Annual Financial Report
City Merchants High Yield Trust Limited
Annual Financial Report Announcement
For the year ended 31 December 2018
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FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
| Twelve Month Total Return(1) | 2018 | 2017 |
| Net asset value(2) | –3.6% | +8.7% |
| Share price(2) | –7.6% | +9.9% |
| Ongoing Charges Ratio(2) | 0.98% | 0.98% |
| Dividend for the year | 10p | 10p |
| Year End Information | 31 DECEMBER | 31 DECEMBER | % |
| 2018 | 2017 | CHANGE | |
| Net asset value per ordinary share(2) | 178.69p | 195.40p | –8.6 |
| Share price(1) | 175.00p | 199.50p | –12.3 |
| (Discount)/Premium | –2.1% | 2.1% | |
| Gearing(2) | |||
| Gross gearing | nil | nil | |
| Net cash(2) | 2.4% | 4.7% |
(1) Source: Refinitiv (Thomson Reuters).
(2) Terms are defined in the Glossary of Terms and Alternative Performance Measures on pages 61 to 64.
CHAIRMAN’S STATEMENT
Performance
2018 proved to be a challenging year for high yield investors. The familiar trend of ever declining yields seen in the prior years was decisively broken, and yields rose steadily during the twelve months under review. To put this increase in context, it is worth keeping in mind that yields had fallen to exceptionally low levels in 2017, levels which by historic standards appeared increasingly detached from the long term characteristics of the asset class.
A number of themes weighed on the high yield market over the course of the year, perhaps the main source of unease stemming from the imminent prospect of a peak in the degree of stimulus provided by ‘quantitative easing’. Quantitative easing, whereby central banks undertake large scale purchases of assets, became a common feature of G7 monetary policy post-2008 as policymakers fought to restore financial market confidence. However, in 2018 this stimulus slowed, particularly in Europe where the European Central Bank (ECB) signalled its intention to rein in its monthly program of asset purchases.
This change in central bank policy, albeit gradual, came at a time of growing uncertainty regarding the outlook for economic activity. Tariff increases enacted in the United States and China caused much alarm, and though by November an uneasy truce was reached between President Trump and China’s Premier Xi Jinping, underlying tensions remained unresolved. Europe saw a particularly marked deceleration in economic activity, and toward the end of the year familiar concerns over the long term sustainability of China’s debt-fuelled development model resurfaced. Brexit and concerns over sovereign risk in Italy compounded investors’ unease.
The Company’s net asset value (NAV) total return for the year was –3.6% compared with a total return of –2.4% for the ICE Bank of America Merrill Lynch European Currency High Yield Index (the Index) and an average return of -2.3% for funds in the Investment Association Sterling Strategic Bond sector. A decline in the premium to NAV saw the share price return –7.6% during 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 2018 your Company’s NAV total return was +17.6% and +26.9% respectively, compared to total returns of +15.7% and +24.9% for the Index. The Board believes that the Manager has delivered good investment performance over these periods.
Income Account
Dividends are a key component of the total return to shareholders and we were able to meet our dividend target of 10p in respect of the financial year, paid in four equal payments. The fourth dividend payment was paid on 25 February 2019 in the form of an interim dividend payment. This means that it can be paid earlier than would be the case had we declared a final dividend, since this would need approval at the Annual General Meeting. Your Board will continue to target a dividend of 10p in the current year.
Costs
The Company’s ongoing charges ratio (OCR) for the year was 0.98% which was the same as 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 0.4% during the year and was at a discount of 2.1% at the year end. We issued a further 1,575,000 shares during 2018. Shares are always issued at a premium sufficient to ensure that existing shareholders do not experience dilution of the net asset value. The average price of these shares issued was 191.09p. Since the year end the share price has traded at a premium, and a further 550,000 shares have been issued.
Your Board believes that shareholders benefit from the growth in the size of the Company in two important ways. First, there is typically a positive correlation between a company’s size and the liquidity of its shares, and secondly, as the Company grows, its fixed costs are spread over a larger base, resulting in downward pressure on the OCR.
Gearing
As at 31 December 2018 the Company’s net cash position was 2.4%. 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. As previously reported, we have established a facility to use repo financing for this purpose in place of or alongside any credit facility.
Board Composition
Winifred Robbins retired from the Board in March 2019. Winifred originally joined the Board of the Company’s predecessor, CMHYT plc, in March 2009 and in 2011 joined the Board of the present Company. On behalf of the Board and shareholders I would like to thank her for her excellent contribution over the years. We have appointed an independent search firm to find a replacement for Winifred and will update shareholders in due course.
Governance Matters
In 2018 we established a Management Engagement Committee to undertake the review of the investment management, secretarial and other third party providers. While this function had previously been undertaken by the Board, we concluded that establishing a committee to complete the review of delegated services was consistent with ‘best practice’ among investment companies. The Management Engagement Committee will report to the Board and is chaired by Phil Austin.
In July the Financial Reporting Council released the 2018 Corporate Governance Code following a lengthy consultation period. The Corporate Governance Code was first published in 1992 by the Cadbury Committee and over the years it has been revised and expanded. Investment companies, such as your Company, have a number of distinctive features and so not all aspects of the Code are relevant. The Association of Investment Companies (‘AIC’) subsequently published the 2019 AIC Code of Corporate Governance (‘2019 AIC Code’) and the Company intends to comply with this code going forward. One governance change we will introduce as a consequence of the 2019 AIC Code is to ensure that from the 2019 AGM, your Directors will seek annual rather than triennial re-election. The resolutions for the re-election of each of the continuing Directors are detailed in the Notice of Meeting on page 65. In line with the 2019 AIC Code an outline of the reasons why their contributions and skills continue to be important to the Company’s long-term sustainable success are included on page 58.
In my 2017 Chairman’s Statement I drew attention to the new regulations which required investment companies to publish return projections according to a series of scenarios in key information documents (KIDs). I explained that 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 financial history. This issue received considerable attention during 2018, notably from the AIC which published a damning report demonstrating that KIDs are systematically flawed and calling for their reform. Let us hope that the KID methodology is replaced with something that is ‘fit for purpose’ in the not too distant future.
AGM
The Company’s 2019 AGM will be held in London at Home House, 20 Portman Square, London W1H 6LW at 3.30pm on 25 June 2019. One of the 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 pages 58 and 59. They consist of the ordinary resolutions to receive this annual financial report and re-appoint the auditor and the re-election of Directors. Ordinary resolutions on Directors’ Remuneration and the Company’s Dividend Payment Policy are included; these are advisory. Items of special business comprise items 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 day’s notice. The Board has considered all the resolutions proposed in the notice and believes they are in the interests of shareholders as a whole. We therefore recommend shareholders vote in favour of each resolution.
Outlook
At the start of 2019 many of the key sources of economic and political uncertainty which overshadowed markets for much of the past 12-18 months appear no closer to resolution. It therefore seems that trade tensions, the direction of monetary policy, particularly in the United States, the health of the Chinese economy, and of course Brexit will continue to preoccupy financial markets for the foreseeable future.
That said, it is the health, or otherwise, of the corporate sector which is ultimately the key determinant of high yield performance, and in this respect there are grounds for cautious optimism. For example, the economic backdrop currently appears to be one of slowdown rather than widespread or protracted recession and while corporate profit margins are likely to have peaked in 2018, their decline over the coming year seems likely to be gradual.
The re-pricing of the market in 2018 has undoubtedly provided greater opportunities to invest in bonds which provide sufficient compensation for the risk to investors. This is an encouraging development, and the Board is confident that your Investment Manager is in a strong position to exploit these opportunities within the portfolio.
Tim Scholefield
Chairman
3 April 2019
MANAGER’S INVESTMENT REPORT
Market Background
The past twelve months has been a difficult period for high yield bond markets with European currency high yield delivering its first year of negative return since 2011 and US high yield its first year of losses since 2015.
The negative returns reflected a deterioration in sentiment attributable to multiple factors. These included: increasing protectionism and rising tensions over trade, political risk in the eurozone concerning the Italian budget deficit, emerging market uncertainty, Brexit, and in the final quarter of 2018, a 40% decline in crude oil prices. At the same time, markets had to adjust to less central bank stimulus. The US Federal Reserve raised US interest rates four times, the Bank of England increased UK interest rates once and at the end of the year the European Central Bank ended its asset purchase programme. There was also some company specific volatility, particularly within the retail and services sectors. One of the more extreme examples was House of Fraser, with the price of the company’s 2020 bond having fallen by over 90% during the year. Although not held in the portfolio the price decline serves as a reminder of the potential for material losses in the high yield market.
Nonetheless, although there are some exceptions, company fundamentals generally remain sound. Although leverage has increased from the low level of recent years, interest coverage ratios (the amount of times interest expense is covered by earnings) remain healthy. This relatively positive backdrop is reflected in default rates, which remain low. It is, however, worth bearing in mind that the repricing to higher yields observed during 2018 will slowly start to put pressure on coverage ratios as companies must refinance at higher coupons.
The more uncertain environment of the past year was accompanied by a fall in supply. Barclays report European new issuance down 38% on levels in 2017. As sentiment deteriorated issuers were forced to row back on some of the more aggressive pricing and terms that had characterised the market right at the start of the year.
Portfolio strategy
Over the twelve months to 31 December 2018 the deterioration in market sentiment led the Company’s NAV to deliver a negative total return of –3.6%. A total dividend of 10p has been paid for the year.
The broad themes of the portfolio were unchanged over the year. However, the re-pricing of the market provided the opportunity to build exposure to bonds we like.
There is a core (42%) 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, which we believe offer relatively attractive yield. Approximately 23% of the portfolio is invested in bank capital, predominantly additional tier 1 and legacy tier 1. We also have around a 10% allocation to subordinated bonds in the insurance sector. Elsewhere, we have 9% in hybrid capital instruments. These bonds are issued with higher coupons than the issuer’s senior debt instruments. We believe the subordination risk of these more junior debt instruments is acceptable in the context of the companies’ relatively strong balance sheets.
Outlook
Looking ahead, the market continues to face significant potential headwinds including the withdrawal of quantitative easing, Brexit and ongoing trade tensions. We therefore remain cautious, but the repricing of recent months has, we believe, created value and where appropriate we will seek to exploit these opportunities.
The guiding principle in our investment approach is whether we are being sufficiently compensated for the risks of holding a bond. To make this judgement it is important that we ensure we have an in-depth understanding of a company so that we can judge whether or not it will be able to meet its financial commitments. In turn this analysis enables us to better gauge the level of income we need to be paid to compensate for those risks. Similarly, it is important to maintain a good diversification of holdings and the portfolio is currently invested in over 100 different issuers.
By adopting this approach, we believe that we will be able to meet the challenges that the market faces and continue to deliver attractive levels of income for the Company’s shareholders.
Rhys Davies Paul Read Paul Causer
Portfolio Managers
3 April 2019
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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 to act as registrar and the Bank of New York Mellon (International) Limited (BNYMIL) as depository and custodian.
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.
The Company is an alternative investment fund for the purposes of the Alternative Investment Fund Managers Directive.
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 are in place and may be used in place of or alongside any credit facility arranged by the Company, subject to the aggregate 30% ceiling. The Company did not use repo financing during the year to 31 December 2018 (2017: none).
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 meaningfully assessed. 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. As explained in the Chairman’s Statement, the Board has noted the under performance in the year and is satisfied with the longer term performance of the portfolio.
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 on page 9 of the annual financial report 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 graph on page 9 of the annual financial report shows the premium/discount through the year, ending with a discount of 2.1%. As explained in the Chairman’s Statement, demand for shares during the year resulted in the issue of 1,575,000 shares at an average price of 191.09p.
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%, the same as 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 maximising 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 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 the portfolio manager assessed 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 effective 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 investment 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. For the year under review these included but were 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 on pages 12 and 13. 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 TPPs, 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 have a 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 received and considered, together with representatives of the Manager, reports in relation to operations and systems of internal controls of the Manager, accounting administrator, custodian and registrar. The Committee also receives regular reports from the Manager’s internal audit and compliance departments. 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 note 18 on pages 49 to 54.
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 TPPs 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 investment 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 for consideration and approval.
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 both the Manager’s and Secretary’s whistleblowing policy under which staff of both Invesco Fund Managers Limited and R&H Fund Services (Jersey) 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 control 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 ICE Bank of America Merrill Lynch European Currency High Yield Index (‘the Index’) is used in contribution analysis. 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.
Borrowing Risk
The Risk: Borrowings for investment purposes will amplify the reduction in NAV in a falling market, which in turn is likely to adversely affect the Company’s share price. There is no guarantee that it will be possible to re-finance repo financing arrangements or replace any other borrowing facilities on their maturity either at all or on terms that are acceptable to the Company, in which case any amounts owing by the Company would need to be funded by the sale of investments and the Company may not be able to realise the expected value of those assets. Repo financing introduces an element of counterparty risk. Repo financing transactions require the counterparty to sell the relevant assets to the Company on the repurchase date at a fixed price but if a counterparty failed to do so, the Company would be left with a contractual claim against the defaulting counterparty and there is no guarantee the Company would be able to recover all of the value of the assets from that counterparty. In adverse market conditions, the risks of counterparty default may be greater than at other times.
Mitigating Procedures and Controls: All borrowings are actively managed by the Manager and monitored by the Board. The Company will only enter into repo arrangements with counterparties who are authorised or regulated by an appropriate regulator and whose credit rating is not less than the minimum investment grade credit ratings issued by internationally recognised agencies. There is a maximum limit allowed with any one counterparty, and transactions typically have a maturity tenor of three months or less.
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 page 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 18. 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. 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 53 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 40 shows the assets and liabilities at the year end. A £20 million revolving credit facility is currently 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. In addition, the Company also has repo financing agreements in place, which were not used during the year.
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 65, 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 2019 |
AT 31 DECEMBER 2018 |
AT 31 DECEMBER 2017 |
||||
| HOLDING | % | HOLDING | % | HOLDING | % | |
| Charles Stanley, stockbrokers | 10,207,392 | 10.5 | 10,162,647 | 10.8 | 10,896,791 | 11.4 |
| Hargreaves Lansdown, stockbrokers (EO) | 9,323,658 | 9.5 | 8,841,373 | 9.1 | 8,291,312 | 8.7 |
| Invesco | 6,881,470 | 7.0 | 6,881,470 | 7.1 | 6,881,470 | 7.2 |
| Redmayne Bentley, stockbrokers | 6,044,111 | 6.2 | 5,797,331 | 6.0 | 4,910,675 | 5.1 |
| EFG Harris Allday, stockbrokers | 5,234,108 | 5.3 | 5,264,368 | 5.4 | 4,906,163 | 5.1 |
| Alliance Trust Savings | 4,689,662 | 4.8 | 4,560,043 | 4.8 | 4,247,330 | 4.4 |
| Brewin Dolphin, stockbrokers | 3,509,781 | 3.6 | 3,546,085 | 3.7 | 3,546,085 | 3.6 |
Board Diversity
The Company’s policy on diversity is set out on page 26. 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. During the year to 31 December 2018, the Board comprised five non-executive directors of whom one was female, thereby constituting 20% female representation. Summary biographical details of the Directors are set out on page 23. 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 3 April 2019.
R&H Fund Services (Jersey) Limited
Company Secretary
.
INVESTMENTS IN ORDER OF VALUATION
AT 31 DECEMBER 2018
| MARKET | ||||||
| MOODY/S&P | COUNTRY OF | VALUE | % OF | |||
| ISSUER | ISSUE | RATING | INDUSTRY | INCORPORATION | £’000 | PORTFOLIO |
| Lloyds Banking Group | 7.875% Perpetual | Baa3/BB– | Financials | UK | 4,194 | 2.5 |
| 7% Var Perpetual | Baa3/BB– | 3,040 | 1.8 | |||
| 7,234 | 4.3 | |||||
| Aviva | 6.125% Perpetual | A3/BBB | Financials | UK | 3,765 | 2.2 |
| 8.875% Preference | NR/NR | 1,495 | 0.9 | |||
| 5,260 | 3.1 | |||||
| Intesa Sanpaolo | 8.375% FRN Perpetual | Ba3/BB– | Financials | Italy | 3,029 | 1.8 |
| 7% Perpetual | Ba3/BB– | 996 | 0.6 | |||
| 7.75% Perpetual | Ba3/BB– | 694 | 0.4 | |||
| 4,719 | 2.8 | |||||
| Altice | 7.375% 01 May 2026 | B2/B | Financials | France | 3,028 | 1.8 |
| 6.625% 15 Feb 2023 | B2/B+ | Luxembourg | 1,204 | 0.7 | ||
| 7.5% 15 May 2026 | B2/B+ | 449 | 0.3 | |||
| 4,681 | 2.8 | |||||
| Koninklijke KPN | 6.875% FRN 14 Mar 2073 | Ba2/BB | Telecommunications | Netherlands | 4,160 | 2.5 |
| Enel | 7.75% 10 Sep 2075 | Ba1/BBB– | Utilities | Italy | 2,742 | 1.6 |
| 6.625% 15 Sep 2076 | Ba1/BBB– | 796 | 0.5 | |||
| 3,538 | 2.1 | |||||
| Standard Chartered | 5.125% 06 Jun 2034 | Baa2/BBB– | Financials | UK | 2,022 | 1.2 |
| 5.7% 26 Mar 2044 | Baa2/BBB– | 1,329 | 0.8 | |||
| 3,351 | 2.0 | |||||
| Telecom Italia | 7.721% 04 Jun 2038 | Ba1/BB+ | Telecommunications | Luxembourg | 1,557 | 0.9 |
| 5.303% 30 May 2024 | Ba1/BB+ | Italy | 1,487 | 0.9 | ||
| 3,044 | 1.8 | |||||
| Thames Water | 7.75% 01 Apr 2019 | B1/NR | Utilities | UK | 3,027 | 1.8 |
| Premier Foods Finance | 6.25% 15 Oct 2023 | B2/B | Consumer Goods | UK | 2,075 | 1.2 |
| FRN 15 Jul 2022 (SNR) | B2/B | 768 | 0.5 | |||
| 2,843 | 1.7 | |||||
| Enterprise Inns | 6.375% 15 Feb 2022 (SNR) | NR/BB– | Consumer Services | UK | 1,282 | 0.8 |
| 6% 06 Oct 2023 | NR/BB– | 1,060 | 0.6 | |||
| 7.5% BDS 15 Mar 2024 | NR/B | 480 | 0.3 | |||
| 2,822 | 1.7 | |||||
| Matalan Finance | 9.5% 31 Jan 2024 (SNR) | Caa2/CCC | Consumer Goods | UK | 1,547 | 0.9 |
| 6.75% 31 Jan 2023 (SNR) | B2/B– | 1,261 | 0.8 | |||
| 2,808 | 1.7 | |||||
| Barclays | 9.25% Perpetual | Ba2/BB+ | Financials | UK | 1,128 | 0.7 |
| 7% Perpetual | NR/B+ | 971 | 0.5 | |||
| 8% Perpetual | NR/B+ | 331 | 0.2 | |||
| 7.875% Var Perpetual | Ba3/B+ | 219 | 0.1 | |||
| 2.75% FRN Perpetual | Ba2/BB+ | 119 | 0.1 | |||
| 2,768 | 1.6 | |||||
| Virgin Money | 8.75% Perpetual | NR/NR | Financials | UK | 2,688 | 1.6 |
| Stonegate | 4.875% 15 Mar 2022 (SNR) | B2/B– | Consumer Services | UK | 1,731 | 1.0 |
| FRN 15 Mar 2022 (SNR) | B2/B– | 880 | 0.5 | |||
| 2,611 | 1.5 | |||||
| Balfour Beatty | 10.75p Cnv Preference | NR/NR | Industrials | UK | 2,555 | 1.5 |
| Royal Bank of Scotland | 7.64% FRN Perpetual | Ba2/B+ | Financials | UK | 1,409 | 0.9 |
| 8% Cnv FRN Perpetual | Ba2u/B | 548 | 0.3 | |||
| 8.625% FRN Perpetual | Ba2u/B | 357 | 0.2 | |||
| 2,314 | 1.4 | |||||
| Catlin Insurance | 7.249% FRN Perpetual | NR/A– | Financials | Bermuda | 2,310 | 1.4 |
| Picard | FRN 30 Nov 2023 | B2/B | Consumer Services | France | 2,195 | 1.3 |
| Algeco Scotsman | 8% 15 Feb 2023 (SNR) | B2/B– | Consumer Services | UK | 1,436 | 0.9 |
| 10% 15 Aug 2023 (SNR) | Caa1/CCC | 739 | 0.4 | |||
| 2,175 | 1.3 | |||||
| DKT Finance | 7% 17 Jun 2023 (SNR) | B3/B– | Financials | Denmark | 1,193 | 0.7 |
| 9.375% 17 Jun 2023 (SNR) | B3/B– | 890 | 0.5 | |||
| 2,083 | 1.2 | |||||
| ELM | 6.3024% FRN Perpetual | A3/A | Financials | Netherlands | 2,013 | 1.2 |
| Virgin Media Finance | 6.25% 28 Mar 2029 | Ba3/BB– | Consumer Services | UK | 2,002 | 1.2 |
| Pension Insurance | 8% 23 Nov 2026 | NR/NR | Financials | UK | 1,987 | 1.2 |
| Fiat Chrysler Automobiles | 4.5% 15 Apr 2020 | Ba3/BB+ | Consumer Goods | Netherlands | 1,962 | 1.2 |
| Drax Finco | 4.25% 01 May 2022 (SNR) | NR/BB+ | Utilities | UK | 1,961 | 1.2 |
| Citigroup Capital | 6.829% FRN Perpetual | Ba1/BB+ | Financials | USA | 1,923 | 1.1 |
| Ocado | 4% 15 Jun 2024 (SNR) | Ba3/NR | Consumer Services | UK | 1,836 | 1.1 |
| Electricite De France | 6% Perpetual | Baa3/BB | Utilities | France | 1,259 | 0.8 |
| 5.875% Perpetual | Baa3/BB | 561 | 0.3 | |||
| 1,820 | 1.1 | |||||
| Société Genérale | 7.375% 31 Dec 2065 | Ba2/BB+ | Financials | France | 1,788 | 1.1 |
| UniCredit International | 8.125% FRN Perpetual | B1/BB– | Financials | Luxembourg | 932 | 0.5 |
| Bank | 8% FRN Perpetual | NR/NR | Italy | 838 | 0.5 | |
| 1,770 | 1.0 | |||||
| TVL Finance | 8.5% 15 May 2023 (SNR) | B3/B– | Consumer Services | UK | 977 | 0.6 |
| FRN 15 May 2023 (SNR) | B3/B– | 731 | 0.4 | |||
| 1,708 | 1.0 | |||||
| Marb Bondco | 6.875% 19 Jan 2025 (SNR) | NR/BB– | Financials | UK | 1,694 | 1.0 |
| Pinnacle Bidco | 6.375% 15 Feb 2025 (SNR) | B3/B | Financials | UK | 1,685 | 1.0 |
| Coty | 4.75% 15 Apr 2026 (SNR) | B3/BB– | Consumer Goods | USA | 1,677 | 1.0 |
| Petra Diamonds | 7.25% 01 May 2022 (SNR) | B3/B | Basic Materials | UK | 1,658 | 1.0 |
| BNP Paribas | Cnv FRN Perpetual | Ba2/BB+ | Financials | Belgium | 1,010 | 0.6 |
| 7.375% Var Perpetual | Ba1/BBB– | France | 602 | 0.4 | ||
| 1,612 | 1.0 | |||||
| CIRSA Finance | 6.25% 20 Dec 2023 (SNR) | B2/B+ | Financials | Luxembourg | 851 | 0.5 |
| 7.875% 20 Dec 2023 (SNR) | B2/B+ | 751 | 0.4 | |||
| 1,602 | 0.9 | |||||
| Arqiva Broadcast Finance | 6.75% 30 Sep 2023 | B2/NR | Telecommunications | UK | 1,561 | 0.9 |
| HSBC | 4.25% 14 Mar 2024 | A3/BBB+ | Financials | UK | 496 | 0.3 |
| 5.25% 14 Mar 2044 | A3/BBB+ | 472 | 0.3 | |||
| 6% FRN Perpetual | Baa3/NR | 360 | 0.2 | |||
| 6.375% Cnv Perpetual | Baa3/NR | 191 | 0.1 | |||
| 1,519 | 0.9 | |||||
| Vodafone Group | 4.875% 03 Oct 2078 | Baa3/BBB– | Telecommunications | UK | 758 | 0.5 |
| 6.25% 03 Oct 2078 | Baa3/BBB– | 728 | 0.4 | |||
| 1,486 | 0.9 | |||||
| Softbank | 5.125% 19 Sep 2027 (SNR) | Ba1/BB+ | Telecommunications | Japan | 1,394 | 0.8 |
| Ecclesiastical Insurance | 8.625% Preference | NR/NR | Financials | UK | 1,360 | 0.8 |
| Office | ||||||
| Telefonica Europe | 5.875% Perpetual | Ba2/BB+ | Telecommunications | Netherlands | 1,336 | 0.8 |
| UBS | 7% Perpetual | NR/BB+ | Financials | Switzerland | 685 | 0.4 |
| 6.875% FRN Perpetual | NR/BB | 651 | 0.4 | |||
| 1,336 | 0.8 | |||||
| Pizza Express | 6.625% 01 Aug 2021 | B3/CCC+ | Consumer Services | UK | 808 | 0.5 |
| 8.625% 01 Aug 2022 | Caa2/CCC– | 513 | 0.3 | |||
| 1,321 | 0.8 | |||||
| Maxeda DIY | 6.125% 15 Jul 2022 (SNR) | B2/B– | Consumer Services | Netherlands | 1,309 | 0.8 |
| Iron Mountain | 3.875% 15 Nov 2025 | Ba3/BB– | Financials | UK | 1,302 | 0.8 |
| Jewel UK Bondco | 8.5% 15 Apr 2023 (SNR) | B2/B– | Consumer Services | UK | 1,287 | 0.8 |
| SCOR | 5.25% 13 Mar 2067 | Baa1u/A– | Financials | France | 1,278 | 0.8 |
| Danske Bank | 7% 26 Jun 2049 | NR/BB+ | Financials | Denmark | 1,229 | 0.7 |
| Burger King France | 8% 15 Dec 2022 (SNR) | NR/CCC | Consumer Services | France | 743 | 0.4 |
| FRN 01 May 2023 | B3/B– | 465 | 0.3 | |||
| 1,208 | 0.7 | |||||
| Platin 1426 | 5.375% 15 Jun 2023 (SNR) | B3/B | Industrials | Germany | 1,190 | 0.7 |
| Orange | 5.875% Perpetual | Baa3/BBB– | Telecommunications | France | 1,175 | 0.7 |
| Wind Tre Spa | 5% 20 Jan 2026 (SNR) | B1/BB– | Telecommunications | Italy | 1,159 | 0.7 |
| Hertz | 7.625% 01 Jun 2022 | B1/B+ | Consumer Services | USA | 1,148 | 0.7 |
| JRP Group | 9% 26 Oct 2026 | NR/NR | Financials | UK | 1,142 | 0.7 |
| Bombardier | 6% 15 Oct 2022 | Caa1/B– | Industrials | Canada | 883 | 0.5 |
| 7.5% 15 Mar 2025 | Caa1/B– | 259 | 0.2 | |||
| 1,142 | 0.7 | |||||
| Vougeot Bidco | 7.875% 15 Jul 2020 | B3/B | Consumer Services | UK | 1,140 | 0.7 |
| OneSavings Bank | 9.125% FRN Perpetual | NR/NR | Financials | UK | 1,130 | 0.7 |
| Chemours | 6.625% 15 May 2023 (SNR) | Ba3/BB– | Basic Materials | USA | 1,024 | 0.6 |
| 7% 15 May 2025 | Ba3/BB– | 95 | 0.1 | |||
| 1,119 | 0.7 | |||||
| Beazley | 5.875% 04 Nov 2026 | NR/NR | Financials | Ireland | 1,084 | 0.6 |
| Time Warner Cable | 5.25% 15 Jul 2042 | Ba1/BBB– | Consumer Services | USA | 1,076 | 0.6 |
| Aker BP | 5.875% 31 Mar 2025 (SNR) | Ba2/BB+ | Oil and Gas | Norway | 586 | 0.3 |
| 6% 01 Jul 2022 (SNR) | Ba2/BB+ | 486 | 0.3 | |||
| 1,072 | 0.6 | |||||
| Codere Finance 2 (Luxembourg) | 7.625% 01 Nov 2021 | B2/B | Consumer Services | Luxembourg | 1,058 | 0.6 |
| Direct Line Insurance | 9.25% FRN 27 Apr 2042 | Baa1/BBB+ | Financials | UK | 1,055 | 0.6 |
| CGG | Common stock | NR/NR | Oil and Gas | France | 539 | 0.3 |
| FRN 21 Feb 2024 | Caa1/NR | 513 | 0.3 | |||
| 1,052 | 0.6 | |||||
| Southern Water (Greensands) |
8.5% 15 Apr 2019 | NR/B+ | Utilities | UK | 1,014 | 0.6 |
| Solvay Finance | 5.869% Var Perpetual | Ba1/BB+ | Basic Materials | France | 989 | 0.6 |
| Jaguar Land Rover | 5% 15 Feb 2022 | Ba3/BB– | Consumer Goods | UK | 551 | 0.3 |
| 3.875% 01 Mar 2023 | Ba3/BB– | 424 | 0.3 | |||
| 975 | 0.6 | |||||
| Travis Perkins | 4.5% 07 Sep 2023 (SNR) | NR/BB+ | Industrials | UK | 974 | 0.6 |
| Credit Agricole | 7.5% Var Perpetual | NR/NR | Financials | France | 953 | 0.6 |
| Deutsche Bank | 7.125% Perpetual | B1/B+ | Financials | Germany | 952 | 0.6 |
| Yew Grove REIT | NR/NR | Financials | Ireland | 898 | 0.5 | |
| Cott | 5.5% 1 Apr 2025 | B1/B | Consumer Goods | USA | 869 | 0.5 |
| Scottish Widows | 5.5% 16 Jun 2023 | Baa1/BBB+ | Financials | UK | 864 | 0.5 |
| Ziggo Bond Finance | 5.875% 15 Jan 2025 | B3/B | Telecommunications | Netherlands | 849 | 0.5 |
| Lamb Weston | 4.625% 01 Nov 2024 | Ba2/BB | Consumer Goods | USA | 840 | 0.5 |
| J. C. Penney | 8.625% 15 Mar 2025 (SNR) | Caa1/CCC+ | Consumer Services | USA | 523 | 0.3 |
| 6.375% 15 Oct 2036 (SNR) | Caa2/CCC+ | 309 | 0.2 | |||
| 832 | 0.5 | |||||
| Sigma Holdco | 7.875% 15 May 2026 (SNR) | B3/B– | Consumer Goods | Netherlands | 821 | 0.5 |
| Argentina (Rep Of) | 6.875% 11 Jan 2048 (SNR) | B2/B | Financials | Argentina | 811 | 0.5 |
| Trinseo | 5.375% 01 Sep 2025 (SNR) | B2/BB– | Basic Materials | Luxembourg | 808 | 0.5 |
| FAGE International | 5.625% 15 Aug 2026 (SNR) | B1/BB– | Consumer Goods | Luxembourg | 804 | 0.5 |
| Phoenix Life | 7.25% Perpetual | WR/NR | Financials | UK | 801 | 0.5 |
| Diamond 1 | 5.45% 15 Jun 2023 | Baa3/BBB– | Technology | USA | 788 | 0.5 |
| Sainsbury's Bank | 6% FRN 23 Nov 2027 | NR/NR | Consumer Services | UK | 782 | 0.5 |
| AXA | 6.379% FRN Perpetual | Baa1/BBB | Financials | France | 772 | 0.4 |
| VIVAT | 6.25% Perpetual | NR/NR | Financials | Netherlands | 755 | 0.4 |
| Teva Pharmaceutical Finance III | 6.75% 01 Mar 2028 | Ba2/BB | Financials | Netherlands | 731 | 0.4 |
| Puma International | 5% 24 Jan 2026 | Ba2/NR | Oil and Gas | Luxembourg | 535 | 0.3 |
| 5.125% 06 Oct 2024 (SNR) | Ba2/NR | 188 | 0.1 | |||
| 723 | 0.4 | |||||
| Takko | FRN 15 Nov 2023 (SNR) | B2/B– | Consumer Goods | Luxembourg | 713 | 0.4 |
| Peel Land & Property | 8.375% Var 30 Apr 2040 | NR/BBB | Financials | UK | 710 | 0.4 |
| Investments | ||||||
| Miller Homes | FRN 15 Oct 2023 (SNR) | NR/BB– | Consumer Goods | UK | 508 | 0.3 |
| 5.5% 15 Oct 2023 (SNR) | NR/BB– | 172 | 0.1 | |||
| 680 | 0.4 | |||||
| JBS Investments | 7.0% 15 Jan 2026 | Ba3/BB– | Consumer Goods | Austria | 653 | 0.4 |
| Avantor | 4.75% 01 Oct 2024 (SNR) | B2/B | Health Care | USA | 641 | 0.4 |
| Brink's | 4.625% 15 Oct 2027 | Ba2/BB | Industrials | USA | 613 | 0.4 |
| XPO Logistics | 6.5% 15 Jun 2022 (SNR) | Ba3/BB | Industrials | USA | 559 | 0.3 |
| Constellium | 5.75% 15 May 2024 | B2/B– | Basic Materials | Netherlands | 360 | 0.2 |
| 5.875% 15 Feb 2026 | B2/B– | 174 | 0.1 | |||
| 534 | 0.3 | |||||
| AMC Entertainment | 6.375% 15 Nov 2024 (SUB NTS) | B3/B– | Consumer Services | USA | 530 | 0.3 |
| Commerzbank | 8.125% 19 Sep 2023 | Baa3/BBB– | Financials | Germany | 515 | 0.3 |
| Principality Building Society | 7% Perpetual | Ba2/NR | Financials | UK | 503 | 0.3 |
| Rothschilds Continuation Finance | FRN Perpetual | NR/NR | Financials | Netherlands | 472 | 0.3 |
| J Sainsbury | 6.5% Var Perpetual | NR/NR | Consumer Services | UK | 428 | 0.3 |
| Almaviva The Italian Innovation Company | 7.25% 15 Oct 2022 | B2/B+ | Technology | Italy | 402 | 0.2 |
| Nationale-Nederlanden | 4.625% 08 Apr 2044 | Baa2u/BBB– | Financials | Netherlands | 396 | 0.2 |
| Standard Life Aberdeen | 5.5% 04 Dec 2042 | Baa1/BBB | Financials | UK | 383 | 0.2 |
| PGH Capital | 5.375% 06 Jul 2027 | NR/NR | Financials | Cayman Islands | 369 | 0.2 |
| CBR Fashion Finance | 5.125% 01 Oct 2022 (SNR) | B2/B | Consumer Services | Netherlands | 367 | 0.2 |
| Caixabank | 6.75% FRN Perpetual | Ba3u/BB | Financials | Spain | 363 | 0.2 |
| CEMEX SAB | 6.125% 05 May 2025 | NR/BB | Industrials | Mexico | 352 | 0.2 |
| Odyssey Europe | 8% 15 May 2023 (SNR) | B2/B | Consumer Services | UK | 346 | 0.2 |
| Sunshine Mid | 6.5% 15 May 2026 (SNR) | Caa1/B– | Consumer Goods | Netherlands | 305 | 0.2 |
| Tesco | 6.15% 15 Nov 2037 (SNR) | Ba1/BB+ | Consumer Services | UK | 188 | 0.1 |
| 5.2% 05 Mar 2057 | Ba1/BB+ | 114 | 0.1 | |||
| 302 | 0.2 | |||||
| CCO Holdings Capital | 5% 01 Feb 2028 | B1/BB | Consumer Services | USA | 302 | 0.2 |
| Rothesay Life | 8% 30 Oct 2025 | NR/NR | Financials | UK | 283 | 0.2 |
| Millicom International Cellular | 5.125% 15 Jan 2028 | Ba2/NR | Telecommunications | Luxembourg | 265 | 0.2 |
| Whitbread | 3.375% 16 Oct 2025 (SNR) | NR/NR | Consumer Services | UK | 254 | 0.1 |
| ASR Nederland | 4.625% Cnv FRN Perpetual | NR/BB | Financials | Netherlands | 206 | 0.1 |
| Nyrstar Netherland | 6.875% 15 Mar 2024 | Caa2/CCC– | Basic Materials | Netherlands | 168 | 0.1 |
| CIS General Insurance | 12% FRN 08 May 2025 | NR/NR | Industrials | UK | 111 | 0.1 |
| Transportadora de Gas del Sur | 6.75% 02 May 2025 (SNR) | B1/B | Utilities | Argentina | 107 | 0.1 |
| Charter Communications Operating | 6.484% 23 Oct 2045 | Ba1/BBB– | Telecommunications | USA | 100 | 0.1 |
| La Financière ATALIAN | 4% 15 May 2024 (SNR) | B3/B | Financials | France | 80 | 0.0 |
| M&G Finance | 7.5% FRN Perpetual | NR/NR | Financials | Luxembourg | 19 | 0.0 |
| (SUB NTS) | ||||||
| 168,188 | 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 15) 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 23, 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.
Signed on behalf of the Board of Directors
Philip Taylor
Audit Committee Chairman
3 April 2019
.
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
| 2018 | 2017 | ||||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL | ||
| NOTES | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| (Loss)/profit on investments held at fair value | 11 | — | (12,911) | (12,911) | — | 4,586 | 4,586 |
| Exchange differences | — | 355 | 355 | — | (156) | (156) | |
| (Loss)/profit on derivative instruments – currency hedges | — | (3,395) | (3,395) | — | 1,555 | 1,555 | |
| Income | 4 | 11,247 | — | 11,247 | 10,766 | — | 10,766 |
| Investment management fees | 5 | (875) | (470) | (1,345) | (895) | (481) | (1,376) |
| Other expenses | 6 | (436) | (1) | (437) | (441) | (3) | (444) |
| Profit/(loss) before finance costs | 9,936 | (16,422) | (6,486) | 9,430 | 5,501 | 14,931 | |
| Finance costs | 7 | (28) | (15) | (43) | (29) | (16) | (45) |
| Profit/(loss) before taxation | 9,908 | (16,437) | (6,529) | 9,401 | 5,485 | 14,886 | |
| Taxation | 8 | — | — | — | (16) | — | (16) |
| Profit/(loss) after taxation | 9,908 | (16,437) | (6,529) | 9,385 | 5,485 | 14,870 | |
| Return per ordinary share | 9 | 10.3p | (17.1p) | (6.8p) | 10.0p | 5.9p | 15.9p |
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 of the Company. No operations were acquired or discontinued in the year.
.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
| STATED | CAPITAL | REVENUE | |||
| CAPITAL | RESERVE | RESERVE | TOTAL | ||
| NOTES | £’000 | £’000 | £’000 | £’000 | |
| 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 | |
| Net proceeds from issue of new shares | 15 | 2,993 | — | — | 2,993 |
| Total comprehensive income for the year | — | (16,437) | 9,908 | (6,529) | |
| Dividends paid | 10 | (23) | — | (9,586) | (9,609) |
| At 31 December 2018 | 158,428 | 11,222 | 3,839 | 173,489 |
The accompanying notes are an integral part of these financial statements.
.
BALANCE SHEET
AT 31 DECEMBER
| 2018 | 2017 | ||
| NOTES | £’000 | £’000 | |
| Non-current assets | |||
| Investments held at fair value through profit or loss | 11 | 168,188 | 175,009 |
| Current assets | |||
| Other receivables | 12 | 3,128 | 2,834 |
| Derivative financial instruments – unrealised net profit | 13 | — | 450 |
| Cash and cash equivalents | 4,181 | 8,792 | |
| 7,309 | 12,076 | ||
| Current liabilities | |||
| Other payables | 14 | (427) | (451) |
| Derivative financial instruments – unrealised net loss | 13 | (1,581) | — |
| Net current assets | 5,301 | 11,625 | |
| Net assets | 173,489 | 186,634 | |
| Capital and reserves | |||
| Stated capital | 15 | 158,428 | 155,458 |
| Capital reserve | 16 | 11,222 | 27,659 |
| Revenue reserve | 16 | 3,839 | 3,517 |
| Shareholders’ funds | 173,489 | 186,634 | |
| Net asset value per ordinary share | 17 | 178.69p | 195.40p |
These financial statements were approved and authorised for issue by the Board of Directors on 3 April 2019.
Signed on behalf of the Board of Directors
Philip Taylor
Audit Committee Chairman
.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER
| 2018 | 2017 | |
| £’000 | £’000 | |
| Cash flow from operating activities | ||
| (Loss)/profit before finance cost and taxation | (6,486) | 14,931 |
| Tax on overseas income | — | (16) |
| Adjustment for: | ||
| Purchases of investments | (57,228) | (67,177) |
| Sales of investments | 51,102 | 52,472 |
| (6,126) | (14,705) | |
| Loss/(profit) on investments at fair value | 12,911 | (4,586) |
| Net cash movement from derivative instruments – | 2,031 | 801 |
| (Increase)/decrease in receivables | (258) | 222 |
| (Decrease)/increase in payables | (24) | 26 |
| Net cash flow from operating activities after taxation | 2,048 | (3,327) |
| Cash flow from financing activities | ||
| Finance cost paid | (43) | (45) |
| Net proceeds from issue of shares | 2,993 | 6,912 |
| Net equity dividends paid – note 10 | (9,609) | (9,341) |
| Net cash outflow from financing activities | (6,659) | (2,474) |
| Net decrease in cash and cash equivalents | (4,611) | (5,801) |
| Cash and cash equivalents at beginning of the year | 8,792 | 14,593 |
| Cash and cash equivalents at end of the year | 4,181 | 8,792 |
| Â | ||
| Reconciliation of cash and cash equivalents to the Balance Sheet is as follows: | ||
| Cash held at custodian | 1,614 | 1,542 |
| Short-Term Investment Company (Global Series) plc, money market fund | 2,567 | 7,250 |
| Cash and cash equivalents | 4,181 | 8,792 |
| Cash flows from operating activities includes: | ||
| Dividends received | 521 | 473 |
| Interest received | 10,465 | 10,494 |
The accompanying notes are an integral part of these financial statements.
.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2018
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 February 2018, is consistent with the requirements of IFRS, the Directors have prepared 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 the SORP.
(ii) Going Concern
As explained under ‘Annual Continuation Vote’ on page 15, 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 33. 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.
The following standards became effective during the year:
• IFRS 9: Financial Instruments (effective 1 January 2018).
• IFRS 15: Revenue from contracts with customers (effective 1 January 2018).
The adoption of the above standards and interpretations (or any other standards and interpretations which are in issue but not effective) have not had a material impact on the financial statements of the Company.
(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. There have been no significant judgements, estimates or assumptions for the current or preceding year, except for the allocation of management fee and finance costs (see note 2(g)).
(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 internally to the Board.
value basis in accordance with the Company’s documented investment strategy and this is also the basis on which information about investments is provided 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.
| 2018 | 2017 | |
| £’000 | £’000 | |
| Income from investments | ||
| UK dividends | 447 | 447 |
| UK investment income – interest | 5,099 | 4,099 |
| Overseas investment income – interest | 5,667 | 6,191 |
| Overseas dividends | 29 | 27 |
| 11,242 | 10,764 | |
| Other income | ||
| Deposit interest | 5 | 2 |
| Total income | 11,247 | 10,766 |
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.
| 2018 | 2017 | |||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Investment management fee | 875 | 470 | 1,345 | 895 | 481 | 1,376 |
Details of the investment management agreement are disclosed in the Strategic Report on page 14. At the period end the management fee accrued was £325,000 (2017: £350,000).
6. Other Expenses
The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.
| 2018 | 2017 | |||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| General expenses (i) | 277 | 1 | 278 | 287 | 3 | 290 |
| Directors’ fees (ii) | 129 | — | 129 | 125 | — | 125 |
| Auditor’s remuneration: | ||||||
| financial statements (including any expenses) | 30 | — | 30 | 29 | — | 29 |
| 436 | 1 | 437 | 441 | 3 | 444 | |
(i) General expenses include £41,000 (2017: £40,000) 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 £26,000 (2017: £25,000). It is based on an initial fee of £22,500 plus RPI increases in May of each year.
Custodian dealing costs of £942 (2017: £2,516) are charged wholly to capital.
(ii) The maximum Directors’ fees authorised by the Articles of Association are £150,000 per annum. The Directors’ Remuneration Report provides further information on Directors’ fees.
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.
| 2018 | 2017 | |||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Commitment fees due on loan facility | 26 | 14 | 40 | 26 | 14 | 40 |
| Bank charges | 2 | 1 | 3 | 3 | 2 | 5 |
| 28 | 15 | 43 | 29 | 16 | 45 | |
The Company has a 364 day committed £20 million multi-currency revolving credit facility with Bank of New York Mellon with a maturity date of 4 May 2019. 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 (2017: none).
Interest payable is based on the interbank offered rate for the currency drawn down plus a margin. The commitment fee is based on 0.20% of the average undrawn amount each quarter.
In addition, the Company has repo financing arrangements in place, which were not used during the year or the previous year.
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 result in a revenue tax, the only overseas tax arises on assets domiciled in countries with which Jersey has no double-taxation treaty.
| 2018 | 2017 | |
| £’000 | £’000 | |
| Overseas taxation | — | 16 |
The Company is subject to Jersey income tax at the rate of 0% (2017: 0%). The overseas tax charge consists of irrecoverable withholding tax.
9. Return per Ordinary Share
Return per ordinary 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 96,209,286 (2017: 93,655,436) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.
10. Dividends on Ordinary Shares
Dividends are usually paid from the income less expenses. Dividends are paid as an amount per ordinary share held.
| 2018 | 2017 | |||
| PENCE | £’000 | PENCE | £’000 | |
| Dividends paid and recognised in the year: | ||||
| Fourth interim | 2.5 | 2,388 | 2.5 | 2,300 |
| First interim | 2.5 | 2,388 | 2.5 | 2,312 |
| Second interim | 2.5 | 2,414 | 2.5 | 2,362 |
| Third interim | 2.5 | 2,419 | 2.5 | 2,367 |
| 10.0 | 9,609 | 10.0 | 9,341 | |
Dividends paid in the year have been charged to revenue except for £23,000 (2017: £63,000) 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 years ended 31 December:
| 2018 | 2017 | |||
| PENCE | £’000 | PENCE | £’000 | |
| Dividends in respect of the year: | ||||
| First interim | 2.5 | 2,388 | 2.5 | 2,312 |
| Second interim | 2.5 | 2,414 | 2.5 | 2,362 |
| Third interim | 2.5 | 2,419 | 2.5 | 2,367 |
| Fourth interim | 2.5 | 2,427 | 2.5 | 2,388 |
| 10.0 | 9,648 | 10.0 | 9,429 | |
The fourth interim dividend for 2018 was paid on 25 February 2019 to shareholders on the register on 25 January 2019.
11. Investments Held at Fair Value Through Profit and 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
| 2018 | 2017 | |
| £’000 | £’000 | |
| Opening book cost | 159,830 | 141,041 |
| Opening investment holding profits | 15,179 | 14,677 |
| Opening valuation | 175,009 | 155,718 |
| Movements in the year: | ||
| Purchases at cost | 57,228 | 67,177 |
| Sales – proceeds | (51,138) | (52,472) |
| Sales – net realised profit | 434 | 4,013 |
| Movement in investment holding profit | (13,345) | 573 |
| Closing valuation | 168,188 | 175,009 |
| Closing book cost | 166,354 | 159,830 |
| Closing investment holding profit | 1,834 | 15,179 |
| Closing valuation | 168,188 | 175,009 |
| Realised profit in the year | 434 | 4,084 |
| Movement in investment holding profit in the year | (13,345) | 502 |
| Total (loss)/profit in the year | (12,911) | 4,586 |
(b) Transaction costs
The Transaction costs on investments amount to £nil on sales and £nil on purchases (2017: £1,000 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.
| 2018 | 2017 | |
| £’000 | £’000 | |
| Prepayments and accrued income | 3,092 | 2,834 |
| Amount due from the liquidation of CMHYT plc (predecessor vehicle) | 36 | — |
| 3,128 | 2,834 |
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.
| 2018 | 2017 | |
| £’000 | £’000 | |
| Forward currency contracts – net unrealised (loss)/profit | (1,581) | 450 |
| (1,581) | 450 |
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.
| 2018 | 2017 | |
| £’000 | £’000 | |
| Accruals | 427 | 451 |
| 427 | 451 |
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.
| 2018 | 2017 | 2018 | 2017 | |
| Number | Number | £’000 | £’000 | |
| Allotted ordinary shares of no par value | ||||
| Brought forward | 95,516,204 | 92,011,204 | 155,458 | 148,609 |
| Net issue proceeds | 1,575,000 | 3,505,000 | 2,993 | 6,912 |
| Dividends paid from stated capital | — | — | (23) | (63) |
| 97,091,204 | 95,516,204 | 158,428 | 155,458 |
Details of the stated capital and rights attaching to the Company’s ordinary shares are shown in the Director’s Report on page 57.
For the year to 31 December 2018 1,575,000 (2017: 3,505,000) 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 £3,010,000 (2017: £6,946,000), at an average price of 191.09p (2017: 198.19p), and the net proceeds after issue costs were £2,993,000 (2017: £6,912,000). The net proceeds included an aggregate amount of £23,000 (2017: £63,000) which arose from the income accrued component of the net asset value at the date of issue of the new shares.
Subsequent to the year end 550,000 ordinary shares were issued at an average price of 184.74p.
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 | Net Assets | |||
| per Ordinary Share | Attributable | |||
| 2018 | 2017 | 2018 | 2017 | |
| Pence | Pence | £’000 | £’000 | |
| Ordinary shares | 178.69 | 195.40 | 173,489 | 186,634 |
Net asset value per ordinary share is based on net assets at the year end and on 97,091,204 (2017: 95,516,204) 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 management risk 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 security fundamentals give the portfolio managers the best possible understanding of the risks associated with a particular security. 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 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. The Company may use forward currency contracts to mitigate currency risk. Drawings in foreign currencies on the borrowing facility can also 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. 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.
| US | ||
| EURO | DOLLAR | |
| 31 DECEMBER 2018 | £’000 | £’000 |
| Investments at fair value through profit or loss that are monetary items (fixed and floating interest) | 22,947 | 57,587 |
| Cash and cash equivalents | 635 | 587 |
| Other receivables (due from brokers and dividends) | 389 | 986 |
| Forward currency contracts | (23,225) | (47,554) |
| Foreign currency exposure on net monetary items | 746 | 11,606 |
| Investments at fair value through profit or loss that are equities | ||
| 1,437 | — | |
| Total net foreign currency | 2,183 | 11,606 |
| US | ||
| EURO | DOLLAR | |
| 31 DECEMBER 2017 | £’000 | £’000 |
| Investments at fair value through profit or loss that are monetary items | 30,086 | 48,459 |
| (fixed and floating interest) | ||
| 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 |
The above may not be representative of the exposure to risk during the year reported because the levels of monetary foreign currency exposure may change significantly throughout the year.
Currency Sensitivity
The effect on the Statement of Comprehensive Income and the net asset value that changes in exchange rates have on the Company’s financial assets and liabilities is based on the following currencies. These changes have been calculated by reference to the volatility of exchange rates during the period using the standard deviation of currency fluctuations against the mean.
| 2018 | 2017 | |
| £/Euro | ±1.0% | ±2.3% |
| £/US Dollar | ±3.6% | ±2.9% |
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:
| US | ||
| EURO | DOLLAR | |
| 2018 | £’000 | £’000 |
| Effect on Statement of Comprehensive Income – profit/(loss) after | ||
| taxation | ||
| Revenue loss | (13) | (88) |
| Capital loss | (22) | (418) |
| Total return after taxation for the year | (35) | (506) |
| Effect on net asset value | 0.0% | –0.3% |
| US | ||
| EURO | DOLLAR | |
| 2017 | £’000 | £’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% |
If sterling had weakened against the euro or dollar to this extent, the effect would have been the exact opposite.
In the opinion of the Directors, the above sensitivity analysis is not representative of the year 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 available repo financing arrangements and a credit facility it can use to finance investment activity, details of which are shown in note 7. The Company uses these 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.
| WITHIN | MORE THAN | ||
| ONE YEAR | ONE YEAR | TOTAL | |
| 2018 | £’000 | £’000 | £’000 |
| Exposure to floating interest rates: | |||
| Investments held at fair value through profit | |||
| or loss | 13,249 | 25,034 | 38,283 |
| Cash and cash equivalents | 4,181 | — | 4,181 |
| 17,430 | 25,034 | 42,464 | |
| Exposure to fixed interest rates: | |||
| Investments held at fair value through profit | |||
| or loss | 5,989 | 117,069 | 123,058 |
| Net exposure to interest rates | 23,419 | 142,103 | 165,522 |
| WITHIN | MORE THAN | ||
| ONE YEAR | ONE YEAR | TOTAL | |
| 2017 | £’000 | £’000 | £’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 |
The nominal interest rates on the investments at fair value through profit or loss are shown in the portfolio list on pages 19 to 22. The weighted average effective interest rate on these investments is 6.5% (2017: 6.6%). The weighted average effective interest rate on cash and cash equivalents is 0.52% (2017: 0.21%).
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.
| 2018 | 2017 | |
| £’000 | £’000 | |
| Effect on Statement of Comprehensive | ||
| Income – profit/(loss) after taxation | ||
| Revenue profit | 42 | 88 |
| Capital loss | (5,841) | (7,289) |
| Total loss after taxation for the year | (5,799) | (7,201) |
| Effect on NAV per ordinary share | (6.0)p | (7.5)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 year as a whole, since the level of exposure changes frequently as borrowings can be drawn down and repaid as required throughout the year.
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 closely 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 55.
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 £6,847,000 (2017: £6,277,000). 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 £685,000 (2017: £628,000). 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 £427,000 (2017: £451,000), 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 66.1% (2017: 64.9%) 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% (2017: 82.2%) 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
Almost 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 18 to 22. 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 £1.6 million (2017: £1.5 million) held at the custodian and £2.57 million (2017: £7.25 million) held in STIC.
There are no financial assets that are past due or impaired during the year (2017: 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.
| LEVEL 1 | LEVEL 2 | TOTAL | |
| 2018 | £’000 | £’000 | £’000 |
| Financial assets designated at fair value through | |||
| profit or loss: | |||
| Quoted securities: | |||
| – Fixed interest securities(1) | — | 159,386 | 159,386 |
| – Convertibles | — | 1,955 | 1,955 |
| – Preference | 2,855 | — | 2,855 |
| – Convertible preference | 2,555 | — | 2,555 |
| – Equities | 1,437 | — | 1,437 |
| Total for financial assets | 6,847 | 161,341 | 168,188 |
| Financial liabilities designated at fair value through | |||
| profit or loss: | |||
| – Derivative financial instruments – forward currency contracts | — | (1,581) | (1,581) |
| Total for financial liabilities | — | (1,581) | (1,581) |
| LEVEL 1 | LEVEL 2 | TOTAL | |
| 2017 | £’000 | £’000 | £’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 |
| – Derivative financial instruments – forward currency contracts | — | 450 | 450 |
| Total for financial assets | 6,277 | 169,182 | 175,459 |
(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 12 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 40, was £173,489,000 (2017: £186,634,000).
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 31 with additional disclosure in note 6. Full details of Directors’ interests are set out in the Report on Directors’ Remuneration and Interests on page 31. 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 2018 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.invesco.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 25 June 2019 at Home House, 20 Portman Square, London W1H 6LW,for the following purposes:
Ordinary Business
1. To receive the annual financial report for the year ended 31 December 2018.
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 re-elect Mr Tim Scholefield a Director of the Company.
6. To re-elect Mr Philip Taylor a Director of the Company.
7. To re-elect Mr Philip Austin a Director of the Company.
8. To re-elect Mr John Boothman a Director of the Company.
Special Business
To consider and if thought fit, to pass the following resolutions, of which resolution 9 will be proposed as an ordinary resolution and resolutions 10 to 12 will be proposed as special resolutions:
9. 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.
10.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.
11.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 14,636,416 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.
12.THAT, the period of notice required for general meetings of the Company (other than AGMs) shall not be less than 14 days.
Dated this 3 April 2019
By order of the Board
R&H Fund Services (Jersey) Limited
Company Secretary
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