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Cazenove Abs Equity (CAEL)

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Thursday 24 February, 2011

Cazenove Abs Equity

Final Results

RNS Number : 8358B
Cazenove Absolute Equity Limited
24 February 2011
 



For the purposes of the Company's dual listing, this is a replacement announcement that was incorrectly released to the Channel Islands Stock Exchange at 15:10pm.  The announcement referred to the Document Viewing Facility and has now been deleted.

 

CAZENOVE ABSOLUTE EQUITY LIMITED

 

YEAR END RESULTS ANNOUNCEMENT

 

The financial information set out in this announcement does not constitute the Company's statutory financial statements for the year ended 31 October 2010. All amounts are based on the 31 October 2010 audited financial statements, approved by the Board of Directors on 23 February 2011.

 

The announcement is prepared on the same basis as will be set out in the annual report and financial statements.

 

Summary Information

 

Structure

Cazenove Absolute Equity Limited ("the Company") was incorporated in Guernsey on 22 September 2006 under the Companies (Guernsey) Laws 1994 to 1996 (as amended), as a limited liability closed-ended investment company.

 

History of the Company

The Company's shares were listed on the Alternative Investment Market ("AIM") of the London Stock Exchange on 25 October 2006 and on the Channel Islands Stock Exchange ("CISX") on 27 October 2006. The Company commenced business on 20 October 2006.

 

The Board of Directors implemented a 'C' share offer on 11 September 2007.

 

The Company's shares were delisted from AIM and were subsequently listed on the official list of the main market of the London Stock Exchange on 29 November 2007.

 

The Company's convertible 'C' participating redeemable preference shares were listed on the official list of the main market of the London Stock Exchange on 29 November 2007.

 

The existing convertible 'C' participating redeemable preference shares were converted to redeemable participating preference shares and were listed on the main market of the London Stock Exchange on 12 December 2007. 

 

The Company made a new issue of redeemable participating preference shares on 29 February 2008.

 

The following table shows the number of shares issued by the Company since inception:

 

                                                             Number of shares                       Share capital

29 February 2008                                  5,444,439                             £54,444

12 December 2007                              21,148,830                           £211,488

25 April 2007                                        3,026,869                             £30,269

30 October 2006                                 30,268,695                           £302,687

                                                            59,888,833                          £598,888

 

On 16 December 2008, the Company joined The Association of Investment Companies ("AIC").

 

During the annual general meeting on 22 April 2010 a continuation vote was held as a result of the discount floor provision being triggered at the end of the Company's 31 October 2009 financial year end.  It was resolved that the Company was to continue as an investment company.  

During the annual general meeting on 22 April 2010 the Directors were granted authority to use the Company's Share Buyback Facility to attempt to close the discount and improve liquidity in the Company's issued share capital by purchasing in the market up to 14.99% of shares in issue. However, because significant share repurchases could take Cazenove Capital's aggregate ownership over the Takeover Code's Mandatory Offer trigger level of 30 percent, the Board applied for and received a waiver of Rule 9 under Rule 37 of the Takeover Code which was granted subject to Shareholder approval.

 

A proposal was put to Shareholders to approve the waiver at the extraordinary general meeting of the Company on 17 June 2010 and this has now been approved.

 

Investment Objective and Policy

The investment objective of the Company is to seek to achieve consistent absolute returns.

 

The Company will seek to achieve its investment objective through a policy of investing in a portfolio of long/short equity funds ("the Underlying Funds"), and will seek to achieve consistent returns with low levels of volatility.

 

The Company is currently invested in five Underlying Funds, each managed by Cazenove Capital Management Limited. The Underlying Funds represent five separate long/short equity strategies, with the flexibility to exploit a wide range of long/short equity investment opportunities and are:

 

·   Cazenove European Equity Absolute Return Fund Limited;

·   Cazenove UK Dynamic Absolute Return Fund Limited;

·   Cazenove UK Equity Absolute Return Fund Limited;

·   Cazenove Leveraged UK Equity Absolute Return Fund Limited; and

·   Cazenove European Alpha Absolute Return Fund Limited.

 

Financial Highlights

31 October 2010

 31 October 2009

Net assets

£68,160,217

£78,447,228

Net assets per participating share

124.55p

130.99p

 

 

 

 

  Management and Administration

Directors                                                                                      Registered Office              

John Hallam (Chairman)                                                                Trafalgar Court                 

Paul Le Page                                                                                Les Banques                    

Geoffrey Marson                                                                          St. Peter Port                   

Andrew Ross                                                                               Guernsey GY1 3QL         

                                                                                                                     

Investment Manager                                                                     Independent Auditor         

Cazenove Capital Management Limited                                         Ernst & Young LLP         

12 Moorgate                                                                                PO Box 9                        

London EC2R 6DA                                                                     Royal Chambers

                                                                                                  St Julian's Avenue

Corporate Brokers                                                                       St. Peter Port                   

J.P. Morgan Securities Ltd                                                            Guernsey GY1 4AF         

125 London Wall                                                                                             

London EC2Y 5AJ                                                                      CISX Listing Sponsor

                                                                                                  Ogier Corporate Finance Limited

Corporate Broker                                                                         Whiteley Chambers

Numis Securities Limited                                                               Don Street

The London Stock Exchange Building                                           St. Helier

10 Paternoster Square                                                                  Jersey JE4 9WG

London EC4M 7LT                                                  

                                                                                                  Legal Adviser (UK)

Legal Adviser (Guernsey)                                                             Dechert LLP

Ogiers                                                                                          160 Queen Victoria Street

Ogier House                                                                                 London EC4V 4QQ            

St. Julian's Avenue                                                                                           

St. Peter Port                                                                               CREST Agent                  

Guernsey GY1 1WA                                                                    Computershare Investor Services     

                                                                                                  (Jersey) Limited                

Administrator, Secretary and Registrar                                          Queensway House           

Northern Trust International Fund                                                 Hilgrove Street

Administration Services (Guernsey) Limited                St. Helier   

Trafalgar Court                                                                             Jersey JE1 1ES

Les Banques                                                                                                                         

St. Peter Port                                                                                Receiving Agent

Guernsey GY1 3QL                                                                     Computershare Investor Services PLC

                                                                                                  The Pavilions                    

Custodian and Principal Bankers                                                   Bridgewater Road

Northern Trust (Guernsey) Limited                                               Bristol BS99 1XZ            

PO Box 859

Trafalgar Court                                                                            

Les Banques                                                                                                                        

St. Peter Port                                                                              

Guernsey GY1 3DA                                                                    

                                                                               

Chairman's Statement and Annual Management Report

 

Cazenove Absolute Equity Limited (the "Company") has had its most challenging year since inception in 2006. At the end of October 2010, the share price stood at 109.5p, compared to 114.75p a year earlier. Over the same period, the net asset value ("NAV") per share fell to 124.55p from 130.99p. The discount ended the year at 12.1%; the Board is taking action to address this discount, as is reported below.

 

All the constituent funds of the Company found the early part of the year problematic and this is covered in the Investment Manager's comment. Happily, we have seen a revival in more recent months. The Company's correlation with the All Share Index remains low, although this is of course less helpful during a period of rising markets. The extended rally in markets was predicated on the belief that, as economies came out of recession, world growth would gather momentum, and there would be a relatively normal upturn. Our Investment Manager remains sceptical of this analysis, believing that after an abnormal downturn, the upturn would also have abnormal features. The defensive bias within our hedge funds that results from this view has continued to prove an impediment to growth in NAV with cyclical shares performing better than the defensives.

 

The positioning was beginning to work in the summer, but the allure of more Quantitative Easing from the Federal Reserve encouraged asset prices higher with high beta equities generally to the fore. Many European hedge funds appear to have given up on shorting with an average net long now in the 60's, speculative positions in gold, oil, platinum, palladium, the Australian dollar and Japanese yen (to name a few) are at or close to record highs and perhaps most interestingly as investors get more bullish, directors' selling in the UK is outstripping buying 5 to 1. The negative correlation of the dollar with commodities and stocks remains at all time highs and we know from past experience that these sorts of correlations tend to break down after they become too stretched. The question is how long this will take.

 

Therefore these high and rising correlations in markets have not caused us to change course. Value is supportive but there are signs of a slowdown in the fourth quarter, so the logical "pair" trade is to favour consumer goods exporters over capital goods. The latter are at all time valuation and profitability highs unlike the former, which also tend to exhibit lower volatility and higher quality earnings stream. This convinces our Investment Manager that this positioning will be proved correct.

 

The Company has performed during the extreme volatility of the last four years. We set out to produce consistent absolute returns with low levels of volatility. Despite a difficult twelve months, the annualised NAV return since launch has been 6.2% and the correlation with the All Share Index has been 0.15. Despite the emergence of a discount, the shares have also out performed the All Share Index's rise of 7.2% since inception with an increase of 9.5%. The NAV has increased by 27.1%.

 

The Board will continue to pursue measures to narrow the discount, the level of which triggered the continuation vote provision at the AGM. The Board is grateful for the support shown by Shareholders and has now embarked on the combination of a marketing campaign and buying in stock. As shareholders will be aware, the Directors have instigated a programme of share repurchases and as at 23 February 2011, the Company had bought in 7,084,804 shares, equivalent to 11.8% of the initial share capital, of which 1,350,000 have been cancelled, so as not to breach the 10% ceiling for shares held in treasury. In order to raise money to effect buying in of shares, there were sales of the underlying funds within the Company, which resulted in a modest re-weighting of the portfolio.

 

We continue to believe that the Company offers a low cost, tax efficient exposure to a stable of proven hedge fund managers that is not readily available to investors. It has been frustrating that the Investment Manager has not produced good returns this year, but they have a proven record of anticipating turning points in markets. They remain convinced that extreme correlations indicate a narrow and dangerous market and being overweight shares uncorrelated to this narrowness will be rewarded.

 

John Hallam

Chairman

 

Investment Manager's Report

 

The last year has been one in which investors have struggled to understand fully the post-recession economic order. In the early part of the period, the positive impetus to activity came from a mix of government help and improvements in the inventory cycle. The result was a continued recovery in world manufacturing output and trade flows. Equity markets performed reasonably well, with the liquidity added through the first round of quantitative easing being an important influence of market psychology. Until the end of the first quarter of 2010, investors remained positively oriented towards cyclical risk.

Moving into the second quarter of 2010, markets were faced first by the realisation that southern Europe and Ireland were in fiscal crisis and then by evidence that the manufacturing recovery was beginning to lose momentum. Worries that countries such as Greece, Portugal and Ireland would no longer be able to finance burgeoning government deficits drove a huge wedge into bond markets, forcing massive increases in yields and financing costs, and necessitating a significant support package being developed by the ECB.

Conversely, during the six-months to the end of the third quarter of 2010, US ten-year yields declined from 4.0% to 2.4%, with similar trends being seen in Germany and the UK. This fall in yields was given additional impetus by rising concerns over the ability of economies to make a successful transition to a more sustainable growth path that relied more on end-demand than inventories and fiscal stimulus. In equity markets, the result was that sectors at the leading edge of the risk trade underperformed as headline indices generally dropped. One interesting consequence of these trends was that, in northern Europe, ten-year bond yields fell below the equity dividend yield. This gave rise to a conundrum that has yet to be fully resolved: while bond markets seem to be discounting an extended period of very low nominal growth in developed economies, equities are continuing to assume a relatively normal recovery remains in prospect.

Our view remains that there is a considerably higher level of economic, fiscal and monetary risk than seems evident in financial market valuations. As the recovery develops, it is likely to become more apparent that the world is facing a two-tier growth profile. Higher growth is likely to be recorded by economies such as Germany (and others in northern Europe) that are less encumbered by public and private-sector debt. The lower tier of growth is likely to be populated by economies such as the US and UK, where restricted credit availability will inhibit the emergence of a normal demand cycle.

Elsewhere, while emerging economies will be at the higher end of the growth scale, it seems likely that they will experience some deceleration in activity as central banks become more focused on domestic inflation. In China, in particular, the central bank is likely to take steps to restrict the strong growth in bank lending that has caused considerable property price inflation. The latter has been the consequence of action taken to circumvent the world economic slowdown through centrally directed capital spending. However, rising property prices threaten to be both economically and socially destabilising.

The authorities in the US seem to us to be taking a severe risk in maintaining exceptionally loose monetary and fiscal policy while simultaneously pursuing further quantitative easing. We do not believe that this will have the desired impact on the real economy and the more likely consequence is that financial assets see prices bid ever higher. Longer term, it seems probably that quantitative easing will prove inflationary, a possibility that is currently being ignored by bond markets. Against this backdrop, we feel more comfortable with assets that can provide protection against inflation. This leaves us more positively oriented towards equities than bonds, and within this stance, we believe it is sensible to maintain heavier weightings in defensive areas of the equity market, and also areas that have the protection of higher yield.

Against the backdrop discussed above, the Company had a difficult year. In large part this reflected our more cautious cyclical-risk positioning within the business-cycle funds. At the same time, however, investors proved more focused on varying sector momentum than on divergent company performance within sectors. The latter began to change in the second half of 2010, as investors became noticeably more discriminating. As a result, both the Cazenove UK Dynamic Absolute Return Fund and the Cazenove European Alpha Absolute Return Fund posted good performance during the final few months of the year. Indeed, each of the funds ended the year on the front foot, helping the Company close the period with its NAV on an upward path.

 

At the end of the year, the investments were allocated as follows:

Fund

Allocation at 31.10.10

Annual performance

Contribution to the Company's NAV


%

%

%

Cazenove UK Equity Absolute Return Fund Limited

14.4

-5.2

-0.9

Cazenove Leveraged UK Equity Absolute Return Fund Limited

16.7

-10.0

-1.4

Cazenove European Equity Absolute Return Fund Limited

28.8

-8.7

-2.7

Cazenove UK Dynamic Absolute Return Fund Limited

30.8

-1.0

-0.2

Cazenove European Alpha Absolute Return Fund Limited

6.8

4.1

0.3

Net current assets

2.5

-

-

 

During the year, we added slightly to the position in the Cazenove Leveraged UK Equity fund and reduced slightly the positions in the other funds. This modest rebalancing of the portfolio was undertaken in order to fund the share buyback programme approved by the Board earlier in the year.  Overall, we have decided to maintain the broad structure of the Company's investments in line with our long term allocations.

Summary of individual fund performance

Broadly speaking, the managers of the UK and European 'business cycle' style funds maintained the view during the year that more defensive areas of the market offered considerably greater value than the early-cycle, higher-risk sectors that had surged in 2009. Another trend that proved detrimental to performance was the negative bias against large cap stocks.

Looking in more detail at underlying fund performance:

Cazenove UK Equity Absolute Return

Average Net Long Position1: +24.9% (beta adjusted2 +5.3%)

Average Gross Investment3: 150.8%

Average 10 day VaR4: 1.75

 

The short position in mining proved most damaging to the fund's performance. Elsewhere, the net short position in IT hardware and software, chemicals and retailers were also costly. The best positive contributions came from longs in automobiles, life insurance and electricity.

Cazenove Leveraged UK Equity Absolute Return Fund

Same characteristics as Cazenove UK Equity Absolute Return, after allowing for the impact of leverage.

Cazenove European Equity Absolute Return Fund

Average Net Long Position1: 19.3% (beta adjusted2 -1.4%)

Average Gross Investment3: 158.5%

Average 10 day VaR4: 1.81

 

Cazenove UK Dynamic Absolute Return Fund

Average Net Long Position1: 41.1% (beta adjusted2 +10.1%)

Average Gross Investment3: 153.8%

Average 10 day VaR4: 2.65

 

As ever the performance of the Dynamic fund reflected as much stock selection as sector orientation; as such, the early part of the year saw some inevitable corrections in positions that had performed well during 2009. Performance during the final months of the year showed a considerable improvement, almost wholly reversing the losses experienced earlier in the year.

 

Cazenove European Alpha Absolute Return Fund

Average Net Long Position1: 9.3% (beta adjusted2 +14.6%)

Average Gross Investment3: 126.7%

Average 10 day VaR4: 2.17

 

Fund returns steadily improved once the market became more discerning and stock selection came to the fore.  European Alpha is similar to Dynamic in that its performance is driven more by stock selection than sector orientation. The main positive contributions to performance came from positions in electronic & electrical equipment, construction, technology hardware chemicals and media.

 

Outlook

Looking into the next financial year, the business cycle funds remain positioned for a reorientation in equity markets away from risk and towards growth-defensives, and there are now signs that this is proving beneficial to performance. At the same time, we expect a greater focus on the differing track records of individual companies to persist, allowing the more alpha-oriented strategies within the Company's portfolio to continue to add value.

 

Cazenove Capital Management Limited

February 2011

 

1Average Net Long Position: Average of long positions minus short positions (positive net benefits from rising market and vice versa)

2Beta Adjusted: Average Net Long adjusted for the sensitivity of both the long and short positions to the market

3Average Gross Investment: Average of long plus short positions

4VaR (Value at Risk): Statistical measure of the most one would expect to lose over a 10 day holding period 95% of the time based on historic volatility

 

Board Members


Directors of the Company

The Directors are responsible for the determination of the Company's investment objectives and policy and have overall responsibility for the Company's activities. The Directors bring a range of expertise in the hedge fund and other financial sectors and have considerable experience of supervising funds with similar corporate structures to that of the Company.

 

The Directors of the Company, all of whom are non-executive, are listed below:

 

John Hallam (Chairman), resident in Guernsey, is a Fellow of the Institute of Chartered Accountants in England and Wales and qualified as an accountant in 1971. He is a former partner of PricewaterhouseCoopers having retired in 1999 after 27 years with the firm both in Guernsey and in other countries. He is currently chairman of Dexion Absolute Limited and Partners Group Global Opportunities Ltd as well as being a director of a number of other financial services companies, some of which are listed on the London Stock Exchange. He served for many years as a member of the Guernsey Financial Services Commission from which he retired in 2006 having been its Chairman for the previous three years.

 

Paul Le Page is a Senior Vice President of Financial Risk Management ("FRM") and is a director of a number of FRM Hedge Fund products; he has extensive knowledge of, and experience in the fund management and hedge fund industry. Prior to joining FRM he was an Associate Director at Collins Stewart Asset Management from January 1999 to July 2005, where he was responsible for managing the firm's fund research team, reviewing hedge fund managers and managing hedge fund portfolios. He joined Collins Stewart in January 1999 after a 12 year career in industrial research and development, latterly as the Research and Development Director for Dynex Technologies (Guernsey) Limited until 1998, where the development of a world leading instrumentation family led to the award of a grant which he used to fund an MBA from Heriot-Watt University in 1999. He graduated in Electrical & Electronic Engineering from University College London in 1987.

 

Geoffrey Marson is Managing Director of Odey Wealth Management (C.I.) Limited. Prior to that, he was Director, Head of Investment at Credit Suisse (Guernsey) Limited, where he was in charge of Portfolio Management with responsibility for asset allocation and investment strategy. Mr Marson started his banking career in Frankfurt working for Deutsche Bank. In 1984, he joined Midland Bank International (subsequently Midland Montagu) where he spent seven years working mainly in London with periods of secondment in Sydney and Paris. After leaving Midland, he joined Nikko Securities and subsequently, Union Discount, where he worked in the financial futures market in London. In 1993, he moved to Guernsey to work in private banking with Credit Suisse (Guernsey) Limited. Mr Marson is an Associate of the Chartered Institute of Bankers and in 1995, qualified as a Fellow of the Securities Institute. He graduated in Economics with Honours from the University of York in 1984.

 

Andrew Ross joined Cazenove in 2001 and is Chief Executive of Cazenove Capital Management Limited, the Investment Manager. He was previously Chief Executive of HSBC Asset Management (Europe) Limited between 1998 and 2001. Prior to that Mr Ross was Managing Director of James Capel Investment Management between 1997 and 1998 and was an investment manager at James Capel Investment Management between 1985 and 1997. He is a member of the FSA Practitioners Panel and Deputy Chairman of APCIMS.

 

Save for Mr Ross, all Directors are independent of the Investment Manager.

 

Directors' Report

 

The Directors present their annual report and audited financial statements for the year ended 31 October 2010, which have been properly prepared in accordance with The Companies (Guernsey) Law, 2008.

 

Principal Activity

Cazenove Absolute Equity Limited ('the Company') is a Guernsey registered closed-ended investment company listed on the main market of the London Stock Exchange (LSE) and on the Channel Island Stock Exchange (CISX). The Company commenced business on 20 October 2006 and issued 30,268,695 redeemable participating preference shares on 30 October 2006. A second issue of 3,026,869 redeemable participating preference shares was made on 25 April 2007. A further C share issue was made on 11 September 2007 which were converted to 21,148,830 redeemable participating preference shares and listed on the main market of the London Stock Exchange on 29 November 2007. On 29 February 2008, the Company made an additional issue of 5,444,439 participating preference shares. Subsequent to 31 October 2010, 1,350,000 of the total shares issued were cancelled.

 

The Company joined The Association of Investment Companies ("AIC") on 16 December 2008.

 

Life of the Company

The Company has been incorporated with an unlimited life, but in accordance with the Articles of Association, the Directors are obliged to propose a continuation vote at the subsequent annual general meeting to be held after the Company's fifth anniversary of incorporation and every five years after.

 

Going Concern

In the opinion of the Directors the Company, in the normal course of business, is able to meet its liabilities as they fall due because it has adequate cash resources and its investments are sufficiently liquid. Consequently the Company has sufficient financial resources to continue in operational existence for at least the next 12 months.

 

As disclosed in note 1 to the financial statements, the Company's shares have, for the last 12 months, traded on average at a discount greater than 5% of its net asset value. In accordance with the Company's Articles, the Board is therefore obliged to hold a continuation vote at the next annual general meeting. If the continuation vote does not receive more than 50% of votes in favour, the Directors will be required to submit proposals to Shareholders to wind-up, reorganise or reconstruct the Company. The outcome of the continuation vote represents a material uncertainty which may cast significant doubt as to the likelihood of the Company continuing as a going concern. The Directors however are of the opinion that Shareholders will react positively to their recommendation to vote in favour of the continuation of the Company and that it is therefore appropriate for the Financial Statements to be prepared on a going concern basis.

 

Results

The results for the year are set out in the Statement of Comprehensive Income. The Directors do not propose an income distribution for the year (31 October 2009: nil).

 

Performance Distribution Facility

The Company has been established with a feature which, subject to a Shareholder making an election and at the Directors' discretion, may allow a Shareholder to benefit from an annual capital distribution representing, as closely as possible, one-third of the increase in the net asset value per share during the relevant financial year. If it is considered to be in the interests of Shareholders, distributions would be made by way of a partial redemption of each Shareholder's holding of shares. No such capital distribution is proposed for the current year, given the decrease in the Company's NAV.

 

Directors

Directors during the year and as at the date of this report are set out on the Management and Administration page.


Directors' Interests

As at 31 October 2010, the Directors of the Company held the following shares in the Company:

                                                                                                        

John Hallam                                                    20,000 redeemable participating preference shares

Andrew Ross                                                  66,000 redeemable participating preference shares

 

Statement of Directors' Responsibilities

The Directors are responsible for preparing the financial statements for the year ended 31 October 2010 which give a true and fair view of the state of affairs of the Company as at the end of the year and of the returns achieved by the Company for that year. In preparing those financial statements the Directors are required to:

 

- select suitable accounting policies and then apply them consistently;

- make judgments and estimates that are reasonable and prudent;

- state whether applicable accounting standards have been followed, and

- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

 

The Directors' 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 and International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors' are responsible for the maintenance and integrity of the corporate and financial information included on the Cazenove Absolute Equity Limited website. Legislation in Guernsey governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.

 

So far as each of the Directors is aware, there is no relevant audit information of which the Company's auditor is unaware, and each has taken all the steps he ought to have taken as a Director to make himself aware of any relevant information and to establish that the Company's auditor is aware of that information.

 

Corporate Governance

As a Guernsey-incorporated company, the Company is eligible for exemption from the requirements of the Combined Code issued by the UK Listing Authority. The Directors, however, attach a high degree of importance to the maintenance of high standards of corporate governance and have therefore adopted where possible, the principles of the Combined Code and the Turnbull guidance in so far as deemed applicable to the Company.

The Company also complies with the principles and recommendations of the AIC Code of Corporate Governance ("AIC Code") by reference to the AIC Corporate Governance Guide for Investment Companies ("AIC Guide").  The AIC Code, as explained by the AIC Guide, addresses all the principles set out in Section 1 of the Combined Code.

The Company has complied with the recommendations of the AIC Code and the relevant provisions of the Combined Code, except as disclosed in the following paragraphs below.

As a result of changes to the UK Listing Regime, with effect from 1 November 2010, the Company must comply with the requirements of the UK Corporate Governance Code. 

 

Composition and Independence of the Board

The Board currently consists of four Directors, all of whom are independent except for Andrew Ross who is the chief executive of the Investment Manager. John Hallam is the Chairman of the Board.

 

The Company has no employees and there is no requirement for a chief executive.

 

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 areas where the Board has delegated responsibility to them.

 

Transactions entered into with these parties are disclosed in note 5 of these financial statements.

 

The Company holds a minimum of 4 board meetings per year to discuss general management, structure, finance, corporate governance, marketing, risk management, compliance, asset allocation, contracts and performance. The quarterly board meetings are the principal source of regular information for the Board enabling it to determine policy and to monitor performance, compliance and controls but these meetings are supplemented by communication and discussions through the year. A representative from the Investment Manager and Administrator attends each board meeting either in person or by telephone thus enabling the Board to fully discuss and review the Company's operation and performance. Each Director has direct access to the Investment Manager and Corporate Secretary and may at the expense of the Company seek independent professional advice on any matter.

 

Attendance at the regular board and audit committee meetings during the year was as follows:      

                                                                                                                                                                                  



Board meetings

Audit committee



Quarterly

Ad-hoc

meetings

Number of meetings held


4

7

3

John Hallam


4

6

3

Paul Le Page


4

7

3

Geoffrey Marson


4

6

2

Andrew Ross


4

0

not a member

 

 

 

 

 

 

 

There are no service contracts between any of the Directors and the Company. Each Director, other than Mr. Ross, serves on the Management Engagement Committee and the Audit Committee.  As all of the Directors are non-executive and independent a separate Remuneration Committee and Nomination Committee have not been appointed.

 

The Management Engagement Committee is responsible for the review of the terms of the Investment Management Agreement between the Company and the Investment Manager, and to ensure that the terms are competitive, fair and reasonable for the shareholders. This includes the review of performance of the Investment Manager relative to the agreed benchmark, performance of key service providers, the level of effectiveness of any marketing support provided and any other topics referred to it by the Board. Geoffrey Marson is the Chairman of the Management Engagement Committee.

 

The Audit Committee is responsible for the review of the annual and the interim reports, the nature and scope of the external audit and the findings therefrom, and the terms of appointment of the Auditors of the Company, including their remuneration and the provision of any non-audit services by them. The audit committee may meet representatives of the Investment Manager and its compliance officer who report as to the proper conduct of business in accordance with the regulatory environment in which both the Company and the Investment Manager operate. The Company's Auditors may also attend this committee at the committee's request and report on their work procedures and their findings in relation to the Company's statutory audit. Paul le Page is the Chairman of the Audit Committee.

 

Remuneration

Directors' remuneration is considered on an annual basis. The Directors, other than the Chairman, are entitled to remuneration for their services of £17,500 (2009: £15,000) per annum, Mr. Ross has waived his right to a fee. The Chairman is entitled to receive £23,500 (2009: £20,000) per annum.

 

Directors' fees for the year ended 31 October 2010 were as follows:



2010

2009



£

£

John Hallam


23,500

20,000

Paul Le Page


17,500

15,000

Geoffrey Marson


17,500

15,000

Andrew Ross


-

-

 

No Directors have been paid additional remuneration outside their normal Directors' fees.

 

Directors' and Officers' liability insurance cover is maintained by the Company on behalf of the Directors.

 

Retirement by Rotation

At each annual general meeting a Director, who is subject to retirement by rotation, shall retire from office if they:

 

(i)         were last appointed or reappointed three years or more prior to the meeting;

(ii)        were last appointed or reappointed at the third immediately preceding annual general meeting; or

(iii)       at the time of the meeting will have served more than eight years as a non executive Director of the Company.

 

As Andrew Ross is an employee of Cazenove Capital Management he is deemed to be a non independent Director and therefore stands for re-election at each annual general meeting.

 

Internal Control

The Board is responsible for establishing and maintaining the Company's system of internal controls and for maintaining and reviewing its effectiveness. The system of internal controls is designed to manage rather than eliminate the risk of failure to achieve specific business objectives and as such can only provide reasonable, but not absolute assurance against material misstatement or loss. These controls aim to ensure that assets of the Company are safeguarded, proper accounting records are maintained and the financial information for publication is reliable.

 

The Board considers on an ongoing basis the process for identifying, evaluating and managing any significant risks faced by the Company. The process includes reviewing reports from the Company Secretary on risk control and compliance, in conjunction with the Investment Manager's regular reports which covers investment performance. 

 

The Board has contractually delegated to external parties various functions as listed below. The duties of investment management, administration and custody are segregated. Each of the contracts entered into with the parties was entered into after full and proper consideration by the Board of the quality and cost of services offered, including the control systems in operation as far as they relate to the affairs of the Company.

 

§ Investment Management is provided by Cazenove Capital Management Limited

§ Brokerage services are provided by JP Morgan Securities Ltd and Numis Securities Limited. Sponsorship services are provided by Ogier Corporate Finance Limited

§ Administration and company secretarial duties are performed by Northern Trust International Fund Administration Services (Guernsey) Limited, a company licensed and regulated by the Guernsey Financial Services Commission

§ Custody of assets is undertaken by Northern Trust (Guernsey) Limited, a company authorised and regulated by the Guernsey Financial Services Commission

§ CREST agency functions are performed by Computershare Investor Services (Jersey) Limited, a company licensed and regulated by the Jersey Financial Services Commission

 

The Board reviews regularly the services provided by these companies and does not intend to make any changes to the current arrangements.

 

As 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 and Administrator, which have their own internal audit and risk assessment functions.

 

Auditor

A resolution for the re-appointment of Ernst & Young LLP will be proposed at the next annual general meeting.

Meeting with Shareholders

All Shareholders have the opportunity to attend and vote at the annual general meeting during which the Board and Investment Managers will be available to discuss issues affecting the Company.

 

Significant Shareholdings

Shareholders with holdings of more than 3% of the issued redeemable participating preference shares of the Company at 15 February 2011 were as follows:

 


Number of shares

Percentage of share capital

Chase Nominees Limited*

           17,152,989

32.48%

Pershing Nominees Limited

              4,967,876

9.41%

JP Morgan Securities Ltd

              4,924,105

9.33%

Vidacos Nominees Limited

              4,249,265

8.05%

HSBC Global Custody Nominess (UK) Limited

              3,233,622

6.12%

The Bank of New York (Nominees) Limited)

              2,970,614

5.63%

Nortrust Nominees Limited

              2,524,030

4.78%

Goodbody Stockbrokers Nominees Limited

              2,377,151

4.50%

Rathbone Nominees Limited

              1,657,155

3.14%

Hargreaves Lansdown (Nominees)

              1,636,214

3.10%

 

*15,951,391 shares held for Cazenove Capital Management

 

John Hallam                                                                  Paul Le Page

23 February 2011

 

Responsibility Statement

 

We confirm that to the best of our knowledge:

 

 (a)       the annual financial report includes information detailed in the Chairman's Statement and Annual Management Report, Investment Manager's Report and Notes to the Financial Statements, which include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risk and uncertainties that the Company faces as required by DTR 4.1.8 and DTR 4.1.11; and

 (b)       the financial statements for the year ended 31 October 2010, have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company.

 

By order of the Board,

         

John Hallam                                                                  Paul Le Page

 23 February 2011

 

Independent Auditors Report to the members of Cazenove Absolute Equity Limited

 

We have audited the Company's financial statements for the year ended 31 October 2010 which comprise the Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity, Statement of Cash Flows, and the related notes 1 to 15.  These financial statements have been prepared under the accounting policies set out therein.

 

This report is made solely to the Company's members, as a body, in accordance with Section 262 of the Companies (Guernsey) Law, 2008. 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 auditors' 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 Auditors

As described in the Statement of Directors' Responsibilities the Company's directors are responsible for the preparation of the financial statements in accordance with applicable Guernsey Law and International Financial Reporting Standards.

 

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board.

 

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies (Guernsey) Law, 2008.  We also report to you if, in our opinion, the Company has not kept proper accounting records, if the financial statements are not in agreement with the accounting records or if we have not received all the information and explanations we require for our audit.

 

We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises the Summary Information, Management and Administration, Chairman's Statement and Annual Management Report, Investment Manager's Report, Board Members, Directors' Report, Responsibility Statement, Portfolio Statement and Significant Portfolio Movements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

 

Basis of Audit Opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland).  An audit includes examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements.  It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed.

 

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

 

Opinion

In our opinion the financial statements give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union, of the state of affairs of the Company as at 31 October 2010 and of its net loss for the year then ended and have been properly prepared in accordance with the Companies (Guernsey) Law, 2008.

 

Emphasis of Matter - Going Concern

In forming our opinion on the financial statements, which is not qualified, we have considered the adequacy of the disclosure made in note 1 to the financial statements concerning the Company's ability to continue as a going concern. The matters explained in note 1 to the financial statements indicate the existence of a material uncertainty which may cast significant doubt about the likelihood of the Company continuing as a going concern. The financial statements do not include the adjustments that would result if the Company were not to continue as a going concern.

 

Michael Bane

For and on behalf of

Ernst & Young LLP

Guernsey

24 February 2011

 

Notes: The maintenance and integrity of the Cazenove Absolute Equity Limited web site is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial information since it was initially presented on the web site.

 

Legislation in Guernsey governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.

 

Portfolio Statement

As at 31 October 2010



 31.10.10

31.10.09



Fair value

  % of net 

% of net


Holding

 

 

 

£

   assets

Assets

 

Unlisted





Cazenove European Equity Absolute Return Fund Limited

12,364

19,643,888

28.82

29.93

Cazenove UK Dynamic Absolute Return Fund Limited

10,863

20,997,871

30.80

32.52

Cazenove UK Equity Absolute Return Fund Limited

6,526

9,805,737

14.39

16.90

Cazenove Leveraged UK Equity Absolute Return Fund Limited

8,522

11,340,433

16.64

14.39

Cazenove European Alpha Absolute Return Fund Limited

3,225

4,642,982

6.81

6.01

Total investments


66,430,911

97.46

99.75

Net current assets


1,731,106

2.54

0.25

Net assets


 68,162,017

100.00

100.00

 

Significant Portfolio Movements¹

For the year ended 31 October 2010



Cost

Holding

Purchases

£

      891

Cazenove Leveraged UK Equity Absolute Return Fund Limited

1,150,000





Total purchase costs

 1,150,000






Proceeds

Holding

Sales

£

    2,211

Cazenove UK Dynamic Absolute Return Fund Limited

3,839,134

    1,840

Cazenove UK Equity Absolute Return Fund Limited

2,754,453

    1,120

Cazenove European Equity Absolute Return Fund Limited

1,828,957

       185

Cazenove European Alpha Absolute Return Fund Limited

253,315





Total sale proceeds

8,675,859

 

¹Significant portfolio movements disclose all the purchases and sales for the year.

 

Statement of Comprehensive Income

For the year ended 31 October 2010



01.11.09 to


01.11.08 to



31.10.10


31.10.09


Notes

£


£

Investment income





Bank interest income


-


631

Net (losses)/gains on financial assets at fair value

through profit and loss

4

(4,294,387)


5,250,855

Total investment income


(4,294,387)


5,251,486






Expenses





Directors' fees

5(a)

(58,500)


(50,000)

Administration fees

5(c)

(36,000)


(36,000)

Investment management fees

5(b)

(25,000)


(25,000)

Custodian fees

5(d)

(14,000)


(14,000)

Brokerage fees

5(e)

(9,358)


-

Audit fees


(16,125)


(10,960)

Continuation vote and whitewash fees

1(c)

(180,564)


-

Other expenses


(87,395)


(35,675)

Total operating expenses


(426,942)


(171,635)






Net (loss)/profit


(4,721,329)


5,079,851






Basic and diluted (loss)/earnings per participating share

7

(7.96p)


8.48p






Earnings per founder share


0.00p


0.00p

 

All of the Company's income and expenses are included in the net (loss)/profit and therefore the (loss)/profit for the year is also the Company's total comprehensive income, as defined by IAS 1 (Revised).

 

All items in the above statement derive from continuing operations.

 

Statement of Financial Position

As at 31 October 2010



31.10.10


31.10.09


Notes

£


£

ASSETS





Non-current assets





Financial assets at fair value through profit or loss

4

66,430,911


78,251,157

Current assets





Cash and cash equivalents

8

1,758,886


227,131

Prepayments


6,821


3,674

Total assets


68,196,618


78,481,962






LIABILITIES





Current liability





Payables

9

36,401


34,734

Total liability


36,401


34,734






EQUITY





Share capital account

10

6,664,756


6,664,756

Treasury shares

1(n),10

(5,565,682)


-

Reserves

11

67,061,143


71,782,472

Total equity


68,160,217


78,447,228






Total equity and liability

68,196,618


78,481,962






Number of participating shares in issue

10

54,724,029


59,888,833






Net assets attributable to holders of participating shares (per share)


124.55p


130.99p






Founder share capital (per share)

100.00p  


100.00p

 

The financial statements were approved on 23 February 2011 and signed on behalf of the Board of Directors by:

                                                          

 

John Hallam                                                                            Paul Le Page

 

 


Statement of Changes in Equity

 

For the year ended 31 October 2010


Notes

Founder share capital

Share capital account

Reserves




Treasury shares

Total equity



£

£ 

£

£

£








Balance as at 1 November 2008


2

6,664,754

66,702,621

-

73,367,377

Net profit


-

-

5,079,851

-

5,079,851

Balance as at 31 October 2009

2

6,664,754

71,782,472

-

78,447,228

 

Balance as at 1 November 2009


2

6,664,754

71,782,472

-

78,447,228

Treasury shares

10

-

-

-

(5,565,682)

(5,565,682)

Net loss


-

-

(4,721,329)

-

(4,721,329)

Balance as at 31 October 2010

2

6,664,754

67,061,143

(5,565,682)

68,160,217

 

 

 

 


Statement of Cash Flows

For the year ended 31 October 2010


01.11.09 to


01.11.08 to


31.10.10


31.10.09


£


£

Operating activities




Interest (paid)/received

(107)


1,368

Operating expenses paid

(428,315)


(215,003)

Cash outflows from operating activities

(428,422)


(213,635)





Investing activities




Purchase of financial assets at fair value through profit or loss

(1,150,000)


-

Sale of financial assets at fair value through profit or loss

8,675,859


250,000

Cash inflows from investing activities

7,525,859


250,000





Financing activities




Repurchase of shares into treasury

(5,565,682)


-

Cash outflows from financing activities

(5,565,682)


-





Increase in net cash and cash equivalents

1,531,755


36,365





Net cash and cash equivalents at beginning of the year

227,131


190,766





Net cash and cash equivalents at end of the year

1,758,886


227,131

 

Notes the Financial Statements

 

1.  SIGNIFICANT ACCOUNTING POLICIES

The following accounting policies have been applied consistently in dealing with items which are considered to be material in relation to the Company's financial statements:

 

(a) Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, the Listing Rules of the London Stock Exchange and applicable legal and regulatory requirements of Guernsey Law. They reflect the following policies:

 

(b) Basis of preparation

The financial statements are presented in Sterling which is also the functional currency of the Company. The financial statements have been prepared on a historical cost basis except for financial assets and financial liabilities at fair value through profit or loss which are measured at fair value.

 

(c) Going concern

In the opinion of the Directors, the Company, in the normal course of business, is able to meet its liabilities as they fall due because it has adequate cash resources and its investments are sufficiently liquid. Consequently the Company has sufficient financial resources to continue in operational existence for at least the next 12 months.

As a listed closed-ended Company, there is always the possibility that the Company's issued shares may trade at a discount to their net asset values. In order to manage this discount risk, the Company's Articles incorporate discount management provisions which require a continuation vote to be proposed if, in the 12 months preceding the Company's financial year end, the participating shares of the Company have traded on average at a discount in excess of 5% of the net asset value. If the resolution for the continuation of the Company is not passed, the Directors are required to formulate proposals to be put to Shareholders within three months of such resolution being defeated to wind-up, reorganise or reconstruct the Company.

 

The Company's 12 month discount floor provision was triggered at the end of the Company's financial year 31 October 2009 and accordingly the Directors put forward a continuation vote at the annual general meeting of the Company on 22 April 2010. It was resolved that the Company was to continue as an investment company.

 

At 31 October 2010, the Company's 12 month discount floor provision was again triggered. The Directors will again put forward a continuation vote at the next annual general meeting of the Company. The outcome of the continuation vote represents a material uncertainty which may cast significant doubt as to the likelihood of the Company continuing as a going concern. It is the opinion of the Directors that Shareholders will react positively to their recommendation to vote in favour of the continuation of the Company and that it is therefore appropriate for the financial statements to be prepared on a going concern basis. If the resolution is not passed for the continuation of the Company it might have been appropriate for these financial statements to be prepared on a break up basis. No adjustments would be required to the carrying amounts of the investments or other net assets, but a provision would be required for the costs of winding up the Company. The financial statements do not include any adjustments that might have been necessary if the financial statements had been prepared on a break up basis.

 

 (d) Changes in accounting policies and disclosures

The accounting policies adopted are consistent with those of the previous financial year with the exception of the following:

 

·  IFRS 8 Operating Segments

·  International Accounting Standards (IAS) 1 (Revised 2007) Presentation of Financial Statements

·  Amendments to IFRS 7 Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments

·  Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial   Statements - Puttable Financial Instruments and Obligations Arising on Liquidation

 

The principal effect of these changes is as follows:

 

IFRS 8 Operating Segments

This standard is effective for accounting periods beginning on or after 1 January 2009. IFRS 8 replaces IAS 14, "Segment Reporting", and aligns segment reporting with the requirements of the US standard SFAS 131, "Disclosures about segments of an enterprise and related information". The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The segment information is therefore reported in a manner that is more consistent with the internal reporting provided to the chief operating decision-maker.

 

The Board identified the operating segment to be the same business segment previously identified under IAS 14. Additional information as required by IFRS 8 is presented in note 6.

 

IAS 1 (revised 2007) Presentation of Financial Statements

The standard replaces IAS 1 Presentation of Financial Statements (revised in 2003) as amended in 2005. The revised IAS 1 Presentation of Financial Statements was issued in September 2007 and is effective for accounting periods beginning on or after 1 January 2009 with early application permitted.

 

The standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with all non-owner changes in equity presented as a single line. In addition, the standard introduces the statement of comprehensive income which presents all items of income and expense recognised in profit or loss, together with all other items of recognised income and expense, either in one single statement, or in two linked statements. The Company chose to present one single statement of comprehensive income.

 

Amendments to IFRS 7 Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments

The amendments to IFRS 7 were issued in March 2009 and are effective for annual periods beginning on or after 1 January 2009, with early adoption permitted. The Company has adopted these amendments with effect from 1 January 2009.

 

Amendments to IFRS 7 Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments

The amendments to IFRS 7 require fair value measurements to be disclosed by the source of inputs using a three-level hierarchy:

 

-   Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).

-   Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2).

-   Inputs for the asset or liability that are not based on observable market data (unobservable inputs)  (Level 3).

 

In addition, the amendments revise the specified minimum liquidity risk disclosures including: the contractual maturity of non derivative and derivative financial liabilities and a description of how this is managed.

 

Adoption of this standard resulted in additional disclosures in the financial statements. Comparative information is not required in the first year of application.

 

Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements - Puttable Financial Instruments and Obligations arising on Liquidation

Amendments to IAS 32 and IAS 1 were issued in February 2008 and are effective for annual periods beginning on or after 1 January 2009 with early application permitted. The amendment to IAS 32 requires certain puttable financial instruments and obligations arising on liquidation to be classified as equity if certain criteria are met.

 

The Company's redeemable shares have had all the features and have met all the conditions for classification as equity instruments during the year.

 

The Company continues to prepare a Statement of Changes in Equity and presents the share capital as equity on the Statement of Financial Position.

 

The following standards, amendments and interpretations to published statements are effective on 1 January 2009 but had no impact on the financial position or performance of the Company:

 

-    Amendment to IFRS 2 Share-based Payments - Vesting Conditions and Cancellations

-    Amendment to IAS 23 Borrowing Costs

-    IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement

-    IFRIC 13 Customer Loyalty Programmes

-    IFRIC 15  Agreements for the Construction of Real Estate

-    IFRIC 16 Hedges of a Net Investment in Foreign Operation

-    IFRIC 18 Transfer of Assets from Customers

 

 (e) Standards, interpretations and amendments to published statements not yet effective

At the date of authorisation of these financial statements, the following standards, interpretations and amendments to existing standards which have not been applied to these financial statements were issued but not yet effective: 

 

-    IFRS 3 Business Combinations (Revised) and IAS 27 (Revised 2008) Consolidated and Separate Financial Statements (Amended) effective 1 January 2009 including consequential amendments to IFRS 7, IAS 21, IAS 28, IAS 31 and IAS 39

-    Amendment to IAS 39 Financial Instruments: Recognition and Measurement - Eligible Hedged Items

-    IFRS 1 First Time Adoption of International Financial Reporting Standards - Additional Exemptions for First-time Adopters

-    IFRS 2 Share-based Payments - Group cash-settled share-based payment transactions

-    IFRIC Interpretation 17 Distributions of Non-Cash Assets to Owners

-    Amendment to IAS 24 Related Party Disclosures

-    IAS 32 Financial Instruments: Presentation - Classification of Rights Issues

-    IFRS 9 Financial Instruments - Classification and Measurement

-    Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement

-    IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

 

'Improvements to IFRS' were issued in May 2008, April 2009 and May 2010 respectively and contain numerous amendments to IFRS, which the IASB consider non-urgent but necessary. 'Improvements to IFRS' comprise amendments that result in accounting changes for presentation, recognition or measurement purposes as well as terminology or editorial amendments related to a variety of individual standards. While no formal assessment has been made, adoption of these standards, interpretations and amendment is not expected to have a significant impact on the financial statements.

 

(f) Financial instruments

The carrying amounts of investments, receivables, cash and cash equivalents and payables approximate their fair values.

 

Disclosures about financial instruments to which the Company is a party are provided in notes 4 and 12.

 

(g) Financial assets at fair value through profit or loss ('investments')

All investments are classified as 'at fair value through profit or loss'. Financial assets are classified as at fair value through profit or loss when the financial asset is either held for trading or is designated as at fair value through profit or loss.

 

The Company's investments consist of shares in funds which may be bought and sold at regular intervals at dealing prices based on their net asset values. Investments are designated as at fair value through profit or loss at the time of purchase because they are managed and their performance is evaluated on a fair value basis in accordance with the Company's investment strategy as documented in the Prospectus, and information thereon is evaluated by the management of the Company on a fair value basis. Subsequent to initial recognition, these investments are valued at fair value, being the respective dealing prices.

 

Differences between the fair values of investments and their costs at the statement of financial position date result in unrealised gains and losses which are recognised in the Statement of Comprehensive Income.

 

Realised gains and losses on investments sold, calculated by reference to the sale proceeds and the average cost attributable to the proportion of the investment sold, are shown in note 4 and recognised in the Statement of Comprehensive Income in the period in which they arise.

 

Investments are recognised in the Company's Statement of Financial Position upon purchase and derecognised when sold. Purchases and sales of investments are accounted for on a trade date basis, which is the date the Company commits to purchase or sell the investment.

 

The investments made by the Company are not necessarily regulated by the rules of any stock exchange or investment exchange or other regulatory body or authority.  In valuing the investments, the Administrator relies on the net asset value of the Underlying Funds as supplied by the various managers or administrators. The Directors believe that such net asset values represent fair value because subscriptions and redemptions in the Underlying Funds occur at these prices at the statement of financial position date.

 

(h) Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial statements in conformity with IFRS requires the use of judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Where such judgements are made they are discussed below.

 

Valuation of investments in unquoted securities

For the purposes of calculation of the net asset value and the net asset value per share, investments in the Underlying Funds are valued at the values provided by their administrators. The administrators provide prices as at each month end. As at 31 October 2010, investments presented in the Statement of Financial Position amounting to £66,430,911 (31 October 2009: £78,251,157) were valued in this manner.

 

The Directors monitor this approach to valuation to ensure that it represents fair value for the portfolio and is in compliance with IFRS.

 

(i) Foreign currency translation

Transactions in currencies other than the functional currency are recorded using the exchange rate prevailing at the transaction date. Foreign exchange gains and losses resulting from the settlement of such transactions and those from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income.

 

(j) Income

All income is accounted for on an accruals basis and is recognised in the Statement of Comprehensive Income.

 

(k) Expenses

All expenses are recognised in the Statement of Comprehensive Income on an accruals basis.

 

(l) Cash and cash equivalents

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

 

(m) Share issue costs

Share issue costs incurred in the issue of participating shares are charged against equity and deducted from the share capital account.

 

(n) Treasury shares

Treasury shares are the Company's own equity instruments which are acquired and deducted from equity and accounted for at amounts equal to the consideration paid, including any directly attributable incremental costs. The treasury shares will subsequently be cancelled or reissued to investors. No gain or loss is recognised in the Statement of Comprehensive Income on the purchase, sale, issuance or cancellation of the Company's own equity instruments.

 

2. TAXATION

The Company is exempt from taxation in Guernsey under the provisions of The Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and has paid an annual exemption fee of £600.

 

3. DISTRIBUTIONS TO PARTICIPATING SHAREHOLDERS

The Directors do not expect income (net of expenses) to be significant and do not currently expect to declare any dividends. In the event that net income is significant, the Directors may consider the distribution of net income in the form of dividends. To the extent that any dividends are paid, they will be paid in accordance with any applicable Guernsey laws and the regulations of the UK listing authority.

 

The Company has been established with a feature which, subject to a Shareholder making an election and at the Directors' discretion, may allow a Shareholder to benefit from an annual capital distribution representing, as closely as possible, one-third of the increase in the net asset value per share during the relevant financial year. If it is considered to be in the interests of Shareholders, distributions would be made by way of a partial redemption of each Shareholder's holding of shares. No such capital distribution is proposed for the current year, given the decrease in the Company's NAV.

 

4. FINANCIAL INSTRUMENTS

The following table analyses the carrying amounts of the financial assets and financial liabilities by category as defined in IAS 39 and by statement of financial position heading.

 


Designated as fair value through profit or loss


Other financial instruments


Total


£


£


£

31 October 2010






Financial assets






Financial assets at fair value

  through profit or loss

66,430,911


-


66,430,911

Cash and cash equivalents

-


1,758,886


1,758,886


66,430,911


1,758,886


68,189,797

Financial liabilities






Payables

-


36,401


36,401


-


36,401


36,401







 

31 October 2009






Financial assets






Financial assets at fair value

  through profit or loss

78,251,157


-


78,251,157

Cash and cash equivalents

-


227,131


227,131


78,251,157


227,131


78,478,288

Financial liabilities






Payables

-


34,734


34,734


-


34,734


34,734

 

The movement in cost and fair value of financial assets at fair value through profit or loss is shown below: 


01.11.09 to

01.11.08 to


31.10.10


31.10.09


£

£

Cost of investments



Balance at 1 November

61,672,071

61,843,000

Purchases at cost

1,150,000

 -

Sales at cost

(8,675,859)

(250,000)

Realised gain on sales

1,471,202

79,071

Balance at 31 October

55,617,414

61,672,071

Unrealised gain on revaluation



Balance at 1 November

16,579,086

11,407,302

Movement in unrealized gains

(5,765,589)

5,171,784

Balance at 31 October

10,813,497

16,579,086





Fair value

66,430,911

78,251,157





 

5. RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operating decisions.

 

(a)  Directors

The Directors are responsible for the determination of the investment policy of the Company and have overall responsibility for the Company's activities.

 

The Directors, other than the Chairman, were entitled to remuneration for their services of £17,500 per annum (£15,000 until 31 October 2009). Mr Ross has waived his right to a fee. The Chairman was entitled to receive £23,500 per annum (£20,000 until 31 October 2009).

 

During the year ended 31 October 2010, Directors' fees of £58,500 (31 October 2009: £50,000) were charged to the Company and £4,875 (31 October 2009: £4,167) was payable at the year end.

 

All Directors are non-executive. Mr Ross is a Director and the Chief Executive of Cazenove Capital Management Limited, the Investment Manager.

 

As at 31 October 2010, the Directors held the following interests either directly or beneficially:

 

Mr Hallam        - 20,000 redeemable participating preference shares.                           

Mr Ross           - 66,000 redeemable participating preference shares.

 

(b) Investment Management

The Company's Investment Manager is Cazenove Capital Management Limited ("the Investment Manager"). The Investment Manager is entitled to an annual management fee, payable monthly in arrears, of £25,000 (31 October 2009: £25,000). The Investment Manager is also entitled to reimbursement of certain expenses incurred by it in connection with its duties.  During the year ended 31 October 2010 investment management fees of £25,000 (31 October 2009: £25,000) were charged to the Company and £2,123 (31 October 2009: £4,230) remained payable at the year end.

 

The Underlying Funds pay the Investment Manager a periodic management fee in arrears at rates ranging from 1.25% to 1.75% per annum of the net asset value. Total management fees charged and payable by the Underlying Funds to Cazenove Capital Management Limited were as follows:


01.11.09 to

01.11.08 to

Charged during the year

31.10.10

31.10.09




European Equity Fund

€7,145,701

€8,126,750

UK Dynamic Fund

£2,200,991

£2,445,034

UK Equity Fund

£865,376

£1,000,671

Leveraged UK Fund

£951,336

£1,811,210

European Alpha Fund

€1,616,966

€1,312,878

 

 

Payable at year end

31.10.10


% of Underlying Fund held as at 31.10.10


31.10.09

% of Underlying Fund held as at 31.10.09

 

European Equity Fund

€308,039


7.65%


€729,770

3.75%

 

UK Dynamic Fund

£97,761


26.88%


£262,346

12.75%

 

UK Equity  Fund

£49,762


20.55%


£82,253

16.90%

 

Leveraged UK Fund

£40,392


41.00%


£113,726

14.61%

 

European Alpha Fund

€104,327


7.51%


€149,844

5.14%

 

 

A performance fee equal to 20% of the increase in the net asset value per share (after adding back any distributions made) outstanding in respect of each performance period less any loss carry forward per share, is also payable by the Underlying Funds to Cazenove Capital Management Limited annually, except for Cazenove European Alpha Absolute Return Fund Limited, which pays semi-annually. Total performance fees charged and payable by the Underlying Funds to Cazenove Capital Management Limited were as follows:


01.11.09 to

01.11.08 to

Charged during the year

31.10.10

31.10.09

 

European Equity Fund

-

€54,786

UK Dynamic Fund

-

£8,005,698

UK Equity Fund

£203

£472,490

Leveraged UK Fund

£8,605

£1,074,319

European Alpha Fund

€297,645

€487,114

 

Payable at year end

31.10.10


31.10.09

 

European Equity Fund

€15,798


€45,197

UK Dynamic Fund

-


£8,005,698

UK Equity  Fund

-


£471,115

Leveraged UK Fund

£9,418


£1,043,409

European Alpha Fund

€323,536


-

 

As at 31 October 2010 Cazenove Capital Management held 16,271,320 shares in the Company as a discretionary Fund Manager, through Chase Nominees Limited, (31 October 2009: 16,770,799 shares), representing 29.73% (31 October 2009: 28.00%) of the Issued Capital. No other related parties held a notifiable interest in the Company under the UK Takeover Code.

 

(c) Administrator

The Company's Administrator is Northern Trust International Fund Administration Services (Guernsey) Limited ("the Administrator"). In consideration for the services provided by the Administrator under the Administration, Secretarial and Registrar Agreement the Administrator is entitled to receive from the Company a fee of £36,000 per annum (31 October 2009: £36,000). The Administrator is also entitled to be paid or reimbursed for all reasonable out of pocket expenses incurred by it in providing administrative services to the Company as set out in the Administration, Secretarial and Registrar Agreement. During the year ended 31 October 2010 administration fees of £36,000 (31 October 2009: £36,000) were charged to the Company and £11,983 (31 October 2009: £2,983) remained payable at the year end.

 

(d) Custody

The Company's Custodian is Northern Trust (Guernsey) Limited ("the Custodian"). In consideration for the services provided by the Custodian under the Custodian Agreement, the Custodian is entitled to receive such fees as agreed with the Company from time to time. Initially the Custodian will be entitled to a fee of £14,000 per annum (31 October 2009: £14,000). The Custodian is also entitled to reimbursement of certain expenses incurred by it in connection with its duties.  During the year ended 31 October 2010 custodian fees of £14,000 (31 October 2009: £14,000) were charged to the Company and £4,717 (31 October 2009: £1,224) remained payable at the year end.

 

(e) Corporate Brokers

On 23 June 2010, the Company entered into an agreement with Numis Securities Limited ("the Broker"), wherein the Broker will act on behalf of the Company in relation to the provision of advisory and corporate broking services ("Broking Services"), including the purchase of ordinary shares in the Company on a principal to principal basis ("Buyback Services").  For the Broking Services, the Broker is entitled to receive an annual retainer of £25,000 in respect of the first 12 months accruing on a per diem basis in equal installments semi-annually in advance.  The Broker is also entitled to the reimbursement of certain expenses incurred by it in connection with its duties. For the Buyback Services, the Broker is entitled to receive the amount equal to the aggregate purchase price of any shares purchased at a fee of 0.5%, including any stamp duties or other relevant transfer taxes arising from the transaction. During the year ended 31 October 2010 semi annual fees of £9,358 were charged to the Company and £3,142 was prepaid at year end. Fees related to Buyback Services amounted to £8,845.

 

6. 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 economic and geographic segment of business, being investment in hedge funds focused in the United Kingdom and continental Europe.

 

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 net asset value, 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 financial statements.

 

The Company's investments and the equivalent percentages of the total value to the Company are reported in the Portfolio Statement. Information on realised and unrealised gains and losses on the sale and change in fair value of the investments are disclosed in note 4.

 

7. BASIC AND DILUTED EARNINGS PER PARTICIPATING SHARE

The earnings per participating share for the year has been calculated on a weighted average basis and is arrived at by dividing the net profit or loss for the year by the weighted average number of participating shares in issue. The weighted average number of participating shares is 59,315,168 (31 October 2009: 59,888,833).

 

8. CASH AND CASH EQUIVALENTS

All cash balances attract interest at variable rates.

 

An uncommitted borrowing facility was made available to the Company by its bank, Northern Trust (Guernsey) Limited. The aggregate amount outstanding under this facility should not exceed 10% of the Company's adjusted total of capital and reserves. The repayment of all monies at any time owing by the Company to the bank is secured by way of a 'security agreement relating to the portfolio' as security against the loan. At 31 October 2010, the Company has not made any use of this facility.

 

9. PAYABLES




31.10.10


31.10.09




£


£

Administration fee payable


11,983


2,983

Audit fee payable


11,194


8,500

Directors' fees payable


4,875


4,167

Custodian fee payable


4,717


1,224

Investment management fee payable


2,123


4,230

Other accruals


1,509


13,630



36,401


34,734

 

 

10. SHARE CAPITAL ACCOUNT

Authorised share capital


31.10.10


31.10.09




£


£

2 founder shares of £1 par value


2


2

250,000,000 unclassified shares of £0.01 par value

2,500,000


2,500,000




2,500,002


2,500,002

 

The Company is a closed-ended investment company with an unlimited life. The participating shares are not puttable instruments because, although a redemption facility exists, the Board has an unconditional right to refuse redemption of the shares. They are not, therefore, required to be classified as debt under IAS 32.

 

Issued share capital

Number of


Share


Treasury


shares

capital

shares



£

£

31 October 2010




Founder shares

2

2

 -





Equity shares




Participating shares




Balances at 1 November 2009

59,888,833

6,664,754

-

Treasury shares

-

-

 (5,565,682)

Balances at 31 October 2010

59,888,833

6,664,754

(5,565,682)





Total balances at 31 October 2010

  59,888,833


 £6,664,756


(£5,565,682)


 

Issued share capital

Number of

Share

Treasury


shares

capital

shares

 



£

£

 

31 October 2009

Founder shares

2

2

-

 

Equity shares




 

Participating shares




 

Balances at 1 November 2008

59,888,833

6,664,754

-

 

Balances at 31 October 2009

59,888,833

6,664,754

-

 





 

Total balances at 31 October 2009

59,888,835


£6,664,756


 -


 

 

Participating shares carry the right to receive notice of, attend and vote as a Member of any general meeting of the Company. Participating shares are redeemable at the option of the Company in the limited circumstances as provided in the Company's Articles of Association. They are entitled to any dividends declared by the Company and on winding up have the rights to any surplus assets after the distribution of paid up capital to the holders of participating shares and founder shares.

 

Founder shares shall only be issued at par value. Founder shares do not carry a general right to dividends nor do they have the right to vote as a Member at any general meeting of the Company except on a modification of class rights issue. In winding up, they rank only for a return of the nominal paid up capital after the return of the nominal capital paid up on the participating shares. They have no right to participate in any of the surplus assets of the Company. The unclassified shares may be issued by the Board as participating shares.

 

During the year, in accordance with the Share Buyback Facility discussed in note 13, the Company purchased its own participating shares in the market to attempt to close the discount to net asset value at which the participating shares are trading and improve the liquidity of its issued share capital. 

 

During the year under the Share Buyback Facility, the Company purchased its own shares as follows:

 

Date

Shares

Price per share

Total

Percentage of issued



£

£

share capital

18 August 2010

625,936

1.06

661,684

1.05% 

25 August 2010

100,000

1.06

106,213

0.17%

27 August 2010

1,438,868

1.06

1,528,252

2.40%

22 September 2010

200,000

1.08

216,433

0.33%

23 September 2010

250,000

1.08

270,541

0.42%

30 September 2010

150,000

1.08

162,325

0.25%

1 October 2010

235,000

1.09

256,151

0.39%

7 October 2010

430,000

1.09

468,647

0.72%

13 October 2010

1,235,000

1.09

1,346,840

2.06%

29 October 2010

500,000

1.10

548,596

0.83%


5,164,804


5,565,682

8.62%






Because significant share repurchases could take the Investment Manager's aggregate ownership over the Takeover Code's Mandatory Offer trigger level of 30 percent, the Board has applied to the Takeover Panel for a waiver of Rule 9 under Rule 37. A proposal was put to Shareholders regarding the waiver at an extraordinary general meeting of the Company on 17 June 2010 and this has now been approved. 

 

Continuation vote and whitewash fees incurred amounted to £180,564 including legal, advisory and other professional fees. Whitewash fees paid to J.P. Morgan Cazenove and Ernst & Young amounted to £85,564 and £40,000 respectively. Included in Other Expenses are non audit fees of £8,329 also paid to Ernst & Young.

 

11. RESERVES



31.10.10

31.10.09



£

£

Distributable reserves at 1 November

71,782,472

66,702,621

Net (loss)/profit for the year


(4,721,329)

5,079,851



67,061,143

71,782,472

 

No distributions were made from this reserve account during the year.

 

12. FINANCIAL INSTRUMENTS AND RISK PROFILE

The investment objective of the Company is to seek to achieve, consistent absolute returns by investing in five Underlying Funds.

 

The Company's financial instruments comprise financial assets at fair value through profit or loss, cash and cash equivalents and certain receivables and payables.

 

The main risks arising from the Company's financial instruments are market risk (market price risk, foreign currency risk and interest rate risk), credit risk and liquidity risk.

 

Market risk

The Company's investments are subject to market fluctuations and the risk inherent in the purchase, holding or selling of securities and there can be no assurance that appreciation or maintenance in the value of those investments will occur.

 

Investments in unlisted securities are generally more illiquid than listed securities and there may be no ready market for such securities at an appropriate price or even at all. Furthermore, the net asset values for such unlisted securities tend to be published on a less frequent basis than for listed securities.

 

The Investment Manager of the Underlying Funds continues to monitor and oversee the profile of the portfolio on a regular basis to ensure risks are managed. 

 

Strategies of the Underlying Funds

The Company's Investment Manager currently classifies the strategies of the Cazenove European Equity Absolute Return Fund, the Cazenove UK Equity Absolute Return Fund and the Cazenove Leveraged UK Equity Absolute Return Fund Limited as being largely uncorrelated with the direction of the underlying equity markets.

 

These Underlying Funds' managers aim to deliver consistent, low risk absolute returns irrespective of market conditions. This includes offering a strategy of genuine asset diversification through minimum correlation to the stock market index and approximately one third of market volatility. The Underlying Funds' managers consider that a business cycle approach to markets is well suited to a long/short strategy as it seeks to perform in all economic and market conditions. The Underlying Funds' managers believe that their pragmatic approach recognises that stock selection is key to a diversified portfolio but that companies are affected by changes in the macro-economic and interest rate environment.

 

The Company's Investment Manager currently classifies the strategies of the Cazenove UK Dynamic Absolute Return Fund as alpha enhancing and more directional. This Underlying Fund's managers aim to deliver consistent, absolute returns irrespective of market conditions with lower market volatility in the medium to long term. The approach will consider the macro and business cycle factors. However, the key strategy will be a bottom up approach in identifying under valued stocks with an investment angle. Each stock held will have a valuation target.

 

The Company's Investment Manager also classifies the strategies of the Cazenove European Alpha Absolute Return Fund Limited as alpha enhancing and more directional. The Investment Manager of this Underlying Fund uses a screening process which identifies stocks that are likely to have a significant movement in share price within a short time horizon (up to six months). This Underlying Fund adheres to a clear stock picking approach with a high level of concentration. Equity is the main asset class but this Underlying Fund can also trade in options and debt instruments, however, only to capture returns which cannot be generated otherwise.

 

Market price risk

Market price risk arises mainly from the uncertainty about future prices of the financial instruments held by the Company.  It represents the potential loss the Company may suffer through holding market positions in the face of price movements.

The Company's investment portfolio is exposed to market price fluctuations which are monitored by the Manager in pursuance of the investment objectives and policies. 

 

Market price sensitivity analysis

The sensitivity analysis below has been determined based on exposure to equity price risks at the reporting date.

 

If the net asset values of the Underlying Funds had been 10% (31 October 2009: 10%) higher/lower, net profit and reserves figures increase/decrease by £6,643,091 (31 October 2009: £7,825,116). The 10% (31 October 2009: 10%) price movement is the Directors' best estimate of a reasonably possible price movement during the year.

 

Foreign currency risk

Foreign currency risk arises from fluctuations in the value of foreign currency. It represents the potential loss the Company may suffer through holding foreign currency assets in the face of foreign exchange movements.

 

The Underlying Fund portfolio invest in equity funds which in turn invest in equities denominated in currencies other than Sterling. The Underlying Funds use forward foreign exchange contracts to manage but not eliminate the risk associated with holding assets in foreign currency.

 

Foreign currency sensitivity

If the exchange rate of Sterling weakens by 5% against the currencies in which the Underlying Funds invest, with the assumption that all other variables are held constant, the Company's net assets would decrease by £904,674 (31 October 2009: £33,690). The same amount but with reverse effect will happen if Sterling strengthens by 5%.

 

The 5% movement in exchange rate represents the Directors' assessment, based on the foreign exchange rate movements over the relevant year, of the reasonably possible change in foreign exchange rates.

 

Interest rate risk

Interest rate risk represents the uncertainty of investment return due to changes in the market rates of interest. Interest receivable on bank deposits or payable on bank overdraft will be affected by fluctuations in interest rates. All cash balances are at variable rates. Increases in interest rates will also increase the borrowing costs of the Company should the borrowing facility be used.

 

Interest rate/risk profile of financial assets and liabilities:


Weighted average interest rate

Less than 1 month

1-3 months

No fixed date

Total



£

£

£

£

31 October 2010






Assets






Non-interest bearing


-

-

66,430,911

66,430,911

Cash and cash equivalents

0.00%

-

1,758,886

-

1,758,886



-

1,758,886

66,430,911

68,189,797

Liabilities






Non-interest bearing


-

25,207

11,194

36,401



-

25,207

11,194

36,401

 


Weighted average interest rate

Less than 1 month

1-3 months

No fixed date

Total



£

£

£

£

31 October 2009






Assets






Non-interest bearing

 -

 -

-

78,251,157

78,251,157

Cash and cash equivalents

0.03%

 -

227,131

 -

227,131



-

227,131

78,251,157

78,478,288

Liabilities






Non-interest bearing

 -

 -

26,234

 8,500

34,734



 -

26,234

 8,500

34,734

 

Interest rate sensitivity

Cash and cash equivalents and receivables will be affected by movements in interest rates. However, no material impact on the Statement of Comprehensive Income nor Statement of Financial Position is expected due to the immateriality of these items as of the year end (31 October 2009: no material impact).

 

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 within the Company.

 

The Company is exposed to material credit risk in respect of cash and cash equivalents and debtors. All cash is placed with Northern Trust (Guernsey) Limited ("NTGL"). The Company is subject to credit risk to the extent that this institution may be unable to return this cash. NTGL is a wholly owned subsidiary of The Northern Trust Corporation ("TNTC"). TNTC is publicly traded and a constituent of S&P 500. TNTC has a credit rating of AA- from Standard & Poor's and A1 from Moody's. The credit risk associated with debtors is limited to interest on bank balances. Credit risk is mitigated by the Company's policy to transact only with leading commercial and investment banks. It is the opinion of the Directors that the carrying amounts of these financial assets represent the maximum credit risk exposure at the statement of financial position date.

 

Liquidity risk

Liquidity risk is the risk that the Company will encounter in realising assets or otherwise raising funds to meet financial commitments.

 

Dealings in the Underlying Funds are done on a monthly basis. Requests for redemption must be received not less than thirty days prior to the relevant dealing day.  Settlement period is usually two weeks after the dealings. The Directors of each Underlying Fund may at their absolute discretion refuse to accept a redemption request in respect of shares of a class held for a period of less than three months. They may also refuse a redemption request for shares in a particular class where the relevant request is in excess of 10% of the total net asset value of such class of shares on any dealing day. As from 31 July 2009 this 10% gating provision was removed on four of the Underlying Funds. The 10% gating provision for Cazenove UK Dynamic Absolute Return Fund remains unchanged.  Furthermore, the Company has a borrowing facility to meet financial commitments.

 

The table below shows the Company's liquidity analysis for its financial liabilities. The table has been drawn up based on the undiscounted gross cash flows on those financial liabilities that require gross settlement.


Less than


More than


Payables

3 months

3-12 months

12 months

Total


£

£

£

£

31 October 2010

25,207

11,194

-

36,401

31 October 2009

26,234

8,500

-

34,734

 

Fair value

The following table shows financial instruments recognised at fair value, analysed between those whose fair value is based on:

 

-    Quoted prices in active markets for identical assets or liabilities (Level 1);

-    Those involving inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and

-    Those with inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

 

 

31 October 2010

Security  type

Total

Level 1

Level 2

Level 3



£

£

£

Financial assets at fair value through profit and loss

66,430,911

-

66,430,911

-


66,430,911

-

66,430,911

-

 

The level within which the financial assets are classified is determined based on the lowest level of significant input to the fair value measurement.

 

The Underlying Funds held by the Company are not quoted in active markets.

 

Assets classified in Level 2 are hedge funds fair-valued using the official month-end net asset value of each Underlying Fund as supplied by each fund's managers or administrators.

 

There were no movements between levels during the year.

 

13. CAPITAL MANAGEMENT

The fair value of the Company's financial assets and financial liabilities approximates their carrying amounts as at the statement of financial position date. Redeemable participating preference shares are considered to be capital.

 

The Company's objectives when managing capital are to safeguard the Company's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

 

The Company has the ability to borrow the lower of 10% of its net asset value or £7.5 million for short-term or temporary purposes as is necessary for the settlement of transactions, to facilitate redemption (where applicable) and annual capital distributions (see below) or to meet ongoing expenses. The Directors have put in place a loan facility with Northern Trust (Guernsey) Limited for this purpose. The facility was undrawn as of 31 October 2010. The Company does not have any structural gearing. The Company is indirectly exposed to gearing to the extent that investee funds are themselves geared. Cash (if any) will be held in G8 currency-denominated accounts.

 

The gearing ratio below is calculated as total liabilities divided by total equity.

 




31.10.10


31.10.09




£


£

Total assets



68,196,618


78,481,962

Less: total liabilities



(36,401)


(34,734)

Total equity



68,160,217


78,447,228







Gearing ratio



0.05%


0.04%

 

At the Directors' discretion and subject to the shareholders' approval, the Company can make an annual capital distribution of one third of the increase in its net asset value by way of partial redemption. Any such distribution will only be made if the Directors, in their discretion, consider prior to any distribution being made it to be in the interest of shareholders and only to holders of participating shares who have made the relevant election, having given consideration to the prevailing price of the participating shares, the net asset value per participating share and the response of the holders of participating shares. Shareholders should have no expectation that a distribution will be made and there can be no guarantee that the Directors will determine to make a distribution in respect of any year.

 

The Company has a Share Buyback Facility whereby, at the discretion of the Directors and subject to the Shareholders' approval, it can purchase its own participating shares in the market with a view to addressing any imbalance between the supply of and demand for shares in the market and to assist in narrowing any discount to net asset value at which the participating shares maybe trading. Purchases will be made in accordance with the Listing Rules, the CISX Rules and the Companies (Guernsey) Law 2008. Any such purchases would only be made at prices which represent a discount to the Iast available net asset value per participating share so as to enhance the net asset value per participating share for the remaining Shareholders. The Directors were granted authority to exercise the Share Buyback Facility on 22 April 2010, as part of the Company's capital management. Purchases made by the Company are shown in note 10.

 

14. CONTINGENT LIABILITIES

There were no contingent liabilities at the statement of financial position date.

 

15. SUBSEQUENT EVENTS

Subsequent to 31 October 2010, the Company has further purchased 1,920,000 of its own shares under the Share Buyback Facility. In addition, 1,350,000 of the total shares issued were cancelled.

 

As at 14 February 2011 Cazenove Capital Management held 15,951,391 shares in the Company as a discretionary Fund Manager, through Chase Nominees Limited, representing 30.21% of the Issued Capital.

 

The Company has today, in accordance with DTR 6.3.5, released its Annual Financial Report for the year ended 31 October 2010. The Report will shortly be available on the Company's website http://www.cazenovecapital.com/investment-funds/absolute-return/absolute-equity/. 

 


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