Annual Financial Report

THE DIVERSE INCOME TRUST PLC ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2014 The Directors present the Annual Financial Report of the Diverse Income Trust plc ("The Company" or "Diverse") for the year ended 31 May 2014. The full Annual Report and Accounts can be accessed via the Company's website, www.mitongroup.com/dit, or by contacting the Company Secretary on 01392 477500. STRATEGIC REPORT RESULTS FOR THE YEAR TO 31 MAY 2014 Increased dividend per share The dividend per share was increased from 2.10p last year to 2.25p this year, representing an increase of 7.1%. Revenue reserves increased to Â£1.3m During the year Â£0.8m was added to distributable revenue reserves, so the total retained revenue reserves for the Group are now Â£1.3m. 26% growth in capital The NAV per share rose from 65.12p to 82.13p over the year. This has been greatly assisted by the general rise in the market, with the FTSE All-Share Index up 5% over the year to 31 May 2014. Increase in total net assets Total net assets in the Company increased from Â£136m to Â£266m in the year to 31 May 2014. A significant part of this increase reflected the performance of the portfolio, although the merger with Miton Income Opportunities Trust ("MIOT") on 30 September 2013 also added Â£85m of assets. The increased scale of the Company dilutes the fixed costs of running the Group and also adds to market liquidity in the shares for shareholders. SUMMARY OF RESULTS At 31 May 2014 At 31 May 2013 Change Net asset value per ordinary 82.13p 65.12p 26.1% share Ordinary share price (mid) 83.25p 66.00p 26.1% Premium to net asset value 1.36% 1.35% Revenue return per ordinary 2.70p 2.42p share Total dividends per ordinary 2.25p 2.10p 7.1% share* Ongoing charges 1.27% 1.45% * Current period revenues funded more than the 7.1% increase and so Â£762,000 was added to revenue reserves for smooth dividend growth in the future. CHAIRMAN'S STATEMENT This is the third Annual Report & Accounts for The Diverse Income Trust plc and covers the 12 month period ended 31 May 2014. Market trends during the period were beneficial to equities, with continued broad-based support from policy makers, including low interest rates. These measures more than offset the trend of moderating world growth and less than anticipated growth in corporate earnings. It was therefore another good year for markets, with the FTSE All-Share Index delivering 5.2% in capital appreciation. Many multi-nationals are finding it more difficult to sustain decent growth at a time when world growth is stagnating. In contrast, smaller businesses, by their nature, tend to have more immature market positions. They have greater potential to buck the trend at times of economic constraint. This contributed, at least in part, to their outperformance during the period. The FTSE SmallCap Index (excluding Investment Companies) rose 13.3% and the AIM All-Share Index was up 11.7% in the year. Given the positioning of the Company's portfolio, these trends were favourable and, along with successful stock selection, enhanced returns. The Company's NAV was up 26.1% over the year. The Board has already declared all four dividends for the year, which amounted to 2.25p, an increase of 7.1% on the 2.10p paid last year. The total return per ordinary share, including the capital appreciation reported above and the four dividends announced during the year, amounted to 29.8% per ordinary share. Growth of the Company and Amendments to the Manager's Fees The Company's assets grew to Â£266m as at 31 May 2014, up from Â£136m at the end of the previous year. In addition to the rise in the NAV of the portfolio, a further Â£85m was added by the acquisition of the assets of MIOT in September 2013, via the issue of new Diverse shares. The Board was delighted that Tom Bartlam, Chairman of MIOT, agreed to join the Board of Diverse, strengthening our skills and experience. Tom has been appointed to Chair the Audit Committee and I thank Jane Tufnell for her sound guidance of this Committee since the Company's launch. Subsequent to the year end, the Company announced that it had raised an additional Â£50m through a C share issue. Once this capital has been invested, it will be merged with the ordinary shares, and this should bring the size of the Company to just over Â£320m. The increasing size of the Company means that shareholders benefit from the lower ratio of the fixed charges, as these are spread over a larger pool of assets, and improved daily liquidity in the Company's shares. Given the growth in the Company, the Board has agreed a revised management fee structure with the Manager, with effect from 26 June 2014, such that the fee paid on the market capitalisation of the Company above Â£300m will be 0.8%. The fee on the market capitalisation up to Â£300m will remain unchanged at 1.0%. AIFMD Following the implementation of the Alternative Investment Fund Managers' Directive ("AIFMD"), the Company has appointed a Miton Group company, PSigma Unit Trust Managers Limited, as its Alternative Investment Fund Manager. The management agreement has been amended with no change to the commercial terms (other than that discussed above), and the day-to-day investment management arrangements remain unchanged. The Company has appointed Bank of New York Mellon as its Depositary and Custodian. Further details about the management agreement and the depositary and custody arrangements for the Company are set out below. Authority to Issue Shares At the forthcoming Annual General Meeting, the Board will once again be seeking the renewal of the Company's authority to issue up to 10% of ordinary shares. This authority is as previously approved at the 2013 Annual General Meeting. In the recent C share issue prospectus, the Board indicated that it was unlikely to carry out any further C share issues. The Company is now of sufficient scale that it can consider issuing new shares via a tap issue if this was considered to be in shareholders' interests. These would only be considered if there were sufficiently attractive investment opportunities, and if the shares of the Company traded at a premium to the underlying NAV at the time. Annual General Meeting The Company's third Annual General Meeting is being held at 11.30 am on Tuesday, 21 October 2014. It will be held at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH. At this meeting you can meet representatives of the Board, and also hear a presentation by the managers on their reasoning for the current positioning of the portfolio. We plan to put a webcast of the presentation on our website for those who are unable to attend. Outlook Equity markets have enjoyed a very substantial rise since the launch of the Company, in large part due to expansive central bank policies, perhaps, rather more than the prospects for promising economic growth. The US has started to reduce its Quantitative Easing ("QE") programme and other central banks are likely to follow. With economic growth remaining anaemic, the environment for corporate earnings growth remains challenging. The Company's principal objective remains to deliver an attractive and growing dividend, and for this reason the portfolio has to remain fully invested largely irrespective of the outlook. However, the cost of portfolio insurance has recently dropped to levels similar to those of the mid-2000s. Against this background, the Company has invested around 1.6% of the portfolio to purchase some downside protection by way of a Put option, covering approximately one-third of the portfolio, extending through to June 2015. Full details are outlined below. The focus remains on investing in a broad spread of companies with strong balance sheets that are selected for their potential to deliver attractive earnings and dividend growth, even in fluctuating economic circumstances. The Board is therefore confident that the Company remains well-placed to continue to deliver premium returns in the future. Michael Wrobel Chairman 12 August 2014 MANAGER'S REPORT Portfolio Overall, the Company has been kept fairly fully invested during the period. Many of the holdings purchased in previous years have continued to trade well over the period, and even after their share price appreciation, most still have attractive risk/reward ratios. Most of the holdings in the portfolio have traded in line with expectations through the results season. Strong performers in the year have been Greencore, Staffline, International Greetings and Bioventix, which have risen by around 100% or more in the period. However, picking out individual stocks is not especially relevant given that the portfolio is so well diversified. The premium return during the year is rather more reflective of the overall strategy of adding value rather than a few stocks performing especially strongly. The Company holds a portfolio of 133 holdings, widely diversified in terms of sectors. Therefore, the stock specific risk on each individual holding should be limited if they disappoint. A summary of the weightings of the portfolio split by different criteria, and the largest 40 holdings are outlined below. Performance over the Last Year During the year, the outperformance of smaller companies and income stocks enhanced returns for shareholders. In addition, active stock selection also added value. Attribution analysis suggests that the portfolio's bias towards both income stocks and smaller companies was beneficial in the year. There was also a good contribution from active stock selection. In addition, the underlying growth of dividend income was also good over the year. The effect was masked to some degree by the increase in the number of shares in issue for the Company due to the takeover of MIOT. However, both the third and fourth interim dividends were increased during the year, with the total dividend up 7.1% on the previous year. In the year under review, the total return on each ordinary share was 29.8% (including the dividends declared during the year). Current Market Trends and Outlook Most professional investors naturally concentrate their attention on the largest positions, where high-conviction decisions on a stock, sector or market can be reflected in sizeable capital allocations. Smaller companies are comparatively miniscule, so any allocation to this area normally requires a more patient approach. Allocations to smaller companies have been reduced during the credit boom when returns elsewhere have been good, but beyond the credit boom as world growth moderates, there are fewer attractive alternatives. Market appreciation over the year to 31 May 2014 was once again driven by the expansive effects of QE, although progress became more uncertain as the US Federal Bank reduced its QE activities. The bid for AstraZeneca - the largest UK corporate bid ever - and Vodafone's distribution of its holding in Verizon, did ensure that the FTSE 100 Index finished the year to May on a high note. However, as QE within the US continues to fade, market trends have become increasingly reliant upon the potential for corporate earnings growth, where recent trends have been challenging. Interestingly, the FTSE MidCap Index performance also became more problematic towards the end of the period. Many investors are suggesting that there are limited attractive areas for investing. Perhaps as a result, there has been an increase in institutional smaller company allocations for the first time in years. The Diverse strategy has been set up to take advantage of these changing market trends. 1. The portfolio selects from a universe of UK quoted stocks with a full range of market capitalisations. Prior to the credit boom, smaller company stocks have a long history of outperformance. 2. Secondly, income stocks tend to outperform. This seems counter-intuitive, as normally income stocks have relatively modest growth expectations. However, that is the reason they outperform. Low expectations normally equate with low valuations. High income stocks still carry downside risk of course, most especially if they cannot sustain their forecast dividends. However, the `bird in the hand' effect often turns out to be more valuable than the `two potential birds in the bush' at times when growth is limited. 3. Finally, value can be added via active stock picking. Larger companies are well researched and therefore stock picking is highly competitive. Smaller companies by their nature are less researched, and so there is greater scope for active managers to add value through stock picking. Although UK growth may moderate and interest rates may increase, we remain upbeat about the potential for many of the holdings in the portfolio to continue to deliver growth. That said, share prices will naturally fluctuate, so, as Managers, we have sought to limit market risk. The details of a Put option held in the portfolio and how this may change in value if markets became more unsettled are detailed below. In addition, on a look-through basis, the cash balances held by some holdings exceed the aggregate borrowings of other holdings (note this analysis does not include the lease commitments in the underlying companies). All these factors give us confidence that the Company remains well positioned with a portfolio that will hopefully deliver a growing dividend. Gervais Williams and Martin Turner Miton Asset Management Limited 12 August 2014 WHAT ARE THE ADVANTAGES OF USING A PUT OPTION AS PART OF THE DIVERSE STRATEGY? As reported in the Half-Yearly Report, in November 2013 the Company purchased a Put option. Put options are different to ordinary shares which make up the vast majority of the Diverse portfolio. Although the price of Put options is principally driven by the movement of an index, the relationship is inversely correlated. Therefore, whereas most stocks rise when markets are buoyant, Put options tend to fall in value. Conversely, when markets fall back, Put options tend to rise in value. One key advantage of holding a Put option in the portfolio is that it reduces the daily NAV fluctuations. The reason most funds do not use them is that Put options are time limited, often extending to no more than a few quarters; their value also decays over time. Using them generally reduces the volatility for investors, but at a cost. The Put option has been purchased to protect the Company's NAV against a significant setback in the market. We believe that, as a general rule, the most dependable way to generate an attractive return for shareholders over the long term is by investing in a portfolio of individual businesses with promising prospects on a bottom-up basis. For most, there is little value to reducing market risk through the purchase of a Put option, given that corporate profits tend to gradually grow over time with productivity growth and inflation. Although options are frequently traded, in general most expire at the end of their term worthless. With this in mind, it is only worth considering utilising Put options within the context of a portfolio when the initial purchase costs are unusually low, and the potential benefits to shareholders could be sizeable. However, we do take a greater interest in the running costs of holding a Put option. When these are high, it is self-evident that the risk/reward ratio is unattractive. However, when the time decay cost comes down to very low levels, then the risk/reward ratio becomes more attractive. It will be noted that prior to the credit crunch, when markets were exceptionally buoyant, the price of volatility fell to very low levels. However, during the global financial crisis, the price of volatility rose several multiples above its previous level. The price of volatility is a key part of the cost of a Put option, and it has recently fallen to levels not dissimilar to those seen at the best stages of the credit boom. The running cost of a Put option appears low at present. Since 2009, markets have risen a lot faster than the modest inflation and corporate profit growth. Of course, the 2009 market levels may not be any more accurate than its current level, but this may indicate that QE may have caused markets to rise rather more than justified by fundamentals. Given that the US is now planning to reduce QE, the scope for markets to appreciate as rapidly as they have in the past few years appears more limited, and it may be that if there were an unexpected adverse event they could fall back. A key objective of the Company is to find ways to grow the dividend. The strategy involves selecting the portfolio from amongst all quoted companies for those with the best prospects. The Company does not have a formal index benchmark, so the individual stock positions are all relatively minor in absolute terms, and as a result the returns are not heavily dependent upon the success or otherwise of a few large holdings, but rather on the selection of a broad range of stocks. It is believed that the risk/reward ratio has become sufficiently attractive for the portfolio to invest around 1.6% of the capital in a Put option. The option has a notional value that equated to around one-third of the capital of the Company at the time. If the FTSE 100 Index and the price of volatility remain as they were at the time of the purchase of the Put option, then the value of this holding will reduce the NAV of the Company by 0.08% on average per month. The Company has little need to hold precautionary cash with a Put option, so if the markets remain buoyant then the portfolio remains well positioned to fully participate in that market rise. This will maximise the further potential for the Company to continue to add value through successful stock selection. Conversely, if markets were to fall back, then the value of the Put option would rise and could become significant in the context of the whole Company. At those times, its rise in value might offset the reduction in the regular portfolio to some degree. Better still, the Put option could then be sold so the scale of the portfolio could be increased at a time when market prices were depressed. Of course, probably the most likely outcome is that somehow markets muddle along somewhere in the middle, and the value of the Put option fluctuates along the way. The cost of the option was 1.6% of the portfolio, but the notional value reflects how much the option would be worth if the FTSE 100 Index were to go to zero. The notional value of the Put option is Â£68.8m. However, we believe that the added value from the stock selection in the portfolio would more than offset the time value decay of the Put option. Terms of the option Strike Price This is the level of the FTSE 100 at which the Put option technically begins to protect against a further market fall. The cost of buying a Put option at the current FTSE 100 level is highly onerous so the purchased option is at the 5,800 level. In truth, the strategy is not seeking to protect the Company against a minor move in the markets, but rather against a more significant setback. Duration The Put option will expire on 19 June 2015. It will therefore have time value for half of the current year and half of the next year. If markets were to fall back, the extended time value could become significantly more valuable. An option of this duration is better placed to take full advantage should the price of volatility rise. Notional Value The cost of the option is only 1.6% of the portfolio, but the notional value reflects how much the option would be worth if the FTSE 100 Index went to zero. The notional value of the Put option is Â£68.8m. PORTFOLIO INFORMATION AS AT 31 MAY 2014 Sector & main Valuation % of net YieldÂ¹ Rank Company activity Â£'000 assets % 1 Charles Taylor Consulting Industrials 5,274 2.0 3.6 2 SQS SoftwareÂ² Technology 5,173 1.9 1.7 3 FairpointÂ² Financial Services 5,104 1.9 4.1 4 SafestyleÂ² Consumer Services 4,866 1.8 2.7 5 Stobart Industrials 4,499 1.7 4.0 6 Randall & Quilter Insurance Services 4,178 1.6 5.3 Investment HoldingsÂ² 7 BioventixÂ² Health Care 4,106 1.5 3.2 8 Shoe ZoneÂ² Consumer Services 3,947 1.5 7.0 9 PowerfluteÂ² Basic Materials 3,795 1.4 2.8 10 Secure Trust Bank Financial Services 3,787 1.4 2.4 Top 10 investments 44,729 16.7 11 DX GroupÂ² Industrials 3,738 1.4 5.0 12 St Ives Industrials 3,689 1.4 3.2 13 Conviviality RetailÂ² Consumer Services 3,654 1.4 5.0 14 CML MicrosystemsÂ² Technology 3,516 1.3 1.1 15 Cable & Wireless Telecommunications 3,381 1.3 4.5 Communications 16 UK Mail Industrials 3,381 1.3 3.4 17 Provident Financial Financial Services 3,251 1.2 4.1 18 Personal GroupÂ² Insurance Services 3,249 1.2 3.6 19 Interserve Industrials 3,231 1.2 3.3 20 Novae Group Insurance Services 3,148 1.2 4.0 Top 20 investments 78,967 29.6 21 Bloomsbury Publishing Consumer Services 3,075 1.2 3.5 22 Talk Talk Telecom Telecommunications 3,031 1.1 3.7 23 A&J Mucklow Financial Services 3,025 1.1 4.5 24 Dairy Crest Consumer Goods 2,959 1.1 4.6 25 Amlin Insurance Services 2,948 1.1 5.5 26 KCOM Telecommunications 2,941 1.1 5.0 27 Esure Insurance Services 2,876 1.1 3.5 28 Go-Ahead Consumer Services 2,839 1.1 3.7 29 Amino TechnologiesÂ² Technology 2,832 1.1 3.9 30 Juridica InvestmentsÂ² Financial Services 2,830 1.1 7.6 Top 30 investments 108,323 40.7 31 Lancashire Holdings Financial Services 2,825 1.1 7.5 32 RPC Group Industrials 2,798 1.0 2.5 33 Catlin Insurance Services 2,793 1.0 5.9 34 4imprint Consumer Services 2,780 1.0 2.5 35 ZotefoamsÂ² Basic Materials 2,716 1.0 1.9 36 Direct Line Insurance Insurance Services 2,682 1.0 5.0 37 Macfarlane Industrials 2,654 1.0 4.0 38 Segro Financial Services 2,620 1.0 4.2 39 Legal & General Insurance Services 2,589 1.0 4.0 40 Friends Life Insurance Services 2,588 1.0 6.8 Top 40 investments 135,368 50.8 Balance held in 89 equity 128,012 48.1 investments Total equity investments 263,380 98.9 William Sinclair 8% Convertible 2,650 1.0 Loan Notes 17/12/2018 (unlisted) St. Modwen Properties 6.25% 863 0.3 07/11/2019 Bonds Private & Commercial Finance 6% 356 0.1 30/09/2016 Notes Fixed interest investments 3,869 1.4 Total investments 267,249 100.3 Listed Put option FTSE 100 - June 2015, 5,800 Put 1,293 0.5 Other net liabilities (2,139) (0.8) Net assets 266,403 100.0 Â¹ Source: Interactive Data. Based on historical yields. Manager's estimate where no historical data. Â² AIM/ISDX listed. A copy of the full portfolio of investments as at 31 May 2014 is available on the Company's website, www.mitongroup.com/dit. Portfolio exposure by sector % Consumer Services 17.0 Insurance Services 15.8 Financial Services 15.5 Support Services 12.7 Industrials 7.6 Technology 6.9 Consumer Goods 6.2 Telecommunications 6.0 Basic Materials 4.5 Health Care 4.2 Oil & Gas 1.6 Cash/Fixed Interest and Other 1.1 Utilities 0.9 100.0 Portfolio asset by Index or Exchange % FTSE 100 Index 9.3 FTSE 250 Index 22.2 FTSE SmallCap Index 17.2 FTSE Fledgling Index 6.2 AIM/ISDX Exchanges 39.9 Other 4.1 Cash/ Fixed Interest and Other 1.1 100.0 Portfolio investment income by Index or Exchange % FTSE 100 Index 11.3 FTSE 250 Index 33.0 FTSE SmallCap Index 19.1 FTSE Fledgling Index 4.9 AIM/ISDX Exchanges 30.8 Fixed Interest and Other 0.9 100.0 Estimated annual income by sectorÂ¹ % Insurance Services 19.1 Financial Services 18.7 Consumer Services 15.3 Industrials 9.3 Telecommunications 7.0 Support Services 5.9 Basic Materials 5.5 Consumer Goods 5.5 Technology 3.7 Health Care 3.5 Cash/Fixed Interest and Other 3.3 Oil & Gas 2.2 Utilities 1.0 100.0 Â¹ Projected income based on portfolio as at 31 May 2014. Source: Miton Asset Management Limited and Interactive Data Investment Objective The Company's investment objective is to provide shareholders with an attractive and growing level of dividends coupled with capital growth over the long term. Investment Policy The Company invests primarily in quoted or traded UK companies with a wide range of market capitalisations, but a long-term bias toward small and mid cap equities. The Company may also invest in large cap companies, including FTSE 100 constituents, where it is believed that this may increase shareholder value. The Manager adopts a stock specific approach in managing the Company's portfolio and therefore sector weightings are of secondary consideration. As a result of this approach, the Company's portfolio does not track any benchmark index. The Company may utilise derivative instruments including index-linked notes, contracts for differences, covered options and other equity-related derivative instruments for efficient portfolio management, gearing and investment purposes. Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Company's direct investments, as described below. The Company will not enter into uncovered short positions. Risk Diversification Portfolio risk is mitigated by investing in a diversified spread of investments. Investments in any one company shall not, at the time of acquisition, exceed 15% of the value of the Company's investment portfolio. Typically it is expected that the Company will hold a portfolio of between 80 and 140 securities, predominantly most of which will represent no more than 1.5% of the value of the Company's investment portfolio as at the time of acquisition. The Company will not invest more than 10% of its gross assets, at the time of acquisition, in other listed closed-ended investment funds, whether managed by the Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds. In addition to this restriction, the Directors have further determined that no more than 15% of the Company's gross assets will, at the time of acquisition, be invested in other listed closed-ended investment funds (including investment trusts) notwithstanding whether or not such funds have stated policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds. Unquoted Investments The Company may invest in unquoted companies from time to time subject to prior Board approval. Investments in unquoted companies in aggregate will not exceed 5% of the value of the Company's investment portfolio as at the time of investment. Borrowing and Gearing Policy The Board considers that long-term capital growth can be enhanced by the use of gearing which may be through bank borrowings and the use of derivative instruments such as contracts for differences. The Company may borrow (through bank facilities and derivative instruments) up to 15% of net asset value (calculated at the time of borrowing). The Board oversees the level of gearing in the Company, and reviews the position with the Manager on a regular basis. In the event of a breach of the investment policy set out above and the investment and gearing restrictions set out therein, the Manager shall inform the Board upon becoming aware of the same and if the Board considers the breach to be material, notification will be made to the London Stock Exchange. No material change will be made to the investment policy without the approval of shareholders by ordinary resolution. BUSINESS MODEL Diverse was launched on 28 April 2011. It is registered in England as a public limited company and is an investment company in accordance with the provisions of Sections 832 and 833 of the Companies Act 2006. The principal activity of the Company is to carry on business as an investment trust. The Company intends at all times to conduct its affairs so as to enable it to qualify as an investment trust for the purposes of Sections 1158/1159 of the Corporation Tax Act 2010 ("S1158/1159"). The Directors do not envisage any change in this activity in the foreseeable future. The Company has been granted approval from HM Revenue & Customs ("HMRC") as an investment trust under S1158/1159 and will continue to be treated as an investment trust company, subject to there being no serious breaches of the conditions for approval. The principal conditions that must be met for continuing approval by HMRC as an investment trust are that the Company's business should consist of "investing in shares, land or other assets with the aim of spreading investment risk and giving members of the company the benefit of the results" and the Company must distribute a minimum of 85% of all its income as dividend payments. The Company must also not be a close company. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 May 2014 so as to be able to continue to qualify as an investment trust. The Company's status as an investment trust allows it to obtain an exemption from paying taxes on the profits made from the sale of its investments and all other net capital gains. Investment trusts offer a number of advantages for investors, including access to investment opportunities that might not be open to private investors and to professional stock selection skills at lower cost. The Company has a wholly owned subsidiary, DIT Income Services Limited. The purpose of the subsidiary is to invest in shorter-term holdings, where the gains after corporation tax can be passed up to the parent company by way of dividends, thus improving the position of the Company's revenue account. Investment Policy The Company's full investment policy set out above contains information on the policies which the Company follows relating to asset allocation, risk diversification and gearing, and includes maximum exposures, where relevant. The Company invests primarily in quoted or traded UK companies with a wide range of market capitalisations but a long-term bias toward small and mid cap equities with a view to achieving the Company's investment objective. The Manager adopts a stock specific approach in managing the Company's portfolio and therefore sector weightings will be of secondary consideration. As a result of this approach, the Company's portfolio will not track any benchmark index. PERFORMANCE AND RISKS Key Performance Indicators The Board reviews the Company's performance by reference to a number of Key Performance Indicators ("KPIs") and considers that the most relevant KPIs are those that communicate the financial performance and strength of the Company as a whole. The Board and the Manager monitor the following KPIs: â€¢ NAV performance, relative to comparable investment trusts and open-ended funds and to various UK stock market indices. The NAV at 31 May 2014 was 82.13p per share (2013: 65.12p). The Company's total return increased by 29.8% over the year. This compares favourably with its peer group, where the average was a 12.8% increase. By comparison, the total return on the FTSE All-Share Index was 8.9%, on the FTSE SmallCap Index (excluding Investment Companies) was 23.9%, and on the AIM All-Share Index was 12.7%. â€¢ NAV volatility The Company has an objective to deliver attractive returns whilst having an eye to constraining volatility relative to other similar investment trusts. For the year to 31 May 2014, the Company's NAV had a volatility of 6.0%. This compares to the peer group where the average was 10.7%. â€¢ Movements in the Company's share price The Company's share price increased by 29.8% over the year on a total return basis. This compares favourably with its peer group, where the average increase was 12.4%. â€¢ The discount of the share price in relation to the NAV The Company has an objective to keep the discount to NAV at a minimum. Over the year to 31 May 2014, the Company has maintained an average premium to NAV of 3.2%. â€¢ The Company's dividend growth rate The Company has an objective to deliver an attractive and growing dividend. In the year, the Company paid dividends totalling 2.25p, representing a yield of 2.9% (based on an average share price of 77.9p). The Company grew this dividend by 7.1% compared to the previous year. This compares to its peer group, where the average estimated growth rate was 3.8%*. â€¢ Ongoing charges The ongoing charges for the year to 31 May 2014 amounted to 1.27% (2013: 1.45%) of total assets. * Average of the other UK Equity Trusts that have reported over the previous twelve months. Dividends Dividends totalling 2.25p per ordinary share have been paid or declared in respect of the year ended 31 May 2014 as follows: First interim 0.30p paid on 29 November 2013 dividend: Second interim 0.50p paid on 28 February 2014 dividend: Third interim 0.50p paid on 31 May 2014 dividend: Fourth interim 0.95p payable on 29 August 2014 dividend: Shareholders will have the option to vote on the dividend payment policy of the Company at the forthcoming Annual General Meeting (see full Annual Report and Accounts for further details). Principal Risks and Uncertainties The Company is exposed to a variety of risks and uncertainties that could cause its asset price or the income from the investment portfolio to reduce, possibly by a sizeable percentage in the most adverse circumstances. The principal financial risks and the Company's policies for managing these risks and the policy and practice with regard to the financial instruments are summarised in note 18 to the financial statements. The Board has also identified the following additional risks and uncertainties: Investment activity and strategy Risk: There can be no guarantee that the investment objective of the Company will be achieved. The Company does not follow any benchmark. Accordingly, the portfolio of investments held by the Company will not mirror the stocks and weightings that constitute any particular index or indices, which may lead to the Company's shares failing to follow either the direction or extent of any moves in the financial markets generally (which may or may not be to the advantage of shareholders). Mitigation: The Manager has in place a dedicated investment management process which is designed to maximise the chances of the investment objective being achieved. The Board reviews regular investment and financial reports from the Manager to monitor this. Smaller companies Risk: The Company will invest primarily in quoted UK companies with a wide range of market capitalisations but a long-term bias toward small and mid cap equities. Smaller companies can be expected, in comparison to larger companies, to be less mature businesses, have more restricted depth of management and a higher risk profile. In addition, the relatively small market capitalisation of such companies can make the market in their shares illiquid. Prices of smaller capitalisation stocks are often more volatile than prices of larger capitalisation stocks and the risk of insolvency of many smaller companies (with the attendant losses to investors) is higher. Mitigation: The Board looks to mitigate this risk by ensuring the Company holds a spread of investments, achieved through limiting the size of new holdings at the time of investment to typically between 1% and 1.5% of the portfolio. All potential investee companies are researched by the Manager prior to investment. Sectoral diversification Risk: The Company is not constrained from weighting to any sector. This may lead to the Company having significant exposure to portfolio companies from certain business sectors from time to time. Greater concentration of investments in any one sector may result in greater volatility in the value of the Company's investments and consequently its NAV. Mitigation: The Company seeks to achieve attractive returns by investing in weightings that are different from the overall market, yet also seeks to ensure that individual variances are not so extreme as to leave shareholders at risk of portfolio volatility that is unreasonably poor. Even though there may be significant exposures to a single sector, this will be achieved by holding a number of different stocks in the portfolio. Dividends Risk: The Company's investment objective includes the aim of providing shareholders with an attractive and growing dividend. There is no guarantee that any dividends will be paid in respect of any financial year or period. The ability to pay dividends is dependent on a number of factors, including the level of dividends earned from the portfolio and the net revenue profits available for that purpose. The redemption of shares pursuant to the redemption facility may also reduce distributable reserves to the extent that the Company is unable to pay dividends. Mitigation: The Company maintains accounting records and produces forecasts that are designed to reduce the likelihood that the Company will not have sufficient distributable resources to meet its dividend objective. Share price volatility and liquidity/marketability risk Risk: The market price of the Company's shares, like shares in all investment companies, may fluctuate independently of the NAV and thus may not reflect the underlying NAV of the shares. The shares could trade at a discount or premium to NAV at different times, depending on factors such as supply and demand for the shares, market conditions and general investor sentiment. Mitigation: The Company has in place an annual redemption facility whereby shareholders can voluntarily tender their shares. The Board monitors the relationship between the share price and the NAV. The Company has taken powers to re-purchase shares should there be an imbalance in the supply and demand leading to a discount. Since launch, however, the Company's shares have traded at a consistent premium to NAV. The Company also has powers to issue shares (only at a premium to NAV) should there be good investment opportunities and the size of the premium to net assets may give rise to the risk of share price volatility. Gearing Risk: The Company's investment strategy may involve the use of gearing to enhance investment returns, which exposes the Company to risks associated with borrowings. Gearing may be generated through the use of options, futures, options on futures, swaps and other synthetic or derivative financial instruments. Such financial instruments inherently contain much greater leverage than a non-margined purchase of the underlying security or instrument. While the use of borrowings should enhance the total return on the shares where the return on the Company's underlying assets is rising and exceeds the cost of borrowing, it will have the opposite effect where the return on the Company's underlying assets is rising at a lower rate than the cost of borrowing or falling, further reducing the total return on the shares. As a result, the use of borrowings by the Company may increase the volatility of the NAV per share. Mitigation: The Company has an overdraft facility in place, as detailed in note 16 to the financial statements. At 31 May 2014, the Company had drawn down Â£3.7m of the available facility. The Company is limited to a maximum gearing of 15% of the net assets. There was gearing of 1.4% at 31 May 2014 (2013: nil). Key Man Risk Risk: The Company depends on the diligence, skill, judgement and business contacts of the Manager's investment professionals and its future success could depend on the continued service of these individuals, in particular Gervais Williams. Mitigation: The Company may terminate the Management Agreement should Gervais Williams cease to be an employee of the Manager's group and is not replaced by a person whom the Company considers to be of equal or satisfactory standing within three months of his departure. Redemption Facility Risk: The operation of the annual redemption facility may lead to a more concentrated and less liquid portfolio which may adversely affect the Company's performance and value. Further, redemptions may also adversely affect the secondary market liquidity of the ordinary shares. Mitigation: The Board would seek to mitigate the risk of substantial redemptions being requested by maintaining a regular flow of communication with shareholders and the achievement of the investment objectives of the Company. Under the Articles of Association, the Board may, at its absolute discretion, elect not to operate the redemption facility on any given Redemption Point, although the Board does not generally expect to exercise this discretion, save in the interests of shareholders as a whole. SHARE CAPITAL Share Issues On 15 February 2013, the Company announced that it had agreed heads of terms with the board of Henderson Fledgling Trust plc (subsequently renamed Miton Income Opportunities Trust plc ("MIOT")) in respect of a future merger of the two companies (the "Scheme"). Under the Scheme, and as set out in the prospectus and circular dated 30 August 2013, MIOT shareholders would receive Diverse shares valued at a premium of 2.5% to the NAV as at the effective date of the Scheme. The consideration for the issue of new Diverse shares was the transfer to Diverse of the entire investment portfolio of MIOT, following the setting aside of such amounts as required to meet its outstanding and contingent liabilities, by way of a scheme of reconstruction. At a General Meeting held on 23 September 2013, the Directors were granted the authority to allot ordinary shares up to an aggregate nominal amount of Â£150,000 in connection with the allotment of ordinary shares to MIOT shareholders. On 30 September 2013, 115,684,143 ordinary shares were issued to MIOT shareholders on the basis of 7.1965 ordinary shares for every MIOT share held. These shares commenced trading on the London Stock Exchange on 1 October 2013. At the Annual General Meeting held on 22 October 2013, the Directors were granted the authority to allot ordinary shares up to an aggregate nominal amount of Â£20,800. No shares have been issued under this authority. As at the year end, the Company's share capital consisted of 324,377,450 ordinary shares and 50,000 management shares (see note 8 to the financial statements). At a General Meeting held on 7 December 2012, the Directors were granted the authority to allot C shares on a fully pre-emptive basis up to an aggregate nominal amount of Â£3,000,000, representing 300,000,000 C shares. This authority was renewed at the Annual General Meeting held on 22 October 2013 in respect of an aggregate nominal amount of Â£2,380,000. Subsequent to the year end, on 23 June 2014, 100,000,000 C shares of 1p each were issued under an Open Offer, Placing and Offer for Subscription at an issue price of 50p each, raising an aggregate of Â£50 million of gross proceeds for the Company. The C shares commenced trading on the London Stock Exchange on 26 June 2014. Following the above transaction and as at the date of this Report, there were 324,377,450 ordinary shares (representing 76.4% of voting capital) and 100,000,000 C shares representing 23.6% of voting capital) in issue. The remaining authorities to issue shares are due to expire at the Company's Annual General Meeting to be held on 21 October 2014. Proposals for their renewal are set out in the full Annual Report and Accounts. There are no restrictions concerning the transfer of securities in the Company or on voting rights; no special rights with regard to control attached to securities; no agreements between holders of securities regarding their transfer known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid. Purchase of Own Shares At the Annual General Meeting of the Company held on 22 October 2013, the Directors were granted the authority to buy back up to 31,283,126 ordinary shares. No ordinary shares have been bought back under this authority. The authority will expire at the next Annual General Meeting when a resolution for its renewal will be proposed. Treasury Shares Shares bought back by the Company may be held in treasury, from where they could be re-issued at a premium to NAV quickly and cost effectively. This provides the Company with additional flexibility in the management of its capital base. No shares were purchased for, or held in, treasury during the year or since the year end. Share Redemptions Valid redemption requests were received under the Company's redemption facility for the 31 May 2014 Redemption Point in relation to 69,892 ordinary shares. As permitted under the Company's Articles of Association, these shares were matched with buyers and were sold at a calculated Redemption Price of 81.86p. MANAGEMENT, SOCIAL, ENVIRONMENTAL AND DIVERSITY MATTERS Management Arrangements During the year, the Company's investments were managed by Miton Asset Management Limited under an agreement dated 7 April 2011. On 1 January 2014, the agreement was novated from Miton Capital Partners Limited to Miton Asset Management Limited. The management fee was calculated at the rate of one-twelfth of 1.0% per calendar month of the average market capitalisation of the Company's shares for the relevant month and payable monthly in arrears. In addition to the basic management fee, and for so long as a Redemption Pool is in existence, the Manager is entitled to receive from the Company a fee calculated at the rate of one-twelfth of 1.0% per calendar month of the NAV of the Redemption Pool on the last business day of the relevant calendar month. With effect from 26 June 2014, it has been agreed that the management fee would be amended such that the fee would be 1.0% on the market capitalisation of the Company up to Â£300m and 0.8% on the market capitalisation above Â£300m. In accordance with the Directors' policy on the allocation of expenses between income and capital, in each financial year 75% of the management fee payable is charged to capital and the remaining 25% to revenue. On 22 July 2014, the Company appointed PSigma Unit Trust Managers Limited ("PUTM"), a Miton Group Company, as the Company's Alternative Investment Fund Manager ("AIFM") on the terms of and subject to the conditions of a new investment management agreement (the "Management Agreement") between the Company and PUTM. PUTM has been approved as an AIFM by the UK's Financial Conduct Authority. The existing investment management agreement between the Company and Miton Asset Management Limited, which is not authorised as an AIFM, has been terminated. Miton Asset Management Limited has been appointed by PUTM as investment manager to the Company pursuant to a delegation agreement, so there will be no change to the day-to-day investment management arrangements. The arrangements in respect of the management fee and notice period remain unchanged. The Management Agreement is terminable by either the Manager or the Company giving to the other not less than 12 months' written notice. The Management Agreement may be terminated earlier by the Company with immediate effect on the occurrence of certain events, including the liquidation of the Manager or appointment of a receiver or administrative receiver over the whole or any substantial part of the assets or undertaking of the Manager or a material breach by the Manager of the Management Agreement which is not remedied. The Company may also terminate the Management Agreement should Gervais Williams cease to be an employee of the Manager's group and is not replaced by a person whom the Company considers to be of equal or satisfactory standing within three months of his departure. The Company has given certain market standard indemnities in favour of the Manager in respect of the Manager's potential losses in carrying on its responsibilities under the Management Agreement. The Board has also appointed Bank of New York Mellon as its Depositary and Custodian, under an agreement dated 22 July 2014. The annual fee for depositary services due to Bank of New York Mellon will be 0.025% of gross assets, subject to a minimum fee of Â£15,000 per annum. Company secretarial and administrative services are provided by Capita Sinclair Henderson Limited, under an agreement dated 7 April 2011, for an annual fee of Â£108,000, increasing annually in line with the UK Retail "all items" Index. The fees are paid in equal monthly instalments in arrears. This agreement may be terminated by 12 months' written notice subject to provisions for earlier termination as provided therein. Continuing Appointment of the Manager The Board keeps the performance of the Manager under continual review, and the Management Engagement Committee conducts an annual appraisal of the Manager's performance, and makes a recommendation to the Board about the continuing appointment of the Manager. It is the opinion of the Directors that the continuing appointment of PUTM and Miton Asset Management Limited is in the interests of shareholders as a whole. The reasons for this view are that the Manager has executed the investment strategy according to the Board's expectations and has demonstrated superior risk-adjusted returns relative to the broader market and the peer group. The Directors also believe that by paying the investment management fee calculated on a market capitalisation basis, rather than a percentage of assets basis, the interests of the Manager are more closely aligned with those of shareholders. As set out in the Chairman's Statement, the Board has agreed a revised management fee structure, which will be on a tiered basis going forward. Environmental, Human Rights, Employee, Social and Community Issues The Company does not have any employees and the Board consists entirely of non-executive Directors. Day-to-day management of the business is delegated to the Manager. As an investment trust, the Company has no direct impact on the community or the environment, and as such has no environmental, human rights, social or community policies. In carrying out its investment activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly. Gender Diversity The Board of Directors of the Company comprises two female and three male Directors. On behalf of the Board Michael Wrobel Chairman 12 August 2014 Going Concern The Directors consider that it is appropriate to adopt the going concern basis in preparing the financial statements. Although the Company had net current liabilities as at 31 May 2014, after making enquiries, and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. In arriving at this conclusion the Directors have considered the liquidity of the portfolio and the Company's ability to meet obligations as they fall due for a period of at least 12 months from the date that these financial statements were approved. Cash flow projections have been reviewed and show that the Company has sufficient funds to meet both its contracted expenditure and its discretionary cash outflows in the form of the dividend policy. The full Annual Report contains the following statements regarding responsibility for the financial statements. STATEMENT OF DIRECTORS' RESPONSIBILITIES The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards ("IFRS") as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the Group for that year. In preparing the Group financial statements, the Directors are required to: â€¢ select suitable accounting policies in accordance with IAS 8: 'Accounting Policies, Changes in Accounting Estimates and Errors' and then apply them consistently; â€¢ present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; â€¢ provide additional disclosures when compliance with specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance; â€¢ state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and â€¢ make judgements and estimates that are reasonable and prudent. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations, and for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority. The financial statements are published on the Company's website, www.mitongroup.com/dit, which is maintained on behalf of the Company by the Manager. Under the Management Agreement, the Manager has agreed to maintain, host, manage and operate the Company's website and to ensure that it is accurate and up-to-date and operated in accordance with applicable law. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and accordingly, the Auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom covering the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction. We confirm that to the best of our knowledge: â€¢ the Group financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; â€¢ this Annual Report includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces; and â€¢ the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy. On behalf of the Board Michael Wrobel Chairman 12 August 2014 NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 May 2014 and 31 May 2013 but is derived from those accounts. Statutory accounts for 2013 have been delivered to the Registrar of Companies, and those for 2014 will be delivered in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor's report can be found in the Company's full Annual Report at: www.mitongroup.com/dit. CONSOLIDATED INCOME STATEMENT Year ended Year ended 31 May 2014 31 May 2013 Revenue Capital Total Revenue Capital Total Note Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Gains on 11 - 45,836 45,836 - 28,196 28,196 investments held at fair value through profit or loss Income 2 8,953 - 8,953 4,765 - 4,765 Investment 3 (583) (1,750) (2,333) (256) (767) (1,023) management fee Other expenses 4 (577) - (577) (532) - (532) Return on 7,793 44,086 51,879 3,977 27,429 31,406 ordinary activities before finance costs and taxation Finance costs - (6) (19) (25) (3) (9) (12) overdraft interest paid Return on ordinary 7,787 44,067 51,854 3,974 27,420 31,394 activities before taxation Taxation - 5 (73) - (73) (25) - (25) irrecoverable withholding tax Return on 6 7,714 44,067 51,781 3,949 27,420 31,369 ordinary activities after taxation pence pence pence pence pence pence Return per 6 2.70 15.41 18.11 2.42 16.85 19.27 ordinary share Return per C 6 - - - 0.63 4.32 4.95 share The total column of this statement is the Income Statement of the Group prepared in accordance with IFRS, as adopted by the European Union. The supplementary revenue and capital columns are presented in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies ("AIC SORP"). All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The notes form part of these financial statements. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share Share premium Special Capital Revenue capital account reserve reserve reserve Total Group Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 As at 1 June 2013 209 59,337 48,558 25,529 2,276 135,909 Total comprehensive income: Net return for the - - - 44,067 7,714 51,781 year Transactions with shareholders recorded directly to equity: Issue of ordinary 116 85,000 - - - 85,116 shares Expenses of share - (780) - - - (780) issue Equity dividends paid - - - - (5,623) (5,623) As at 31 May 2014 325 143,557 48,558 69,596 4,367 266,403 Share Share premium Special Capital Revenue capital account reserve reserve reserve Total Group Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 As 1 June 2012 100 - 48,558 (1,891) 1,059 47,826 Total comprehensive income: Net return for the - - - 27,420 3,949 31,369 year Transactions with shareholders recorded directly to equity: Issue of ordinary 109 60,891 - - - 61,000 shares Expenses of share - (1,554) - - - (1,554) issue Equity dividends paid - - - - (2,732) (2,732) As at 31 May 2013 209 59,337 48,558 25,529 2,276 135,909 The notes form part of these financial statements. PARENT COMPANY STATEMENT OF CHANGES IN EQUITY Share Share premium Special Capital Revenue capital account reserve reserve reserve Total Company Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 As at 1 June 2013 209 59,337 48,558 25,529 2,276 135,909 Total comprehensive income: Net return for the - - - 44,067 7,327 51,394 year Transactions with shareholders recorded directly to equity: Issue of ordinary 116 85,000 - - - 85,116 shares Expenses of share - (780) - - - (780) issue Equity dividends - - - - (5,623) (5,623) paid As at 31 May 2014 325 143,557 48,558 69,596 3,980 266,016 Share Share premium Special Capital Revenue capital account reserve reserve reserve Total Company Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 As at 1 June 2012 100 - 48,558 (1,891) 1,002 47,769 Total comprehensive income: Net return for the - - - 27,420 4,006 31,426 year Transactions with shareholders recorded directly to equity: Issue of ordinary 109 60,891 - - - 61,000 shares Expenses of share - (1,554) - - - (1,554) issue Equity dividends - - - - (2,732) (2,732) paid As at 31 May 2013 209 59,337 48,558 25,529 2,276 135,909 The notes form part of these financial statements. CONSOLIDATED AND PARENT COMPANY BALANCE SHEETS Group Group Company Company 31 May 31 May 31 May 31 May 2014 2013 2014 2013 Note Â£'000 Â£'000 Â£'000 Â£'000 Non-current assets: Investments held at 11 267,249 128,897 267,249 128,897 fair value through profit or loss Current assets: Derivative instruments 12 1,293 - 1,293 - Trade and other 15 1,769 6,609 1,769 6,609 receivables Cash and cash 130 893 - 893 equivalents 3,192 7,502 3,062 7,502 Current liabilities: Bank overdraft 16 (3,724) - (3,724) - Trade and other 16 (314) (490) (571) (490) payables (4,038) (490) (4,295) (490) Net current (846) 7,012 (1,233) 7,012 (liabilities)/assets Total net assets 266,403 135,909 266,016 135,909 Capital and reserves: Share capital 8 325 209 325 209 Share premium account 9 143,557 59,337 143,557 59,337 Special reserve 9 48,558 48,558 48,558 48,558 Capital reserve 9 69,596 25,529 69,596 25,529 Revenue reserve 9 4,367 2,276 3,980 2,276 Shareholders' funds 266,403 135,909 266,016 135,909 pence pence Net asset value per 10 82.13 65.12 ordinary share These financial statements were approved by the Board of The Diverse Income Trust plc on 12 August 2014 and were signed on its behalf by: Michael Wrobel Chairman Company no.: 7584303 The notes form part of these financial statements. CONSOLIDATED AND PARENT COMPANY CASH FLOW STATEMENTS Group Group Company Company 31 May 31 May 31 May 31 May 2014 2013 2014 2013 Â£'000 Â£'000 Â£'000 Â£'000 Operating activities: Net return before taxation 51,854 31,394 51,467 31,451 Gains on investments held at fair (45,836) (28,196) (45,836) (28,196) value Purchases of investments (76,311) (78,718) (76,311) (78,718) Sales of investments 72,370 19,130 72,370 19,130 Purchase of derivative (4,060) - (4,060) - instruments Increase in accrued income (95) (7) (95) (7) Increase in other receivables (644) (508) (644) (508) Increase in other payables 17 191 17 191 Movement in investments by - 151 - - subsidiary Net cash outflow from operating (2,705) (56,563) (3,092) (56,657) activities before taxation Taxation: Withholding tax paid (73) (25) (73) (25) Financing: C shares issued - 61,000 - 61,000 Expenses of share issue (780) (1,554) (780) (1,554) Equity dividends paid (5,623) (2,732) (5,623) (2,732) Cash received from acquisition of 4,694 - 4,694 - MIOT Movement in loan from subsidiary - - 257 324 Net cash (outflow)/inflow from (1,782) 56,689 (1,525) 57,013 financing and taxation (Decrease)/increase in cash and (4,487) 126 (4,617) 356 cash equivalents Reconciliation of net cash flow to movements in net funds: Cash and cash equivalents at the 893 767 893 537 start of the year Net cash (outflow)/inflow from (4,487) 126 (4,617) 356 cash and cash equivalents Cash and cash equivalents at the (3,594) 893 (3,724) 893 end of the year Cash and cash equivalents Comprise the following: Cash at bank 130 893 - 893 Bank overdraft (3,724) - (3,724) - (3,594) 893 (3,724) 893 The notes form part of these financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 General Information and Significant Accounting Policies The Diverse Income Trust plc is a company incorporated and registered in England and Wales. The principal activity of the Company is that of an investment trust company within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010. The Group's annual financial statements for the year ended 31 May 2014 have been prepared in conformity with IFRS as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and as applied in accordance with the provisions of the Companies Act 2006. The annual financial statements have also been prepared in accordance with the AIC SORP issued in January 2009 for the financial statements of investment trust companies and venture capital trusts, except to any extent where it is not consistent with the requirements of IFRS. Basis of Preparation The accounting policies adopted in preparing the current year's financial statements are consistent with those of the previous year. In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been prepared alongside the Income Statement. The financial statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue to be met. The Directors have made an assessment of the Group's ability to continue as a going concern and are satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern, having taken into account the liquidity of the Company's investment portfolio and the Group's financial position in respect of its cash flows, borrowing facilities and investment commitments (of which there are none of significance). Therefore, despite the net current liability position as at 31 May 2014, the consolidated financial statements have been prepared on the going concern basis. The financial statements are presented in sterling, which is the Group's functional currency as the UK is the primary environment in which it operates, rounded to the nearest Â£'000, except where otherwise indicated. Basis of Consolidation The Group financial statements consolidate the financial statements of the Company and its wholly-owned subsidiary, DIT Income Services Limited, drawn up to 31 May 2014. The subsidiary is consolidated from the date of its acquisition, being the date on which the Company obtained control, and will continue to be consolidated until the date that such control ceases. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights. The financial statements of the subsidiary are prepared for the same reporting year as the parent Company, using consistent accounting policies. All inter-company balances and transactions, including unrealised profits arising from them, are eliminated. As permitted by Section 408 of the Companies Act 2006, the Company has not presented its own Income Statement. The amount of the Company's return for the financial year dealt with in the financial statements of the Group is a profit after tax of Â£51,394,000 (2013: Â£31,426,000). Segmental Reporting The Directors are of the opinion that the Group is engaged in a single segment of business, being investment business. The Group primarily invests in companies listed in the UK. Accounting Developments The accounting policies adopted are consistent with those of the previous financial year, except that the following new standard has been adopted in the current year: In May 2011, the IASB issued IFRS 13 `Fair Value Measurement'. IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. In particular, it unifies the definition of fair value as the price at which an ordinary transaction to sell an asset or to transfer a liability would take place between investor participants at the measurement date. It also replaces and expands the disclosure requirements about fair value measurements in other IFRSs, including IFRS 7 `Financial Instruments: Disclosures'. This standard became effective for accounting periods beginning on or after 1 January 2013 and requires specific disclosures on fair value but has not materially affected the fair value measurements made by the Company. The IASB has issued the following relevant standards and interpretations which are not effective for the year ended 31 May 2014 and have not been applied in preparing these financial statements. International Accounting Standards (IAS/IFRSs) Effective for periods beginning on or after IAS 27 Reissued as IAS 27 Consolidated and Separate 1 January 2014 Financial Statements (as amended in 2011) IAS 28 Investments in Associates and Joint Ventures 1 January 2014 IFRS 9 Financial Instruments: Classification and 1 January 2014 Measurement IFRS 10 Consolidated Financial Statements 1 January 2014 IFRS 11 Joint Arrangements 1 January 2014 IFRS 12 Disclosure of Interests in Other Entities 1 January 2014 The Group does not believe that there will be a material impact on the consolidated financial statements from the adoption of these standards/ interpretations. Critical Accounting Judgements and Key Sources of Estimation Uncertainty The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts in the Balance Sheet, the Income Statement and the disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future period if the revision affects both current and future periods. There were no accounting estimates or significant judgements in the current period. Valuation of Investments The Group's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Group's Board of Directors. Accordingly, upon initial recognition the Group designates the investments `at fair value through profit or loss'. They are included initially at fair value, which is taken to be their cost (excluding expenses incidental to the acquisition which are written off in the Income Statement, and allocated to `capital' at the time of acquisition). When a purchase or sale is made under a contract, the terms of which require delivery within the time-frame of the relevant market, the investments concerned are recognised or derecognised on the trade date. Subsequent to initial recognition, investments are valued at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE 100 constituents and the most liquid constituents of the FTSE 250 Index along with some other securities. Changes in fair value of investments not designated as held for trading are recognised in the Income Statement as a capital item. On disposal, realised gains and losses are also recognised in the Income Statement as capital items. Gains and losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Income Statement and are ultimately recognised in the capital reserve. The investment in the subsidiary company, DIT Income Services Limited, is held at cost (Â£1) (2013: Â£1). Investments held as current assets by the subsidiary undertaking are classified as `held for trading', and are at fair value. Profits or losses on investments held for trading are taken to revenue in the Income Statement. All investments for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy in note 11, described as follows, based on the lowest significant applicable input: Level 1 reflects financial instruments quoted in an active market. Level 2 reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets. Level 3 reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data. For investments that are recognised in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing the categorisation (based on the lowest significant applicable input) at the date of the event that caused the transfer. Derivative Instruments - held for Trading Derivatives, including Index Put options, which are listed investments are classified as financial assets or liabilities held for trading. They are initially recorded at cost (being the premium paid to purchase the option) and are subsequently valued at fair value at the close of business at the year end and included in fixed assets or current assets/liabilities depending on their maturity date. Changes in the fair value of derivative instruments are recognised as they arise in the Income Statement. 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 risk of changes in value. For the purpose of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts when applicable. Income Dividends received from UK registered companies are accounted for net of imputed tax credits. Dividends from overseas companies are shown gross of any non-recoverable withholding taxes which are described separately in the Income Statement. Dividends receivable on quoted equity shares are taken to revenue on an ex-dividend basis. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established. Fixed returns on non-equity shares are recognised on a time-apportioned basis. Special dividends are taken to revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the Board reviews all relevant information as to the reasons for the sources of the dividend on a case by case basis. When the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend forgone is recognised as income. Any excess in the value of the cash dividend is recognised in the capital column. All other income is accounted for on a time-apportioned accruals basis using the effective interest rate method and is recognised in the Income Statement. Expenses and Finance Costs All expenses are accounted for on an accruals basis. On the basis of the Board's expected long-term split of total returns in the form of capital and revenue returns of 75% and 25% respectively, the Company charges 75% of its investment management fee and finance costs to capital. All other administrative expenses are charged through the revenue column in the Income Statement. Expenses incurred directly in relation to placings and offers for subscription of shares are deducted from equity and charged to the share premium account. Taxation Deferred tax is provided on an undiscounted basis in accordance with IFRS 19 on all timing differences that have originated, but not reversed, by the Balance Sheet date based on tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax assets are only recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of timing differences can be deducted. In line with the recommendations of the SORP, the allocation method used to calculate the tax relief on expenses charged to capital is the "marginal" basis. Under this basis, if taxable income is capable of being offset entirely by expenses charged through the revenue account, then no tax relief is transferred to the capital account. No taxation liability arises on gains from sales of fixed asset investments by the Company by virtue of its investment trust status. However, the net revenue (excluding UK dividend income) accruing to the Company is liable to corporation tax at the prevailing rates. Dividends Payable to Shareholders Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the Statement of Changes in Equity. Dividends declared and approved by the Company after the Balance Sheet date have not been recognised as a liability of the Company at the Balance Sheet date. Capital Reserve Gains or losses on disposal of investments and changes in the fair value of investments held at the year end are recognised in the Income Statement and subsequently transferred to the capital reserve. Also, certain other expenses are charged to this reserve in accordance with the expenses policy above. Special Reserve The special reserve was created by a cancellation of the share premium account by order of the High Court in February 2012. It can be used for the repurchase of the Company's ordinary shares and for other corporate purposes. Its main purpose is to allow the Company to meet annual redemption requests for ordinary shares. The costs of repurchasing ordinary shares and meeting annual redemption requests, including related stamp duty and transaction costs, are also charged to the special reserve. Share Capital The Company classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. The share capital of the Company comprises of redeemable ordinary shares ("ordinary shares"), C shares, when in issue, and management shares. The Company is a closed-ended investment company with an unlimited life. The ordinary shares are not puttable instruments because redemption is conditional upon certain market conditions and/or Board approval. As such, they are not required to be classified as debt under IAS 32 `Financial Instruments: Disclosure and Presentation'. As defined in the Articles of Association, redemption of ordinary shares is at the sole discretion of the Directors, therefore the ordinary shares have been classified as equity. The issuance, acquisition and resale of ordinary shares are accounted for as equity transactions and no gain or loss is recognised in the Income Statement. 2 Income Year ended Year ended 31 May 2014 31 May 2013 Â£'000 Â£'000 Income from investments: UK dividends 5,784 3,486 UK REIT dividend income 133 57 Unfranked dividend income 2,457 1,035 UK fixed interest 166 40 8,540 4,618 Other income: Bank deposit interest - 2 Net dealing profit of subsidiary 387 143 Underwriting income 26 2 Total income 8,953 4,765 3 Investment Management Fee Year ended Year ended 31 May 2014 31 May 2013 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Investment management fee 583 1,750 2,333 256 767 1,023 Under the terms of an agreement dated 7 April 2011, the Company has appointed Miton Asset Management as the Manager. The basic investment management fee is calculated at the rate of one-twelfth of 1.0% of the adjusted market capitalisation of the Company on the last business day of each calendar month. The basic management fee accrues daily and is payable in arrears in respect of each calendar month. For the purpose of calculating the basic fee, the `adjusted market capitalisation' of the Company is defined as the average daily mid-market price for an ordinary share and C share (when in issue), multiplied by the number of relevant shares in issue, excluding those held by the Company in treasury, on the last business day of the relevant month. In addition, the Manager is entitled to receive a management fee on any Redemption Pool, as detailed in the Strategic Report above. At 31 May 2014, an amount of Â£227,000 (2013: Â£226,000) was outstanding and due to Miton Asset Management in respect of management fees. As discussed above, with effect from 26 June 2014, it has been agreed that the management fee would be amended such that the fee would be 1.0% on the market capitalisation of the Company up to Â£300m and 0.8% on the market capitalisation in excess of Â£300m. 4 Other Expenses Year ended Year ended 31 May 2014 31 May 2013 Â£'000 Â£'000 Secretarial services 108 120 Auditor's remuneration for: Audit of the Group's financial statements 31 28 (payable by the Company only) Other assurance related services* - - Directors' fees (see the Directors' 122 105 Remuneration Report in the full Annual Report) Other expenses 316 279 577 532 * Amounts paid to the Company's Auditor in connection with the calculation of the formula asset values and resulting conversion ratios for the acquisition of MIOT of Â£21,000 inclusive of VAT (2013: Â£22,000 for review of C share conversion ratios) are included in share issue costs. 5 Taxation Year ended Year ended 31 May 2014 31 May 2013 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Overseas withholding 73 - 73 25 - 25 tax suffered The current taxation charge for the year is lower than the standard rate of corporation tax in the UK of 21%. The differences are explained below. Year ended Year ended 31 May 2014 31 May 2013 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Return on ordinary 7,787 44,067 51,854 3,974 27,420 31,394 activities before taxation Theoretical tax at UK 1,765 9,990 11,755 947 6,534 7,481 corporation tax rate of 22.67% (2013: 23.83%) Effects of: - UK dividends that are (1,310) - (1,310) (830) - (830) not taxable - Overseas dividends that (515) - (515) (247) - (247) are not taxable - Other non-taxable - - - (2) - (2) income - Realised dealing gains (88) - (88) (32) - (32) - Unrealised dealing - - - (2) - (2) gains - Non-taxable investment - (10,391) (10,391) - (6,719) (6,719) gains - Overseas taxation 73 - (73) 25 - 25 suffered - Expenses not deductible - - - 10 - 10 for tax - Unrelieved expenses 148 401 549 156 185 341 Actual current tax charge 73 - 73 25 - 25 Factors That May Affect Future Tax Charges The Company has excess management expenses of Â£4,257,000 (2013: Â£2,200,000) that are available to offset future taxable revenue. At 31 May 2014, the Group has not recognised a deferred tax asset of Â£851,000 (2013: Â£506,000), calculated using the standard rate of corporation tax in the UK of 21%, in respect of these accumulated expenses as they will only be recoverable to the extent that there is sufficient future taxable revenue. It is unlikely that the Company will generate sufficient taxable income in the future to utilise these expenses to reduce future tax charges and therefore no deferred tax charge has been recognised. In addition, deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company under HMRC rules. 6 Return per Share Ordinary Shares The return per ordinary share is based on the net profit after taxation of Â£51,781,000 (2013: Â£28,343,000) and on 286,027,365 (2013: 147,044,788) ordinary shares, being the weighted average number of ordinary shares in issue during the year. The return per ordinary share detailed above can be further analysed between revenue and capital as follows: Year ended Year ended 31 May 2014 31 May 2013 Revenue Capital Total Revenue Capital Total Basic and diluted Net profit (Â£'000) 7,714 44,067 51,781 3,563 24,780 28,343 Weighted average 286,027,365 147,044,788 number of ordinary shares in issue Return per 2.70 15.41 18.11 2.42 16.85 19.27 ordinary share (pence) C Shares The return per C share is based on the net profit after taxation of Â£nil 2013: Â£3,026,000) and on nil (2013: 61,136,364) C shares, being the weighted average number of C shares in issue during the periods in issue. The return per C share detailed above can be further analysed between revenue and capital as follows: Year ended Year ended 31 May 2014 31 May 2013 Revenue Capital Total Revenue Capital Total Basic and diluted Net profit (Â£,000) - - - 386 2,640 3,026 Weighted average - 61,136,364 number of C shares in issue Return per C share - - - 0.63 4.32 4.95 (pence) 7 Dividends per Ordinary Share Amounts recognised as distributions to equity holders in the year. Year ended Year ended 31 May 2014 31 May 2013 pence pence Â£'000 per share Â£'000 per share In respect of the previous period: Fourth interim dividend 1,753 0.84 930 0.93 In respect of the year under review: First interim dividend 626 0.30 300 0.30 Second interim dividend 1,622 0.50 782 0.50 Third interim dividend 1,622 0.50 720 0.46 Dividends distributed during the 5,623 2.14 2,732 2.19 year The Directors have declared a fourth interim dividend in respect of the year ended 31 May 2014 of 0.95p per ordinary share payable on 29 August 2014 to all shareholders on the register at close of business on 27 June 2014. The total dividends payable in respect of the financial year for the purposes of the income retention test for Section 1158 of the Corporation Tax Act 2010 are set out below. Year ended Year ended 31 May 2014 31 May 2013 Â£'000 Â£'000 Revenue available for distribution by way of 7,714 3,949 dividends for the year First interim dividend of 0.30p (2013: 0.30p) per (626) (300) ordinary share Second interim dividend of 0.50p (2013: 0.50p) per (1,622) (782) ordinary share Third interim dividend of 0.50p (2013:0.50p) per (1,622) (720) ordinary share Declared fourth interim dividend of 0.95p (3,082) (1,753) (2013: 0.84p) per ordinary share Estimated revenue reserve retained for the year 762 394 8 Called Up Share Capital 31 May 2014 31 May 2013 number Â£'000 number Â£'000 Ordinary shares 0.1p each: Opening balance 208,693,307 209 100,000,000 100 Issue of ordinary 115,684,143 116 108,693,307 109 shares 324,377,450 325 208,693,307 209 During the year, the Company issued 115,684,143 ordinary shares as a result of the acquisition of MIOT, receiving assets totalling Â£85,116,000. As a result of this transaction, there were 324,377,450 ordinary shares in issue as at 31 May 2014. After related costs of the issue, Â£84,220,000 was credited to the share premium account. Redemption of Ordinary Shares The Company, which is a closed-ended investment company with an unlimited life, has a redemption facility through which shareholders are entitled to request the redemption of all or part of their holding of ordinary shares on an annual basis on 31 May in each year. As set out in the Articles of Association, the Board may, at its absolute discretion, elect not to operate the annual redemption facility in whole or in part. Accordingly, the ordinary shares have been classified as equity. At 31 May 2014, the Company had received redemption requests for 69,982 ordinary shares. All of those shares were matched with buyers at the same calculated redemption price and were settled on 13 June 2014. Following this, the issued share capital and voting rights remained unchanged at 324,377,450 ordinary shares. Management Shares The 50,000 management shares with a nominal value of Â£1 each were allotted to Miton Group plc on 30 March 2011, the parent company of the Manager, on the basis of an undertaking to pay one-quarter of their nominal value on or before 30 March 2016 and the balance on demand. The management shares are non-voting and non-redeemable and, upon a winding-up or on a return of capital of the Company, shall only receive the fixed amount of capital paid up on such shares and shall confer no right to any surplus capital or assets of the Company. As at 31 May 2014, no amounts had been paid up (2013: Â£nil). 9 Reserves Share Capital Capital premium Special reserve reserve Revenue account reserve realised unrealised reserve 2014 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening balance 59,337 48,558 (295) 25,824 2,276 Premium on issue of 85,000 - - - - ordinary shares Expenses of share issue (780) - - - - Net gains on realisation - - 19,066 - - of investments Unrealised net increase - - - 29,537 - in value of investments Unrealised net decreases - - - (2,767) - in value of derivative instruments Management fees/finance - - (1,769) - - costs charged to capital Equity dividends paid - - - - (5,623) Revenue return on - - - - 7,714 ordinary activities after tax Closing balance 143,557 48,558 17,002 52,594 4,367 Share Capital Capital premium Special reserve reserve Revenue account reserve realised unrealised reserve 2013 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening balance - 48,558 (1,173) (718) 1,059 Premium on issue of 60,891 - - - - ordinary shares Expenses of share issue (1,554) - - - - Net gains on realisation - - 1,654 - - of investments Unrealised net increase - - - 26,542 - in value of investments Management fees/finance - - (776) - - costs charged to capital Equity dividends paid - - - - (2,732) Revenue return on - - - - 3,949 ordinary activities after tax Closing balance 59,337 48,558 (295) 25,824 2,276 At a General Meeting of the Company held on 6 April 2011, a resolution was passed approving the cancellation of the Company's share premium account. The Court subsequently confirmed this cancellation on 22 February 2012 and an amount of Â£48,558,000 was transferred from the Company's share premium account to its special reserve. This amount can be treated as a distributable reserve for all purposes permitted by the Companies Act 2006 (as amended), and will enhance substantially the ability of the Company to meet annual redemption requests and to buy-back its own shares either into treasury or for cancellation. 10 Net Asset Value per Ordinary Share The net asset value per ordinary share and the net asset values attributable at the year end were as follows: Net asset value Net assets Net asset value Net assets per share attributable per share attributable 31 May 2014 31 May 2014 31 May 2013 31 May 2013 pence Â£'000 pence Â£'000 Ordinary shares 82.13 266,403 65.12 135,909 - Basic and diluted Net asset value per ordinary share is based on net assets at the year end and 324,377,450 ordinary shares (2013: 208,693,307), being the number of ordinary shares in issue at the year end. 11 Investments Group and Company 31 May 2014 31 May 2013 Â£'000 Â£'000 Investment portfolio summary: Opening book cost 103,073 47,206 Opening investment holding gains/ 25,824 (718) (losses) Total investments designated at fair 128,897 46,488 value Group and Company 31 May 2014 31 May 2013 Â£'000 Â£'000 Analysis of investment portfolio movements Opening valuation 128,897 46,488 Movements in the period: Purchases at cost 75,749 78,217 Acquisition of the MIOT portfolio 80,374 - Stamp duty thereon 369 - Sales - proceeds (66,743) (24,004) - gains on sales 19,066 1,654 Increase in investment holding gains 29,537 26,542 Closing valuation 267,249 128,897 Closing book cost 211,888 103,073 Closing investment holding gains 55,361 25,824 267,249 128,897 A list of the largest portfolio holdings by their fair value is shown above. Included in the Balance Sheet at fair value, with the exception of the Company's investment in William Sinclair Holdings 8% Convertible Loan Notes (purchased during the year and valued at Â£2,650,000 at 31 May 2014), the investments are all equities or bonds which are listed either on the Official List or quoted on AIM/ISDX in the UK. The William Sinclair Loan Note is an unlisted investment held at its original purchase cost and is a reasonable approximation of its fair value as at 31 May 2014 representing approximately 1% of total net assets. This has been classified as a `Level 3' investment in the fair value hierarchy as disclosed below. As at 31 May 2014, the investments were registered in the names of the nominees of HSBC Bank plc, as custodian to the Company. There were no contingent liabilities in respect of the investments held at the end of the year. On 22 July 2014, following the arrangements to implement AIFMD, the Company terminated the Custody Agreement with HSBC and duly appointed Bank of New York Mellon as its Depositary and Custodian. The investments are now registered in the name of BONY OCS Nominees Ltd. Year ended Year ended 31 May 2014 31 May 2013 Â£'000 Â£'000 Transaction costs: 70 460 Costs on acquisitions Costs on disposals 119 52 189 512 Year ended Year ended 31 May 2014 31 May 2013 Â£'000 Â£'000 Analysis of capital gains/(losses) Gains on sales of investments 19,066 1,654 Losses on open derivative instruments (2,767) - - see note 12 Movement in investment holding gains 29,537 26,542 45,836 28,196 Fair Value Hierarchy IFRS 7 requires classification of financial instruments measured at fair value at one of three levels according to the relative reliability of the inputs used to estimate the fair values. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are explained in the accounting policies in note 1 under the heading `Valuation of Investments'. At 31 May 2014, all the Company's financial assets at fair value through profit or loss (including the listed Put option) are included in Level 1 with the exception of William Sinclair Loan Notes, as described above, and the investment in the subsidiary, which are both classified as a Level 3 investment (2013: same). Valuation Process for Level 3 Investments Investments classified within level 3 have significant unobservable inputs. Level 3 investments can typically include unlisted equity and corporate debt securities and over the counter ("OTC") derivative instruments. As observable prices are not available for these securities, the Group has used valuation techniques to derive the fair value. In respect of the unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital ("IPEVC") Valuation Guidelines. New investments are initially carried at cost, for a limited period, being the price of the most recent investment in the investee. This is in accordance with IPEVC Guidelines as the cost of recent investments will generally provide a good indication of fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. Other than the investment in its trading subsidiary (DIT Income Services Limited) the Group has one other Level 3 investment, being the holding in William Sinclair Convertible Loan Notes. As this was a new investment purchased during the year, the loan notes were initially purchased at par value and have been fair valued in accordance with the above policy by the Board of Directors. There are no other significant unobservable inputs with the measurement of its fair value at this stage and there have been no changes in valuation techniques during the year. 12 Derivative Contracts Typically, derivative contracts serve as components of the Company's investment strategy and are utilised primarily to structure and hedge investments, to enhance performance and reduce risk to the Group (the Company does not designate any derivative as a hedging instrument for hedge accounting purposes). The derivative contracts that the Company may hold from time to time or issue include: index-linked notes, contracts for differences, covered options and other equity-related derivative instruments. Derivatives often reflect, at their inception, only a mutual exchange of promises with little or no transfer of tangible consideration. However, these instruments can involve a high degree of leverage and are very volatile. A relatively small movement in the underlying value of a derivative contract may have a significant impact on the profit and loss and net assets of the Group. The Company's investment objective sets limits on investments in derivatives with a high risk profile. The Manager is instructed to closely monitor the Company's exposure under derivative contracts and any use of the derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Company's direct investments. The Company will not enter into uncovered short positions. As at 31 May 2014, the Group has positions in the following type of derivative: Options Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. The Company purchases either Put or Call options through regulated exchanges and OTC markets. Options purchased by the Company provide the Company with the opportunity to purchase (Call options) or sell (Put options) the underlying asset at an agreed-upon value either on or before the expiration of the option. The Company is exposed to credit risk on purchased options only to the extent of their carrying value, which is their fair value. During the year, and as discussed in more detail above, the Company purchased a FTSE 100 - June 2015 5,800 Put option. At the Balance Sheet date, the Put option had a fair value of Â£1,293,000 with a notional portfolio exposure of Â£68,800,000. Unrealised holding losses of Â£2,767,000 are included within the net investment result, as detailed in the table in note 11. 13 Substantial Share Interests The Company has notified interests in 3% or more of the voting rights of 34 (2013: 7) investee companies (none of which are closed-end investment funds). However, the Board does not consider any of the Company's other equity investments to be individually material in the context of the financial statements. 14 Investment in Subsidiary The Company owns the whole of the issued ordinary share capital (Â£1) of DIT Income Services Limited, an investment dealing company registered in England and Wales. The subsidiary is held at cost of Â£1 and has provided loans to the Company amounting to Â£257,000 at 31 May 2014 (2013: Â£nil). 15 Trade and Other Receivables Group Company 31 May 2014 31 May 2013 31 May 2014 31 May 2013 Â£'000 Â£'000 Â£'000 Â£'000 Amounts due from brokers 59 5,686 59 5,686 Dividends receivable 1,508 893 1,508 893 Accrued income 102 7 102 7 Taxation recoverable 30 4 30 4 Cash due from MIOT 48 - 48 - Prepayments and other 22 19 22 19 debtors 1,769 6,609 1,769 6,609 16 Trade and Other Payables Group Company 31 May 2014 31 May 2013 31 May 2014 31 May 2013 Â£'000 Â£'000 Â£'000 Â£'000 Bank overdraft 3,724 - 3,724 - Amounts due to brokers - 193 - 193 Other creditors 314 297 314 297 Amounts due to - - 257 - subsidiary 4,038 490 4,295 490 As at 31 May 2014, the Company had an uncommitted multi-currency overdraft facility agreement with HSBC Bank plc, under which the bank made available an aggregate amount equal to the lesser of: i. Â£7,500,000; and ii. 15% of custody assets from time to time The purpose of the facility is for short-term liquidity and it has no fixed term but is subject to review from time to time, at least on an annual basis. Interest is payable monthly in arrears on the amount of the facility outstanding at the rate of 1.75% above the applicable base rate set by the bank. In addition, a fee of Â£15,000 per annum is payable on each anniversary date. The facility is secured by a floating charge over the Company's assets. The overdraft facility with HSBC was drawn down by Â£3,724,000, at 31 May 2014 (31 May 2013: Â£nil). Following the year end, the Company's overdraft facility with HSBC was withdrawn when custody was switched to Bank of New York Mellon as part of the arrangements to implement AIFMD. The Board expects shortly to be able to agree borrowing facilities on broadly similar terms to those previously available to the Company. 17 Capital Commitments and Contingent Liabilities As at 31 May 2014, there were no outstanding commitments or contingent liabilities (2013: none). 18 Analysis of Financial Assets and Liabilities Investment Objective and Policy The Group's investment objective and policy are detailed above. The Group's investing activities in pursuit of its investment objective involve certain inherent risks. The Group's financial instruments comprise: â€¢ shares and debt securities held in accordance with the Group's investment objective and policies; â€¢ derivative instruments for efficient portfolio management, gearing and investment purposes; â€¢ cash,liquid resources and short-term debtors and creditors that arise from its operations; and â€¢ current asset investments held by its subsidiary. The risks identified arising from the Group's financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency exposure), liquidity risk and credit and counterparty risk. The Group may enter into derivative contracts to manage risk, and has taken out a listed Put option against the FTSE 100 Index during the year. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies have remained unchanged since the beginning of the accounting year. Market Risk Market risk arises mainly from uncertainty about future prices of financial instruments used in the Group's business. It represents the potential loss the Group might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Manager on a regular basis and the Board at quarterly meetings with the Manager. Market price risk Market price risk (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments. The Board manages the risks inherent in the investment portfolio by ensuring full and timely reporting of relevant information from the Manager. Investment performance and exposure are reviewed at each Board meeting. The Group's exposure to other changes in market prices as at 31 May 2014 on its equity and debt investments and listed Put index option held at fair value through profit or loss was Â£264,673,000 (2013: Â£127,699,000). A 10% increase in the market value of its listed equity investments at 31 May 2014 would have increased net assets attributable to shareholders by Â£26,467,000 (2013: Â£12,770,000). An equal change in the opposite direction would have decreased the net assets and net profit available to shareholders by an equal and opposite amount. The analysis is based on closing balances only and is not representative of the year as a whole. Interest rate risk Interest rate movements may affect the level of income receivable on cash deposits and payable on its overdraft facility. The Group's financial assets and liabilities, excluding short-term debtors and creditors, may include investment in fixed interest securities, such as UK corporate debt stock, whose fair value may be affected by movements in interest rates. The majority of the Group's financial assets and liabilities, however, are non-interest bearing. As a result, the Group's financial assets and liabilities are not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. There was limited exposure to interest bearing liabilities during the year ended 31 May 2014 (2013: same). The possible effects on the fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions. As disclosed in note 16, during the year the Company had an uncommitted multi-currency overdraft facility with HSBC Bank plc. The Company had drawn down Â£3,724,000 of the facility as at the Balance Sheet date (2013: Â£nil). As detailed above, at 31 May 2014 the Company held three (2013: two) fixed income securities representing 1.4% of the total investment portfolio 2013: 0.9%). The interest rate profile of the Group (excluding short-term debtors and creditors) was as follows: Weighted average interest Floating rate rate Fixed rate As at 31 May 2014 % Â£'000 Â£'000 Assets and liabilities Fixed interest securities 7.43 - 3,869 Cash at bank - 130 - Bank overdraft - (3,724) - (3,594) 3,869 Weighted average interest Floating rate rate Fixed rate As at 31 May 2013 % Â£'000 Â£'000 Assets and liabilities Fixed interest securities 6.17 - 1,198 Cash at bank - 893 - 893 1,198 The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average fixed interest rate is based on the current yield of each asset, weighted by its current market value. The maturity dates and nominal interest rates on these investments held at fair value through profit or loss are shown in the portfolio information above. The weighted average years to maturity are 4.55 years (2013: 5.56 years). The floating rate assets and liabilities consist of cash deposits on call earning interest at the prevailing market rates and the bank overdraft, with interest payable at the rate of 1.75% above the prevailing bank base rate (currently 0.50%). The interest rate risk sensitivity of the Group on its floating rate assets and liabilities is given below: The Group receives interest on cash deposits over Â£25,000 at the rate of 0.03%. The interest received in the year amounted to Â£nil (2013: Â£2,000). The Group also had a bank overdraft position of Â£3,724,000 at the year-end out of a maximum facility available of Â£7,500,000. If interest rates had been 500 basis points higher or lower and all other variables were held constant, the Group's net assets and profit for the year ended 31 May 2014 would decrease/increase by Â£181,000 (2013: decrease/increase by Â£45,000). This is attributable to the Group's exposure to interest rates on its floating rate cash balances and bank overdraft as at the year ended 31 May 2014, and is not considered by the Directors to be representative for the year as a whole. Foreign currency risk Although the Company's performance is measured in sterling, a proportion of the Group's assets may be either denominated in other currencies or are in investments with currency exposure. Any income denominated in a foreign currency is converted into sterling upon receipt. At the Balance Sheet date, all the Group's assets were denominated in sterling and accordingly the only currency exposure the Group has is through the trading activities of its investee companies. Liquidity Risk Liquidity risk is not considered to be significant as the Group's assets primarily comprise mainly cash and readily realisable securities, which can under normal conditions be sold to meet funding commitments if necessary. They may, however, be difficult to realise in adverse market conditions. The Group can achieve short-term flexibility by the use of its overdraft facility. The maturity profile of the Group's financial liabilities of Â£4,038,000 (2013: Â£490,000) are all due in one year or less. Credit and Counterparty Risk Credit risk is the risk of financial loss to the Group if the contractual party to a financial instrument fails to meet its contractual obligations. The maximum exposure to credit risk as at 31 May 2014 was Â£7,061,000 (2013: Â£8,700,000). The calculation is based on the Group's credit risk exposure as at 31 May 2014 and this may not be representative for the whole year. The Group's listed investments are held on its behalf by HSBC Bank plc acting as the Group's custodian. Bankruptcy or insolvency of the custodian may cause the Group's rights with respect to securities held by the custodian to be delayed. The Board monitors the Group's risk by reviewing the custodian's internal controls report. Where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Group of default. Investment transactions are carried out with a number of brokers whose creditworthiness is reviewed by the Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Group's custodian bank ensures that the counterparty to any transaction entered into by the Group has delivered on its obligations before any transfer of cash or securities away from the Group is completed. Cash is only held at banks that have been identified by the Board as reputable and of high credit quality. None of the Group's assets are past due or impaired (2013: same). Derivatives The Manager may use derivative instruments in order to `hedge' the market risk of part of the portfolio. The Manager reviews the risks associated with individual investments and where they believe it appropriate, may use derivatives to mitigate the risk of adverse market (or currency) movements. The Manager discusses regularly the hedging strategy with the Board. At the year end, there was one derivative contract open (2013: nil). The FTSE 100 Put option aims to provide a limited degree of protection from a fall in the value of the FTSE 100 Index and has a strike price of 5,800, and would not materially impact the portfolio returns if a large market movement did occur. There were no other derivative contracts entered into during the year (2013: same). Fair Values of Financial Assets and Financial Liabilities All financial assets and liabilities of the Group are either carried in the Balance Sheet at fair value through profit or loss, or the Balance Sheet amount is a reasonable approximation of fair value (2013: same). Capital Management Policies The Company's capital management objectives are: â€¢ to ensure that it will be able to continue as a going concern; and â€¢ to maximise the income and capital return over the long-term to its equity shareholders through an appropriate balance of equity capital and `debt'. As stated in the investment policy, the Company has authority to borrow up to 15% of net asset value through a mixture of bank facilities and certain derivative instruments. There were borrowings of Â£3,724,000 as at 31 May 2014 (2013: Â£nil). Also, as a public company the minimum share capital is Â£50,000. 2014 2013 Â£'000 Â£'000 The Company's capital at 31 May comprised: Debt: Bank overdraft facility 3,724 - Equity: Equity share capital 325 209 Retained earnings and other reserves 266,078 135,700 Total shareholders' funds 266,403 135,909 Debt as a % of net assets 1.40% - The Board, with the assistance of the Manager, monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes: â€¢ the planned level of gearing, which takes into account the Manager's view of the market; â€¢ the need to buy back shares for cancellation or treasury, which takes account of the difference between the net asset value per share and the share price (i.e. the level of share price discount or premium); â€¢ the need for new issues of equity shares; and â€¢ the extent to which revenue in excess of that which is required to be distributed should be retained. The Company's objectives, policies and processes for managing capital have remained unchanged since its launch. 19 Transactions with the Manager and Related Parties The amounts paid to the Manager, together with details of the investment management contract, are disclosed in note 3. The existence of an independent Board of Directors demonstrates that the Company is free to pursue its own financial and operating policies and therefore, under the AIC SORP, the Manager is not considered to be a related party. The Company's related parties are its Directors. Fees paid to the Company's Board are disclosed in the Directors' Remuneration Report in the full Annual Report. There are no other identifiable related parties at the year end. 20 Post Balance Sheet Events Subsequent to the year end and as set out in the Chairman's Statement, the Company announced that it had raised an additional Â£50m through a C share issue. Once this capital has been invested, it will be merged with the ordinary shares and this should bring the size of the Company to just over Â£320m. ANNUAL GENERAL MEETING The Company's Annual General Meeting will be held on Tuesday, 21 October 2014 at 11.30 am, at the offices of Stephenson Harwood LLP,1 Finsbury Circus, London EC2M 7SH. NATIONAL STORAGE MECHANISM A copy of the Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/nsm ENDS Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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