Annual Financial Report
City Merchants High Yield Trust Limited
Annual Financial Report Announcement
For the year ended 31 December 2017
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FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
| Twelve Month Total Return* | 2017 | 2016 |
| Net asset value†| +8.7% | +11.8% |
| Share price | +9.9% | +11.6% |
| Ongoing Charges Ratio†| 0.98% | 1.01% |
| Dividend for the year | 10p | 10p |
| Year End Information | 31 DECEMBER 2017 |
31 DECEMBER 2016 |
% CHANGE |
| Net asset value per share†| 195.40p | 189.32p | +3.2 |
| Share price* | 199.50p | 191.00p | +4.5 |
| Premium | 2.1% | 0.9% | |
| Gearing | |||
| Gross gearing | nil | nil | |
| Net cash | 4.7% | 8.4% |
*Source: Thomson Reuters Datastream.
Terms marked †are defined in the Glossary of Terms on pages 58 and 59.
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CHAIRMAN’S STATEMENT
It is with great pleasure that I address shareholders in this my first full year Chairman’s Statement. I have been Chairman of the Board since 15 June 2017 following the retirement of my predecessor, Clive Nicholson.
The economic backdrop for high yield markets in 2017 had several important features. Growth tended to surprise positively and, whilst inflation edged higher, wage growth was subdued. Central bank policy remained supportive, albeit 2017 was notable for growing indications that the peak in central bank largesse established in response to the global financial crisis of 2008 was finally close at hand. Against this backdrop high yield markets remained strong for much of the year such that by November a new yield low had been established in Europe.
As the year progressed your Manager sounded an increasing note of caution in respect of the pricing of high yield securities, highlighting in particular growing signs that investors were less and less inclined to differentiate between the long-term prospects for corporates. Financial history contains numerous examples of risk becoming mispriced, and this danger is greatest during extended periods of ‘easy’ monetary policy, precisely the type of environment we are currently experiencing.
Significantly, the new yield low in November was quickly followed by a bout of market weakness and, encouragingly for the fundamental investor at least, some tentative signs that high yield markets were starting to pay closer attention to the variation in corporate prospects.
In this environment your Manager adopted a defensive strategy, maintaining a net cash position throughout the year and remaining focused on long-term ‘fundamental’ corporate prospects. The Manager’s Investment Report provides further information on the market background and portfolio strategy during the review period.
Performance
The Company’s net asset value (NAV) total return for the year was 8.7% compared with a total return of 7.6% for the Bank of America Merrill Lynch European Currency High Yield Index (the Index) and an average return of 4.9% for funds in the Investment Association Sterling Strategic Bond sector. A slight increase in the premium to NAV saw the share price return 9.9% over the year.
The Manager has a long-term horizon and consequently the Board pays close attention to returns over three and five years in its assessment of investment performance. For the three and five years to the end of 2017 your Company’s NAV total return was 25.2% and 49.7% respectively, compared to total returns of 20.9% and 41.6% for the Index.
Income Account
Dividends are a key component of the total return to shareholders and despite a challenging combination of exceptionally low yields, low credit spreads and low market volatility we were able to meet our dividend target of 10p in respect of the financial year. Your Board will continue to target a dividend of 10p in the coming year.
Costs
The Board pays careful attention to the costs of managing your Company; after all, these costs reduce the returns available to shareholders. The Company’s ongoing charges ratio (OCR) for the year was 0.98% compared to 1.01% for the previous year. The OCR is a measure of the expenses of managing your Company, and the Board monitors this ratio to ensure that it remains competitive with alternative investment vehicles.
Discount/Premium and Issuance
The Company’s shares traded at an average premium to net asset value of 1.6% during the year. Demand for investment trusts offering relatively high and stable income remained strong, a feature no doubt of a world in which interest rates have been close to, and in some cases below zero in the aftermath of the Global Financial Crisis. We issued a further 3,505,000 shares during 2017. Shares are always issued at a premium sufficient to ensure that existing shareholders do not experience dilution of the Net Asset Value. The new shares were issued at an average share price of 198.19p and an average premium of 2%. No further shares have been issued up to the date of this report.
Your Board believes that shareholders benefit from the growth in the size of the Company in two important ways. First, stock market liquidity is improved and secondly the Company’s fixed costs as a percentage of the NAV are reduced.
Gearing
At 31 December 2017 the Company had a net cash position of 4.7%. The Company’s policy on borrowing is determined by the Board and remains unchanged. The maximum amount of borrowing permitted is 30% of total assets. The decision to use borrowing to gear the portfolio rests with the Manager and a credit facility from the Bank of New York Mellon remains in place. In addition we are establishing a facility to use repo financing should the Manager wish to do so.
Board Composition
I would like to take this opportunity on behalf of the Board and shareholders to thank my predecessor, Clive Nicholson, for his long and successful contribution both as Chairman and prior to that as a Director of the Company and its predecessor.
I am pleased to report that Winifred Robbins has agreed to extend her tenure with the Board for a year beyond the ninth anniversary of original appointment. Win brings a wealth of experience of high yield investment to the Board and we will begin the search for her replacement later in the year.
Governance Matters
New regulation came into force at the start of 2018 requiring investment companies to publish projected returns according to a series of different scenarios. These scenarios are part of the Key Information Document provided to investors and in the opinion of the Board the methodology that must be used is not an appropriate way of projecting investment returns, given that it relies on recent history. This is an industry-wide issue which hopefully will be resolved in 2018.
AGM
The Company’s 2018 AGM will be held in London at Invesco’s west end office, 1st Floor, 43-45 Portman Square, London W1H 6LY at 3.30pm on 13 June 2018. One of the portfolio managers will provide a presentation on the portfolio and investment outlook, and the Directors will be available to answer questions.
The resolutions to be put to shareholders at the meeting are described in the Directors’ Report on page 56. They consist of the usual ordinary resolutions to receive this annual financial report and to re-appoint the auditor, as well as to elect myself as a director, as this is the first AGM since I became a director, as well as the re-election of Win Robbins. Ordinary resolutions on Directors’ Remuneration and the Company’s Dividend Payment Policy are also included; these are advisory.
Items of special business comprise those approved in past years by shareholders: continuation of the Company; authority to issue shares up to 10% of the existing share capital; renewal of the buy-back authority; and authority to call general meetings on 14 days’ notice. The Board has considered all the resolutions proposed in the notice and believes all are in the interests of shareholders as a whole. We therefore recommend shareholders vote in favour of each resolution.
Outlook
Last November’s weakness in high yield markets was a timely indication of quite how much optimism and perhaps complacency have crept into investors’ thinking in recent times. Despite their late year rise, yields and credit spreads remain at exceptionally low levels by historical standards, moreover we have still some way to go before quantitative easing is unwound and we see a return to more normal monetary conditions; as ever, politics, both domestically and with the European Union, remains very much a wild card for financial markets. Should 2018 see greater attention paid to the longer term fundamental prospects for corporates then the Board is confident that your Manager, as a patient, disciplined investor, is well placed to take advantage of the opportunities that will emerge.
Tim Scholefield
Chairman
27 March 2018
MANAGER’S INVESTMENT REPORT
Market Background
High yield bond markets enjoyed another year of positive returns in 2017. The best performing sector of the European high yield market was financials, while in the US utility companies delivered the highest return.
The strong performance of this area of the bond market can be attributed to a number of factors. First, central bank policy has remained accommodative. In the UK and Eurozone this included corporate bond purchase programmes that significantly influenced markets. Second, global economic data has shown continuous improvement. For example, the latest GDP data shows annual economic growth to the end of September in the Eurozone of 2.8%. This is the highest level of economic growth in the Eurozone since the first quarter of 2011 and importantly is broad-based across the region. Third, inflation has generally remained benign. The UK has been the main exception, with annualised Consumer Price Inflation above the Bank of England’s 2% target since February 2017. Fourth, the surprise election of Donald Trump to the office of US President in late 2016 raised expectations of tax reforms and a shift toward fiscal stimulus. Finally, after the rise of populism in 2016, political risk fell during 2017 with the election of market friendly candidates in the Netherlands, France and Germany.
Against this backdrop, the primary market has been very active. JP Morgan reported that new supply for European Currency high yield bonds exceeded €100 billion over the year. However, this was offset by €80 billion in redemptions. As a result, net supply was higher than it was in 2016, but still lower than for each year from 2010-15.
Amid the increased supply of high yield bonds there have been signs that investors are prepared to accept less favourable terms in the quest for income. For example, in the new issue market some bond issuers are taking on higher levels of leverage, while the terms being offered in bond agreements have deteriorated. In general, there has been a fall in the level of protection for bond investors. For now, the market’s ongoing demand for income is ensuring that this supply is absorbed. However, in our view the quality of the new issue market is an important indicator of where we are in the cycle and so something we continue to closely monitor.
Portfolio Strategy
Over the 12 months to 31 December 2017 the NAV total return for the Company was 8.7%. The NAV per share increased by 6.08p to 195.40p. A total dividend of 10p has been paid for the year.
The broad themes of the portfolio were unchanged during the year. There is a core (39%) of non-financial high yield corporate bonds, focused on seasoned issuers that we consider have a low likelihood of default. In addition, we have significant exposure to areas of the market that we believe offer relatively attractive yield. Approximately 25% of the portfolio is invested in bank capital, predominantly in the subordinated debt of large European banks (Additional Tier 1 and Legacy Tier 1). We also have around a 10% allocation to subordinated bonds in the insurance sector. Elsewhere, we have holdings in hybrid capital instruments (subordinated corporate bonds with some equity-like characteristics). These are issued with higher coupons than the issuer’s senior debt instruments, and are held across various sectors including telecoms and utilities. We believe the subordination risk of these more junior debt instruments is acceptable in the context of the companies’ relatively strong balance sheets.
We are maintaining an allocation to liquidity (cash, government bonds and bonds maturing within one year). This helps to mitigate the impact of any periods of market weakness and also means we are well placed to exploit any opportunities that arise. As at 31 December 2017 this allocation was 8% of the portfolio’s market value.
Outlook
Looking ahead, we think the market is balanced between very low yields and a broadly supportive fundamental and technical backdrop (positive economic growth, benign inflation, accommodative central bank policy and the ongoing demand for income). One of the key risks to the market is that, amid the search for income, investors become willing to accept yields and bond terms that in a different economic environment would not look appropriate. As the business cycle turns, these weaker bonds could come under significant pressure.
Through in-depth analysis we aim to identify the key risks to a company meeting its financial commitments. In turn this enables us to gauge the level of income we need to be paid to compensate for those risks. In a market that we believe is very tightly priced, the process of security selection takes on even more importance. Similarly, it is important to maintain a good diversification of holdings, with the portfolio currently invested in well over 100 different issuers.
By adopting this approach, we believe that we will be able to meet the challenges that the ongoing environment of historically low yields poses and continue to deliver attractive levels of income for the Company’s shareholders.
Paul Read Paul Causer Rhys Davies
Portfolio Managers
27 March 2018
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STRATEGIC REPORT
Business Review
Strategy and Business Model
City Merchants High Yield Trust Limited is a Jersey domiciled investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied.
The business model the Company has adopted to achieve its objective has been to contract investment management and administration to appropriate external service providers, who are subject to oversight by the Board. The principal service providers are:
– Invesco Fund Managers Limited (the ‘Manager’) to manage the portfolio in accordance with the Board’s strategy; and
– R&H Fund Services (Jersey) Limited (the ‘Secretary’) to provide company secretarial and general administration services.
In addition to the management and administrative functions of the Manager and the Secretary, the Company has contractual arrangements with Link Market Services (Jersey) Limited (formerly known as Capita Registrars (Jersey) Limited) to act as registrar and the Bank of New York Mellon (International) Limited (BNYMIL) as depository and custodian. BNYMIL became the depositary following novation of the depositary agreement from BNY Mellon Trust & Depositary (UK) Limited on 1 December 2017. This transfer has no substantive effect on the services received by the Company.
The Board has oversight of the Company’s service providers, and monitors them on a formal and regular basis. The portfolio managers responsible for the day-to-day management of the portfolio are Paul Read, Paul Causer and Rhys Davies.
For the purposes of the Alternative Investment Fund Managers Directive, the Company is an alternative investment fund.
Investment Objective and Policy
Investment Objective
The Company’s investment objective is to seek to obtain capital growth and high income from investment, predominantly in high-yielding fixed-interest securities.
Investment Policy
The Company seeks to provide a high level of dividend income relative to prevailing interest rates mainly through investment in bonds and other fixed-interest securities. The Company also invests in equities and other equity-like instruments consistent with the overall objective.
This Investment Policy should be read in conjunction with the descriptions of Investment Style, Investment Limits, Derivatives and Currency Hedging, and Borrowings set out below.
Investment Style
The Manager seeks to ensure that the portfolio is diversified, having regard to the nature and type of securities (including duration, credit rating, performance and risk measures and liquidity) and the geographic and industry sector composition of the portfolio. The Company may hold both illiquid securities (for example, securities where trading volumes are relatively low and unlisted securities) and concentrated positions (for example, where a high proportion of the Company’s total assets are comprised of a relatively small number of investments).
Investment Limits
– the Company may invest in fixed-interest securities, including but not restricted to preference shares, loan stocks (convertible and redeemable), corporate bonds and government stocks, up to 100% of total assets;
– investments in equities may be made up to an aggregate limit of 20% of total assets;
– the aggregate value of holdings of shares and securities in a single issuer or company, including a listed investment company or trust, will not exceed 15% of the value of the Company’s investments; and
– investments in unlisted investments will not exceed 10% of the Company’s total assets for individual holdings and 25% in aggregate.
All the above limits are measured at the time a new investment is made.
Derivatives and Currency Hedging
The Company may enter into derivative transactions (including options, futures, contracts for difference, credit derivatives and interest rate swaps) for the purposes of efficient portfolio management. The Company will not enter into derivative transactions for speculative purposes.
Efficient portfolio management may include reduction of risk, reduction of cost and enhancement of capital or income through transactions designed to hedge all or part of the portfolio, to replicate or gain synthetic exposure to a particular investment position where this can be done more effectively or efficiently through the use of derivatives than through investment in securities or to transfer risk or obtain protection from a particular type of risk which might attach to portfolio investments.
The Company may hedge against exposure to changes in currency rates to the full extent of any such exposure.
Borrowings
The Company’s borrowing policy is determined by the Board, which has set a maximum of 30% of the Company’s total assets. This limit may be varied from time to time in the light of prevailing circumstances, but has not been changed since the Company’s incorporation in its current form. The Manager has discretion to borrow within the limit set by the Board. Any borrowings are covered by investments in matching currencies to manage exposure to exchange rate fluctuations.
The Board has reviewed the methods of financing available to the Company including repo financing whereby a company participates in sale and repurchase arrangements in connection with its portfolio. Under these arrangements, a company sells fixed interest securities and is contractually obliged to repurchase them at a fixed price on a fixed date, whilst retaining economic exposure to the securities sold. The difference between the (lower) sale price and the later purchase price is the cost (effectively interest) of the repo financing. Repo financing agreements should shortly be in place, and will be used alongside or in place of the Company’s current credit facility subject to the aggregate 30% ceiling.
Key Performance Indicators
The Board reviews performance by reference to a number of Key Performance Indicators which include the following:
• Performance
• Dividends
• Premium/Discount
• Ongoing Charges Ratio
Performance
As the Company’s objective is to seek to obtain capital growth and high income, the performance is best measured in terms of total return. There is no single index against which the Company’s performance may be measured with any degree of relevance. Therefore, the Board refers to a variety of relevant data and this is reflected in both the Chairman’s Statement and the Manager’s Investment Report on pages 3 to 6. The Manager has a long-term horizon and consequently the Board pays close attention to returns over three and five years in its assessment of investment performance. The Board is satisfied with the portfolio performance in the year.
When considering historical returns, the terms of the reconstruction in 2012 allow direct comparison of the Company’s financial information with that of its predecessor, City Merchants High Yield Trust plc. It is therefore appropriate to combine the information from both companies, and the graph that follows shows the performance of the share price and net asset value (both on a total return basis) for the last ten years.
Dividends and Dividend Payment Policy
Dividends form a key component of the total return to shareholders and the Board currently targets dividends of 10p per year. This target has been met in the year under review. Dividends paid over the last ten years are shown in the table on page 2.
The Board’s Dividend Payment Policy is to pay dividends on a regular quarterly basis in May, August, November and February in respect of each accounting year. The timing of these regular three-monthly payments means that shareholders do not have an opportunity to vote on a final dividend. Recognising the importance of shareholder engagement, and although not required by any regulation, shareholders are given an opportunity to vote on this policy at the forthcoming AGM.
Premium/Discount
The Board monitors the price of the Company’s shares in relation to their net asset value and the premium/discount at which the shares trade. The Board has limited influence on the price at which the Company’s shares trade. Powers are taken each year to issue and buy back shares, which can assist short term management, however the level of discount or premium is mostly a function of investor sentiment and demand for the shares. The ideal would be for the shares to trade close to their net asset value. The following graph shows the premium/discount through the year, ending with a premium of 2.1%. As explained in the Chairman’s Statement, demand for shares during the year resulted in the issue of 3,505,000 shares at an average price of 198.19p.
Ongoing Charges Ratio
The expenses of managing the Company are carefully monitored by the Board. The standard measure of these is the ongoing charges ratio, which is calculated by dividing the sum of such expenses over the course of the year, including those charged to capital, by the average net asset value. This ongoing charges ratio provides a guide to the effect on performance of annual operating costs. The Company’s ongoing charges ratio for the current year was 0.98%, reducing slightly from 1.01% for the previous year.
Investment Process
At the core of the portfolio managers’ philosophy is a belief in active investment management. They seek to invest where they see the potential for attractive returns and to avoid risks that they do not think are well rewarded. Fundamental principles drive a genuinely unconstrained investment approach, with a strong emphasis on value.
The investment process comprises four key elements to deliver the information the portfolio managers use to make their decisions:
• top down, macroeconomic analysis – examining the factors that shape the economy;
• credit analysis using internal and external research with a view to maximise returns from acceptable and understood credit risk exposure;
• value assessment, considering the risk/return profile of any bond in relation to cash, core government bonds and the rest of the fixed interest universe; and
• risk considerations, analysing all holdings to allow for a comprehensive understanding of any risks involved to ensure diversification of the portfolio.
The portfolio managers enter into the majority of positions with a view to holding them until their call or maturity date and their investment process is based on making investments where the yield to maturity or call appears to them to be at least an adequate reward for the risk. The nature of the high yield market and the Company’s mandate mean that there will be occasions when the value they saw in an investment is fully realised through capital appreciation or when an existing investment comes to appear overvalued by the market. On these occasions, they may exit the position before maturity.
The portfolio managers believe that it is good investment practice to try and keep the level of turnover to a minimum, whilst at the same time recognising that this should not at any time act as a deterrent to efficient portfolio management. The closed end nature of the Company means the portfolio managers are not presented with regular daily inflows and outflows, and as such are not required to turn the portfolio over to manage liquidity. Turnover will generally be very low due to the long term nature of many of the holdings and the Company structure.
Internal Control and Risk Management
The Directors have overall responsibility for the Company’s system of internal controls and are responsible for reviewing the effectiveness of these controls. This includes safeguarding of the Company’s assets. The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
The Audit Committee (the ‘Committee’), on behalf of the Board, has established an ongoing process for identifying and assessing the risks to which the Company is exposed by reference to a risk control summary, which maps the risks, mitigating controls in place, and monitoring and reporting of relevant information to it.
As part of the process, the Committee has identified four risk categories: strategic; investment management; third party service providers; and regulation and corporate governance. An explanation of these categories follows.
Strategic Risk
The Board sets the Company’s strategy, including setting its objective and how this should be achieved. The Board assesses the performance of the Company in the context of the market and macro conditions and gives direction to, and monitors, the Manager’s actions, and those of other third parties, on behalf of the Company.
Investment Management Risk
Investment management covers management of the portfolio together with cash management, gearing and hedging, all being areas the portfolio managers can control, and which generate the Company’s performance.
Third Party Service Providers Risk
The Company has no employees and its Directors are appointed on a non-executive basis. The Company is reliant on third party service providers (TPPs) for its executive functions. The Company’s most significant TPPs are the Manager, to which portfolio management is delegated, and the Secretary. Other significant TPPs are the corporate broker, depositary, custodian, registrar and auditor.
Regulation and Corporate Governance Risk
The Company is required to comply with many regulations including, but not limited to, the provisions of the Companies (Jersey) Law 1991, the UK Listing Rules, the Alternative Investment Fund Managers Directive, the Market Abuse Regulation, the FCA’s Disclosure Guidance and Transparency Rules, the UK Corporate Governance Code and International Financial Reporting Standards.
A matrix of the risks, set out according to their assessed risk levels after mitigation, enables the Directors to concentrate on those risks that are most significant, and also forms the basis of the list of principal risks and uncertainties. The ratings take into account the Directors’ risk appetite and the ongoing monitoring by the Manager.
Oversight of the control environment is based on the Company’s relationship with its third party service providers, all of which have clearly defined lines of responsibility, delegated authority, and control procedures and systems. The Company’s main third party service providers, the Manager and the Secretary, both use the three lines of defence model, which is embedded into their risk management systems.
The effectiveness of the Company’s internal control and risk management system is reviewed at least twice a year by the Committee. The Committee has received satisfactory reports on the operations and systems of internal control of the Manager, custodian and registrar from the Manager’s Compliance and Internal Audit Officers. The Committee also received a comprehensive, and satisfactory, report from the depositary at the year end Committee meeting. The Company’s risk management policies and procedures for financial instruments are set out in note18 on pages 47 to 52.
Due diligence is undertaken before any contracts are entered into with any third party service provider. The Manager regularly reviews, against agreed service standards, the performance of all third party service providers through formal and informal meetings, and by reference to third party independently audited control reports. The results of the Manager’s reviews are reported to and reviewed by the Committee. These various reports and reviews did not identify any significant failings or weaknesses which were relevant to the Company during the year and up to the date of this annual financial report. If any had been identified, the required remedial action would have been taken.
Reporting to the Board at each board meeting comprises, but is not limited to: financial reports, including any hedging and gearing; performance against relevant indices and the Company’s peers; the portfolio managers’ review, including of the market, the portfolio, transactions and prospects; revenue forecasts; and investment monitoring against investment guidelines. The portfolio managers are permitted discretion within these guidelines, which are set by the Board. Compliance with the guidelines is monitored daily by the Manager. Any proposed variation to these guidelines is referred to the Board.
The Board formally reviews the performance of the Manager and the Secretary annually and informally at every board meeting. The Board has reviewed and accepted the Manager’s whistleblowing policy under which staff of Invesco Fund Managers Limited can, in confidence, raise concerns about possible improprieties or irregularities in matters affecting the Company.
Principal Risks and Uncertainties
The Board has carried out a robust assessment of the risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity. The principal risks that follow are those identified by the Board after consideration of mitigating factors. In carrying out this assessment, consideration was given to market uncertainty in relation to Brexit.
Strategic Risks
Market Risk
The Risk: The Company invests primarily in fixed interest securities, the majority of which are traded on global security markets. The principal risk for investors in the Company is a significant fall and/or a prolonged period of decline in these markets. This could be triggered by unfavourable developments globally and/or in one or more regions. The Board cannot mitigate the effect of such external influences on the portfolio. Market risk also arises from movements in foreign currency exchange rates and interest rates.
Mitigating Procedures and Controls: An explanation of market risk and how this is addressed is given in note 18.1 to the financial statements.
Investment Objectives
The Risk: The Company’s investment objectives and structure no longer meet investors’ demands.
Mitigating Procedures and Controls: The Board receives regular reports reviewing the Company’s investment performance against its stated objectives and peer groups, and reports from discussion with its broker and major shareholders. The Board also has a periodic strategy meeting.
Lack of Liquidity in the Company’s Shares
The Risk: Lack of liquidity and lack of marketability of the Company’s shares leading to stagnant share price and wide discount.
Mitigating Procedures and Controls: The Board receives regular reports from both the Manager and the Company’s broker on the Company’s share price performance and level of discount (or premium), together with regular reports on marketing and meetings with shareholders and prospective investors. The Board recognises the importance of the Company’s scale in terms of the aggregate value of its shares in the market (‘market cap’) in creating liquidity and the benefit of a wide shareholder base, and has the ability to both issue and buy back shares to assist with market volatility. The foundation to this lies in solid investment performance and a high level of dividend. Powers are also taken to issue and buy back shares.
Investment Management Risk
Performance
The Risk: The portfolio persistently underperforms relevant indices and/or peers because of the investments selected. Performance will also be affected by market risk, which was addressed above, and by credit risk. A significant portion of the Company’s portfolio consists of non-investment grade securities which by their nature have a higher risk of default as well as the likelihood of price volatility.
Mitigating Procedures and Controls: The Company does not have a formal benchmark, however, the BoAML European Currency High Yield Index (‘the Index’) is used in both contribution analysis and by the broker. This index tracks the performance of EUR and GBP denominated sub-investment grade corporate debt publicly issued in the eurobond, sterling domestic and euro domestic markets. The Board regularly compares the Company’s NAV performance over both the short and long term to that of the Index and relevant peers as well as reviewing analyses breaking out contributory elements of the portfolio’s performance compared with the Index. The Board also receives reports on and reviews: the constituents of the portfolio, transactions in the period and, if applicable, gearing and hedging. The investment process the portfolio managers employ to address risk versus return is explained on page 10, and an explanation of credit risk and how this is addressed is given in note 18.3 to the financial statements.
Third Party Service Providers Risk
Unsatisfactory Performance of Third Party Service Providers (TPPs)
The Risk: Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operations of the Company and affect its ability to successfully pursue its investment policy and expose it to reputational risk. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company’s financial position.
Mitigating Procedures and Controls: Details of how the Board monitors the services provided by the Manager and the other TPPs, and the key elements designed to provide effective internal control, are included in the internal control and risk management section on pages 10 and 11.
Information Technology Resilience and Security
The Risk: The Company’s operational structure means that all cyber risk (information technology and physical security) arises at its TPPs. This cyber risk includes fraud, sabotage or crime perpetrated against the Company or any of its TPPs.
Mitigating Procedures and Controls: The Audit Committee on behalf of the Board regularly reviews TPPs’ audited service organisation control reports and meets with representatives of the Manager’s Investment Management, Compliance, Internal Audit and Investment Trust teams as well as the Secretary’s senior staff and Compliance team. The Board receives regular updates on the Manager’s and the Secretary’s information security. The Board monitors TPPs’ business continuity plans and testing – including their regular ‘live’ testing of workplace recovery arrangements.
Regulation and Corporate Governance Risk
Failure to Comply With or Adverse Changes to Law or Regulation
The Risk: A serious breach of law or regulation could lead to suspension from the Official List and from trading on the London Stock Exchange, a fine or a qualified audit report. Adverse changes to law or regulation could affect the ability of the Company to operate or the practicality of its domicile.
Mitigating Procedures and Controls: The Board, the Secretary and the Manager monitor compliance with and changes to government policy, legislation and other regulations relevant to the Company.
Viability Statement
This Company is an investment company whose business consists of investing the pooled funds of its shareholders to provide them with capital growth and a high income over the long term, predominantly from a portfolio of high yielding fixed income securities. Long term for this purpose is considered to be at least five years and the Directors have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.
The main risk to the Company’s continuation is shareholder dissatisfaction through failure to meet the Company’s investment objective, through poor investment performance or the investment policy not being appropriate in prevailing market conditions, either of which could affect the demand for and liquidity of the Company’s shares. Accordingly, failure to meet the Company’s investment objective, and contributory market and investment risks, are deemed by the Board to be principal risks of the Company and are given particular consideration in the continuing assessment of its long term viability.
The Company’s investment objective and policy are kept under review. In essence they are the same as they have been since the Company commenced trading in 2012, which in turn were unchanged from those of the Company’s UK based predecessor, City Merchants High Yield Trust plc. The continued relevance of the investment objective and policy are underlined by the Company’s annual continuation vote. Last year nearly 100% of the votes registered were in favour of continuation and the Board has no reason to believe that the continuation resolution will not be passed at the forthcoming and subsequent AGMs.
Performance derives from returns for risk taken. The Manager’s Investment Report on pages 5 and 6 sets out the current investment strategy of the portfolio managers. The portfolio contains a high level of relatively high–yielding non-investment grade bonds and these carry a higher risk of default than investment grade paper. This is discussed further in note 18 to the financial statements. The Board has adopted investment limits within which the portfolio managers operate. The Directors and the portfolio managers constantly monitor the portfolio, its ratings and default risk. A bond rating analysis of the portfolio at the year-end is shown on page 17. Exposure is weighted towards higher quality issuers where the risk of default is considered to be more remote.
The terms of the Company’s corporate transition in 2012 allow direct comparison of the Company’s financial information with its UK predecessor. Taking the two together, performance has been strong for many years through different, and difficult, market cycles – as shown by the ten year total return performance graph on page 9. The investment policy has effectively been stress tested by market events in 2007/8 and earlier cycles, and in recent times by both global and domestic events, such as Brexit. These events affected performance, but at no time did they threaten the viability of the Company. Whilst past performance may not be indicative of performance in the future, the investment policy has been consistent and the Company’s portfolio managers, overseen by the Board, have been in place throughout those past periods.
Performance and demand for the Company’s shares are not things that can be forecast, but there are no current indications that either or both of these may falter materially over the next five years so as to affect the Company’s viability.
As described in note 18.2 to the financial statements on page 51 liquidity risk is not viewed by the Directors as a significant risk. The majority of the Company’s assets are readily realisable and amount to many times the value of its short term liabilities and annual operating costs. The Company is permitted to borrow up to a maximum of 30% of the Company’s total assets but currently has no long term debt obligations.
Based on the above analysis, the Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.
Investment Management
As noted above, the Manager provides investment management and certain administrative services to the Company. The agreement is terminable by either party giving no less than three months’ prior written notice and subject to earlier termination without compensation in the event of a material breach of the agreement or the insolvency of either party. The management fee is payable quarterly in arrears and is equal to 0.1875% of the value of the Company’s total assets under management less current liabilities at the end of the relevant quarter. In addition, the Manager is paid a fee, based on an initial amount of £22,500 plus RPI per annum, for administrative services.
The portfolio managers responsible for the day-to-day management of the portfolio are Paul Read, Paul Causer and Rhys Davies.
The Manager’s Responsibilities
The Directors have delegated to the Manager the responsibility for the investment management activities of the Company, for seeking and evaluating investment opportunities and for analysing the accounts of investee companies. The Manager has full discretion to manage the assets of the Company in accordance with the Company’s stated objectives and policies as determined from time to time by the Board and approved by shareholders. Within the guidelines specified by the Board, the Manager has discretion to make purchases and sales, make and withdraw cash deposits, enter into underwriting commitments and exercise all rights over the investment portfolio. The Manager also advises on currency exposures and borrowings.
Assessment of the Manager
The performance of the Manager is reviewed continuously by the Board and the ongoing requirements of the Company and services received are assessed annually with reference to key performance indicators as set out on pages 8 to 10.
Based on its recent review of activities, the Board believes that the continuing appointment of Invesco Fund Managers Limited remains in the best interests of the Company and its shareholders.
Financial Position
The Company’s balance sheet on page 38 shows the assets and liabilities at the year end. A £20 million revolving credit facility is available, though it was not used during the year. Details of this facility, including applicable covenants, are shown in note 7 to the financial statements.
Performance and Future Development
The performance and future development of the Company depend on the success of the Company’s investment strategy. A review of the Company’s performance, market background, investment activity and strategy during the year, together with the investment outlook are provided in the Chairman’s Statement and Manager’s Investment Report on pages 3 to 6.
Annual Continuation Vote
The Articles of Association of the Company require that unless an ordinary resolution is passed at or before the Annual General Meeting (AGM) each year releasing the Directors from the obligation to do so, the Directors shall convene a general meeting within six months of the AGM at which a special resolution would be proposed to wind up the Company. Having made enquiries, the Directors have no reason to believe that the resolution to release them from that obligation, which is included in the notice for the forthcoming AGM on page 60, will not be passed.
Substantial Holdings in the Company
The Company has been notified of the following holdings of 3% and over of the Company’s ordinary share capital carrying unrestricted voting rights:
| AT 28 FEBRUARY 2018 |
AT 31 DECEMBER 2017 |
AT 31 DECEMBER 2016 |
||||
| HOLDING | % | HOLDING | % | HOLDING | % | |
| Charles Stanley, stockbrokers | 10,591,860 | 11.1 | 10,896,791 | 11.4 | 8,997,138 | 9.8 |
| Hargreaves Lansdown, stockbrokers (EO) | 8,265,877 | 8.7 | 8,291,312 | 8.7 | 6,427,195 | 7.0 |
| Invesco | 6,881,470 | 7.2 | 6,881,470 | 7.2 | 7,101,392 | 7.7 |
| Redmayne Bentley, stockbrokers | 5,055,780 | 5.3 | 4,910,675 | 5.1 | 3,438,608 | 3.7 |
| EFG Harris Allday, stockbrokers | 4,936,777 | 5.2 | 4,906,163 | 5.1 | 4,507,865 | 5.0 |
| Alliance Trust Savings | 4,303,411 | 4.5 | 4,247,330 | 4.4 | 4,741,902 | 5.1 |
| Smith & Williamson | 2,691,978 | 2.8 | 2,698,843 | 2.8 | 3,259,026 | 3.5 |
| Court Funds Office | 2,549,074 | 2.7 | 2,537,506 | 2.7 | 2,716,995 | 3.0 |
| WH Ireland, stock brokers | 2,159,001 | 2.3 | 2,396,569 | 2.5 | 2,918,126 | 3.1 |
Board Diversity
The Company’s policy on diversity is set out on page 25. The Board considers diversity, including the balance of skills, knowledge, experience and gender amongst other factors when reviewing its composition and appointing new directors, but does not consider it appropriate to establish targets or quotas in this regard. The Board comprises five non-executive directors of whom one is a woman, thereby constituting 20% female representation. Summary biographical details of the Directors are set out on page 22. The Company has no employees.
Social and Environmental Matters
As an investment company with no property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While an investee company’s policy towards the environment and social responsibility, including with regard to human rights and the risk of involvement in human trafficking, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to, or not to, make an investment on environmental and social grounds alone. The Company does not have a human rights policy, however, the Manager applies the United Nations Principles for Responsible Investment.
The Company is an investment vehicle and does not provide goods or services in the normal course of business, or have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.
This Strategic Report was approved by the Board of Directors on 27 March 2018.
R&H Fund Services (Jersey) Limited
Company Secretary
.
INVESTMENTS IN ORDER OF VALUATION
AT 31 DECEMBER 2017
ISSUER |
ISSUE |
MOODY/S&P RATING |
INDUSTRY |
COUNTRY OF INCORPORATION |
MARKET VALUE £’000 |
% OF PORTFOLIO |
| Lloyds Banking Group | 7.875% Perpetual | NR/BB– | Financials | UK | 4,760 | 2.7 |
| 7% Var Perpetual | NR/BB– | 3,233 | 1.9 | |||
| 7,993 | 4.6 | |||||
| Aviva | 6.125% Perpetual | A3/BBB | Financials | UK | 4,180 | 2.4 |
| General Accident | 8.875% Preference | NR/NR | 1,966 | 1.1 | ||
| 6,146 | 3.5 | |||||
| Intesa Sanpaolo | 8.375% FRN Perpetual | Ba3/BB– | Financials | Italy | 3,261 | 1.9 |
| 7% Perpetual | Ba3/BB– | 1,081 | 0.6 | |||
| 7.75% Perpetual | Ba3/BB– | 792 | 0.4 | |||
| 5,134 | 2.9 | |||||
| Société Genérale | 8.875% FRN Perpetual | Ba2/BB+ | Financials | France | 4,207 | 2.4 |
| US Treasury | 2.5% 15 Feb 2046 | Aaa/AA+ | Government Bonds | USA | 4,074 | 2.3 |
| Telefonica Europe | 6.75% Perpetual | Ba2/BB+ | Telecommunications | Netherlands | 2,320 | 1.4 |
| 5.875% Perpetual | Ba2/BB+ | 1,443 | 0.8 | |||
| 3,763 | 2.2 | |||||
| Origin Energy | 7.875% 16 Jun 2071 | Ba2/BB | Utilities | Australia | 3,676 | 2.1 |
| Standard Chartered | 5.125% 06 Jun 2034 | Baa1/BBB– | Financials | UK | 2,135 | 1.2 |
| 5.7% 26 Mar 2044 | Baa1/BBB– | 1,521 | 0.9 | |||
| 3,656 | 2.1 | |||||
| Premier Foods Finance | 6.5% 15 Mar 2021 (SNR) | B2/B | Consumer Goods | UK | 2,546 | 1.5 |
| FRN 15 Jul 2022 (SNR) | B2/B | 780 | 0.4 | |||
| 3,326 | 1.9 | |||||
| SFR | 7.375% 01 May 2026 (SNR) | B1/B+ | Telecommunications | France | 3,207 | 1.8 |
| Barclays | 9.25% Perpetual | Ba1/BB+ | Financials | UK | 1,220 | 0.7 |
| 7% Perpetual | NR/B+ | 1,049 | 0.6 | |||
| 8% Perpetual | NR/B+ | 358 | 0.2 | |||
| 7.875% Var Perpetual | Ba2/B+ | 227 | 0.1 | |||
| 2,854 | 1.6 | |||||
| Virgin Money | 8.75% Perpetual | NR/NR | Financials | UK | 2,784 | 1.6 |
| Enterprise Inns | 6.375% 15 Feb 2022 (SNR) | NR/BB– | Consumer Services | 1,348 | 0.8 | |
| 6% 06 Oct 2023 | NR/BB– | 1,093 | 0.6 | |||
| 6.5% 06 Dec 2018 (SNR) | NR/BB– | UK | 250 | 0.1 | ||
| 2,691 | 1.5 | |||||
| Stonegate | 4.875% 15 Mar 2022 (SNR) | B2/B | Consumer Services | UK | 1,791 | 1.0 |
| FRN 15 Mar 2022 (SNR) | B2/B | 897 | 0.5 | |||
| 2,688 | 1.5 | |||||
| Balfour Beatty | 10.75p Cnv Preference | NR/NR | Industrials | UK | 2,687 | 1.5 |
| Drax Finco | 4.25% 01 May 2022 (SNR) | NR/BB+ | Utilities | Luxembourg | 2,015 | 1.1 |
| FRN 01 May 2022 | NR/BB+ | 631 | 0.4 | |||
| 2,646 | 1.5 | |||||
| Enel | 7.75% 10 Sep 2075 | Ba1/BBB– | Utilities | Italy | 1,657 | 1.0 |
| 6.625% 15 Sep 2076 | Ba1/BBB– | 873 | 0.5 | |||
| 2,530 | 1.5 | |||||
| Shop Direct Funding | 7.75% 15 Nov 2022 (SNR) | B2/NR | Consumer Services | UK | 2,334 | 1.3 |
| Picard | FRN 30 Nov 2023 | B2/B+ | Consumer Services | France | 2,334 | 1.3 |
| Catlin Insurance | 7.249% FRN Perpetual | NR/BBB+ | Financials | USA | 2,247 | 1.3 |
| Iron Mountain | 3.875% 15 Nov 2025 | Ba3/BB– | Financials | USA | 1,447 | 0.8 |
| 4.875% 15 Sep 2027 | Ba3/BB– | 787 | 0.5 | |||
| 2,234 | 1.3 | |||||
| Pension Insurance | 8% 23 Nov 2016 | NR/NR | Financials | UK | 2,206 | 1.3 |
| Koninklijke KPN | 6.875% FRN 14 Mar 2073 | Ba2/BB | Telecommunications | Netherlands | 2,193 | 1.3 |
| ELM | 6.3024% FRN Perpetual | A3/A | Financials | Netherlands | 2,126 | 1.2 |
| Virgin Media Finance | 7.0% 15 Apr 2023 (SNR) | B2/B | Consumer Services | UK | 1,570 | 0.9 |
| 6.25% 28 Mar 2029 | Ba3/BB– | 514 | 0.3 | |||
| 2,084 | 1.2 | |||||
| Electricite De France | 6% Perpetual | Baa3/BB | Utilities | France | 1,386 | 0.8 |
| 5.875% Perpetual | Baa3/BB | 624 | 0.4 | |||
| 2,010 | 1.2 | |||||
| Pizza Express | 8.625% 01 Aug 2022 | Caa1/CCC | Consumer Services | UK | 1,048 | 0.6 |
| 6.625% 01 Aug 2021 | B2/B– | 961 | 0.6 | |||
| 2,009 | 1.2 | |||||
| Wagamama Finance | 4.125% 01 Jul 2022 (SNR) | B2/B | Consumer Services | UK | 1,965 | 1.1 |
| Citigroup Capital | 6.829% FRN Perpetual | Ba1/BB+ | Financials | USA | 1,926 | 1.1 |
| TVL Finance | 8.5% 15 May 2023 (SNR) | B3/B– | Consumer Services | UK | 1,172 | 0.7 |
| FRN 15 May 2023 (SNR) | B3/B– | 739 | 0.4 | |||
| 1,911 | 1.1 | |||||
| Fiat Chrysler Automobiles | 4.5% 15 Apr 2020 | B1/BB | Consumer Goods | Netherlands | 1,892 | 1.1 |
| Ocado | 4% 15 Jun 2024 (SNR) | Ba3/NR | Consumer Services | UK | 1,885 | 1.1 |
| Marfrig | 8.375% 09 May 2018 | B2/B+ | Consumer Goods | Netherlands | 1,572 | 0.9 |
| 6.875% 24 June 2019 (SNR) | B2/B+ | 304 | 0.2 | |||
| 1,876 | 1.1 | |||||
| BBVA | 9% Perpetual | NR/NR | Financials | Spain | 1,814 | 1.0 |
| BNP Paribas | Cnv FRN Perpetual | Ba3/BB+ | Financials | France | 1,133 | 0.6 |
| 7.375% Var Perpetual | Ba1/BBB– | 657 | 0.4 | |||
| 1,790 | 1.0 | |||||
| Altice | 6.625% 15 Feb 2023 | B1/BB– | Financials | Luxembourg | 1,233 | 0.7 |
| 7.5% 15 May 2026 | B1/BB– | 496 | 0.3 | |||
| 1,729 | 1.0 | |||||
| Standard Life | 6.75% Perpetual | A3/A– | Financials | UK | 1,260 | 0.7 |
| 5.5% 04 Dec 2042 | Baa1/BBB+ | 398 | 0.2 | |||
| 1,658 | 0.9 | |||||
| Thames Water | 7.75% 01 Apr 2019 | B1/NR | Utilities | UK | 1,080 | 0.6 |
| 5.875% 15 Jul 2022 (SNR) | B1/NR | 545 | 0.3 | |||
| 1,625 | 0.9 | |||||
| HSBC | 5.25% 14 Mar 2044 | A3/BBB+ | Financials | UK | 528 | 0.3 |
| 4.25% 14 Mar 2024 | A3/BBB+ | 494 | 0.3 | |||
| 6% FRN Perpetual | Baa3/NR | 396 | 0.2 | |||
| 6.375% Cnv Perpetual | Baa3/NR | 205 | 0.1 | |||
| 1,623 | 0.9 | |||||
| Solvay Finance | 5.869% Var Perpetual | Ba1/BB+ | Basic Materials | France | 1,089 | 0.6 |
| 5.425% Perpetual | Ba1/BB+ | 491 | 0.3 | |||
| 1,580 | 0.9 | |||||
| Ecclesiastical Insurance Office | 8.625% Preference | NR/NR | Financials | UK | 1,550 | 0.9 |
| UniCredit International Bank | 8.125% FRN Perpetual | B1/BB– | Financials | Luxembourg | 998 | 0.6 |
| 8.5925% FRN Perpetual | B1/BB– | 516 | 0.3 | |||
| 1,514 | 0.9 | |||||
| Galapagos | 7% 15 Jun 2022 | Caa3/CCC– | Industrials | Luxembourg | 1,496 | 0.9 |
| J. C. Penney | 8.125% 01 Oct 2019 (SNR) | B3/B | Consumer Services | USA | 898 | 0.5 |
| 6.375% 15 Oct 2036 (SNR) | B3/B | 559 | 0.3 | |||
| 1,457 | 0.8 | |||||
| UBS | 7% Perpetual | NR/BB+ | Financials | Switzerland | 717 | 0.4 |
| 6.875% Perpetual | NR/BB+ | 708 | 0.4 | |||
| 1,425 | 0.8 | |||||
| Maxeda DIY | 6.125% 15 Jul 2022 (SNR) | B2/B– | Consumer Services | Netherlands | 1,420 | 0.8 |
| Softbank | 5.125% 19 Sep 2027 (SNR) | Ba1/BB+ | Telecommunications | Japan | 1,392 | 0.8 |
| Tesco | 6.15% 15 Nov 2037 (SNR) | Ba1/BB+ | Consumer Services | UK | 803 | 0.5 |
| 5.2% 05 Mar 2057 | Ba1/BB+ | 574 | 0.3 | |||
| 1,377 | 0.8 | |||||
| JRP Group | 9% 26 Oct 2026 | NR/NR | Financials | UK | 1,286 | 0.7 |
| Platin 1426 | 5.375% 15 Jun 2023 (SNR) | B3/B | Industrials | Germany | 1,286 | 0.7 |
| Deutsche Bank | 7.125% Perpetual | B1/B+ | Financials | Germany | 1,261 | 0.7 |
| OneSavings Bank | 9.125% FRN Perpetual | NR/NR | Financials | UK | 1,256 | 0.7 |
| Orange | 5.875% Perpetual | Baa3/BBB– | Telecommunications | France | 1,252 | 0.7 |
| Burger King France | 8% 15 Dec 2022 | B3/CCC | Consumer Services | France | 752 | 0.4 |
| FRN 01 May 2023 | B3/B– | 471 | 0.3 | |||
| 1,223 | 0.7 | |||||
| Hertz | 7.625% 01 Jun 2022 | B1/BB– | Consumer Services | USA | 1,203 | 0.7 |
| Direct Line Insurance | 9.25% FRN 27 Apr 2042 | Baa1/BBB+ | Financials | UK | 1,166 | 0.7 |
| Vougeot Bidco | 7.875% 15 Jul 2020 | B2/B | Consumer Services | UK | 1,163 | 0.7 |
| Mercury Bondco | 8.25% 30 May 2021 (SNR) | B3/B | Financials | UK | 692 | 0.4 |
| 7.125% 30 May 2021 (SNR) | B3/B | 459 | 0.3 | |||
| 1,151 | 0.7 | |||||
| Petra Diamonds | 7.25% 01 May 2022 (SNR) | B3/B | Basic Materials | UK | 1,140 | 0.7 |
| Bombardier | 6% 15 Oct 2022 | Caa1/B– | Industrials | Canada | 873 | 0.5 |
| 7.5% 15 Mar 2025 | Caa1/B– | 261 | 0.1 | |||
| 1,134 | 0.6 | |||||
| Time Warner Cable | 5.25% 15 Jul 2042 | Ba1/BBB– | Consumer Services | USA | 1,132 | 0.6 |
| Beazley | 5.875% 04 Nov 2026 | NR/NR | Financials | Ireland | 1,125 | 0.6 |
| AA Bond Co | 5.5% Var 31 Jul 2043 (SNR) | NR/B+ | Industrials | UK | 1,108 | 0.6 |
| Global Ship Lease | 9.875% 15 Nov 2022 | B3/B | Industrials | USA | 1,105 | 0.6 |
| Chemours | 6.625% 15 May 2023 (SNR) | Ba3/BB– | Basic Materials | USA | 1,008 | 0.5 |
| 7% 15 May 2025 | Ba3/BB– | 96 | 0.1 | |||
| 1,104 | 0.6 | |||||
| Credit Agricole | 7.5% Var Perpetual | NR/NR | Financials | France | 1,099 | 0.6 |
| Southern Water (Greensands) | 8.5% 15 Apr 2019 | NR/BB– | Utilities | UK | 1,091 | 0.6 |
| Travis Perkins | 4.5% 07 Sep 2023 (SNR) | NR/BB+ | Industrials | UK | 1,044 | 0.6 |
| William Hill | 4.875% 07 Sep 2023 (SNR) | Ba1/BB+ | Consumer Services | UK | 1,003 | 0.6 |
| Paprec | 7.375% 01 Apr 2023 (SNR) | B2/B– | Industrials | France | 995 | 0.6 |
| Takko | FRN 15 Nov 2023 (SNR) | B2/B | Consumer Goods | Luxembourg | 973 | 0.6 |
| Codere Finance 2 (Luxembourg) S.A. | 7.625% 01 Nov 2021 | B2/B | Consumer Services | Luxembourg | 968 | 0.6 |
| Royal Bank of Scotland | 8% Cnv FRN Perpetual | Ba3/B | Financials | UK | 592 | 0.3 |
| 8.625% FRN Perpetual | Ba3/B | 366 | 0.2 | |||
| 958 | 0.5 | |||||
| Scottish Widows | 5.5% 16 Jun 2023 | Baa1/BBB+ | Financials | UK | 915 | 0.5 |
| HEMA | 8.5% 15 Jan 2023 (SNR) | Caa2/CCC | Consumer Services | Netherlands | 913 | 0.5 |
| Trinseo | 5.375% 01 Sep 2025 (SNR) | B3/BB– | Basic Materials | Luxembourg | 903 | 0.5 |
| Cott | 5.5% 1 Apr 2025 | B2/B | Consumer Goods | USA | 896 | 0.5 |
| Ziggo Bond Finance | 5.875% 15 Jan 2025 | B3/B | Telecommunications | UK | 872 | 0.5 |
| Phoenix Life | 7.25% Perpetual | WR/NR | Financials | UK | 864 | 0.5 |
| AXA | 6.379% FRN Perpetual | Baa1/BBB | Financials | France | 862 | 0.5 |
| XPO Logistics | 6.5% 15 Jun 2022 (SNR) | B1/BB– | Industrials | USA | 756 | 0.4 |
| 6.125% 01 Sep 2023 | B1/BB– | 94 | 0.1 | |||
| 850 | 0.5 | |||||
| Sainsbury’s Bank | 6% FRN 23 Nov 2027 | NR/NR | Consumer Services | UK | 836 | 0.5 |
| Diamond 1 | 5.45% 15 Jun 2023 | Baa3/BBB– | Technology | USA | 790 | 0.5 |
| VRX Escrow | 4.5% 15 May 2023 (SNR) | Caa1/B– | Health Care | Canada | 425 | 0.2 |
| 5.375% 29 Feb 2020 | Caa1/B– | 351 | 0.2 | |||
| 776 | 0.4 | |||||
| Miller Homes | FRN 15 Oct 2023 (SNR) | NR/BB– | Consumer Goods | UK | 549 | 0.3 |
| 5.5% 15 Oct 2023 (SNR) | NR/BB– | 192 | 0.1 | |||
| 741 | 0.4 | |||||
| VIVAT | 6.25% Perpetual | NR/NR | Financials | Netherlands | 739 | 0.4 |
| Peel Land & Property Investments | 8.375% Var 30 Apr 2040 | NR/BBB | Financials | UK | 738 | 0.4 |
| Bracken Midco One | 10.5% 15 Nov 2021 | NR/B+ | Financials | Ireland | 714 | 0.4 |
| CGG | 6.875% 15 Jan 2022 (SNR) | WR/D | Oil and Gas | France | 476 | 0.3 |
| 6.5% 01 Jun 2021 (SNR) | WR/D | 170 | 0.1 | |||
| 646 | 0.4 | |||||
| Avantor | 4.75% 01 Oct 2024 (SNR) | B2/B | Health Care | USA | 631 | 0.4 |
| Brink’s | 4.625% 15 Oct 2027 | Ba2/BB | Industrials | USA | 624 | 0.4 |
| Rothschilds Continuation Finance | FRN Perpetual | NR/NR | Financials | Netherlands | 582 | 0.3 |
| Constellium | 5.75% 15 May 2024 | B3/B– | Basic Materials | Netherlands | 377 | 0.2 |
| 5.875% 15 Feb 2026 | B3/B– | 188 | 0.1 | |||
| 565 | 0.3 | |||||
| Principality Building Society | 7% Perpetual | Ba2/NR | Financials | UK | 534 | 0.3 |
| Commerzbank | 8.125% 19 Sep 2023 | Ba1/BBB– | Financials | Germany | 530 | 0.3 |
| Unitymedia Hessen | 5.625% 15 Apr 2023 | Ba3/BB– | Consumer Services | Germany | 517 | 0.3 |
| Almaviva The Italian Inn | 7.25% 15 Oct 2022 | B2/B+ | Technology | Italy | 493 | 0.3 |
| UniCredit | 8% FRN Perpetual | NR/NR | Financials | Italy | 486 | 0.3 |
| Aker BP | 6% 01 Jul 2022 (SNR) | Ba3/BB+ | Oil and Gas | Norway | 479 | 0.3 |
| Arqiva Broadcast Finance | 9.5% 31 Mar 2020 | B3/NR | Telecommunications | UK | 478 | 0.3 |
| AMC Entertainment | 6.375% 15 Nov 2024 (SUB NTS) | B2/B+ | Consumer Services | USA | 472 | 0.3 |
| J Sainsbury | 6.5% Var Perpetual | NR/NR | Consumer Services | UK | 444 | 0.3 |
| Nationale-Nederlanden | 4.625% 08 Apr 2044 | Baa3/BBB– | Financials | Netherlands | 432 | 0.3 |
| PGH Capital | 5.375% 06 Jul 2027 | NR/NR | Financials | Ireland | 427 | 0.2 |
| CBR Fashion Finance | 5.125% 01 Oct 2022 (SNR) | B2/B | Consumer Services | Germany | 424 | 0.2 |
| Wind Tre Spa | 5% 20 Jan 2026 (SNR) | B1/BB– | Telecommunications | Italy | 419 | 0.2 |
| Caixabank | 6.75% FRN Perpetual | B1/BB– | Financials | Spain | 395 | 0.2 |
| Cognita Financing | 7.75% 15 Aug 2021 (SNR) | B3/B | Consumer Services | UK | 373 | 0.2 |
| CEMEX SAB | 6.125% 05 May 2025 | NR/BB | Industrials | Mexico | 362 | 0.2 |
| Rothesay Life | 8% 30 Oct 2025 | NR/NR | Financials | UK | 303 | 0.2 |
| CCO Holdings Capital | 5% 01 Feb 2028 | B1/BB | Consumer Services | USA | 301 | 0.2 |
| New Look | 6.5% 01 Jul 2022 (SNR) | Caa1/CCC+ | Consumer Services | UK | 200 | 0.1 |
| 8% 01 Jul 2023 (SNR) | Ca/CCC– | 100 | 0.1 | |||
| 300 | 0.2 | |||||
| Puma Energy | 6.75% 01 Feb 2021 | Ba2/NR | Oil and Gas | Luxembourg | 294 | 0.2 |
| Millicom International Cellular | 5.125% 15 Jan 2028 | Ba2/NR | Telecommunications | Luxembourg | 281 | 0.2 |
| Whitbread | 3.375% 16 Oct 2025 (SNR) | NR/NR | Consumer Services | UK | 264 | 0.2 |
| ASR Nederland | 4.625% Cnv FRN Perpetual | NR/BB | Financials | Netherlands | 244 | 0.1 |
| Puma International | 5.125% 06 Oct 2024 (SNR) | Ba2/NR | Oil and Gas | Luxembourg | 227 | 0.1 |
| Spectrum Brands | 4% 01 Oct 2026 (SNR) | B2/BB– | Consumer Goods | USA | 217 | 0.1 |
| M&G Finance | 7.5% FRN Perpetual (SUB NTS) | NR/NR | Industrials | Luxembourg | 196 | 0.1 |
| American Greetings | 7.875% 15 Feb 2025 (SNR) | B3/BB– | Consumer Services | USA | 176 | 0.1 |
| FAGE International | 5.625% 15 Aug 2026 (SNR) | B1/BB– | Consumer Goods | Luxembourg | 143 | 0.1 |
| CIS General Insurance | 12% FRN 08 May 2025 | NR/NR | Industrials | UK | 112 | 0.1 |
| Charter Communications Operating | 6.484% 23 Oct 2045 | Ba1/BBB– | Telecommunications | USA | 109 | 0.1 |
| Lamb Weston | 4.625% 01 Nov 2024 | Ba3/BB | Consumer Goods | USA | 76 | — |
| Peabody Energy | Common stock | NR/NR | Basic Materials | USA | 74 | — |
| 175,009 | 100.0 |
Abbreviations used in the above valuation:
Cnv: Convertible
FRN: Floating Rate Note
SNR : Senior
Var: Variable
SUB NTS: Subordinated Notes
.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN RESPECT OF THE PREPARATION OF FINANCIAL STATEMENTS
The Directors are responsible for preparing the annual financial report in accordance with applicable laws and regulations.
Company law requires the Directors to prepare financial statements for each financial period. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation and presentation of financial statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs.
In preparing these financial statements, the Directors are required to:
• properly select and apply accounting policies and then apply them consistently;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and
• make an assessment of the Company’s ability to continue as a going concern.
The financial statements have been prepared on a going concern basis. When considering this, the Directors took into account the annual shareholders’ continuation vote (as explained in detail on page 14) and the following: the Company’s investment objective and risk management policies, the nature of the portfolio and expenditure and cash flow projections. As a result, they determined that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the accounts comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Corporate Governance Statement and a Directors’ Report that comply with that law and those regulations.
The Directors of the Company, who are listed on page 22, each confirm to the best of their knowledge that:
• the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;
• this annual financial report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and
• they consider that this annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Philip Taylor
Audit Committee Chairman
Signed on behalf of the Board of Directors
27 March 2018
.
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
| 2017 | 2016 | |||||||
NOTES |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
||
| Profit on investments at fair value | 11 | — | 4,586 | 4,586 | — | 19,088 | 19,088 | |
| Exchange differences | — | (156) | (156) | — | (60) | (60) | ||
| Profit/(loss) on derivative instruments – currency hedges | — | 1,555 | 1,555 | — | (9,213) | (9,213) | ||
| Income | 4 | 10,766 | — | 10,766 | 10,695 | — | 10,695 | |
| Investment management fees | 5 | (895) | (481) | (1,376) | (794) | (428) | (1,222) | |
| Other expenses | 6 | (441) | (3) | (444) | (404) | — | (404) | |
| Profit before finance costs and taxation | 9,430 | 5,501 | 14,931 | 9,497 | 9,387 | 18,884 | ||
| Finance costs | 7 | (29) | (16) | (45) | (29) | (15) | (44) | |
| Profit before taxation | 9,401 | 5,485 | 14,886 | 9,468 | 9,372 | 18,840 | ||
| Taxation | 8 | (16) | — | (16) | (171) | — | (171) | |
| Profit after taxation | 9,385 | 5,485 | 14,870 | 9,297 | 9,372 | 18,669 | ||
| Return per ordinary share | 9 | 10.0p | 5.9p | 15.9p | 10.5p | 10.5p | 21.0p | |
The total column of this statement represents the Company’s statement of comprehensive income, prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The profit after taxation is the total comprehensive income. The supplementary revenue and capital columns are both prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
NOTES |
STATED CAPITAL £’000 |
CAPITAL RESERVE £’000 |
REVENUE RESERVE £’000 |
TOTAL £’000 |
|
| At 31 December 2015 | 138,323 | 12,802 | 2,851 | 153,976 | |
| Net proceeds from issue of new shares | 15 | 10,401 | — | — | 10,401 |
| Total comprehensive income for the year | — | 9,372 | 9,297 | 18,669 | |
| Dividends paid | 10 | (115) | — | (8,738) | (8,853) |
| At 31 December 2016 | 148,609 | 22,174 | 3,410 | 174,193 | |
| Net proceeds from issue of new shares | 15 | 6,912 | — | — | 6,912 |
| Total comprehensive income for the year | — | 5,485 | 9,385 | 14,870 | |
| Dividends paid | 10 | (63) | — | (9,278) | (9,341) |
| At 31 December 2017 | 155,458 | 27,659 | 3,517 | 186,634 |
The accompanying notes are an integral part of these financial statements.
.
BALANCE SHEET
AT 31 DECEMBER
NOTES |
2017 £’000 |
2016 £’000 |
|
| Non-current assets | |||
| Investments held at fair value through profit or loss | 11 | 175,009 | 155,718 |
| Current assets | |||
| Other receivables | 12 | 2,834 | 3,056 |
| Derivative financial instruments – unrealised net profit | 13 | 450 | 1,251 |
| Cash and cash equivalents | 8,792 | 14,593 | |
| 12,076 | 18,900 | ||
| Current liabilities | |||
| Other payables | 14 | (451) | (425) |
| Net current assets | 11,625 | 18,475 | |
| Net assets | 186,634 | 174,193 | |
| Capital and reserves | |||
| Stated capital | 15 | 155,458 | 148,609 |
| Capital reserve | 16 | 27,659 | 22,174 |
| Revenue reserve | 16 | 3,517 | 3,410 |
| Shareholders’ funds | 186,634 | 174,193 | |
| Net asset value per ordinary share | 17 | 195.40p | 189.32p |
These financial statements were approved and authorised for issue by the Board of Directors on 27 March 2018.
Signed on behalf of the Board of Directors
Philip Taylor
Audit Committee Chairman
The accompanying notes are an integral part of these financial statements.
.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER
| 2017 £’000 |
2016 £’000 |
|
| Cash flows from operating activities | ||
| Profit before tax | 14,886 | 18,840 |
| Taxation | (16) | (171) |
| Adjustment for: | ||
| Purchases of investments | (67,177) | (36,697) |
| Sales of investments | 52,472 | 41,900 |
| (14,705) | 5,203 | |
| Profit on investments | (4,586) | (19,088) |
| Exchange differences | 156 | (5) |
| Net cash movement from derivative instruments – | ||
| currency hedges | 801 | (2,342) |
| Finance costs | 45 | 44 |
| Operating cash flows before movements in working capital | (3,419) | 2,481 |
| Decrease/(increase) in receivables | 222 | (120) |
| Increase/(decrease) in payables | 26 | (7) |
| Net cash flows from operating activities after taxation | (3,171) | 2,354 |
| Cash flows from financing activities | ||
| Finance cost paid | (45) | (44) |
| Net proceeds from issue of shares | 6,912 | 10,401 |
| Net equity dividends paid – note 10 | (9,341) | (8,853) |
| Net cash (outflow)/inflow from financing activities | (2,474) | 1,504 |
| Net (decrease)/increase in cash and cash equivalents | (5,645) | 3,858 |
| Exchange differences | (156) | 5 |
| Movement in cash and cash equivalents | (5,801) | 3,863 |
| Cash and cash equivalents at beginning of year | 14,593 | 10,730 |
| Cash and cash equivalents at end of the year | 8,792 | 14,593 |
| Reconciliation of cash and cash equivalents to the | ||
| Balance Sheet is as follows: | ||
| Cash held at custodian | 1,542 | 4,543 |
| Short-Term Investment Company (Global Series) plc, money market fund | 7,250 | 10,050 |
| Cash and cash equivalents | 8,792 | 14,593 |
| Cash flows from operating activities includes: | ||
| Dividends received | 473 | 596 |
| Interest received | 10,494 | 9,809 |
The accompanying notes are an integral part of these financial statements.
.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
1. Principal Activity
The Company is a closed-end investment company incorporated in Jersey and operates under the Companies (Jersey) Law 1991. The principal activity of the Company is investment in a diversified portfolio of high-yielding fixed-interest securities as set out in the Company’s Investment Objective and Policy.
2. Principal Accounting Policies
Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.
The principal accounting policies adopted in the preparation of these financial statements are set out below.
(a) Basis of Preparation
(i) Accounting Standards Applied
The financial statements have been prepared on an historical cost basis, except for the measurement at fair value of investments and derivatives, and in accordance with the applicable International Financial Reporting Standards (IFRS) and interpretations issued by the International Financial Reporting Interpretations Committee as adopted by the European Union. The standards are those endorsed by the European Union and effective at the date the financial statements were approved by the Board.
Where presentational guidance set out in the Statement of Recommended Practice (SORP) ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’, updated by the Association of Investment Companies in January 2017, is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. The supplementary information which analyses the statement of comprehensive income between items of a revenue and a capital nature is presented in accordance with this.
(ii) Going Concern
As explained under ‘Annual Continuation Vote’ on page 14, the Company has an annual continuation vote. However, as also explained in that note the Directors believe shareholders will vote for the Company to continue. The Directors also determined that the financial statements should be prepared on a going concern basis as reported on page 31. Accordingly, the financial statements have been prepared on a going concern basis and the accounts do not include any adjustments which might arise from cessation of the Company.
(iii) Adoption of New and Revised Standards
New and revised standards and interpretations that became effective during the year had no significant impact on the amounts reported in these financial statements but may impact accounting for future transactions and arrangements.
At the date of authorising these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU).
• IFRS 9: Financial Instruments (2014) (effective 1 January 2018).
The Directors do not expect the adoption of the above standards and interpretations (or any other standards and interpretations which are in issue but not effective) will have a material impact on the financial statements of the Company in future periods.
(iv) Critical Accounting Estimates and Judgements
The preparation of the financial statements may require the Directors to make estimations where uncertainty exists. It also requires the Directors to exercise judgement in the process of applying the accounting policies.
(b) Foreign Currency
(i) Functional and Presentation Currency
The financial statements are presented in sterling, which is the Company’s functional and presentation currency and the currency in which the Company’s stated capital and expenses are denominated, as well as certain of its income, assets and liabilities.
(ii) Transactions and Balances
Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rate of exchange ruling on the date of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. All profits and losses, whether realised or unrealised, are recognised in the statement of comprehensive income and are taken to capital reserve or revenue reserve, depending on whether the gain or loss is capital or revenue in nature.
(c) Financial Instruments
(i) Recognition of Financial Assets and Financial Liabilities
Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument. These are offset if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.
(ii) Derecognition of Financial Assets
Financial assets are derecognised when the contractual rights to the cash flows from the asset expire, or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.
(iii) Derecognition of Financial Liabilities
Financial liabilities are derecognised when the Company’s obligations are discharged, cancelled or expired.
(iv) Trade Date Accounting
Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.
(v) Classification of Financial Assets and Financial Liabilities
Financial Assets
Investments are classified as held at fair value through profit or loss as the investments are managed and their performance evaluated on a fair value basis in accordance with the Company’s documented investment strategy and this is also the basis on which information about investments is provided internally to the Board.
Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the statement of comprehensive income, and are subsequently valued at fair value.
For investments that are actively traded in organised financial markets, fair value is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including broker quotes and price modelling.
Financial Liabilities
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
(d) Derivatives and Hedging
Derivative instruments are valued at fair value in the balance sheet. Hedge accounting has not been adopted.
Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date and any profits and losses are recognised in the statement of comprehensive income and taken to capital.
(e) Cash and Cash Equivalents
Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds.
(f) Income Recognition
All income is recognised in the statement of comprehensive income. Interest income arising from fixed income securities is recognised using the effective interest method. Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’. Deposit interest is taken into account on an accruals basis.
(g) Expenses and Finance Costs
All expenses are accounted for on an accruals basis and are recognised in the statement of comprehensive income. Investment management fees and finance costs are allocated 35% to capital and 65% to revenue in accordance with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio. Except for custodian dealing costs, all other expenses are charged through revenue.
(h) Tax
Overseas interest and dividends are shown gross of withholding tax and the corresponding irrecoverable tax is shown as a charge in the statement of comprehensive income.
3. Segmental Reporting
No segmental reporting is provided as the Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt and, to a significantly lesser extent, equity securities.
4. Income
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
| 2017 £’000 |
2016 £’000 |
|
| Income from investments | ||
| UK dividends | 447 | 507 |
| UK investment income – interest | 4,099 | 3,688 |
| Overseas investment income – interest | 6,191 | 6,470 |
| Overseas dividends | 27 | 26 |
| 10,764 | 10,691 | |
| Other income | ||
| Deposit interest | 2 | 4 |
| Total income | 10,766 | 10,695 |
5. Investment Management Fee
This note shows the fees paid to the Manager, which are calculated quarterly on the basis of the value of the assets being managed.
| 2017 | 2016 | ||||||
| REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
||
| Investment management fee | 895 | 481 | 1,376 | 794 | 428 | 1,222 | |
Details of the investment management agreement are disclosed in the Strategic Report on page 14. At the period end the management fee accrued was £350,000 (2016: £327,000).
6. Other Expenses
The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.
| 2017 | 2016 | |||||
| REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
|
| General expenses (i) | 287 | 3 | 290 | 256 | — | 256 |
| Directors’ fees (ii) | 125 | — | 125 | 119 | — | 119 |
| Auditor’s remuneration: | ||||||
| – for the audit of the financial statements (including any expenses) | 29 | — | 29 | 29 | — | 29 |
| 441 | 3 | 444 | 404 | — | 404 | |
(i) General expenses include £40,000 (2016: £39,000) due to R&H Fund Services (Jersey) who act as administrator and company secretary to the Company under an Agreement dated 19 December 2011. This agreement is terminable at any time by either party giving no less than three months’ notice. The fee is payable quarterly in arrears and is revised with effect from 1 January each year, by the application of a formula based on the Retail Price Index for the month of December of the previous year applied to the initial rate of £37,500 per annum.
General expenses also include an administration fee due to the Manager of £25,000 (2016: £25,000). It is based on an initial fee of £22,500 plus RPI increases in May of each year.
Custodian dealing costs of £2,516 (2016: £455) are charged wholly to capital.
(ii) The maximum Directors’ fees authorised by the Articles of Association are £150,000 per annum.
7. Finance Costs
Finance costs arise on any borrowing facilities the Company has and comprise commitment fees on any unused facility as well as interest when the facility is used.
| 2017 | 2016 | |||||
| REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
|
| Commitment fees due on loan facility | 26 | 14 | 40 | 26 | 14 | 40 |
| Bank charges | 3 | 2 | 5 | 3 | 1 | 4 |
| 29 | 16 | 45 | 29 | 15 | 44 | |
The Company has a 364 day committed £20 million multi-currency revolving credit facility with Bank of New York Mellon which is renewable on 5 May 2018. Available currencies are sterling, euros or US dollars. Drawings under this facility are subject to the restriction that the Company’s total financial indebtedness must not exceed 30% of total assets and that the assets must be in excess of £50 million. At the balance sheet date the Company had no drawdowns (2016: none).
Interest payable is based on the interbank offered rate for the currency drawn down. The commitment fee is based on 0.20% of the average undrawn amount each quarter.
8. Taxation
As a Jersey investment company no tax is payable on capital gains and, as the Company principally invests in assets which do not suffer tax on income, the only overseas tax arises on the few assets domiciled in countries with which Jersey has no double-taxation treaty, e.g. Italy and Portugal.
| 2017 £’000 |
2016 £’000 |
|
| Overseas taxation | 16 | 171 |
The Company is subject to Jersey income tax at the rate of 0% (2016: 0%). The overseas tax charge consists of irrecoverable withholding tax.
9. Return per Ordinary Share
Return per share is the amount of gain generated for the financial year divided by the weighted average number of ordinary shares in issue.
The basic revenue, capital and total return per ordinary share is based on each of the profit after tax and on 93,655,436 (2016: 88,902,058) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.
10. Dividends on Ordinary Shares
Dividends are paid from the income less expenses. Dividends are paid as an amount per ordinary share held.
| 2017 | 2016 | |||
| PENCE | £’000 | PENCE | £’000 | |
| Dividends paid and recognised in the year: | ||||
| Fourth interim | 2.5 | 2,300 | 2.5 | 2,158 |
| First interim | 2.5 | 2,312 | 2.5 | 2,182 |
| Second interim | 2.5 | 2,362 | 2.5 | 2,224 |
| Third interim | 2.5 | 2,367 | 2.5 | 2,289 |
| 10.0 | 9,341 | 10.0 | 8,853 | |
Dividends paid in the year have been charged to revenue except for £63,000 (2016: £115,000) which was charged to stated capital. This amount is equivalent to the income accrued on the new shares issued in the year (see note 15).
Set out below are the dividends that have been declared in respect of the financial period 31 December:
| 2017 | 2016 | |||
| PENCE | £’000 | PENCE | £’000 | |
| Dividends in respect of the year: | ||||
| First interim | 2.5 | 2,312 | 2.5 | 2,182 |
| Second interim | 2.5 | 2,362 | 2.5 | 2,224 |
| Third interim | 2.5 | 2,367 | 2.5 | 2,289 |
| Fourth interim | 2.5 | 2,388 | 2.5 | 2,300 |
| 10.0 | 9,429 | 10.0 | 8,995 | |
The fourth interim dividend for 2017 was paid on 23 February 2018 to shareholders on the register on 26 January 2018.
11. Investments Held at Fair Value Through Profit or Loss
The portfolio is principally made up of investments which are listed and traded on regulated stock exchanges. Profits and losses are either:
• realised, usually arising when investments are sold; or
• unrealised, being the difference from cost of those investments still held at the year end.
(a) Analysis of investment profits
| 2017 £’000 |
2016 £’000 |
|
| Opening book cost | 141,041 | 139,161 |
| Opening investment holding profits | 14,677 | 2,672 |
| Opening valuation | 155,718 | 141,833 |
| Movements in the year: | ||
| Purchases at cost | 67,177 | 36,697 |
| Sales – proceeds | (52,472) | (41,900) |
| Sales – net realised profit | 4,013 | 7,083 |
| Movement in investment holding profit | 573 | 12,005 |
| Closing valuation | 175,009 | 155,718 |
| Closing book cost | 159,830 | 141,041 |
| Closing investment holding profit | 15,179 | 14,677 |
| Closing valuation | 175,009 | 155,718 |
| Realised profit in the year | 4,084 | 7,083 |
| Movement in investment holding profit in the year | 502 | 12,005 |
| 4,586 | 19,088 |
(b) Transaction costs
The Transaction costs on investments amount to £1,000 on sales and £nil on purchases (2016: £4,000 on sales and £nil on purchases).
(c) Registration of investments
The investments of the Company are registered in the name of the Company or in the name of nominees and held to the account of the Company.
12. Other Receivables
Other receivables are amounts which are due to the Company, such as income which has been earned (accrued) but not yet received and monies due from brokers for investments sold.
| 2017 £’000 |
2016 £’000 |
|
| Prepayments and accrued income | 2,834 | 3,056 |
| 2,834 | 3,056 |
13. Derivative Financial Instruments
Derivative financial instruments are financial instruments that derive their value from the performance of another item, such as an asset or exchange rates. They are used to manage the risk associated with fluctuations in the value of certain assets and liabilities. The Company can use derivatives to manage its exposure to fluctuations in foreign exchange rates.
Derivative financial instruments comprise forward currency contracts.
| 2017 £’000 |
2016 £’000 |
|
| Forward currency contracts – net unrealised profit | 450 | 1,251 |
| 450 | 1,251 |
14. Other Payables
Other payables are amounts which must be paid by the Company, and include amounts owed to suppliers, such as the Manager and auditor, and any amounts due to brokers for the purchase of investments.
| 2017 £’000 |
2016 £’000 |
|
| Accruals | 451 | 425 |
| 451 | 425 |
15. Stated Capital
The stated capital represents the total number of shares in issue, for which dividends accrue. Stated capital can be used for distributions under Jersey law.
| 2017 Number |
2016 Number |
2017 £’000 |
2016 £’000 |
|
| Allotted ordinary shares of no par value | ||||
| Brought forward | 92,011,204 | 86,337,459 | 148,609 | 138,323 |
| Net issue proceeds | 3,505,000 | 5,673,745 | 6,912 | 10,401 |
| Dividends paid from stated capital | — | — | (63) | (115) |
| 95,516,204 | 92,011,204 | 155,458 | 148,609 |
Details of the stated capital and rights attaching to the Company’s ordinary shares are shown in the Director’s Report on page 55.
For the year to 31 December 2017 3,505,000 (2016: 5,673,745) new ordinary shares were issued to the Company’s corporate broker, Winterflood Securities Limited, for onward transmission to their clients. These shares were issued in tranches of various quantities throughout the year to satisfy secondary market demand. The gross issue proceeds were £6,946,000 (2016: £10,469,000), at an average price of 198.19p (2016: 184.51p), and the net proceeds after issue costs were £6,912,000 (2016: £10,401,000). The net proceeds included an aggregate amount of £63,000 (2016: £115,000) which arose from the income accrued component of the net asset value at the date of issue of the new shares.
Because the criteria in paragraphs 16C and 16D of IAS 32 Financial Instruments: Presentation have been met, the stated capital of the Company is classified as equity even though there is a continuation vote.
16. Reserves
This note explains the different reserves attributable to shareholders. The aggregate of the reserves and stated capital (see previous note) make up total shareholders’ funds.
The capital reserve includes unrealised investment holding profits and losses, being the difference between cost and market value at the balance sheet date, as well as realised profits and losses of disposals of investments. The revenue reserve shows the net revenue after payment of any dividend from the reserve. Both the capital and revenue reserves are distributable.
17. Net Asset Value per Ordinary Share
The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue.
The net asset value per ordinary share and the net assets attributable at the year end were as follows:
| Net Asset Value per Ordinary Share |
Net Assets Attributable |
|||
| 2017 PENCE |
2016 PENCE |
2017 £’000 |
2016 £’000 |
|
| Ordinary shares | 195.40 | 189.32 | 186,634 | 174,193 |
Net asset value per ordinary share is based on net assets at the year end and on 95,516,204 (2016: 92,011,204) ordinary shares, being the number of ordinary shares in issue at the year end.
18. Financial Instruments
Financial instruments comprise the Company’s investment portfolio and derivative financial instruments (for the latter see note 13) as well as any cash, borrowings, other receivables and other payables. The following note explains the risks that affect the Company’s financial instruments and looks at the Company’s exposure to these various risks.
Risk Management Policies and Procedures
The Strategic Report details the Company’s approach to investment risk management on page 12 and the accounting policies in note 2 explain the Company’s valuation basis for investments and currency.
As an investment company, the Company invests in loan stocks, corporate bonds, government stocks, preference shares and equities which are held for the long-term in order to achieve the Company’s Investment Objective in accordance with its Investment Policy. In pursuing these, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction in the profits available for payment as dividends.
The Company’s principal financial instruments at risk comprise its investment portfolio. Other financial instruments at risk include cash and cash equivalents, borrowings, other receivables and other payables that arise directly from the Company’s operations.
The Company may enter into derivative transactions for efficient portfolio management. Derivative instruments can be highly volatile and expose investors to a high risk of loss. Where used to hedge risk there is a risk that the return on a derivative does not exactly correlate to the returns on the underlying investment, obligation or market sector being hedged against. If there is an imperfect correlation, the Company may be exposed to greater loss than if the derivative had not been entered into. During the year the only derivatives entered into were forward currency contracts.
These risks and the Directors’ approach to managing them are set out below, and have not changed from those applying in the comparative year.
Risk management is an integral part of the investment management process. The Manager controls risk by ensuring that the Company’s portfolio is appropriately diversified and the portfolio managers actively monitor both the ratings and liquidity of the fixed-interest securities taking into account the Company’s financing requirements. In-depth and continual analysis of market and stock fundamentals give the portfolio managers the best possible understanding of the risks associated with a particular stock. The portfolio managers assess the exposure to market risk when making each investment decision, and monitor the overall level of market risk on the whole of the portfolio on an ongoing basis.
High-yield fixed-interest securities are subject to a variety of risks, including credit risk (18.3). Borrowing using the Company’s credit facility increases the Company’s exposure to interest rate risk and this is explained under interest rate risk (18.1.2).
The day to day management of the investment activities, borrowings and hedging of the Company has been delegated to the Manager, and is the responsibility of the portfolio managers to whom the Board has given wide discretion to operate within set guidelines. Any proposed variation outside those guidelines is referred to the Board and the guidelines themselves are reviewed at every board meeting.
18.1 Market Risk
Market risk arises from changes in the fair value or future cash flows of a financial instrument because of movements in market prices. Market risk comprises three types of risk: currency risk (18.1.1), interest rate risk (18.1.2) and other price risk (18.1.3).
18.1.1 Currency Risk
The Company has assets, liabilities and income which are denominated in currencies other than sterling and movements in exchange rates will affect the sterling value of those items.
Management of the Currency Risk
The Board meets at least quarterly to assess risk and review investment performance. The portfolio managers monitor the Company’s exposure to foreign currencies on a daily basis and is reviewed by Directors at each Board meeting. Drawings in foreign currencies on the borrowing facility can be used to limit the Company’s currency exposure and to achieve the portfolio characteristics that assist the Company in meeting its investment objective and policy. The Company may use forward currency contracts to mitigate currency risk. All facility drawings and derivative contracts are limited to currencies and amounts commensurate with asset exposure to those currencies.
Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.
Currency Exposure
The fair values of the Company’s monetary items that have foreign currency exposure at 31 December follow. Where the Company’s investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis to show the overall level of exposure.
31 December 2017 |
EURO £’000 |
US DOLLAR £’000 |
| Investments at fair value through profit or loss that are monetary items (fixed and floating interest) | 30,086 | 48,459 |
| Cash and cash equivalents | 107 | 914 |
| Other receivables (due from brokers and dividends) | 422 | 685 |
| Forward currency contracts | (25,792) | (34,970) |
| Foreign currency exposure on net monetary items | 4,823 | 15,088 |
| Investments at fair value through profit or loss that are equities | — | 74 |
| Total net foreign currency | 4,823 | 15,162 |
31 December 2016 |
EURO £’000 |
US DOLLAR £’000 |
| Investments at fair value through profit or loss that are monetary items (fixed and floating interest) | 32,512 | 40,719 |
| Cash and cash equivalents | 941 | 706 |
| Other receivables (due from brokers and dividends) | 582 | 729 |
| Forward currency contracts | (32,091) | (25,514) |
| Foreign currency exposure on net monetary items | 1,944 | 16,640 |
| Investments at fair value through profit or loss that are equities | — | 564 |
| Total net foreign currency | 1,944 | 17,204 |
The above may not be representative of the exposure to risk during the period reported because the levels of monetary foreign currency exposure may change significantly throughout the period.
Currency Sensitivity
The effect on the income statement and the net asset value that changes in exchange rates have on the Company’s financial assets and liabilities is based on the following exchange rates. These rates have been calculated by reference to the volatility of exchange rates during the period using the standard deviation of currency fluctuations against the mean.
| 2017 | 2016 | |
| £/Euro | ±2.3% | ±5.4% |
| £/US Dollar | ±2.9% | ±6.2% |
The following sensitivity analysis is based on the Company’s monetary foreign currency financial instruments held at the balance sheet date, taking account of any forward foreign exchange contracts that offset the effects of changes in currency exchange rates, and the income receivable in foreign currency in the year.
If sterling had strengthened by the changes in exchange rates shown above, this would have had the following effect:
2017 |
EURO £’000 |
US DOLLAR £’000 |
| Effect on Statement of Comprehensive Income – profit/(loss) after taxation | ||
| Revenue loss | (41) | (58) |
| Capital loss | (111) | (440) |
| Total return after taxation for the year | (152) | (498) |
| Effect on net asset value | –0.1% | –0.3% |
2016 |
EURO £’000 |
US DOLLAR £’000 |
| Effect on Statement of Comprehensive Income – profit/(loss) after taxation | ||
| Revenue loss | (108) | (103) |
| Capital loss | (105) | (1,066) |
| Total return after taxation for the year | (213) | (1,169) |
| Effect on net asset value | –0.1% | –0.7% |
If sterling had weakened by the changes in exchange rates shown above this would have an equal and opposite effect.
In the opinion of the Directors, the above sensitivity analysis is not representative of the period as a whole, since the level of exposure changes frequently as part of the currency risk management process of the Company.
18.1.2 Interest Rate Risk
The Company is exposed to interest rate risk in a number of ways. Movements in interest rates may affect the fair value of fixed-interest rate securities, income receivable on cash deposits and floating rate securities, and interest payable on variable rate borrowings. Interest rate risk is related above all to long-term financial instruments.
Management of Interest Rate Risk
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account as part of the portfolio management and borrowings processes of the Manager. The Board reviews on a regular basis the investment portfolio and borrowings. This encompasses the valuation of fixed-interest and floating rate securities.
When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependant on the base rate of the custodian.
The Company has a credit facility with which it can finance investment activity, details of which are shown in note 7. The Company uses the facility at levels approved and monitored by the Board.
Interest Rate Exposure
The following table shows the Company’s exposure to interest rate risk at the balance sheet date arising from its monetary financial assets and liabilities.
2017 |
WITHIN ONE YEAR £’000 |
MORE THAN ONE YEAR £’000 |
TOTAL £’000 |
| Exposure to floating interest rates: | |||
| Investments held at fair value through profit or loss | — | 42,065 | 42,065 |
| Cash and cash equivalents | 8,792 | — | 8,792 |
| 8,792 | 42,065 | 50,857 | |
| Exposure to fixed interest rates: | |||
| Investments held at fair value through profit or loss | 1,822 | 124,845 | 126,667 |
| Net exposure to interest rates | 10,614 | 166,910 | 177,524 |
2016 |
WITHIN ONE YEAR £’000 |
MORE THAN ONE YEAR £’000 |
TOTAL £’000 |
| Exposure to floating interest rates: | |||
| Investments held at fair value through profit or loss | — | 27,089 | 27,089 |
| Cash and cash equivalents | 14,593 | — | 14,593 |
| 14,593 | 27,089 | 41,682 | |
| Exposure to fixed-interest rates: | |||
| Investments held at fair value through profit or loss | 1,063 | 121,156 | 122,219 |
| Net exposure to interest rates | 15,656 | 148,245 | 163,901 |
The nominal interest rates on the investments at fair value through profit or loss are shown in the portfolio list on pages 18 to 21. The weighted average effective interest rate on these investments is 6.6% (2016: 6.9%). The weighted average effective interest rate on cash and cash equivalents is 0.21% (2016: 0.34%).
Interest Rate Sensitivity
The following table illustrates the sensitivity of the profit or loss after taxation for the year to a 1% increase in interest rates in regard to the Company’s financial assets and financial liabilities. As future changes cannot be estimated with any degree of certainty, the sensitivity analysis is based on the Company’s financial instruments held at the balance sheet date, with all other variables held constant.
| 2017 £’000 |
2016 £’000 |
|
| Effect on Statement of Comprehensive | ||
| Income – profit/(loss) after taxation | ||
| Revenue profit | 88 | 146 |
| Capital loss | (7,289) | (6,883) |
| Total loss after taxation for the year | (7,201) | (6,737) |
| Effect on NAV per share | (7.5)p | (7.3)p |
If interest rates had decreased by 1%, this would have had an equal and opposite effect.
The above exposure and sensitivity analysis are not representative of the period as a whole, since the level of exposure changes frequently as borrowings can be drawn down and repaid as required throughout the period. In particular, for the year under review there has been limited interest rate movements and as a consequence little change in interest rate sensitivity.
18.1.3 Other Price Risk
Other price risk includes changes in market prices, other than those arising from currency risk or interest rate risk, which may affect the value of the investment portfolio, whether by factors specific to an individual investment or its issuer, or by factors affecting the wider market.
Management of Other Price Risk
It is the portfolio managers’ responsibility to manage the portfolio and borrowings in accordance with the investment objective and policy, and in accordance with the investment policy guidelines set by the Board. The Board manages the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis compliance with these. The Board also reviews investment performance. Because the Company’s portfolio is the result of the portfolio managers’ investment process, performance may not correlate with the markets in which the Company invests.
The Company’s exposure to other changes in market prices at 31 December on its investments is shown in the fair value hierarchy table on page 53.
Concentration of Exposure to Other Price Risks
The Company’s investment portfolio is not concentrated in any single country of domicile, however, it is recognised that an investment’s country of domicile or listing does not necessarily equate to its exposure to the economic conditions in that country.
Other Price Risk Sensitivity
Excluding fixed interest securities and convertibles, at the year end the Company held other investments of £6,277,000 (2016: £6,410,000). The effect of a 10% increase or decrease in the fair values of these investments (including any exposure through derivatives) on the profit after taxation for the year is £628,000 (2016: £641,000). This level of change is considered to be reasonably possible based on the observation of current market conditions. The sensitivity analysis is based on the Company’s other investments (including equity exposure through derivatives) at the balance sheet date with all other variables held constant.
18.2 Liquidity Risk
This is the risk that the Company may encounter difficulty in meeting its obligations associated with financial liabilities i.e. when realising assets or raising finance to meet financial commitments. A lack of liquidity in the portfolio may make it difficult for the Company to realise assets at or near their purported value in the event of a forced sale.
Management of Liquidity Risk
Liquidity risk is not viewed by the Directors as a significant risk because a majority of the Company’s assets comprise readily realisable securities, although a lack of liquidity in non-investment grade securities may make it difficult to rebalance the Company’s investment portfolio as and when the portfolio managers believe it would be advantageous to do so. On a daily basis the portfolio managers ascertain the Company’s cash and borrowing requirements by reviewing future cash flows arising from purchases and sales of investments, interest and dividend receipts, expenses and dividend payments, and available financing.
Liquidity Risk Exposure
Financial liabilities at the balance sheet date comprised of other payables of £451,000 (2016: £425,000), all of which were payable in less than three months.
18.3 Credit Risk
Credit risk is the risk that the failure of the counterparty to a transaction to discharge its obligation under that transaction could result in a loss to the Company. This risk also includes transactions in derivatives.
At the year end 64.9% (2016: 65.7%) of the Company’s portfolio consisted of non-investment grade securities. To the extent that the Company invests in non-investment grade securities, the Company may realise a higher current yield than the yield offered by investment grade securities. On the other hand, investments in such securities involve a greater volatility of price and a greater risk of default by the issuers of such securities, with consequent loss of interest payments and principal. Non-investment grade securities are likely to be subject to greater uncertainties from exposure to adverse conditions and will be speculative with respect to an issuer’s capacity to meet interest payments and repay principal in accordance with its obligations.
Investment grade and non-investment grade securities totalled 82.2% (2016: 83%) of the portfolio at the year end. Adverse changes in the financial position of an issuer of such high-yield fixed-interest securities or in general economic conditions may impair the ability of the issuer to make payments of principal and/or interest or may cause the liquidation or insolvency of an issuer.
The portfolio may be adversely affected if the Company’s custodian suffers insolvency or other financial difficulties. The appointment of a depositary has substantially lessened this risk. The Board reviews the custodian’s annual control report and the Manager’s management of the relationship with the custodian.
Management of and Exposure to Credit Risk
All of the Company’s assets are subject to credit risk. The Company’s principal credit risk is the risk of default of the non-investment grade debt. Where the portfolio managers make an investment in a bond, corporate or otherwise, the credit rating of the issuer is also considered when assessing the risk of defaults. Investments in bonds are across a variety of industrial sectors and geographical markets to avoid concentration of credit risk. Counterparties for derivative transactions are also a source of credit risk. Transactions involving derivatives are entered into only with banks whose credit ratings are taken into account to minimise default risk. The credit ratings of the derivatives counterparties were mostly A3 with one at Baa3.
Details of the Company’s investments, including their credit ratings, are shown on pages 28 to 21. Credit risk for transactions involving derivatives and equity investments is minimised as the Company only uses approved counterparties.
Cash balances are held with approved deposit takers only and are limited to a maximum of 4% of the Company’s net asset value with any one deposit taker. Balances held with Short-Term Investments Company (Global Series) plc, a triple-A rated money market fund (STIC), are limited to a maximum of 10% of the Company’s net asset value. At the balance sheet date the Company had £1.5 million (2016: £4.5 million) held at the custodian and £7.25 million (2016: £10.1 million) held in STIC.
There are no financial assets that are past due or impaired during the year (2016: none).
Fair Values of Financial Assets and Financial Liabilities
Financial assets are either carried in the balance sheet at their fair value (investments and derivatives), or the balance sheet amount is a reasonable approximation of fair value (due from brokers, dividends receivable, accrued income, due to brokers, accruals and cash).
Financial liabilities are carried at amortised cost except for derivatives, which as stated above are carried at fair value.
19. Classification Under Fair Value Hierarchy
The valuation techniques used by the Company are explained in the accounting policies note 2(c). The table that follows sets out the fair value of the financial instruments. The three levels set out in IFRS 7 hierarchy follow:
Level 1 – The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.
Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.
There were no transfers in the year between any of the levels.
Normally investments would be valued using stock market active prices, with investments disclosed as Level 1 and this is the case for the quoted equity investments that the Company holds. However, the majority of the Company’s investments are non-equity investments. Evaluated prices from a third party pricing vendor are used to price these securities, together with a price comparison made to secondary and tertiary evaluated third party sources. Evaluated prices are in turn based on a variety of sources including broker quotes and benchmarks. As a result, the Company’s non-equity investments have been shown as Level 2 – recognising that the fair values of these investments are not as visible as quoted equity investments and their higher inherent pricing risk. However, this does not mean that the fair values shown in the portfolio valuation are not achievable at point of sale. No Level 3 investments were held during the year or the previous year.
2017 |
LEVEL 1 £’000 |
LEVEL 2 £’000 |
TOTAL £’000 |
| Financial assets designated at fair value through profit or loss: | |||
| Quoted securities: | |||
| – Fixed interest securities(1) | — | 166,558 | 166,558 |
| – Convertibles | — | 2,174 | 2,174 |
| – Preference | 3,516 | — | 3,516 |
| – Convertible preference | 2,687 | — | 2,687 |
| – Equities | 74 | — | 74 |
| – Warrants | — | — | — |
| – Derivative financial instruments | — | 450 | 450 |
| Total for financial assets | 6,277 | 169,182 | 175,459 |
2016 |
LEVEL 1 £’000 |
LEVEL 2 £’000 |
TOTAL £’000 |
| Financial assets designated at fair value through profit or loss: | |||
| Quoted securities: | |||
| – Fixed interest securities(1) | — | 145,998 | 145,998 |
| – Convertibles | — | 3,310 | 3,310 |
| – Preference | 2,990 | — | 2,990 |
| – Convertible preference | 2,856 | — | 2,856 |
| – Warrants | 564 | — | 564 |
| – Derivative financial instruments | — | 1,251 | 1,251 |
| Total for financial assets | 6,410 | 150,559 | 156,969 |
(1) Fixed interest securities include both fixed and floating rate securities.
20. Capital Management
The Company’s capital, or equity, is represented by its net assets which are managed to achieve the Company’s investment objective set out on page 7.
The main risks to the Company’s investments are shown in the Strategic Report under the ‘Principal Risks and Uncertainties’ section on pages 11 and 13. These also explain that the Company is able to borrow and that any resultant gearing will amplify the effect on equity of changes in the value of the portfolio.
The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy-back shares and it also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect to the availability of the borrowing facility, by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements throughout the period.
Total equity at the balance sheet date, the composition of which is shown on the balance sheet on page 38, was £186,634,000 (2016: £174,193,000).
21. Contingencies, Guarantees and Financial Commitments
Liabilities the Company is committed to honour but which are dependent on a future circumstance or event occurring would be disclosed in this note if any existed.
There were no contingencies, guarantees or financial commitments outstanding at the balance sheet date.
22. Related Party Transactions and Transactions with the Manager
A related party is a company or individual who has direct or indirect control or who has significant influence over the Company.
Under International Financial Reporting Standards as adopted by the EU, the Company has identified the Directors as related parties and Directors fees paid have been disclosed in the Report on Directors’ Remuneration and Interests on page 29 with additional disclosure in note 6. Full details of Directors’ interests are set out in the Director's Report on page 30. No other related parties have been identified.
Invesco Fund Managers Limited and Invesco Asset Management Limited, both of which are wholly owned subsidiaries of Invesco Limited, provided investment management and administration services to the Company. Details of the services and fees are disclosed in the Strategic Report and management fees payable are shown in note 5.
23. Post Balance Sheet Events
Any significant events that occurred after the end of the reporting period but before the signing of the balance sheet will be shown here.
There are no significant events after the end of the reporting period requiring disclosure.
.
This annual financial report announcement is not the Company’s statutory accounts. The statutory accounts for the period ended 31 December 2017 have been audited and approved but are not yet filed. They received an audit report which is unqualified and does not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.
The audited annual financial report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the Company’s Registered Office, Ordnance House, 31 Pier Road, St.Helier, Jersey, JE4 8PW or the Manager’s website via the directory found at the following link: www.invescoperpetual.co.uk/citymerchants.
.
NOTICE OF ANNUAL GENERAL MEETING
NOTICE IS GIVEN that the Annual General Meeting (AGM) of City Merchants High Yield Trust Limited (the Company) will be held at 3.30pm on 13 June 2018 at 1st Floor, 43-45 Portman Square, London W1H 6LY, for the following purposes:
Ordinary Business
1. To receive the annual financial report for the year ended 31 December 2017.
2. To approve the Report on Directors’ Remuneration and Interests
3. To approve the Company’s Dividend Payment Policy to pay four quarterly dividends to shareholders in May, August, November and February in respect of each accounting year.
4. To re-appoint PricewaterhouseCoopers CI LLP as the Company’s auditor and authorise the Audit Committee to determine their remuneration.
5. To elect Mr Scholefield a Director of the Company.
6. To re-elect Mrs Winifred Robbins a Director of the Company.
Special Business
To consider and if thought fit, to pass the following resolutions, of which resolution 7 will be proposed as an ordinary resolution and resolutions 8 to 10 will be proposed as special resolutions:
7. THAT, in accordance with Article 158 of the Company’s Articles of Association, the Directors of the Company be and they are hereby released from their obligation pursuant to such Article to convene a general meeting of the Company within six months of the AGM at which a special resolution would be proposed to wind up the Company.
8. THAT, pursuant to Article 14.1 of the Company’s Articles of Association, the Directors be and are hereby empowered to issue shares, up to 10% of the existing shares in issue at the time of the AGM, without pre-emption.
9. THAT, pursuant to Article 8.2 of the Company’s Articles of Association and Article 57 of the Companies (Jersey) Law 1991 as amended (the Law), the Company be generally and unconditionally authorised:
(a) to make purchases of its issued ordinary shares of no par value (Shares) to be cancelled or held as treasury shares provided that:
(i) the maximum number of Shares hereby authorised to be purchased shall be 14.99% of the Company’s issued ordinary shares, this being 95,516,204 on the date of this notice;
(ii) the minimum price which may be paid for a Share is 1p;
(iii) the maximum price, exclusive of expenses, which may be paid for a Share is an amount equal to 105% of the average of the middle market quotations for a Share taken from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which the Share is purchased; and
(iv) the authority hereby conferred shall expire on the earlier of the conclusion of the next AGM of the Company held after passing of this resolution or 15 months from the date of the passing of this resolution, whichever is the earlier.
10. THAT, the period of notice required for general meetings of the Company (other than AGMs) shall not be less than 14 days.
Dated this 27 March 2018
By order of the Board
R&H Fund Services (Jersey) Limited
Company Secretary.
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