|
|
|
|
|
Share
capital |
|
|
|
15 |
93,626,149 |
|
93,746,629 |
Other
reserves |
|
|
|
2(r) |
52,748,550 |
|
37,396,149 |
Total
shareholders' equity |
|
|
|
146,374,699 |
|
131,142,778 |
Net
assets per share |
|
|
|
6 |
1.5027 |
|
1.3449 |
The notes form an integral part of these Financial
Statements.
The Financial Statements were approved and signed by the Board
of Directors on 26 April 2017.
Norman Crighton
Chairman
Stephen Coe
Director
Statement of Comprehensive Income
|
|
|
|
|
|
|
For
the year ended |
|
For
the year ended |
|
|
|
|
|
|
|
31
December 2016 |
|
31
December 2015 |
|
|
|
|
|
|
Notes |
£ |
|
£ |
Income |
|
|
|
|
|
|
|
|
Net
changes in fair value of financial assets at fair value
through profit or loss |
|
7 |
17,282,902 |
|
16,197,400 |
Income |
|
|
|
|
8 |
3,943,448 |
|
2,586,621 |
Total
income |
|
|
|
|
|
21,226,350 |
|
18,784,021 |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
Operating
expenses |
|
|
|
9 |
(2,822,857) |
|
(2,466,120) |
Total
operating expenses |
|
|
|
(2,822,857) |
|
(2,466,120) |
|
|
|
|
|
|
|
|
|
|
Profit
for the year before tax |
|
|
|
18,403,493 |
|
16,317,901 |
Withholding tax |
|
|
|
(2q) |
(867,556) |
|
(569,098) |
Profit for the year
after tax |
|
|
|
|
|
|
17,535,937 |
|
15,748,803 |
Profit
and comprehensive income for the year |
|
17,535,937 |
|
15,748,803 |
Basic
and diluted earnings per share |
|
5 |
0.1800 |
|
0.1561 |
All items derive from continuing activities.
The notes form an integral part of these Financial
Statements.
Statement of Changes in Equity
For the
year ended 31 December 2016 |
|
|
|
|
|
|
|
|
|
Share |
Other |
|
|
|
|
|
capital |
reserves |
Total |
|
|
|
Notes |
£ |
£ |
£ |
Balance at 1
January 2016 |
|
|
|
93,746,629 |
37,396,149 |
131,142,778 |
Profit for the
year |
|
|
|
- |
17,535,937 |
17,535,937 |
Transactions with Shareholders, recorded directly in
equity |
|
|
|
|
Repurchase
of ordinary shares and cancelled on purchase |
15 |
(120,480) |
- |
(120,480) |
Distributions
paid |
|
|
3 |
- |
(2,183,536) |
(2,183,536) |
Balance at 31
December 2016 |
|
|
|
93,626,149 |
52,748,550 |
146,374,699 |
|
|
|
|
|
|
|
Balance at 1
January 2015 |
|
|
|
102,900,000 |
23,515,820 |
126,415,820 |
Total
comprehensive income for the year |
|
|
- |
15,748,803 |
15,748,803 |
Transactions with Shareholders, recorded directly in
equity |
|
|
|
|
Repurchase
of ordinary shares and cancelled on purchase |
15 |
(9,153,371) |
- |
(9,153,371) |
Distributions
paid |
|
|
3 |
- |
(1,868,474) |
(1,868,474) |
Balance at 31
December 2015 |
|
|
|
93,746,629 |
37,396,149 |
131,142,778 |
The notes form an integral part of these Financial
Statements.
Statement of Cash Flows
For the year ended
31 December 2016 |
|
For
the year ended |
|
For
the year ended |
|
|
31
December 2016 |
|
31
December 2015 |
|
Notes |
£ |
|
£ |
Cash flows from
operating activities |
|
|
|
|
Profit for the
year |
|
17,535,937 |
|
15,748,803 |
|
|
|
|
|
Adjustments for: |
|
|
|
|
Net change in fair
value of financial assets held at fair value profit or loss |
7 |
(17,282,902) |
|
(16,197,400) |
Effect of foreign
exchange rate fluctuations |
|
1,400,058 |
|
41,626 |
Increase in
debtors |
13 |
(1,177,437) |
|
(123,455) |
Increase in
creditors |
14 |
373,163 |
|
68,228 |
Net cash generated
from/(used in) operating activities |
|
848,819 |
|
(462,198) |
|
|
|
|
|
Cash flows from
investing activities |
|
|
|
|
Purchase of financial
assets at fair value through profit or loss |
11 |
(61,621,560) |
|
(24,778,741) |
Proceeds from the sale
of financial assets at fair value through profit or loss |
11 |
58,957,103 |
|
36,214,129 |
Net cash (used
in)/generated from investing activities |
|
(2,664,457) |
|
11,435,388 |
|
|
|
|
|
Cash flows from
financing activities |
|
|
|
|
Repurchase of ordinary
shares and cancelled on purchase |
15 |
(120,480) |
|
(9,153,371) |
Distributions
paid |
3 |
(2,183,536) |
|
(1,868,474) |
Net cash used in
financing activities |
|
(2,304,016) |
|
(11,021,845) |
|
|
|
|
|
Net decrease in
cash and cash equivalents |
|
(4,119,654) |
|
(48,655) |
Cash and cash
equivalents at the beginning of the year |
|
6,360,135 |
|
6,408,790 |
Cash and cash
equivalents at the end of the year |
|
2,240,481 |
|
6,360,135 |
The notes form an integral part of these Financial
Statements.
Notes to the Financial Statements
1. General information
The Company was incorporated with limited liability in Guernsey,
as a closed-ended investment company on 12
April 2013. The Company’s Shares were admitted to trading on
the AIM Market of the LSE on 14 May 2013.
The Company’s investment objective and policy is set out in the
Summary Information.
The Investment Manager of the Company is Weiss Asset Management
LP.
At the AGM held on 27 July 2016,
the Board approved the adoption of the new Articles of
Incorporation in accordance with Section 42(1) of the Companies
(Guernsey) Law, 2008 (the “Law”).
2. Significant accounting
policies
a) Statement
of compliance
The Annual Report and Audited Financial Statements of the
Company for the year ended 31 December
2016 have been prepared in accordance with IFRS issued by
the European Union and the AIM Rules of the London Stock Exchange.
They give a true and fair view and are in compliance with the
Law.
b) Basis of
preparation
The Financial Statements are prepared in pounds sterling (£),
which is the Company’s functional and presentational currency. They
are prepared on a historical cost basis modified to include
financial assets at fair value through profit or loss.
c) Going
concern
In accordance with the Company’s Articles of Association and
Prospectus, the Company shall offer all Shareholders the right to
elect to realise some or all of the value of their ordinary shares
(the “Realisation Opportunity”), less applicable costs and
expenses, on or prior to the fourth anniversary of Admission,
being
15 May 2017 (the “Realisation Date”).
See Note 17 for further details.
On 20 March 2017, the Company
announced that pursuant to the Realisation Opportunity,
Shareholders who are on the register as at the record date may
elect, during the election period, to redesignate all or part
(provided that such part be rounded up to the nearest whole
ordinary share) of their ordinary shares as Realisation Shares.
Subject to the aggregate NAV of the continuing ordinary shares
at the close of business on the last Business Day before the
Realisation Date being not less than £50 million, the ordinary
shares held by the Shareholders who have elected for Realisation
will be redesignated as Realisation Shares and the Portfolio will
be split into two separate and distinct Pools namely the
Continuation Pool (comprising the assets attributable to the
continuing ordinary shares) and the Realisation Pool (comprising
the assets attributable to the Realisation Shares). If one or more
Realisation Elections are duly made and the NAV of the continuing
ordinary shares at the close of business on the last Business Day
before the Reorganisation Date is less than £50 million, the
Directors may propose an ordinary resolution for the winding up of
the Company and may pursue a liquidation of the Company instead of
splitting the Portfolio into the Continuation Pool and the
Realisation Pool.
Currently, the Board does not know the number of shareholders
(or related shares), who will take up the Realisation Opportunity.
Based on the uncertainty of the offer and the fact that the assets
of the Company consist mainly of securities that are readily
realisable, whilst the Directors acknowledge that the liquidity of
these assets needs to be managed, the Directors believe that the
Company has adequate financial resources to meet its liabilities as
they fall due in the foreseeable future and for at least twelve
months from the date of this report, and that it is appropriate for
the Financial Statements to be prepared on a going concern basis,
given that the Board believes the Company will continue in
existence post the Realisation Opportunity.
d) Standards,
amendments and interpretations not yet effective
At the date of approval of these Financial Statements, the
following standards and interpretations have not been applied in
these Financial Statements, but were in issue and not yet
effective.
IFRS 9 ‘Financial Instruments’ is effective for annual reporting
periods beginning on or after 1 January
2018, with early adoption permitted and amends IAS 39
‘Financial Instruments – Recognition and measurement.’ IFRS 9
specifies how an entity should classify and measure financial
assets, including some hybrid contracts. They require 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. They
apply a consistent approach to classifying financial assets and
replace the numerous categories of financial assets in IAS 39, each
of which had its own classification criteria.
They also result in one impairment method, replacing the
numerous impairment methods in IAS 39 that arise from the different
classification.
IFRS 15 ‘Revenue from Contracts with Customers’ is effective for
annual periods beginning on or after
1 January 2018, with early adoption
permitted. IFRS 15 establishes a comprehensive framework for
determining whether, how much and when revenue is recognised. It
replaces existing revenue recognition guidance, including IAS 18
‘Revenue’.
The Company currently recognises dividend income under IAS 18
‘Revenue’. The Company does not anticipate any impact on its
recognition of dividend income under IFRS 15 ‘Revenue from
Contracts with Customers’ as the standard only outlines the
treatment of revenue from customer contracts. Dividend income will
continue to be recognised under IAS 18 ‘Revenue,’ when the
Company’s right to receive payments is established.
The Board anticipates that the adoption of these standards and
interpretations 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 this
standard.
e) Financial
instruments
i)
Classification
Financial assets are classified into the following categories:
financial assets at fair value through profit or loss and loans and
receivables.
The classification depends on the nature and purpose of the
financial assets and is determined at the time of initial
recognition.
Financial liabilities are classified as either financial
liabilities at fair value through profit or loss or other financial
liabilities.
ii)
Recognition
Financial assets at fair value
through profit or loss (“investments”)
Financial assets and derivatives are recognised in the Company’s
Statement of Financial Position when the Company becomes a party to
the contractual provisions of the instrument.
Purchases and sales of investments are recognised on the trade
date (the date on which the Company commits to purchase or sell the
investment). Investments purchased are initially recorded at fair
value, being the consideration given and excluding transaction or
other dealing costs associated with the investment.
Subsequent to initial recognition, investments are measured at
fair value. Gains and losses arising from changes in the fair value
of investments and gains and losses on investments that are sold
are recognised through profit or loss in the Statement of
Comprehensive Income within net changes in fair value of financial
assets at fair value through profit or loss.
Other financial instruments
For other financial instruments, including other receivables and
other payables, the carrying amounts as shown in the Statement of
Financial Position approximate to fair values due to the short term
nature of these financial instruments.
iii) Fair Value Measurement
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 traded in
active markets are valued at the latest available bid prices ruling
at midnight, Greenwich Mean Time (“GMT”), on the reporting date.
The Directors are of the opinion that the bid-market prices are the
best estimate on fair value. Gains and losses arising from changes
in the fair value of financial assets/(liabilities) are shown as
net gains or losses on financial assets through profit or loss in
Note 11 and are recognised in the Statement of Comprehensive Income
in the period in which they arise.
iv) Derecognition of financial
instruments
A financial asset is derecognised when: (a) the rights to
receive cash flows from the asset have expired, (b) the Company
retains the right to receive cash flows from the asset, but has
assumed an obligation to pay them in full without material delay to
a third party under a “pass through arrangement”; or (c) the
Company has transferred substantially all the risks and rewards of
the asset, or has neither transferred nor retained substantially
all the risks and rewards of the asset, but has transferred control
of the asset.
On de-recognition of a financial asset, the difference between
the carrying amount of the asset using the average cost method and
the consideration received (including any new asset obtained, less
any new liability assumed) is recognised in profit or loss.
A financial liability is derecognised when the obligation under
the liability is discharged, cancelled or expired.
f) Net changes
in fair value of financial assets at fair value through profit or
loss
Net changes in fair value of financial assets at fair value
through profit or loss includes all realised and unrealised fair
value changes and foreign exchange differences, but excludes
dividend income.
g) Income
Dividend income from equity investments is recognised through
profit or loss in the Statement of Comprehensive Income when the
relevant investment is quoted ex-dividend.
h) Expenses
All expenses are accounted for on an accruals basis. Expenses
incurred on the acquisition of financial assets at fair value
through profit or loss and management fees are charged to the
Statement of Comprehensive Income.
i) Cash and
cash equivalents
Cash comprises cash in hand and demand deposits. Cash
equivalents, which can include bank overdrafts, are short term,
highly liquid investments that are readily convertible to known
amounts of cash and which are subject to insignificant changes in
value. Cash, deposits with banks and bank overdrafts are stated at
their principal amount.
j) 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.
k) Foreign currency
translations
Functional and presentation
currency
The Financial Statements of the Company are presented in the
currency of the primary economic environment in which the Company
operates (its ‘functional currency’). The Directors have considered
the currency in which the original capital was raised,
distributions will be made and ultimately the currency in which
capital would be returned in a liquidation.
On the Statement of Financial Position date, the Directors
believe that pounds sterling best represents the functional
currency of the Company. For the purpose of the Financial
Statements, the results and financial position of the Company are
expressed in pounds sterling, which is the presentational currency
of the Company. Monetary assets and liabilities, denominated in
foreign currencies, are re-translated into pounds sterling at the
exchange rate at the reporting date. Non-monetary assets
denominated in foreign currencies that are measured at fair value
are retranslated in pounds sterling at the exchange rate at the
date on which the fair value was determined. Realised and
unrealised gains or losses on currency translation are recognised
in the Statement of Comprehensive Income. Foreign currency
differences relating to investments at fair value through profit or
loss are included within net changes in fair value of financial
assets at fair value through profit or loss.
l) Treasury
shares
Where the Company purchases its own share capital, the
consideration paid, which includes any directly attributable costs,
the nominal value of the shares are deducted through share capital
and the difference between the total consideration and the total
nominal value of all shares purchased is recognised through other
reserves, which is a distributable reserve.
When such Shares are subsequently sold or reissued, any
consideration received, net of any directly attributable
incremental transaction costs and the related income tax effects,
is recognised as an increase in equity and the resulting surplus or
deficit on the transaction is transferred to/from the other
reserve.
Where the Company cancels treasury shares, no further adjustment
is required to the share capital account at the time of
cancellation. Shares held in treasury are excluded from
calculations when determining NAV per share and earnings per
share.
m) Operating segments
The Board has considered the requirements of IFRS 8 ‘Operating
Segments’, and is of the view that the Company is engaged in a
single segment of business, being an investment strategy tied to
listed preferred shares issued by companies incorporated in
South Korea. The Board, as a
whole, has been determined as constituting the chief operating
decision maker of the Company.
The key measure of performance used by the Board to assess the
Company’s performance and to allocate resources is the total return
on the Company’s NAV, as calculated under IFRS, and therefore no
reconciliation is required between the measure of profit or loss
used by the Board and that contained in these Audited Financial
Statements.
The Board of Directors is charged with setting the Company’s
investment strategy in accordance with the investment policy. They
have delegated the day to day implementation of this strategy to
its Investment Manager but retain responsibility to ensure that
adequate resources of the Company are directed in accordance with
their decisions. The investment decisions of the Investment Manager
are reviewed on a regular basis to ensure compliance with the
policies and legal responsibilities of the Board. The Investment
Manager has been given full authority to act on behalf of the
Company, including the authority to purchase and sell securities
and other investments on behalf of the Company and to carry out
other actions as appropriate to give effect thereto.
Whilst the Investment Manager may make the investment decisions
on a day to day basis regarding the allocation of funds to
different investments, any changes to the investment strategy or
major allocation decisions have to be approved by the Board, even
though they may be proposed by the Investment Manager.
The Board therefore retains full responsibility as to the major
decisions made on an on-going basis. The Investment Manager will
always act under the terms of the Admission Document which cannot
be significantly changed without the approval of the Board of
Directors and where necessary, Shareholders.
n) Other
receivables
Other receivables are amounts due in the ordinary course of
business. Other receivables are recognised initially at fair value
and subsequently measured at amortised cost using the effective
interest 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 recognised initially at fair value and subsequently measured at
amortised cost using the effective interest method.
p) Due from
and due to brokers
Amounts due from and due to brokers represent receivables for
securities sold and payables purchased that have been contracted
for but not yet settled or delivered on the Statement of Financial
Position date respectively.
q) Dividend
distribution
Dividend distribution to the Company’s Shareholders is
recognised as a liability in the Company’s Financial Statements and
disclosed in the Statement of Changes in Equity in the period in
which the dividends are proposed and approved by the Board.
r)
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 is an annual fee of £1,200 (2015:
£1,200).
The amounts disclosed as taxation in the Statement of
Comprehensive Income relates solely to withholding tax levied in
South Korea on distribution from
Korean companies at an offshore rate of 22%.
s) Other
reserves
Total comprehensive income for the year is transferred to Other
Reserves.
t) Dividends to
Shareholders
Dividends, if any, will be paid annually in June each year. An
annual dividend of 2.2416 pence per
share (£2,183,536) was approved on 2 June
2016 and paid on 28 June 2016,
in respect of the year ended 31 December 2015.
An annual dividend of 1.8580 pence
per share (£1,868,474) was approved on 4
June 2015 and paid on 26 June 2015, in respect of
the year ended 31 December 2014.
u) Significant accounting
judgements, estimates and assumptions
The preparation of the Financial Statements in conformity with
IFRS requires management to make judgements, estimates and
assumptions that affect the application of policies and the
reported amounts of assets and liabilities, income and expense 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.
The estimates and underlying assumptions are reviewed on an
on-going basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period, or in the period of revision and future periods
if the revision affects both current and future periods.
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 Annual
Financial Statements:
Functional currency
As disclosed in Note 2(j), the Company’s functional currency is
the pound sterling. Pound sterling is the currency in which the
original capital was raised, distributions will be made and
ultimately the currency in which capital would be returned in a
liquidation.
v) Basic and diluted
earnings per share
The basic and diluted earnings per share for the Company has
been calculated based on the total comprehensive income for the
year of £14,779,671 (for the year ended 31
December 2015: £15,748,803) and the weighted average number
of ordinary shares in issue during the year of 97,414,942 (for the
year ended 31 December 2015: 100,886,598).
w) Net asset value per ordinary
share
The net asset value of each Share of £1.5027 (as at 31 December 2015: £1.3449) is determined by
dividing the net assets of the Company attributed to the ordinary
shares of £146,374,699 (as at 31 December 2015: £131,142,778)
by the number of ordinary shares in issue at 31 December 2016 of 97,409,750 (as at
31 December 2015: 97,509,750 ordinary shares in issue).
x) Net changes in fair
value on financial assets at fair value through profit or loss
|
|
|
|
|
|
For
the year ended |
|
For
the year ended |
|
|
|
|
|
|
31
December 2016 |
|
31
December 2015 |
|
|
|
|
|
|
£ |
|
£ |
Realised
gain on investments |
|
|
15,045,539 |
|
4,927,720 |
Realised
gain/(loss) on foreign currency |
|
|
1,488,424 |
|
(1,686) |
Movement
in unrealised gain on investments |
|
|
837,305 |
|
11,228,054 |
Movement
in unrealised exchange gain on foreign currency |
|
(88,366) |
|
43,312 |
Net
changes in fair value on financial assets at fair value through
profit or loss |
|
17,282,902 |
|
16,197,400 |
y) Other income
|
|
|
|
|
For
the year ended |
|
For
the year ended |
|
|
|
|
|
31
December 2016 |
|
31
December 2015 |
|
|
|
|
|
£ |
|
£ |
Dividend
income |
|
|
|
3,943,448 |
|
2,586,621 |
z) Operating expenses
|
|
|
|
|
For
the year ended |
|
For
the year ended |
|
|
|
|
|
31
December 2016 |
|
31
December 2015 |
|
|
|
|
|
£ |
|
£ |
Investment
Management fee (Note 16c) |
|
2,060,184 |
|
1,894,277 |
Custodian
fees |
|
|
|
79,913 |
|
54,885 |
Audit
fees |
|
|
|
21,954 |
|
24,308 |
Administration and Secretarial fees |
|
93,634 |
|
95,405 |
Directors'
fees (Note 16a) |
|
|
68,000 |
|
68,000 |
Auditors
remuneration for non-audit services* |
|
3,750 |
|
3,750 |
Professional fees |
|
|
40,614 |
|
37,609 |
Transaction costs |
|
|
342,547 |
|
162,896 |
Financial
Adviser, Nominated Adviser and Broker fee |
30,300 |
|
30,000 |
Sundry
expenses |
|
|
81,962 |
|
94,990 |
|
|
|
|
|
2,822,858 |
|
2,466,120 |
* Fees of £3,750 (31 December
2015: £3,750) were paid to the Auditor, KPMG Channel Islands
Limited, in respect of tax services provided in the year to
31 December 2016.
aa) Operating segments
Information on realised gains and losses derived from sales of
investments are disclosed in Note 7 of the Financial Statements.
The Company is domiciled in Guernsey. Substantially all of the
Company’s income is from its investment in listed preferred shares
issued by companies incorporated in South
Korea.
The Company has no assets classified as non-current assets. The
Company is likely to have a high degree of portfolio concentration
as Korean preferred shares are concentrated with a small number of
issuers.
The Company also has a diversified Shareholder base. As at 31
December, registered Shareholders that have notified the market of
their holding in the Company via an announcement to the LSE, were
as follows:
|
|
|
|
As at 31 December 2016 |
|
|
|
|
|
|
% of
issued |
Shareholders |
|
|
|
Shares |
|
share
capital |
City of
London Investment Management Company |
|
|
13,753,909 |
|
14.12% |
Aberdeen
Emerging Capital Limited |
|
|
12,498,100 |
|
12.83% |
Ruffer LLP |
|
|
|
11,500,000 |
|
11.81% |
Banque
Degroof Luxembourg |
|
|
10,125,000 |
|
10.39% |
Lepercq de Neuflize
Asset Management |
|
|
|
9,546,077 |
|
9.80% |
Mount Capital |
|
|
|
8,000,000 |
|
8.21% |
Merrill Lynch Pierce
Fenner |
|
|
|
7,000,000 |
|
7.19% |
Andrew M. Weiss |
|
|
|
6,510,888 |
|
6.68% |
|
|
|
|
|
|
|
|
|
|
|
As at 31 December 2015 |
|
|
|
|
|
|
% of
issued |
Shareholders |
|
|
|
Shares |
|
share
capital |
Aberdeen
Emerging Capital Limited |
|
|
12,452,000 |
|
12.77% |
Ruffer LLP |
|
|
|
11,500,000 |
|
11.79% |
Banque
Degroof Luxembourg |
|
|
10,125,000 |
|
10.38% |
Lepercq de Neuflize
Asset Management |
|
|
|
8,764,065 |
|
8.99% |
Mount Capital |
|
|
|
8,000,000 |
|
8.20% |
City of
London Investment Management Company |
|
|
7,160,740 |
|
7.34% |
Andrew M. Weiss |
|
|
|
6,427,550 |
|
6.59% |
11. Financial assets at fair value
through profit or loss
|
|
|
|
As
at |
|
As
at |
|
|
|
|
31
December |
|
31
December |
|
|
|
|
2016 |
|
2015 |
|
|
|
|
£ |
|
£ |
Cost of
investments at beginning of the year |
|
|
96,544,822 |
|
103,534,207 |
Purchases
of investments in the year |
|
|
61,773,470 |
|
24,778,741 |
Disposal
of investments in the year |
|
|
(58,475,386) |
|
(36,695,846) |
Realised
gain on disposal of investments in the year |
|
|
15,045,539 |
|
4,927,720 |
Cost of
investments held at end of the year |
|
|
114,888,445 |
|
96,544,822 |
Unrealised
gain on investments |
|
|
27,068,152 |
|
26,230,847 |
Financial
assets at fair value through profit or loss |
|
|
141,956,597 |
|
122,775,669 |
Financial assets are valued at the bid-market prices ruling as
at the close of business at the Statement of Financial Position
date, net of any accrued interest which is included in the
Statement of Financial Position as an income related item. The
Directors are of the opinion that the bid-market prices are the
best estimate of fair value in accordance with the requirements of
IFRS 13 ‘Fair Value Measurement.’ Movements in fair value are
included in the Statement of Comprehensive Income.
12. Cash and cash equivalents
|
|
|
|
As
at |
|
As
at |
|
|
|
|
31
December |
|
31
December |
|
|
|
|
2016 |
|
2015 |
|
|
|
|
£ |
|
£ |
Cash at bank |
|
|
|
2,240,481 |
|
6,360,135 |
Cash at bank earns interest at floating rates based on daily
bank deposit rates.
13. Other receivables
|
|
|
|
As
at |
|
As
at |
|
|
|
|
31
December |
|
31
December |
|
|
|
|
2016 |
|
2015 |
|
|
|
|
£ |
|
£ |
Dividends
receivable |
|
|
|
3,533,674 |
|
2,356,303 |
Prepaid expenses |
|
|
|
2,656 |
|
2,590 |
|
|
|
|
3,536,330 |
|
2,358,893 |
The Directors consider that the carrying amount of receivables
approximate their fair value.
14. Other payables
|
|
|
|
As
at |
|
As
at |
|
|
|
|
31
December |
|
31
December |
|
|
|
|
2016 |
|
2015 |
|
|
|
|
£ |
|
£ |
Investment
management fees payable (Note 16c) |
|
|
337,375 |
|
162,303 |
Withholding tax
payable |
|
|
|
777,408 |
|
518,387 |
Administration fee payable |
|
|
19,400 |
|
24,079 |
Custody fee
payable |
|
|
|
7,160 |
|
5,320 |
Directors'
fees payable (Note 16a) |
|
|
- |
|
17,000 |
Audit fees
payable |
|
|
|
10,150 |
|
15,156 |
Other payables |
|
|
|
55,306 |
|
91,391 |
|
|
|
|
1,206,799 |
|
833,636 |
The Directors consider that the carrying amount of payables
approximate their fair value.
15. Share capital
The share capital of the Company consists of an unlimited number
of ordinary shares of no par value.
|
|
|
|
As
at |
|
As
at |
|
|
|
|
31
December |
|
31
December |
|
|
|
|
2016 |
|
2015 |
Authorised |
|
|
|
|
|
|
Unlimited
Ordinary Shares at no par value |
|
|
- |
|
- |
|
|
|
|
|
|
|
Issued at no par
value |
|
|
|
|
|
|
97,409,750
(2015: 97,509,750) unlimited ordinary shares at no par value |
- |
|
- |
|
|
|
|
|
|
|
Reconciliation of number of Shares |
|
|
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
31
December |
|
31
December |
|
|
|
|
2016 |
|
2015 |
|
|
|
|
No. of
Shares |
|
No. of
Shares |
Ordinary
shares at the beginning of the year |
|
|
97,509,750 |
|
105,000,000 |
Purchase
of own shares for cancellation |
|
|
(100,000) |
|
(7,490,250) |
Total
Ordinary Shares in issue at the end of the year |
|
|
97,409,750 |
|
97,509,750 |
|
|
|
|
|
|
|
Share capital
account |
|
|
|
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
31
December |
|
31
December |
|
|
|
|
2016 |
|
2015 |
|
|
|
|
Share
Capital |
|
Share
Capital |
|
|
|
|
£ |
|
£ |
Share
capital at the beginning of the year |
|
|
93,746,629 |
|
102,900,000 |
Purchase
of own shares for cancellation |
|
|
(120,480) |
|
(9,153,371) |
Total
share capital at the end of the year |
|
|
93,626,149 |
|
93,746,629 |
The share capital of the Company consists of an unlimited number
of ordinary shares of no par value.
Ordinary shares
The Company has a single class of ordinary shares, which were
issued by means of an initial public offering on 14 May 2013, at 100
pence per Share.
The rights attached to the ordinary shares are as follows:
a) the holders of ordinary shares shall
confer the right to all dividends in accordance with the Articles
of Incorporation of the Company.
b) the capital and surplus assets of the
Company remaining after payment of all creditors shall, on
winding-up or on a return (other than by way of purchase or
redemption of own ordinary shares) be divided amongst the
Shareholders on the basis of the capital attributable to the
ordinary shares at the date of winding up or other return of
capital.
c) the Shareholders present in person or
by proxy or (being a corporation) 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 every Share.
d) On 20 March
2017, being 56 days before the fourth anniversary of
admission to AIM, the Company published a circular, pursuant to the
Realisation Opportunity, entitling the Shareholders to serve a
written notice, during the election period (a “Realisation
Election”), requesting that all or a part of the ordinary shares
held by them be redesignated to Realisation Shares, subject to the
aggregate NAV of the continuing ordinary shares on the last
business day before the Reorganisation Date being not less than £50
million. A Realisation Notice, once validly given is irrevocable
unless the Board agrees otherwise. If any Shareholders elect to
participate in the Realisation Opportunity, the Company’s current
portfolio will be divided into two pools: the Continuation Pool;
and the Realisation Pool. If one or more Realisation Elections are
duly made and the aggregate NAV of the continuing ordinary shares
on the last business day before the Realisation Date is less than
£50 million, the Directors may propose an ordinary resolution for
winding up of the Company and may pursue a liquidation of the
Company instead of splitting the Portfolio into the Continuation
Pool and the Realisation Pool.
Share buy-back and cancellation
During the year ended 31 December
2016, the Company purchased 100,000 of its own shares
(31 December 2015: 7,490,250) at a
consideration of £120,480 (31 December
2015: £9,153,371) under the share buy-back authority
originally granted to the Company in 2014. These shares have been
subsequently cancelled.
Following the share buy-back, the Company has 97,409,750
ordinary shares in issue as of 31 December
2016 (as at 31 December 2015:
97,509,750).
At the AGM held on 27 July 2016,
Shareholders granted the Company a general buy-back authority of up
to 40% of the Company's issued share capital, as at
27 July 2016. In addition, on
12 February 2016, the Company
appointed N+1 Singer Advisory LLP to manage an irrevocable
programme during the close period leading up to the publication of
the Company’s full year results (the “Close Period Buy-Back
Programme”) to buy back ordinary shares within certain pre-set
parameters. Any shares purchased in the Close Period Buy- Back
Programme will count towards the Company's general buy-back
authority of 40% of the Company's issued share capital, as approved
at the Company's AGM.
On 5 August 2016, the Company
re-appointed N+1 Singer Advisory LLP to manage the Closed Period
Buy- Back Programme to buy back ordinary shares within certain
pre-set parameters during the close period leading up to the
publication of the year-end results. The Closed Period Buy-Back
Programme commenced on 24 March 2017
and will run until the end of the closed period, when the Company’s
financial statements for the year ended 31
December 2016 were published on 27
April 2017, Any shares purchased in the Closed Period
Buy-Back Programme will count towards the Company's share buy-back
authority of 40% of the Company's issued share capital, as approved
at the Company's AGM.
Realisation Opportunity
On 20 March 2017, the Company
announced that pursuant to the Realisation Opportunity,
Shareholders who are on the register as at the record date may
elect, during the election period, to re-designate all or part
(provided that such part be rounded up to the nearest whole
ordinary share) of their ordinary shares as Realisation Shares,
subject to the aggregate NAV of the continuing ordinary shares as
at the close of business on the last business day before the
Realisation Date being not less than £50 million. See Note 17 for
further details.
16. Related party transactions and
material agreements
Related party transactions
a) Directors’
remuneration and expenses
During the year ended 31 December
2016, directors’ fees of £68,000 (31
December 2015: £68,000) were charged to the Company and £Nil
remained payable at the year-end (as at 31
December 2015: £17,000). For additional information refer to
the Directors’ Remuneration Report.
b) Shares held
by related parties
The Directors’ Interests are set out in the Report of the
Directors.
The Investment Manager is principally owned by Dr. Andrew Weiss and certain members of the
Investment Manager’s senior management team.
As at 31 December 2016, Dr.
Andrew Weiss and his immediate
family members held an interest in 6,510,888 ordinary shares (as at
31 December 2015: 6,427,550 ordinary
shares) representing 6.68 per cent. (as at 31 December 2015:
6.59 per cent.) of the issued share capital of the Company.
As at 31 December 2016, employees
of the Investment Manager, their respective immediate family
members or entities controlled by them or their immediate family
members held an interest in 2,718,333 ordinary shares (as at
31 December 2015: 2,718,733)
representing 2.79 per cent. (as at 31
December 2015: 2.79 per cent.) of the issued share capital
of the Company.
Material agreements
c) Investment
management fee
The Company’s Investment Manager is Weiss Asset Management LP.
In consideration for its services provided by the Investment
Manager under the Investment Management Agreement dated
8 May 2013, the Investment Manager is
entitled to an annual management fee of 1.5% of the Company’s NAV
accrued daily and payable within 14 days after each month end. The
management fee is subject to a minimum annual amount of £1 (one)
million per annum for the first 48 months following Admission. The
Investment Manager is also entitled to reimbursement of certain
expenses incurred by it in connection with its duties.
The Investment Management Agreement will continue in force until
terminated by the Investment Manager or the Company giving to the
other party thereto not less than 12 months’ notice in writing,
such notice not to expire prior to the fourth anniversary of
admission other than in limited circumstances. During the
Management and Engagement Committee meeting, held on 5 December 2016, the Directors agreed that the
Investment Management Agreement would be reviewed, following the
Realisation Opportunity in May
2017.
For the year ended 31 December
2016, investment management fees and charges of £2,060,184
(for the year ended 31 December 2015:
£1,894,277) were charged to the Company and £337,375 (as at
31 December 2015: £162,303) remained
payable at the year-end.
17. Financial risk management
The Company’s objective in managing risk is the creation and
protection of Shareholder value. Risk is inherent in the Company’s
activities, but it is managed through an on-going process of
identification, measurement and monitoring.
The Company’s financial instruments include investments
designated at fair value through profit or loss and cash and cash
equivalents.
The main risks arising from the Company’s financial instruments
are market risk, foreign currency risk, interest rate risk, credit
risk and liquidity 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 is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in
market prices. The Company’s activities expose it primarily to the
market risks of changes in market prices, interest rates and
foreign currency exchange rates. The Company’s investments are
heavily concentrated in South Korean securities.
Market price risk
The Company’s NAV is sensitive to movement in market prices. As
at 31 December 2016, if market prices
had been 5% higher, or 5% lower, with all other variables held
constant then the increase/decrease in NAV would have been
£7,097,830 (as at 31 December 2015:
£6,138,783). Actual trading results may differ from the above
sensitivity analysis and those differences may be material.
Were there to be a major change in the political or economic
environment in South Korea, the
movement in market prices may be significantly and materially
higher than the above. Refer to the Investment Manager’s Report for
a discussion of potential political and economic changes.
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 does not hedge its exposure to foreign currency
(predominantly Korean won (KWR) and NAV per share will fluctuate
with movements in foreign exchange rates.
As at 31 December 2016, the
Company held the following assets and liabilities in foreign
currencies:
|
|
|
As
at |
|
As
at |
|
|
|
31
December |
|
31
December |
|
|
|
2016 |
|
2015 |
Amounts in
Sterling |
|
KRW |
USD |
KRW |
USD |
Assets |
|
|
|
|
|
Monetary assets |
|
4,961,622 |
345,923 |
6,235,621 |
2,736,979 |
Non-monetary
assets |
|
141,956,597 |
- |
122,775,669 |
- |
|
|
146,918,219 |
345,923 |
129,011,290 |
2,736,979 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Monetary
liabilities |
|
1,358,709 |
- |
518,387 |
- |
|
|
1,358,709 |
- |
518,387 |
- |
Amounts in the above table are based on the carrying value of
monetary assets and liabilities.
The table below summarises the sensitivity of the Company’s
monetary and non-monetary assets and liabilities to changes in
foreign exchange movements at 31 December
2016.
|
|
Reasonable |
As
at |
Reasonable |
As
at |
|
|
possible |
31
December |
possible |
31
December |
|
|
shift
in rate |
2016 |
shift
in rate |
2015 |
|
|
2016 |
£ |
2015 |
£ |
Currency |
|
|
|
|
|
KRW |
|
|
|
|
|
- Monetary assets |
|
+/-
5% |
248,081 |
+/-
5% |
311,781 |
- Non-monetary
assets |
|
+/-
5% |
7,097,830 |
+/-
5% |
6,138,783 |
- Monetary
liabilities |
|
+/-
5% |
67,935 |
+/-
5% |
25,919 |
|
|
|
|
|
|
US Dollars |
|
|
|
|
|
- Monetary assets |
|
+/-
5% |
17,296 |
+/-
5% |
136,849 |
- Non-monetary
assets |
|
+/-
5% |
- |
+/-
5% |
- |
Interest rate risk
The Company holds limited amounts on interest bearing deposits
of £2,240,481 as at 31 December 2016
(as at 31 December 2015: £6,360,135)
and does not invest in interest bearing securities and instruments.
Accordingly interest rate risk is considered very low.
The tables below summarise the Company’s exposure to interest
rate risk as of 31 December
2016:
|
|
|
|
|
Total |
|
|
|
|
|
As
at |
|
|
Floating |
Fixed |
Non-Interest |
31
December |
|
|
rate |
rate |
bearing |
2016 |
|
|
£ |
£ |
£ |
£ |
Financial
Assets |
|
|
|
|
|
Investments designated
at fair value |
|
|
|
|
|
through profit or
loss |
|
- |
- |
141,956,597 |
141,956,597 |
Cash and cash
equivalents |
|
2,240,481 |
- |
- |
2,240,481 |
Due from broker |
|
- |
- |
- |
- |
Other receivables |
|
- |
- |
3,533,674 |
3,533,674 |
|
|
2,240,481 |
- |
145,490,271 |
147,730,752 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
As
at |
|
|
Floating |
Fixed |
Non-Interest |
31
December |
|
|
rate |
rate |
bearing |
2016 |
|
|
£ |
£ |
£ |
£ |
Financial
Liabilities |
|
|
|
|
|
Due to broker |
|
- |
- |
151,910 |
151,910 |
Other payables |
|
- |
- |
429,391 |
429,391 |
|
|
- |
- |
581,301 |
581,301 |
The tables below summarise the Company’s exposure to interest
rate risk as of 31 December 2015:
|
|
|
|
|
Total |
|
|
|
|
|
As
at |
|
|
Floating |
Fixed |
Non-Interest |
31
December |
|
|
rate |
rate |
bearing |
2015 |
|
|
£ |
£ |
£ |
£ |
Financial
Assets |
|
|
|
|
|
Investments designated
at fair value |
|
|
|
|
|
through profit or
loss |
|
- |
- |
122,775,669 |
122,775,669 |
Cash and cash
equivalents |
|
6,360,135 |
- |
- |
6,360,135 |
Due from broker |
|
- |
- |
481,717 |
481,717 |
Other receivables |
|
- |
- |
2,356,303 |
2,356,303 |
|
|
6,360,135 |
- |
125,613,689 |
131,973,824 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
As
at |
|
|
Floating |
Fixed |
Non-Interest |
31
December |
|
|
rate |
rate |
bearing |
2015 |
|
|
£ |
£ |
£ |
£ |
Financial
Liabilities |
|
|
|
|
|
Other payables |
|
- |
- |
315,249 |
315,249 |
|
|
- |
- |
315,249 |
315,249 |
Credit risk
Credit risk is the risk that an issuer or counterparty will be
unable or unwilling to meet a commitment that it has entered into
with the Company. Credit risk is limited to the carrying value of
financial assets at 31 December 2016 as follows:
|
|
|
|
As
at |
As
at |
|
|
|
|
31
December |
31
December |
|
|
|
|
2016 |
2015 |
|
|
|
|
£ |
£ |
Cash and cash
equivalents |
|
|
|
2,240,481 |
6,360,135 |
Other receivables |
|
|
|
3,533,674 |
2,358,893 |
Due from broker |
|
|
|
- |
481,717 |
|
|
|
|
5,774,155 |
9,200,745 |
The Company is exposed to material credit risk in respect of
cash and cash equivalents. The credit risk from cash and cash
equivalents is mitigated as the majority of cash is placed with
Northern Trust (Guernsey) Limited (“NTGL”). NTGL is a wholly owned
subsidiary of The Northern Trust Corporation (“TNTC”). TNTC is
publicly traded and a constituent of the S&P 500. As at
31 December 2016, TNTC has a credit
rating of A+ (as at 31 December 2015: A+) from Standard
& Poor’s and A2 (as at 31 December
2015: A2) from Moody’s.
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.
The Company’s investments are relatively liquid and the Company
holds sufficient cash balances (or liquid investments) to meet its
obligations as they fall due. The Board reviews its resources and
obligations on a regular basis to ensure sufficient liquid assets
are held.
As at 31 December 2016, the
Company had no significant financial liabilities other than
payables arising directly from investing activity.
|
|
|
|
|
Total |
|
|
|
|
|
As
at |
|
|
Less
than 1 |
|
|
31
December |
|
|
month |
1-3
months |
3-12
months |
2016 |
|
|
£ |
£ |
£ |
£ |
|
|
|
|
|
|
Due to broker |
|
151,910 |
- |
- |
151,910 |
Other payables |
|
419,241 |
- |
787,558 |
1,206,799 |
|
|
571,151 |
- |
787,558 |
1,358,709 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
As
at |
|
|
Less
than 1 |
|
|
31
December |
|
|
month |
1-3
months |
3-12
months |
2015 |
|
|
£ |
£ |
£ |
£ |
|
|
|
|
|
|
Other payables |
|
256,939 |
43,154 |
15,156 |
315,249 |
|
|
256,939 |
43,154 |
15,156 |
315,249 |
Capital risk management
The fair value of the Company’s financial assets and liabilities
approximate to their carrying amounts at the reporting date.
The Company’s objective when managing capital is to maintain an
optimal capital structure, in order to reduce the cost of capital.
The Company may borrow, however, as at 31
December 2016 there were no borrowings (as at 31 December 2015: £Nil).
The gearing ratio below is calculated as total liabilities
divided by total equity.
|
|
|
|
As
at |
As
at |
|
|
|
|
31
December |
31
December |
|
|
|
|
2016 |
2015 |
|
|
|
|
£ |
£ |
Total assets |
|
|
|
147,733,408 |
131,976,414 |
Less: total
liabilities |
|
|
|
(1,358,709) |
(833,636) |
Net Asset
Value |
|
|
|
146,374,699 |
131,142,778 |
|
|
|
|
|
|
Gearing Ratio |
|
|
|
0.93% |
0.64% |
The Board considers the above gearing ratio to be adequate,
since total borrowings refer only to amounts due to the broker and
other payables.
Share buy-backs
The Directors have general Shareholder authority to purchase in
the market up to 40 per cent. of the ordinary shares in issue from
time to time following Admission. The Directors intend to seek
annual renewal of this authority from Shareholders at each general
meeting of the Company.
Pursuant to this authority, and subject to Guernsey law and
discretion of the Directors, the Company may repurchase ordinary
shares in the market on an on-going basis at a discount to NAV with
a view to increasing the NAV per ordinary share and assisting in
controlling the discount to NAV per ordinary share in relation to
the price at which such ordinary shares may be trading.
Purchases by the Company will be made only at prices below the
estimated prevailing NAV per ordinary share based on the last
Published NAV but taking account of movements in investments, stock
markets and currencies, in consultation with the Investment Manager
and at prices where the Directors believe such purchases will
result in an increase in the NAV per Ordinary Share of the
remaining Ordinary Shares.
The Directors will consider repurchasing ordinary shares when
the price per ordinary share plus the pro forma cost to the Company
per share repurchased is less than 95 per cent. of the NAV per
ordinary share. The pro forma cost per share should include any
brokerage commission payable and costs of realising portfolio
securities to fund the purchase. The Directors may, at their
discretion, also consider repurchasing ordinary shares at a smaller
discount to NAV per ordinary share, provided that such purchase
would be accretive to NAV per ordinary share for any continuing
Shareholders.
Realisation Opportunity
On 20 March 2017, the Company
announced that pursuant to the Realisation Opportunity,
shareholders who are on the register as at the record date, may
elect, during the election period, to re-designate all, or part,
(provided that such part be rounded up to the nearest whole
ordinary share) of their ordinary shares as Realisation Shares,
subject to the aggregate NAV of the continuing ordinary shares at
the close of business on the last Business Day before the
Realisation Date being not less than £50 million. The ordinary
shares held by the Shareholders who have elected for Realisation
will be redesignated as Realisation Shares and the Portfolio will
be split into two separate and distinct Pools namely the
Continuation Pool (comprising the assets attributable to the
continuing ordinary shares) and the Realisation Pool (comprising
the assets attributable to the Realisation Shares).
With effect from the Realisation Date, the assets in the
Realisation Pool will be managed in accordance with an orderly
realisation programme with the aim of making progressive returns of
cash, as soon as practicable, to those Shareholders who have
elected to receive Realisation Shares. Ordinary shares held by
Shareholders who do not submit a valid and complete election in
accordance with the Articles during the Election Period will remain
ordinary shares.
Unless it has already been determined that the Company will be
wound-up, every two years after the Realisation Date, the Directors
will propose further realisation opportunities for Shareholders who
have not previously elected to realise their ordinary shares using
a similar mechanism to that described above.
If the weighted average discount on the Portfolio is less than
25 per cent. over any 90 day period, then the Directors shall
propose an ordinary resolution for the winding up of the Company.
If one or more Realisation Elections are duly made and the NAV of
the continuing ordinary shares at the close of business on the last
Business Day before the Reorganisation Date is less than £50
million, the Directors may propose an ordinary resolution for the
winding up of the Company and may pursue a liquidation of the
Company instead of splitting the Portfolio into the Continuation
Pool and the Realisation Pool.
18. Fair value measurement
IFRS 13 ‘Fair Value Measurement’ requires the Company to
establish a fair value hierarchy that prioritises the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements).
The three levels of the fair value hierarchy under IFRS 13 ‘Fair
Value Measurement’ are set as follows:
- Level 1 Quoted prices (unadjusted) in active markets for
identical assets or liabilities;
- Level 2 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);
and
- Level 3 Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs).
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement. For this purpose, the significance of an input
is assessed against the fair value measurement in its entirety.
If a fair value measurement uses observable inputs that require
significant adjustment based on unobservable inputs, that
measurement is a Level 3 measurement. Assessing the significance of
a particular input to the fair value measurement requires
judgement, considering factors specific to the asset or
liability.
The determination of what constitutes ‘observable’ requires
significant judgement by the Company. The Company considers
observable data to be that 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.
The following table presents the Company’s financial assets and
liabilities by level within the valuation hierarchy as of
31 December 2016:
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
As
at |
|
|
|
|
|
31
December |
|
|
Level
1 |
Level
2 |
Level
3 |
2016 |
|
|
£ |
£ |
£ |
£ |
Financial assets at
fair value through |
|
|
|
|
|
profit or loss: |
|
|
|
|
|
Korean preferred shares |
|
136,175,733 |
- |
- |
136,175,733 |
Korean exchange traded funds |
|
5,780,864 |
- |
- |
5,780,864 |
Total assets |
|
141,956,597 |
- |
- |
141,956,597 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
As
at |
|
|
|
|
|
31
December |
|
|
Level
1 |
Level
2 |
Level
3 |
2015 |
|
|
£ |
£ |
£ |
£ |
Financial assets at
fair value through |
|
|
|
|
|
profit or loss: |
|
|
|
|
|
Korean preferred shares |
|
122,775,669 |
- |
- |
122,775,669 |
Total assets |
|
122,775,669 |
- |
- |
122,775,669 |
The Company recognises transfers between levels of the fair
value hierarchy as of the end of the reporting year during which
the transfer has occurred. There were no transfers between levels
during the year-end 31 December 2016 (for the year ended
31 December 2015: £Nil).
Investments whose values are based on quoted market prices in
active markets, and are therefore classified within Level 1,
include Korean preference shares and Exchange Traded Funds.
The Company held no Level 2 or 3 investments as at or during the
year ended 31 December 2016 (as at
31 December 2015: £Nil).
19. NAV reconciliation
The Company announces its NAV, based on bid value, to the LSE
after each weekly and month end valuation point. The following is a
reconciliation of the NAV per share attributable to redeemable
participating preference Shareholders as presented in these
Financial Statements, using IFRS to the NAV per share reported to
the LSE:
|
|
As at 31 December 2016 |
As at 31 December 2015 |
|
|
|
NAV
per |
|
NAV
per |
|
|
|
Participating |
|
Participating |
|
|
NAV |
Share |
NAV |
Share |
|
|
£ |
£ |
£ |
£ |
Net Asset Value
reported to the LSE |
|
143,618,433 |
1.4744 |
129,304,862 |
1.3261 |
Adjustment for
dividend income |
|
2,756,265 |
0.0283 |
1,837,916 |
0.0188 |
Net Assets
Attributable to Shareholders per Financial Statements |
146,374,699 |
1.5027 |
131,142,778 |
1.3449 |
The published NAV per Share of £1.4744 (as at 31 December 2015: £1.3261) is different from the
accounting NAV per Share of £1.5027 (as at 31 December 2015: £1.3449) due to the adjustments
noted above.
20. Subsequent events
These Financial Statements were approved for issuance by the
Board on _______ 2017. Subsequent events have been evaluated until
this date.
On 5 January 2017, Dr.
Andrew Weiss purchased 500,000
ordinary shares at a price of 144.75
pence per share. This increased his holding in the company
to 7,010,888 ordinary shares, representing 7.20% per cent. of the
Company’s total issued share capital.
As at the date of this Report, the Company has 97,409,750
ordinary shares in issue.
No further subsequent events have occurred.