Annual Financial Report

RNS Number : 0016G

Acorn Income Fund Ld

30 April 2014

 



 

ACORN INCOME FUND LIMITED

ANNOUNCEMENT OF RESULTS

The Directors announce the statement of results for the year ended 31 December 2013  as follows:

COMPANY SUMMARY - INVESTMENT OBJECTIVES

The objectives of Acorn Income Fund Limited (the "Company") are to provide the Company's shareholders with a high income and also the opportunity for capital growth.

The Company's portfolio is invested in equities and high income and fixed interest securities in order to achieve its investment objectives.  It is the aim of the Company to provide both income and capital growth predominantly through investment of approximately 70% to 80% of the portfolio in smaller capitalised United Kingdom companies, admitted to the Official List of the Financial Conduct Authority (FCA) and traded on the London Stock Exchange or traded on Alternative Investment Market (AIM); and by investing approximately 20% to 30% of its assets in high yielding instruments which will be predominantly fixed interest securities (including corporate bonds, preference and permanent interest bearing shares, convertible and reverse convertible bonds and debentures) but may include up to 15% of the portfolio (measured at the time of acquisition) in high yielding investment company shares.

History

The Company was incorporated on 5 January 1999 and commenced its activities on 11 February 1999.  At the same time the Company drew down on an £8 million seven year floating rate term loan facility with Bank of Scotland. The portfolio was divided into two sub portfolios, a Smaller Companies Portfolio representing 75% of the total and an Income Portfolio investing in fixed income and investment company shares representing 25%.  The manager, Collins Stewart Fund Management Limited, appointed Granville Investment and Pensions Limited (subsequently Unicorn Asset Management Limited) as investment adviser for the Smaller Companies Portfolio. In October 1999 the Company raised a further £19 million through a placing and increased the size of the bank facility.  On 5 January 2007 an EGM authorised a tender offer to provide a cash exit for shareholders wishing to sell their shares at close to net asset value (NAV), and a change of manager from Collins Stewart Fund Management Limited to Premier Asset Management (Guernsey) Limited (PAMG). PAMG retained the arrangement whereby Unicorn Asset Management Limited acted as investment adviser on the Smaller Companies Portfolio. Following an EGM on 15 December 2011 the Company's bank facility was refinanced with an issue of £12 million Zero Dividend Preference Shares (ZDP Shares). Following shareholder approval in May 2013 the Company raised £10 million through a placing of Ordinary Shares and ZDP Shares in the necessary ratio to maintain the capital structure. Subsequent to the placing the Company raised further capital through a succession of tap issues.  During 2013 there were 27 separate tap issues raising £20.56 million and these issues have continued in 2014.  

Investment objectives

The Company's investment objectives are to provide the Company's shareholders with high income and the opportunity for capital growth.

Investment policy

The Company's investment policy is to allocate approximately 70% to 80% of the Company's assets to the Smaller Companies Portfolio with the balance to the Income Portfolio. The Smaller Companies Portfolio is principally smaller capitalised UK companies and the Income Portfolio is invested principally in fixed interest securities and higher yielding investment company shares.  A full statement of the Investment Policy, Investment Objectives and Restrictions is set out in the Directors' Report.

Financial Calendar

Company's year end	31 December
Annual results announced	April
Annual General Meeting	20 August 2014
Company's half year end	30 June
Half year results announced	August
Dividend payments - 2013	At the end of March, June, September and December

Capital Structure

Bank Loan	As at 31 December 2013 the Company had no bank loans outstanding.
Zero Dividend Preference Shares (1p each)	20,642,306 The ZDP Shares will have a final capital entitlement of 138 pence per ZDP Share on 31 January 2017 subject to there being sufficient capital in the Company.  The ZDP Shares are not entitled to any dividends.  ZDP shareholders rank ahead of the ordinary shareholders in regards to rights as to capital. The ZDP shareholders have the right to receive notice of all general meetings of the Company, but do not have the right to attend or vote unless the business of the meeting involves an alteration of the rights attached to the ZDP Shares, in which case the holders of ZDP Shares can attend and vote.
Ordinary Shares (1p each)	15,378,129 The Ordinary Shares are entitled to participate in all dividends and distributions of the Company.  On a winding-up holders of Ordinary Shares are entitled to participate in the distribution and the holders of Ordinary Shares are entitled to receive notice of and attend and vote at all general meetings of the Company.
Treasury Shares	As at 31 December 2013 there were no Ordinary or ZDP Shares held in treasury.
Shareholder Funds	£54.847 million as at 31 December 2013
Market Capitalisation of the Ordinary Shares	£56.130 million as at 31 December 2013

Company Details

The Board	The Board consists of three independent non executive directors, Helen Green (Chairman) Nigel Ward and David Warr (the "Directors") Their respective biographies can be found on below.
Investment Manager	Premier Asset Management (Guernsey) Limited ("PAMG Ltd"), is a subsidiary of Premier Asset Management Limited ("PAM Ltd").  PAM Ltd had approximately £2.5bn of funds under management as at 31 December 2013.  PAMG Ltd is licensed under the provisions of the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, by the Guernsey Financial Services Commission to carry on controlled investment business.
Investment Advisers	Premier Fund Managers Limited ("PFM Ltd") - the Company's Income Portfolio is managed by Paul Smith and Nigel Sidebottom. Unicorn Asset Management Limited ("Unicorn Ltd") - the Company's Smaller Companies Portfolio is managed by John McClure, Simon Moon and Fraser Mackersie.
Secretary	JTC Fund Managers (Guernsey) Limited provide the Company's secretarial and administrative services.
Management Fee	0.7% per annum (Total Assets) charged 75% to capital and 25% to revenue, plus performance fee.  Minimum annual management fee £100,000.

Total Return Performance	% change CHAChange		31/12/2013	31/12/2012
PERFORMANCE SUMMARY for the year ended 31 December 2013
Total Return on Gross Assets * ##	29.25
Total Return on Net Assets (assets	42.85
attributable to shareholders) *
Numis Smaller Companies  (Ex Investment  Companies) Index	36.93		15,818.00	11,552.25
FTSE All Share Index	20.81		5,385.63	4,458.04
FTSE Small Cap (ex Investment Companies Index)	43.85		5,497.16	3,821.31
Total Expenses Ratio (TER)			0.84%	1.24%
Ongoing Charges			1.84%	2.24%
Share Price and NAV Returns
Ordinary Shares
Ordinary Share - share price	57.67		365.00p	231.50p
Ordinary Share - NAV**	37.79		359.97p	261.25p
Ordinary Share - IFRS NAV#	36.52		356.66p	261.25p
Dividends Declared per Ordinary Share Ordinary Shares Total Return Discount (-)/Premium (+) to NAV on Ordinary Shares ZDP Shares ZDP - share price ZDP - NAV** ZDP - IFRS NAV#	0.00 63.86 6.60 6.22 10.16		12.00p +1.40 % 121.00p 113.35p 114.72p		12.00p      -11.39 %        113.50p        106.71p 104.14p
* assumes dividends reinvested ** NAV calculated in accordance with the Articles # NAV calculated in accordance with International Financial Reporting Standards # # adjusted for debt repayment and the issue of new Ordinary Shares and ZDP Shares Sources: Index data: Bloomberg.  Total return on gross and net assets, PFM Ltd

CHAIRMAN'S STATEMENT

Year to 31 December 2013

I am delighted to be able to report that your Company, Acorn Income Fund Limited ('Acorn'), has enjoyed another year of outstanding performance.  I was able to report a year ago that Acorn, measured on share price total return had been the best performing Investment Company in 2012.  In 2013, on the same measure, Acorn was the 10^th best performing investment company (Source, Winterflood and Numis Securities Annual Reviews 2013). 

During the year Acorn was singled out for several awards; being selected as Investment Company of the Year in the Specialist Income sector, winning the Money Observer Best High Income Trust 2013 award and being the best performing fund (in the year to 30 June 2013) in the Investors Chronicle Top 100 funds.

With increasing investor interest in Acorn the Directors sought approval from the shareholders at an EGM on 24 April 2013 for a placing of new shares and an on-going placing programme to satisfy demand for Acorn's shares and increase the size of the fund. An initial £10m placing of Ordinary Shares and ZDP Shares was completed in May 2013. Subsequent "tap issues" of smaller tranches of shares raised a further £20.56m by the year end. With the new capital raised together with the fund performance total assets grew from £35.40m to £79.23m over the year.  The increased fund size will have the benefit of reducing Acorn's total expense ratio and has also improved secondary market liquidity with weekly turnover levels significantly higher.

The placing and the subsequent tap issues all involved the issue of Ordinary and ZDP Shares in the same ratio to each other as pertained initially so that there was no alteration to the capital structure. The issues were all done at a premium to the package net asset value (NAV) - the NAV of the Ordinary Shares and ZDP Shares in the ratio issued - so that existing shareholders would not have their NAV diluted by the increased number of shares. 

Investment Performance

The UK equity market continued its recovery during the year with the FTSE All Share (total return) index rising 20.81%. Notably from Acorn's perspective was the strength of the smaller company sector. The Numis Smaller Companies (Ex ITs) Index (total return) rose 36.93% over the year and the FTSE Small Cap (ex Investment Companies) (total return) Index was up 43.85%. Acorn's total assets generated a total return of 29.25% and net asset value per Ordinary Share (total return) was 42.85%.  During most of the year the split between the Smaller Companies Portfolio and the Income Portfolio had been weighted towards the Smaller Companies Portfolio with close to 80% in small cap stocks against the normal range of 70% to 80%.  The Income Portfolio, with a mix of fixed interest securities and some investment company shares serves to enhance yield and to provide some diversification away from a pure equity exposure.  The Income Portfolio together with the relatively cautious approach to stock selection in the Smaller Companies Portfolio enables our Investment Advisers to dampen down the volatility that might otherwise be a feature of the geared structure. Indeed an analysis of volatility of Acorn's Ordinary Share NAV per share over the last five years shows that Acorn's Ordinary Share NAV, despite the gearing, has been marginally less volatile than the benchmark indices and the majority of the peer group funds in UK equity income and UK smaller companies sectors.

Dividends

During 2013 quarterly dividends of 3p were maintained.  Revenue earnings per share for the year were 13.42p (12.33p in 2012). Revenue reserves stood at £297,363   at the start of the year and £447,558 at the year end, equivalent to 2.91p per Ordinary Share.

Discount

At the end of 2012 the Ordinary Shares traded on a discount to NAV of 11.39% but this narrowed during the first quarter and since the placing in May 2013 Acorn's Ordinary Shares have traded at close to NAV and the "package" of Ordinary Shares and ZDP Shares (in the ratio of the shares in issue) has consistently traded at a premium to asset value. At the year end the Ordinary Shares were trading on a 1.4% premium.

Regulatory Matters

Directive 2011/61/EU of the European Parliament (AIFMD) and of the Council 8 June 2011 on Alternative Investment Fund Mangers.

The AIFMD (a European regulatory directive) was written into UK legislation with effect from 22 July 2013 and the transitional period ends on 22 July 2014. Acorn will act as its own Alternative Investment Fund Manager (AIFM).  Amongst other things, the AIFMD controls the marketing of Alternative Investment Funds within the EEA. As a Guernsey (non - EEA), Alternative Investment Fund (AIF)  with a Guernsey (non- EEA) AIFM, in order for Acorn to issue new shares to UK investors after 22 July 2014 Acorn will be required to register under the UK Financial Conduct Authority's (FCA's) AIFMD National Private Placement Regime and satisfy the reporting requirement of that regime. The Directors expect to complete this registration and the notification to the Guernsey Financial Services Commission of the intention to market in the UK before 22 July 2014.  As a Guernsey AIF with a Guernsey AIFM, Acorn will not be required to appoint an AIFMD depository and incur other additional costs that many UK investment trusts will face in complying with the AIFMD.

Investment Strategy

The prospectus published last May included a section on Investment Strategy which indicated that in the Smaller Companies Portfolio the Company would invest principally in companies with a market capitalisation of under £1 billion. This limit on market cap size was set when the Company was launched in 1999. At that time the largest company in the Numis index had a market cap of only £600 million. Today the largest company in the Numis Smaller Companies Index has a market capitalisation of over £1.5 billion. The Board consider that it is appropriate to move away from setting an upper end of the Company's investment universe at £1 billion and to define the investment universe for Acorn so that it is consistent with the constituents of the Numis Smaller Companies Index which is composed of those companies falling into the bottom 10% of the UK market by market capitalisation. The Directors' Report sets out this position in the revised statement of Investment Strategy. The change does not reflect any alteration in Acorn's investment objectives or investment policy but is a recognition that as the UK economy grows so does the size of companies operating within it.

Outlook

The Investment Adviser for Acorn's Smaller Companies Portfolio is increasingly optimistic about the outlook for the UK economy and the prospect for increasing merger and acquisition (M&A) activity. Accordingly exposure to the domestic economy within the Smaller Companies Portfolio has been increased.

The Investment Adviser for Acorn's Income Portfolio is maintaining a short duration on the portfolio in the expectation that bond yields will rise but will still find opportunities to exploit credit mispricing particularly in the financial sector.

Helen Green

Chairman

INVESTMENT ADVISERS' REPORT

The Smaller Companies Portfolio

During the twelve month period to 31 December 2013 the Smaller Companies Portfolio generated a capital return of 36.7% compared to a rise of 33.1% in the Numis Smaller Companies Index (Ex Investment Companies) (capital return).

The UK small companies sector enjoyed another strong year in 2013, outperforming their larger quoted peers. The Smaller Companies Portfolio has again benefited from this trend with new cash resources invested throughout the period in both existing holdings and a number of new investments.  The strength of the recovery in the UK has been particularly encouraging and the positioning of this portfolio reflects the renewed confidence in the UK consumer.  It is worth noting this exposure has been increased on a highly selective basis.

The revival of the Initial Public Offering (IPO) market in 2013 has provided a number of potential new investment opportunities and the performance of the portfolio has been enhanced by the Company's participation in two new issues which are detailed below.  The anticipated return of significant merger and acquisition activity did not materialise in 2013 however the Company remains confident the portfolio is well positioned for any recovery in this area.

The number of holdings within the portfolio increased to thirty nine during the period following the initiation of nine new positions. These additions included the Company's participation in two IPOs. Conviviality Retail is a franchise retail business which trades under the Bargain Booze brand and listed on AIM in July 2013. Safestyle UK is a double glazing business with particular strength in the North of England which listed on AIM in early December 2013. Both companies came to the market at attractive valuations and generated returns of 67% and 55% respectively in their debut calendar year.  Despite these strong share price performances both stocks are still forecast to pay a dividend yield well in excess of 4.0% in their next financial year end.

The other new additions to the Smaller Companies Portfolio  were Domino Printing Sciences, the manufacturer of ink jet printing equipment and consumables; Hill & Smith, the manufacturer of infrastructure products used in the transport and utilities sectors; Interserve, the support services and construction company; Brammer, the value added business to business component distributor; Premier Farnell, the electronic component distributor; Marston's, the UK pub company and John Menzies, the provider of aviation support and newspaper distribution services.

There were no full disposals during the year however the holding in Silverdell was partially sold during the period and then subsequently written down to zero following the discovery of financial difficulties at one of its subsidiaries.  Approximately half of the holding was sold earlier in the year, locking in gains of over 70% on the book cost and significantly reducing the negative impact of the write down.

A number of existing positions were also topped up during the period with significant increases in the holdings of Berendsen, Cineworld, Electrocomponents and Primary Health Properties in particular.  In total £21.4m was invested in new and follow-on investments and £0.5m was generated from the partial disposal of Silverdell.

It is pleasing to report that of the thirty nine  stocks held at the end of the year only seven delivered a negative contribution to performance.  Strong share price performances were seen from the majority of the portfolio, with some of the highlights detailed below:

VP (+97.0%) - is a specialist equipment rental company engaged in the rental and sale of products to the civil engineering, rail, oil and gas exploration, construction, outdoor events, and industrial markets.  For the second year running VP was one of the strongest performers in the portfolio.

Secure Trust Bank (+85.0%) - is a UK retail bank focused on providing lending solutions to UK customers who may not otherwise be able to access credit. The bank is highly liquid; ending the year with robust capital and funding positions, and is successfully growing all lending portfolios and its current account product.  This is also the second year in succession Secure Trust Bank has featured amongst the portfolio's top performers. 

UK Mail (+109.4%) - is a parcel delivery business which continues to benefit from structural industry changes and the rapid growth in online retail in the UK.  Despite this strong share price performance market forecasts continue to predict a dividend yield in excess of 3% in the current financial year.

Acal (+70.1%) - is a European electronics supplier which made two acquisitions during the period as it continues to move up the value chain. The Company participated in the £6.1m cash placing used to finance the larger of these two acquisitions, investing £120,000.

Outlook for Smaller Companies Portfolio

The Investment Adviser believes the portfolio remains well positioned to outperform its benchmark.  The exposure to the UK consumer has been selectively increased during the period as confidence is gained in the UK recovery.  The continued strength of sterling and the impact on our international earners has also contributed to the greater domestic focus of the portfolio.  The Investment Adviser believes the resurgent IPO market will continue to be a source of new opportunities in 2014 and also that the portfolio remains well positioned to benefit from the long awaited improvement in M&A activity.

John McClure

Unicorn Asset Management Limited

The Income Portfolio

Over the last year the Income Portfolio provided a positive contribution to the performance of the Company whilst providing a high income. Overall bond markets suffered in 2013 with many bond funds struggling to provide a positive return as Federal Reserve tapering concerns intensified. In stark contrast, the Income Portfolio provided a very attractive return of over 12% (before management costs) dramatically outperforming comparative benchmarks, such as the Merrill Lynch Sterling Non-gilts Index.

Overweight exposures to Consumer Cyclical and Financial Sectors aided performance with strong specific contributions from holdings in Punch Taverns, Spirit Issuer, subordinated debt issues such as Barclays Bank Plc 4.875% Perpetual 2014, Nationwide 10.25% Core Capital Deferred Shares, as well as all asset management company issues and contingent convertible holdings. Underweight exposure to government bonds and utilities as well as the Income Portfolio's ability to avoid losses incurred in broader bond markets via the active management of duration further enhanced performance. We increased the bond duration towards the year end as government bond yields rose, although it is likely that the Income Portfolio will maintain less sensitivity to interest rate changes than the broader market for the foreseeable future.

Inflation fell during the year with the Consumer Price Index (CPI) falling from 2.7% to 2%. Three month LIBOR remained flat despite the Bank of England's Forward Guidance under new Governor, Mark Carney, there was an increasing expectation that an interest rate rise was drawing closer. The European Investment Grade Main Index, which represents the most liquid investment grade names tightened from 117 basis points (bps) to 70bps by the end of the year. However, the tightening in credit spreads only partially offset the rise in government bond yields with the ten-year gilt yield rising by over 1%

Over the year the Company's successful placing of shares resulted in the enlarged size of the Income Portfolio. Investments were made across a mix of existing holdings and new names. A new investment worth mentioning is Burford Capital Contingent Partly-Paid Preference Share Units (COPPS.) Burford Capital offers financing for corporate litigation, arbitration and other disputes. COPPS are the most senior investment in their capital structure and provide contingent capital equivalent to a bank revolving credit facility. When uncalled the Company receives 3% per annum on the full uncalled amount stepping up to a higher rate on any amounts called. Currently no amounts are called hence the holding represents a small weighting in the Income Portfolio.

Outlook

We believe 2014 will be another tough year for bond markets with the broader market having limited prospects for generating returns in excess of the current yield. However, a small, nimble bond mandate such as the Company's Income Portfolio is likely to be able to add significantly to total return, as it did in 2013, with a greater range of bonds to choose from and an ability to actively manage duration.  The major risks facing bond markets have changed, with a significant reduction in macroeconomic fears replaced by fear of the potential actions of central banks and the prospect of higher interest rates.

Default rates are likely to remain low despite further re-leveraging as issuers lock-in cheap borrowings. Investment grade leverage is at a seven year high but with interest cover ratios sufficient given the cost of borrowing undertaken. This leverage has subsequently resulted in net credit rating downgrades and when combined with lower secondary market liquidity this will curb further yield compression, with credit spreads already at a six year low.

Our current strategy is to position the Income Portfolio with greater sector diversification and a longer tail of holdings, but still to be active and aggressive in credit and duration versus peers, some of whom reflect the broader market. We suspect, due to negative net issuance and regulatory compliance, subordinated bank debt will continue to generate the highest excess returns. We expect a flattening in the yield curve during the next few years but for yields to rise across all durations.  
It is difficult to envisage an environment where duration outperforms credit, unless a severe liquidity tail risk event occurs.  We continue to keep the Income Portfolio highly liquid, enabling a flexible structure while overall bond market liquidity remains a concern.

Paul Smith

Premier Fund Managers Limited

SCHEDULE OF PRINCIPAL INVESTMENTS as at 31 December 2013
		NOMINAL		VALUATION		TOTAL
TOP 10 HOLDINGS		HOLDINGS				ASSETS
				GBP		%
Smaller Companies Portfolio
VP plc		466,414		3,106.317		3.92
RPC Group plc		450,000		2,655,000		3.35
Electrocomponents plc		940,000		2,618,840		3.31
Cineworld Group plc		673,539		2,547,661		3.22
Secure Trust Bank plc		83,009		2,407,261		3.04
Menzies (John) plc		330,000		2,336,400		2.95
Berendsen plc		249,014		2,309,605		2.92
Primary Health Properties		624,596		2,184,525		2.76
Hill & Smith  plc		413,766		2,132,964		2.69
Brewin Dolphin Holdings plc		680,506		2,075,543		2.62
				24,374,116		30.78
Income Portfolio
Real Estate Credit Preference Shares		550,000		577,500		0.73
Nationwide 10.25% CCDS/2049		5,000		573,165		0.72
GE Capital Funding 8% 2039		350,000		521,997		0.66
Credit Suisse 7.875% CoCo 2041		700,000		457,661		0.58
UK Treasury 1.25% Index Linked 2017		300,000		430,835		0.54
Lloyds 7.5884% CoCo 2020		400,000		423,096		0.53
Tritax Big Box Reit plc		400,000		409,000		0.52
SVG Capital plc 8.25% Convertible 2016		350,000		387,464		0.49
University of Cambridge 3.75% 17/10/2052 (75 Days)		400,000		382,744		0.48
Standard Life UK Smaller Companies 3.5% CULS CULSConvertible 2018		300,000		378,000		0.48
				4,541,462		5.73
TOTAL				28,915,578		36.50

SCHEDULE OF PRINCIPAL INVESTMENTS as at 31 December 2012
			NOMINAL		VALUATION		TOTAL
TOP 10 HOLDINGS			HOLDINGS				ASSETS
					GBP		%
Smaller Companies Portfolio
VP plc			466,414		1,576,479		4.45
James Halstead plc			245,500		1,473,000		4.16
Diploma plc			263,960		1,434,623		4.05
Lupus Capital plc			882,242		1,358,653		3.84
Castings plc			424,112		1,340,194		3.79
Consort Medical plc			171,171		1,321,440		3.73
Secure Trust Bank plc			78,009		1,201,339		3.39
Brewin Dolphin Holdings plc			580,506		1,193,520		3.37
RPC Group plc			300,000		1,191,000		3.36
British Polythene Industries plc			282,500		1,115,875		3.15
					13,206,123		37.29
Income Portfolio
GE Capital Funding 8% 2039			250,000		365,943		1.03
Credit Suisse 7.875% CoCo 2041			500,000		324,131		0.92
Greenwich Loan Income Fund Limited			625,000		320,313		0.90
Rabobank Nederland 6.875% 03/19/2020			350,000		316,375		0.89
Real Estate Credit Preference Shares NPV			300,000		301,500		0.85
Standard Life UK 3.5% CULS 231/03/2018			250,000		270,000		0.76
F&C Finance Plc 9% 20/12/2016			245,000		262,001		0.74
Invesco Leveraged High Yield Fund			425,000		261,375		0.74
Unite Group 6.125% 12/06/2020			250,000		254,000		0.72
Juridica Ord NPV			250,000		225,000		0.64
					2,900,637		8.19
TOTAL					16,106,759		45.48

MANAGEMENT REPORT

For the year ended 31 December 2013

A description of important events which have occurred during the financial period, their impact on the performance of the Company as shown in the Financial Statements and a description of the principal risks and uncertainties facing the Company is given in the Chairman's Statement, Investment Advisers' Reports, the Directors Report, the Audit Committee Report and the notes to the Financial Statements and is incorporated here by reference.

There were no material related party transactions which took place in the financial period.

The Board concluded that, after making enquiries, there is a reasonable expectation that the Company has adequate resources to continue its existence for the foreseeable future.  Thus it continues to adopt the going concern basis of accounting in preparing the annual financial statements.

Directors' Responsibility Statement

The Directors confirm to the best of their knowledge and belief:

(a)        The management report (comprising the Chairman's Statement, the Investment Advisers' Reports, Directors' Report and Audit Committee Report) includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces;

(b)       The financial statements, prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB), give a true and fair view of the assets, liabilities, financial position and profits of the Company; and

The annual report and accounts, taken as a whole; is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Helen Green

                                                Chairman

Nigel Ward

                                                            Director          

30 April 2014

Directors' Report

For the year ended 31 December 2013

The Directors have pleasure in presenting their business review, report and financial statements of the Company for the year ended 31 December 2013.

Principal Activities and Business Review

The principal activity of the Company is to carry on business as an investment company.  The Directors do not envisage any change in these activities for the foreseeable future. A description of the activities of the Company in the period under review is given in the Chairman's Statement above.

Business and Tax Status

The Company is a closed-ended investment company, incorporated with limited liability in Guernsey on 5 January 1999, registered number 34778. The Company operates under The Companies (Guernsey) Law, 2008, (the "Law") the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended and the Authorised Closed Ended Investment Scheme Rules 2008.

The Company's Ordinary Shares and ZDP Shares are traded on the London Stock Exchange ("LSE") with the Ordinary Shares having a premium listing and the ZDP Shares having a standard listing, as defined by the LSE. 

The Company's management and administration takes place in Guernsey and the Company has been granted exemption from income tax within Guernsey by the Administrator of Income Tax.  It is the intention of the Directors to continue to operate the Company so that each year this tax-exempt status is maintained.

Foreign Account Compliance Act ('FATCA)

FATCA requires certain financial institutions outside the United States ("US") to pass information about their US customers to the US tax authorities, the Internal Revenue Service (the "IRS"). A 30% withholding tax is imposed on the US source income and disposal of assets of any financial institution within the scope of the legislation that fails to comply with this requirement.  On 13 December 2013, the Intergovernmental Agreement between the United States and the States of Guernsey implementing FATCA was signed. 

On 22 October 2013 an Intergovernmental Agreement between the United Kingdom ("UK") Government and the States of Guernsey to implement a similar provision between the States of Guernsey and the UK was signed.   The Board of the Company is actively considering the implications of these agreements on the Company, and will take any necessary steps to ensure that the Company continues to comply with its obligations.

Investment Objectives

The Company's investment objectives are to provide the Company's shareholders with a high income and also the opportunity for capital growth.

Investment Policy

The Company's investments are held in two portfolios.  The Company's assets comprise investments in equities and fixed interest securities in order to achieve its investment objective. Approximately 70 per cent. to 80 per cent. of the Company's assets are invested in smaller capitalised United Kingdom companies, admitted to the Official List of the FCA and traded on the LSE or traded on AIM at the time of investment.  The Company also aims to enhance income for Ordinary Shareholders by investing approximately 20 per cent. to 30 per cent. of the Company's assets in high yielding instruments which are predominantly fixed interest securities but may include up to 15 per cent. of the Company's overall portfolio (measured at the time of acquisition) in high yielding investment company shares.

The proportion of the overall portfolio held in the Smaller Companies Portfolio and the Income Portfolio varies from day to day as the market prices of investments move.  The Directors retain discretion to transfer funds from one portfolio to the other and generally expect between 70 per cent. to 80 per cent. of the investments to be held in the Smaller Companies Portfolio.

While the Company's investment policy is to spread risk by maintaining diversified portfolios, there are no restrictions on the proportions of either of the portfolios which may be invested in any one geographical area, asset class or industry sector. However, not more than 7.5 per cent. of the Company's gross assets may be invested in securities issued by any one company as at the time of investment, save that (i) in respect of the Income Portfolio only, investments may be made in other investment funds subject only to the restriction set out in paragraph c of the section headed ''Investment Restrictions'' below; and (ii) in respect of the Smaller Companies Portfolio only, provided that not more than 10 per cent. of the Company's gross assets are invested in securities issued by any one company at any time, the 7.5 per cent. limit may be exceeded on a short term basis, with Board approval, where a company whose securities form part of the Smaller Companies Portfolio issues new securities (for example by way of a rights issue).

The Company's capital structure is such that the underlying value of assets attributable to the Ordinary Shares is geared relative to the rising capital entitlements of the ZDP Shares. The Company's gearing policy is not to employ any further gearing through long-term bank borrowing. Save with the prior sanction of ZDP Shareholders, the Company will incur no indebtedness other than short term borrowings in the normal course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares.

Investment Restrictions

For so long as required by the Listing Rules in relation to closed-ended investment companies, the Company has adopted the following investment and other restrictions:

a)         the Company will at all times invest and manage its assets in a way which is consistent with its object of spreading investment risk and in accordance with its published investment policy;

b)         the Company will not conduct any significant trading activity; and

c)         not more than 10 per cent. in aggregate of the value of the total assets of the Company at the time the investment is made will be invested in other listed closed-ended investment funds.  The Listing Rules provide an exception to this restriction to the extent that those investment funds have stated investment policies to invest no more than 15 per cent. of their total assets in other listed closed-ended investment companies.

Derivatives

The Company may invest in derivatives, money market instruments and currency instruments including contracts for difference, futures, forwards and options. These investments may be used for hedging positions against movements in, for example; equity markets, currencies and interest rates. In addition, these instruments will only be used for efficient portfolio management purposes. The Company will not use such instruments to engage in trading transactions. The Company will not maintain derivative positions should the total underlying exposure of these positions exceed one times adjusted total capital reserves.

Investment strategy

Smaller Companies Portfolio

The Smaller Companies Portfolio is invested predominantly in companies which at the time of investment are smaller capitalised UK companies. The Directors define smaller capitalised UK companies as those companies constituting the bottom 10% of the UK market by market capitalisation. This is the same measure that is used to select the constituents of the Numis Smaller Companies Index. The focus is on companies with experienced and well motivated management, products or services supplying growth markets, sound operational and management controls, good cash generation and a progressive dividend.

The Smaller Companies Portfolio is predominantly invested in securities which are admitted to the Official List of the FCA and traded on the London Stock Exchange or traded on AIM at the time of investment. There is no fixed allocation to any industry sectors and the Smaller Companies Portfolio is invested in a diversified spread of industry sectors, but has limited exposure to certain sectors which do not generally satisfy the requirement for good cash generation and progressive dividends.

Income Portfolio

The assets in the Income Portfolio comprise sterling denominated fixed interest securities, including corporate bonds, preference and permanent interest bearing shares, convertible securities, reverse convertible bonds, contingent convertible bonds, debentures and other similar securities and securities issued by open-ended bond funds. However, not all of these investments are necessarily held in this portfolio at any one time. The Income Portfolio may also contain higher yielding shares of other investment companies, including property investment companies, not exceeding 15 per cent. of the overall portfolio at the time of investment. It may also contain instruments denominated in other currencies in respect of which the currency exposure is generally hedged.

There is no fixed allocation between unrated investments (being those which have not been given a credit rating), investment grade securities and non-investment grade securities. The proportion of the overall portfolio held in the Smaller Companies Portfolio and the Income Portfolio varies from day to day as the market prices of investments move. The Directors retain discretion to transfer funds from one portfolio to the other and generally expect between 70 per cent. to 80 per cent. of the investments to be held in the Smaller Companies Portfolio.

Management Fees

The management fee is 0.7% per annum of total assets subject to a minimum annual fee of £100,000 and the Investment Manager is also potentially entitled to a performance fee of 15% of any excess of the NAV per Ordinary Share (together with any dividends paid by reference to the relevant period) over the benchmark NAV per Ordinary Share.  A performance fee of £501,345 was payable to the Investment Manager at the year end 2013.

Going Concern

In the opinion of the Directors the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the financial statements have been prepared on a going concern basis.

The Directors have arrived at this opinion by considering, inter alia, the following factors:

·           the Company has sufficient liquidity to meet all ongoing expenses. The Company has net current   assets of £2,552,082 at the year end. In addition the Board regularly reviews the cash flow of the Company and is confident that the Company will have sufficient resources to meet all future obligations.

·      both the Income and Smaller Companies Portfolios consist of listed investments which are readily realisable and therefore the Company has sufficient resources to meet its liquidity requirements;

·      as at 31 December 2013, the Company had no borrowings other than the ZDP Shares which as explained in Note 13 will have a final capital entitlement on the 31^st January 2017. The Company is not therefore under any obligation to repay any borrowing at the year end; and

·      in accordance with the Company's Articles of Incorporation shareholders will not have an opportunity to vote on the Company's continuation until August 2016.

Gearing Policy

The Company's gearing policy is not to employ any gearing through long-term bank borrowing. Save with the prior sanction of the ZDP Shareholders the Company will incur no indebtedness other than short term borrowings in the normal course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares.

Results and Dividends

The results attributable to Ordinary Shareholders for the period are shown later in this document.  The Company made a revenue return for the period of 13.42   pence (2012: 12.33 pence) per Ordinary Share and a capital return of 98.31 pence (2012: 74.79 pence) per Ordinary Share.

A bar chart on earlier in this report displays the history of dividend payments.

	Payment date	Dividend per share (pence)
First interim	2 April 2013	3.00
Second interim	28 June 2013	2.00
Third interim	28 June 2013	1.00
Fourth interim	30 September 2013	3.00
Fifth interim	27 December 2013	3.00

On 28 March 2014 an interim dividend of 3.00p per share was paid.

Principal risks

The Board has an on-going process in place for identifying, evaluating and managing the significant risks faced by the Company.  The responsibility for carrying out the risk review is undertaken by the Audit Committee, which meet at least twice per year. The results of the risk evaluations are then reported back to the Board. The last risk assessment took place on 19 November 2013.  This process of review has been in place since 2011 and is in line with the Association of Investment Companies ("AIC") Code of Corporate Governance (the "AIC Code").

Risks of the Structure of the Company and gearing

The Company's business could be materially and adversely affected by a number of risks.  External factors to the Company may either adversely or favourably affect the volatility and liquidity of the Smaller Companies and Income Portfolios, as well as their values.  These can be caused by economic conditions, changes to tax laws, competition and a number of other factors.

Investors holding either Ordinary Shares or ZDP Shares should have carefully considered whether these investments, given the risks attached, are suitable for them.  Investors in ZDP Shares should be aware that interest rate movements will affect the value of their investment. Further risks include the lower level of regulatory protection than applies to premium listed shares.

Holders of Ordinary Shares should be aware that the issue during 2011 of ZDP Shares to replace the existing bank borrowing facility increased the implicit level of gearing and thus exaggerated the likely impact of adverse movements in the value of the Company's investments.  Furthermore, since the policy of the Company for valuation purposes, is not to amortise the increase in its ultimate liability to ZDP Shareholders, the amount eventually realised by Ordinary shareholders on the liquidation or winding up of the Company will be adversely impacted by the prior redemption of the ZDP Shares.

The Company's future performance depends on the success of its strategy, the skill and judgement of the Investment Manager and of the Investment Advisers.  The departure of key personnel of either provider may have an adverse effect on the performance of the Company.  

The Company may use derivatives to hedge exposure to currency risk and interest rate risk.  No assurance can be given that any hedging strategies which may be used by the Company will be successful under all or any market conditions and, if unsuccessful, could have an adverse effect on the Company's financial position.

Risks associated with investments held in the Smaller Companies Portfolio

Investing in smaller companies, including AIM companies and unlisted companies, can carry greater risks than those usually associated with larger capitalised companies.  Liquidity, in particular, can be lower in such shares with a risk of reducing the underlying asset value of the portfolio. Such companies, being less diversified, may be more vulnerable to weaknesses in the markets they serve, and may be less well placed than larger companies to secure financial support if required.

Risks associated with investments held in the Income Portfolio

The Income Portfolio primarily contains fixed interest securities.  Bond prices and interest rates are inversely correlated.  Thus, when interest rates increase, the price of a bond with a fixed coupon will decline.  Alternatively, when interest rates decline, the price of a bond with a fixed coupon will increase.  Therefore, interest rate movements are carefully monitored by the Investment Adviser, but when interest rates rise or credit ratings decline losses are probable.

The Income Portfolio may contain higher yielding investment company shares (including shares of split capital investment trusts) and bonds (including reverse convertible bonds and contingent convertible bonds).

As a result of the underlying gearing in some investment company shares, any increase or decrease in the value of such shares might magnify movements in their net asset values and consequently affect the value of the Income Portfolio accordingly.  In accordance with the Listing Rules, where appropriate, the Company makes Stock Exchange announcements detailing its holdings in other UK listed investment companies which themselves do not have a stated investment policy to invest no more than 15% of their gross assets in other UK listed investment companies (including investment trusts).

Dividend levels

Dividends paid on the Company's Ordinary Shares rely on receipt of interest payments and dividends from the securities in which the Company invests.  The Company's revenue levels are monitored on a regular basis by the Board and the Investment Advisers.

Currency risk

The majority of the Company's assets and all of its liabilities are denominated in sterling.  To the extent that the Company has fixed interest investments denominated in foreign currency, this exposure is likely to be hedged back to sterling. Therefore, there is unlikely to be any significant direct currency risk.

Market price risk

Since the Company invests in financial instruments, market price risk is inherent in these investments.  In order to minimise this risk, a detailed analysis of the risk/reward relationship of each investee company is undertaken by the Investment Advisers prior to making investments.

Interest rate risk

The Company's investment portfolios include investments bearing interest at fixed rates.  Generally when interest rates rise the market prices of fixed interest securities fall and when interest rates fall the prices of fixed interest securities rise.  The Company, through its Income Portfolio, is exposed to movements in interest rates.  The Company has fixed rate leverage through its ZDP shares.  Replacing this leverage after the current ZDP issue has redeemed might involve the Company paying a higher accrual rate on an issue of new ZDP Shares if interest rates have risen.

Liquidity risk

Liquidity risk is the risk that the Company will encounter in realising assets or otherwise raising funds to meet financial commitments. Some of the Company's investments in smaller company equities and in certain bond issues may have relatively low levels of daily turnover such that it might take several days or even weeks to sell a holding into the market.

Discount volatility

Being a closed-end fund, the Company's shares may trade at a discount or premium to their NAV.  The magnitude of this discount or premium fluctuates daily and can vary significantly.  Thus, for a given period of time, it is possible that the market price could decrease despite an increase in the Company's NAV.  The Directors review the discount levels regularly.  The Investment Advisers actively communicate with the Company's major shareholders and potential new investors, with the aim of managing discount levels.

The Ordinary Shares are geared by the ZDP Shares and should be regarded as carrying above average risk since a positive NAV for the Ordinary Shareholders will be dependent upon the Company's assets being sufficient to meet those prior entitlements of the holders of ZDP Shares.

Ordinary Shareholders do not have a right for their Ordinary Shares to be redeemed and those Ordinary Shareholders wishing to realise their investment will be required to dispose of their Ordinary Shares on the stock market.

Market liquidity in the shares of companies such as the Company is less than market liquidity in shares issued by larger companies traded on the LSE.  There can be no guarantee that a liquid market will exist for the Ordinary Shares or the ZDP Shares which may prevent any holder of Ordinary Shares or ZDP Shares from disposing of such shares at a price or at such time that they wish.

The market value of ZDP Shares will be affected by changes in general interest rates, with upward movements in interest rates likely to lead to reductions in the market value of ZDP Shares.

Although the holders of ZDP Shares have a prior entitlement to the other assets of the Company (after payment of its liabilities) on a winding-up, if the gross assets of the Company fall at a rate which erodes the cover to a ratio of less than 1 over the planned life of the ZDP Shares, this would result in a lower payment than the Fixed Capital Entitlement on the ZDP Repayment Date.

In certain circumstances, such as a major fall in the capital value of the Portfolios such that the Final Capital Entitlement of the ZDP Shares is significantly uncovered but where the Company's Portfolios are still generating revenue, the interests of ZDP Shareholders and the Ordinary Shareholders may conflict.  In such circumstances, the Directors may find it impossible to meet fully, both sets of expectations and so will need to act in a manner which they consider to be fair and equitable to both Ordinary Shareholders and ZDP Shareholders but having regard to the entitlements of each class of shares.

Key Performance Indicators and Analysis of Company's Performance

At each quarterly board meeting the Directors consider a number of performance measures in order to assess the Company's success in achieving its objectives. The key areas reviewed are as follows:

·   Review of the history of the NAV.

·           Receive an update on the market activity of the Ordinary Shares and the ZDP Shares by Numis Securities Limited, the Company's corporate broker.

·           Receive updates on the performance of both the Income Portfolio and the Smaller Companies' Portfolio from the Investment Advisers.

·           Consideration of the quarterly accounts and revenue projection.

On-going Charges and Total Expense Ratio

The annual on-going charges figure for the year was 1.84% (2012: 2.24%).  This figure which has been prepared in accordance with the recommended methodology provided by the Association of Investment Companies and represents the annual percentage reduction in shareholder returns as a result of recurring operational expenses excluding the performance fee. A performance fee of £501,345 was payable to the Investment Manager at the year end 2013.

The total expense ratio (TER) of the Company is calculated as a percentage of costs against total assets at the year end and is capped at 1.5%. For 2013 the TER was 0.84% (2012: 1.24%). The calculation of costs excludes performance fees, non-routine administration and professional fees. The net management fee charged in 2013 was £385,296.

Share Price Rating and Discount Management including information on treasury shares

At the Company's Extraordinary General Meeting held on 24 April 2013, the Company was authorised to issue 14 million new Ordinary Shares and 19 million new ZDP Shares.  At the General Meeting on 21 August 2013 the Directors obtained shareholder approval to buy back up to 14.99% of each class of Shares in issue and they intend to seek annual renewal of this authority from shareholders at each future general meeting to be held under section 199 of the Law. In accordance with the Law any share buy backs will be affected by the purchase in the market for cash at a price below the prevailing NAV of the relevant class of Shares where the Directors believe such a purchase will enhance shareholder value. Shares which are purchased may be cancelled or held in treasury.

The Directors obtained authority to sell from treasury Ordinary Shares at a discount to the prevailing NAV per Ordinary Share, provided that the authority conferred was limited to issues or sales of Ordinary Shares at the same time as ZDP Shares are issued or sold from treasury at a premium, such that, the combined effect of the issue or sale of Ordinary Shares and the issue or sale of ZDP Shares at a premium is that; (i) the NAV per Ordinary Share is thereby increased; and (ii) gearing is not thereby increased. This statement complies with LR 9.8.6 (4) (a).

Directors

The Directors all of whom served throughout the year ended 31 December 2013 were as follows:

Helen Green

Nigel Ward

David Warr

At the General Meeting held on 21 August 2013 Helen Green was re-elected as Director and continued to be Chairman of the Company, and David Warr was elected as Director.

All three Directors of the Board are non-executive Directors and are considered independent of the Investment Manager.

Both Helen Green and David Warr are chartered accountants and have extensive non executive director experience.  Further details of the qualifications and suitability of each of the director's appointments are as follows:- 

Helen Foster Green (Chair)

Helen joined the Company in January 2007 and has been Chairman of the Company since 22 August 2012. She was re-elected as Chairman of the Company in August 2013.  Helen is a chartered accountant. She has been employed by Saffery Champness, a top 20 firm of chartered accountants, since 1984.  She qualified as a chartered accountant in 1987 and became a partner in the London office in 1997.  Since 2000 she has been based in the Guernsey office where she is client liaison director responsible for trust and company administration. Helen serves on the boards of both London Stock Exchange listed companies and AIM listed companies*. Helen is a resident of Guernsey.

John Nigel Ward

Nigel joined the Company in December 2011.  Nigel has 40 years experience of international investment markets, credit and risk analysis, portfolio management, corporate and retail banking, corporate governance, compliance and the managed funds industry gained at Nat West, TSB Bank, Baring Asset Management and Bank Sarasin. Nigel is a full-time non-executive director (NED) serving on a number of company boards which have London Stock Exchange or Channel Island Securities Exchange listings.* His NED experience includes private equity, distressed debt, European SME private debt, ground rents, real estate, agricultural land, student accommodation, commodities, equity income and UK activist. He is a founding Commissioner of the Guernsey Police Complaints Commission, an Associate of the Institute of Financial Services, a member of the Institute of Directors and holder of the IoD Diploma in Company Direction. Nigel is a resident of Guernsey.

David John Warr

David joined the Company in August 2012.  David is a Fellow of the Institute of Chartered Accountants in England and Wales having qualified as a chartered accountant in 1976.  In 1981 David was appointed a partner in Reads & Co. a Guernsey based firm of chartered accountants, which he helped develop into a more broadly based financial services business leading up to its sale at the end of 1998.  David's experience at Reads & Co. included audit, trust and company administration.  David now acts as a non-executive director on a number of UK Listed companies* whilst combining those responsibilities with charitable work most noticeably as Vice-Chairman of the Guernsey Community Foundation LBG.  David is a resident of Guernsey.

*Details of the Directors' other directorships for listed companies can be found below.

Conflicts of Interest

None of the Directors nor any persons connected with them had a material interest in any of the Company's transactions, arrangements or agreements at the date of this report and none of the Directors has or had any interest in any transaction which is or was unusual in its nature or conditions or significant to the business of the Company, and which was effected by the Company during the reporting period.

At the date of this report, there are no outstanding loans or guarantees between the Company and any director.

Substantial Shareholdings

There were no substantial interests to be disclosed as at 28 April 2014 the latest practicable date for disclosure in this report.

Investment Management and Administration

Management Agreement

The Board is responsible for the determination of the Company's investment policy and has overall responsibility for the Company's day-to-day activities.  The Company has, however, entered into a Management Agreement with PAMG Ltd, a wholly-owned, Guernsey incorporated subsidiary of Premier Asset Management Limited.  PAMG Ltd receives a management fee of 0.7% per annum of total assets subject to a minimum fee of £100,000 calculated monthly and payable quarterly in arrears, out of which it pays fees to the Investment Advisers.  PAMG Ltd is also paid a shareholder communication and support fee, currently £3,100 for the twelve months from 1 April 2013 to 31 March 2014. PAMG Ltd is also potentially entitled to a performance fee as set out later in this report.  The Management Agreement may be terminated by either party on 12 months' written notice.

Under separate Investment Adviser Agreements, PAMG Ltd has delegated certain of its duties and responsibilities to PFM Ltd and Unicorn Ltd, in relation to the Income Portfolio and Smaller Companies Portfolio respectively, as Investment Advisers who are responsible on behalf of PAMG Ltd for the identification and analysis of investments meeting the investment objectives and strategy of the Company.  PFM Ltd and Unicorn Ltd are authorised and regulated by the FCA.

The Board keeps under review the performance of the Investment Manager and the Investment Advisers.  In the opinion of the Directors the continuing appointment of the Investment Manager on the terms agreed is in the interest of shareholders as a whole, due to the experience and proven track record of the fund management team in the chosen markets.  The Directors consider the investment performance of the Company is satisfactory relative to the markets in which the Company invests.

A list of the top ten holdings is shown in this report and is also included in the monthly fund factsheet, available on the Company's website.

In accordance with principle 21 of the Association of Investment Companies Code of Corporate Governance, if further details regarding the full portfolio listings are required for either the Income Portfolio or the Smaller Companies Portfolio a request can be made to JTC Fund Managers (Guernsey) Limited, full contact details are set out at the end of this document.

Administration Agreement

Under the terms of the Management Agreement, the Investment Manager is responsible for, amongst other things, providing administration and secretarial services to the Company.  With the consent of the Company, the Investment Manager has delegated the provision of certain administrative and secretarial services to JTC Fund Managers (Guernsey) Limited (formerly known as Anson Fund Managers (Guernsey) Limited) (the "Administrator" and "Company Secretary") pursuant to an Administration Agreement.  The Administrator carries out the general secretarial functions required by the Law and ensures that the Company complies with its continuing obligations as a company listed on the Official List of the FCA.  The Administrator also carries out the Company's general administrative functions such as the calculation of NAV, calculating the performance of the Company's investments and the maintenance of accounting records.  The Administration Agreement is terminable by either party on giving not less than three months' written notice.

Payment of Suppliers

It is the Company's payment policy to obtain the best possible terms for all business and, therefore, there is no consistent policy as to the terms used.  The Company agrees with its suppliers the terms on which business will be transacted, and it is the Company's policy to abide by those terms.

Segmental Reporting

The Company has two reportable segments, being the Income Portfolio and the Smaller Companies Portfolio.  Each of these portfolios is managed separately, entail different investment objectives and contain investments in different products.  A more comprehensive disclosure can be found within note Error! Reference source not found.of the Notes to the Financial Statements.

Board Responsibilities/Corporate Governance

On 1 October 2013 the Company became a member of the AIC, and on 19 November 2013 the Company formally resolved to adopt and comply with the AIC Code.

The Financial Reporting Council has confirmed that an AIC member which reports against the AIC Code and who follows the AIC Corporate Governance Guide for Investment Companies (the "AIC Guide"), will be meeting their Listing Rule obligations in relation to reporting against The UK Code of Corporate Governance (the "UK Code").

Statement of Compliance with the UK Code

The Board of the Company has considered the principles and recommendations of the AIC Code by reference to the AIC Guide.  The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to the Company.

The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the UK Code), will provide better information to shareholders.

Due to the Ordinary Shares having a premium listing on the LSE, the Company has to comply with Listing Rule 9.8.6(5) which requires the Company to apply the provisions of the UK Code to the extent that they are considered relevant to the Company.  The Directors place a high degree of importance on ensuring that high standards of corporate governance are maintained within the Company.

The AIC Code is available for download from the AIC website: www.theaic.co.uk.

With effect from 1 January 2012, the Company was also required to comply with the Guernsey Financial Services Commission Financial Sector Code of Corporate Governance (the "Guernsey Code").  As the Company reports under the AIC Code it is deemed to meet the Guernsey Code and the Board has undertaken to evaluate its corporate governance compliance on an on-going basis.

The Company has complied with the recommendations of the AIC Code and the relevant provisions of the UK Code throughout the year, except as set out below.

The UK Code includes provisions relating to:

·      the role of the chief executive;

·      executive Directors' remuneration; and

·      the need for an internal audit function.

For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to the Company, being an externally managed investment company.  In particular, all of the Company's day to day management and administrative functions are outsourced to third parties.  As a result, the Company has no executive Directors, employees or internal operations.  The Company therefore has not reported further in respect of these provisions.

Other areas of non-compliance with the AIC Code by the Company, and the reasons therefore, are as follows:

There is no Senior Independent Director.  This is not in accordance with the recommendations in principle 1 of the AIC Code but is felt to be appropriate for the size and nature of the Company.

The non-executive Directors of the Company do not meet without the Chairman present to appraise the Chairman's performance. This is not in accordance with principle 1 of the AIC Code.  However, the Company has a Chairman'sPerformance Evaluation Questionnaire which is completed by all Directors (other than the Chairman) and is analysed annually to facilitate the review of the Chairman's performance.

As per the Company's Articles of Incorporation, the Directors are not subject to re-election by the Shareholders except in their first year of appointment, nor are they appointed for specific terms as required by these provisions, as this is not felt to be appropriate for the size and nature of the Company.  However, the Board has determined in order to facilitate good corporate governance practice in line with principle 2 of the AIC Code, each director will offer themselves for re-election every 6 years. As a result of this principle the Directors were elected as follows:

Helen Green was re-elected in 2013.

David Warr was elected in 2013.

Nigel Ward will be eligible for re-election in 2018.

In accordance with principle 5 of the AIC Code the following details are of all other public Company directorships and employment held by each director and shared directorships of any commercial company held by two or more Directors:

Helen Green

·   Henderson Diversified Income Limited - Full Listing*

·   Tamar European Industrial Fund Limited - Full Listing

·   John Laing Infrastructure Fund Limited - Full Listing

·   Advance Frontier Markets Fund Limited - AIM Listed **

·   Landore Resources Limited - AIM Listed

David Warr

·     Schroder Real Estate Investment Trust Limited - Full Listing

·     Threadneedle UK Select Trust Limited - Full Listing.

·     Breedon Aggregate Limited - AIM Listed

·     Crystal Amber Fund Limited - AIM Listed - Resigned 7 March 2014.

Nigel Ward

·     Crystal Amber Fund Limited - AIM Listed

*Full Listing' means listed on the Main Market of the London Stock Exchange

**'AIM Listed' means listed on the Alternative Investment Market of the London Stock Exchange

The Company does not comply with principle 9 of the AIC Code as it does not have a formal policy on diversity, however the Company has established a Nomination Committee that adheres to formal terms of reference and which is responsible for identifying any gaps on the Company's board that need to be filled and when considering candidates has due regard to the benefits of diversity on the board and amongst other considerations this includes gender.

Board Responsibilities

The Board comprises three non-executive Directors, who meet at least quarterly to consider the affairs of the Company in a prescribed and structured manner.  All Directors are considered independent of the Investment Manager for the purposes of the AIC Code and Listing Rule 15.2.12A.  Biographies of the Directors appear below, demonstrating the wide range of skills and experience they bring to the Board. 

The Directors, in the furtherance of their duties, may take independent professional advice at the Company's expense, which is in accordance with principle 13 of the AIC Code.  The Directors also have access to the advice and services of the Company Secretary through its appointed representatives who are responsible to the Board for ensuring that the Board's procedures are followed and that applicable rules and regulations are complied with. To enable the Board to function effectively and allow directors to discharge their responsibilities, full and timely access is given to all relevant information.

In line with principle 19 of the AIC Code the Investment Advisers communicate with shareholders and the Chairman and are available to communicate and meet with major shareholders.

None of the Directors has a contract of service with the Company.

During the year ended 31 December 2013 the number of Board meetings attended were as follows:

	Quarterly Board meetings	Ad hoc Board Meetings	Committee Meetings
Helen Green	4(4)	14(17)	10 (12)
Nigel Ward	4(4)	14(17)	8(12)
David Warr	4(4)	17(17)	8(12)

The figures in brackets indicate the number of meetings held in the period in respect of which the individual was a Board member.

Audit Committee

In accordance with the AIC Code an Audit Committee has been established consisting of David Warr, Helen Green, and Nigel Ward. David Warr is the Chairman of the Audit Committee.  It has been decided that the entire Board should fulfil the role of the Audit Committee and that the Chairman of the Company can be a member of the Audit Committee.  The size and structure of the Company mean that it is unnecessarily burdensome to establish an Audit Committee that does not comprise all of the three non executive Directors of the Company. The qualifications of the Directors are included within the biographies below.

A full report regarding the Audit Committee can be found later in this document.

Nomination Committee

In accordance with the AIC Code, a Nomination Committee has been established consisting of David Warr, HelenGreen and Nigel Ward. David Warr has been appointed Chairman.  Due to the size of the Company the Board consider that it would be overly burdensome to establish a separate Nomination Committee that does not comprise all three non executive Directors of the Company. The qualifications of the Directors are included within the biographies later in this report.  The Nomination Committee meets at least once a year in accordance with the terms of reference and reviews, inter alia, the structure, size and composition of the Board and to make recommendations to the Board evaluating candidates from a wide range of backgrounds through open advertising.  Whilst considering the composition of the Board, the Nomination Committee will be mindful of diversity, inclusiveness and meritocracy and, in considering a new candidate, the Nomination Committee will apply comparative analysis of candidates' qualifications and experience, applying pre-established clear, neutrally formulated and unambiguous criteria to determine the most suitable candidate sought for the specific position.

Other duties of the Nomination Committee are to give full consideration to succession planning for Directors, to regularly review the leadership needs of the non-executive Directors, ensure non-executive Directors receive a formal letter of appointment and to review the results of the Board's performance evaluation process.  The terms of reference of the Nomination Committee are available from the Administrator on request.

Remuneration and Management Engagement (RME) Committee

The RME Committee consists of, Nigel Ward, David Warr and Helen Green.  Nigel Ward has been appointed Chairman of the RME Committee. Due to the size of the Company the Board consider that it would be overly burdensome to establish a separate RME Committee that does not comprise all three non executive Directors of the Company. The qualifications of the Directors are included within the biographies later in this document. The RME Committee shall meet at least once a year to determine and agree with the Board the framework for the remuneration of the Company's Chairman, Directors and service providers, taking into account remuneration trends and all other factors which it deems necessary.  The RME Committee also reviews all contractual terms of third parties to ensure their compliance.

The terms of reference of the RME Committee are available from the Administrator on request.

Details of the Directors' remuneration can be found in the notes to the accounts.

Internal Control and Financial Reporting

The Board is responsible for establishing and maintaining the Company's systems of internal control ensuring that they are designed to meet the particular needs of the Company and the risks to which it is exposed, and by their very nature provide reasonable, but not absolute, assurance against material misstatement or loss.  The key procedures which have been established to provide effective internal control are as follows:

Investment advice is provided by PFM Ltd and Unicorn Ltd under Investment Adviser Agreements.  The Board is responsible for setting the overall investment policy and monitors the actions of the Investment Advisers at regular board meetings.  Both PFM Ltd and Unicorn Ltd provide the Board with updates at each quarterly board meeting and at any other time that the Board requests.

Administration and company secretarial duties of the Company are performed by JTC Fund Managers (Guernsey) Limited (JTC Limited) (formerly known as Anson Fund Managers Limited).

Registrar duties are performed by Anson Registrars Limited.

Custody of assets is undertaken by BNP Paribas Trust Company (Guernsey) Limited.

The duties of investment management, accounting and the custody of assets are segregated.  The procedures of the individual parties are designed to complement one another.

The Directors of the Company clearly define the duties and responsibilities of their agents and advisers.  The appointment of agents and advisers is conducted by the Board after consideration of the quality of the parties involved; the Board monitors their on-going performance and contractual arrangements.  A detailed review of the main service providers is undertaken by the RME Committee and their findings are reported to the Board.

Mandates for authorisation of investment transactions and expense payments are set out by the Board.

The Board reviews detailed financial information produced by the Investment Advisers and the Administrator on a regular basis.

The Board is provided, on a quarterly basis, with a Compliance Report produced by a specialist Compliance and Legal department at PAM Ltd.  The monitoring programme ensures that all activities of PFM Ltd, for the year under review, have been in accordance with both internal procedures and with FCA principles for firms and individuals.  The Compliance team also make regular external visits to both Unicorn Ltd and JTC Limited, the latest visits being carried out in March 2014 for JTC Limited and February 2014 for Unicorn Ltd.  The Secretary provides a report at each quarterly Board meeting which highlights any areas of non compliance with the Listing Rules and the Law.  The Board has access, at all times, to all relevant compliance personnel.

The Company does not have an internal audit department.  All the Company's management and administration functions are delegated to independent third parties and it is therefore felt there is no need for the Company to have an internal audit facility.

Relations with Shareholders

All holders of Ordinary Shares in the Company have the right to receive notice of, and attend the general meetings of the Company.  The holders of ZDP Shares have the right to receive notice of all general meetings but only have the right to attend and vote if the business of the meeting proposes a resolution which will vary, modify or abrogate any of the special rights attached to the ZDP Shares.

At each general meeting of the Company the Board and the Investment Advisers are available to discuss issues affecting the Company.  This is in accordance with principle 19 of the AIC Code.  Only Ordinary Shares carry full voting rights, holders of ZDP Shares are entitled to vote only on issues affecting their share class. The primary responsibility for shareholder relations lies with PFM Ltd. However, the Directors are always available to enter into dialogue with shareholders and the Chairman is always willing to meet major shareholders as the Company believes such communication to be important.

Anti Bribery and Corruption Policy

The Company adopted a zero tolerance policy towards bribery and is committed to carrying out business fairly, honestly and openly.

Voting and Stewardship code 

The Investment Manager is committed to the principles of the Financial Reporting

Council's (FRC's) UK Stewardship Code (the 'Code') and this also constitutes the disclosure of that commitment required under the rules of the FCA (Conduct of Business Rule 2.2.3)

This policy has been revised in line with the changes made to the UK Code which came into effect on 1 October 2012. This policy is reviewed annually.

Annual General Meeting and Class Meeting

The notice of the Company's forthcoming annual general meeting (AGM) to be held pursuant to section 199 of the Law is set out at the end of this report. Resolutions relating to the following items of special business will be proposed at that meeting:

Further issues of shares

At the extraordinary general meeting of the Company held on 24 April 2013, Shareholders voted in favour of resolutions authorising the Company to issue up to 14 million new Ordinary Shares and up to 19 million new ZDP Shares pursuant to a placing programme (the "Placing Programme").  The Placing Programme was proposed by the Company to enable it to satisfy demand for its shares as well as to increase the size of the Company. These authorities expire at the forthcoming annual general meeting and, accordingly, the Directors are seeking to renew and extend these authorities.

Ordinary Shares

In accordance with the Law, the issue of Ordinary Shares requires the approval of Ordinary Shareholders in general meeting. Resolution 3 will be proposed to give the Directors authority to issue up to 30,000,000 Ordinary Shares (being 182.17 per cent. of the issued Ordinary Shares at the date of this document, excluding treasury shares). The Board will use this authority to issue new Ordinary Shares in response to market demand, on an ad hoc basis or by way of a series of placings. This authority will expire (unless renewed) at the annual general meeting to be held in 2015.  The new Ordinary Shares will rank pari passu with the existing Ordinary Shares in all respects (save for any dividends or other distributions declared, made or paid on the Ordinary Shares by reference to a record date prior to the allotment of the relevant new Ordinary Shares).

The rights of the ZDP Shares permit the Board to issue further Ordinary Shares without the approval of existing ZDP Shareholders only if the Cover Test is met or if the Cover is otherwise increased by such issues. The Directors will only issue new Ordinary Shares in circumstances where either the Cover Test is met or where Cover is otherwise increased by any further issues of new Ordinary Shares when taking into account the issue of new ZDP Shares at the same time. Accordingly, the Directors do not require the consent of ZDP Shareholders to issue further Ordinary Shares in the circumstances described above.

ZDP Shares

In accordance with the Law, the issue of ZDP Shares requires the approval of Ordinary Shareholders in general meeting. At the AGM, Resolution 4 will be proposed to give the Directors authority to issue up to 40,269,475 new ZDP Shares (being 182.17 per cent. of the issued ZDP Shares at the date of this document, excluding treasury shares). The Board will use this authority to issue new ZDP Shares in response to market demand, on an ad hoc basis or by way of a series of placings. This authority will expire (unless renewed) at the annual general meeting to be held in 2015. 

As the new ZDP Shares issued will rank pari passu in all respects with the existing ZDP Shares, the Company requires the authority of ZDP Shareholders at a separate class meeting prior to the issue of any further ZDP Shares. The notice of class meeting is set out later in this document.

The Directors will only issue new ZDP Shares in circumstances where the Cover Test is met or where Cover is maintained or is otherwise increased, in each case, immediately following any such issue. It is likely that this will be achieved by issuing new ZDP Shares in conjunction with the issue of new Ordinary Shares, thereby increasing Cover for ZDP Shareholders and increasing the NAV of the Company for the benefit of Ordinary Shareholders.

Application will be made to the UK Listing Authority for admission of any new Ordinary Shares and new ZDP Shares issued to the Official List (a premium listing in the case of the new Ordinary Shares and a standard listing in the case of the new ZDP Shares). Application will also be made to the London Stock Exchange for the new Ordinary Shares and the new ZDP Shares issued to be admitted to trading on the London Stock Exchange's main market for listed securities. It is expected that admission will become effective and that unconditional dealings in the new Ordinary Shares and the new ZDP Shares will commence on the London Stock Exchange four Business Days following the Board's resolution to issue such shares. The new Ordinary Shares and the new ZDP Shares may be issued in certificated or uncertificated form.

The Company may, depending on the extent of any issuance, be required to publish a new prospectus under the Prospectus Rules in order to enable it to issue new Ordinary Shares and new ZDP Shares. This will incur a cost which the Board will take into account in considering the Cover following any issues of new Ordinary Shares and new ZDP Shares.

Authority to issue or sell new Ordinary Shares at a discount to NAV

The issue or sale of new Ordinary Shares at prices representing a discount to NAV per Share (other than on a pre-emptive basis) is only permitted under the Listing Rules if Shareholders have authorised such issues. Accordingly, Resolution 5 to be proposed at the AGM seeks Ordinary Shareholder approval for the issue or sale of Ordinary Shares at a discount to the prevailing NAV per Ordinary Share.

The Board is proposing to seek such an authority from existing Ordinary Shareholders on the basis that it will only to be utilised in the circumstances in (i) and (ii) below:

(i)         where new ZDP Shares are issued at the same time at a premium to NAV such that the combined effect of the issue of both new Ordinary Shares at a discount to NAV and the issue of new ZDP Shares at a premium to NAV is that the NAV per Ordinary Share is increased; and

(ii)        where there is no increase in gearing.

This power will expire (unless renewed) at the annual general meeting in 2015.

Disapplication of pre-emption rights

In connection with the proposals to issue and sell new Ordinary Shares referred to above, pursuant to the Listing Rules, the Company is required to seek Ordinary Shareholder approval to issue and sell from treasury Ordinary Shares otherwise than pro rata to existing Ordinary Shareholders. Resolution 6 to be proposed at the AGM is seeking Ordinary Shareholder approval for the disapplication of pre-emption rights in connection with such issues or sales from treasury.

The power to disapply pre-emption rights in relation to the issue of new Ordinary Shares will be limited to 30,000,000 Ordinary Shares in aggregate (being 182.17 per cent. of the issued Ordinary Shares at the date of this document, excluding treasury shares). This power will expire (unless renewed) at the annual general meeting in 2015.

Use of treasury shares

The Company intends to place with Numis up to 25 per cent. of the Ordinary Shares and 25 per cent. of the ZDP Shares in issue on the date of the AGM, each at prices equal to the respective latest published NAV per Share on the date of such placing. Pursuant to the terms of a repurchase agreement to be entered into between the Company and Numis, Numis will immediately then sell the same number of shares back to the Company at the same price for the Company to then hold in treasury. The Company will not place any shares with Numis with the intention of immediately repurchasing such shares unless both the Company and Numis have entered into a binding repurchase agreement prior to such placing. The shares held in treasury will then be available to be sold to meet market demand and to enable the Company to save on the significant fixed listing costs associated with further issues of shares.

While 25 per cent. is higher than the percentage of issued shares the Company would ordinarily seek authority to repurchase, the Directors believe that taking a larger than normal authority is justified in the present circumstances. It is currently intended that these buyback authorities will be used in conjunction with the Company's authority to reissue shares from treasury to enable the Company to implement its placing programme in a cost-efficient manner.

The Company requires Ordinary Shareholder authority in accordance with the Articles and the Listing Rules to make market acquisitions of its Ordinary Shares and ZDP Shares. In addition, under the Listing Rules, purchases of 15 per cent. or more of any class of shares may only be made without the making of a tender offer if the full terms of the buyback have been specifically approved by shareholders. The Company is therefore seeking approval from Ordinary Shareholders to make one or more market acquisitions of shares. Resolutions 7 and 9 to be proposed at the Annual General Meeting seek such Ordinary Shareholder approval.

Market acquisitions of shares

At the same time as seeking Ordinary Shareholder authority to make market acquisitions of 25 per cent. of the issued shares in connection with the proposed placings with and buybacks from Numis, the Company is also seeking authority to make market acquisitions of up to a further 5 per cent. of the issued shares to manage any future discount to NAV. Accordingly, the maximum number of shares that may be purchased on-market pursuant to the authorities contained in Resolutions 8 and 10 is 5 per cent. of the issued shares at the date of the AGM.

The minimum price payable by the Company for each Ordinary Share or ZDP Share shall be £0.01 and the maximum price payable by the Company for each Ordinary Share or ZDP Share shall be the higher of (i) an amount equal to 105 per cent. of the average of the middle market quotations for an Ordinary Share or a ZDP Share as derived from the London Stock Exchange for the five business days immediately preceding the day on which the Ordinary Shares or the ZDP Shares are purchased and (ii) the higher of the price of the last independent trade and highest bid on the London Stock Exchange when the purchase is carried out. These authorities will expire (unless renewed) at the annual general meeting in 2015.

The Company will be permitted to make market acquisitions of its shares at such time as it thinks fit but will only do so in circumstances where (i) the Cover Test would be met immediately following any such purchase or (ii) Cover is otherwise increased following any such purchase.

Recommendation

The Board considers that the passing of the resolutions being put to the separate meeting of Zero Dividend Preference shareholders and the Company's AGM would be in the best interests of the Company and its Shareholders as a whole. They therefore recommend that shareholders vote in favour of the Resolutions set out in the notice of meeting of Zero Dividend Preference Shareholders and Resolutions 1 to 10, as set out in the Notice of Annual General Meeting.

Statement of Directors Responsibilities

The Directors are responsible for preparing the Directors' Report and the financial statements in accordance with applicable law and regulations. 

The Law requires the Directors to prepare financial statements for each financial year.  In accordance with section 243 (3) (a) of the Law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards as issued by the IASB and applicable law. 

The Financial Statements are required by the Law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.  The accounts of the Company comply with the Law as enacted as at 31 December 2013.

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 and prudent;

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

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

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Law.  They 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 who held office at the date of approval of the Directors Report confirm that they consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Disclosure of information to auditors

The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware; and each director has taken all the steps that 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.

Reappointment of auditor

The Auditor, KPMG Channel Islands Limited, has expressed its willingness to continue in office as Auditor.  A resolution proposing their reappointment will be submitted at the forthcoming general meeting to be held pursuant to section 199 of the Law.

Signed on behalf of the Board by:

David Warr                                                      Nigel Ward                             

Director                                                           Director

 30 April 2014

AUDIT COMMITTEE REPORT

In accordance with the AIC Code an Audit Committee has been established consisting of David Warr, Helen Green, and Nigel Ward. David Warr is the Chairman of the Audit Committee. 

The Audit Committee meets at least twice a year  and, where requested, provides advice to the Board on whether the annual report and accounts, taken as a whole, is fair balanced and understandable and provides information necessary for the shareholders to assess the Company's performance, business model and strategy. The Audit Committee also reviews, inter alia, the financial reporting process and the system of internal control and management of financial risks including understanding the current areas of greatest financial risk and how these are managed by the Investment Manager, reviewing annual financial statements, assessing the fairness of preliminary and interim statements and disclosures and reviewing the external audit process.  The Audit Committee is responsible for overseeing the Company's relationship with the external auditor (the 'Auditor'), including making recommendations to the Board on the appointment of the Auditor and their remuneration. The Audit Committee considers the nature, scope and results of the Auditor's work and reviews, and develops and implements a policy on the supply of any non-audit services that are to be provided by the Auditor. The Audit Committee annually reviews the independence and objectivity of the Auditor and also considers the appointment of an appropriate Auditor.

At the Audit Committee meeting on 19 November 2013 the appointment of the Auditor was considered and the Board decided that the Auditor was sufficiently independent and was appropriately appointed in order to carry out the audit for year ended 31 December 2013. During the year under review, the Auditor was not formally engaged to provide any non audit services to the Company however the Auditor was previously formally engaged in 2012 to provide tax advice. The fee charged was £2,600.

The Audit Committee receives and reviews reports from the Investment Advisers and the Auditor relating to the Company's Annual Report and financial statements. The Audit Committee focuses particularly on compliance with legal requirements, accounting standards and the Listing Rules and ensures that an effective system of internal financial and non-financial controls is maintained.  The ultimate responsibility for reviewing and approving the annual report and financial statements remains with the Board.

The Audit Committee holds an annual meeting to approve the Company's Annual Financial Report and Accounts before its publication. At a meeting held on 19 November 2013 the Audit Committee met with the Auditor to discuss the audit plan and approach. During this meeting it was agreed with the Auditor that the area of significant audit focus related to the valuation of investments given that they represent the majority of net assets of the Company. The scope of the audit work in relation to this balance was discussed.  At the conclusion of the audit, the Audit Committee met with the Auditor and discussed the scope of their annual audit work and also their audit findings.

The objectivity of the Auditor is reviewed by the Audit Committee which also reviews the terms under which the Auditor may be appointed to perform non-audit services. The Audit Committee reviews the scope and results of the audit, its cost effectiveness and the independence and objectivity of the Auditor, with particular regard to any non-audit work that the Auditor may undertake.  In order to safeguard the Auditor's independence and objectivity, the Audit Committee ensures that any other advisory and/or consulting services provided by the Auditor does not conflict with their statutory audit responsibilities.

To fulfil its responsibilities regarding the independence of the Auditor, the Audit Committee considered:

·     a report from the Auditor describing their arrangements to identify, report and manage any conflicts of interest; and

·     the extent of the non-audit services provided by the Auditor.

To assess the effectiveness of the Auditor, the committee reviewed:

·     the Auditor's fulfilment of the agreed audit plan and variations from it;

·     reports highlighting the major issues that arose during the course of the audit; and

·     the effectiveness and independence of the Auditor having considered the degree of diligence and professional scepticism demonstrated by them.

The Audit Committee is satisfied with KPMG Channel Islands Limited's effectiveness and independence as Auditor having considered the degree of diligence and professional scepticism demonstrated by them.

As the Auditor has been previously engaged to provide the annual audit the Board was able to rely on both; their previous experiences with the Auditor and the presentation received when deciding to reappoint.

As the Company is not a FTSE 350 company it is not necessary to put the appointment of the Auditor out to tender.  Further, having satisfied itself that the Auditor remains independent and effective, the Audit Committee has recommended to the Board that KPMG Channel Islands Limited be reappointed as Auditor for the year ending 31 December 2014.

The terms of reference of the Audit Committee are available from the Administrator on request.

During the year the Audit Committee met three times and of those meetings all Audit Committee members were in attendance.

David Warr

Chairman of the Audit Committee

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF ACORN INCOME FUND LIMITED

Opinions and conclusions arising from our audit

Opinion on financial statements 

We have audited the financial statements of Acorn Income Fund Limited (the "Company") for the year ended 31 December 2013 which comprise the statement of comprehensive income, the statement of financial position, the statement of changes in equity, the statement of cash flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as issued by the IASB.  In our opinion, the financial statements: 

·     give a true and fair view of the state of the Company's affairs as at 31 December 2013 and of its total comprehensive income for the year ended 31 December 2013; 

·     have been properly prepared in accordance with International Financial Reporting Standards as issued by the IASB; and 

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

Our assessment of risks of material misstatement

The risks of material misstatement detailed in this section of this report are those risks that we have deemed, in our professional judgement, to have had the greatest effect on: the overall audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team. Our audit procedures relating to these risks were designed in the context of our audit of the financial statements as a whole. Our opinion on the financial statements is not modified with respect to any of these risks, and we do not express an opinion on these individual risks.

In arriving at our audit opinion above on the financial statements, the risk of material misstatement that had the greatest effect on our audit was as follows:

Valuation of investments (£75,976,377)

Refer to the Report of the Audit Committee, Note 1 Accounting Policies and Note 10 Financial Assets Designated as at Fair Value through Profit or Loss disclosures.

·    The risk- The Company has invested 139% of its net assets at 31 December 2013 into listed equities and bonds. The Company's investments are valued based on the active market price. The valuation of the Company's investments, given that they represent the majority of net assets of the Company, is considered to be a significant area of our audit.

·    Our response - Our audit procedures with respect to the valuation of investments included but were not limited to, obtaining the market price for each investment from an independent source and assessing whether this represented an active price based on market information. We have also considered the Company's disclosures for compliance with International Financial Reporting Standards as issued by the IASB which included the investment valuation policies as disclosed in Note 1(l), the use of judgements and estimates in determining the fair value of investments as disclosed in Note 1(b) and the fair value disclosures as disclosed in Note 10.

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

Materiality is a term used to describe the acceptable level of precision in financial statements. Auditing standards describe a misstatement or an omission as "material" if it could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The auditor has to apply judgement in identifying whether a misstatement or omission is material and to do so the auditor identifies a monetary amount as "materiality for the financial statements as a whole".

The materiality for the financial statements as a whole was set at £1,640,000.  This has been calculated using a benchmark of the Company's NAV (of which it represents approximately 3%) which we believe is the most appropriate benchmark as NAV is considered to be one of the principal considerations for members of the Company in assessing the financial performance of the Company.

We agreed with the audit committee to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of £82,000, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.

Our assessment of materiality has informed our identification of significant risks of material misstatement and the associated audit procedures performed in those areas as detailed above. 

Whilst the audit process is designed to provide reasonable assurance of identifying material misstatements or omissions it is not guaranteed to do so. Rather we plan the audit to determine the extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements does not exceed materiality for the financial statements as a whole. This testing requires us to conduct significant depth of work on a broad range of assets, liabilities, income and expenses as well as devoting significant time of the most experienced members of the audit team, in particular the Responsible Individual, to subjective areas of the accounting and reporting process.

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Board of Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Matters on which we are required to report by exception 

Under International Standards on Auditing (ISAs) (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the Annual Report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.

In particular, we are required to report to you if:

·     we have identified material inconsistencies between the knowledge we acquired during our 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 members to assess the Company's performance, business model and strategy; or

·     the Directors' Report does not appropriately address matters communicated by us to the audit committee.

Under the Companies (Guernsey) Law, 2008, we are required 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.

Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the UK Corporate Governance Code specified for our review. 

We have nothing to report in respect of the above responsibilities.

 

Scope of report and responsibilities

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 Law, 2008 and, in respect of any further matters on which we have agreed to report, on terms we have agreed with the Company. 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.

Respective responsibilities of Directors and auditor

As explained more fully in the Directors' Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and ISAs (UK and Ireland). Those standards require us to comply with the UK Ethical Standards for Auditors.

Steven D Stormonth

For and on behalf of KPMG Channel Islands Limited

Chartered Accountants and Recognised Auditors

20 New Street, St Peter Port, Guernsey GY1 4AN

The maintenance and integrity of the Acorn Income Fund Limited website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements or audit report since they were initially presented on the website.

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

.

	STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2013
				Year ended						Year ended
			Notes	31 Dec 2013						31 Dec 2012
				Revenue		Capital		Total		Total
				GBP		GBP		GBP		GBP
	Net gains on financial assets designated as at fair value through profit or loss
			10	-		13,143,949		13,143,949		7,638,853
	Gains / (losses) on derivative financial instruments		4	-		93,555		93,555		(27,605)
	Investment income		3	1,939,769		-		1,939,769		1,359,333
	Total income and gains			1,939,769		13,237,504		15,177,273		8,970,581
	Expenses		5	(410,816)		(937,272)		(1,348,088)		(511,144)
	Return on ordinary activities before finance costs and taxation			1,528,953		12,300,232		13,829,185		8,459,437
	Interest payable and similar charges		7	-		(1,095,754)		(1,095,754)		(858,207)
	Return on ordinary activities before taxation			1,528,953		11,204,478		12,733,431		7,601,230
	Taxation on ordinary activities			-		-		-		-
	Other comprehensive income			-		-		-		-
	Total comprehensive income for the year attributable to Ordinary Shareholders
				1,528,953		11,204,478		12,733,431		7,601,230
				Pence		Pence		Pence		Pence
	Return per Ordinary Share		9	13.42		98.31		111.73		87.12
	Dividend per Ordinary Share		8	12.00		0.00		12.00		12.00
	Return per ZDP share (IFRS)		9	-		0.07		0.07		0.07
	The supplementary revenue return and capital return columns have been prepared in accordance with the Statement of Recommended Practice ("SORP") issued by the Association of Investment Companies ("AIC").
	In arriving at the results for the financial year, all amounts above relate to continuing operations.
	No operations were acquired or discontinued in the year.
	The notes following this statement form an integral part of these financial statements

	STATEMENT OF FINANCIAL POSITION
	as at 31 December 2013
						31 Dec 2013			31 Dec 2012
						GBP			GBP
				Notes
	NON-CURRENT ASSETS
	Financial assets designated as at fair value through profit or loss			10		75,976,377			34,358,936
	CURRENT ASSETS
	Receivables			11		723,023			418,464
	Cash and cash equivalents					2,458,412			618,376
	Derivative financial assets			18		73,305			707
						3,254,740			1,037,547
	TOTAL ASSETS					79,231,117			35,396,483
	CURRENT LIABILITIES
	Payables - due within one year			12		702,658			106,361
	NON-CURRENT LIABILITIES
	ZDP shares			13		23,681,183			12,496,984
	TOTAL LIABILITIES					24,383,841			12,603,345
	NET ASSETS					54,847,276			22,793,138
	EQUITY
	Share capital			14		153,781			89,398
	Share premium					20,411,044			79,173
	Treasury shares			15		-			(303,211)
	Revenue reserve					447,558			297,363
	Special reserve			18		10,000,000			10,000,000
	Capital reserve			18		23,834,893			12,630,415
	TOTAL EQUITY					54,847,276			22,793,138
						Pence			Pence
	Net asset value per Ordinary Share (per Articles)					359.97			261.25
	Net asset value per Ordinary Share (per IFRS)					356.66			261.25
	Net asset value per ZDP Share (per IFRS)					114.72			104.14
	Net asset value per ZDP Share (per Articles)					113.35			106.71
	The financial statements were approved by the Board of Directors and authorised for issue on 30 April 2014  and signed on its behalf by:
	David Warr,  Director			Nigel Ward, Director
	The notes following this statement form an integral part of these financial statements

	STATEMENT OF CASH FLOWS
	for the year ended 31 December 2013
							31 Dec 2013		31 Dec 2012
							GBP		GBP
	Operating activities				Notes
	Return on ordinary activities before taxation						12,733,431		7,601,230
	Net gains on financial assets designated as at fair value through profit or loss				10		(13,143,949)		(7,638,853)
	Investment income				3		(1,939,769)		(1,359,333)
	Interest expense						1,095,754		858,207
	(Increase) / decrease in derivative financial assets						(72,598)		22,458
	Decrease in derivative financial liabilities				18		-		(24,178)
	Increase / (decrease) in payables and appropriations				12		596,297		(251,217)
	(Increase) / decrease in receivables excluding accrued investment income				11		(130,571)		54,496
	Net cash used in operating activities before investment income						(861,405)		(737,190)
	Investment income received						1,765,780		1,248,102
	Net cash from operating activities before taxation						904,375		510,912
	Tax paid						-		-
	Net cash from operating activities after taxation						904,375		510,912
	Investing activities
	Purchase of financial assets						(59,932,096)		(21,500,190)
	Sale of financial assets						31,458,604		16,822,771
	Net cash from / (used in) investing activities						(28,473,492)		(4,677,419)
	Financing activities
	Equity dividends paid				8		(1,378,758)		(1,046,975)
	Proceeds from issue of shares				15		21,224,719		-
	Cost of issue of Ordinary Shares						(525,254)		-
	Bank loan interest paid						-		2,345
	Proceeds from issue of ZDP shares						11,161,270		-
	Cost of issue of ZDP shares						(1,072,825)		-
	Net cash from / (used in) financing activities						29,409,152		(1,044,630)
	Increase / (decrease) in cash and cash equivalents						1,840,035		(5,211,137)
	Cash and cash equivalents at beginning of year						618,376		5,829,513
	Cash and cash equivalents at end of year						2,458,412		618,376
	The notes following this statement form an integral part of these financial statements

STATEMENT OF CHANGES IN EQUITY
as at 31 December 2013
		Share Capital		Share Premium		Treasury Reserve		Revenue Reserve		Special Reserve			Capital Reserve				Total
		31 Dec 2013		31 Dec 2013		31 Dec 2013		31 Dec 2013		31 Dec 2013			31 Dec 2013				31 Dec 2013
		GBP		GBP		GBP		GBP		GBP			GBP				GBP
Balances as at 1 January 2013		89,398		79,173		(303,211)		297,363		10,000,000			12,630,415				22,793,138
Total comprehensive income for the year attributable to shareholders		-		-		-		1,528,953		-			11,204,478				12,733,431
Dividends		-		-		-		(1,378,758)		-			-				(1,378,758)
Treasury shares acquired		-		-		(5,815,445)		-		-			-				(5,815,445)
Treasury shares sold		-		338,564		6,210,501		-		-			-				6,549,065
Transfer between reserves		-		91,845		(91,845)		-		-			-				-
Issue of Ordinary Shares		64,383		20,426,716		-		-		-			-				20,491,099
Share issue costs		-		(525,254)		-		-		-			-				(525,254)
Balances as at 31 December 2013		153,781		20,411,044		-		447,558		10,000,000			23,834,893				54,847,276
STATEMENT OF CHANGES IN EQUITY (continued)
as at 31 December 2012
		Share Capital		Share Premium		Treasury Reserve		Revenue Reserve		Special Reserve			Capital Reserve				Total
		31 Dec 2012		31 Dec 2012		31 Dec 2012		31 Dec 2012		31 Dec 2012			31 Dec 2012				31 Dec 2012
		GBP		GBP		GBP		GBP		GBP			GBP				GBP
Balances as at 1 January 2012		89,398		79,173		(303,211)		268,891		10,000,000			6,104,632				16,238,883
Total comprehensive income for the year attributable to shareholders		-		-		-		1,075,447		-			6,525,783				7,601,230
Dividends		-		-		-		(1,046,975)		-			-				(1,046,975)
Treasury shares acquired		-		-		-		-		-			-				-
Transfer between reserves		-		-		-		-		-			-				-
Balances as at 31 December 2012		89,398		79,173		(303,211)		297,363		10,000,000			12,630,415				22,793,138
The notes following this statement form an integral part of these financial statements

Notes to the Financial Statements
for the year ended 31 December 2013
1	ACCOUNTING POLICIES
(a)	Basis of preparation
	The financial statements, which give a true and fair view, have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB"), the AIC's SORP (as revised in January 2009) where this is consistent with the requirements of IFRS and all in compliance with The Companies (Guernsey) Law, 2008.  All accounting policies adopted for the period are consistent with IFRS issued by the IASB.  The financial statements have been prepared on an historical cost basis except for the measurement at fair value of financial assets designated as at fair value through profit or loss and derivative financial instruments.
	The following Standards or Interpretations have been adopted in the current year. Their adoption has not had any impact on the amounts reported in these Financial Statements and it is not expected to have any impact on future financial periods:
	IFRS 10 Consolidated Financial Statements (effective for annual periods beginning on or after 1 January 2013). The standard builds on existing principles by identifying the concept of control as the determining factor in whether any entity should be included with the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess.
	Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment Entities, will become effective commencing on or after 1 January 2014 but the Company has early adopted the standard to coincide with the adoption of IFRS 10. The amendments define an investment entity and introduce an exception to consolidating particular subsidiaries for investment entities. The amendments require an investment entity to measure those subsidiaries at fair value through profit or loss in accordance with IFRS 9 Financial Instruments in its consolidated and separate financial statements. The amendments also introduce new disclosure requirements for investment entities in IFRS 12 and IAS 27.
	IFRS 13 Fair Value Measurement effective for annual periods beginning on or after 1 January 2013. The objective of the standard is to replace and standardise the different definitions and measurement methods of fair value contained in the various standards and establish a single source of guidance. The standard also introduces more comprehensive disclosure requirements regarding fair value measurement.
	IAS 1 Presentation of Financial Statements (amendments effective for annual periods beginning on or after 1 January 2013). The amendments to IAS 1 change the grouping of items presented in Other Comprehensive Income in its Consolidated Statement of Comprehensive Income. Items that could be reclassified to profit or loss at a future point in time are now required to be presented separately from items that will never be reclassified.
	A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2013, and have not been applied in preparing these financial statements. None of these are expected to have a significant effect on the measurement of the amounts recognised in the financial statements of the Company. However, IFRS 9 will change the classification of financial assets. The standard is not expected to have an impact on the measurement basis of the financial assets since the majority of the Company's financial assets are measured at fair value through profit or loss.
	IFRS 8 - Operating Segments (effective for annual periods beginning on or after 1 July 2014).  This amendment will require that an entity discloses the judgements made by management in applying the aggregation criteria to operating segments. It also clarifies that an entity shall only provide reconciliations of the total of the reportable segments' assets to the entity's assets if the segment assets are reported regularly.
	IFRS 9 Financial Instruments - Accounting for financial liabilities and derecognition.  IFRS 9 (2009) deals with recognition, derecognition, classification and measurement of financial assets and financial liabilities. The standard contains two primary measurement categories for financial assets: at amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset's contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. Other requirements of IFRS 9 relating to classification and measurement of financial liabilities are unchanged from IAS 39. The requirements of IFRS 9 relating to derecognition are unchanged from IAS 39. IFRS 9 (2013) introduces new requirements for hedge accounting that align hedge accounting more closely with an entities risk management approach. With the issue of IFRS 9 (2013) the mandatory effective date was removed and an effective date for IFRS 9 will be determined when the outstanding impairment guidance and a limited scope amendment to classification of financial assets are issued.  Current application of IFRS 9 is however permitted.
	IFRS 13 Fair Value Measurement (amendments effective for annual periods beginning on or after 1 July 2014).  Clarifies that the scope of the portfolio exception defined in paragraph 52 of IFRS 13 includes all contracts accounted for within the scope of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments, regardless of whether they meet  the definition of financial assets or financial liabilities as defined in IAS 32 Financial Instruments. IAS 24 Related Party Disclosures (amendments effective for annual periods beginning on or after 1 July 2014).  Clarifies that an entity providing key management personnel services to the reporting entity or to the parent of the reporting entity is a related party of the reporting entity.
	IAS 32 Financial Instruments: Presentation (amendments effective for annual periods beginning on or after 1 January 2014).  The amendments to IAS 32 clarifies that an entity currently has a legally enforceable right to set-off if that right is not contingent on a future event and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties.
	IAS 39 Financial Instruments: Recognition and Measurement (amendments to permit an entity to elect to continue to apply hedge accounting requirements) effective earlier than annual periods beginning on or after 1 January 2014). Under the amendments there would be no need to discontinue hedge accounting if a hedging derivative was novated, provided certain criteria are met.
	The Directors have considered the above and are of the opinion that these Standards and Interpretations are not expected to have an impact on the Company's financial statements except for the presentation of additional disclosures and changes to the presentation of components of the financial statements.  These items will be applied in the first financial period for which they are required.

	(b)	Use of estimates and judgements
		The preparation of the financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
		Estimates and underlying assumptions are reviewed on an on going basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
		Management use estimates and judgements in allocating expenses between Revenue and Capital and in ascertaining the risk disclosures contained in Note 18. Management use estimates and judgements in valuing the market value of the investments contained in Note 10.
	(c)	Ordinary share capital
		Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of Ordinary Shares are recognised as a deduction from equity.
	(d)	Zero Dividend Preference shares
		Under IAS 32, the ZDP Shares are classified as financial liabilities and are held at amortised cost. Appropriation for the period in respect of ZDP Shares is included in the Statement of Comprehensive Income as a finance cost and is calculated using the effective interest method ("EIR"). The costs of issue and premium of the ZDP Shares are being amortised over the period until the ZDP Shares will be redeemed.
	(e)	Taxation
		The Company has been granted exemption under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 from Guernsey Income Tax, and has elected to remain exempt following changes to the Guernsey tax regime. The Company pays an annual fee of £600.
	(f)	Treasury shares
		Treasury shares are classified as a deduction from equity and recorded for the consideration paid.
	(g)	Capital reserve
		The following are accounted for in this reserve:
		- gains and losses on the realisation of investments;
		- expenses charged to this account in accordance with the policy below;
		- increases and decreases in the valuation of the investments held at the year end; and
		- unrealised exchange differences of a capital nature.
	(h)	Expenses
		All expenses are accounted for on an accruals basis. Expenses are charged to the capital reserve where a connection with the maintenance or enhancement of the value of the investments can be demonstrated.
		75% of the Company's management fee and financing costs are charged to the capital reserve in line with the Board's expected long-term split of returns between income and capital gains from the investment portfolio.
		100% of any performance fee, commissions paid and the appropriation in respect of ZDP Shares is charged to the capital account.  All other expenses are charged through the revenue account.

	(i)	Investment income
		Interest income and distributions receivable are accounted for on an accruals basis. Interest income relates only to interest on bank balances. Bond income is accounted for using the effective interest rate "EIR" basis. Dividends are recognised on the ex-dividend date. All investment income is treated as a revenue item in the Statement of Comprehensive Income.
	(j)	Foreign currency translation
		The currency of the primary economic environment in which the Company operates (the functional currency) is Great British Pounds (GBP) which is also the presentational currency.
		Transactions denominated in foreign currencies are translated into GBP at the rate of exchange ruling at the date of the transaction.
		Monetary assets and liabilities, other than investments, denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the Statement of Comprehensive Income. Foreign exchange differences relating to investments are taken to the capital reserve. Realised and unrealised foreign exchange differences on non-capital assets or liabilities are taken to the Statement of Comprehensive Income in the period in which they arise.
	(k)	Cash and cash equivalents
		Cash and cash equivalents are defined as cash in hand, demand deposits and short term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash, deposits at bank and money market deposits, with a maturity of less than 3 months.
	(l)	Investments
		All investments have been designated as financial assets at "fair value through profit or loss". Investments are initially recognised on the date of purchase at fair value, with transaction costs recognised in the Statement of Comprehensive Income. Unrealised gains and losses on movement in fair value of investments are recognised in the Statement of Comprehensive Income. Investments are derecognised on the date of sale. Gains and losses on the sale of investments will be taken to the Statement of Comprehensive Income in the period in which they arise. For investments actively traded in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices as at the close of business on the reporting date.
	(m)	Derivatives
		Derivatives consist of forward foreign exchange contracts which are stated at market value, with the resulting net realised and unrealised gains and losses being reflected in the Statement of Comprehensive Income.
	(n)	Trade date accounting
		All "regular way" purchases and sales of financial assets are recognised on the "trade date", i.e. the date that the entity commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of the asset within the timeframe generally established by regulation or convention in the market place.

	(o)	Segmental reporting
		The Company retains two Investment Advisers, Unicorn Asset Management Limited and Premier Fund Managers Limited for the Smaller Companies Portfolio and Income Portfolio respectively. As the Board reviews the performance of each portfolio separately and decides on the allocation of resources based on this performance, the Board has determined that the Company has two reportable segments (2012: two).
		The Board is charged with setting the Company's investment strategy in accordance with the Prospectus.  They have delegated the day to day implementation of this strategy to its Investment Advisers but retain responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions.  The investment decisions of the Investment Advisers are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board.  The Investment Advisers have 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 Advisers 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 Advisers.  The Board, therefore, retains full responsibility as to the major allocation decisions made on an ongoing basis. The Investment Advisers will always act under the terms of the Prospectus which cannot be radically changed without approval of the Board and the shareholders.
		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 the financial statements.
		The schedule of principal investments held as at the period end are presented following the Investment Advisers' Report.
	(p)	Going Concern
		The Company has adequate financial resources and as a consequence, the Directors believe the Company is well placed to manage its business risks successfully despite the current economic climate. In reaching this conclusion, the Directors have considered the liquidity of the Company's portfolio of investments as well as its cash position, income and expense flows. In addition, during 2011, the Company passed its continuation vote and is not subject to a further continuation vote until 2016.
	2	OPERATING SEGMENTS
		The Company has two reportable segments, being the Income Portfolio and the Smaller Companies Portfolio. Each of these portfolios is managed separately as they entail different investment objectives and strategies and contain investments in different products.

		For each of the portfolios, the Board reviews internal management reports on a quarterly basis. The objectives and principal investment products of the respective reportable segments are as follows:
		Segment	Investment objectives and principal investments products
		Income Portfolio	To maximise income through investments in sterling denominated fixed interest securities including corporate bonds, preference and permanent interest bearing shares, convertibles, reverse convertibles, debentures and other similar securities.
		Smaller Companies Portfolio	To maximise income and capital growth through investments in smaller-capitalised UK companies.
		Information regarding the results of each reportable segment follows. Performance is measured based on the increase in value of each portfolio, as included in the internal management reports that are reviewed by the Board.
		Segment information is measured on the same basis as those used in the preparation of the Company's financial statements.
				Income		Smaller Companies		Unallocated		Total
				Portfolio		Portfolio
				GBP		GBP		GBP		GBP
		2013
		External revenues:
		Net gains on financial assets designated as at fair value through profit or loss		618,539		12,525,410		-		13,143,949
		Gains on derivative financial instruments		-		-		93,555		93,555
		Investment income:
		Bank interest		-		-		170		170
		Dividend income		114,996		1,299,400		-		1,414,398
		Bond income		525,201		-		-		525,201
		Total income and gains		1,258,736		13,824,810		93,725		15,177,273
		Expenses		-		-		(1,348,088)		(1,348,088)
		Interest payable and similar charges		-		-		(1,095,754)		(1,095,754)
		Total comprehensive income for the year attributable to shareholders		1,258,736		13,824,810		(2,350,117)		12,733,431

				Income		Smaller Companies		Unallocated		Total
				Portfolio		Portfolio
				GBP		GBP		GBP		GBP
		2013
		Financial assets designated as at fair value through  profit or loss		15,243,477		60,732,900		-		75,976,377
		Receivables		463,269		256,172		3,582		723,023
		Derivative financial assets		-		-		73,305		73,305
		Cash and cash equivalents		511,577		302,978		1,643,858		2,458,412
		Total assets		16,218,323		61,292,049		1,720,745		79,231,117
		Derivative financial liabilities		-		-		-		-
		Payables		-		-		702,658		702,658
		Total liabilities		-		-		702,658		702,658
				Income		Smaller Companies		Unallocated		Total
				Portfolio		Portfolio
		2012		GBP		GBP		GBP		GBP
		External revenues:
		Net gains on financial assets designated  as at fair value through profit or loss		959,870		6,678,983		-		7,638,853
		Losses on derivative financial instruments		(102,799)		-		75,194		(27,605)
		Investment income:
		Bank interest		-		-		2,995		2,995
		Dividend income		118,272		899,155		-		1,017,427
		Bond income		338,911		-		-		338,911
		Total income and gains		1,314,254		7,578,138		78,189		8,970,581
		Expenses		-		-		(511,144)		(511,144)
		Interest payable and similar charges		-		-		(858,207)		(858,207)
		Total comprehensive income for the year attributable to shareholders		1,314,254		7,578,138		(1,291,162)		7,601,230

				Income		Smaller Companies		Unallocated		Total
				Portfolio		Portfolio
		2012		GBP		GBP		GBP		GBP
		Financial assets designated as at fair value through profit or loss		7,096,762		27,262,174		-		34,358,936
		Receivables		270,533		144,225		3,706		418,464
		Derivative financial assets		-		-		707		707
		Cash and cash equivalents		303,270		177,913		137,192		618,376
		Total assets		7,670,565		27,584,312		141,605		35,396,483
		Derivative financial liabilities		-		-		-		-
		Payables		-		-		106,361		106,361
		Total liabilities		-		-		106,361		106,361

		Geographical information
		In presenting information on the basis of geographical segments, segment revenue and segment assets are based on the domicile countries of the investees and counterparties to derivative transactions.
						Other	Rest of
			UK	Guernsey	Jersey	Europe	the World	Total
		31 Dec 2013	GBP	GBP	GBP	GBP	GBP	GBP
		External revenues
		Total Revenue	1,688,513	127,924	35,171	63,874	24,116	1,939,598
						Other	Rest of
			UK	Guernsey	Jersey	Europe	the World	Total
		31 Dec 2012	GBP	GBP	GBP	GBP	GBP	GBP
		External revenues
		Total Revenue	1,104,983	105,906	24,063	100,793	20,593	1,356,338
		The Company did not hold any non-current assets during the year other than financial instruments (2012: £nil).

		Major customers
		The Company regards its shareholders as customers. There were no shareholders with a holding greater than 10% at the period end.
	3	INVESTMENT INCOME			Year ended			Year ended
						31 Dec 2013		31 Dec 2012
						GBP		GBP
		Bank interest				170		2,995
		Dividend income				1,414,398		1,017,427
		Bond income				525,201		338,911
						1,939,769		1,359,333
	4	GAINS / (LOSSES) ON DERIVATIVE FINANCIAL INSTRUMENTS				Year ended		Year ended
						31 Dec 2013		31 Dec 2012
						GBP		GBP
		Unrealised gain / (loss) on forward foreign currency contracts				43,281		(54,486)
		Realised gain on forward foreign currency contracts				50,274		129,680
		Appreciation on fair value of derivative financial assets				-		24,178
		Realised losses on derivative financial assets				-		(126,977)
						93,555		(27,605)

	5	EXPENSES		Year ended
				31 Dec 2013
				Revenue		Capital		Total
				GBP		GBP		GBP
		Manager's fee *		96,324		288,972		385,296
		Performance fee *		-		501,345		501,345
		Administrator's fee		71,539		-		71,539
		Registrar's fee		16,986		-		16,986
		Directors' fees		64,700		-		64,700
		Custody fees		23,777		-		23,777
		Audit fees		23,846		-		23,846
		Directors' and Officers' insurance		5,810		-		5,810
		Annual fees		16,894		-		16,894
		Bank charges		1,738		-		1,738
		Commission paid		-		146,955		146,955
		Broker fees		22,837		-		22,837
		Sundry costs		25,002		-		25,002
		Legal and professional fees		19,642		-		19,642
		Loss on foreign exchange		21,721		-		21,721
				410,816		937,272		1,348,088
		*The Company has entered into a Management Agreement with Premier Asset Management (Guernsey) Limited, a wholly-owned, Guernsey incorporated subsidiary of Premier Asset Management Limited.  The Manager receives a management fee of 0.7% per annum of total assets (subject to a minimum fee of £100,000) calculated monthly and payable quarterly in arrears, out of which it pays fees to the Investment Advisers.  The Manager is also paid a shareholder communication and support fee, currently £3,100 for the twelve months from 1 April 2013 to 31 March 2014. The Manager is also potentially entitled to a performance fee of 15% of any excess of the NAV per Ordinary Share (together with any dividends paid by reference to the relevant period) over the higher of the First benchmark or the Second Benchmark. The First Benchmark is calculated as the NAV per Ordinary Share immediately following completion of the tender offer, in January 2007, compounded at a rate of 10.0% per annum up to the relevant calculation day. The Second Benchmark, being the highest NAV on the last day in the prior period, is used if a performance fee was paid in that prior period. A performance fee of £501,345 (2012; nil) was payable for the year under review.  The Management Agreement may be terminated by either party on 12 months' written notice.

				Year ended
				31 Dec 2012
				Revenue		Capital		Total
				GBP		GBP		GBP
		Manager's fee *		56,644		169,931		226,575
		Administrator's fee		59,585		-		59,585
		Registrar's fee		11,671		-		11,671
		Directors' fees		54,358		-		54,358
		Custody fees		15,506		-		15,506
		Audit fees		23,054		-		23,054
		Directors' and Officers' insurance		6,940		-		6,940
		Annual fees		16,285		-		16,285
		Bank charges		1,506		-		1,506
		Commission paid		-		56,741		56,741
		Broker fees		12,938		-		12,938
		Sundry costs		13,205		-		13,205
		Legal and professional fees		2,600		-		2,600
		Loss on foreign exchange		10,180		-		10,180
				284,472		226,672		511,144

	6	DIRECTORS' REMUNERATION
		Under their terms of appointment, each Director is paid a fee of £17,500 per annum by the Company, except for the Chairman, who receives £22,500 per annum.  Since the year end the Directors' fees have been increased to £27,500 for the Chairman and £25,000 for each of the chairmen of the Audit Committee and Remuneration and Management Engagement Committee.
	7	INTEREST PAYABLE AND SIMILAR CHARGES								Year ended
						Revenue		Capital		31 Dec 2013
						GBP		GBP		GBP
		Appropriation in respect of ZDP Shares				-		1,013,690		1,013,690
		Amortisation of ZDP issue costs				-		82,064		82,064
						-		1,095,754		1,095,754
										Year ended
						Revenue		Capital		31 Dec 2012
						GBP		GBP		GBP
		Bank loan interest				(586)		(1,759)		(2,345)
		Appropriation in respect of ZDP Shares				-		784,800		784,800
		Amortisation of ZDP issue costs						75,752		75,752
						(586)		858,793		858,207
	8	DIVIDENDS IN RESPECT OF ORDINARY SHARES					Year ended
						31 Dec 2013
						GBP		Pence per share
		First interim payment				261,744		3.00
		Second interim payment				178,796		2.00
		Third interim payment				111,502		1.00
		Fourth interim payment				373,518		3.00
		Fifth interim payment				453,198		3.00
						1,378,758		12.00
						Year ended
						31 Dec 2012
						GBP		Pence per share
		First interim payment				261,744		3.00
		Second interim payment				261,744		3.00
		Third interim payment				261,744		3.00
		Fourth interim payment				261,744		3.00
						1,046,975		12.00

	9	EARNINGS PER SHARE
		Ordinary Shares
		The total return per Ordinary Share (per IFRS) is based on the total return on ordinary activities for the year attributable to Ordinary shareholders of £12,733,431 (2012: £7,601,230) and on 11,396,905 (2012: 8,724,790) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gain per share is identical.
		The revenue return per Ordinary Share (per IFRS) is based on the revenue return on activities for the year attributable to Ordinary shareholders of £1,528,953 (2012: £1,075,447) and on 11,396,905 (2012: 8,724,790) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gain per share is identical.
		The capital return per Ordinary Share (per IFRS) is based on the capital return on ordinary activities for the year attributable to Ordinary shareholders of £11,204,478 (2012: £6,525,783) and on 11,396,905 (2012: 8,724,790) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gain per share is identical.
		ZDP shares
		The return per ZDP Share (per IFRS) is based on the appropriation in respect of ZDP Shares and the amortisation of ZDP Share issue costs totalling £1,095,754 (2012: £860,552) and on 15,490,355 (2012: 12,000,000) shares, being the weighted average number of ZDP Shares in issue during the year.

	10	FINANCIAL ASSETS DESIGNATED AS			31 Dec 2013		31 Dec 2012
		AT FAIR VALUE THROUGH PROFIT OR LOSS				GBP		GBP
		INVESTMENTS
		Opening portfolio cost				23,711,877		17,493,826
		Unrealised appreciation on valuation brought forward				10,647,059		4,548,837
		Opening valuation				34,358,936		22,042,663
		Movements in the year
		Purchases at cost				59,932,096		21,500,190
		Sales
		- proceeds				(31,458,604)		(16,822,771)
		- realised gains / (losses) on sales				695,645		1,540,631
		Unrealised appreciation on valuation for the year				12,448,304		6,098,222
		Fair value of investments at 31 December 2013				75,976,377		34,358,936
		Closing book cost				52,881,014		23,711,877
		Closing unrealised appreciation				23,095,363		10,647,059
						75,976,377		34,358,936
		Realised gains on sales				695,645		1,540,631
		Increase in unrealised appreciation				12,448,304		6,098,222
		Net gains on financial assets designated as at fair value through profit or loss				13,143,949		7,638,853
		As at 31 December 2013, the closing fair value of investments comprises £63,507,047 (2012: £27,807,487) of equity shares and £12,414,432 (2012: £6,551,549) of fixed income securities.

IFRS 13 requires the fair value of investments to be disclosed by the source of inputs, using a three-level hierarchy as detailed below:

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

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

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

The Investments held by the Company have been classified as Level 1. This is in accordance with the fair value hierarchy.

Details of the value of each classification are listed in the table below. Values are based on the market value of the investment as at the reporting date:

Financial assets designated as at fair value through profit

or loss

31 Dec 2013

31 Dec 2013

31 Dec 2012

31 Dec 2012

Market Value

Market Value

Market Value

Market Value

%

GBP

%

GBP

Level 1

100

75,976,377

100

34,358,936

Total

100

75,976,377

100

34,358,936

Derivative financial  assets and liabilities designated as at fair value through profit or loss

31 Dec 2013

31 Dec 2013

31 Dec 2012

31 Dec 2012

Market Value

Market Value

Market Value

Market Value

%

GBP

%

GBP

Level 2 derivative financial assets

100

73,305

100

707

Level 2 derivative financial liabilities

100

-

100

-

	There have been no transfers between levels of the fair value hierarchy during the year under review. It is the Company's policy to recognise all the transfers into the levels and transfers out of the levels at the end of the reporting period. Transfers into each level shall be disclosed and discussed separately from transfers out of each level.
	The derivative financial instruments held by the Company have been classified as Level 2. This is in accordance with the fair value hierarchy. The Company uses widely recognised valuation models for determining fair value of derivative financial instruments that use only observable market data and require little management judgement and estimation.
11	RECEIVABLES
	(amounts due within one year)			31 Dec 2013		31 Dec 2012
					GBP		GBP
	Prepayments				3,582		3,706
	Accrued income				488,396		314,408
	Sundry receivables				231,045		100,350
					723,023		418,464
12	PAYABLES
	(amounts falling due within one year)			31 Dec 2013		31 Dec 2012
					GBP		GBP
	Accrued expenses				679,776		26,066
	Trade creditors				22,882		80,295
					702,658		106,361

					31 Dec 2013			31 Dec 2012
	13	ZDP Shares				GBP		GBP
		12,000,000 ZDP Shares issued 21 December 2011				12,000,000		12,000,000
		8,642,305 ZDP Shares issued during the year				9,977,006		-
		2,357,107 Buyback of ZDP Shares during the year				(2,625,985)		-
		2,357,107 ZDP Shares sold out of treasury during the year				2,796,559		-
		Appropriation in respect of ZDP Shares				1,818,890		805,200
		ZDP Value (calculated in accordance with the Articles)				23,966,470		12,805,200
		ZDP issue costs				(367,351)		(383,968)
		Issue costs amortised during period				82,064		75,752
		ZDP value (calculated in accordance with IFRS)				23,681,183		12,496,984
		The fair value of the ZDP Shares is considered to be the same as the value calculated in accordance with IFRS.
		ZDP Shares carry no entitlement to income distributions to be made by the Company. The ZDP Shares will not pay dividends but will have a final capital entitlement at the end of their life on 31 January 2017 of 138 pence. It should be noted that the predetermined capital entitlement of a ZDP Share is not guaranteed and is dependent upon the Company's gross assets being sufficient on 31 January 2017 to meet the final capital entitlement of the ZDP shares. If the Company had been wound up on 31 December 2013, the ZDP Shares would have had an entitlement of 116.10 pence each. The ZDP Shares have the right to receive notice of and attend, but shall not have the right to vote at, any general meeting.
		Under the Articles of Incorporation, the Company is obliged to redeem all of the ZDP Shares on 31 January 2017 (if such redemption has not already been effected).
		The number of authorised ZDP Shares is 50,000,000. The number of issued ZDP Shares is 20,642,306 (2012: 12,000,000).
		The effect of the non-amortisation of the ZDP Shares in line with the Articles has an impact on the NAV per Ordinary Share of 3.31 pence.

14	SHARE CAPITAL
	Authorised						GBP
	Ordinary Shares of 1p each						unlimited
	Issued						Number of
							shares
	The issue of Ordinary Shares took place as follows:
	Ordinary Shares		11 February 1999				29,600,002
	Tender offer		17 January 2007				(20,660,212)
	Purchase of treasury shares - Year ended 31 December 2011						(215,000)
	Number of shares in issue at 31 December 2012						8,724,790
	Placing during the year						6,438,339
	Purchase of treasury shares						(1,756,000)
	Shares sold out of treasury during the year						1,971,000
	Number of shares in issue at 31 December 2013						15,378,129

	Issued and fully paid capital as at 31 December 2013							153,781
	The Ordinary Shares are entitled to participate in all dividends and distributions of the Company.  On a winding-up holders of Ordinary Shares are entitled to participate in the distribution and the holders of Ordinary Shares are entitled to receive notice of and attend and vote at all general meetings of the Company.
15	TREASURY RESERVES		31 Dec 2013						31 Dec 2012
			GBP						GBP
	Balance as at 1 January 2013		(303,211)						(303,211)
	Acquired during the year		(5,815,445)						-
	Treasury shares sold		6,210,501						-
	Transfer between reserves		(91,845)
	Balance as at 31 December 2013		-						(303,211)
			31 Dec 2013						31 Dec 2012
			No. Shares						No. Shares
	Balance as at 1 January 2013		215,000						215,000
	Acquired during the year		1,756,000						-
	Treasury shares sold		(1,971,000)						-
	Balance as at 31 December 2013		-						215,000
	The Treasury Shares were purchased in the market at various prices ranging from £2.91 to £3.59 and held by the Company in treasury.
16	RELATED PARTIES
	Premier Asset Management (Guernsey) Limited is the Company's Manager and operates under the terms of the Management Agreement in force which gives it complete control over the Company's investment portfolio.
	£886,641 (2012: £226,575) of costs were incurred by the Company with this related party in the year, of which £636,168 (2012: £62,382) was due to this related party as at 31 December 2013.
	Directors' remuneration is disclosed in Note 6.
	JD McClure, an employee of Unicorn Asset Management, the Smaller Companies Portfolio Investment Advisor, holds 174,235 shares in the Company as at 31 December 2013.

17	FINANCIAL INSTRUMENTS
	The Company's main financial instruments comprise:
(a)	Cash and cash equivalents that arise directly from the Company's operations;
(b)	Investments in listed entities and derivative financial assets;
(c)	ZDP shares; and
(d)	Derivative financial assets.
18	FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
	The following table details the categories of financial assets and liabilities held by the Company at the reporting date:
					31 Dec 2013		31 Dec 2012
					GBP		GBP
	Financial assets
	Financial assets at fair value through profit or loss				75,976,377		34,358,936
	Derivative financial assets				73,305		707
	Total financial assets at fair value through profit or loss				76,049,682		34,359,643
	Loans and receivables				3,181,435		1,036,840
	Total assets				79,231,117		35,396,483

	Financial liabilities			31 Dec 2013			31 Dec 2012
	Financial liabilities at fair value through profit or loss:				GBP		GBP
	Accrued expenses				702,658		106,361
	Derivative financial liabilities				-		-
	Total financial liabilities at fair value through profit or loss				702,658		106,361
	Financial liabilities measured at amortised cost				23,681,183		12,496,984
	Total liabilities excluding net assets attributable to holders of Ordinary Shares				24,383,841		12,603,345
	Loans and receivables presented above represents cash and cash equivalents, balances due from brokers and other receivables as detailed in the Statement of Financial Position.
	Financial liabilities measured at amortised cost presented above represents accrued expenses and ZDP Shares as detailed in the Statement of Financial Position.
	Derivative financial assets presented above represent forward foreign exchange contracts. Long gilts exist and are valued initially at date of purchase at fair value. Unrealised gains and losses on movement in fair value are recognised in the Statement of Comprehensive Income.
	The main risks arising from the Company's financial instruments are market price risk, credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Board regularly review and agrees policies for managing each of these risks and these are summarised on in notes 18(a) to 18(f).

(a)	Market Price Risk
	Market price risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Investment Advisers actively monitor market prices and report to the Board as to the appropriateness of the prices used for valuation purposes. The Investment Advisers also attempt to minimise market price risk by undertaking a detailed analysis of the risk/reward relationship of each investee company prior to any investment being made.
	Details of the Company's Investment Objective and Policy are given inside the front cover of this Report.
	Price sensitivity
	The following details the Company's sensitivity to a 15% increase and decrease in the market prices, with 15% being the sensitivity rate used when reporting price risk internally to key management personnel and representing management's assessment of the possible change in market prices.
	At 31 December 2013, if market prices had been 15% higher with all the other variables held constant, the return attributable to shareholders for the year would have been £11,396,457 (2012: £5,153,840) greater, due to the increase in the fair value of financial assets at fair value through profit or loss. This would represent an increase in Net Assets of 20.78% (2012: 22.61%).
	If market prices had been 15% lower with all the other variables held constant, the net return attributable to shareholders for the year would have been £11,396,457 (2012: £5,153,840) lower, due to the decrease in the fair value of financial assets at fair value through profit or loss. This would represent a decrease in Net Assets of 20.78% (2012: 22.61%).

(b)	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. The Directors receive financial information on a regular basis which is used to identify and monitor risk. It is Company policy not to invest more than 20% of the gross assets of the Company in the securities of any one company or group at the time the investment is made.
	The Company has no significant concentration of credit risk, with exposure spread over a large number of counterparties. At 31 December 2013 the Company's largest exposure to a single investment was £3,106,317 (2012: £1,576,479), 3.92% (2012: 4.45%) of total assets.
	Investors should be aware that the prospective returns to Shareholders mirror the returns under the Quoted Securities held or entered into by the Company and that any default by an issuer of any such Quoted Security held by the Company would have a consequential adverse effect on the ability of the Company to pay some or all of the entitlement to Shareholders. Such a default might, for example, arise on the insolvency of an issuer of a Quoted Security.
	The Company's financial assets exposed to credit risk are as follows:
					31 Dec 2013		31 Dec 2012
					GBP		GBP
	Financial assets designated as at fair value through profit or loss
	(fixed income securities only)				12,414,432		6,551,549
	Cash and cash equivalents				2,458,412		618,376
	Interest, dividends and other receivables				723,023		418,464
					15,595,867		7,588,389

(b)	Credit Risk
	The credit ratings of the bonds in the Income Portfolio, as rated by Moody's Investor Services Inc ("Moodys") were:
	Rating		31 Dec 2013		31 Dec 2012
	Aaa		2.51%		1.16%
	Aa		9.89%		4.09%
	A		8.62%		15.30%
	Baa		14.04%		24.46%
	Ba		9.11%		5.58%
	B		3.98%		2.22%
	WR		0.00%		0.00%
	No Rating available		51.85%		47.19%
	The cash and cash equivalents were held with BNP Paribas, which at the time of signing this report held a credit rating, as rated by Moody's, of A2.
(c)	Liquidity Risk
	Liquidity risk is the risk that the Company will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments. The Company's main financial commitments are its ongoing operating expenses and the settlement of the obligation upon maturity of the ZDP Shares on 31 January 2017. The ZDP liability will be settled through realisation of the Company's investment portfolio.
	The Investment Advisers ensure that the Company has sufficient liquid resources available to fulfil its operational plans and to meet its financial obligations as they fall due. This is monitored by carrying out a solvency calculation on a quarterly basis by reference to management accounts and revenue projections. The Board will approve, if appropriate, a Solvency Certificate resolution prior to declaring any interim dividend distributions.

(c)	Liquidity Risk (continued)
	The ZDP Shares will not pay dividends but will have a final capital entitlement at the end of their life on 31 January 2017 of 138 pence. It should be noted that the predetermined capital entitlement of a ZDP Share is not guaranteed and is dependent upon the Company's gross assets being sufficient on 31 January 2017 to meet the final capital entitlement of the ZDP Shares.
	The Board intend to monitor the financial position of the Company to ensure that it has sufficient liquid resources available to fulfil its obligation upon maturity of the ZDP Shares.
	The table below details the residual contractual maturities of financial liabilities:
	As at 31 December 2013:
			1-3 months			Over 1 year
			GBP			GBP
	Financial assets
	Financial assets designated as at fair value through profit or loss			75,976,377		34,358,936
	Receivables			723,023		418,464
	Cash and cash equivalents			2,458,412		618,376
				79,157,712		35,395,776
	Financial liabilities including derivatives
	Payables - due within one year		702,658			-
	ZDP Share entitlement		-			28,486,382
			702,658			28,486,382
	As at 31 December 2012:
			1-3 months			Over 1 year
			GBP			GBP
	Financial liabilities including derivatives
	Payables - due within one year		106,361			-
	ZDP Share entitlement		-			16,560,000
			106,361			16,560,000

(d)		Interest Rate Risk
	The Company could hedge interest rate risk using various different methods.
	The following table details the Company's exposure to interest rate risks. It includes the Company's assets and liabilities at fair values, categorised by the earlier of contractual re-pricing or maturity date measured by the carrying value of the assets and liabilities:
	As at 31 December 2013:
			Less than		Non-interest
			1 month	Fixed interest	Bearing	Total
			GBP	GBP	GBP	GBP
	Financial Assets
	Financial assets at fair value through profit or loss on initial recognition		-	12,414,432	63,561,945	75,976,377
	Cash and cash equivalents		2,458,412	-	-	2,458,412
	Interest, dividends and other receivables		-	-	723,023	723,023
	Derivative financial instruments		-	-	73,305	73,305
	Total Financial Assets		2,458,412	12,414,432	64,358,273	79,231,117
	Financial Liabilities
	Payables		-	-	702,658	702,658
	ZDP Share entitlement		-	23,681,183	-	23,681,183
	Total Financial Liabilities		-	23,681,183	702,658	24,383,841
	Total interest sensitivity gap		2,458,412	(11,266,751)
	As at 31 December 2012:
			Less than		Non-interest	Total
			1 month	Fixed interest	Bearing
			GBP	GBP	GBP	GBP
	Financial Assets
	Financial assets at fair value through profit or loss on initial recognition		-	6,551,549	27,807,387	34,358,936
	Cash and cash equivalents		618,375	-	-	618,375
	Interest, dividends and other receivables		-	-	418,464	418,464
	Derivative financial instruments		-	-	707	707
	Total Financial Assets		618,375	6,551,549	28,226,558	35,396,482

	As at 31 December 2012:
		Less than			Total
		1 month	Fixed interest	Bearing
		GBP	GBP	GBP	GBP
	Financial Liabilities
	Derivative financial instruments	-	-	-	-
	Payables	-	-	106,361	106,361
	ZDP Share entitlement	-	12,496,983	-	12,496,983
	Total Financial Liabilities	-	12,496,983	106,361	12,603,344
	Total interest sensitivity gap	618,375	(5,945,434)

(d)	Interest Rate Risk (continued)
	Interest rate sensitivity takes account of the effect of interest rate movements on cash balances, loan amounts and fixed interest securities. Interest rate risk does not affect the cash flows of the fixed interest securities but does affect the fair value and as such this sensitivity has been reflected in the market price risk disclosures at Note 18a.
	Interest rate sensitivity
	If interest rates had been 25 basis points higher and all other variables were held constant, the Company's return attributable to Shareholders for the year ended 31 December 2013 would have increased by approximately £6,146 (2012: £1,546) or 0.01% (2012: 0%) of Total Assets due to an increase in the amount of interest receivable on the bank balances.
	If interest rates had been 25 basis points lower and all other variables were held constant, the Company's return attributable to shareholders for the year ended 31 December 2013 would have decreased by approximately £6,146 (2012: £1,546) or 0.01 % (2012: 0 %) of Total Assets due to a decrease in the amount of interest receivable on the bank balances.
(e)	Foreign Exchange Risk
	Forward currency transactions are used to hedge the foreign currency exposure in bonds, other investments and cash balances held within the portfolio.  The purpose of the hedge is to protect the Company's assets from a decline in value that might arise from the depreciation of a foreign currency against Sterling.
	At 31 December 2013, the Company's holdings in derivatives  translated into GBP were as specified below:
							Notional		Fair value
							amount of contracts		assets
	Type of contract		Expiration		Underlying		outstanding
									GBP
	Forward		February 2014		Sold USD		300,000.00		2,298
	Forward		February 2014		Sold USD		35,000.00		278
	Forward		February 2014		Sold EUR		1,425,000.00		15,052
	Forward		February 2014		Sold USD		3,235,000.00		55,677
									73,305

	At 31 December 2012, the Company's holdings in forward currency contracts translated into GBP were as specified below:
							Notional		Fair value
							amount of contracts		assets /
	Type of contract		Expiration		Underlying		outstanding		(liabilities)
									GBP
	Forward		March 2013		Sold USD		1,000,000.00		5,229
	Forward		March 2013		Sold EUR		1,455,000.00		(4,521)
									707
	Exchange rate exposures are managed by minimising the amount of foreign currency held at any one time and entering into forward exchange contracts.
	The following table sets out the Company's total exposure to foreign currency risk and the net exposure to foreign currencies of the monetary assets and liabilities:
	31 December 2013		Monetary Assets		Monetary Liabilities		Forward FX Contracts		Net Exposure
			GBP		GBP		GBP		GBP
	Euro		1,406,764		-		(1,198,509)		208,255
	US Dollar		2,310,212		-		(2,214,441)		95,772
	Australian Dollar		12,418		-		-		12,418
	31 December 2012		Monetary Assets		Monetary Liabilities		Forward FX Contracts		Net Exposure
			GBP		GBP		GBP		GBP
	Euro		1,380,666		-		(1,176,773)		203,893
	US Dollar		740,262		-		(620,424)		119,838
	Australian Dollar		14,527		-		-		14,527
	Amounts in the above table are based on the carrying value of monetary assets and liabilities and the underlying principle amount of forward currency contracts.

(f)	Capital Management
	The principal investment objectives of the Company are to provide shareholders with a high income and also the opportunity for income and capital growth by investing primarily in smaller capitalised United Kingdom companies admitted to the Official List of the United Kingdom Listing Authority and traded on the London Stock Exchange or traded on AIM.
	The Company's portfolio is invested in equities and high income and fixed interest and other income-bearing securities in order to achieve its investment objectives. It is the aim of the Company to provide both income and capital growth predominantly through investment of approximately 70% - 80% of the portfolio in smaller capitalised United Kingdom companies. The Company also aims to further enhance income for shareholders by investing approximately 20% - 30% of its assets in high yielding securities which will be predominantly fixed income securities (including corporate bonds, preference and permanent interest bearing shares, convertible and reverse convertible bonds and debentures) but may include up to 15% of the portfolio (measured at time of acquisition) in high yielding investment company shares.
	As the Company's Ordinary Shares are traded on the London Stock Exchange, the Ordinary Shares may trade at a discount or premium to their NAV per Share on occasion. However, the Directors and the Investment Manager monitor the discount on a regular basis and can use share buy backs to manage the discount.
	The Company monitors capital on the basis of the carrying amount of equity as presented on the face of the Statement of Financial Position. Capital for the reporting periods under review is summarised as follows:
					GBP
	Distributable reserves				10,447,558
	Share capital and share premium				20,564,825
	Non distributable reserves				23,834,893
	Treasury shares				-
	Total				54,847,276
	The distributable reserves comprise the revenue reserve and the special reserve. The non distributable reserves comprise the capital reserve. The special reserve was created on the cancellation of part of the Company's share premium account. The Directors have resolved that the capital reserve is a non distributable reserve.
19	SUBSEQUENT EVENTS A dividend of 3.00p per share was paid to Ordinary shareholders on 28 March 2014. Issues of new shares and sales from treasury year to date 2014. Further to the authority granted to the Board under the placing programme in April 2013, the Company has issued 2,500,205 Ordinary Shares and 3,356,065 ZDP Shares in the calendar year 2014. Following the authority granted to the Company at the EGM on 6 January 2014, the Company has sold 240,000 Ordinary Shares and 322,156 ZDP Shares from treasury. The financial statements were authorised for issue on 30 April 2014  by the Board of Directors.

DIRECTORS AND ADVISERS

Directors

Helen Foster Green (Chairman)

John Nigel Ward

David John Warr

Investment Manager	Custodian
Premier Asset Management (Guernsey) Limited PO Box 156 Frances House, Sir William Place St Peter Port Guernsey GY1 4EU	BNP Paribas Trust Company (Guernsey) Limited BNP Paribas House St Julian's Avenue St Peter Port Guernsey GY1 3WE
Investment Adviser - Smaller Companies Portfolio	Corporate Broker
Unicorn Asset Management Limited Preacher's Court The Charterhouse Charterhouse Square London EC1M 6AU	Numis Securities Limited 10 Paternoster Square London EC4M 7LT
Investment Adviser - Income Portfolio	Independent Auditors
Premier Fund Managers Limited Eastgate Court High Street Guildford GU1 3DE	KPMG Channel Islands Limited PO Box 20 20 New Street St Peter Port Guernsey GY1 4AN
Administrator and Secretary	Registered Office
JTC Fund Managers (Guernsey) Limited PO Box 156 Frances House, Sir William Place St Peter Port Guernsey GY1 4EU	PO Box 156 Frances House Sir William Place St Peter Port Guernsey GY1 4EU
Registrar
Anson Registrars Limited PO Box 405 Anson House Havilland Street St Peter Port Guernsey GY1 3GF

For further information about this announcement contact:

JTC Fund Managers (Guernsey) Limited

Secretary

Tel: [phone]

30 April 2014

END OF ANNOUNCEMENT

E&OE - in transmission

 

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