Annual Financial Report

RNS Number : 7426P

F&C UK High Income Trust PLC

30 May 2018

 

To:                    RNS

From:                F&C UK High Income Trust plc

Date:                30 May 2018

LEI:                  213800B7D5D7RVZZPV45

Results for the year ended 31 March 2018

·      Distribution yield of 5.1 per cent on Ordinary shares and B shares at 31 March 2018, based on total distributions for the financial year of 4.88p per share, compared to the yield on the FTSE All-Share Capped 5% Index of 3.8 per cent. Total distributions increased by 3.4% compared to the prior year.

·      Ordinary share price total return per share for the year was -2.8 per cent, compared to the FTSE All-Share Capped 5% Index total return of 0.9 per cent.

·      B share price total return per share for the year was -3.8 per cent, compared to the FTSE All-Share Capped 5% Index total return of 0.9 per cent.

·      Net asset value total return per share for the year was -2.5 per cent, compared to the FTSE All-Share Capped 5% Index total return of 0.9 per cent.

Chairman's Statement as follows:

Over the financial year a number of changes have been made to simplify the Company's overall structure and message. We are pleased with the positive feedback we have received from shareholders as we enter a new phase for the Company.

Performance

For the Company's financial year ended 31 March 2018, the NAV total return for the Ordinary shares and the B shares was -2.5% compared to the total return of the Company's benchmark of 0.9%. At the year end the discount on the Company's shares had widened slightly resulting in a share price total return for the Ordinary shares and B shares of -2.8% and -3.8% respectively for the financial year.

The 2018 financial year has been one of significant change for the Company following the appointment of a new Fund Manager (Philip Webster) in April 2017. As a Board we have made great strides in simplifying the message to current and prospective shareholders in tandem with transitioning to a pure equity portfolio. The ethos of the Company remains the same, to pay a high and growing dividend, but we felt the investment portfolio needed a clearer strategy which we have now put in place. The Manager has delivered a concentrated, differentiated strategy that we feel offers shareholders something unique in the 'high income' landscape. Whilst the one-year performance is behind the benchmark the Manager has articulated a clear strategy and as a Board we understand that this can take time to come to fruition.

Investment portfolio

As part of the changes referenced above, at the Company's Annual General Meeting in June 2017, shareholders approved the proposed changes to the Company's investment policy, which included the removal of the Higher Yield Portfolio ('corporate bonds'). There had been a continued reduction in assets allocated to this portfolio and the remaining holdings have now been sold.

There has been a lot of discussion around bond yields rising and the financial system returning to a more normalised interest rate. Whilst this will happen over the medium-term, valuations on bonds remain expensive and the yields on offer made allocating capital to this asset class no longer tenable.

The principal contributors to the performance and additional information is covered in more detail in the Manager's Review in the Annual Report and Financial Statements.

The Company's longer-term performance is shown within the Key Performance Indicators in the Annual Report and Financial Statements.

Earnings, Dividends and Capital Repayments

The Company's revenue earnings per share increased over the year to 4.03p per share (2017: 3.82p per share) and reflected continued growth in underlying dividends. The Manager has changed the emphasis of the portfolio moving away from some of the mega-caps, where the dividend cover and growth is low, towards dividend growth. This is again a medium-term strategy and in line with the Board's commitment to a progressive dividend policy.

Movements in the Sterling exchange rate, most notably against the US dollar, have an important influence on the Company's revenue as broadly a quarter of the Company's income comes from UK-listed companies that declare dividends in US dollars. Following a period of weakness in Sterling, over the past year it has strengthened against the US dollar by approximately 11% which will have tempered the rate of growth in dividend income.

Turning to the wider UK market, the 2017 calendar year was a record for dividend payments, surpassing the 2014 high, with dividends rising 10.7% year-on-year to £94bn. While at face value this looks an impressive increase nearly half of the upside came from a resurgent mining sector and a further quarter came from the weakness in Sterling and a number of large special dividends. The underlying dividend growth was therefore less impressive and in the quarter to 31 December 2017 growth was a more moderate 1.1% as currency gains in the previous quarters swung into losses.

For each of the Company's first three quarters, the dividends paid on the Ordinary shares and capital repayments on the B shares were 1.21p per share. A fourth quarter dividend and a capital repayment of 1.25p per share was paid to Ordinary shareholders and B shareholders respectively, after the year end, on 4 May 2018.

The total dividend/capital repayment in respect of the year ended 31 March 2018 amounted to 4.88p per share, an increase of 3.4% on the previous year and ahead of the 2.4% increase in the Consumer Price Index.

The total dividend/capital repayment for the year represents a yield of 5.1% on both the Ordinary share and B share year end prices, a premium of around 34% to the 3.8% yield from the Company's benchmark at that date.

We have now steadily increased the annual total dividend/capital repayment in each of the last five years while adding to the revenue reserve. After deducting the fourth quarter dividend, (which was paid after the year-end), the Company has a revenue reserve of £5.2m equivalent to approximately 124% of the current annual dividend cost. This revenue reserve affords the Company the ability to sustain the level of dividend payments if a more difficult environment develops.

Proposed benchmark index change

The Board measures and assesses the performance of the Company against a number of comparators and since launch performance has primarily been measured against the FTSE All-Share Capped 5% Index. Within the Company's investment policy the objective is to achieve a total return in excess of that of the FTSE All-Share Capped 5% Index. It is proposed that this benchmark index be changed to the FTSE All-Share Index in order to simplify the measurement of the Company's performance. It was clear that the FTSE All-Share Capped 5% Index (in which constituents are capped to avoid over-concentration in any one stock) was not that well understood by our shareholders or the market. I would like to state that the two indices have performed in tandem (less than 0.5% difference over 5 years) which should comfort shareholders that this is very much about clarity of message.

Shareholders will be aware that while the Company does not have a fixed life, in the event that the net asset value total return performance of the Company is less than that of the FTSE All-Share Capped 5% index over the relevant five-year period, shareholders are given the opportunity to vote on whether the Company should continue, by ordinary resolution, at the Company's Annual General Meeting every five years.

The current five-year period for this purpose runs from 1 April 2017 to 31 March 2022. Accordingly it is proposed that the index used to measure this be changed to the FTSE All-Share Index with effect from 1 April 2017. A resolution to amend the Company's Articles to implement this change will be proposed at the Annual General Meeting. By way of illustration the returns from this index over 1 year, 3 years, 5 years, 10 years and from launch have been included within the performance table within Key Performance Indicators in the Annual Report.

In the event that shareholders approve this change, the Investment Policy as set out in the Annual Report would also be amended to reflect that the objective is to achieve a total return in excess of that of the FTSE All-Share Index.

Borrowing

The Company refinanced its borrowings at the end of September 2017 and reduced the fixed level of debt from £18 million at a cost of 3.15% per annum to £7.5 million at a lower rate of annual interest of 2.58%, fixed for five years. In addition the Company also entered into a five year unsecured multicurrency revolving credit facility for £7.5 million.

The Company's gearing policy and related limits are set out in the Annual Report and at the time of writing, borrowings total 5.3 per cent of gross assets.

This dual structure gives us both fixed structural gearing and flexibility to use the revolving facility when we feel it is appropriate.

Management fees

As set out in the Director's Report within the Annual Report the Remuneration Committee regularly reviews the Manager's appointment and the terms of its contract. I am pleased to report that with effect from 1 April 2018 it has been agreed with the Manager that the investment management fee be reduced from 0.75 per cent per annum on the net asset value to 0.65 per cent per annum on the net asset value of the Company. The Board strives to ensure that the ongoing charges of running the Company are as competitive as possible.

Discount and buy backs

At the financial year end, the Company's Ordinary share price and B share price stood at a discount to net asset value of 7.0% and 7.7% respectively. The average discount level at which the Company's Ordinary shares and B shares traded relative to net asset value in the year was 6.6%.

During the year, the Company bought back 500,000 Ordinary shares, representing 0.6% of the Ordinary shares, in issue at the previous year end. The shares were bought back in line with the Company's stated policy, which is to repurchase shares of either class, at the Directors' discretion, when there are net sellers and the market price stands at a discount to net asset value of 5 per cent or more. The price paid for these Ordinary shares represented a discount of approximately 7.6% to the prevailing net asset value at the time of purchase.

Board Changes

As explained in my Interim Report, Mr Kenneth Shand retired as a Director of the Company following the conclusion of the Annual General Meeting on 29 June 2017. Following his retirement, James Williams became Senior Independent Director and chairman of the Remuneration Committee.

Following the AGM, the Board was pleased to announce the appointment of Mr Andrew Watkins as a non-executive Director of the Company, which took immediate effect. Andrew has worked in the financial services industry for over 40 years and was Head of Client Relations for Investment Trusts at Invesco Perpetual from 2004 until his recent retirement. We believe that his experience of investment trusts and his extensive knowledge of the industry will contribute significantly to the Board.

Annual General Meeting ("AGM")

The AGM will be held at 12 noon on Thursday 5 July 2018 in the offices of BMO Global Asset Management, Quartermile 4, 7a Nightingale Way, Edinburgh. It will be followed by a presentation from our Fund Manager Philip Webster. This is a good opportunity for shareholders to meet the Board and the Fund Manager and I would encourage you to attend.

Outlook

The Board has taken a number of positive steps over the last 12 months to position the Company for the next five-year performance cycle. The Income sector is a competitive space and we feel the changes we have made, along with the portfolio changes made by the Manager, give us a clear and differentiated position in the market. We have managed to deliver this whilst maintaining the above market yield and despite performance lagging over the last financial year we remain comfortable with the Company's investment portfolio. The market has become very short-term with a focus on quarterly results. This has caused a disconnect with the medium-term fundamentals which plays into the hands of stock pickers, although this will take time. It is early days but we are encouraged by the response we have had from our shareholders to the changes we have made and feel well placed for the future.

Iain McLaren

Chairman

29 May 2018

For further information, please contact:

Philip Webster                                                                          

Fund Manager to F&C UK High Income Trust plc                          Tel:        [phone]

Ian Ridge

For F&C Investment Business Limited

Company Secretary to F&C UK High Income Trust plc                  Tel:        [phone]

Statement of Comprehensive Income (audited)

		Year to 31 March 2018
	Note	Revenue	Capital	Total
		£'000	£'000	£'000
Capital losses on investments
Losses on investments held at fair value through profit or loss		-	(6,867)	(6,867)
Exchange differences		-	(17)	(17)
Revenue
Investment income		5,601	-	5,601
Total income		5,601	(6,884)	(1,283)
Expenditure
Investment management fee		(294)	(686)	(980)
Other expenses		(424)	-	(424)
Total expenditure		(718)	(686)	(1,404)
Profit/(loss) before finance costs and tax		4,883	(7,570)	(2,687)
Finance costs
Interest on bank loan		(119)	(277)	(396)
Total finance costs		(119)	(277)	(396)
Profit/(loss) before tax		4,764	(7,847)	(3,083)
Tax		-	-	-
Profit/(loss) for the year		4,764	(7,847)	(3,083)
Total comprehensive income/(expense) for the year		4,764	(7,847)	(3,083)
Earnings per share	2	4.03p	(6.64)p	(2.61)p

Statement of Comprehensive Income (audited)

		Year to 31 March 2017
	Note	Revenue	Capital	Total
		£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value through profit or loss		-	20,184	20,184
Exchange differences		-	(545)	(545)
Revenue
Investment income		5,447	-	5,447
Total income		5,447	19,639	25,086
Expenditure
Investment management fee		(287)	(670)	(957)
Other expenses		(397)	-	(397)
Total expenditure		(684)	(670)	(1,354)
Profit before finance costs and tax		4,763	18,969	23,732
Finance costs
Interest on bank loan		(178)	(415)	(593)
Total finance costs		(178)	(415)	(593)
Profit before tax		4,585	18,554	23,139
Tax		-	-	-
Profit for the year		4,585	18,554	23,139
Total comprehensive income for the year		4,585	18,554	23,139
Earnings per share	2	3.82p	15.48p	19.30p

Balance Sheet (audited)

as at 31 March

		2018		2017
	Note		£'000		£'000
Non-current assets
Investments held at fair value through profit or loss			127,664		136,291
Current assets
Receivables			1,179		979
Cash and cash equivalents			1,563		12,982
			2,742		13,961
Total assets			130,406		150,252
Current liabilities
Payables			(581)		(603)
Bank loan			-		(18,000)
			(581)		(18,603)
Non-current liabilities
Bank loan			(7,500)		-
			(7,500)		-
Total liabilities			(8,081)		(18,603)
Net assets			122,325		131,649
Share capital			134		134
Share premium			153		153
Capital redemption reserve			5		5
Buy back reserve			82,190		82,711
Special capital reserve			18,089		19,589
Capital reserves			15,426		23,273
Revenue reserve			6,328		5,784
Equity shareholders' funds			122,325		131,649
Net asset value per Ordinary/A share†	6		103.75p		111.19p
Net asset value per B share	6		103.75p		111.19p

The Company's loss for 2018 was £3,083,000 (2017: profit £23,139,000).

† At the Company's Annual General Meeting held on 29 June 2017 shareholders approved the proposal to change the name of the Company's A Shares to Ordinary shares.

Cash Flow Statement (audited)

for the year to 31 March

	Year to 31 March 2018	Year to 31 March 2017
	£'000	£'000
Cash flows from operating activities
(Loss)/profit before tax	(3,083)	23,139
Adjustments for:
Losses/(gains) on investments held at fair value through profit or loss	6,867	(20,184)
Exchange differences	17	545
Interest income	(11)	(21)
Interest received	11	21
Investment interest	(63)	(426)
Investment interest received	125	587
Dividend income	(5,522)	(5,000)
Dividend income received	5,292	4,958
Decrease/(increase) in receivables	4	(10)
(Decrease)/increase in payables	(22)	15
Purchases of investments	(69,296)	(25,097)
Sales of investments	71,056	36,456
Finance costs	396	593
Net cash inflow from operating activities	5,771	15,576
Cash flows from financing activities
Bank loan repaid	(10,500)	-
Dividends paid on Ordinary/A shares†	(4,220)	(4,168)
Capital returns paid on B shares	(1,500)	(1,469)
Interest on bank loan	(436)	(593)
Shares purchased for treasury	(521)	(3,056)
Net cash outflow from financing activities	(17,177)	(9,286)
Net (decrease)/increase in cash and cash equivalents	(11,406)	6,290
Currency losses	(13)	(572)
Opening net cash and cash equivalents	12,982	7,264
Closing net cash and cash equivalents	1,563	12,982

† At the Company's Annual General Meeting held on 29 June 2017 shareholders approved the proposal to change the name of the Company's A Shares to Ordinary shares.

Statement of Changes in Equity (audited)

for the year to 31 March 2018

	Share Capital	Share Premium	Capital Redemption Reserve	Buy Back Reserve	Special Capital Reserve	Capital Reserve - Investments sold	Capital Reserve - Investments held	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 1 April 2017	134	153	5	82,711	19,589	(9,910)	33,183	5,784	131,649
Total comprehensive income for the year
Profit/(loss) for the year	-	-	-	-	-	7,074	(14,921)	4,764	(3,083)
Total comprehensive income for the year	-	-	-	-	-	7,074	(14,921)	4,764	(3,083)
Transactions with owners of the Company recognised directly in equity
Shares bought back for treasury	-	-	-	(521)	-	-	-	-	(521)
Dividends paid on Ordinary shares†	-	-	-	-	-	-	-	(4,220)	(4,220)
Capital returns paid on B shares	-	-	-	-	(1,500)	-	-	-	(1,500)
Balance as at 31 March 2018	134	153	5	82,190	18,089	(2,836)	18,262	6,328	122,325

† At the Company's Annual General Meeting held on 29 June 2017 shareholders approved the proposal to change the name of the Company's A Shares to Ordinary shares.

Statement of Changes in Equity (audited)

for the year to 31 March 2017

	Share Capital	Share Premium	Capital Redemption Reserve	Buy Back Reserve	Special Capital Reserve	Capital Reserve - Investments sold	Capital Reserve - Investments held	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 1 April 2016	134	153	5	85,092	21,058	(14,777)	19,496	5,367	116,528
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	4,867	13,687	4,585	23,139
Total comprehensive income for the year	-	-	-	-	-	4,867	13,687	4,585	23,139
Transactions with owners of the Company recognised directly in equity
Shares bought back for treasury	-	-	-	(2,381)	-	-	-	-	(2,381)
Dividends paid on A shares	-	-	-	-	-	-	-	(4,168)	(4,168)
Capital returns paid on B shares	-	-	-	-	(1,469)	-	-	-	(1,469)
Balance as at 31 March 2017	134	153	5	82,711	19,589	(9,910)	33,183	5,784	131,649

F&C UK High Income Trust plc

Principal Risks and Viability Statement

Most of the Company's principal risks that could threaten its objective, strategy, future performance, liquidity and solvency are market related and comparable to those of other investment trusts investing primarily in listed securities.

In accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, issued by the Financial Reporting Council, the Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. It has also regularly reviewed the effectiveness of the Company's risk management and internal control systems for the period.

The principal risks and uncertainties faced by the Company, and the Board's mitigation approach are described below.

Financial Risk.

The Company's assets consist mainly of listed equity securities and its principal financial risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk.

Mitigation:  

The Board regularly considers the composition and diversification of the Investment Portfolio and considers individual stock performance together with purchases and sales of investments.  Investments and markets are discussed with the Manager and a Strategy meeting is held annually. An explanation of these risks and the way in which they are managed are contained in the notes to the financial statements.

Investment and strategic risk.

Incorrect strategy, asset allocation, stock selection, inappropriate capital structure, insufficient monitoring of costs, failure to maintain an appropriate level of discount/premium and the use of gearing could all lead to poor returns for shareholders.

Mitigation: 

The Company's objective and investment policy and performance against peers and benchmark are considered by the Board at each meeting.  A separate Board meeting is also held each year to consider strategic issues. The Investment Portfolio is diversified and comprises listed securities and its composition is reviewed regularly with the Board. F&C's Investment Risk team provides oversight on investment risk management. Market intelligence is maintained via the Company's Broker and the effectiveness of the marketing strategy is also reviewed at each meeting. The Manager also meets with major shareholders. The Board regularly considers operating costs combined with underlying dividend income from portfolio companies and the consequent dividend paying capacity of the Company.

Regulatory. 

Breach of regulatory rules could lead to the suspension of the Company's Stock Exchange listing, financial penalties, or a qualified audit report. Breach of section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains. Changes to tax regulations could alter the market competitiveness of the Company's B Shares.

Mitigation: 

The Board liaises with advisors to ensure compliance with laws or regulations. The Manager and its Business Risk department provide regular reports to the Board and Audit Committee on their monitoring and oversight of such rules and are reviewed by the Board.  This includes the conditions to maintain investment trust status including the income distribution requirement. The Board has access to F&C's Head of Business Risk and requires any significant issues directly relevant to the Company to be reported immediately.

Operational. 

Failure of the Manager's systems or disruption to its business, or that of an outsourced or third party service provider, could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets leading to a potential breach of the Company's investment mandate or loss of shareholders' confidence. External cyber attacks could cause such failure or could lead to the loss or sabotage of data.

Mitigation:

The Board meets regularly with the management of F&C and its Risk team to review internal control and risk reports which includes oversight of third party service providers. The Manager's appointment is reviewed annually.  The contract can be terminated with six months' notice. A business continuity plan is in place. The Manager continues to benefit from the long-term financial strength and policies of its parent company, Bank of Montreal. Supervision of third party service providers has been maintained by F&C and includes the review of IT security and cyber threat. The Board received a presentation during the year from the Custodian on its own cyber-security controls.

Custody Risk.

Safe custody of the Company's assets may be compromised through control failures by the custodian.

Mitigation: 

The Board receives quarterly reports from the Depositary confirming safe custody of the Company's assets and cash and holdings are reconciled to the Custodian's records. The Custodian's internal controls reports are also reviewed by the Manager and key points reported to the Audit Committee.  The Depositary is specifically liable for loss of any of the Company's securities and cash held in custody.

Viability assessment and statement

In accordance with the UK Corporate Governance Code, the Board is required to assess the future prospects for the Company, and has considered that a number of characteristics of its business model and strategy were relevant to this assessment:

·      The Board looks to long-term outperformance rather than short-term opportunities.

·      The Company's investment objective, strategy and policy, which are subject to regular Board monitoring, mean that the Company is invested mainly in liquid listed securities and that the level of borrowing is restricted.

·      The Company is a closed-end investment trust, whose shares are not subject to redemptions by shareholders.

·      Subject to shareholder continuation votes, in the event that the net asset value total return performance of the Company is less than that of the FTSE All-Share Capped 5% Index over the relevant five year period, the Company's business model and strategy is not time limited.

Also relevant were a number of aspects of the Company's operational arrangements:

·      The Company retains title to all assets held by the Custodian under the terms of the formal agreement with the Custodian and Depositary.

·      The borrowing facilities, which remain available until September 2022, are also subject to formal agreements, including financial covenants with which the Company complied in full during the year.

·      Revenue and expenditure forecasts are reviewed by the Directors at each Board Meeting.

·      Cash is held with banks approved and regularly reviewed by the Manager.

In considering the viability of the Company, the Directors carried out a robust assessment of the principal risks and uncertainties which could threaten the Company's objective and strategy, future performance, liquidity and solvency.  These risks, their mitigations and the processes for monitoring them are set out above within Principal Risks and in the Report of the Audit Committee and in Note 21 of the financial statements within the Annual Report.

The Directors have also considered:

·      the level of ongoing charges incurred by the Company which are modest and predictable and total 0.93% of average net assets,

·      future revenue and expenditure projections,

·      the Company's borrowing and liquidity in the context of the fixed rate loan which is due to mature in September 2022,

·      its ability to meet liquidity requirements given the Company's investment portfolio consists mainly of readily realisable listed equity securities which can be realised to meet liquidity requirements if required,

·      the ability to undertake share buybacks if required,

·      the effect of significant future falls in investment values and the ability to maintain dividends and capital repayments.

These matters were assessed over a five year period to May 2023, and the Board will continue to assess viability over five year rolling periods, taking account of severe but plausible scenarios.  A rolling five year period represents the horizon over which the Directors believe they can form a reasonable expectation of the Company's prospects, balancing the Company's financial flexibility and scope with the current outlook for longer-term economic conditions affecting the Company and its shareholders.

Based on their assessment, and in the context of the Company's business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period to May 2023.

Statement of Directors' Responsibilities in Relation to the Financial Statements

In accordance with Chapter 4 of the Disclosure Guidance and Transparency Rules, the Directors confirm, in respect of the Annual Report and financial statements for the year ended 31 March 2018 of which this statement of results is an extract, that to the best of their knowledge:

·      the financial statements contained within the Annual Report have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      the Strategic Report (comprising the Chairman's Statement, Business Model and Strategy, Policy summary, Key Performance Indicators, Principal Risks and Viability Statement, Manager's Review, Classification of Investments and Investment Portfolio) and the Report of the Directors include 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 that they face;

·      taken as a whole, the annual report and financial statements are fair, balanced and understandable and provide the information necessary for shareholders to assess the performance, business model and strategy of the Company;

·      the financial statements include details on related party transactions; and

·      having assessed the principal risks and other matters discussed in connection with the Viability Statement, it is appropriate to adopt the going concern basis in preparing the financial statements.

On behalf of the Board

Iain McLaren

Chairman

29 May 2018                                                      

Notes (audited)

1.            The financial statements of the Company which are the responsibility of, and were approved by, the Board on 29 May 2018, have been prepared on a going concern basis under the historical cost convention modified to include fixed asset investments and derivatives at fair value and in accordance with the Companies Act 2006, International Financial Reporting Standards (''IFRS''), which comprise standards and interpretations approved by the International Accounting Standards Board (the ''IASB''), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee (''IASC'') that remain in effect, and to the extent that they have been adopted by the European Union.

The Company's subsidiary undertaking Investors Securities Company Limited has not been consolidated in the financial statements as it is exempt in accordance with Section 405(2) of the Companies Act 2006 on grounds of materiality. Investors Securities Company Limited has been classified at fair value through profit of loss in the Balance Sheet.

Where presentational guidance set out in the Statement of Recommended Practice (''SORP'') for investment trusts issued by the Association of Investment Companies (''AIC'') is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

2.            The Company's earnings per share are based on the loss for the year of £3,083,000 (year to 31 March 2017 profit: £23,139,000) and on 87,138,309 Ordinary shares (2017: 88,644,856) and 30,976,703 B shares (2017: 31,262,045), being the weighted average number of shares in issue of each share class during the year. 

The Company's revenue earnings per share are based on the revenue profit for the year of £4,764,000 (year to 31 March 2017: £4,585,000) and on the weighted average number of shares in issue as above.

The Company's capital earnings per share are based on the capital loss for the year of £7,847,000 (year to 31 March 2017 profit: £18,554,000) and on the weighted average number of shares in issue as above.

3.            The fourth interim dividend of 1.25p per Ordinary share, was paid on 4 May 2018 to Ordinary shareholders on the register at close of business on 6 April 2018, having an ex-dividend date of 5 April 2018. The fourth capital repayment of 1.25p per B share was paid on 4 May 2018 to B shareholders on the register on 6 April 2018.

4.            On 28 September 2017 the Company repaid its £18 million secured term loan with JPMorgan Chase Bank. On the same date the Company drew down a £7.5 million unsecured term loan from Scotiabank Europe plc. The new facility has a five year term to 28 September 2022 and has a fixed interest rate of 2.58 per cent per annum. The Company also entered into a five year unsecured multicurrency revolving credit facility with Scotiabank (Ireland) Designated Activity Company, for £7.5 million. £nil was drawn down at 31 March 2018. Arrangement and legal fees of £55,000 were incurred and are being amortised over the term of the facilities.

The loan agreements contain certain financial covenants with which the Company must comply. These include a financial covenant with respect to the ratio of the Adjusted Net Asset Value (as defined in the loan agreements) to the level of debt and also that the Net Asset Value does not fall below £65 million. The Company complied with the required financial covenants throughout the period since drawdown.

The fair value of the £7.5 million term loan is not materially different from the value reflected in the Balance Sheet. The fair value of the fixed rate £18 million term loan, on a marked to market basis, was £18,078,000 at 31 March 2017.

5.            During the year the Company bought back 500,000 Ordinary Shares (2017: 2,000,000 A shares) to hold in treasury at a cost of £521,000 (2017: £1,941,000) and nil (2017: 450,000) B Shares to hold in treasury (2017: at a cost of £440,000). The Company did not buy back any shares for cancellation during the year (2017: nil).

At 31 March 2018 the Company held 15,139,000 Ordinary Shares (2017: 14,639,000 A shares) and 1,100,000 (2017: 1,100,000) B Shares in treasury.

6.            The Company's basic net asset value per share of 103.75p (2017: 111.19p) is based on the equity shareholders' funds of £122,325,000 (2017: £131,649,000) and on 117,904,847 equity shares, consisting of 86,928,144 Ordinary Shares and 30,976,703 B Shares (2017: 118,404,847 equity shares, consisting of 87,428,144 A Shares and 30,976,703 B Shares), being the number of shares in issue at the year end.

The Company's shares may also be traded as units, each unit consisting of three Ordinary Shares and one B Share. The basic net asset value per unit as at 31 March 2018 was therefore 415.00p (2017: 444.76p).

The Company's treasury net asset value per share, incorporating the 15,139,000 Ordinary Shares and 1,100,000 B Shares held in treasury at the year end (2017: 14,639,000 A Shares and 1,100,000 B Shares), was 103.12p (2017: 110.54p). The Company's treasury net asset value per unit at the end of the year was 412.48p (2017: 442.16p). The Company's policy is to only re-sell shares held in treasury at a price representing a discount of not more than 5 per cent to net asset value at the time of sale, together with other conditions. Accordingly, for the purpose of the calculation, such treasury shares are valued at the higher of net asset value less 5 per cent and the mid market share price at each year end.

7.            Financial Instruments

The Company's financial instruments comprise equity investments, cash balances, receivables and payables that arise directly from its operations and borrowings. As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company makes use of borrowings to achieve enhanced returns. The downside risk of borrowings can be mitigated by raising the level of cash balances held.

The Company may use derivatives for efficient portfolio management from time to time. The only derivatives used in the year were forward foreign exchange currency contracts to hedge currency movements.  These were also used in the prior year. The Company may also write call options over some investments held in the Investment Portfolio. There were no call options written during the current year or prior year.

The fair value of the financial assets and liabilities of the Company at 31 March 2018 is not materially different from their carrying value in the financial statements.

The Company is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, market price risk, liquidity risk, interest rate risk and foreign currency risk.

The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and have remained unchanged for the year under review.

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 Company's principal financial assets are bank balances and cash and other receivables, whose carrying amounts in the balance sheet represent the Company's maximum exposure to credit risk in relation to financial assets. The Company did not have any exposure to any financial assets which were past due or impaired at the current or prior year end.

The Company is exposed to potential failure by counterparties to deliver securities for which the Company has paid, or to pay for securities which the Company has delivered. A list of pre-approved counterparties used in such transactions is maintained and regularly reviewed by the Manager, and transactions must be settled on a basis of delivery against payment. Broker counterparties are selected based on a combination of criteria, including credit rating, balance sheet strength and membership of a relevant regulatory body. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the acceptable quality of the brokers used. The rate of default in the past has been insignificant.

All of the assets of the Company are held by JPMorgan Chase Bank, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to the securities held by the custodian to be delayed or limited. The Board monitors the Company's risk by reviewing the custodian's internal control reports.

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings, normally rated A or higher, assigned by international credit rating agencies. Bankruptcy or insolvency of such financial institutions may cause the Company's ability to access cash placed on deposit to be delayed, limited or lost.

The Company has no significant concentration of credit risk with exposure spread over a number of counterparties and financial institutions.

Market price risk

The fair value of equity and other financial securities held in the Company's portfolio fluctuates with changes in market prices. Prices are themselves affected by movements in currencies and interest rates and by other financial issues, including the market perception of future risks. Other external events such as protectionism, inflation or deflation, economic recessions and terrorism could also affect share prices in particular markets. The Company's strategy for the management of market price risk is driven by the Company's investment policy. The Board sets policies for managing this risk and meets regularly to review full, timely and relevant information on investment performance and financial results. The management of market price risk is part of the fund management process and is typical of equity investment. The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with an objective of maximising overall returns to shareholders. Investment and portfolio performance are discussed in more detail in the Manager's Review in the Annual Report.

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 risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given the liquid nature of the portfolio of investments and the level of cash and cash equivalents ordinarily held. Cash balances are held with a spread of reputable banks with a credit rating of normally A or higher, usually on overnight deposit. The Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.

In certain circumstances, the terms of the Company's bank loan entitle the lender to demand early repayment and, in such circumstances, the Company's ability to maintain dividend levels and the net asset value attributable to equity shareholders could be adversely affected. Such early repayment may be required on the occurrence of certain events of default which are customary for facilities of this type. These include events of non payment, breach of other obligations, misrepresentations, insolvency and insolvency proceedings, illegality and a material adverse change in the financial condition of the Company.

Interest rate risk

Some of the Company's financial instruments are interest bearing. They are a mix of both fixed and variable rate instruments with differing maturities. As a consequence, the Company is exposed to interest rate risk due to fluctuations in the prevailing market rate. The Company's exposure to floating interest rates gives cashflow interest rate risk and its exposure to fixed interest rates gives fair value interest rate risk.

Floating rate

When the Company retains cash balances the majority of the cash is held in deposit accounts. The benchmark rate which determines the interest payments received on cash balances is the bank base rate, which was 0.50 per cent at 31 March 2018 (2017: 0.25 per cent).

Fixed rate

At 31 March 2018 the Company's Investment Portfolio did not contain any fixed interest or floating rate interest assets. At 31 March 2017 the Company held fixed interest investments. At 31 March 2018 and 31 March 2017 the Company had fixed interest liabilities.

The £7.5 million term loan carries a fixed interest rate of 2.58 per cent per annum.

Foreign currency risk

In previous years and prior to the removal of the Higher Yield portfolio from the Investment Policy, in order to achieve a diversified portfolio of higher yielding interest bearing securities the Company invested partly in overseas securities which gives rise to currency risks. Historically, the Company entered into US Dollar and Euro foreign exchange currency contracts with a view to hedging these currency risks. At 31 March 2018, the Company's investment portfolio does not contain any overseas higher yielding interest bearing securities. It is however not the Company's policy to hedge any overseas currency exposure on equity investments.

8.         These are not full statutory financial statements in terms of Section 434 of the Companies Act 2006. The full audited annual report and financial statements for the year ended 31 March 2018 will be sent to shareholders in June 2018 and will be available for inspection at 6^th Floor, Quartermile 4, 7a Nightingale Way, Edinburgh, EH3 9EG the registered office of the Company.  The full annual report and financial statements will be available on the website maintained on behalf of the Company at www.fandcukhit.co.uk .

The audited financial statements for the year to 31 March 2018 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 5 July 2018.

 

END

 

 

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