Annual Financial Report

WEISS KOREA OPPORTUNITY FUND LTD.

LEI 213800GXKGJVWN3BF511

(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)

ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019

Weiss Korea Opportunity Fund Ltd. (the “Company”) has today, released its Annual Financial Report for the year ended 31 December 2019. The Report will shortly be available for inspection via the Company's website www.weisskoreaopportunityfund.com.

For further information, please contact:

N+1 Singer
James Maxwell – Nominated Adviser
James Waterlow – Sales

+44 20 7496 3000
Northern Trust International Fund Administration Services (Guernsey) Limited
Samuel Walden


+44 1481 745385


Summary Information

The Company

Weiss Korea Opportunity Fund Ltd. (“WKOF” or the “Company”) was incorporated with limited liability in Guernsey, as a closed-ended investment company on 12 April 2013. The Company’s Shares were admitted to trading on the Alternative Investment Market (“AIM”) of the London Stock Exchange (the “LSE”) on
14 May 2013.

The Company is managed by Weiss Asset Management LP (the “Investment Manager”), a Boston-based investment management company registered with the Securities and Exchange Commission in the United States of America.

Investment Objective and Dividend Policy

The Company's investment objective is to provide Shareholders with an attractive return on their investment, predominantly through long-term capital appreciation. The Company is geographically focussed on South Korean companies. Specifically, the Company invests primarily in listed preferred shares issued by companies incorporated in South Korea, which in many cases trade at a discount to the corresponding common shares of the same companies. Since the Company's Admission to AIM, the Investment Manager has assembled a portfolio of South Korean preferred shares that it believes are undervalued and could appreciate based on the criteria that it selects. The Company may, in accordance with its investment policy, also invest some portion of its assets in other securities, including exchange-traded funds, futures contracts, options, swaps and derivatives related to Korean equities, and cash and cash equivalents. The Company does not have any concentration limits.

The Company intends to return to Shareholders all dividends received, net of withholding tax, on an annual basis.

Investment Policy

The Company is geographically focused on South Korean companies. Some of the considerations that affect the Investment Manager’s choice of securities to buy and sell may include the discount at which a preferred share is trading relative to its respective common share, its dividend yield, its liquidity, and the weighting of its common share (if any) in the MSCI Korea 25/50 Net Total Return Index (the “Korea Index”), among other factors. Not all of these factors will necessarily be satisfied for particular investments. The Investment Manager does not generally make decisions based on corporate fundamentals or its view of the commercial prospects of an issuer. Preferred shares are selected by the Investment Manager at its sole discretion, subject to the overall control of the board of directors of the Company (the “Board”).

The Company purchased certain credit default swaps on the sovereign debt of South Korea and put options on iShares MSCI South Korea as general market and portfolio hedges, but generally did not hedge its exposure to interest rates or foreign currencies during the year ended 31 December 2019 (2018: Nil). Please see additional information about the nature of these hedges in the Investment Manager’s Report within.

Realisation Opportunity

In accordance with the Company’s Articles of Incorporation and its Admission Document, the Company offered all Shareholders the right to elect to realise some or all of the value of their Ordinary Shares (the “Realisation Opportunity”), less applicable costs and expenses, on or prior to the fourth anniversary of Company’s admission to AIM and, unless it has already been determined that the Company be wound-up, every two years thereafter, the most recent being 15 May 2019 (the “Realisation Date”) and the next Realisation Date taking place in May 2021. See Note 18 for further details.

On 20 March 2019, the Company announced that pursuant to the Realisation Opportunity, Shareholders who were on the register as at the record date could elect, during the Election Period, to redesignate all or part of their Ordinary Shares as Realisation Shares. The Election Period commenced on 15 April 2019 and closed on 8 May 2019. Elections were received from shareholders totalling of 2,747,153 Ordinary Shares, representing 3.3 per cent of the Company’s issued share capital.

Following the Realisation Date, the Ordinary Shares held by the Shareholders who elected for Realisation were redesignated as Realisation Shares and the Portfolio was split into two separate and distinct Pools, namely the Continuation Pool (comprising the assets attributable to the continuing Ordinary Shares) and the Realisation Pool (comprising the assets attributable to the Realisation Shares).

Share Buybacks

In addition to the Realisation Opportunity, the Company has authority to repurchase on the open market up to 40 percent of its outstanding Ordinary Shares. During the year ended 31 December 2019, the Company purchased none (2018: Nil) of its own Shares at a consideration of £Nil (31 December 2018: £Nil) under its general buyback authority.

For additional information on Share buybacks refer to Note 18.

Shareholder Information

Northern Trust International Fund Administration Services (Guernsey) Limited (the “Administrator”) is responsible for calculating the Net Asset Value (“NAV”) per Share of the Company. The unaudited NAV per Ordinary Share is calculated on a weekly basis and at the month end by the Administrator, and is announced by a Regulatory News Service and is available through the Company’s website www.weisskoreaopportunityfund.com.

Company financial highlights and performance summary for the year ended 31 December 2019

As at As at
31 December 2019 31 December 2018
£ £
Total Net Assets 126,988,732 126,489,595
NAV per share 1.5559 1.4993
Basic and diluted earnings/(loss) per share 0.0960  (0.3780)
Mid-Market Share price 1.50 1.47
Premium/(discount) to NAV* (3.6%) (2.0%)

As at close of business on 21 April 2020, the latest published NAV per Share had decreased to £1.4055 (as at 24 April 2020) and the Share price stood at £1.27.

*The amount by which the market value exceeds or is less than the face value of a stock.

Total expense ratio

The annualised total expense ratio for the year ended 31 December 2019 was 1.85 per cent (31 December 2018: 1.89 per cent). The annualised total expense ratio includes charges paid to the Investment Manager and other expenses divided by the average NAV for the year. See Note 10 for details of such expenses.


Chairman’s Review

Year to 31 December 2019

We are pleased to provide the 2019 Annual Report on the Company. During the period from
31 December 2018 to 31 December 2019 (the “Period”), the Company’s NAV increased by 6.7 per cent, [1] outperforming the reference MSCI Korea 25/50 Net Total Return Index (the “Korea Index”), which increased 4.8 per cent in pounds sterling. Since the admission of the Company to AIM in May 2013, the NAV has increased by 73.4 per cent including reinvested dividends, [2] or 72.4 per cent assuming dividends are not reinvested in the Company, compared to the Korea Index returns of 44.3 per cent [3]. A report from the Investment Manager follows.

As described in the circular to Shareholders published on 20 March 2019, the Company made available its second Realisation Opportunity enabling Shareholders to elect to realise all, or a part, of their shareholding.[4] Realisation opportunities are now scheduled to occur every two years on or about the anniversary of the Company’s listing. We are pleased to offer this feature to our investors, and proud to note that it has been copied elsewhere in the market as a model of good corporate governance.

The Directors declared a dividend of 4.1195 pence Sterling per share, Ex-Dividend Date 9 May 2019, to distribute the income received by the Company in respect of the year ended 31 December 2018. This dividend was paid to all Shareholders on 31 May 2019 regardless of any election made under the Realisation Opportunity.

In addition to the Realisation Opportunity, the Company has an active share repurchase program as part of its discount management strategy. As the Company traded at a narrow discount or premium to NAV during the first half of 2019, there were no share repurchases during the Period. The Board is authorised to repurchase up to 40 per cent of the Company's outstanding Ordinary Shares in issue as at 25 July 2019.[5] Since Admission almost six years ago, and as at the date of this document, the Company has repurchased, at a discount to NAV, 12,590,250 Ordinary Shares of the original 105,000,000 Ordinary Shares issued at Admission. The Board also has in place standing instructions with the Company’s broker, N+1 Singer Advisory LLP, for the repurchase of the Company’s Shares during closed periods when the Board is not permitted to give individual instructions; such closed periods typically occur around the preparation of the Annual and Half Yearly Financial Reports. The Board intends to continue to aggressively repurchase Shares if the Company’s shares are trading at a significant discount to NAV. We will continue to keep Shareholders informed of any share repurchases through public announcements.

In early March the spread of COVID-19 in South Korea was exponential and alarming. The country quickly recorded several thousand cases and the largest outbreak outside of China. Currently, nearly 11,000 cases and 250 deaths have been reported. At the same time, the rate of new infections has substantially declined over that period, from a high of over 800 per day at the end of February to less than 20 per day at the end of April. It appears, at this time, that the government’s swiftly implemented containment policies, that included mass testing within infection cluster areas, have been effective at abating the spread of the virus. That being said, significant uncertainty about containment remains, and there will likely be a substantial disruption to both the supply and demand side of the Korean economy.

If you would like to speak with the Investment Manager or learn about potential opportunities to meet with them, please contact the Company’s broker, N+1 Singer. I would like to thank Shareholders for their support and look forward to the continued success of the Company in the future.

Finally, I would like to congratulate Dr Andrew Weiss for the extraordinary recognition his charitable work received in 2019. It is not widely known, but for many years Andrew has been making charitable donations through his own foundation to improve the lives of poor people in poor countries, and one aspect of that has been to fund development research through the Weiss Fund for Research in Development Economics. As you would expect, the charity prides itself on its efficiency and making every dollar count. His work has achieved unusual recognition. The joint winners of the 2019 Nobel Prize for Economics, Abhijit Banerjee, Esther Duflo, and Michael Kremer, decided to donate their prize money of almost $1m to the Weiss Fund. [6] Congratulations to Andrew and his wife Bonnie for their efforts and contributions over many years.

Norman Crighton
Chairman
28 April 2020

[1] This return includes the annual cash dividend paid to the Company’s Shareholders but does not assume such dividends are reinvested.

[2] This return includes all dividends paid to the Company’s Shareholders and assumes that these dividends were reinvested in WKOF shares at the next date for which the Company reports a NAV, at the NAV for that date.

[3] MSCI total return indices are calculated as if any dividends paid by constituents are reinvested at their respective closing prices on the ex-date of the distribution.

[4] On 8 May 2019, the Election Period for the Realisation Opportunity closed; valid elections were received from Shareholders totalling 2,747,153 Ordinary Shares, representing approximately 3.3 per cent. of the Company’s issued share capital. On 15 May 2019, these electing Ordinary Shares were redesignated as Realisation Shares, and on 18 June 2019 a full cash redemption was paid out to holders of Realisation Shares, and the shares were cancelled. None of the Directors and personnel associated with the Investment Manager participated in the Realisation Opportunity in respect of all, or any part of, their respective shareholdings. Indeed, certain personnel associated with the Investment Manager acquired additional shares during the Period.

[5]  On 25 July 2019, the Company had 81,617,828 Ordinary Shares in issue.

[6] Further information can be found in a press release here: https://economics.harvard.edu/news/2019-economics-laureates-donate-nobel-prize-money-invest-next-generation-development 


Investment Manager’s Report

For the year ended 31 December 2019

Performance

In 2019, the Company’s NAV gained 6.7 per cent, outperforming the reference MSCI South Korea Index [1] (GBP) (“the Index”), which returned 4.8 per cent in pounds sterling. From its inception in May 2013, the Company has significantly outperformed the Korean market. The total return to an investor in the Company since inception was 73.4 per cent [2] including reinvested dividends, or 72.4 per cent assuming dividends are not reinvested in the Company, compared to returns of 45.4 per cent for the Korea Index over the same period.

The outperformance against the Index for 2019 was largely due to discount narrowing of preferred shares owned, which contributed 4.9 per cent of the 6.7 per cent NAV performance as described in the table below. The Company generally had less favourable weightings to positive and negative performing sectors than the Index. In other words, a portfolio composed of the corresponding common shares of equal market value to the preference shares the Company owns would have underperformed the index by 3.7 per cent. However, the largest detractor from performance, as measured in GBP Sterling, was GBP’s 7.2 per cent appreciation against the Korean Won (“KRW”) over the year. The Company generally does not hedge currencies.

Return Attribution Component Trailing 12 month Attribution
MSCI South Korea Index (KRW) [3] 12.9%
WKOF Common Shares vs Korea Index (KRW) [4] -3.7%
Discount Narrowing of Preferred Shares Owned 4.9%
Excess Dividend Yield of Preferred Shares Owned [5] 0.7%
Currency (KRW vs. GBP) -7.2%
Fees & Expenses -1.9%
Other 1.0%
NAV Performance 6.7%

Korea as an Investment

The broader Korean equity market rebounded in 2019 following a dismal 2018. However, no export reliant economy was spared its share of fallout from the US-China trade war during the year, and South Korea suffered more than most. Sales to the US and China account for approximately 40 per cent of Korea’s export value, and by year-end, total South Korean exports had fallen by 10.3 per cent, year over year. Heightened tensions between Korea and Japan over war reparations, and Japanese restrictions on Korean exports, resulted in yet more bad news for Korean trade. Toward year end, tensions decreased on both fronts. In November, Korea reversed a threat made earlier in the year to terminate the military intelligence sharing pact between the two countries, followed in December by Japan partially reversing recently levied export restrictions on raw materials crucial for semiconductor production to Korea. Despite the global easing of trade tensions, we remain cautious about future developments in this space.

In addition to the potential for further political vicissitudes, demand for semiconductors and memory technology is changing. Approximately three quarters of the world’s market share for Dynamic Random Access Memory (“DRAM”) chips is held by two Korean manufacturers – Samsung Electronics and SK Hynix – while semiconductors comprise approximately 20 per cent of South Korea’s exports by value. 2017 and 2018 were particularly good years for the semiconductor and memory industry, resulting from a pricing “supercycle” driven by increased demand and lagging supply for DRAM and NAND memory. Much of this excess demand subsided in the second half of 2018 and 2019, as new capacity caught up and prices mean reverted. In turn, overseas sales of semiconductors declined by nearly 18 per cent year over year from 2018.

Where does this leave us? From a valuation perspective, South Korea looks cheap in absolute and relative value terms. Valuations for South Korean companies continue to lag global peers. As of 31 December 2019 the price-to-book ratio for the KOSPI 200 was 0.9x, while the MSCI All-Country World Index’s price to book ratio is approximately 2.4x. For an investor in the Company, which has a portfolio of preferred shares with a weighted average discount of 42.6 per cent to common shares, the implied price to book ratio of the portfolio is a mere 0.4x (for a portfolio of preferred shares comprised of the corresponding common shares owned by the Company the price to book ratio was 0.8x). We continue to believe that preferred shares offer an excellent risk/reward investment opportunity that is levered both to the fundamentals of the South Korean economy and improved corporate governance over time.

COVID-19

It is difficult for us to predict the full effects of COVID-19 at this time. Clearly, COVID-19 hurts both global aggregate demand and aggregate supply, and we are keeping a close eye on the virus developments in Korea, as well as its impacts to the supply chain of our portfolio investments. On the other hand, the recent decline in oil prices should generally benefit South Korea, a large importer of oil and liquid natural gas, and many Korean industries utilize oil as a raw material. It remains to be seen which one of these effects (COVID-19 vs lower oil prices) will dominate over the long term, and admittedly, we would not place high confidence in our estimates of the macro picture three months from now. There is considerable uncertainty whether the global pandemic can be contained and stabilized during the upcoming summer months.

Increased Shareholder Engagement

We have continuously maintained that corporate governance improvements tend to carry a general pattern of “two steps forward, one step back.” True to this idiom, in 2019, we observed clear improvements in corporate governance standards in Korea, as well as disappointments. It’s noteworthy that Korea’s Stewardship Code (“the Code”) that sets forth “Principles on the Stewardship Responsibilities of Institutional Investors” continues to garner signatories from domestic and foreign asset managers, expanding from 100 signatories in July 2019 to 124 at the time of writing. One area where Korea has improved significantly since the establishment of the Code is in shareholder engagement.

Both large institutional investors such the National Pension Service (“NPS”) and small asset managers have been more determined to publicly challenge management policies deemed detrimental to shareholder value. Post the adoption of the Code there has been an increased proxy vote dissent rate amongst local and foreign asset managers from 2.8 per cent to 5.4 per cent.

As described more fully in the Semi-annual report, NPS engagement with company management has yielded mixed results, but it has certainly become more frequent. NPS asked LG Electronics to increase its dividend payout ratio, and during 2019 the company announced an 87 per cent increase to its dividend payout; NPS voted against the re-election of the Korean Air Lines chairman, the first time NPS has voted against the re-election of a Chaebol head, and the Chairman was removed. NPS also pressured Namyang Dairy Products Co Ltd (“Namyang”) to install a dividend committee after also pushing the company to increase its dividend payout ratio – ultimately NPS was rebuffed by Namyang. On the other hand, NPS’ support for Hyundai Motor Co’s dividend proposals over those of Elliott Management was disappointing, but not unexpected (as both major proxy advisory firms ISS and Glass Lewis, also recommended voting in favor of the company’s proposals).

Separately, no less than 8 domestic and foreign asset managers this year have been pressuring their portfolio companies for change and improved governance.

The increased number of shareholder engagements with Korean companies reinforces our view that corporate governance in Korea continues to improve over time. We reiterate our belief that long run improved corporate governance will not only lead to the narrowing of the discount of securities in the portfolio, but also add value to the common shares underlying the portfolio’s preferred shares. At the same time, we don’t expect drastic changes to corporate governance overnight, and we anticipate short term setbacks, as seen in cases where shareholder engagement did not lead to a material change in dividends or capital allocation.

Regulatory Changes

From a regulatory perspective, the Korean Financial Services Commission (“FSC”) announced that mandatory corporate governance disclosures would be required annually for companies with assets greater than 2 trillion KRW (and expected to be required for all companies by 2021). Such disclosure will provide shareholders with greater transparency into the shareholder base, composition of management, the board, internal committees within the board, outside directors and detail the appointment of the audit committee and external auditor – in turn this information will be disclosed to the public.

The FSC is also cognizant of the need to clarify standards of engagement for passive funds. Currently, any investor with an ownership percentage greater than 5 per cent of a listed company must announce whether it would like to exercise management control (“active”) or simply seek investment returns (“passive”). The stated investment purpose affects the required type, formality, and frequency of mandatory shareholder reporting, and investors that declare an active stake are subject to more stringent reporting responsibilities. For example, active investors holding more than 10 per cent of a company are subject to a short-swing profits disgorgement for sales made within sixth months of their stock acquisition.

In a development that reflects U.S. regulatory reporting standards, the FSC is contemplating creating a new investment purpose category to explicitly allow passive investors to engage with management without declaring an investment to be “active.” The new investment purpose category would be suitable for institutional investors who have no intention of obtaining management control, but want to pursue active shareholder activities, such as proposals regarding dividend payouts. In a similar vein, the FSC is considering abolishing the above-mentioned short swing profit rule for 10 per cent holders in order to encourage more management engagement amongst pension funds. We believe this development would be a meaningful step forward for shareholder rights and should increase the pressure on companies to raise their dividend payouts, which in turn would be a particular benefit to investors holding preferred shares at a discount to the corresponding common shares.

New Preferred Share Issuances

Following CJ Corp’s issuance of a new convertible preferred share in late 2018, Amorepacific Group conducted a similar issue in 2019. In both cases the new preferred shares convert into the corresponding common share in ten years’ time.

The CJ preferred share issue carried similar economic and legal rights as a typical preferred share in Korea, as well as the right to receive the common share dividend plus two percent of par value. These new CJ preferred shares listed on the Korean Stock Exchange in August on the back of a bonus issue, initially trading at a discount of around 30 per cent to common shares. In the case of Amorepacific Group (“Amorepacific”) it was a pre-emptive rights offering, providing existing shareholders the right to subscribe to a new issue of preferred shares convertible into common shares of Amorepacific in ten years.

The convertibility clause makes these decidedly different from the majority of the existing preferred share universe. We suspect that the discounts for these convertible preferred shares will likely widen out during times of market stress when the onshore cost of capital increases, potentially giving us opportunities to invest at attractive long-term levels.

Discounts

The Company’s preferred share portfolio weighted average discount narrowed from 43.3 per cent to 42.6 per cent during the year. However, investors should not take the year on year change in portfolio discount as a representative measure of the discount movements of the Korean preferred share universe because the Company’s portfolio is neither static nor is it an index of the preferred share universe. The portfolio year on year change in discount incorporates significant factors such as active management and rebalancing of the portfolio. For example, unwinding holdings trading at narrow discounts and reinvesting cash into securities at wider discounts would, all else being equal, lead to a widening of the portfolio discount. In fact, despite the modest change of the portfolio’s weighted average discount year on year, discount narrowing of preferred shares owned accounted for approximately 4.9 per cent out of the 6.7 per cent total return for 2019.

Dividends

The Manager was pleased to observe that the dividend payout ratio for the KOSPI 200, as reported on
31 December 2019, was 35 per cent. This is the highest dividend payout ratio on record for Korea (available data from Bloomberg begins in 2002), a substantial increase on the value reported on the prior year end of
21 per cent, and nearly three times the payout ratio in 2013 when the Company began trading. We believe the increased focus on dividend payouts is a positive catalyst for the portfolio as Korean preferred share discounts have been correlated with the size of the common share dividend yield.

Hedging

The Company pursues its investment strategy with a portfolio that is generally long only. However, as described more fully in the 2018 year-end report, because of political tensions in Northeast Asia, the Board approved a hedging strategy in September 2017. The purpose of the hedging strategy is to reduce exposure to extreme events that would be catastrophic to the Company. Importantly, the Company has limited its use of hedging instruments to purchases of credit default swaps and/or put options when deemed cost effective: securities that we believe would generate high returns in an economic disaster, without introducing material new risks into the portfolio or exacerbating existing risks. These catastrophe hedges are not intended to make money. We expect that the Company’s hedges will lose money most of the time - as with any insurance policy.

The table below provides details about the hedges as of 31 December 2019. Note that outside of the general market and portfolio hedges described herein, the Company has generally not hedged interest rates or currencies.

Number of Option Contracts Held on EWY Strike Price (USD) Total Cost to Expiration (USD) Purchase Date Expiration Date
4,000 $49 $366,155 18 October 2019 17 April 2020
Total Cost $366,155

*Each Option Contract gives the right to sell 100 shares at the Strike Price.

Credit Default Swaps on South Korean Sovereign Debt Notional Value (USD) Total Cost to Expiration (USD) Annual Cost (USD) Price Paid as % of Notional Value (per annum) Expiration Date Duration (Years)
5 yr CDS $20m $457,151 $91,430 45bps 2023 5.0
2 yr CDS $80m $382,619 $191,309 23bps 2020 2.0
Total Cost $839,770 $282,739

Conclusion

Markets have a short memory. Results are often measured on a quarter by quarter or year by year basis. This short-term mindset tends to open up investment opportunities for longer term investors, as informational trends can be obfuscated by short term volatility. For an investor who observes Korean corporate governance only through the lens of occasional media coverage, they will miss the significant lengths in which the market has improved compared to 5 or 10 years ago. While we cannot predict the future, our expectation is that this trend will continue, and South Korea in the year 2025 will similarly have made cumulative improvements to corporate governance and investor protections. Korean preferred shares, in our opinion, provide unique and difficult to replicate upside exposure to this return factor. We continue to believe that the ability to invest in large-cap, multinational companies at around 50 cents on the dollar and double the dividend yield remains an attractive investment opportunity.

Weiss Asset Management LP
28 April 2020

[1] SCI Korea 25/50 Net Total Return Index denominated in GBP. MSCI total return indices are calculated as if any dividends paid by constituents are reinvested at their respective closing prices on the ex date of the distribution. WKOF’s performance figures include such distributions, but the distributions are not assumed to be reinvested in WKOF when calculating WKOF’s performance.

[2] Note that this return includes all dividends paid to the Company’s Shareholders and assumes that these dividends were reinvested in WKOF shares at the next date for which the Company reports a NAV, at the NAV for that date.

[3] MSCI Korea 25/50 Net Total Return Index denominated in KRW.

[4] WKOF Common Shares vs Korea Index (KRW) is calculated as the return of a portfolio of common shares issued by the same issuers as the preferred shares WKOF has owned, as if a hypothetical investor bought or sold an equal quantity of those common shares on the same days that WKOF purchased or sold its preferred share investments.

[5] Excess dividend yield of preferred shares owned relative to a portfolio of the respective common shares.

Directors

For the year ended 31 December 2019

The Company has three non-executive Directors, all of whom are considered independent of the Investment Manager and details are set out below.

Norman Crighton (aged 53)

Mr Crighton is Chairman of the Company. He is also a non-executive chairman of RM Secured Direct Lending plc and AVI Japan Opportunity Trust. Norman was, until May 2011, an investment manager at Metage Capital Limited where he was responsible for the management of a portfolio of closed-ended funds and has almost three decades of experience in closed-ended funds having led teams at Olliff and Partners, LCF Edmond de Rothschild, Merrill Lynch, Jefferies International Limited and latterly Metage Capital Limited. His experience covers analysis and research as well as sales and corporate finance. Norman is British and resident in the United Kingdom. Norman was appointed to the Board in 2013.

Stephen Charles Coe (aged 54)

Stephen is Chairman of the Audit Committee. He is also a director (and Chairman of the Audit Committee) of Leaf Clean Energy Company and Merian Chrysalis Investment Company. He has been involved with offshore investment funds and managers since 1990 with significant exposure to property, debt, emerging markets, and private equity investments.

He qualified as a Chartered Accountant with Price Waterhouse Bristol in 1990 and remained in audit practice, specialising in financial services, until 1997. From 1997 to 2003 he was a director of the Bachmann Group of fiduciary companies and Managing Director of Bachmann Fund Administration Limited, a specialist third party fund administration company. From 2003 to 2006 Stephen was a director with Investec in Guernsey and Managing Director of Investec Trust (Guernsey) Limited and Investec Administration Services Limited. He became self-employed in August 2006 providing services to financial services clients. Stephen is British and resident in Guernsey. Stephen was appointed to the Board in 2013.

Robert Paul King (aged 56)

Rob is a non-executive director for a number of open and closed-ended investment funds including Tufton Oceanic Assets Limited (chairman), Chenavari Capital Solutions Limited (chairman), and CIP Merchant Capital Limited. Before becoming an independent non-executive director in 2011, he was a director of Cannon Asset Management Limited and their associated companies. Prior to this he was a director of Northern Trust International Fund Administration Services (Guernsey) Limited (formerly Guernsey International Fund Managers Limited) where he had worked from 1990 to 2007. He has been in the offshore finance industry since 1986 specialising in administration and structuring of offshore open and closed-ended investment funds. Rob is British and resident in Guernsey. Rob was appointed to the Board in 2013.

Report of the Directors

For the year ended 31 December 2019

The Directors of the Company present their Annual Report and Audited Financial Statements for the year ended 31 December 2019.

Principal Activity

The Company was incorporated with limited liability in Guernsey on 12 April 2013 as a company limited by shares and as an authorised closed-ended investment company. The Company’s Shares were admitted to trading on the AIM of the LSE on 14 May 2013. As an existing closed-ended fund, the Company is deemed to be granted an authorised declaration in accordance with Section 8 of the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended and Rule 6.02 of the Authorised Closed Ended Investment Schemes Rules 2008 on the same date as the Company obtained consent under the Control of Borrowing (Bailiwick of Guernsey) Ordinance 1959 to 1989.

Investment Objective and Investment Policy

The investment objective and investment policy of the Company is to provide Shareholders with an attractive return on their investment, predominantly though long-term capital appreciation, by investing primarily in listed South Korean preferred shares. The full investment objective and investment policy are detailed on Summary Information of the Annual Report.

Going Concern

Given that the Company has continued in existence following the second Realisation Opportunity and will continue to operate as a going concern unless a determination to wind up the Company is made, every two years after the Realisation Date, the Directors will propose further realisation opportunities for Shareholders who have not previously elected to realise all of their Ordinary Shares using a similar mechanism used in the previously announced Realisation Opportunity. The next Realisation Opportunity will take place during
May 2021.

Based on the fact that the assets currently held by the Company consist mainly of securities that are readily realisable, whilst the Directors acknowledge that the liquidity of these assets needs to be managed, the Directors believe that the Company has adequate financial resources to meet its liabilities as they fall due for at least twelve months from the date of this report, and that it is appropriate for the Financial Statements to be prepared on a going concern basis.

Viability Statement

In accordance the UK Corporate Governance Code (July 2018) (the “UK Code”), published by the Financial Reporting Council in 2018, the Board has assessed the prospects of the Company over the three year period to 31 December 2022 (the “Viability Period”).

On 20 March 2019, the Company announced to offer all Shareholders the right to elect, during the Election Period, to realise some or all of the value of their Ordinary Shares, less applicable costs and expenses, on or prior to the Realisation Date. Shareholders representing a total of 2,747,153 shares elected to participate in the realisation.

The Board and the Investment Manager believe that the investment opportunity provided by the Company remains compelling, but the viability of the Company is clearly contingent on the investment opportunity remaining in place, a matter which the Board monitors on an on-going basis. As the South Korean preference shares held by the Company trade at a discount compared with ordinary shares for the same companies, the Company remains attractive to long term investors over the Viability Period.

The Board has been monitoring the development of the pandemic and has considered the impact it has had to date and assessing the impact it may have in the future. Despite the impact on the Company’s share performance, there remains continued uncertainty on its development and scale such that predicting the impact with any certainty remains challenging.  The Board will continue to assess the position.

The Board’s assessment of the Company over the Viability Period has been made with reference to the Company’s current financial position and prospects, the Company’s strategy, and risk appetite, having considered the Company’s principal risks and uncertainties detailed below. The Board has also considered the Company’s likely cash flows and the liquidity of its portfolio.

It is noted that the Company currently has no gearing, though borrowing is permitted under its constitution. In the event that the Company did consider taking on debt, the Board would carefully assess the Company’s ability to meet the debt obligations as they become due.

It is possible to imagine a number of scenarios, such as war, pandemic or political events, which could severely impact the liquidity of the Company’s investments.

The Board has assumed that the regulatory and fiscal regimes under which the Company operates will continue in broadly the same form during the Viability Period. The Board speaks with its Broker and legal advisers on a regular basis to understand issues impacting the Company’s regulatory and fiscal structure.

The Board have carried out a robust assessment of the risks outlined below and they confirm they have a reasonable expectation that the Company will be able to continue in operation to serve shareholder appropriately and meet its liabilities as they fall due over the three year period to December 2022.

The Board however remain conscious that, should either:

(a)  the aggregate Net Asset Value of the continuing Ordinary Shares at the close of business on the last Business Day before the next Realisation Date, (this being May 2021) be less than £50 million; or

(b)  the mean Weighted Average Discount on the Portfolio is less than 25 per cent. Over any 90 day period,

the Board will need to reassess the Company’s position and may propose an ordinary resolution for the winding up of the Company.

Notice period of Investment Manager

The Board has assumed that the Investment Manager will remain in place during the Viability Period; however, the Board acknowledges the risk of the Investment Manager serving a twelve month notice period under the Investment Management Agreement (“IMA”). To mitigate this risk, the Board meets and communicates regularly with the Investment Manager to review its performance and the Board’s relationship with the Investment Manager.

Failure of the Custodian to carry out its obligations to the Company

The Company’s assets are held in accounts maintained by the Company’s Custodian. Failure by the Custodian to carry out its obligations to the Company in accordance with the terms of the Custodian Agreement could have an impact on the viability of the Company. To mitigate this risk, the Board regularly receives reports from the Custodian, and through the Management and Engagement Committee, monitors the relationship with the Custodian.

Loss of license or listing

The Board has assumed that the Company will retain its regulatory status and listing throughout the Viability Period. The Company Secretary, Administrator, and Broker report to the Board at least quarterly on regulatory matters and confirm compliance with listing and other regulatory requirements.

Failure to implement and poor execution of the investment strategy

The Company maintains an investment policy as discussed on Summary Information. The policy states that the Company must invest primarily in listed South Korean preference shares, and also states that investments in other types of securities are allowed as long as the investments track South Korean companies or the South Korean market as a whole. Failure to implement the investment strategy or poor execution by the Investment Manager would have an effect on the viability of the Company. The Board ensures that the policy is being implemented in the quarterly Board Meetings, where the Investment Manager presents reports to the Board detailing the current portfolio and investment performance.

The risks specifically associated with the South Korean economic and political climate are discussed on the Investment Manager’s Report.

Based on the Company’s processes for monitoring operating costs, the Share price discount, the Investment Manager’s compliance with the investment objective, asset allocation, the portfolio risk profile, liquidity risk, and the robust assessment of the principal risks and uncertainties facing the Company, the Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the Viability Period to 31 December 2022.

International Tax Reporting

For purposes of the US Foreign Accounts Tax Compliance Act, the Company registered with the US Internal Revenue Service (“IRS”) as a Guernsey reporting Foreign Financial Institution (“FFI”) in November 2014, received a Global Intermediary Identification Number (2A7KNV.99999.SL.831), and can be found on the IRS FFI list.

The Common Reporting Standard (“CRS”) is a global standard for the automatic exchange of financial account information developed by the Organisation for Economic Co-operation and Development (“OECD”), which has been adopted by Guernsey and which came into effect on 1 January 2016.

The Board takes the necessary actions to ensure that the Company is compliant with Guernsey regulations and guidance in this regard.

Results and Dividends

The results for the year ended 31 December 2019 are set out in the Statement of Comprehensive Income. An annual dividend of 4.1195 pence per Share (£3,475,416) was approved on 1 May 2019 and paid on
31 May 2019 in respect of the year ended 31 December 2018. An annual dividend of 3.4155 pence per Share (£2,881,486) was approved on 8 June 2018 and paid on 13 July 2018 in respect of the year ended
31 December 2017.

The Board expects to declare an interim dividend on 1 May 2020 with a record date on 11 May 2020 for the year ended 31 December 2019 based on dividends received primarily from investments in South Korean preferred shares.

Shareholder Information

Further Shareholder information can be found in the Summary Information.

Investment Management

The Investment Manager of the Company is Weiss Asset Management LP, a Delaware limited partnership formed on 10 June 2003 (the “Investment Manager”). The key terms of the IMA and specifically the fee charged by the Investment Manager are set out in Note 19 of the Financial Statements. The Board believes that the investment management fee is competitive with other investment companies with similar investment mandates.

The Board reviews, on an on-going basis, the performance of the Investment Manager and considers whether the investment strategy utilised is likely to achieve the Company’s investment objective.

Having considered the portfolio performance and investment strategy, the Board has unanimously agreed that the interests of the Shareholders as a whole are best served by the continuing appointment of the Investment Manager on the terms agreed.

Directors

The details of the Directors of the Company during the year and at the date of this Report are set out on Directors section.

Directors’ Interests

The Directors who held office at 31 December 2019 and up to the date of this Report held the following numbers of Ordinary Shares beneficially:

As at 31 December 2019 As at 31 December 2018
Ordinary % of issued Ordinary % of issued
 Shares share capital  Shares share capital
Norman Crighton 20,000 0.02% 20,000 0.02%
Stephen Coe 10,000 0.01% 10,000 0.01%
Robert King 15,000 0.02% 15,000 0.02%

There have been no changes in the interests of the above Directors during the year.

Substantial Interests

Disclosure and Transparency Rules (“DTRs”) are now comprised in the Financial Conduct Authority handbook. Section 5, the only section of the DTRs which applies to AIM-listed companies, requires substantial Shareholders to make relevant holding notifications to the Company. The Company must then disseminate this information to the wider market. Details of major Shareholders in the Company are shown below.

As at 31 December 2019
% of issued
Shareholders Shares share capital
Standard Life Aberdeen 13,058,100 16.00%
Ruffer LLP 11,500,000 14.09%
Banque Degroof Luxembourg 10,125,000 12.41%
City of London Investment Management Co. 8,723,893 10.69%
Merrill Lynch Pierce Fenner & Smith 7,000,000 8.58%
Andrew M. Weiss 6,486,888 7.95%
Lepercq de Neuflize Asset Management 5,746,077 7.04%
EdenTree Investment Management 5,170,000 6.33%
Mount Capital 4,279,000 5.24%

At the date of signing, 28 April 2020, City of London Investment Management Co. have increased their holding to 20,796,520 shares, representing 25.48 per cent of issued share capital and Lepercq de Neuflize Asset Management have fully redeemed their holding of 5,746,077 shares.

There have been no other notifications of significant changes to the substantial shareholdings at 28 April 2020.

As at 31 December 2018
% of issued
Shareholders Shares share capital
Standard Life Aberdeen 13,148,100 15.58%
Ruffer LLP 11,500,000 13.63%
Banque Degroof Luxembourg 10,125,000 12.00%
Mount Capital 8,000,000 9.48%
Merrill Lynch Pierce Fenner & Smith 7,000,000 8.30%
Andrew M. Weiss 6,486,888 7.69%
City of London Investment Management Co. 6,022,626 7.14%
Lepercq de Neuflize Asset Management 5,746,077 6.81%
EdenTree Investment Management 5,170,000 6.13%

Corporate Governance

The Company does not have a Main Market Listing on the LSE, and as such, the Company is not required to comply with the UK Code as issued by the Financial Reporting Council. However, the Board is committed to high standards of corporate governance and has implemented a framework for corporate governance which it considers to be appropriate for an investment company in order to comply with the main principles of the UK Code. By complying with the main principles of the UK Code, the Company is deemed to comply with the Code of Corporate Governance (the “GFSC Code”) issued by the Guernsey Financial Services Commission.

The Board has considered the principles and recommendations of the UK Code, and considers that reporting against the UK Code will provide better information to Shareholders. To ensure on-going compliance with these principles, the Board receives a report from the Company Secretary at each quarterly meeting, identifying how the Company is in compliance and identifying any changes that might be necessary.

The Board considers that it has maintained procedures during the year ended 31 December 2019 and up to the date of this Report to ensure that it complies with the UK Code, except as explained elsewhere in this Annual Report and Financial Statements.

Role of the Board

The Board is the Company’s governing body and has overall responsibility for maximising the Company’s success by directing and supervising the affairs of the business and meeting the appropriate interests of Shareholders and relevant stakeholders, while enhancing the value of the Company and also ensuring protection of investors. A summary of the Board’s responsibilities is as follows:

· statutory obligations and public disclosure;

· strategic matters and financial reporting;

· risk assessment and management including reporting compliance, governance, monitoring, and control; and

· other matters having a material effect on the Company.

The Board’s responsibilities for the Annual Report are set out in the Statement of Directors’ Responsibilities.

Although the Company is domiciled in Guernsey, the Board has considered the requirements of Section 172 of the Companies Act 2006 in the UK. Section 172 of the Companies Act requires that the Directors of the Company act in the way they consider, in good faith, is most likely to promote the success of the Company for the benefit of all stakeholders, including suppliers, customers and shareholders. The Board has engaged external companies to undertake the investment management, administrative, and custodial activities of the Company. Documented contractual arrangements are in place with these companies which define the areas where the Board has delegated responsibility to them.

The Board needs to ensure that the Annual Report and Financial Statements, taken as a whole, are fair, balanced, and understandable and provide the information necessary for Shareholders to assess the Company’s performance, business model, and strategy.

In seeking to achieve this, the Directors have set out the Company’s investment objective and investment policy, have explained how the Board and its delegated committees operate, have explained how the Directors review the risk environment within which the Company operates, and have set appropriate risk controls. Furthermore, throughout the Annual Report and Financial Statements, the Board has sought to provide further information to enable Shareholders to better understand the Company’s business and financial performance.

Composition and Independence of the Board

The Board currently comprises three non-executive Directors, all of whom are considered independent of the Investment Manager. The Directors of the Company are listed on the Directors section.

The Chairman is Mr Crighton. Biographies for Mr Crighton and all other Directors appear on the Directors section. In considering the independence of the Chairman, the Board has taken note of the provisions of the UK Code relating to independence, and has determined that Mr Crighton is an Independent Director.

The Board believes it has a good balance of skills and experience to ensure it operates effectively. The Chairman is responsible for leadership of the Board and ensuring its effectiveness.

As the Chairman is an Independent Director, no appointment of a Senior Independent Director has been made. The Company has no employees and therefore there is no requirement for a Chief Executive or a whistleblowing policy.

The Company holds a minimum of four Board Meetings per year to discuss general management, structure, finance, corporate governance, marketing, risk management, compliance, asset allocation and gearing, contracts, and performance. The quarterly Board Meetings are the principal source of regular information for the Board, enabling it to determine policy and to monitor performance, compliance, and controls. These meetings are supplemented by communication and discussions throughout the year.

A representative of the Investment Manager, Administrator, and Company Secretary may attend each Board Meeting either in person or by telephone, thus enabling the Board to fully discuss and review the Company’s operations and performance. Each Director has direct access to the Investment Manager and Company Secretary and may, at the expense of the Company, seek independent professional advice on any matter.

The UK Corporate Governance Code limits the tenure of a Board member to nine years, with additional explanations to be provided should the nine year recommendation be exceeded. No Director has reached this length of service at the date of these Financial Statements.

Attendance at the Board and other Committee Meetings during the year was as follows:

Number of Norman Robert Stephen
Meetings held Crighton King Coe
Quarterly Board Meetings 4 4 4 4
Audit Committee Meetings 3 3 3 3
Management Engagement Committee Meetings 1 1 1 1
Ad-hoc Board Meetings 5 3 4 2

Board Diversity

The Board considers the composition of the Board on an on-going basis.

Re-election

The Articles of Incorporation provide that one-third of the Directors retire by a voluntary rotation basis at each Annual General Meeting (“AGM”). However, in order to meet the highest standards of corporate governance, the Directors have agreed to stand for election annually.

The Directors may at any time appoint any person to be a Director either to fill a casual vacancy or as an addition to the existing Directors. Any Director so appointed shall hold office only until, and shall be eligible for re-election at, the next AGM following their appointment, but shall not be taken into account in determining the Directors or the number of Directors who are to retire by a voluntary rotation basis at that meeting if it is an AGM.

Although the Company looks at not retaining the Chairman of the Board in the post beyond nine years from date of first appointment on the Board, the Board have not set such a formal policy in place since the Company shareholders decide, on an annual basis, whether or not to support the continuation of the Chairman.

Board Performance

The Board undertakes an evaluation of its own performance and that of individual Directors on an annual basis. In order to review its effectiveness, the Board carries out a process of formal self-appraisal. The Board considers how it functions as a whole and also reviews the individual performance of its members. This process is conducted by the respective Chairman reviewing each members’ performance, contributions, and commitment to the Company by verbal discussion.

The Board considers it has a breadth of experience relevant to the Company, and the Directors believe that any changes to the Board’s composition can be managed without undue disruption.

In accordance with the UK Code, when 20 per cent or more of Shareholder votes have been cast against a Board recommendation for a resolution, the Company should explain, when announcing voting results, what actions it intends to take to consult Shareholders in order to understand the reasons behind the result. An update on the views received from shareholders and actions taken should be published no later than six months after the Shareholder meeting. The Board should then provide a final summary in the annual report and, if applicable, in the explanatory notes to resolutions at the next shareholder meeting, on what impact the feedback has had on the decisions the Board has taken and any actions or resolutions now proposed. During the year, no resolution recommended by the Board received more than 20 per cent of votes against it.

Committees of the Board

The Board has established an Audit Committee and a Management and Engagement Committee. All Terms of Reference for both Committees are available from the Company Secretary upon request or on the Company’s website, www.weisskoreaopportunityfund.com.

Audit Committee

The Company has established an Audit Committee with formally delegated duties and responsibilities within written terms of reference. The Audit Committee is chaired by Mr Coe. The Audit Committee’s other members are Mr Crighton and Mr King. The Audit Committee meets formally at least twice a year. Due to the small size of the Board, the Board considers it appropriate that all Directors should be members of the Audit Committee.

Appointment to the Audit Committee is for a period of up to three years, which may be extended for two further three year periods.

The table on Corporate Governance section of the Director’s Report sets out the number of Audit Committee Meetings held during the year ended 31 December 2019 and the number of such meetings attended by each Audit Committee member.

A report of the Audit Committee detailing responsibilities and activities is presented on the Audit Committee Report

Management and Engagement Committee

The Company has established a Management and Engagement Committee with formally delegated duties and responsibilities within written terms of reference. The Management and Engagement Committee is chaired by Mr King. The Management and Engagement Committee’s other members are Mr Crighton and Mr Coe. The Management and Engagement Committee meets formally once a year.

The principal duties of the Management and Engagement Committee are to review the performance of and contractual arrangements with the Investment Manager and all other service providers to the Company (other than the External Auditor).

During the Management and Engagement Committee meeting held on 14 November 2019, the quality of the services provided by the Investment Manager as well as the other service providers was reviewed. The Management and Engagement Committee also reviewed the fees of all other service providers (other than the External Auditor).

As at 31 December 2019, Directors’ fees were: £30,000 payable to Mr Crighton as Chairman of the Board, £27,500 to Mr Coe as Chairman of the Audit Committee, and £24,000 to Mr King.

For the year ended  For the year ended 
31 December 2019 31 December 2018
£ £
Norman Crighton 30,000 30,000
Stephen Coe 27,500 27,500
Robert King 24,000 24,000

Nomination Committee

The Board does not have a separate Nomination Committee. The Board as a whole fulfils the function of a Nomination Committee. Any proposal for a new Director will be discussed and approved by the Board. The Board will determine whether an external search consultancy or open advertising is used in the appointments of non-executive Directors in the future.

Remuneration Committee

In view of its non-executive and independent nature, the Board considers that it is not appropriate for there to be a Remuneration Committee as anticipated by the UK Code because this function is carried out as part of the regular Board business. A Remuneration Report prepared by the Board is contained within the Director’s Remuneration Report. Directors’ remuneration is considered on an annual basis.

Environmental, Social and Governance Matters

As an investment company, WKOF’s own direct environmental impact is minimal. Other than short flights of approximately 160 miles made by the Chairman to attend quarterly board meetings, the Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Reporting and Directors’ Reports) Regulations 2013 or the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.

The Company’s operations are delegated to third party service providers, and the Company has no employees. The Board seeks assurances, at least annually, from its main counterparties that they comply with the provisions of the UK Modern Slavery Act 2015 and maintain adequate safeguards in keeping with the provisions of the Bribery Act 2010 and Criminal Finances Act 2017.

The Board and Weiss Asset Management LP “WAM” recognise that governance issues have an effect on its investee companies. The Board supports WAM in its belief that good corporate governance will help deliver long term Shareholder value. Since inception of the Company, improved corporate governance has been one of the main drivers of value, as some Korean companies have improved the efficiency of their balance sheets by buying back preference shares and improving dividend payouts. The Board and WAM will continue to support these changes in its investee companies and expect these governance improvements to continue in Korea.

Internal Controls

The Board is ultimately responsible for establishing and maintaining the Company’s system of internal controls and for maintaining and reviewing the system’s effectiveness. The Company’s risk matrix continues to be the basis of the Company’s risk management process in establishing the Company’s system of internal financial and reporting controls. The risk matrix is prepared and maintained by the Board, which initially identifies the risks facing the Company and then collectively assesses the likelihood of each risk, the impact of those risks, and the strength of the controls operating over each risk. The Company’s system of internal controls is designed to manage rather than to eliminate the risk of failure to achieve the Company’s objectives, and by the internal controls’ nature, can only provide reasonable and not absolute assurance against misstatement and loss. These controls aim to ensure that: assets of the Company are safeguarded; proper accounting records are maintained; and the financial information for publication is reliable.

The UK Code requires Directors to conduct at least annually a review of the Company’s system of internal controls, covering all controls including financial, operational, compliance, and risk management. The Board has evaluated the Company’s system of internal controls. In particular, it has prepared a process for identifying and evaluating the significant risks affecting the Company and the policies by which these risks are managed. The process has resulted in a low to medium risk assessment.

The Board has delegated the management of the Company’s investment portfolio, administration, registrar, and corporate secretarial functions, which includes the independent calculation of the Company’s NAV and the production of the audited Annual Report and Financial Statements. Whilst the Board delegates these functions, it remains responsible for the functions it delegates and for the systems of internal control. Formal contractual agreements have been put in place between the Company and providers of these services. On an on-going basis, Board reports are provided at each quarterly Board Meeting from the Investment Manager, Administrator, Registrar, and Company Secretary, and a representative from the Investment Manager is asked to attend these meetings.

In common with most investment companies, the Company does not have an internal audit function. All of the Company’s management functions are delegated to the Investment Manager, Administrator, Registrar, and Company Secretary, which have their own internal audit and/or risk assessment functions.

The Company’s risk exposure and the effectiveness of its risk management and internal control systems are reviewed by the Audit Committee at its meetings and annually by the Board. The Board believes that the Company has adequate and effective systems in place to identify, mitigate, and manage the risks to which it is exposed.

Emerging Risks

In order to recognise any new risks that may impact the Company and to ensure that appropriate controls are in place to manage those risks, the Audit Committee undertakes a regular review of the Company’s Risk Matrix. This review took place on three occasions during the year.

COVID-19

The Board has been monitoring the development of the pandemic and has considered the impact it has had to date and assessing the impact it may have in the future. Despite the impact on the Company’s share performance, there remains continued uncertainty on its development and scale such that predicting the impact with any certainty remains challenging.  The Board will continue to assess the position.

Principal Risks and Uncertainties

In respect to the Company’s system of internal controls and reviewing its effectiveness, the Directors:

• are satisfied that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency, or liquidity; and

• have reviewed the effectiveness of the risk management and internal control systems, including material financial, operational, and compliance controls (including those relating to the financial reporting process) and no significant failings or weaknesses were identified.

The principal risks and uncertainties which have been identified and the steps which are taken by the Board to mitigate them are as follows:

Investment Risks

The Company is exposed to the risk that its portfolio fails to perform in line with its investment objective and policy if markets move adversely or if the Investment Manager fails to comply with the investment policy. The Board reviews reports from the Investment Manager at the quarterly Board Meetings, with a focus on the performance of the portfolio in line with its investment policy. The Administrator is responsible for ensuring that all transactions are in accordance with the investment restrictions.

Operational Risks

The Company is exposed to the risk arising from any failures of systems and controls in the operations of the Investment Manager, Administrator, and the Custodian. The Board and its Committees regularly review reports from the Investment Manager and the Administrator on their internal controls. The Administrator will report to the Investment Manager any valuation issues which will be brought to the Board for final approval as required.

Accounting, Legal and Regulatory Risks

The Company is exposed to the risk that it may fail to maintain accurate accounting records, fail to comply with requirements of its Admission Document, and fail to meet listing obligations. The accounting records prepared by the Administrator are reviewed by the Investment Manager. The Administrator, Broker, and Investment Manager provide regular updates to the Board on compliance with the Admission Document and changes in regulation.

Discount Management

The Company is exposed to Shareholder dissatisfaction through inability to manage the Share price discount to NAV. The Board and its Broker monitor the Share price discount (or premium) continuously and have engaged in Share buybacks from time to time to help minimise any such discount. The Board believes that it has access to sufficiently liquid assets to help manage the Share price discount. The Company’s discount management programme is described within Note 18.

Liquidity of Investments

The Korean preferred shares typically purchased by the Company generally have smaller market capitalisations and lower levels of liquidity than their common share counterparts. These factors, among others, may result in more volatile price changes in the Company’s assets as compared to the South Korean stock market or other more liquid asset classes. This volatility could cause the NAV to go up or down dramatically.

In order to realise its investments, the Company will likely need to sell its holdings in the secondary market, which could prove difficult if adequate liquidity does not exist at the time, and could result in the values received by the Company being significantly less than their holding values. The liquidity of the market for preferred shares may vary materially over time. There can be no guarantee that a liquid market for the Company’s assets will exist or that the Company’s assets can be sold at prices similar to the published NAV. Illiquidity could also make it difficult or costly for the Company to purchase securities, and this could result in the Company holding more cash than anticipated. Furthermore, it is possible that South Korea could impose currency-exchange or capital controls on foreign investors, making it difficult or impossible for the Company to repatriate funds. The Investment Manager considers the liquidity of secondary trading in assessing and managing the liquidity of the Company’s investments. The Board reviews the Company’s resources and obligations on a regular basis with a view to ensuring that sufficiently liquid assets are held for the expected day to day operations of the Company. However, if the Company were required to liquidate a substantial portion of its assets at a single time, it is likely that the market impact of the necessary sale transactions would impact the value of the portfolio materially.

Fraud Risk

The Company is exposed to fraud risk. The Audit Committee continues to monitor the fraud, bribery, and corruption policies of the Company. The Board receives an annual confirmation from all service providers that there have been no instances of fraud or bribery.

Financial Risks

The financial risks, including market, credit, and liquidity risks, faced by the Company are set out in Note 20 of the Financial Statements. These risks and the controls in place to reduce the risks are reviewed at the quarterly Board Meetings.

Coronavirus Risk(“COIVD-19”)

The Board has been in contact with its principal service providers to determine that their operations remain effective during the time of the pandemic. To date there has been no discernible impact on the operations of the Company.

Shareholder Engagement

The Directors welcome Shareholders’ views and place great importance on communication with the Company’s Shareholders. Shareholders wishing to meet with the Chairman and other Board members should contact the Company’s Administrator.

The Investment Manager and Broker maintain a regular dialogue with institutional Shareholders, the feedback from which is reported to the Board.

The Company’s AGM provides a forum for Shareholders to meet and discuss issues of the Company and provides Shareholders with the opportunity to vote on the resolutions as specified in the Notice of AGM. The Notice of AGM and the results are released to the London Stock Exchange in the form of an announcement.

In addition, the Company maintains a website which contains comprehensive information, including links to regulatory announcements, Share price information, financial reports, investment objective, and investor contacts.

Auditor

The Auditor, KPMG Channel Islands Limited, has indicated their willingness to continue in office. Accordingly, a resolution for their reappointment will be proposed at the forthcoming AGM.

Statement of Directors’ Responsibilities

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law they have elected to prepare the Financial Statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and applicable law.

Under Company law the Directors must not approve the Financial Statements unless they are satisfied that the Financial Statements give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these Financial Statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable, relevant, and reliable;

· state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements;

· assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

· use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable the Directors to ensure that the Financial Statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal control as they determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in Guernsey governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

The Directors confirm that they have complied with the above requirements in preparing the Annual Report and Financial Statements and that to their best knowledge and belief:

· the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position, and profit or loss of the Company; and

· the Directors’ Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

We consider the Annual Report and Financial Statements, taken as a whole, to be fair, balanced, and understandable and provides the information necessary for Shareholders to assess the Company’s position and performance, business model, and strategy.

The Board of Directors confirms that, throughout the period covered by the Financial Statements, the Company complied with the GFSC Code through its compliance with the UK Code.

Disclosure of Information to the Auditor

The Directors who hold office at the date of approval of this Directors’ Report confirm that, so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware, and that each Director has taken all the steps he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

Signed on behalf of the Board by:

Norman Crighton
Chairman
28 April 2020

Stephen Coe
Director
28 April 2020


Directors’ Remuneration Report

For the year ended 31 December 2019

Introduction

An ordinary resolution for the approval of the Directors’ Remuneration Report will be put to the Shareholders at the AGM to be held on 24 July 2020.

Remuneration Policy

All Directors are non-executive and a Remuneration Committee has not been established. The Board as a whole considers matters relating to the Directors’ remuneration. No advice or services were provided by any external person in respect of the Board’s consideration of the Directors’ remuneration.

The Company’s policy is that the fees payable to the Directors should reflect the time spent by the Directors on the Company’s affairs and the responsibilities borne by the Directors, and be sufficient to attract, retain, and motivate Directors of a quality required to run the Company successfully. The Chairman of the Board is paid a higher fee in recognition of his additional responsibilities, as is the Chairman of the Audit Committee. The policy is to review fee rates periodically, although such a review will not necessarily result in any changes to the rates, and account is taken of fees paid to directors of comparable companies. The Directors of the Company are remunerated for their services at such a rate as the Directors determine, provided that the aggregate amount of such fees does not exceed £150,000 per annum.

There are no long term incentive schemes provided by the Company and no performance fees are paid to Directors.

None of the Directors have a service contract with the Company, but each of the Directors is appointed by a letter of appointment which sets out the main terms of their appointment. Directors hold office until they retire by rotation or cease to be a Director in accordance with the Articles of Incorporation, by operation of law, or until they resign.

Remuneration

Directors are remunerated in the form of fees, payable quarterly in arrears, to the Director personally. No Director has been paid additional remuneration outside their normal Directors’ fees and expenses.

As at 31 December 2019, Directors’ fees were: £30,000 payable to Mr Crighton as Chairman of the Board, £27,500 to Mr Coe as Chairman of the Audit Committee, and £24,000 to Mr King.

For the year ended  For the year ended 
31 December 2019 31 December 2018
£ £
Norman Crighton 30,000 30,000
Stephen Coe 27,500 27,500
Robert King 24,000 24,000

Signed on behalf of the Board by:

Norman Crighton
Chairman
28 April 2020

Stephen Coe
Director
28 April 2020


Audit Committee Report

For the year ended 31 December 2019

Dear Shareholders,

We present the Audit Committee’s Report for 2019, setting out the responsibilities of the Audit Committee and its key activities in 2019.

The Audit Committee has reviewed the Company’s financial reporting, significant areas of judgement and estimation within the Company’s Financial Statements, the independence and effectiveness of the External Auditor, and the internal control and risk management systems of the Company’s service providers. The Audit Committee considered whether the Annual Report and Financial Statements are fair, balanced, and understandable, and whether they provided the necessary information for Shareholders to assess the Company’s performance, business model, and strategy before recommending them to the Board for approval. In order to assist the Audit Committee in discharging these responsibilities, regular reports are received from the Investment Manager, Administrator, and External Auditor. Following its review of the independence and effectiveness of the Company’s External Auditor, the Audit Committee has recommended to the Board that KPMG Channel Islands Limited be reappointed as Auditor, which the Board has submitted for approval to the Company’s Shareholders.

A member of the Audit Committee will continue to be available at each AGM to respond to any Shareholder questions on the activities of the Audit Committee.

Responsibilities

The Audit Committee reviews and recommends the approval of the Financial Statements of the Company to the Board and is the forum through which the External Auditor reports to the Board of Directors. The External Auditor and the Audit Committee will meet together without representatives of either the Administrator or Investment Manager being present if either considers this to be necessary.

The role of the Audit Committee includes:

• monitoring the integrity of the published Financial Statements of the Company;

• reviewing and reporting to the Board on the significant issues, judgements, and estimates made in the preparation of the Company’s published Financial Statements;

• monitoring and reviewing the quality and effectiveness of the External Auditor and their independence;

• considering and making recommendations to the Board on the appointment, reappointment, replacement, and remuneration to the Company’s External Auditor;

• reviewing the Company’s procedures for prevention, detection and reporting of fraud, bribery, and corruption; and

• monitoring and reviewing the internal control and risk management systems of the service providers.

The Audit Committee’s full terms of reference can be obtained by contacting the Company’s Secretary or on the Company’s website, www.weisskoreaopportunityfund.com.

Key Activities of the Audit Committee

The following sections discuss the assessments made by the Audit Committee during the year:

Financial Reporting

The Audit Committee’s review of the Annual Report and Audited Financial Statements focused on the following significant areas:

Valuation of Investments

The Company’s financial investments had a fair value of £117,853,987 as at 31 December 2019 and represent the vast majority of the net assets of the Company. The vast majority of the investments are listed and traded, and the valuation is by reference to the fair value measurement required by IFRS. The Audit Committee considered the fair value of the investments held by the Company as at 31 December 2019 to be reasonable from a review of the information provided by the Investment Manager and Administrator. All prices have been confirmed by the Administrator to independent pricing sources as at 31 December 2019.

The Investment Manager and Administrator confirmed to the Audit Committee that they were not aware of any material misstatements including matters relating to the Financial Statements’ presentation, nor were they aware of any fraud or bribery relating to the Company’s activities. Furthermore, the External Auditor reported to the Audit Committee that no material misstatements were found in the course of their work.

Following a review of the presentations and reports from the Administrator and consulting where necessary with the External Auditor, the Audit Committee is satisfied that the Financial Statements appropriately address the critical judgements and key estimates made in the preparation of the Financial Statements (both in respect to the amounts reported and the disclosures). The Audit Committee is also satisfied that the significant assumptions used for determining the value of assets and liabilities have been appropriately scrutinised and challenged and are sufficiently robust.

Risk Management

The Audit Committee continued to consider the process for managing the risk of the Company and its service providers. Risk management procedures for the Company, as detailed in the Company’s risk assessment matrix, were reviewed and approved by the Audit Committee. A review of the risk matrix took place during the Audit Committee meeting of the 14 November 2019. Following the review, minor amendments were made.

Fraud, Bribery and Corruption

The Audit Committee continues to monitor the fraud, bribery, and corruption policies of the Company. The Board receives a confirmation from all service providers that there have been no instances of fraud or bribery.

The External Auditor

Independence, Objectivity and Fees

The independence and objectivity of the External Auditor are reviewed by the Audit Committee, which also reviews the terms under which the External Auditor is appointed to perform non-audit services. The Audit Committee has established pre-approval policies and procedures for the engagement of the External Auditor to provide audit and assurance services.

The External Auditor may not provide a service which:

• places them in a position to audit their own work;

• creates a mutuality of interest;

• results in the External Auditor developing close relationships with service providers of the Company, in respect of services to the Company;

• results in the External Auditor functioning as a manager or employee of the Company; and

• puts the External Auditor in the role of advocate of the Company.

As a general rule, the Company does not utilise the External Auditor for internal audit purposes, secondments, or valuation advice. Services such as tax compliance, tax structuring, private letter rulings, accounting advice, quarterly reviews, and disclosure advice are normally permitted but will be pre-approved by the Audit Committee.

The following table summarises the remuneration payable to KPMG Channel Islands Limited and to other KPMG member firms for audit and non-audit services:

For the year ended  For the year ended 
31 December 2019 31 December 2018
KPMG Channel Islands Limited £ £
Annual audit 32,000 28,300
KPMG LLP
Tax fees (UK Reporting Fund Status) 9,750 5,000

The Audit Committee does not consider KPMG Channel Islands Limited’s independence to be under threat. In making this assessment, the Audit Committee has concluded that the non-audit fees, disclosed above, do not relate to prohibited services. In approving the non-audit services, the Audit Committee considered the safeguards put in place by KPMG Channel Islands Limited to reduce the threats to independence and objectivity to an acceptable level.

For the year ended 31 December 2019 the Company has engaged KPMG LLP to provide tax services, a separate entity to KPMG Channel Islands Limited.

KPMG Channel Islands Limited has been the External Auditor from the date of the initial listing on the London Stock Exchange. The UK Code introduced a recommendation that the external audit be put out to tender every ten years. The Audit Committee has noted this and will develop a plan for tendering at the appropriate time.

The Audit Committee has examined the scope and results of the audit, its cost effectiveness, and the independence and objectivity of the External Auditor, with particular regard to non-audit fees, and considers KPMG Channel Islands Limited, as External Auditor, to be independent of the Company.

Performance and Effectiveness

During the year, when considering the effectiveness of the External Auditor, the Audit Committee has taken into account the following factors:

• The audit plan presented to it before the audit;

• Changes in audit personnel;

• The post audit report including variations from the original plan, if any;

• The External Auditor’s report on independence; and

• Feedback from both the Investment Manager and Administrator.

Further to the above, at the conclusion of the 2019 audit fieldwork, the Audit Committee performed specific evaluation of the performance of the External Auditor through discussion with the Administrator and Investment Manager, as well as the audit team itself.

There were no significant adverse findings from this evaluation.

Reappointment of External Auditor

Consequent to this review process, the Audit Committee has recommended to the Board that a resolution be put to the 2020 AGM for the reappointment of KPMG Channel Islands Limited as External Auditor. The Board has accepted this recommendation.

Internal Control and Risk Management Systems

After consultation with the Investment Manager, Administrator, and External Auditor, the Audit Committee has considered the impact of the risk of the override of controls by its service providers, the Investment Manager, and Administrator.

The Audit Committee reviews externally prepared assessments of the control environment in place at the Administrator, with the Administrator providing a Service Organisation Controls Report on a bi-annual basis. The Audit Committee noted that the Management and Engagement Committee received a self-assessment from the Investment Manager and no issues were identified in this. Additionally, representatives of the Investment Manager meet with the Board of Directors annually to discuss and review the controls in place at the Investment Manager. No significant failings or weaknesses were identified in these reviews.

The Audit Committee has also reviewed the need for an internal audit function. The Audit Committee has decided that the systems and procedures employed by the Investment Manager, as well as the Administrator’s internal audit function provide sufficient assurance that a sound system of internal control, which safeguards the Company’s assets, is maintained. An internal audit function specific to the Company is therefore considered unnecessary.

In finalising the Financial Statements for recommendation to the Board for approval, the Audit Committee is satisfied that, taken as a whole, the Annual Report and Financial Statements are fair, balanced, and understandable. The Board has accepted this approval.

For any questions on the activities of the Audit Committee not addressed in the foregoing, a member of the Audit Committee remains available to attend each AGM to respond to such questions.

The Audit Committee Report was approved by the Board on 28 April 2020 and signed on behalf of the Audit Committee by:

Stephen Coe
Chairman, Audit Committee
28 April 2020


Independent Auditor’s Report

To the Members of Weiss Korea Opportunity Fund Ltd.

Our opinion is unmodified

We have audited the financial statements of Weiss Korea Opportunity Fund Ltd. (the “Company”), which comprise the statement of financial position as at 31 December 2019, the statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying financial statements:

• give a true and fair view of the financial position of the Company as at 31 December 2019, and of the Company’s financial performance and cash flows for the year then ended;

• are prepared in accordance with International Financial Reporting Standards as adopted by the EU (“IFRS”); and

• comply with the Companies (Guernsey) Law, 2008.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Company in accordance with, UK ethical requirements including FRC Ethical Standards, as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion.

Key audit matters: our assessment of the risks of material misstatement

Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.  In arriving at our audit opinion above, the key audit matter was as follows (unchanged from 2018):

The risk Our response
Valuation of financial assets at fair value through profit or loss (“Investments”)

£117,853,987; (2018:  £120,312,836)

Refer to the Audit Committee Report, note 2f accounting policy and notes 12 and 21 disclosures.

 
Basis:
As at 31 December 2019 the Company had invested 92.8% of its net assets in listed preferred shares and other financial instruments issued by companies incorporated and listed in South Korea, which in certain cases may trade at a discount to the corresponding common shares of the same companies.

The Company’s listed investments are valued based on bid-market prices at the close of business of the relevant stock exchange on the reporting date obtained from third party pricing providers.

Risk:
The valuation of the Company’s investments, given they represent the majority of the Company’s net assets as at 31 December 2019, is a significant area of our audit.
Our audit procedures included but were not limited to:

Control Evaluation:
We evaluated the design, implementation and operating effectiveness of the relevant controls over the valuation of investments.

Valuation procedures including use of a KPMG Specialist:
We have used our own valuation specialist to independently price investments to a third party data source and assessed the trading volumes behind such prices.

Assessingdisclosures:
We also considered the Company’s investment valuation policies and their application as described in note 2f to the financial statements for compliance with IFRS in addition to the adequacy of disclosures in notes 12 and 21.

Our application of materiality and an overview of the scope of our audit

Materiality for the financial statements as a whole was set at £2,427,000, determined with reference to a benchmark of net assets of £124,544,734, of which it represents approximately 2.0% (2018: 3.0%).

We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding £121,000, in addition to other identified misstatements that warranted reporting on qualitative grounds.

Our audit of the Company was undertaken to the materiality level specified above, which has informed our identification of significant risks of material misstatement and the associated audit procedures performed in those areas as detailed above.

We have nothing to report on going concern

We are required to report to you if we have anything material to add or draw attention to in relation to the directors’ statement in note 2(c) to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements.  We have nothing to report in this respect.

Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report but does not include the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Disclosures of emerging and principal risks and longer term viability

Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:

• the directors’ confirmation within the Viability Statement that they have carried out a robust assessment of the emerging and principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity;

• the Principal Risks disclosures describing these risks and explaining how they are being managed or mitigated;

• the directors’ explanation in the Viability Statement as to how they have assessed the prospects of the Company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether 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 period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Corporate governance disclosures

We are required to report to you if:

• we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy; or

• the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.   

We have nothing to report to you in these respects.

We have nothing to report on other matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:

• the Company has not kept proper accounting records; or

• the financial statements are not in agreement with the accounting records; or

• we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit.

Respective responsibilities

Directors' responsibilities

As explained more fully in the Report of the Directors, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities

The purpose of this report and restrictions on its use by persons other than the Company's members as a body

This report is made solely to the Company’s members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, 2008.  Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.

KPMG Channel Islands Limited
Chartered Accountants
Guernsey
29 April 2020



Statement of Financial Position
As at 31 December 2019

As at As at
31 December 31 December
2019 2018
Notes £ £
Assets
Current assets
Financial assets at fair value through profit or loss 12,21 117,853,987 120,312,836
Derivative financial assets 16,21 33,218 1,706,418
Other receivables 15 2,445,789 2,636,504
Cash and cash equivalents 13 6,430,069 1,304,537
Margin account 14 1,435,750 2,252,688
Total assets 128,198,813 128,212,983
Liabilities
Current liabilities
Derivative financial liabilities 16,21 704,019 1,209,227
Other payables 17 506,062 514,161
Total liabilities 1,210,081 1,723,388
Net assets 126,988,732 126,489,595
Represented by:
Shareholders' equity and reserves
Share capital 18 68,124,035 72,080,642
Other reserves 2t 58,864,697 54,408,953
Total shareholders' equity 126,988,732 126,489,595
Net assets per share 6 1.5559 1.4993

The Notes form an integral part of these Financial Statements.

The Financial Statements were approved and authorised for issue by the Board of Directors on 28 April 2020.

Norman Crighton
Chairman

Stephen Coe
Director


Statement of Comprehensive Income
For the year ended 31 December 2019

For the year ended For the year ended
31 December 2019 31 December 2018
Notes £ £
Income
Net changes in fair value of financial assets at fair value through profit or loss   7 8,105,875 (32,710,234)
Net changes in fair value of derivative financial instruments through profit or loss  8 123,038 607,612
Net foreign currency (losses)/gains 7 (496,260) 164,874
Other income 9 4,325,414 4,437,519
Total income/(loss) 12,058,067 (27,500,229)
Expenses
Operating expenses 10 (3,161,724) (3,418,829)
Total operating expenses (3,161,724) (3,418,829)
Profit/(loss) for the year before tax 8,896,343 (30,919,058)
Withholding tax 2s (965,183) (974,141)
Profit/(loss) for the year after tax 7,931,160 (31,893,199)
Profit/(loss) and total comprehensive income/(loss) for the year  7,931,160 (31,893,199)
Basic and diluted earnings/(loss) per Share 5 0.0960 (0.3780)

All items derive from continuing activities.

The Notes form an integral part of these Financial Statements.


Statement of Changes in Equity
For the year ended 31 December 2019

Share Other
capital reserves Total
Notes £ £ £
Balance at 1 January 2019 72,080,642 54,408,953 126,489,595
Total comprehensive income for the year  - 7,931,160 7,931,160
Transactions with Shareholders, recorded directly in equity
Redemption of Realisation Shares 18 (3,956,607) - (3,956,607)
Distributions paid 3  - (3,475,416) (3,475,416)
Balance at 31 December 2019 68,124,035 58,864,697 126,988,732
For the year ended 31 December 2018
Balance at 1 January 2018 72,080,642 89,183,638 161,264,280
Total comprehensive loss for the year  - (31,893,199) (31,893,199)
Transactions with Shareholders, recorded directly in equity
Distributions paid 3 - (2,881,486) (2,881,486)
Balance at 31 December 2018 72,080,642 54,408,953 126,489,595

The Notes form an integral part of these Financial Statements.


Statement of Cash Flows
For the year ended 31 December 2019

For the year ended For the year ended
31 December 2019 31 December 2018
Notes £ £
Cash flows from operating activities
Profit/(loss) for the year 7,931,160 (31,893,199)
Adjustments for:
Net change in fair value of financial assets held at fair value through profit or loss 7 (7,609,615) 32,545,360
Net change in fair value of derivative financial instruments held at fair value through profit or loss 8 (123,038) (1,399,458)
Net change in NAV of Realisation Shares (41,049) -
Realised loss on closure of derivatives in the year - 791,846
Effect of foreign exchange rate fluctuations (496,260) 164,874
Decrease/(increase) in debtors 15 190,715 (273,396)
(Decrease)/increase in creditors 17 (8,099) 143,938
Net cash (used in)/generated from operating activities (156,186) 79,965
Cash flows from investing activities
Purchase of financial assets at fair value through profit or loss (8,239,027) (23,512,302)
Open of derivative financial instruments (593,087) (967,526)
Proceeds from the sale of financial assets at fair value through profit or loss 18,803,752 23,877,567
Closure of derivative financial instruments 1,884,115 122,665
Decrease in margin account 816,938 1,156,352
Net cash generated from investing activities 12,672,691 676,756
Cash flows from financing activities
Redemption of Realisation Shares (3,915,557) -
Distributions paid 3 (3,475,416) (2,881,486)
Net cash used in financing activities (7,390,973) (2,881,486)
Net increase/(decrease) in cash and cash equivalents 5,125,532 (2,124,765)
Cash and cash equivalents at the beginning of the year 1,304,537 3,429,302
Cash and cash equivalents at the end of the year 6,430,069 1,304,537

The Notes form an integral part of these Financial Statements.


Notes to the Financial Statements
For the year ended 31 December 2019

1.  General information

The Company was incorporated with limited liability in Guernsey, as a closed-ended investment company on 12 April 2013. The Company’s Shares were admitted to trading on AIM of the LSE on 14 May 2013.

The Investment Manager of the Company is Weiss Asset Management LP.

At the AGM held on 27 July 2016, the Board approved the adoption of the new Articles of Incorporation in accordance with Section 42(1) of the Companies (Guernsey) Law, 2008 (the “Law”).

2.  Significant accounting policies

a)  Statement of compliance

The Financial Statements of the Company for the year ended 31 December 2019 have been prepared in accordance with IFRS adopted by the European Union and the AIM Rules of the London Stock Exchange. They give a true and fair view and are in compliance with the Law.

b)  Basis of preparation

The Financial Statements are prepared in pounds sterling (£), which is the Company’s functional and presentational currency. They are prepared on a historical cost basis modified to include financial assets at fair value through profit or loss.

c)  Going concern

The Company has continued in existence following the second Realisation Opportunity and will continue to operate as a going concern unless a determination to wind up the Company is made. Given this, the Directors will propose further realisation opportunities for Shareholders who have not previously elected to realise all of their Ordinary Shares. Such opportunities will be made using a similar mechanism to previously announced Realisation Opportunities. The next Realisation Opportunity will take place during May 2021.

Based on the fact that the assets currently held by the Company consist mainly of securities that are readily realisable, whilst the Directors acknowledge that the liquidity of these assets needs to be managed, the Directors believe that the Company has adequate financial resources to meet its liabilities as they fall due for at least twelve months from the date of this report, and that it is appropriate for the Financial Statements to be prepared on a going concern basis.

d)  Standards, amendments and interpretations not yet effective

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2020, and have not been early adopted in preparing these financial statements. None of these are expected to have a material effect on the financial statements of the Company.

e)  Standards, amendments and interpretations effective during the year

There are no new standards effective in the current year which impact the Company.

f)  Financial instruments

i)  Classification

Financial assets are classified into the following categories: financial assets at fair value through profit or loss and amortised cost.

The classification depends on the business model in which a financial asset is managed and its contractual cash flows.

Financial liabilities are classified as either financial liabilities at fair value through profit or loss or other financial liabilities at amortised cost.

ii)  Recognition and measurement 

Financial assets at fair value through profit or loss (“investments”)

Financial assets and derivatives are recognised in the Company’s Statement of Financial Position when the Company becomes a party to the contractual provisions of the instrument.

Purchases and sales of investments are recognised on the trade date (the date on which the Company commits to purchase or sell the investment). Investments purchased are initially recorded at fair value, being the consideration given and excluding transaction or other dealing costs associated with the investment.

Subsequent to initial recognition, investments are measured at fair value. Gains and losses arising from changes in the fair value of investments and gains and losses on investments that are sold are recognised through profit

or loss in the Statement of Comprehensive Income within net changes in fair value of financial assets at fair value through profit or loss.

Financial assets at fair value through profit or loss (“derivatives: credit default swaps and options”)

Subsequent to initial recognition at fair value, credit default swaps and options are measured at fair value through profit and loss.

The fair values of the credit default swaps and options are based on traded prices. The valuation of the credit default swaps' and options' fair values means fluctuations will be reflected in the net changes in fair value of derivative instruments.

Derivatives are presented in the Statement of Financial Position as financial assets when their fair value is positive and as financial liabilities when their fair value is negative.

Other financial instruments

For other financial instruments, including other receivables and other payables, the carrying amounts as shown in the Statement of Financial Position approximate the fair values due to the short term nature of these financial instruments.

iii) Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Investments traded in active markets are valued at the latest available bid prices ruling at midnight, Greenwich Mean Time (“GMT”), on the reporting date. The Directors are of the opinion that the bid-market prices are the best estimate of fair value. Gains and losses arising from changes in the fair value of financial assets and financial liabilities at fair value through profit and loss are shown as net gains or losses on financial assets through profit or loss in Note 12 and are recognised in the Statement of Comprehensive Income in the period in which they arise. Gains and losses arising from changes in the fair value of derivative financial instruments are shown as net gains or losses on financial derivatives through profit or loss in Note 16 and are recognised in the Statement of Comprehensive Income in the period in which they arise.

iv) Derecognition of financial instruments

A financial asset is derecognised when: (a) the rights to receive cash flows from the asset have expired; (b) the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass through arrangement”; or (c) the Company has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

On derecognition of a financial asset, the difference between the carrying amount of the asset using the average cost method and the consideration received (including any new asset obtained, less any new liability assumed) is recognised in profit or loss.

A financial liability is derecognised when the obligation under the liability is discharged, cancelled, or expired.

f)  Net changes in fair value of financial assets at fair value through profit or loss

Net changes in fair value of financial assets at fair value through profit or loss includes all realised and unrealised fair value changes and foreign exchange differences, but excludes dividend income.

g)  Income

Dividend income from equity investments is recognised through profit or loss in the Statement of Comprehensive Income when the relevant investment is quoted ex-dividend.

h)  Expenses

All expenses are accounted for on an accruals basis. Expenses incurred on the acquisition of financial assets at fair value through profit or loss and management fees are charged to the Statement of Comprehensive Income.

i)  Cash and cash equivalents

Cash comprises cash in hand and demand deposits. Cash equivalents, which can include bank overdrafts and margin accounts, are short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant changes in value. Cash, deposits with banks, and bank overdrafts are stated at their principal amount.

j)  Share capital

Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of these Shares are shown in equity as a deduction, net of tax, from the proceeds and disclosed in the Statement of Changes in Equity.

k)  Foreign currency translations

Functional and presentation currency

The Financial Statements of the Company are presented in the currency of the primary economic environment in which the Company operates (its “functional currency”). The Directors have considered the currency in which the original capital was raised, distributions will be made, and ultimately the currency in which capital would be returned in a liquidation.

On the Statement of Financial Position date, the Directors believe that pounds sterling best represents the functional currency of the Company. For the purpose of the Financial Statements, the results and financial position of the Company are expressed in pounds sterling, which is the presentational currency of the Company. Monetary assets and liabilities, denominated in foreign currencies, are translated into pounds sterling at the exchange rate at the reporting date. Non-monetary assets denominated in foreign currencies that are measured at fair value are translated in pounds sterling at the exchange rate at the date on which the fair value was determined. Realised and unrealised gains or losses on currency translation are recognised in the Statement of Comprehensive Income. Foreign currency differences relating to investments at fair value through profit or loss are included within net changes in fair value of financial assets at fair value through profit or loss.

l)  Treasury shares

Where the Company purchases its own share capital, the consideration paid, which includes any directly attributable costs, is deducted through share capital. The difference between the total consideration and the total nominal value of all Shares purchased is recognised through other reserves, which is a distributable reserve.

If such Shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is recognised as an increase in equity and the resulting surplus or deficit on the transaction is transferred to or from other reserves.

Where the Company cancels treasury shares, no further adjustment is required to the share capital account at the time of cancellation. Shares held in treasury are excluded from calculations when determining NAV per Share and earnings per Share.

m) Operating segments

The Board has considered the requirements of IFRS 8 ‘Operating Segments’ and is of the view that the Company is engaged in a single segment of business, being an investment strategy tied to listed preferred shares issued by companies incorporated in South Korea. The Board, as a whole, has been determined as constituting the chief operating decision maker of the Company.

The key measure of performance used by the Board to assess the Company’s performance and to allocate resources is the total return on the Company’s NAV, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in these Audited Financial Statements.

The Board of Directors is charged with setting the Company’s investment strategy in accordance with the investment policy. They have delegated the day to day implementation of this strategy to the Company’s Investment Manager but retain responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions. The investment decisions of the Investment Manager are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board. The Investment Manager has been given full authority to act on behalf of the Company, including the authority to purchase and sell securities and other investments on behalf of the Company and to carry out other actions as appropriate to give effect thereto.

Whilst the Investment Manager may make the investment decisions on a day to day basis regarding the allocation of funds to different investments, any changes to the investment strategy or major allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Manager.

The Board therefore retains full responsibility as to the major decisions made on an on-going basis. The Investment Manager will always act under the terms of the Admission Document which cannot be significantly changed without the approval of the Board of Directors and where necessary, Shareholders.

o)  Other receivables

Other receivables are amounts due in the ordinary course of business. Other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.

p)  Other payables

Other payables are obligations to pay for services that have been acquired in the ordinary course of business. Other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

q)  Due from and due to brokers

Amounts due from and due to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the Statement of Financial Position date, respectively.

r)  Dividend distribution

Dividend distribution to the Company’s Shareholders is recognised as a liability in the Company’s Financial Statements and disclosed in the Statement of Changes in Equity in the period in which the dividends are proposed and approved by the Board.

s)  Taxation

The Company has been granted Exempt Status under the terms of The Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its liability is an annual fee of £1,200 (2018: £1,200).

The amounts disclosed as taxation in the Statement of Comprehensive Income relate solely to withholding tax levied in South Korea on distributions from South Korean companies at an offshore rate of 22 per cent.

t)  Other reserves

Total comprehensive income for the year is transferred to Other Reserves.

3.  Dividends to Shareholders

Dividends, if any, will be paid annually each year. An annual dividend of 4.1195 pence per Share (£3,475,416) was approved on 1 May 2019 and paid on 31 May 2019 in respect of the year ended 31 December 2018.

An annual dividend of 3.4155 pence per Share (£2,881,486) was approved on 8 June 2018 and paid on 13 July 2018 in respect of the year ended 31 December 2017.

4.  Significant accounting judgements, estimates and assumptions

The preparation of the Financial Statements in conformity with IFRS requires management to make judgements, estimates, and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense, and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods.

Judgements

In the process of applying the Company’s accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the Annual Financial Statements:

Functional currency

As disclosed in Note 2l, the Company’s functional currency is the pound sterling. Pound sterling is the currency in which the original capital was raised, distributions will be made, and ultimately the currency in which capital would be returned in a liquidation.

5.  Basic and diluted loss/earnings per Share

The basic and diluted earnings per Share of £0.0960 (31 December 2018: loss per Share of £0.3780) for the Company has been calculated based on the total comprehensive profit for the year of £7,931,160 (for the year ended 31 December 2018: £31,893,199 loss) and the weighted average number of Ordinary Shares in issue during the year of 82,633,898 (for the year ended 31 December 2018: 84,364,981).

6.  Net asset value per Ordinary Share

The NAV of each Share of £1.5559 (as at 31 December 2018: £1.4993) is determined by dividing the net assets of the Company attributed to the Ordinary Shares of £126,988,732 (as at 31 December 2018: £126,489,595) by the number of Ordinary Shares in issue at 31 December 2019 of 81,617,828 (as at 31 December 2018: 84,364,981 Ordinary Shares in issue).

7.  Net changes in fair value on financial assets at fair value through profit or loss

For the year ended For the year ended
31 December 2019 31 December 2018
£ £
Realised gain on investments 6,830,858 4,905,671
Realised loss on foreign currency (232,536) (32,938)
Movement in unrealised gain/(loss) on investments 1,275,017 (37,615,905)
Movement in unrealised exchange (loss)/gain on foreign currency (263,724) 197,812
Net changes in fair value on financial assets at fair value through profit or loss 7,609,615 (32,545,360)

8.  Net changes in fair value on derivative financial instruments at fair value through profit or loss

For the year ended For the year ended
31 December 2019 31 December 2018
£ £
Realised gain/(loss) on options 668,601 (226,513)
Realised loss on credit default swaps  - (565,333)
Movement in unrealised (loss)/gain on options (1,050,771) 923,716
Movement in unrealised gain/(loss) on credit default swaps 505,208 475,742
Net changes in fair value on financial derivatives at fair value through profit or loss
123,038 607,612

9.  Other income

For the year ended For the year ended
31 December 2019 31 December 2018
£ £
Dividend income 4,325,414 4,437,519

10. Operating expenses

For the year ended For the year ended
31 December 2019 31 December 2018
£ £
Investment Management fee (Note 19c) 1,860,960 2,108,383
Custodian fees 46,965 60,401
Audit fees 33,788 28,300
Administration and Secretarial fees 98,314 99,315
Directors' fees (Note 19a) 81,500 81,500
Tax services 9,750 5,000
Professional fees 68,137 154,485
Transaction costs¹ 103,063 136,536
Sundry expenses 96,632 116,260
Derivative expense¹ 762,615 628,649
Total Operating Expenses 3,161,724 3,418,829

1. Excluded from the TER calculation.

11. Operating segments

Information on realised gains and losses derived from sales of investments is disclosed in Note 7 of the Financial Statements. The Company is domiciled in Guernsey. Substantially all of the Company’s income is from its investment in listed preferred shares issued by companies incorporated in South Korea.

The Company has no assets classified as non-current assets. The Company is likely to have a high degree of portfolio concentration as South Korean preferred shares are concentrated with a small number of issuers.

12. Financial assets at fair value through profit or loss

As at As at
31 December 2019 31 December 2018
£ £
Cost of investments at beginning of the year 110,153,284 106,460,720
Purchases of investments in the year 8,239,027 20,717,121
Disposal of investments in the year (18,803,751) (21,930,228)
Realised gain on disposal of investments in the year 6,830,858 4,905,671
Cost of investments held at end of the year 106,419,418 110,153,284
Unrealised gain on investments 11,434,569 10,159,552
Financial assets at fair value through profit or loss 117,853,987 120,312,836

Financial assets are valued at the bid-market prices ruling as at the close of business at the Statement of Financial Position date, net of any accrued interest which is included in the Statement of Financial Position as an income related item. The Directors are of the opinion that the bid-market prices are the best estimate of fair value in accordance with the requirements of IFRS 13 ‘Fair Value Measurement’. Movements in fair value are included in the Statement of Comprehensive Income.

13. Cash and cash equivalents

As at As at
31 December 2019 31 December 2018
£ £
Cash at bank 6,430,069 1,304,537

Cash at bank earns interest at floating rates based on daily bank deposit rates. The carrying value of cash at bank approximates the fair values due to the short term nature.

14. Margin account

As at As at
31 December 2019 31 December 2018
£ £
Margin account 1,435,750 2,252,688

The margin account represents a margin deposit of collateral held by Credit Suisse Securities (USA) LLC in relation to the credit default swaps. The carrying value of the margin account approximates the fair values due to the short term nature.

15. Other receivables

As at As at
31 December 2019 31 December 2018
£ £
Dividends receivable 2,443,998 2,632,690
Prepaid expenses 1,791 3,814
Total Other Receivables  2,445,789 2,636,504

The Directors consider that the carrying amount of receivables approximate their fair value.

Dividends are presented net of withholding tax of £689,333 (2018: £742,554).

16. Derivative financial instruments

As at As at
31 December 2019 31 December 2018
£ £
Cost of derivatives at beginning of the year (552,309) (605,324)
Open of derivatives in the year 593,087 967,526
Closure of derivatives in the year (1,884,116) (122,665)
Realised gain/(loss) on closure of derivatives in the year 668,601 (791,846)
Net cost of derivatives held at end of the year (1,174,737) (552,309)
Net changes in fair value on derivative financial instruments at fair value through profit or loss 503,936 1,049,500
Net fair value on derivative financial instruments at fair value through profit or loss (670,801) 497,191

The following are the composition of the Company’s derivative financial instruments at year end:

As at As at
31 December 2019 31 December 2018
Assets Liabilities Assets Liabilities
Derivatives held for trading: £ £ £ £
Options 33,218 - 1,706,418 -
Credit default swaps - (704,019) - (1,209,227)
Total 33,218 (704,019) 1,706,418 (1,209,227)

17. Other payables

As at As at
31 December 2019 31 December 2018
£ £
Investment management fees payable (Note 19c) 310,841 316,144
Administration fee payable 34,876 18,138
Custody fee payable 3,900 15,993
Co-sec and Listing fee payable 12,499 2,561
Audit fees payable 33,000 22,800
Other payables 110,946 138,525
Total Other Payables  506,062 514,161

The Directors consider that the carrying amount of payables approximate their fair value.

18. Share capital

The share capital of the Company consists of an unlimited number of Ordinary Shares of no par value.

As at As at
31 December 2019 31 December 2018
Authorised
Unlimited Ordinary Shares at no par value - -
Issued at no par value
81,617,828 (2018: 84,364,981) unlimited Ordinary Shares at no par value - -
Reconciliation of number of Shares
As at As at
31 December 2019 31 December 2018
No. of Shares No. of Shares
Ordinary Shares at the beginning of the year 84,364,981 84,364,981
Purchase of Realisation Shares (2,747,153) -
Total Ordinary Shares in issue at the end of the year 81,617,828 84,364,981
Share capital account
As at As at
31 December 2019 31 December 2018
£ £
Share capital at the beginning of the year 72,080,642 72,080,642
Purchase of Realisation Shares (3,956,607) -
Total Share capital at the end of the year 68,124,035 72,080,642

Ordinary Shares

The Company has a single class of Ordinary Shares, which were issued by means of an initial public offering on 14 May 2013, at 100 pence per Share.

The rights attached to the Ordinary Shares are as follows:

a)  The holders of Ordinary Shares shall confer the right to all dividends in accordance with the Articles of Incorporation of the Company.

b)  The capital and surplus assets of the Company remaining after payment of all creditors shall, on winding-up or on a return (other than by way of purchase or redemption of own Ordinary Shares) be divided amongst the Shareholders on the basis of the capital attributable to the Ordinary Shares at the date of winding up or other return of capital.

c)  Shareholders present in person or by proxy or (being a corporation) present by a duly authorised representative at a general meeting have, on a show of hands, one vote and, on a poll, one vote for every Share.

d)  On 20 March 2019, being 46 days before the Subsequent Realisation Date, the Company published a circular pursuant to the Realisation Opportunity, entitling the Shareholders to serve a written notice during the election period (a “Realisation Election”) requesting that all or a part of their Ordinary Shares be re-designated to Realisation Shares, subject to the aggregate NAV of the continuing Ordinary Shares on the last business day before the Reorganisation Date being not less than £50 million. As Shareholders elected to participate in the Realisation Opportunity, the Company’s portfolio was divided into two pools: the Continuation Pool; and the Realisation Pool.

e)  On 15 May 2019, 2,747,153 Ordinary Shares, which represented 3.3 per cent of the Company’s issued Ordinary Share capital were redesignated as Realisation Shares. On the 7 June 2019 the Board approved the compulsory redemption of the Realisation Shares in issue. The redemption price was 142.53 pence per Realisation Share, being the net assets of the Realisation Pool of £3,915,557, divided by the number of outstanding Realisation Shares in issue, being 2,747,153 Realisation Shares. The redemption proceeds were paid to the Realisation Shareholders on 18 June 2019, after which the Realisation Shares were cancelled and were no longer in issue.

Share buyback and cancellation

During the year ended 31 December 2019, the Company purchased Nil of its own Shares (31 December 2018: Nil) at a consideration of £Nil (31 December 2018: £Nil) under the Share buyback authority originally granted to the Company in 2014.

The Company has 81,617,828 Ordinary Shares in issue as at 31 December 2019 (as at 31 December 2018: 84,364,981).

At the AGM held on 25 July 2019, Shareholders approved the authority of the Company to buy back up to 40 per cent of the issued Ordinary Shares to facilitate the Company’s discount management. Any Ordinary Shares bought back may be cancelled or held in treasury.

19. Related party transactions and material agreements

Related party transactions

a)  Directors’ remuneration and expenses

During the year ended 31 December 2019, Directors’ fees of £81,500 (31 December 2018: £81,500) were charged to the Company and £Nil remained payable at the year-end (as at 31 December 2018: £Nil). For additional information refer to the Directors’ Remuneration Report.

b)  Shares held by related parties

The Directors’ Interests are set out in the Report of the Directors.

The Investment Manager is principally owned by Dr Andrew Weiss and certain members of the Investment Manager’s senior management team.

As at 31 December 2019, Dr Andrew Weiss and his immediate family members held an interest in 6,486,888 Ordinary Shares (as at 31 December 2018: 6,486,888) representing 7.95 per cent. (as at 31 December 2018: 7.69 per cent.) of the issued share capital of the Company.

As at 31 December 2019, employees of the Investment Manager, their respective immediate family members or entities controlled by them or their immediate family members held an interest in 2,844,333 Ordinary Shares (as at 31 December 2018: 2,718,333) representing 3.48 per cent. (as at 31 December 2018: 3.22 per cent.) of the issued share capital of the Company.

Material agreements

c)  Investment management fee

The Company’s Investment Manager is Weiss Asset Management LP. In consideration for its services provided by the Investment Manager under the IMA dated 8 May 2013, the Investment Manager is entitled to an annual management fee of 1.5 per cent of the Company’s NAV accrued daily and payable within 14 days after each month end. The Investment Manager is also entitled to reimbursement of certain expenses incurred by it in connection with its duties.

The IMA will continue in force until terminated by the Investment Manager or the Company, giving to the other party thereto not less than 12 months’ notice in writing.

For the year ended 31 December 2019, investment management fees and charges of £1,860,960 (for the year ended 31 December 2018: £2,108,383) were charged to the Company and £310,841 (as at 31 December 2018: £316,144) remained payable at the year-end.

Additionally, investment management fees of £5,630 were charged to the Realisation pool up until its closure.

20. Financial risk management

The Company’s objective in managing risk is the creation and protection of Shareholder value. Risk is inherent in the Company’s activities, but it is managed through an on-going process of identification, measurement, and monitoring.

The main risks arising from the Company’s financial instruments are market risk, foreign currency risk, interest rate risk, credit risk, and liquidity risk. The techniques and instruments utilised for the purposes of efficient portfolio management are those which are reasonably believed by the Board to be economically appropriate to the efficient management of the Company.

Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Company’s activities expose it primarily to the market risks of changes in market prices, interest rates, and foreign currency exchange rates. The Company’s investments are heavily concentrated in South Korean securities. As the Company’s investments are heavily concentrated in South Korean securities, the Company has entered into certain portfolio hedge positions which are intended to provide some level of protection against potential adverse geopolitical and macroeconomic conditions in South Korea.

Market price risk

The Company’s NAV is sensitive to movements in market prices. As at 31 December 2019, if market prices had been 5 per cent higher or 5 per cent lower with all other variables held constant, then the increase/decrease in NAV would have been £5,892,699 (as at 31 December 2018: £6,039,161). Actual trading results may differ from the above sensitivity analysis and those differences may be material.

Were there to be a major change in the political or economic environment in South Korea, the movement in market prices may be significantly and materially higher than the above. Refer to Investment Manager’s Report for a discussion of potential political and economic changes.

Foreign currency risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

The Company does not hedge its exposure to foreign currency (predominantly Korean won (KRW)) and NAV per Share will fluctuate with movements in foreign exchange rates.

As at 31 December 2019, the Company held the following assets and liabilities in foreign currencies:

As at As at
31 December 2019 31 December 2018
Amounts in Sterling KRW USD KRW USD
Assets
Monetary assets 7,942,503 1,717,106 3,402,192 2,611,598
Non-monetary assets 117,853,986 33,218 120,312,836 1,706,418
125,796,489 1,750,324 123,715,028 4,318,016
Liabilities
Non-monetary liabilities - (704,019) - (1,209,227)
Total  - (704,019) - (1,209,227)

Amounts in the above table are based on the carrying value of monetary assets and liabilities.

The table below summarises the sensitivity of the Company’s monetary and non-monetary assets and liabilities to changes in foreign exchange movements at 31 December 2019.

Reasonable As at Reasonable As at
possible 31 December possible 31 December
shift in rate 2019 shift in rate 2018
2019 £ 2018 £
Currency
KRW
Monetary assets +/- 5% 397,125 +/- 5% 170,110
Non-monetary assets +/- 5% 5,892,699 +/- 5% 6,015,642
US Dollars
Monetary assets +/- 5% 85,855 +/- 5% 130,580
Non-monetary assets +/- 5% 1,661 +/- 5% 85,321
Non-monetary liabilities +/- 5% (35,201) +/- 5% (60,461)

Interest rate risk

The Company holds limited cash and margin balances in interest-bearing accounts of £7,865,819 as at
31 December 2019 (as at 31 December 2018: £3,557,225) and does not invest in interest-bearing securities and instruments. Accordingly, interest rate risk is considered very low.

The tables below summarise the Company’s exposure to interest rate risk as of 31 December 2019:

Total
Floating Fixed Non-Interest As at
rate rate bearing 31 December 2019
£ £ £ £
Financial Assets
Investments designated at fair value
through profit or loss - - 117,853,987 117,853,987
Derivative financial assets - - 33,218 33,218
Other receivables - - 2,445,789 2,445,789
Cash and cash equivalents 6,430,069 - - 6,430,069
Margin account 1,435,750 - - 1,435,750
Total 7,865,819 - 120,332,994 128,198,813
Total
Floating Fixed Non-Interest As at
rate rate bearing 31 December 2019
£ £ £ £
Financial Liabilities
Derivative financial liabilities - - 704,019 704,019
Other payables - - 506,062 506,062
Total  - - 1,210,081 1,210,081

The tables below summarise the Company’s exposure to interest rate risk as of 31 December 2018:

Total
Floating Fixed Non-Interest As at
rate rate bearing 31 December 2019
£ £ £ £
Financial Assets
Investments designated at fair value
through profit or loss - - 120,312,836 120,312,836
Derivative financial assets - - 1,706,418 1,706,418
Other receivables - - 2,636,504 2,636,504
Cash and cash equivalents 1,304,537 - - 1,304,537
Margin account 2,252,688 - - 2,252,688
Total  3,557,225 - 124,655,758 128,212,983
Total
Floating Fixed Non-Interest As at
rate rate bearing 31 December 2018
£ £ £ £
Financial Liabilities
Derivative financial liabilities - - 1,209,227 1,209,227
Other payables - - 514,161 514,161
Total  - - 1,723,388 1,723,388

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Company. Credit risk is limited to the carrying value of financial assets at 31 December 2019 as follows:

As at As at
31 December 2019 31 December 2018
£ £
Other receivables 2,445,789 2,636,504
Cash and cash equivalents 6,430,069 1,304,537
Margin account 1,435,750 2,252,688
Total  10,311,608 6,193,729

The Company is exposed to material credit risk in respect of cash and cash equivalents. The credit risk from cash and cash equivalents is mitigated as cash is placed within a margin account held with Credit Suisse Securities (USA) LLC, a subsidiary of Credit Suisse (USA), Inc (“CS”). As at 31 December 2019, CS had a credit rating of A+ (as at 31 December 2018: A) from Standard & Poor’s and A1 (as at 31 December 2018: A1) from Moody’s. Other cash and cash equivalents are held with Northern Trust (Guernsey) Limited which is a wholly owned subsidiary of The Northern Trust Corporation (“TNTC”). TNTC is publicly traded and a constituent of the S&P 500. As at 31 December 2019, TNTC had a credit rating of A+ (as at 31 December 2018: A+) from Standard & Poor’s and A2 (as at 31 December 2018: A2) from Moody’s.

Liquidity risk

Liquidity risk is the risk that the Company may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous.

The Company’s investments are relatively liquid and the Company holds sufficient cash balances (or liquid investments) to meet its obligations as they fall due. The Board reviews its resources and obligations on a regular basis to ensure sufficient liquid assets are held.

As at 31 December 2019, the Company had no significant financial liabilities other than payables arising directly from investing activity:

Total
Less than 1 As at
 month 1-3 months 3-12 months 31 December 2019
£ £ £ £
Derivative financial liabilities 704,019 - - 704,019
Other payables 506,062 - - 506,062
Total  1,210,081 - - 1,210,081
Total
Less than 1 As at
 month 1-3 months 3-12 months 31 December 2018
£ £ £ £
Derivative financial liabilities 1,209,227 - - 1,209,227
Other payables 514,161 - - 514,161
Total 1,723,388 - - 1,723,388

Capital risk management

The fair value of the Company’s financial assets and liabilities approximate their carrying amounts at the reporting date.

The Company’s objective when managing capital is to maintain an optimal capital structure in order to reduce the cost of capital. The Company may borrow capital, but as at 31 December 2019 there were no borrowings (as at 31 December 2018: £Nil).

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

As at As at
31 December 2019 31 December 2018
£ £
Total assets 128,198,813 128,212,983
Less: Total liabilities (1,210,081) (1,723,388)
Net Asset Value 126,988,732 126,489,595
Gearing Ratio 0.95% 1.36%

The Board considers the above gearing ratio to be adequate, since total borrowings refer only to amounts due to brokers, derivative liabilities, and other payables.

Share buybacks

The Directors have general Shareholder authority to purchase in the market up to 40 per cent. of the Ordinary Shares in issue from time to time following Admission. The Directors intend to seek annual renewal of this authority from Shareholders at each general meeting of the Company.

Pursuant to this authority, and subject to Guernsey law and discretion of the Directors, the Company may repurchase Ordinary Shares in the market on an on-going basis at a discount to NAV with a view to increasing the NAV per Ordinary Share and assisting in controlling the discount to NAV per Ordinary Share in relation to the price at which such Ordinary Shares may be trading.

Purchases by the Company will be made only at prices below the estimated prevailing NAV per Ordinary Share based on the last published NAV but taking account of movements in investments, stock markets, and currencies, in consultation with the Investment Manager and at prices where the Directors believe such purchases will result in an increase in the NAV per Ordinary Share of the remaining Ordinary Shares.

The Directors will consider repurchasing Ordinary Shares when the price per Ordinary Share plus the pro forma cost to the Company per Share repurchased is less than 95 per cent. of the NAV per Ordinary Share. The pro forma cost per Share should include any brokerage commission payable and costs of realising portfolio securities to fund the purchase. The Directors may, at their discretion, also consider repurchasing Ordinary Shares at a smaller discount to NAV per Ordinary Share, provided that such purchase would be accretive to NAV per Ordinary Share for any continuing Shareholders.

Realisation Opportunity

On 20 March 2019, the Company announced that pursuant to the Realisation Opportunity, Shareholders who are on the register as at the record date may elect, during the Election Period, to redesignate all or part (provided that such part be rounded up to the nearest whole Ordinary Share) of their Ordinary Shares as Realisation Shares, subject to the aggregate NAV of the continuing Ordinary Shares at the close of business on the last Business Day before the Realisation Date being not less than £50 million. The Ordinary Shares held by the Shareholders who elected for Realisation were redesignated as Realisation Shares and the Portfolio was split into two separate and distinct Pools, namely the Continuation Pool (comprising the assets attributable to the continuing Ordinary Shares) and the Realisation Pool (comprising the assets attributable to the Realisation Shares).

With effect from the Realisation Date, the assets in the Realisation Pool were managed in accordance with an orderly realisation programme with the aim of making progressive returns of cash, as soon as practicable, to those Shareholders who elected to receive Realisation Shares. Ordinary Shares held by Shareholders who did not submit a valid and complete election in accordance with the Articles during the Election Period remained as Ordinary Shares.

The creation and subsequent redemption of the Realisation Shares resulted in the redemption of 2,747,153 Shares at a value of £3,956,607.

Unless it has already been determined that the Company will be wound-up, every two years after the Realisation Date, the Directors will propose further realisation opportunities for Shareholders who have not previously elected to realise their Ordinary Shares using a similar mechanism to that described above.

If the weighted average discount on the Portfolio is less than 25 per cent over any 90-day period, then the Directors shall propose an ordinary resolution for the winding up of the Company. If one or more Realisation Elections are duly made and the NAV of the continuing Ordinary Shares at the close of business on the last Business Day before the Reorganisation Date is less than £50 million, the Directors may propose an ordinary resolution for the winding up of the Company and may pursue a liquidation of the Company instead of splitting the Portfolio into the Continuation Pool and the Realisation Pool.

21. Fair value measurement

IFRS 13 ‘Fair Value Measurement’ requires the Company to establish a fair value hierarchy that prioritises the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy under IFRS 13 ‘Fair Value Measurement’ are set as follows:

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

· Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (that is, as prices) or indirectly (that is, derived from prices); and

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

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety.

If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement requires judgement, considering factors specific to the asset or liability.

The determination of what constitutes ‘observable’ requires significant judgement by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The following table presents the Company’s financial assets and liabilities by level within the valuation hierarchy as of 31 December 2019:

Total
As at
Level 1 Level 2 Level 3 31 December 2019
£ £ £ £
Financial assets/(liabilities) at fair value through
profit or loss:
  Korean preferred shares 117,853,988 - - 117,853,988
  Financial derivative assets 33,218 - - 33,218
  Financial derivative liabilities - (704,019) - (704,019)
Total net assets 117,887,206 (704,019) - 117,183,187
Total
As at
Level 1 Level 2 Level 3 31 December 2018
£ £ £ £
Financial assets/(liabilities) at fair value through
profit or loss:
  Korean preferred shares 120,312,836 - - 120,312,836
  Financial derivative assets 1,706,418 - - 1,706,418
  Financial derivative liabilities - (1,209,227) - (1,209,227)
Total net assets 122,019,254 (1,209,227) - 120,810,027

The Company recognises transfers between levels of the fair value hierarchy as of the end of the reporting year during which the transfers have occurred. During the year ended 31 December 2019, financial assets of £Nil were transferred from Level 1 to Level 2 (for the year ended 31 December 2018: £Nil).

Investments whose values are based on quoted market prices in active markets, and are therefore classified within Level 1, include Korean preference shares and exchange traded options.

The Company holds investments in derivative financial instruments which are classified as Level 2 within the fair value hierarchy. These consist of credit default swaps with a fair value of (£704,019)
(as at 31 December 2018: (£1,209,227)).

The following tables analyse within the fair value hierarchy the Company’s assets and liabilities not measured at fair value at 31 December 2019 and 31 December 2018 but for which fair value is disclosed.

Total
As at
31 December 2019
Assets Level 1 Level 2 Level 3 £
Cash and cash equivalents 6,430,069 - - 6,430,069
Margin account 1,435,750 - - 1,435,750
Other receivables 2,443,998 1,791 - 2,445,789
Total  10,309,817 1,791 - 10,311,608
Liabilities
Other payables - 506,062 - 506,062
Total - 506,062 - 506,062
Total
As at
31 December 2018
Assets Level 1 Level 2 Level 3 £
Cash and cash equivalents 1,304,537 - - 1,304,537
Margin account 2,252,688 - - 2,252,688
Other receivables 2,632,690 3,814 - 2,636,504
Total 6,189,915 3,814 - 6,193,729
Liabilities
Other payables - 514,161 - 514,161
Total - 514,161 - 514,161

The assets and liabilities included in the above table are carried at amortised cost; their carrying values are a reasonable approximation of fair value.

Cash and cash equivalents include cash in hand and deposits held with banks.

Amounts due to brokers and other payables represent the contractual amounts and obligations due by the Company for settlement of trades and expenses. Amounts due from brokers and other receivables represent the contractual amounts and rights due to the Company for settlement of trades and income.

22. NAV reconciliation

The Company announces its NAV to the LSE after each weekly and month end valuation point. The following is a reconciliation of the NAV per Share attributable to participating Shareholders as presented in these Financial Statements, using IFRS to the NAV per Share reported to the LSE:

As at 31 December 2019 As at 31 December 2018
NAV per NAV per
Participating Participating
NAV  Share NAV  Share
£ £ £ £
Net Asset Value reported to the LSE 124,536,322 1.5258 123,860,752 1.4682
Adjustment to accruals and cash 8,412 0.0001 (3,847) -
Adjustment for dividend income 2,443,998 0.0300 2,632,690 0.0312
Net Assets Attributable to Shareholders per Financial Statements 126,988,732 1.5559 126,489,595 1.4994

The published NAV per Share of £1.5258 (as at 31 December 2018: £1.4682) is different from the accounting NAV per Share of £1.5559 (as at 31 December 2018: £1.4993) due to the adjustments noted above.

23. Subsequent events

These Financial Statements were approved for issuance by the Board on 28 April 2020. Subsequent events have been evaluated until this date.

Since the start of 2020, the outbreak of COVID-19 has adversely impacted global commercial activities and financial markets. The rapid development and fluidity of this situation precludes any prediction as to its ultimate impact, which may have a continued adverse impact on economic and market conditions and may trigger a period of global economic slowdown. The Company, consistent with other in the industry, does not believe there is any impact to the financial statements as of 31 December 2019 as a result of this subsequent event. No additional events or transactions require further disclosure.

As at 21 April 2020, the published NAV per share was £1.4055. This represents a drop of 7.88 per cent from the 31 December 2019 published NAV per share, which movement was mostly attributable to the impact of COVID-19 on the global markets.

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