Annual Financial Report
POLAR CAPITAL GLOBAL HEALTHCARE GROWTH AND INCOME TRUST PLC
ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2014
THIS ANNOUNCEMENT CONTAINS REGULATED INFORMATION
16 December 2014
Financial Highlights - For the year ended 30 September 2014
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Performance |
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Net Asset Value per ordinary share (total return) (note 1) |
19.7% |
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MSCI ACWI/Healthcare Index (total return in Sterling with dividends reinvested) |
24.8% |
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Total Return for Investors since Inception (note 2) |
82.2% |
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Financials |
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As at 30 September 2014 |
As at 30 September 2013 |
% Change |
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Net asset value per ordinary share |
Undiluted |
164.41p |
148.54p |
10.7% |
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|
Diluted |
164.41p |
141.50p |
16.2% |
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Ordinary share price |
|
155.50p |
144.00p |
8.0% |
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Ordinary shares in issue (Notes 3 & 4) |
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121,620,000 |
104,850,000 |
16.0% |
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Ordinary shares held in treasury |
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1,030,000 |
- |
- |
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Expenses |
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Ongoing charges (Note 5) |
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1.04% |
1.10% |
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Dividends
The Company has paid the following dividends relating to the financial year ended 30 September 2014:
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Pay date |
Amount per ordinary share |
Record date |
Ex-date |
Declared date |
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7 March 2014 |
0.55p |
21 February 2014 |
19 February 2014 |
28 January 2014 |
|
30 May 2014 |
0.55p |
16 May 2014 |
14 May 2014 |
8 May 2014 |
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29 August 2014 |
1.80p |
15 August 2014 |
13 August 2014 |
31 July 2014 |
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28 November 2014 |
0.60p |
14 November 2014 |
13 November 2014 |
30 October 2014 |
All data sourced from Polar Capital LLP
Note 1 - The total return NAV performance for the period is calculated by reinvesting the dividends in the assets of the Company from the relevant pay date and adjusting for the subscription share dilution. The undiluted and diluted NAVs became the same following the subscription share conversion on 31 January 2014.
Note 2 - The Total Return for Investors since Inception calculation is adjusted for any dividends to have been reinvested on the payment date in ordinary shares at the prevailing share price and assumes that all investors have exercised their subscription rights.
Note 3 - Following the exercise of the subscription rights attached to the subscription shares 17,800,000 new ordinary shares were issued at 100p each to the holders of the subscription shares on 31 January 2014. The subscription shares were originally issued free to investors on 15 June 2010 on the basis of one subscription share for every five ordinary shares.
Note 4 - The issued share capital comprises 122,650,000 ordinary shares of which 1,075,000 are held in treasury by the Company as at the date of this report.
Note 5 - Ongoing charges represents the total expenses of the fund, excluding finance costs, expressed as a percentage of the average daily net asset value, in accordance with AIC guidance issued in May 2012.
Chairman's Statement
Performance
It is again pleasing to be able to report to shareholders an increase in net asset value, share price and dividend. The Company achieved a net asset value total return of 19.7% for the year which although good in absolute terms was still some way behind our benchmark, the MSCI Healthcare Index which rose by 24.8%, outperforming the broader market indices. At the time of our launch we told investors that we were aiming for a total return of between 10% and 12% per annum and we are very satisfied with this year's results and with a total return of 82.2% since inception in June 2010.
There were two main reasons for our underperformance of the benchmark. First our underweight position in North America where we had exposure of less than 50% throughout the year compared to a benchmark weighting of around 61%, reflecting our positions in UK and European pharmaceutical companies that make an important contribution to our income. The second reason was the very strong performance of biotechnology shares where we are underweight. Biotechnology has accounted for around 3.1% of the portfolio over the period and at the year end was 4.9% of the Company's investment portfolio, compared to around 14% in our benchmark; furthermore our biotechnology exposure is focused on smaller companies rather than larger companies like Celgene that outperformed during the period.
In keeping with the income part of our remit the portfolio continues to be focused on income generating stocks and is heavily weighted towards the major global pharmaceutical companies which currently comprise 69.4% of our portfolio. During the year we benefited from the increased corporate activity in this sector and in particular Pfizer's approach to AstraZeneca which is one of our largest holdings.
Our share price (+8.0%) has lagged the performance in the Company's diluted net asset value (+16.2%). This is due to the Company's shares moving from a premium of 1.8% to a discount of 5.4% over the period. This is perhaps a case of "mid term blues" but, given the Company's seven and a half year life and hard wind-up date of January 2018, it represents a potentially enhanced yield to maturity for those shareholders purchasing now and an opportunity for the Company to buy back its shares at a discount to their intrinsic worth for the benefit of all remaining shareholders.
Share Capital
At the time of our initial launch in June 2010 we issued 17.8 million Subscription shares on a 1 for 5 basis to all holders of Ordinary shares. Early this year these were all converted into Ordinary shares at £1 per share. As part of this process the Company bought back 650,000 Ordinary shares into Treasury. We subsequently bought back another 280,000 Ordinary shares in March and a further 100,000 in August. After the end of the period the Company bought back a further 45,000 Ordinary shares and as at the date of this report, had 122,650,000 Ordinary shares in issue, of which 1,075,000 are currently held in Treasury. Your Board will continue to watch the Ordinary share discount to underlying assets closely and will consider further buybacks where it considers this to be in the best interests of shareholders as a whole.
Dividends
In respect of the financial year just ended we have paid four dividends which include the dividend paid on 28 November 2014 of 0.60p. These total 3.50p per Ordinary share compared to 3.35p in respect of the previous year, an increase of 4.5%.
The Company aims to increase the dividend on an annual basis progressively. Although there can be no guarantee that we will achieve this over the remaining three years of the Trust's life, the fact that we have revenue reserves of 1.3p per share available after payment of the November dividend should provide some reassurance.
Regulation
Pursuant to the requirements of the Alternative Investment Fund Managers Directive (AIFMD), we formally appointed Polar Capital LLP as our Alternative Investment Fund Manager and HSBC as our depositary, both with effect from July this year. In the eyes of Brussels, investment trusts are not mainstream and have been placed in the same group as hedge funds and other "alternative" investments which seems inappropriate given our strong corporate governance ethos and the existence of independent Boards to look after shareholders' interests. Your Board has done its best to try and control the extra costs arising from this regulation and, by joining with the other Polar Capital investment trusts we were able to secure a lower bulk rate from the depositary, HSBC. As HSBC was already our custodian we have managed to avoid unnecessary duplication. The net result will be a small increase in costs to be borne by shareholders.
Regulation has also come at us from the United States in the shape of the Foreign Account Tax Compliance Act (FATCA). The use of nominee names makes it difficult to be sure whether we have any US shareholders but if we had, and failed to register, we would have been liable to a substantial increase in the withholding tax levied on dividends received from US companies. Given the fact that almost half our assets are in the United States, your Board deemed this an unacceptable risk and opted to register for FATCA.
Outlook
The key question for us now is whether we feel we can continue to achieve total returns of 10% to 12% per annum? Our answer to this is yes we think we can. The pharmaceutical sector is no longer as cheap as it was in 2010 but the Price Earnings Ratio is still only in line with, rather than at a premium to, the market average. With the patent cliff now a distant memory investor focus has moved on to emerging drug pipelines and which companies have the best growth potential. The signs here are good with large pharmaceutical companies turning to the biotechnology sector as a source of new drug ideas. It is in identifying those stocks where there is unappreciated potential that our investment managers will seek to add value.
Merger and acquisition activity in the sector will likely continue notwithstanding the proposed introduction of new US Treasury rules that will make tax inversions less attractive. Many drug companies are spread too thinly and need to consolidate in areas of strength whilst disposing of less profitable businesses where they have insufficient critical mass. Eli Lilly, GSK and Novartis have already been involved in a three-way asset swap and it seems likely that there will be other similar deals in future. We believe we have entered a period of disruptive change for healthcare which should provide plenty of opportunities for us to make money for our shareholders.
Annual General Meeting
The Company's fourth Annual General Meeting (AGM) will be held at noon on Friday 23 January 2015. This year we have decided on a different venue with the meeting being held at the office of our brokers Panmure Gordon, One New Change, Cheapside, London, EC4M 9AF, for which the nearest underground station is St Pauls. Our manager, Dr Daniel Mahony, will be making a presentation and I would encourage any of you who have not had the opportunity to hear him (and those who already have!) to come along to what I am sure will be a most stimulating and thought-provoking session. As well as the routine business of the AGM, the Board proposes to make certain amendments to the Company's Articles of Association in response to the introduction of the AIFM Regulations coming into force, and in order to remove the now defunct provisions relating to subscription shares. Further details are included in the separate Notice of AGM. Attendance at the meeting provides a good opportunity for you to meet the Board and ask any questions you might have. A buffet lunch will be served at the conclusion of the meeting.
James Robinson
Chairman
15 December 2014
Investment Manager's Report -For the year ended 30 September 2014
Performance Review
For the fiscal year to 30 September 2014, the Company delivered a total return of 19.7%, which was behind the benchmark (MSCI Global Healthcare Index) that recorded a total return of 24.8% over the same period. Global markets have performed reasonably well over the 12 months to 30 September 2014, with the US market particularly strong, but the majority of these returns came in the last quarter of calendar 2013. The healthcare sector has significantly out-performed broader markets during the reporting period with large cap biotechnology and healthcare facilities as the best performing sub-sectors.
The major concern at the beginning of October last year was the debt ceiling crisis and the partial government shutdown in the United States. Resolution of this issue resulted in an increase in investor appetite for risk and a strong recovery in stock markets into year-end.
The appetite for growth stocks continued into the first two months of 2014 but market dynamics changed markedly towards the end of March. The catalyst was the release of the minutes from the U.S. Federal Reserve meeting, which suggested that US interest rates could start to rise sooner than the market had been expecting. The result was a sharp sell-off in the shares of growth companies - within healthcare, smaller medical technology and biotechnology stocks fared particularly poorly. Concerns regarding an increase in interest rates have continued to linger and there has been little investor appetite for risk
over the last 6 months of the reporting period.
For healthcare, the most important fundamental driver this year has been the implementation of President Obama's healthcare reform in the United States. The goal of healthcare reform is to increase healthcare insurance coverage via an expansion of Medicaid, the programme run by States for the poor, and the initiation of a healthcare insurance exchange programme. The latter enables individuals to obtain coverage from private healthcare providers with a government subsidy for those earning less than 400% of the Federal poverty level.
The initial implementation did not quite go to plan as the failure of the government web-site prevented many individuals from enrolling - these problems were ironed out at the beginning of January. By the end of March, it was estimated that six million new people had enrolled into Medicaid and eight million had obtained insurance via the healthcare exchanges. Therefore, despite the initial scepticism, we would argue that healthcare reform has rolled out as well as could be expected. Importantly, reform has already had a positive impact on the earnings for hospitals and other healthcare providers as patient volumes have begun to increase.
We have continued to manage the Company's portfolio conservatively, according to our original investment mandate, with a low weighting in biotechnology and a high weighting in pharmaceutical stocks. As a result, the Company's portfolio has underperformed the benchmark during the reporting period. However, we do not intend to make any significant changes to the overall portfolio composition and expect to maintain the concentration in pharmaceutical stocks and dividend yielding companies. Our goal has been to deliver a total return of 10-12% per annum over the life of the Company and we continue to believe that we can achieve this level of return going forward.
Review of the portfolio
For operational purposes, we have split the Company's investment portfolio into an income portfolio and a growth portfolio. All of the companies in the income portfolio pay a dividend and there is a large weighting towards the major global pharmaceutical companies. Dividend yields for the large pharmaceutical companies range from 2.5% to 6%, with GlaxoSmithKline an outlier at the high-end of the range, and we project 4-5% dividend growth for the peer group over the next 12 months. The growth portfolio comprises stocks in a range of biotechnology, healthcare service, medical technology and pharmaceutical companies. We have maintained an approximate 80:20 split of assets between the income and growth portfolios since the launch of the Company.
Given our positive view on healthcare, the portfolio remained fully invested for most of the year with a modest increase in the weighting of large capitalisation names in the portfolio. The percentage of the entire portfolio invested in large capitalisation companies (greater than $5 billion) increased from 72% to 75% over the fiscal year. The weighting in large pharmaceutical stocks remained above 60% and this, combined with a low exposure to biotechnology, has helped to reduce the risk of the portfolio compared to the benchmark. As a measure of this risk, the beta of the portfolio compared to the benchmark remained steady throughout the year at 0.80, which was slightly lower than the 0.85 we reported for last year.
Income portfolio
The composition of the income portfolio has not changed materially over the last 12 months. The large weighting in pharmaceutical stocks has increased marginally and we continue to hold positions in medical technology, healthcare services and healthcare real estate investment trusts (REITs). We would not expect much change over the next 12 months, but it is likely that we will begin to decrease our weighting in REITs - given that these stocks are sensitive to increasing interest rates - and may look to increase the weighting of large medical technology companies.
The top ten holdings of the Company's portfolio are all pharmaceutical companies and we have made some changes to the size of individual holdings over the last year. For the top five positions, we have made some minor changes - we trimmed our holding in Novartis that was our biggest position at the beginning of the year. Our two largest positions are now Merck and Roche - we think the drug pipeline for each of these companies is underappreciated and so current valuations look attractive given the potential growth opportunities. The other significant changes are an increase in our holding in AbbVie and a decrease in the GlaxoSmithKline position.
Novartis was our largest position at the beginning of the reporting period but at the time the prevailing market view was that it was relatively uninteresting. While the company has built a strong cancer franchise, it was not an active player in the emerging field of immuno-oncology and so was overlooked by many investors. We believed that management was well positioned to execute on its plans for improving margins and that there was little in the price for the company's novel heart failure drug candidate, LCZ696 - as a result, we viewed the risk/reward as attractive.
In March, the company announced that the Phase III study for LCZ696 had been stopped early based on compelling efficacy. Over the summer, expectations began to build on the prospects of this new drug candidate ahead of the release of full data in late August at the European Society of Cardiology (ESC) meeting. We were concerned that expectations were too high going into the conference and so we trimmed our Novartis position. However, these concerns proved to be unfounded as Novartis reported a 20% reduction in cardiovascular deaths in heart failure patients treated with LCZ696 compared to the standard therapy - this is arguably one of the most important advances in the treatment of heart failure for two decades. With few reported side effects, consensus estimates for LCZ696 are now in the region of $4-5 billion in peak sales potential.
AbbVie has been one of the better performing pharmaceutical stocks over the last 12 months. The company's blockbuster Humira, a treatment for autoimmune diseases such as rheumatoid arthritis, looks set to be the best-selling drug globally in 2014 with sales in the region of $12 billion. We increased our position in Abbvie in November 2013 on the basis of an undervalued pipeline - the company should launch a new Hepatitis C treatment, which will compete with Gilead's mega-blockbuster Sovaldi, in 2015 and has an emerging oncology pipeline that we think is significantly undervalued. AbbVie made an approach to acquire Shire in July of this year - in part driven by the opportunity to lower its corporation tax by moving its tax domicile. However, in October 2014 the company withdrew its offer after a change in US Treasury rules made the deal less attractive financially. We continue to believe that AbbVie's pipeline is underappreciated and that it could take a greater
share of the Hepatitis C market in 2015 than is currently factored into the share price.
GlaxoSmithKline has been one of the most disappointing stocks in the large cap pharmaceutical sector over the last 12 months. We reduced our position in the stock in April as we had concerns that the company's respiratory franchise would come under pressure. However, when the company reported Q2 results in July the weakness in respiratory was much greater than we had feared. The company is facing greater pricing pressure for its existing asthma drug Advair and the launch of its two new respiratory drugs, Anoro and Breo, are progressing below expectations. While the company has reassured investors that it will maintain its dividend in 2014 and 2015, it seems as though there will be little earnings growth over the next two years.
On an absolute basis, the most important contributors to performance have been the positions in AstraZeneca, Merck and Eli Lilly. At the beginning of the reporting period, expectations for all three of these companies were low - especially with respect to their drug development pipelines. AstraZeneca has probably been the largest "turnaround" of the three - helped in part by Pfizer's attempt to acquire the company in April. The biggest detractors to performance in the income portfolio have been GlaxoSmithKline and Takeda - both of these stocks delivered a negative capital return over the year.
Growth portfolio
The growth portfolio is invested in a range of biotechnology, healthcare services, medical device, and pharmaceutical companies. The turnover in the growth portfolio has again been higher than in the income portfolio over the year but our weighting across the sub-sectors has been fairly steady. The weighting in small cap increased from 49% to 51% and the number of positions in the growth portfolio has increased from 36 to 40.
Given the continued strength in the biotechnology sector, the most important contributors were biotechnology companies - namely Intercept, Cardio3 BioSciences and Intermune. The biggest detractors during the year were Vocera and Summit. The latter is part of our diversified portfolio of small companies, which had a market capitalisation of less than £100 million at the time of investment. This part of the portfolio has fared less well this year - in large part driven by the sell-off in small cap growth stocks that occurred in March. We do not expect to make any new investments in this part of the portfolio but remain optimistic that some of these companies will deliver significant outperformance before the Company winds up in 2018.
We have held a position in Intercept pharmaceuticals since its IPO in 2012 and this stock was the most significant contributor to performance in the growth portfolio. At the beginning of January, Intercept announced very positive data from the trial investigating the use of obeticholic acid (OCA) in non-alcoholic steatohepatitis (NASH) - a disease that is estimated to affect at least 6 million people in the Unites States. An independent review body stopped the clinical trial early on the basis of efficacy - a rare event that requires the data to be overwhelmingly positive. Given the strong move in the shares (the stock moved from $72 to $445 in two days), we decided to sell the position from the portfolio.
Cardio3 is a European company that is developing a stem cell technology for the treatment of heart failure -Phase III trials are ongoing. We bought the stock at IPO in 2013, but the shares began to move at the beginning of January following an announcement that the U.S. Food and Drug Administration (FDA) had authorised its Investigational New Drug (IND) application enabling the company to start a Phase III trial in the U.S. This type of announcement is not normally a value-driving event but it served to raise investor awareness in the United States and drove a move from €26 to €45 per share over the month of January.
We highlighted Summit, a UK-based biotechnology company with a drug candidate for the treatment of Duchenne muscular dystrophy (DMD), as one of our best performing stocks last year. However, the stock has been one of the biggest detractors over this reporting period. The strong move in the shares we saw in September 2013 has been partly reversed over the course of the year largely because there has been a lack of significant clinical news flow - either positive or negative. However, the company has raised additional capital and so has sufficient funds to execute on its clinical development plan. We continue to believe that the company is undervalued.
The other major detractor has been our position in Vocera, a U.S.-based healthcare IT company. Vocera is commercialising an advanced communications system for use in hospitals that provides benefits in terms of patient safety, management and improvement in clinical outcomes. We continue to believe in the power of the technology but we had overestimated how quickly the company could penetrate its customer markets. We have now sold the position from the portfolio following a series of disappointing results announcements.
Pharmaceutical sector looks set for double-digit earnings growth
The launch of the Company in 2010 was based on a clear investment thesis - we believed that the pharmaceutical sector was out of favour and undervalued. The market was too pessimistic on the earnings impact of drug patent expirations - the so-called "patent cliff" - given that management teams had embarked on significant cost-saving and restructuring programmes and were focused on delivering shareholder value. In addition, we thought that R&D productivity was beginning to improve and that drug pipelines could begin to be replenished.
This pharmaceutical sector recovery investment thesis has played out largely as we had projected, although we had expected emerging markets to provide more of a mid-term revenue growth driver than has transpired. The patent cliff now seems to be behind most companies and seems like a distant memory to investors. The removal of this overhang has had a positive impact on the valuation of all companies in the sector - the rising tide has lifted all of the boats.
Over the last eighteen months, investor focus has moved on to emerging drug pipelines and which companies have the best mid-and long-term growth potential. Drug pipelines seem to be improving across the sector, not least because large pharmaceutical companies have turned to innovators in the biotechnology sector as a source of new drug candidates.
The turnaround in investor sentiment over the last five years has been quite striking. Five years ago, our argument that R&D productivity could improve was controversial as the share price of nearly every large pharmaceutical drug company implied that the R&D spending was destroying value. Now the key issue is not if there can be any new drugs but which company has the best pipeline and growth potential.
This is reflected in the valuation of the sector as measured by the price to earnings (P/E) multiple. When we launched the Company in 2010, the sector average P/E multiple was less than 10X. At the end of September 2014, the P/E multiple was 16X and had returned to the long-term historical average for the sector. And this is not without justification as the pharmaceutical sector is projected to grow at a 10% compound annual growth rate from 2015 to 2018, based on consensus estimates.
Within this analysis of the sector, it is clear that some companies are better positioned than others. For example, Bristol-Myers Squibb trades at a significant premium to the sector but it is widely perceived to have one of the best pipelines and is expected to at least double its earnings base from 2015 to 2020. The challenge going forward is that we are likely to see a greater dispersion of returns within the sector based on the perceived strength of each company's pipeline and, therefore, its earnings growth potential. Our current investment strategy is now focused on identifying the large pharmaceutical companies where the drug pipeline is still underappreciated and where mid- and long-term earnings estimates may be too low.
Drug pipelines continue to improve
The rising expectations associated with the pharmaceutical sector are based on the recent publication of positive clinical data or approval of new drugs. Over the last two years, there have been some major advances in the fields of cancer, infectious disease and cardiovascular disease.
In cancer, we have seen impressive clinical data in the emerging field of immuno-oncology with a novel class of therapeutics that help a patient's own immune system to fight a tumour. While this approach to treating cancer is not new (there has been a long history of academic research), there are now a number of drug candidates in clinical development that have produced very encouraging results. While we may still be some years away from a "cure for cancer", this approach raises the possibility of turning cancer from an acute disease that a patient dies from into a chronic condition that a patient dies with.
In September of this year, Merck's Keytruda was the first of this new class of drugs to receive regulatory approval for the treatment of advanced melanoma. There are a number of biotechnology companies working in this field as well as major drug development programmes at AstraZeneca, Bristol-Myers Squibb and Roche. This is a rapidly evolving field and we expect the publication of more clinical data for a number of different types of cancer over the next few years.
In infectious disease, the most significant advance has been seen in the treatment of Hepatitis C - a viral infection of the liver. Gilead launched Sovaldi, its new drug for Hepatitis C, at the end of 2013 and it looks set to generate $10 billion in sales in the first year - such a ramp-up in sales is unprecedented within the pharmaceutical industry. The reason for its success is that for the vast majority of patients the treatment is a cure and the virus is eradicated. While Gilead dominates this market, we expect AbbVie and Merck to launch their new Hepatitis C treatments over the next year or so.
In cardiovascular disease, we have seen positive data for a new class of agents targeting an enzyme, called PCSK9, involved in cholesterol metabolism. Two competing drug development programmes, run by Amgen and Sanofi, have both delivered positive data in the last year showing that these drugs can significantly lower "bad" cholesterol in hard-to-treat patients. These drug candidates could receive regulatory approval next year. As we noted earlier, the other major advance in cardiovascular disease was announced by Novartis, with the publication of its impressive data for LCZ696 as a treatment for heart failure.
Premium pricing requires superior efficacy
While the outlook for the pharmaceutical sector from a drug development perspective is positive, the elephant in the room is drug pricing. Most pharmaceutical companies have moved away from traditional medicines, which are prescribed by general practitioners (GPs), and are developing drugs for more serious diseases - those that are treated by specialists. The perceived advantage, from a business perspective, is that such drugs can be sold at higher prices with a smaller sales force and so operating margins should be higher.
Over the last few years, pricing power for specialist drugs has been strong - on average, companies have achieved in the region of 10% price increases per annum. Moreover, pharmaceutical companies expect to garner strong pricing for any new drugs that they bring to the market - this is especially true for some of the recently approved cancer drugs.
While we do not see it as a near-term concern, we do think that pricing will begin to be more of an issue for the pharmaceutical industry on a five year view. To get premium pricing, companies need to show that the drugs they are producing have far superior efficacy to existing therapies.
For example, one of the problems for GlaxoSmithKline this year has been pushback on the reimbursement of its new respiratory drugs, Breo and Anoro. The health insurers have much greater purchasing power than they had twenty years ago as they have developed financial incentives to influence which drug a patient and his/her doctor may choose to use.
Technology will play a role in these reimbursement decisions, as governments and insurance will soon have access to data that may help determine who will be a good or a poor responder to a particular drug. The responsibility is shifting to pharmaceutical companies to prove that a new drug has more than just a marginal benefit and to show which patients are likely to benefit the most.
A new trend for healthcare investors
We believe that we are at the beginning of a period of disruptive change for healthcare. The drivers of this change are a combination of demographics - an aging population means increased demands for healthcare provision; macroeconomics - governments need to find ways to pay for this increased demand; and technology - as it is changing the way products are discovered and developed as well as transforming healthcare management and delivery.
For the last few years, we have argued that the best investment strategy has been to identify growth opportunities in healthcare by focusing on the innovators - companies that are developing products and services that can deliver the same, or better healthcare, for less money. We continue to believe that this is a viable investment strategy, especially given the amount of technological change that we are seeing. If anything, the pace of innovation is beginning to accelerate - not just in the drug industry but in medical devices, healthcare services and in healthcare IT.
Over the last year, however, we think a new investment trend has emerged as we are seeing a new wave of consolidation across all parts of the value chain. M&A activity has been a major theme for the healthcare sector this year, especially with respect to large deals in pharmaceuticals such as Pfizer's approach to AstraZeneca and AbbVie's bid for Shire. To some degree this has been driven by tax considerations with US companies looking to "invert" and move their headquarters to a low-tax domicile country. Recent moves by the US Treasury appear to have made this less attractive for companies, which was one of the reasons why AbbVie's deal with Shire fell through.
However, we think there is more to the recent M&A activity than just tax optimisation. We think healthcare companies are pursuing consolidation as a route to improving efficiency. In this way, companies can create economies of scale, broaden product portfolios, standardise products and processes, lower cost of goods, take market share and deliver cheaper solutions to their customers.
From a pharmaceutical industry perspective, management teams are disposing of business units that they see as non-essential and acquiring assets that build strength and scale in their key growth areas. The most recent example of this was a three-way asset swap between Eli Lilly, GlaxoSmithKline and Novartis that was announced in April. The industry seems to be "moving the chairs around" as companies prioritise growth objectives and look to build competitive advantages.
Importantly, in the broader healthcare sector, the efficiency gains from consolidation have benefits not only for a company itself but also for its customers in the medical community. For example, Zimmer's decision to acquire Biomet will make it one of the largest suppliers of hip and knee implants globally. The enlarged company should be able to generate the cost savings and efficiencies that are derived from such a combination. However, it should also be able to develop simpler instrumentation and a reduced range of products that will enable its hospital customers to standardise their practices, improve efficiency and so save them money.
This trend for increasing scale to improve efficiency is not without precedent in healthcare - the best example is the U.S. dialysis services industry. Today, the two major dialysis providers, Fresenius Medical Care and DaVita, between them care for over 75% of all dialysis patients in the United States. What is different about the consolidation we are currently seeing is that it appears to be happening across the industry in all parts of the value chain - drug companies, medical devices, medical supply companies, distributors, service providers and health insurers.
The fundamental driver is structural change in healthcare and the need for industry to find solutions to the efficiency conundrum. Moreover, management teams are realising that as both customers and suppliers are getting larger then they are at risk of decreased pricing and diminished purchasing power. This change in the competitive landscape also seems to be providing a strong impetus to the consolidation trend. Companies that fail to generate sufficient scale or the small- and mid-sized companies that have "me-too" products or services are likely to be big losers in this changing environment.
As healthcare continues through a period of disruptive change, we would advocate a two-pronged investment strategy that focuses on (a) the consolidators or (b) the innovators - these are the companies that will decrease the cost and increase the quality of healthcare, respectively.
Outlook
We continue to hold a positive stance on the pharmaceutical sector. Over the last twelve months, a steady flow of positive clinical news shows that drug pipelines are strengthening and that the earnings outlook for the pharmaceutical sector is set to improve. On a broader healthcare view, fundamentals remain positive as the impact of Obamacare begins to drive an increase in patient volumes and utilisation over the coming quarters.
We have also begun to see more evidence supporting our view that a period of disruptive change in healthcare has begun - this is a key driver of the consolidation trend that we have seen across the healthcare sector over the last year. We recognise that disruptive change can result in major winners and major losers and so our focus is to identify those companies with services or products that provide better and/or more cost-effective care for patients.
Importantly, despite a strong move in share prices over the last four years, valuations do not seem to be stretched - P/E multiples are back to long-term historical averages for most healthcare sub-sectors. Healthcare looks to be well positioned compared to many other sectors in terms of both growth prospects and current valuation.
Our original investment thesis continues to play out and we seem to be entering the final phase as the pharmaceutical sector returns to growth. Our investment strategy remains unchanged - we expect to maintain a low risk portfolio with a high weighting in pharmaceutical stocks - with the goal of delivering a return in the region of 10-12% per annum.
Dr. Daniel Mahony
Gareth Powell
Investment Managers
15 December 2014
Portfolio - As at 30 September 2014
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|
|
Stock |
Country |
Market Value £'000 |
% of total net assets |
||
|
|
2014 |
2013 |
2014 |
2013 |
|||
|
1 |
(3) |
Merck & Co |
United States |
16,089 |
10,288 |
8.0% |
6.6% |
|
2 |
(5) |
Roche Holding |
Switzerland |
15,913 |
9,161 |
8.0% |
5.9% |
|
3 |
(2) |
Eli Lilly |
United States |
13,089 |
10,878 |
6.5% |
7.0% |
|
4 |
(4) |
AstraZeneca |
United Kingdom |
11,948 |
9,647 |
6.0% |
6.2% |
|
5 |
(1) |
Novartis |
Switzerland |
10,476 |
11,383 |
5.2% |
7.3% |
|
6 |
(6) |
Pfizer |
United States |
9,120 |
8,864 |
4.6% |
5.7% |
|
7 |
(13) |
AbbVie |
United States |
9,060 |
3,869 |
4.5% |
2.5% |
|
8 |
(8) |
Sanofi |
France |
8,863 |
7,632 |
4.4% |
4.9% |
|
9 |
(10) |
Astellas Pharma |
Japan |
7,798 |
5,349 |
3.9% |
3.4% |
|
10 |
(7) |
GlaxoSmithKline |
United Kingdom |
6,500 |
8,784 |
3.3% |
5.6% |
|
Top 10 investments |
|
108,856 |
|
54.4% |
|
||
|
11 |
(9) |
Johnson & Johnson |
United States |
5,919 |
5,353 |
3.0% |
3.4% |
|
12 |
|
Novo Nordisk |
Denmark |
5,312 |
- |
2.7% |
- |
|
13 |
(11) |
Bristol-Myers Squibb |
United States |
5,051 |
4,571 |
2.5% |
2.9% |
|
14 |
|
Bayer |
Germany |
4,325 |
- |
2.2% |
- |
|
15 |
(12) |
Takeda Pharmaceutical |
Japan |
4,011 |
4,375 |
2.0% |
2.8% |
|
16 |
(14) |
Consort Medical |
United Kingdom |
3,395 |
3,045 |
1.7% |
2.0% |
|
17 |
|
Abbott Labs |
United States |
2,309 |
- |
1.1% |
- |
|
18 |
(17) |
Sonic Healthcare |
Australia |
2,184 |
2,159 |
1.1% |
1.4% |
|
19 |
(15) |
Summit |
United Kingdom |
1,887 |
2,946 |
0.9% |
1.9% |
|
20 |
(25) |
Religare Health Trust |
India |
1,600 |
1,174 |
0.8% |
0.8% |
|
Top 20 investments |
|
144,849 |
|
72.4% |
|
||
|
21 |
(21) |
Omega Healthcare |
United States |
1,581 |
1,383 |
0.8% |
0.9% |
|
22 |
(30) |
Asahi Intecc |
Japan |
1,560 |
1,125 |
0.8% |
0.7% |
|
23 |
(52) |
Newron Pharmaceuticals |
Italy |
1,444 |
660 |
0.7% |
0.4% |
|
24 |
(36) |
Team Health |
United States |
1,431 |
937 |
0.7% |
0.6% |
|
25 |
|
Medtronic |
United States |
1,414 |
- |
0.7% |
- |
|
26 |
(44) |
Air Methods |
United States |
1,376 |
789 |
0.7% |
0.5% |
|
27 |
(18) |
Oxford Pharmascience |
United Kingdom |
1,367 |
1,680 |
0.7% |
1.1% |
|
28 |
|
CareFusion |
United States |
1,307 |
- |
0.7% |
- |
|
29 |
|
Quintiles Transnational |
United States |
1,306 |
- |
0.7% |
- |
|
30 |
(56) |
Hutchison China Meditech |
Hong Kong |
1,287 |
616 |
0.6% |
0.4% |
|
Top 30 investments |
|
158,922 |
|
79.5% |
|
||
|
31 |
|
Zimmer |
United States |
1,262 |
- |
0.6% |
- |
|
32 |
(24) |
National Health Investors |
United States |
1,234 |
1,230 |
0.6% |
0.8% |
|
33 |
(47) |
Medical Properties Trust |
United States |
1,224 |
752 |
0.6% |
0.5% |
|
34 |
|
Celgene |
United States |
1,169 |
- |
0.6% |
- |
|
35 |
(28) |
Senior Housing Properties Trust |
United States |
1,161 |
1,153 |
0.6% |
0.7% |
|
36 |
(27) |
Health Care REIT |
United States |
1,154 |
1,155 |
0.6% |
0.7% |
|
37 |
(49) |
Spectranetics |
United States |
1,147 |
725 |
0.6% |
0.5% |
|
38 |
|
Merck KGaA |
Germany |
1,138 |
- |
0.6% |
- |
|
39 |
(67) |
Leisureworld Senior Care |
Canada |
1,110 |
316 |
0.6% |
0.2% |
|
40 |
(62) |
Cardio3 BioSciences |
Belgium |
1,102 |
467 |
0.6% |
0.3% |
|
Top 40 investments |
|
170,623 |
|
85.5% |
|
||
|
41 |
(46) |
Synairgen |
United Kingdom |
1,084 |
768 |
0.5% |
0.5% |
|
42 |
|
Cambian Group |
United Kingdom |
1,040 |
- |
0.5% |
- |
|
43 |
(20) |
HCA Holdings |
United States |
1,026 |
1,576 |
0.5% |
1.0% |
|
44 |
(22) |
Novadaq Technologies |
Canada |
1,018 |
1,331 |
0.5% |
0.9% |
|
45 |
(34) |
Acadia Healthcare |
United States |
1,016 |
974 |
0.5% |
0.6% |
|
46 |
|
Kythera Biopharmaceuticals |
United States |
1,010 |
- |
0.5% |
- |
|
47 |
|
Brookdale Senior Living |
United States |
994 |
- |
0.5% |
- |
|
48 |
(37) |
UDG Healthcare |
Ireland |
992 |
911 |
0.5% |
0.6% |
|
49 |
(32) |
Endologix |
United States |
980 |
995 |
0.5% |
0.6% |
|
50 |
(71) |
HCP |
United States |
980 |
253 |
0.5% |
0.2% |
|
Top 50 investments |
|
180,763 |
|
90.5% |
|
||
|
51 |
(45) |
Coltene Holding |
Switzerland |
944 |
779 |
0.5% |
0.5% |
|
52 |
(38) |
Conatus Pharmaceuticals |
United States |
935 |
900 |
0.5% |
0.6% |
|
53 |
(31) |
Medical Facilities |
Canada |
931 |
1,004 |
0.5% |
0.6% |
|
54 |
|
Receptos |
United States |
923 |
- |
0.5% |
- |
|
55 |
(41) |
Healthcare Realty Trust REIT |
United States |
876 |
856 |
0.4% |
0.5% |
|
56 |
(53) |
Sigma Pharmaceuticals |
Australia |
842 |
658 |
0.4% |
0.4% |
|
57 |
|
Primary Health Care |
Australia |
827 |
- |
0.4% |
- |
|
58 |
|
LDR Holding |
United States |
821 |
- |
0.4% |
- |
|
59 |
(55) |
NIB Holdings |
Australia |
786 |
627 |
0.4% |
0.4% |
|
60 |
(54) |
Optos |
United Kingdom |
785 |
637 |
0.4% |
0.4% |
|
Top 60 investments |
|
189,433 |
|
94.9% |
|
||
|
61 |
|
Universal Health |
United States |
773 |
- |
0.4% |
- |
|
62 |
(69) |
Circle Holdings |
United Kingdom |
770 |
290 |
0.4% |
0.2% |
|
63 |
(50) |
Sabra Health Care REIT |
United States |
749 |
710 |
0.4% |
0.5% |
|
64 |
(59) |
Futura Medical |
United Kingdom |
704 |
532 |
0.4% |
0.3% |
|
65 |
|
Revance Therapeutics |
United States |
685 |
- |
0.3% |
- |
|
66 |
(57) |
Healthcare Services Group |
United States |
677 |
610 |
0.3% |
0.4% |
|
67 |
|
HMS Holdings |
United States |
661 |
- |
0.3% |
- |
|
68 |
(51) |
Ablynx |
Belgium |
658 |
668 |
0.3% |
0.4% |
|
69 |
(60) |
Amsurg |
United States |
638 |
499 |
0.3% |
0.3% |
|
70 |
|
Dynavax Technologies |
United States |
600 |
- |
0.3% |
- |
|
Top 70 investments |
|
196,348 |
|
98.3% |
|
||
|
71 |
(61) |
Extendicare |
Canada |
561 |
493 |
0.3% |
0.3% |
|
72 |
(66) |
Photocure |
Norway |
491 |
392 |
0.2% |
0.3% |
|
73 |
(58) |
Meridian Bioscience |
United States |
467 |
584 |
0.2% |
0.4% |
|
74 |
(63) |
Epistem Holdings |
United Kingdom |
450 |
459 |
0.2% |
0.3% |
|
75 |
|
AtriCure |
United States |
362 |
- |
0.2% |
- |
|
76 |
(64) |
Virtus Health |
Australia |
358 |
405 |
0.2% |
0.3% |
|
77 |
(70) |
EOS Imaging |
France |
238 |
282 |
0.1% |
0.2% |
|
78 |
(73) |
Sul America |
Brazil |
115 |
134 |
0.1% |
0.1% |
|
79 |
(72) |
Stentys |
France |
69 |
223 |
- |
0.1% |
|
Total equities |
|
199,459 |
|
99.8% |
|
||
|
Other net assets |
|
500 |
|
0.2% |
|
||
|
Net assets |
|
199,959 |
|
100.0% |
|
||
|
Geographical Exposure at |
30 September 2014 |
30 September 2013 |
|
United States |
46.3% |
45.1% |
|
United Kingdom |
15.0% |
18.5% |
|
Switzerland |
13.7% |
13.7% |
|
Japan |
6.7% |
6.9% |
|
France |
4.6% |
5.2% |
|
Germany |
2.7% |
- |
|
Denmark |
2.7% |
- |
|
Australia |
2.5% |
2.5% |
|
Other |
5.6% |
7.8% |
|
Cash |
0.2% |
0.3% |
|
Total |
100.0% |
100.0% |
|
Sector Exposure at |
30 September 2014 |
30 September 2013 |
|
Pharmaceuticals |
69.4% |
68.6% |
|
Healthcare Equipment |
8.6% |
6.2% |
|
Healthcare Facilities |
5.4% |
4.3% |
|
Biotechnology |
4.9% |
4.7% |
|
Specialised Healthcare REITs |
4.5% |
5.6% |
|
Healthcare Services |
3.3% |
3.0% |
|
Healthcare Supplies |
1.1% |
2.0% |
|
Healthcare Distributors |
0.9% |
1.0% |
|
Life Science Tools & Services |
0.9% |
1.3% |
|
Life & Health Insurance |
0.4% |
0.4% |
|
Healthcare Technology |
0.3% |
1.5% |
|
Other |
0.1% |
1.1% |
|
Cash |
0.2% |
0.3% |
|
Total |
100.0% |
100.0% |
|
Market Cap at |
30 September 2014 |
30 September 2013 |
|
Large (>US$5bn) |
75.4% |
72.2% |
|
Medium (US$1bn-$5bn) |
10.2% |
11.0% |
|
Small (<US$1bn) |
14.4% |
16.8% |
|
|
100.0% |
100.0% |
Strategic Review
The Company is required by the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 to set out a report to shareholders outlining a fair review of the strategy and performance of the Company during the year ended 30 September 2014, the position of the Company at the year end and a description of the principal risks and uncertainties.
Full details of the Investment Manager's activities and its views are given in the Investment Manager's Report. The Board considers that the Chairman's Statement and the Investment Manager's Report should be read in conjunction with this Strategic Report and the Report of the Directors which follows.
The Strategic Report Section of this annual report which comprises the Chairman's Statement, the Investment Manager's Report and this Strategic Report has been prepared solely to provide additional information to shareholders on the Company's strategies and potential for those strategies to succeed. The Strategic Report Section contains certain forward looking statements. These statements are made by the Directors in good faith based on the information available to them at the time of their approval of this report and such statements should be treated with caution due to inherent uncertainties, including both economic and business risk factors underlying any such forward-looking information.
Future Developments
The Board remains positive on the longer-term outlook for healthcare and the Company will continue to pursue its investment objective in accordance with the stated investment policy and strategy. The outlook for the future performance is dependent to a significant degree on the world's financial markets and their reactions to economic events and other geo-political forces. The Chairman's Statement and the Investment Manager's Report comment on the business and the outlook.
Investment Objective, Policy and Strategy
Objective
The Company's investment objective is to generate capital growth and income by investing in a global portfolio of healthcare stocks.
Policy
The Company will seek to achieve its objective by investing in a diversified global portfolio of companies consisting primarily of listed equities issued by healthcare companies involved in pharmaceuticals, medical services, medical devices and biotechnology, with an emphasis on pharmaceutical stocks. Stocks will be selected for inclusion in the portfolio after a due diligence process. The portfolio is diversified by geography, industry sub-sector and investment size with no single investment normally accounting for more than 10% of the portfolio at the time of investment.
The portfolio has a bias towards large-capitalisation companies, with a market capitalisation in excess of US$5 billion, and the balance in mid and smaller capitalisation companies. Exposure to companies with a market capitalisation below US$200 million is not expected to exceed 5% of gross assets at the time of investment. The Company does not expect to have any material exposure to unlisted companies and, in aggregate, any such investments will not exceed 5% of gross assets at the time of investment.
The portfolio composition is by reference to market capitalisation rather than number of companies.
The Company may invest through equities, index-linked, equity-linked and other debt securities, cash deposits, money market instruments, foreign currency exchange transactions, forward transactions, index options and other instruments including derivatives. Forward transactions and derivatives (including put and call options on individual positions or indices) may be used to gain exposure to the securities of companies falling within the Company's investment policy or to seek to generate income from the Company's position in such securities, as well as for efficient portfolio management. Any use of derivatives for investment purposes is made on the basis of the same principles of risk spreading and diversification that apply to the Company's direct investments, as described in its investment policy.
The Company may hedge exposure to foreign currencies if considered appropriate for efficient portfolio management.
Strategy
The Investment Manager's investment process is primarily based on bottom-up fundamental analysis. The Investment Manager uses a qualitative filter consisting of six key criteria to build up a watch-list of securities that is monitored on a regular basis. Due diligence is then carried out on the individual securities on the watch-list.
The Company's portfolio comprises a single pool of investments, but for operational purposes there is an income portfolio and a growth portfolio. The income portfolio comprises investments where the majority will have a market capitalisation in excess of US$5 billion and will be in the pharmaceutical sector. The growth portfolio comprises investments to give exposure to small capitalisation medical services, medical devices and biotechnology companies.
Each individual holding is assessed on its own merits in terms of risk/reward. While the Company expects normally to be fully or substantially invested, the Company may hold cash or money market instruments pending deployment in the investment portfolio. In addition it will have the flexibility, when the Investment Manager perceives there to be actual or expected adverse equity market conditions, to maintain cash holdings as it deems appropriate.
Gearing
It is not intended that the Company incur borrowings to provide long-term structural gearing. No borrowings have been made and no arrangements made for any bank loans. However the Articles of Association provide that the Company may borrow up to 15% of its Net Asset Value at the time of drawdown, for tactical deployment when the Board believes that gearing will enhance returns to shareholders.
Benchmark
The Company will measure the Investment Manager's performance against the MSCI ACWI/Health Care Index total return, in Sterling. This will be used to measure the performance of the Company, which will not seek to replicate the index in constructing its portfolio. The portfolio may, therefore, diverge substantially from the constituents of this index. Although the Company has a benchmark, this is neither a target nor an ideal investment strategy. The purpose of the Benchmark is to set a reasonable return for shareholders above which the Investment Manager is entitled to a share of the extra performance it has delivered.
Performance and Key Performance Objectives
The Board appraises the performance of the Company and the Investment Manager as the key supplier of services to the Company against key performance indicators (KPIs). The objectives comprise both specific financial and shareholder related measures.
|
KPI |
Control process |
Outcome |
|
The provision of |
The Board reviews at each meeting the performance of the portfolio and considers the views of the Investment Manager. |
The Company's diluted NAV total return, over the year ended 30 September 2014, was 19.7% while the Benchmark Index over the same period increased by 24.8%. The performance is explained in the Chairman's Report and the Investment Manager's Report. |
|
The achievement |
Financial forecasts are reviewed |
A total of four dividends amounting to 3.5p per share have been paid in respect of the year ended 30 September 2014 representing an increase of over 4.5% over the dividends paid in respect of the year to 30 September 2013 of 3.35p per share. |
|
Monitoring and reacting to issues created by the discount or premium of the ordinary share price to the NAV per ordinary share with the aim of reduced discount volatility for shareholders. |
The Board receives regular information of the composition of the share register including trading patterns and discount/premium levels of the Company's ordinary shares. The Board discusses and authorises the issue or buy back A daily NAV per share, diluted when appropriate, calculated in accordance with the AIC guidelines is issued to the London Stock Exchange. |
The discount/premium of the ordinary share price to the fully diluted NAV per ordinary share (when appropriate) over the year ended 30 September 2014 has ranged from a maximum discount of 13.5% to a premium of 1.8%. In the year ended 30 September 2014, the Company issued 17,800,000 ordinary shares as the result of the exercise of subscription share rights. The Company has bought back |
|
To continue to meet the requirements for Sections 1158 and 1159 of the Corporation Tax Act 2010. |
The Board receives regular financial information which discloses the current and projected financial position of the Company against each of the tests set out in |
Investment trust status was granted to the Company in respect of subsequent periods from 1 October 2013 subject to the Company continuing to satisfy the conditions of Section 1158 of the Corporation Taxes Act 2010 and other associated ongoing requirements. The Directors believe that the conditions and other ongoing requirements have been met in respect of the year ended 30 September 2014 and they believe that the Company |
|
Ongoing charges |
The Board receives regular |
Ongoing charges for the year ended 30 September 2014 were 1.04% compared to 1.10% the previous year. |
Principal Risks and Uncertainties
In delivering long-term returns to shareholders the identification and monitoring of risk is crucial. In addition to the detailed internal controls set out in the corporate governance report the Board seeks to identify, assess and monitor risks to the business. The Board maintains a Risk Map and reporting structure with investment limits
and guidelines appropriate to the investment objective to monitor and mitigate as far as practical such risks.
The Board has identified two principal groups of risks.
The first group relate primarily to economic uncertainties and its particular sphere of activity of investing in worldwide stock markets.
• The appropriateness of the investment mandate and strategy is considered as this may lead to a depressed share price as investors seek alternative investments or lower risk strategies.
• The investment performance is monitored as underperformance against the Benchmark or peer group could adversely affect shareholders' returns.
• As the Company's assets comprise mainly listed equities the principal risks to the performance of the business are associated with equity markets and foreign exchange rates. Both share prices and exchange rates may move rapidly and adversely impact the value of the Company's portfolio.
• While the portfolio is diversified across a number of stock markets worldwide, the investment mandate is focused on a single sector and thus the portfolio may be more sensitive to investor sentiment than a general investment portfolio.
• Healthcare companies are subject to many factors that could adversely affect their performance, profitability and share prices including regulatory approvals, the failure to comply with applicable regulations and legislative developments, the results of clinical trials, patent approvals for new drugs and the expiry of patent protection
for existing drugs.
• There is significant exposure to the economic cycles of the economies in which the underlying investments operate.
The Board mitigates this group of risks through the regular reporting and monitoring of the investment performance including financial information, analytical performance data and attribution presented by the Investment Manager at Board meetings. The composition and diversification of the portfolio including the sales and purchases of investments is also considered. The Board discusses individual investments with the Investment Manager as well as the Investment Manager's general views on the various markets and the healthcare sector in particular. The Board also considers the investment strategy and has regard to the degree of risk which the Investment Manager incurs in order to generate the investment returns.
The second group of business risks take the form of financial, operational, including accounting and taxation, and legal and regulatory requirements.
• The financial risks which arise from the investment activities expose the Company to risks such as market price, credit, liquidity, foreign currency and interest rates.
• The operational and accounting risks cover disruption to or failure of systems and processes provided by the Investment Manager including: any sub contractors to which the Investment Manager has delegated a task; the valuation of investments; the work of the Depositary including the safe custody of the Company's assets and; the risk that suppliers may deliver sub standard services that may have an impact on the Company or its customers.
• The taxation risks are that the Company may fail to continue to qualify as an investment trust and that the Company may fail to recover, as far as possible, withholding taxes levied on overseas investment income.
• Legal and regulatory risks include compliance with the FCA's Prospectus Rules, Listing Rules and Transparency and Disclosure Rules; meeting the provisions of the Companies Act 2006 and other UK, European and overseas legislation affecting UK companies and compliance with accounting standards.
The Board seeks to manage this second group of risks by obtaining information from the Investment Manager, the Depositary, or professional advisers and, where necessary, the commissioning of topical reports for discussion. The Board having considered the reports will take any remedial action or make such changes as it considers appropriate.
The policies for managing the risks posed by exposure to market prices, interest rates, foreign currency
exchange rates, credit and liquidity are set out in note 23 to the financial statements.
Management Company and Management of the Portfolio
As the Company is an investment vehicle for shareholders, the Directors have sought to ensure that the business of the Company is managed by a leading specialist investment management team and that the investment strategy remains attractive to shareholders. The Directors believe that a strong working relationship with the Investment Manager will achieve the optimum return for shareholders.
The Company entered into an Investment Management Agreement dated 26 May 2010, with Polar Capital LLP (the Investment Manager), which is authorised and regulated by the Financial Conduct Authority, to act as Investment Manager of the Company with sole responsibility for the discretionary management of the Company's assets (including uninvested cash) and to advise the Company on a day to day basis in accordance with the investment policy of the Company, all subject to the overall control and supervision of the Board.
The Investment Manager also agreed to procure or provide the day to day administration of the Company and general secretarial functions. The Investment Manager has, with the consent of the Directors, delegated the provision of certain of these administrative functions to HSBC Securities Services (UK) Limited and to Polar Capital Secretarial Services Limited. The fees of HSBC Securities Services (UK) Limited in providing such services will be for the account of the Company.
Investment Team
The Investment Manager provides a team of healthcare specialists and the portfolio is managed jointly by Dr. Daniel Mahony, the lead manager, and Mr. Gareth Powell. The Investment Manager also has other specialist and geographically focused investment teams which may contribute to idea generation.
Termination Arrangements
The Investment Management Agreement is terminable by either the Investment Manager or the Company giving to the other not less than 12 months' written notice. The Investment Management Agreement may be terminated earlier by the Company with immediate effect on the occurrence of certain events, including: (i) if an order has been made or an effective resolution passed for the liquidation of the Investment Manager; (ii) if the Investment Manager ceases or threatens to cease to carry on its business; (iii) where the Company is required to do so by a relevant regulatory authority; (iv) on the liquidation of the Company; or (v) subject to certain conditions, where the Investment Manager commits a material breach of the Investment Management Agreement.
In the event the Investment Management Agreement is terminated before the expiry of the Company's fixed life then, except in the event of termination by the Company for certain specified causes, the base fee and the performance fee will be calculated pro rata for the period up to and including the date of termination.
Fee arrangements
Management Fee
Under the terms of the Investment Management Agreement, the Investment Manager will be entitled to a management fee together with reimbursement of reasonable expenses incurred by it in the performance of its duties. The management fee is payable monthly in arrears and will be at the rate of 0.85% per annum of the lower of the Company's market capitalisation and the Company's Net Asset Value on the relevant day.
In accordance with the Directors' policy on the allocation of expenses between income and capital, in each financial year 80% of the management fee payable is charged to capital and the remaining 20% to income.
Performance Fee
The Investment Manager may be entitled to a performance fee. The performance fee will be paid in cash at the end of the Company's expected life (except in the case of an earlier termination of the Investment Management Agreement) and will be an amount equal to 10% of the excess return (based on the Adjusted Net Asset Value per ordinary share at that time) over the performance fee hurdle.
The performance fee hurdle will be 100 pence, increased or decreased (as the case may be) by reference to the return on the Benchmark Index plus 15 pence, the 15 pence equating approximately to a simple 2% per annum return on the opening Net Asset Value per share over the period from 15 June 2010 to the expiry of the Company's expected life.
For the purposes of calculating the performance fee, the Company's Adjusted Net Asset Value will be based on the Net Asset Value adjusted as follows:
(a) the amount of any dividends paid by the Company shall be deemed to have been reinvested on the date of payment in ordinary shares at their Net Asset Value (on such date) and the resulting amount added to the Company's Net Asset Value; and
(b) any dilutive effect caused by the exercise by shareholders of subscription rights in relation to subscription shares shall be deemed to have been added back to the Company's Net Asset Value at the time of issue of the ordinary shares resulting from such exercise, so as to negate the effect of the dilution, provided, for the avoidance of doubt, that no adjustment to the Company's Net Asset Value per ordinary share will be made in respect of;
(i) any repurchase of ordinary shares at a discount to the Net Asset Value per ordinary share prevailing at the time of such repurchase or
(ii) any issue of ordinary shares at a premium to the Net Asset Value per ordinary share prevailing at the time of such issue.
If at the end of the Company's expected life the amount available for distribution to shareholders is less than 100 pence per ordinary share, no performance fee will be payable. If the amount is more than 100 pence per ordinary share but payment of the performance fee in full would reduce it below that level, then the performance fee will be reduced such that shareholders receive exactly 100 pence per share.
No performance fee has been accrued for the year ended 30 September 2014.
Service Providers
In addition to the arrangements with Polar Capital LLP to provide investment, company secretarial and administrative services which includes accounting, portfolio valuation and trade settlement, the Company entered into a contract on 22 July 2014 with HSBC Bank plc to act as Depositary. This role includes responsibility as global custodian for all the Company's investments and other supervisory duties under the Alternative Investment Fund Manager Directive. The Company used the services of Panmure Gordon (UK) Limited during the year as corporate broker. The Company also retains Equiniti Limited as registrars and PricewaterhouseCoopers LLP as independent auditors. Each of these contracts was entered into after full and proper consideration of the quality and cost of the services offered, including the control systems in operation in so far as they relate to the affairs of the Company.
HSBC Securities Services (UK) Limited has been retained by the Investment Manager to provide accounting, valuation and trade settlement services.
Corporate Responsibility
Socially responsible investing and exercise of voting powers
The Board has instructed the Investment Manager to take into account the published corporate governance of the companies in which they invest.
The Company has also considered the Investment Manager's Stewardship Code and Proxy Voting Policy. The Voting Policy is for the Investment Manager to vote at all general meetings of companies in favour of resolutions proposed by the management where it believes that the proposals are in the interests of shareholders. However, in exceptional cases, where it believes that a resolution could be detrimental to the interests of shareholders or the financial performance of the Company, appropriate notification will be given and abstentions or a vote against will be lodged.
The Investment Manager has voted at 84 Company meetings over the year ended 30 September 2014 in each case following the recommendations of the management of that company on the casting of votes.
The Investment Manager reports to the Board, when requested, on the application of the Stewardship Code and Voting Policy. The Investment Manager's Stewardship Code and Voting Policy can be found on the Investment Manager's website (www.polarcapital.co.uk).
Environment
The Company's core activities are undertaken by its Investment Manager which seeks to limit the use of non-renewable resources and reducing waste where possible.
Diversity, Gender Reporting and Human Rights Policy
The Company has no employees and a Board comprised entirely of male Non-executive Directors.
Given the relatively short life expectancy of the Company, it is not anticipated that any new appointments will be made to the Board but, in the event that new Directors are appointed, the Board would have regard to the benefits of diversity, including gender, when seeking to make any such appointment(s).
The Company has not adopted a policy on human rights as it has no employees or operational control of its assets.
Greenhouse Gas Emissions
The Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013 require companies listed on the Main Market of the London Stock Exchange to report on the greenhouse gas ('GHG') emissions for which they are responsible. The Company is an investment trust, with neither employees nor premises, nor has it any financial or operational control of the assets which it owns. Consequently, it has no GHG emissions to report from its operations nor does it have responsibility for any other emissions.
Approved by the Board on 15 December 2014
By order of the Board
N P Taylor FCIS
Polar Capital Secretarial Services Limited
Company Secretary
Report of the Directors
The Directors present their Report including the Report on Corporate Governance together with the Audited Financial Statements for the Company prepared under International Financial Reporting Standards as adopted by the European Union (IFRSs) for the year ended 30 September 2014.
Principal Activities and Status
The future developments of the Company are set out in the Strategic Report Section.
The Company is incorporated in England and Wales as a public limited company and is domiciled in the United Kingdom. It is an investment company as defined in section 833 of the Companies Act 2006 and its ordinary shares and subscription shares are listed and traded on the London Stock Exchange.
The close company provisions do not apply.
The business of the Company is to provide shareholders with access to a discretionary managed diversified global portfolio consisting primarily of listed equities issued by healthcare companies involved in pharmaceuticals, medical services, medical devices and biotechnology. The portfolio is diversified by geographic location and size of investee companies.
The portfolio is managed within a framework of investment limits and guidelines determined by the Board which seeks to meet the investment objective while seeking to spread and mitigate risk.
The Company has no employees or premises and the Board is comprised of Non-executive Directors. The day to day operations and functions of the Company have been delegated to third parties.
Investment Trust Status
Investment Trust status permits the accumulation of capital within the portfolio without any liability to UK Capital Gains Tax.
The Company seeks to operate as an investment trust in accordance with Section 1158 Corporation Tax Act 2010. Confirmation has been received from HM Revenue and Customs that on the basis of the information provided, the Company has been accepted as an approved investment trust for accounting periods commencing on or after 1 October 2013 and subject to the Company continuing to meet the eligibility conditions of and the ongoing requirements for approved companies in Chapter 3 of Part 2 Investment Trust (Approved Company) (Tax) Regulations 2011 (Statutory Instrument 2011/2999).
The Directors are of the opinion that the Company has conducted its affairs in respect of the year ended 30 September 2014 and will continue to conduct its affairs so as to maintain its status as an investment trust.
The Company's ordinary shares are eligible for inclusion within the stocks and shares component of an ISA (save where acquired pursuant to the IPO placing).
Life of the Company
The Articles of Association require the Directors to put forward at the seventh Annual General Meeting a resolution to place the Company into liquidation. The voting on that resolution will be enhanced such that, provided any single vote is cast in favour, the resolution will be passed. The seventh AGM is expected to be held in January 2018.
Annual General Meeting ('AGM')
The Annual General Meeting will be held at 12.00 noon on 23 January 2015 at the offices of Panmure Gordon & Co, One New Change, London EC4N 9AF.
The separate Notice of Annual General Meeting contains the full text of the resolutions and an explanation of each.
Dividends
The Company aims to increase the dividend (on an annual basis) progressively, but there is no guarantee that this will be achieved. Shareholders should recognise that circumstances may arise when it is necessary to reduce the level of dividend payment or equally there may be instances when the level of dividend must be increased in order to comply with Sections 1158 and 1159 of the Corporation Tax Act 2010. Where this would result in paying a dividend beyond the Board's aim a 'special dividend' will be declared and paid.
The Company aims to pay four interim dividends in February, May, August and November each year. These interim dividends will not necessarily be of equal amounts.
Details of the dividends paid are set out on page 1.
Capital Structure and Voting Interests
Issued
At 30 September 2014 the Company's share capital was divided into ordinary shares of 25p and there were 122,650,000 ordinary shares in issue of which 1,030,000 were held in treasury by the Company.
Changes during the year and since the year end
During the year the Company has issued 17,800,000 ordinary shares as the result of the exercise of subscription share rights.
The Company made four market purchases during the year amounting to 1,030,000 ordinary shares at prices between 144p and 147p per share all of which, at 30 September 2014, are held in treasury. Since the year end, a further 45,000 ordinary shares have been bought back and the issued share capital stands at 122,650,000 ordinary shares as at the date of this report, with 1,075,000 shares held in treasury.
Subscription Shares
31 January 2014 was the final exercise date for the 17,800,000 subscription shares. Exercise notices were received from subscription shareholders exercising their rights to 15,206,136 ordinary shares were issued. On the same date 2,593,864 subscription shares which remained unexercised became the property of the final subscription trustee. The final subscription trustee exercised the remaining subscription shares and a further 2,593,864 ordinary shares were issued to the final subscription trustee and sold in the market.
Subscription shareholders whose subscription rights were exercised by the final subscription trustee were entitled to receive the net proceeds from the sale of the resultant ordinary shares and, after deduction of the subscription price, costs, expenses and brokerage fees, received a cash payment of 43.18p for each subscription share. Entitlements of less than £5 were retained for the benefit of the Company.
Voting rights
Ordinary shares carry voting rights which are exercised on a show of hands at a meeting, or on a poll, where each share has one vote.
Details for the lodging of proxy votes are given when a notice of meeting is issued.
Capital Structure and Voting Interests
Transferability
Shares in the Company may be held in uncertificated form and, subject to the Articles of Association ('Articles'), title to uncertificated shares may be transferred by means of a relevant system.
The Articles can be changed by a shareholder resolution passed at a general meeting of the Company.
Subject to the Articles, any member may transfer all or any of his certificated shares by an instrument of transfer in any usual form or in any other form which the Board may approve. The instrument of transfer must be executed by or on behalf of the transferor and (in the case of a partly-paid share) the transferee.
The Board may, in its absolute discretion and without giving any reason, decline to register any transfer of any share which is not a fully paid share. The Board may also decline to register a transfer of a certificated share unless the instrument of transfer: (i) is duly stamped or certified or otherwise shown to the satisfaction of the Board to be exempt from stamp duty and is accompanied by the relevant share certificate and such other evidence of the right to transfer as the Board may reasonably require; (ii) is in respect of only one class of share; and (iii) if joint transferees, is in favour of not more than four such transferees.
The Board may decline to register a transfer of any of the Company's certificated shares by a person with a 0.25% interest (as defined in the Articles) if such a person has been served with a restriction notice (as defined in the Articles) after failure to provide the Company with information concerning interests in those shares required to be provided under the Companies Act 2006, unless the transfer is shown to the Board to be pursuant to an arm's length sale (as defined in the Articles).
Powers to issue ordinary shares and make market purchases of ordinary shares
At the AGM in 2014 the Board was granted by shareholders the power to allot equity securities up to a nominal value of £2,621,250 being 10% of the Company's issued ordinary share capital at that date, and to issue those shares for cash without offering those shares to shareholders in accordance with their statutory pre-emption rights.
These powers will expire at the AGM in 2015. These powers have been used as described above and renewal of the authorities will be sought at the AGM in 2015. New ordinary shares will not be allotted and issued at below the fully diluted Net Asset Value per share after taking into account the costs of issue.
The Board also obtained shareholder authorities at the AGM in 2014 to make market purchases of up to 15,717,000 ordinary shares of the Company in accordance with the terms and conditions set out in the shareholder resolution. This authority expires at the AGM in 2015 and renewal of the authority will be sought at the AGM in 2015.
Details of the resolutions and the Directors' policies for the issue and purchase of shares are set out in the separate formal Notice of the Annual General Meeting.
Major interests in ordinary shares
The Company has received notifications from the following Shareholders in respect of their interests in the voting rights of the Company at 30 September 2014:
|
|
|
Number of ordinary shares |
Percentage of voting rights* |
|
Investec Wealth & Investments Limited |
Indirect |
16,514,572 |
13.58% |
|
Brewin Dolphin Limited |
Indirect |
15,706,052 |
12.91% |
|
Rathbone Brothers Public Limited Company |
Indirect |
9,221,325 |
7.58% |
|
Cazenove Capital Wealth Management Limited |
Indirect |
7,789,270 |
6.41% |
|
Charles Stanley |
Indirect |
5,513,991 |
4.53% |
|
Cheviot Asset Management Limited |
Direct |
4,805,275 |
3.95% |
Since the year end, the Company has been notified of the following changes:
|
|
|
Number of ordinary shares |
Percentage of voting rights* |
|
Brewin Dolphin Limited |
Indirect |
15,079,954 |
12.40% |
|
Charles Stanley |
Indirect |
6,151,086 |
5.06% |
* The above percentages are calculated by applying the ordinary shareholdings as notified to the Total Voting Rights of the issued ordinary share capital at 15 December 2014 of 121,575,000.
The Directors are accountable to shareholders for the governance of the Company's affairs. The UK Listing Rules require all listed companies to disclose how they have applied the principles and complied with the provisions of the UK Corporate Governance Code (the 'UK Code') which was effective during the financial year, issued by the Financial Reporting Council. The UK Code can be viewed at www.frc.org.uk
The Financial Reporting Council confirmed in 2013 that by following the 2013 version of the AIC Code of Corporate Governance ('AIC Code') and the Corporate Governance Guide for Investment Companies produced by the AIC, boards of investment companies should fully meet their obligations in relation to the UK Code and the UK Listing Rules. The AIC code and AIC guide address the principles set out in the UK Code as well as additional principles and recommendations on issues that are specific to investment trusts. The AIC Code can be viewed at www.theaic.co.uk
As an investment company most of the day to day responsibilities are delegated to outside parties as the Company has no employees and all the Directors are non-executive. Many of the provisions of the UK Code are not directly applicable to the Company and the Board has determined that reporting against the AIC Code of Corporate Governance ('AIC Code'), which incorporates the UK Code, provides the most appropriate information to shareholders.
The corporate governance report describes how the principles of the AIC Code have been applied.
Application of the AIC Code's Principles
The Board has considered the principles and recommendations of the AIC Code by reference to the AIC Corporate Governance Guide for Investment Companies ('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 believes that the Company's current practices are consistent in all material respects with the principles of the AIC Code and where non-compliance occurs, an explanation has been provided. The Board will continue to observe the principles and recommendations set out in the AIC Code in future.
It should be noted that, as an investment Company where the Directors are non-executive, most of the Company's day to day duties are delegated to third parties. The Company has agreed policies and operating procedures with the suppliers of these services.
Directors and Board; Independence and Composition
The Board is responsible to shareholders for the overall management of the Company's affairs and currently consists of four Non-executive Directors. Each Director has different qualities and areas of expertise on which they may lead where issues arise.
The Directors' biographies, set out on page 22, demonstrate the breadth of investment, commercial and professional experience relevant to their positions as Directors of the Company. The Directors' Remuneration Report is set out on pages 34 to 36.
The Board has considered the contribution and performance of each Director as part of the Director and Board performance evaluation. It determined that each Director has relevant experience, effectively contributed to the operation of the Board and has demonstrated independent views on a range of subjects. All the Directors were considered independent of the Investment Manager and had no relationship or conflicts which were likely to affect their judgement.
Succession
The Board believes that retaining Directors with sufficient experience of the Company, industry and the markets is of benefit to shareholders. While the Board recognises the value of progressive refreshing of and succession planning for company's boards, given the expected seven year life of the Company, the Board has determined that there is no need for a policy on the length of service for Directors.
Election of Directors at the AGM
The Articles of Association (the 'Articles') govern the appointment, re-election and removal of a Director.
• The Articles permits the Board to appoint further Directors without shareholder approval but subject to any such Directors standing for election by shareholders at the first AGM following their appointment.
• All Directors are appointed for an initial term of three years and are subject to re-election by shareholders at a general meeting in accordance with the Articles.
• The Articles and the Companies Act provide for the removal of a Director.
All Directors are required to offer themselves for re-election at the AGM in 2015, having last been elected at the AGM in 2012 and under the Articles of Association they are required to offer themselves for re-election at every third AGM after their last election. They have been in office throughout the year ended to 30 September 2014. The appointment date for each Director is given on page 22.
Directors' Interests and Conflicts of Interests
The Chairman of the Company is a Non-executive Director and has no conflicting relationships.
The share interests of the Directors in the ordinary shares of the Company are set out in the Directors' Remuneration Report.
Directors have a duty to avoid a situation in which they have or could have a conflict of interest or possible conflict with the interests of the Company. Under the Companies Act 2006 public companies may authorise conflicts or potential conflicts if the Articles of Association contain provisions to this effect and the Company's Articles of Association contain such provisions.
Each Director has provided the Company with a statement of all conflicts of interest and potential conflicts of interest. These have been approved by the Board and recorded in a register. The Board may impose conditions on authorising any conflict or potential conflict situations. Each Director has agreed to notify the Chairman and the Company Secretary of any changes to his circumstances which would impact on the notified conflicts or potential conflicts and obtain approval before entering into any situation which might give rise to a conflict or potential conflict with the interests of the Company.
Directors are reminded at each Board meeting of their obligations to notify any changes in their statement of conflicts and also to declare any benefits from third parties in their capacity as a Director of the Company which might give rise to a conflict or potential conflict with the Company's interests. No Director has declared receipt of any benefits other than his emoluments in his capacity as a Director of the Company.
Only Directors not involved in the conflict or potential conflict participate in the authorisation process. Directors in deciding whether to authorise a situation take into account their duty to promote the Company's success.
The Board as part of its year-end review has considered the register of conflicts, any conditions imposed on such conflicts or potential conflicts and the operation of the notification and authorisation process. It concluded that the process has operated effectively since its introduction.
No Director has any links with the Investment Manager and there were no contracts during or at the end of the period in which a Director of the Company is or was materially interested and which is or was significant in relation to the Company's business or to the Director.
Role, Responsibilities and Committees
The Board
The Board meets regularly and as required. During the period eight Board and Board Committee meetings were held to deal with the ongoing stewardship of the Company and other matters including the setting and monitoring of investment strategy and performance, review of financial statements, and shareholder issues including investor relations. The level of share price discount or premium to the Net Asset Value together with policies for re-purchase or issuance of new shares are kept under review along with matters affecting the industry and the evaluation of third party service providers.
A formal schedule of matters specifically reserved for decision by the full Board has been defined and a procedure has been adopted for Directors, in the furtherance of their duties, to take independent professional advice at the expense of the Company. No such advice has been sought during the period.
The number of formal meetings of the Board and its Committees held during the year and the attendance of individual Directors are shown below:
|
Year ended 30 September 2014 |
Board |
Audit Committee |
Management Engagement Committee |
|
Number of Meetings* |
8 |
4 |
2 |
|
James Robinson |
8 |
4 |
2 |
|
John Aston |
8 |
4 |
2 |
|
Anthony Brampton |
8 |
4 |
2 |
|
Antony Milford |
8 |
4 |
2 |
All the Directors attended the AGM.
* In addition to the above meetings, a number of ad hoc special purpose Board and committee meetings were held during the period for the approval of documents, the issue of new shares and approval of regulatory announcements.
Board Committees
The Board has delegated to the Audit Committee and the Management Engagement Committee specific remits for consideration and recommendation but the final responsibility in these areas remains with the Board. The Board determined that due to its size, and the fact that all the Directors are non-executive and independent, the functions of the Nomination Committee and Remuneration Committee would be carried out by the full Board.
The Board acting as the Nomination Committee will, when considering new or further appointment of directors, consider the balance of skills, knowledge and experience as well as gender diversity of the whole Board and also consider the use of external consultants when drawing up a list of candidates.
The Board also creates ad hoc committees from time to time to enact policies or actions agreed in principle by the whole Board. Copies of the terms of reference for each of the standing committees are available on the Company's website.
Audit Committee
The Audit Committee comprises all the independent Non-executive Directors under the chairmanship of John Aston. The Board is satisfied that at least one of the Committee's members has recent and relevant financial experience. The experience and qualification of the Committee members are set out in the biographical details on page 22.
None of the members of the Committee has any involvement in the preparation of the financial statements of the Company, as this has been contracted to the Investment Manager. The Chairman of the Committee will be present at the AGM to answer questions relating to the financial statements.
The Audit Committee has direct access to the auditors and to the key senior staff of the Investment Manager and it reports its findings and recommendations to the Board which retains the ultimate responsibility for the financial statements of the Company.
A separate report of the work of the Audit Committee over the year is set out on pages 37 to 39.
Management Engagement Committee
The Management Engagement Committee comprises all the independent Non-executive Directors under the chairmanship of John Aston and will usually meet once a year and at such other times as may be necessary.
The Management Engagement Committee is responsible for the review of the relationship with the Investment Manager including the annual review of the Investment Management and other services and resources supplied by the Investment Manager, prior to making its recommendation to the Board, whether the retention of the Investment Manager is in the interests of shareholders.
Work of the Management Engagement Committee
During the year ended 30 September 2014 the Management Engagement Committee has met twice. Once to carry out the review of the Investment Manager and consider its continued appointment and once to consider arrangements for the appointment of the Alternative Investment Fund Manager.
The Board, through the Management Engagement Committee, has reviewed the performance of the Investment Manager in managing the portfolio over the period since launch. The review also considered the quality of the other services provided by the Investment Manager.
It has concluded that it is in the best interests of shareholders as a whole that the appointment of Polar Capital LLP as Investment Manager is continued on the existing terms.
Senior Independent Director
Due to the structure of the Board it was considered unnecessary to identify a senior non-executive. The Board considers that all Directors have different qualities and areas of expertise on which they may lead where issues arise and to whom concerns may be conveyed. Each Director may be contacted through the Registered office of the Company.
Directors' Professional Development
When a new Director is appointed he or she is offered an induction course provided by the Investment Manager. Directors are also provided on a regular basis with key information on the Company's policies, regulatory and statutory obligations and internal controls. Changes affecting Directors' responsibilities are advised to the Board as they arise. Directors also participate in the Investment Manager's online training as well as also regularly participating in professional and industry seminars.
Performance Evaluation
The Board
The evaluation of the Board, its Committees and individual Directors is carried out annually. The process involves the use of a written questionnaire and the Chairman seeking the views of each Director. The responses to the questionnaire were reviewed by the full Board.
The review of the Chairman's performance was conducted by the full Board led by the Chairman of the Audit Committee.
In carrying out these evaluations each Director is assessed on their relevant experience, their strengths and weaknesses in relation to the overall requirements of the Board and their commitment to the Company in terms of time by regular attendance at Board meetings. The process is constructed to assess the contribution of individual Directors to the overall operation of the Board and its Committees.
The Board has considered the size and structure of the Board as well as succession planning bearing in mind the balance of skills, knowledge and experience existing on the Board and the Company's expected seven year life.
Reappointment as a Director is not automatic and follows a process of evaluation of each Director's performance, the Company does not have a policy on length of service for Directors due to the expected seven year life. All Directors are appointed for an initial term of three years, subject to reappointment and Companies Act provisions.
The Investment Manager
The Board has contractually delegated the management of the portfolio to the Investment Manager, Polar Capital LLP (the 'Investment Manager'). It is the Investment Manager's sole responsibility to take decisions as to the purchase and sale of individual investments. The Investment Manager has responsibility for asset allocation and sector selection within the limits established and regularly reviewed by the Board. The investment team provided by the Investment Manager, led by Dr. Daniel Mahony, has experience of investing in the healthcare sector. In addition, the Investment Manager has other investment resources which support the investment team and has experience in managing and administering other investment trust companies.
The Investment Manager also provides accountancy services, company secretarial and administrative services including the monitoring of third party suppliers which are directly appointed by the Company. The Investment Manager provides in a timely manner all relevant management, regulatory and financial information to the Directors. Representatives of the Investment Manager attend Board meetings enabling the Directors to probe further on matters of concern or seek clarification on certain issues.
The Directors have access to the advice and services of the corporate company secretary through its appointed representative who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. The Board and Investment Manager operate in a supportive, co-operative and open environment.
The Board reviews the performance of the Investment Manager at each Board meeting and the Company's performance against the Benchmark and a peer group of investment companies and funds with similar investment objectives.
The Management Engagement Committee reviews the terms of the contract with the Investment Manager.
Accountability and Audit
The Statement of Directors' Responsibilities in respect of the financial statements is set out on pages 40 and 41 and the Independent Auditors' Report is on pages 42 to 45.
Internal Controls
The Board has overall responsibility for the Company's system of internal control and for reviewing its effectiveness. The Company has no employees as its operational functions are carried out by third parties.
The Audit Committee does not consider it necessary for the Company to establish its own internal audit function as the Investment Manager, overseen by the Board, is responsible for monitoring all accounting and internal control operations. The Investment Manager has an internal control framework to provide reasonable but not absolute assurance on the effectiveness of the internal controls operated on behalf of its clients. The Investment Manager is authorised and regulated by the Financial Conduct Authority and its compliance department monitors compliance with the FCA rules.
The Board through the Audit Committee has established an ongoing process for identifying, evaluating and managing any major risks faced by the Company. The process is documented through the use of a Risk Map which is subject to regular review by the Audit Committee and accords with the Revised Guidance for Directors on the Combined Code published by the Financial Reporting Council.
The controls are embedded within the business and aim to ensure that identified risks are managed and systems are in place to report on such risks. The internal controls seek to ensure the assets of the Company are safeguarded, proper accounting records are maintained and the financial information used in the Company and for publication is reliable. Controls covering the risks identified, including financial, operational, compliance and risk management are monitored by a series of regular reports covering investment performance, attribution analysis, reports from various third parties and from the Investment Manager including risks not directly the responsibility of the Investment Manager.
Operation
The process was active throughout the period and up to the date of approval of this annual report. However, such a system is designed to manage rather than eliminate risks of failure to achieve the Company's business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Board will continue to monitor the system of internal controls in order to provide assurance that they operate as intended.
The Board has received a formal report from the Investment Manager with details of any known internal control failures and has also considered reports on the Investment Manager's internal controls and systems operated by other third party suppliers. The Board considers ad hoc reports from the Investment Manager and information is supplied to the Board as required.
The Investment Manager has delegated the provision of accounting, portfolio valuation and trade processing to HSBC Securities Services (UK) Limited but remains responsible to the Company for these functions and provides the Board with information on these services.
The Board undertakes an annual review of the Company's system of internal control where the Risk Map is reviewed and control processes considered. The Board, assisted by the Investment Manager, has conducted the annual review of the risk map and the effectiveness of the system of internal controls taking into account any issues, none of which were considered significant, which arose during the course of the year ended 30 September 2014 and up to the date of this report.
The Board has adopted a zero tolerance to bribery and corruption in its business activities and uses the anti-bribery policy formulated and implemented by Polar Capital LLP which was sent to all suppliers of both Polar Capital LLP and the Company.
Relations with Shareholders
The Board and the Investment Manager consider maintaining good communications with shareholders and engaging with larger shareholders through meetings and presentations a key priority. Shareholders are kept informed by the publication of annual and interim reports which include financial statements. These reports are supplemented by interim management statements, the daily release of the net asset value per share to the London Stock Exchange and the publication by the Investment Manager of a monthly factsheet.
All this information together with the Investment Manager's presentations is available from the Company's website at www.polarcapitalhealthcaretrust.co.uk
The Board is also keen that the AGM be a participative event for all shareholders who attend. The Investment Manager will make a presentation and shareholders are encouraged to attend. The Chairmen of the Board and of the Committees attend the AGM and are available to respond to queries and concerns from shareholders.
At least twenty working days notice of the AGM is given to shareholders and separate resolutions are proposed in relation to each substantive issue.
Where the vote is decided on a show of hands, the proxy votes received are relayed to the meeting and subsequently published on the Company's website. Proxy forms have a 'vote withheld' option. The Notice of Annual General Meeting sets out the business of the AGM together with the full text of any special resolutions.
Shareholders may submit questions for the AGM in advance of the meeting or make general enquiries of the Company via the company secretary at the Registered Office of the Company.
The Board monitors the share register of the Company; it also reviews correspondence from shareholders and maintains regular contact with major shareholders. Shareholders who wish to raise matters with a Director may do so by writing to them at the Registered Office of the Company.
Statement of Compliance
The AIC Code comprises 21 principles. The Board consider that for the year under review the Directors,
Board and Company have complied with the recommendations of the AIC Code in so far as they apply to the Company's business. For the reasons set out in the AIC Guide, the Board considers these provisions are not relevant to the position of the Company, being an externally managed investment company;
• as all Directors are non-executive and day to day management has been contracted to third parties the Company does not have a Chief Executive. The Chairman of the Board is non-executive,
• as there are no executive Directors it does not comply with the UK Code in respect of executive directors' remuneration,
• the Company does not have an internal audit function as it relies on the systems of control operated by third party suppliers in particular those of the Investment Manager,
• due to the structure of the Board it was considered unnecessary to identify a senior independent non-executive. The Board considers that all Directors have different qualities and areas of expertise on which they may lead where issues arise and to whom concerns may be conveyed.
By order of the Board
N P Taylor FCIS
Polar Capital Secretarial Services Limited
Company Secretary
15 December 2014
Statement of Directors' Responsibilities
In respect of the Annual Report, Directors' Remuneration Report and Financial Statements
The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have prepared the Company Financial Statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Under company law the Directors must not approve the Financial Statements unless they are satisfied that they 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. In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable IFRSs as adopted by the European Union 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 adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Financial Statements, Article 4 of the IAS Regulations. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website although day to day maintenance has been delegated to Polar Capital LLP. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions. 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 since they were initially presented on the website.
The Directors consider that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
Disclosure of Information to the Auditors
As far as the Directors are aware and to the best of their knowledge, having made enquiries, there is no relevant audit information of which the Auditors are unaware and the Directors have taken steps to make themselves aware of any relevant audit information and to establish that the Auditors are aware of such information.
Going Concern
The Board has, through the Audit Committee, considered the Company's position as at 30 September 2014 and the factors impacting the forthcoming year are set out in the Chairman's Statement and the Investment Manager's Report on pages 2 to 10 and in the Strategic Report and in the Report of the Directors which incorporates the corporate governance statements.
The financial position of the Company, its cash flows, and its liquidity position is described in the Strategic Report section on pages 2 to 21. Note 23 to the financial statements includes the Company's policies and process for managing its capital; its financial risk management objectives and details of financial instruments and hedging activities. Exposure to credit risk and liquidity risk are also disclosed.
The Company has a portfolio of investments listed and traded on stock exchanges around the world, the great majority of which can be sold within five working days, providing considerable financial resources, and after making enquiries the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future despite the continued uncertain economic outlook. Accordingly, the Directors continue to adopt the going concern basis in preparing the annual report and financial statements.
Responsibility Statement under the Disclosure and Transparency Rules
Each of the Directors of Polar Capital Global Healthcare Growth and Income Trust plc, who are listed on page 22, confirm that, to the best of their knowledge:
• the Financial Statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
• the Chairman's Statement, Investment Manager's Report, Strategic Report and Report of the Directors (together constituting the Management Report) 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 and uncertainties that it faces.
The financial statements were approved by the Board on 15 December 2014 and the responsibility statements were signed on its behalf by James Robinson, Chairman of the Board.
James Robinson
Chairman
15 December 2015
Statement of Comprehensive Income - For the year ended 30 September 2014
|
|
Notes |
Year ended |
Year ended |
|||||
|
Revenue return £'000 |
Capital return £'000 |
Total return £'000 |
Revenue return £'000 |
Capital return £'000 |
Total return £'000 |
|||
|
Investment income |
3 |
5,118 |
179 |
5,297 |
4,607 |
314 |
4,921 |
|
|
Other operating income |
4 |
657 |
- |
657 |
244 |
- |
244 |
|
|
Gains on investments held |
5 |
- |
28,531 |
28,531 |
- |
25,749 |
25,749 |
|
|
Other currency gains/(losses) |
6 |
- |
21 |
21 |
- |
(188) |
(188) |
|
|
Total income |
|
5,775 |
28,731 |
34,506 |
4,851 |
25,875 |
30,726 |
|
|
Expenses |
|
|
|
|
|
|
|
|
|
Investment management fee |
7 |
(296) |
(1,183) |
(1,479) |
(244) |
(975) |
(1,219) |
|
|
Other administrative expenses |
8 |
(419) |
- |
(419) |
(373) |
- |
(373) |
|
|
Total expenses |
|
(715) |
(1,183) |
(1,898) |
(617) |
(975) |
(1,592) |
|
|
Profit before finance costs and tax |
5,060 |
27,548 |
32,608 |
4,234 |
24,900 |
29,134 |
||
|
Finance costs |
|
- |
- |
- |
- |
- |
- |
|
|
Profit before tax |
|
5,060 |
27,548 |
32,608 |
4,234 |
24,900 |
29,134 |
|
|
Tax |
9 |
(583) |
26 |
(557) |
(482) |
(25) |
(507) |
|
|
Net profit for the year and total comprehensive income |
|
4,477 |
27,574 |
32,051 |
3,752 |
24,875 |
28,627 |
|
|
Earnings per ordinary share (basic) (pence) |
11 |
3.86 |
23.76 |
27.62 |
3.68 |
24.38 |
28.06 |
|
|
Earnings per ordinary share (diluted) (pence) |
11 |
3.86 |
23.76 |
27.62 |
3.51 |
23.28 |
26.79 |
|
The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS as adopted by the European Union.
The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.
The notes on pages 50 to 69 form part of these financial statements.
Statement of Changes in Equity - For the year ended 30 September 2014
|
|
Notes |
Year ended 30 September 2014 |
|||||
|
Called up share capital £'000 |
Share premium reserve £'000 |
Special distributable reserve £'000 |
Capital reserves £'000 |
Revenue reserve £'000 |
Total equity £'000 |
||
|
Total equity at |
|
26,391 |
15,417 |
64,792 |
47,153 |
1,994 |
155,747 |
|
Total comprehensive income: |
|
|
|
|
|
|
|
|
Profit for the year ended 30 September 2014 |
- |
- |
- |
27,574 |
4,477 |
32,051 |
|
|
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
|
Issue of ordinary shares on exercise of subscription shares |
15,16 |
4,272 |
13,499 |
- |
- |
- |
17,771 |
|
Shares bought back and held in treasury |
- |
- |
(1,504) |
- |
- |
(1,504) |
|
|
Equity dividends paid |
10 |
- |
- |
- |
- |
(4,106) |
(4,106) |
|
Total equity at 30 September 2014 |
30,663 |
28,916 |
63,288 |
74,727 |
2,365 |
199,959 |
|
|
|
Notes |
Year ended 30 September 2013 |
|||||
|
Called up share capital £'000 |
Share premium reserve £'000 |
Special distributable reserve £'000 |
Capital reserves £'000 |
Revenue reserve £'000 |
Total equity £'000 |
||
|
Total equity at 1 October 2012 |
|
24,653 |
7,360 |
64,792 |
22,278 |
1,655 |
120,738 |
|
Total comprehensive income: |
|
|
|
|
|
|
|
|
Profit for the year ended 30 September 2013 |
- |
- |
- |
24,875 |
3,752 |
28,627 |
|
|
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
|
Issue of ordinary shares |
15,16 |
1,738 |
8,057 |
- |
- |
- |
9,795 |
|
Equity dividends paid |
10 |
- |
- |
- |
- |
(3,413) |
(3,413) |
|
Total equity at 30 September 2013 |
26,391 |
15,417 |
64,792 |
47,153 |
1,994 |
155,747 |
|
The notes on pages 50 to 69 form part of these financial statements.
Balance Sheet - As at 30 September 2014
|
|
Notes |
30 September 2014 £'000 |
30 September 2013 £'000 |
|
Non-current assets |
|
|
|
|
Investments held at fair value |
12 |
199,459 |
155,308 |
|
Current assets |
|
|
|
|
Receivables |
13 |
846 |
3,197 |
|
Overseas tax recoverable |
|
175 |
137 |
|
Cash and cash equivalents |
21 |
13 |
844 |
|
|
|
1,034 |
4,178 |
|
Total assets |
|
200,493 |
159,486 |
|
Current liabilities |
|
|
|
|
Payables |
14 |
(424) |
(3,739) |
|
Bank overdraft |
21 |
(110) |
- |
|
|
|
(534) |
(3,739) |
|
Net assets |
|
199,959 |
155,747 |
|
Equity attributable to equity shareholders |
|
|
|
|
Called up share capital |
15 |
30,663 |
26,391 |
|
Share premium reserve |
16 |
28,916 |
15,417 |
|
Special distributable reserve |
17 |
63,288 |
64,792 |
|
Capital reserves |
18 |
74,727 |
47,153 |
|
Revenue reserve |
19 |
2,365 |
1,994 |
|
Total equity |
|
199,959 |
155,747 |
|
Net asset value per ordinary share (pence) |
20 |
164.41 |
148.54 |
|
Net asset value per ordinary share (diluted) (pence) |
20 |
164.41 |
141.50 |
The financial statements on pages 46 to 69 were approved and authorised for issue by the Board of Directors on 15December 2014 and signed on its behalf by
James Robinson
Chairman
The notes on pages 50 to 69 form part of these financial statements.
Registered number 7251471
Cash Flow Statement - For the year ended 30 September 2014
|
|
Notes |
Year ended 30 September 2014 £'000 |
Year ended 30 September 2013 £'000 |
|
Cash flows from operating activities |
|
|
|
|
Profit before tax |
|
32,608 |
29,134 |
|
Adjustment for non-cash items: |
|
|
|
|
Gain on investments held at fair value through profit or loss |
|
(28,531) |
(25,749) |
|
Adjusted profit before tax |
|
4,077 |
3,385 |
|
Adjustments for: |
|
|
|
|
Purchases of investments, including transaction costs |
|
(60,886) |
(55,857) |
|
Sales of investments, including transaction costs |
|
44,168 |
47,375 |
|
(Increase)/decrease in receivables |
|
(29) |
18 |
|
Increase/(decrease) in payables |
|
163 |
(30) |
|
Overseas tax deducted at source |
|
(595) |
(514) |
|
Net cash used in operating activities |
|
(13,102) |
(5,623) |
|
Cash flows from financing activities |
|
|
|
|
Proceeds from issue of share capital (net of issue costs) |
|
17,771 |
9,795 |
|
Cost of shares repurchased |
|
(1,504) |
- |
|
Equity dividends paid |
10 |
(4,106) |
(3,413) |
|
Net cash generated from financing activities |
|
12,161 |
6,382 |
|
Net (decrease)/increase in cash and cash equivalents |
|
(941) |
759 |
|
Cash and cash equivalents at the beginning of the year |
844 |
85 |
|
|
Cash and cash equivalents at the end of the year |
21 |
(97) |
844 |
The notes on pages 50 to 69 form part of these financial statements.
Notes to the Financial Statements - For the year ended 30 September 2014
1 General Information
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC), as adopted by the European Union, and with those parts of the Companies Act 2006 applicable to companies under IFRS.
The Company's presentational currency is pounds sterling. Pounds sterling is also the functional currency of the Company because it is the currency which is most relevant to the majority of the Company's shareholders and creditors and the currency in which the majority of the Company's operating expenses are paid.
2 Accounting Policies
The principal accounting policies which have been applied consistently for all years presented are set out below:
(a) Basis of Preparation
The financial statements have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments and derivative financial instruments at fair value through profit or loss.
Where presentational guidance set out in the Statement of Recommended Practice (SORP) for investment trusts issued by the Association of Investment Companies (AIC) in January 2009 is consistent with the requirements of IFRS, in so far as those requirements are applicable to the financial statements, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.
(b) Presentation of the Statement of Comprehensive Income
In order to better reflect the activities of an investment trust company and in accordance with the guidance set out by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. The results presented in the revenue return column is the measure the directors believe appropriate in assessing the Company's compliance with certain requirements set out in section 1158 of the Corporation Tax Act 2010.
(c) Income
Dividends receivable from equity shares are recognised and taken to the revenue return column of the Statement of Comprehensive Income on an ex-dividend basis.
Special dividends are recognised on an ex-dividend basis and may be considered to be either revenue or capital items. The facts and circumstances are considered on a case by case basis before a conclusion on appropriate allocation is reached.
Income from US/Canadian REITs is initially taken to the revenue return column of the Statement of Comprehensive Income on an ex-dividend basis. An adjustment may then be made to reallocate a proportion of this income to capital, depending on the information announced by the REITs.
Where the Company has received dividends in the form of additional shares rather than in cash, the amount of the cash dividend foregone is recognised in the revenue return column of the Statement of Comprehensive Income. Any excess in value of shares received over the amount of the cash dividend foregone is recognised in the capital return column of the Statement of Comprehensive Income.
Bank interest is accounted for on an accruals basis. Interest outstanding at the year end is calculated on a time apportionment basis using market rates of interest.
(d) Written Options
The Company may write exchange-traded options with a view to generating income. This involves writing short-dated covered-call options and put options. The use of financial derivatives is governed by the Company's policies, as approved by the Board.
These options are recorded initially at fair value, based on the premium income received, and are then measured at subsequent reporting dates at fair value. Changes in the fair value of the options are recognised in the capital return for the period.
The option premiums are recognised evenly over the life of the option and shown in the revenue return, with an appropriate amount shown in the capital return to ensure the total return reflects the overall change in the fair value of the options.
Where an option is exercised, any balance of the premium is recognised immediately in the revenue return with a corresponding adjustment in the capital return based on the amount of the loss arising on exercise of the option.
(e) Expenses
All expenses, including the management fee, are accounted for on an accruals basis and are recognised when they fall due.
All expenses have been presented as revenue items except as follows:
Expenses are charged to the capital column of the Statement of Comprehensive Income where a connection with the maintenance or enhancement of the value of investments can be demonstrated. In this respect the investment management fees have been charged to the Statement of Comprehensive Income in line with the Board's expected long-term split of returns, in the form of capital gains and income from the Company's portfolio. As a result 20% of the investment management fees are charged to the revenue account and 80% charged to the capital account of the Statement of Comprehensive Income.
The performance fee (when payable) is charged entirely to capital as the fee is based on the out-performance of the Benchmark and is expected to be attributable largely, if not wholly, to capital performance.
(f) Taxation
The tax expense represents the sum of the overseas withholding tax deducted from investment income, tax currently payable and deferred tax.
The tax currently payable is based on the taxable profits for the year ended 30 September 2014. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date.
In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented against capital returns in the supplementary information in the Statement of Comprehensive Income is the 'marginal basis'. Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue return column of the Statement of Comprehensive Income, then no tax relief is transferred to the capital return column.
Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Investment trusts which have approval as such under section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax rates that have been enacted or substantively enacted at the balance sheet date.
Deferred tax is charged or credited in the Statement of Comprehensive Income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
(g) Investments Held at Fair Value Through Profit or Loss
When a purchase or sale is made under contract, the terms of which require delivery within the timeframe of the relevant market, the investments concerned are recognised or derecognised on the trade date and are initially measured at fair value.
On initial recognition the Company has designated all of its investments as held at fair value through profit or loss as defined by IFRS. All investments are measured at subsequent reporting dates at fair value, which is either the bid price or the last traded price, depending on the convention of the exchange on which the investment is quoted.
All investments, classified as fair value through profit or loss, are further categorised into the following fair value hierarchy:
Level 1: Unadjusted prices quoted in active markets for identical assets and liabilities.
Level 2: Having inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices).
Level 3: Having inputs for the asset or liability that are not based on observable market data.
Changes in fair value of all investments held at fair value and realised gains and losses on disposal are recognised in the capital return column of the Statement of Comprehensive Income.
(h) Receivables
Receivables are initially recognised at fair value and subsequently measured at amortised cost. Receivables do not carry any interest and are short-term in nature and are accordingly stated at their nominal value (amortised cost) as reduced by appropriate allowances for estimated irrecoverable amounts.
(i) Cash and Cash Equivalents
Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash.
(j) Dividends Payable
Dividends payable to shareholders are recognised in the financial statements when they are paid or, in the case of final dividends, when they are approved by the shareholders.
(k) Payables
Other payables are not interest-bearing and are initially valued at fair value and subsequently stated at their nominal value (amortised cost).
(l) Foreign Currency Translation
Transactions in foreign currencies are translated into sterling at the rate of exchange ruling on the date of each transaction. Monetary assets, monetary liabilities and equity investments in foreign currencies at the balance sheet date are translated into sterling at the rates of exchange ruling on that date. Realised profits or losses on exchange, together with differences arising on the translation of foreign currency assets or liabilities, are taken to the capital return column of the Statement of Comprehensive Income.
Foreign exchange gains and losses arising on investments held at fair value are included within changes in fair value.
(m) Capital Reserves
Capital reserve arising on investments sold includes:
- gains/losses on disposal of investments
- exchange differences on currency balances
- other capital charges and credits charged to this account in accordance with the accounting policies above.
Capital reserve arising on investments held includes:
- increases and decreases in the valuation of investments held at the balance sheet date.
All of the above are accounted for in the Statement of Comprehensive Income.
(n) Repurchase of Ordinary Shares (Including Those Held in Treasury)
The costs of repurchasing Ordinary shares including related stamp duty and transaction costs are taken directly to equity and reported through the Statement of Changes in Equity as a charge on the special distributable reserve. Share repurchase transactions are accounted for on a trade date basis. The nominal value of Ordinary share capital repurchased and cancelled is transferred out of called up share capital and into the capital redemption reserve. Where shares are repurchased and held in treasury, the transfer to capital redemption reserve is made if and when such shares are subsequently cancelled.
(o) Accounting Standards
(i) Standards, amendments and interpretations becoming effective in the
year to 30 September 2014:
• IAS 1 (amendment), 'Presentation of Financial Statements' - amendments resulting from annual improvements review to revise the way other comprehensive income is presented.
• IFRS 7 (amendment), 'Financial Instruments - Disclosures' (effective for periods beginning on or after 1 January 2013) - amendments enhancing disclosures about offsetting financial assets and financial liabilities.
• IFRS 13, 'Fair Value Measurement' (effective for annual periods beginning on or after 1 January 2013) - aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP.
None of the above has any significant impact on the amounts reported in these financial statements.
(ii) Standards, amendments and interpretations to existing standards become effective in future accounting periods and have not been adopted early by the Company:
• IFRS 9, 'Financial Instruments' (effective for financial periods beginning on or after 1 January 2015) - addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Company is yet to assess IFRS 9's full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after 1 January 2015, subject to endorsement by the EU.
• IFRS 10, 'Consolidated Financial Statements' (effective for financial periods beginning on or after 1 January 2014) - Provides additional guidance to assist in the determination of control where this is difficult to assess.
• IFRS 12, 'Disclosures of Interests In Other Entities' (effective for financial periods beginning on or after 1 January 2014) - includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.
• IAS 27 (revised), 'Separate Financial Statements' (effective for financial periods beginning on or after 1 January 2014) - requirements for consolidated financial statements moved to IFRS 10.
• IAS 32, 'Financial Instruments: Presentation' (effective for financial periods beginning on or after 1 January 2014) - updates the application guidance in IAS 32 to clarify some of the requirements for offsetting financial assets and financial liabilities on the balance sheet.
• IAS 39, 'Financial Instruments: Recognition and Measurement' (effective for financial periods beginning on or after 1 January 2014) - narrow scope amendments allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met (in this context, a novation indicates that parties to a contract agree to replace their original counterparty with a new one).
It is not expected that the standards listed above will have a significant impact on the financial statements of the Company in future periods, except that IFRS 9 may impact both the measurement and disclosure of financial instruments. However it is not yet practical to provide an estimate of the effect.
(iii) The following standards, amendments and interpretations to existing standards become effective in future accounting periods (all from 1 January 2014), but are not relevant for
the Company's operations:
• IFRS 1 (amendments), 'First Time Adoption of International Financial Reporting Standards'
• IFRS 11, 'Joint Arrangements'
• IAS 12 (amendment), 'Income Taxes'
• IAS 16, 'Property, Plant and Equipment'
• IAS 19 (amendment), 'Employee Benefits'
• IAS 28, 'Associates and Joint Ventures'
• IAS 34, 'Interim Reporting'
• IAS 36, 'Impairment of Assets'
(p) Segmental Reporting
Under IFRS 8, 'Operating Segments', operating segments are considered to be the components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker has been identified as the Investment Manager (with oversight from the Board).
The Directors are of the opinion that the Company has only one operating segment and as such no distinct segmental reporting is required.
3 Investment Income
|
|
Year ended 30 September 2014 £'000 |
Year ended 30 September 2013 £'000 |
|
Revenue: |
|
|
|
Franked: Listed investments |
|
|
|
Dividend income |
1,022 |
890 |
|
Unfranked: Listed investments |
|
|
|
Dividend income |
4,096 |
3,717 |
|
Total investment income allocated to revenue |
5,118 |
4,607 |
|
Capital: |
|
|
|
Special dividends allocated to capital |
24 |
157 |
|
Dividends from REITs allocated to capital |
155 |
157 |
|
Total investment income allocated to capital |
179 |
314 |
4 Other Operating Income
|
|
Year ended 30 September 2014 £'000 |
Year ended 30 September 2013 £'000 |
|
Option premium income |
656 |
243 |
|
Bank interest |
1 |
1 |
|
Total other operating income |
657 |
244 |
Option premium income for the year arises from writing short-dated covered-call options and put options in the expectation that the options will not be exercised or, in overall terms, any losses that may arise following exercise will be outweighed by the premiums received. A gain of £nil (2013: £nil) has been recognised in the capital return for the year in respect of these options.
5 Gains on Investments Held at Fair Value
|
|
Year ended 30 September 2014 £'000 |
Year ended 30 September 2013 £'000 |
|
Net gains on disposal of investments at historic cost |
11,664 |
10,939 |
|
Less fair value adjustments in earlier years |
(5,038) |
(4,622) |
|
Gains based on carrying value at previous balance sheet date |
6,626 |
6,317 |
|
Valuation gains on investments held during the year |
21,905 |
19,432 |
|
|
28,531 |
25,749 |
6 Other Currency Gains/(Losses)
|
|
Year ended 30 September 2014 £'000 |
Year ended 30 September 2013 £'000 |
|
Exchange gains/(losses) on currency balances |
21 |
(188) |
7 Investment Management Fee
|
|
Year ended 30 September 2014 £'000 |
Year ended 30 September 2013 £'000 |
|
Management fee |
|
|
|
- charged to revenue |
296 |
244 |
|
- charged to capital |
1,183 |
975 |
|
Investment management fee payable to Polar Capital LLP |
1,479 |
1,219 |
Management fees are allocated 20% to revenue and 80% to capital.
8 Other Administrative Expenses (Including VAT where appropriate)
|
|
Year ended 30 September 2014 £'000 |
Year ended 30 September 2013 £'000 |
|
Directors' fees |
107 |
95 |
|
Auditors' remuneration: |
|
|
|
For audit of the Company financial statements |
21 |
21 |
|
For taxation compliance services |
- |
1 |
|
Other expenses |
291 |
256 |
|
|
419 |
373 |
Ongoing charges represents the total expenses of the Fund, excluding finance costs, expressed as a percentage of the average daily net asset value, in accordance with AIC guidance issued in May 2012.
The ongoing charges ratio for the year ended 30 September 2014 was 1.04% (2013: 1.10%).
9 Taxation
|
|
Year ended |
Year ended |
||||
|
Revenue return £'000 |
Capital return £'000 |
Total return £'000 |
Revenue return £'000 |
Capital return £'000 |
Total return £'000 |
|
|
a) Analysis of tax charge for the year: |
|
|
|
|
|
|
|
Overseas tax |
553 |
4 |
557 |
482 |
25 |
507 |
|
Tax relief in capital |
30 |
(30) |
- |
- |
- |
- |
|
Total tax for the year (see note 9b) |
583 |
(26) |
557 |
482 |
25 |
507 |
|
b) Factors affecting tax charge for the year: |
|
|
|
|
|
|
|
The charge for the year can be reconciled |
|
|
|
|
|
|
|
Profit before tax |
5,060 |
27,548 |
32,608 |
4,234 |
24,900 |
29,134 |
|
Tax at the UK corporation tax rate of 21%* (2013: 23%)* |
531 |
2,893 |
3,424 |
486 |
2,856 |
3,342 |
|
Tax at the UK corporation tax rate of 23% (2013: 24%) |
582 |
3,168 |
3,750 |
509 |
2,996 |
3,505 |
|
Tax effect of non-taxable dividends |
(1,025) |
(39) |
(1,064) |
(1,004) |
(74) |
(1,078) |
|
Gains on investments that are not taxable |
- |
(6,281) |
(6,281) |
- |
(6,008) |
(6,008) |
|
Unrelieved current period expenses and deficits |
(8) |
190 |
182 |
19 |
230 |
249 |
|
Overseas tax suffered |
553 |
4 |
557 |
482 |
25 |
507 |
|
Tax relief on overseas tax suffered |
(50) |
39 |
(11) |
(10) |
- |
(10) |
|
Total tax for the year (see note 9a) |
583 |
(26) |
557 |
482 |
25 |
507 |
* The standard rate of corporation tax in the UK changed from 23% to 21% with effect from 1 April 2014. Accordingly, the Company's profits for this accounting period are taxed at an effective rate of 22%.
c) Factors that may affect future tax charges:
The Company has an unrecognised deferred tax asset of £583,000 (2013: £416,000) based on a
prospective corporation tax rate of 20% (2013: 20%).
The deferred tax asset has arisen due to the cumulative excess of deductible expenses over taxable income. Given the composition of the Company's portfolio, it is not likely that this asset will be utilised in the foreseeable future and therefore no asset has been recognised in the financial statements.
The reduction in the standard rate of corporation tax was substantively enacted in July 2013 and will be effective from 1st April 2015.
Given the Company's intention to continue to meet the conditions requires to retain its status as an Investment Trust Company, no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments.
10 Amounts Recognised as Distributions to Ordinary Shareholders in the Year
Dividends paid in the year ended 30 September 2014
|
Payment date |
No of shares |
Pence per share |
Year ended 30 September 2014 £'000 |
|
29 November 2013 |
104,850,000 |
0.55p |
577 |
|
7 March 2014 |
122,000,000 |
0.55p |
671 |
|
30 May 2014 |
121,720,000 |
0.55p |
669 |
|
29 August 2014 |
121,620,000 |
1.80p |
2,189 |
|
|
|
|
4,106 |
The revenue available for distribution by way of dividend for the year is £4,477,000 (2013: £3,752,000).
The total dividends payable in respect of the financial year ended 30 September 2014 which is the basis on which the requirements of Section 1158 Corporation Tax Act 2010 are considered, is set out below:
|
Payment date |
No of shares |
Pence per share |
Year ended £'000 |
|
7 March 2014 |
122,000,000 |
0.55p |
671 |
|
30 May 2014 |
121,720,000 |
0.55p |
669 |
|
29 August 2014 |
121,620,000 |
1.80p |
2,189 |
|
28 November 2014 |
121,620,000 |
0.60p |
730 |
|
|
|
|
4,259 |
Dividends paid in the year ended 30 September 2013
|
Payment date |
No of shares |
Pence per share |
Year ended |
|
30 November 2012 |
100,250,000 |
0.50p |
501 |
|
28 February 2013 |
100,250,000 |
0.50p |
501 |
|
31 May 2013 |
104,850,000 |
0.50p |
524 |
|
30 August 2013 |
104,850,000 |
1.80p |
1,887 |
|
|
|
|
3,413 |
The total dividends payable in respect of the financial year ended 30 September 2013 which is the basis on which the requirements of Section 1158 Corporation Tax Act 2010 are considered, is set out below:
10 Amounts Recognised as Distributions to Ordinary Shareholders in the Year continued
|
|
No of shares |
Pence per share |
Year ended |
|
28 February 2013 |
100,250,000 |
0.50p |
501 |
|
31 May 2013 |
104,850,000 |
0.50p |
524 |
|
30 August 2013 |
104,850,000 |
1.80p |
1,887 |
|
29 November 2013 |
104,850,000 |
0.55p |
577 |
|
|
|
|
3,489 |
All dividends are paid as interim dividends.
The dividends paid in November each year relate to a dividend declared in respect of the previous financial year but paid in the current accounting year.
11 Earnings per Ordinary Share
|
|
Year ended 30 September 2014 |
Year ended 30 September 2013 |
||||
|
Revenue return |
Capital return |
Total return |
Revenue return |
Capital return |
Total return |
|
|
The calculation of basic earnings per share is based on the following data: |
|
|
|
|
|
|
|
Net profit for |
4,477 |
27,574 |
32,051 |
3,752 |
24,875 |
28,627 |
|
Weighted average ordinary shares |
116,029,389 |
116,029,389 |
116,029,389 |
102,032,603 |
102,032,603 |
102,032,603 |
|
Basic - ordinary shares (pence) |
3.86 |
23.76 |
27.62 |
3.68 |
24.38 |
28.06 |
|
The calculation of diluted earnings per share is based on the following data: |
|
|
|
|
|
|
|
Net profit for |
4,477 |
27,574 |
32,051 |
3,752 |
24,875 |
28,627 |
|
Diluted number of shares in issue during the year |
116,029,389 |
116,029,389 |
116,029,389 |
106,864,230 |
106,864,230 |
106,864,230 |
|
Diluted - ordinary shares (pence) |
3.86 |
23.76 |
27.62 |
3.51 |
23.28 |
26.79 |
The calculation of the diluted total, revenue and capital returns per ordinary share are carried out in accordance with IAS 33 'Earnings per Share'. For the purposes of calculating diluted returns per ordinary share, the number of ordinary shares is the weighted average used in the basic calculation plus the number of ordinary shares deemed to be issued for no consideration on exercise of all subscription shares by reference to the average share price of the ordinary shares during the year.
As at 30 September 2014 there were no potentially dilutive shares in issue as all subscription shares were converted into ordinary shares during the year.
12 Investments Held at Fair Value
(a) Movements on investments
|
|
30 September 2014 |
30 September 2013 |
|
Cost brought forward |
119,312 |
99,146 |
|
Valuation gains |
35,996 |
21,186 |
|
Valuation brought forward |
155,308 |
120,332 |
|
Additions at cost |
57,408 |
59,335 |
|
Proceeds on disposal |
(41,788) |
(50,108) |
|
Gains on disposal |
6,626 |
6,317 |
|
Valuation gains |
21,905 |
19,432 |
|
Valuation at 30 September |
199,459 |
155,308 |
|
Cost at 30 September |
146,596 |
119,312 |
|
Closing fair value adjustment |
52,863 |
35,996 |
|
Valuation at 30 September |
199,459 |
155,308 |
The following transaction costs, including stamp duty and broker commissions were incurred during the year:
|
|
30 September 2014 |
30 September 2013 |
|
On acquisition |
124 |
162 |
|
On disposal |
81 |
94 |
|
|
205 |
256 |
(b) Fair value hierarchy
|
|
30 September 2014 |
30 September 2013 |
|
Level 1 assets |
199,459 |
155,308 |
|
Valuation at 30 September |
199,459 |
155,308 |
All Level 1 assets are traded on a recognised Stock Exchange.
13 Receivables
|
|
30 September 2014 £'000 |
30 September 2013 £'000 |
|
Sales for future settlement |
353 |
1,397 |
|
Spot foreign exchange contracts awaiting settlement |
- |
1,336 |
|
Accrued income |
470 |
441 |
|
Prepayments |
23 |
23 |
|
|
846 |
3,197 |
The carrying values of receivables approximate their fair value.
14 Payables
|
|
30 September 2014 £'000 |
30 September 2013 £'000 |
|
Purchases for future settlement |
- |
2,146 |
|
Spot foreign exchange contracts awaiting settlement |
- |
1,332 |
|
Accruals |
424 |
261 |
|
|
424 |
3,739 |
The carrying values of payables approximate their fair value.
15 Called up Share Capital
|
|
30 September 2014 £'000 |
30 September 2013 £'000 |
|
Allotted, Called up and Fully paid: |
|
|
|
Ordinary shares of 25p each: |
|
|
|
Opening balance of 104,850,000 (30 September 2013: 97,899,999) |
26,213 |
24,475 |
|
Issue of 17,800,000 (2013: nil) ordinary shares on exercise |
4,450 |
- |
|
Repurchase of 1,030,000 (2013: nil) ordinary shares, into treasury |
(258) |
- |
|
Issue of nil (2013: 6,950,001) ordinary shares |
- |
1,738 |
|
Allotted, Called up and Fully paid: 121,620,000 (30 September 2013: 104,850,000) ordinary shares of 25p |
30,405 |
26,213 |
|
Nil (2013: 17,800,000) subscription shares at 1p each |
- |
178 |
|
1,030,000 (2013: nil) ordinary shares, held in treasury |
258 |
- |
|
At 30 September 2014 |
30,663 |
26,391 |
The subscription shares were issued as a bonus issue to ordinary shareholders at a rate of one bonus subscription share for every 5 ordinary shares held on 15 June 2010.
A subscription share carried the right to subscribe in cash for one ordinary share at a price of 100p on 31 January 2014, when the rights lapsed. During the year holders of 15,206,136 subscription shares exercised their right to convert those shares into ordinary shares at a price of 100 pence per share. Following the subsequent appointment of a trustee, the remaining 2,593,864 subscription shares were exercised on the same terms and sold in the market.
In addition, 1,030,000 ordinary shares were repurchased into treasury at a cost of £1,504,000.
The ordinary shares held in treasury have no voting rights and are not entitled to dividends.
16 Share Premium Reserve
|
|
30 September 2014 £'000 |
30 September 2013 £'000 |
|
As at 1 October 2013 |
15,417 |
7,360 |
|
Issue of 17,800,000 (2013: nil) ordinary shares |
13,499 |
- |
|
Issue of nil (2013: 6,950,001) ordinary shares |
- |
8,057 |
|
At 30 September 2014 |
28,916 |
15,417 |
17 Special Distributable Reserve
|
|
30 September 2014 £'000 |
30 September 2013 £'000 |
|
As at 1 October 2013 |
64,792 |
64,792 |
|
Repurchase of 1,030,000 (2013: nil) ordinary shares into treasury |
(1,504) |
- |
|
At 30 September 2014 |
63,288 |
64,792 |
Surpluses to the credit of the special distributable reserve can be used to purchase the Company's own shares. In addition the Company may use this reserve for the payment of dividends.
18 Capital Reserves
|
|
30 September 2014 £'000 |
30 September 2013 £'000 |
|
As at 1 October 2013 |
47,153 |
22,278 |
|
Net gains on disposal of investments |
6,626 |
6,317 |
|
Valuation gains on investments held during the year |
21,905 |
19,432 |
|
Exchange losses on currency balances |
21 |
(188) |
|
Capital dividends |
179 |
314 |
|
Irrecoverable tax on capital dividends |
(4) |
(25) |
|
Tax relief due from revenue |
30 |
- |
|
Investment management fee allocated to capital |
(1,183) |
(975) |
|
At 30 September 2014 |
74,727 |
47,153 |
The balance on the capital reserve represents a profit of £52,863,000 (2013: £35,996,000) on investments held and a profit of £21,864,000 (2013: £11,157,000) on investments sold.
19 Revenue Reserve
|
|
30 September 2014 £'000 |
30 September 2013 £'000 |
|
As at 1 October 2013 |
1,994 |
1,655 |
|
Revenue profit |
4,477 |
3,752 |
|
Interim dividends paid |
(4,106) |
(3,413) |
|
At 30 September 2014 |
2,365 |
1,994 |
20 Net Asset Value Per Ordinary Share
|
|
30 September 2014 |
30 September 2013 |
|
Undiluted: |
|
|
|
Net assets attributable to ordinary shareholders (£'000) |
199,959 |
155,747 |
|
Ordinary shares in issue at end of year |
121,620,000 |
104,850,000 |
|
Net asset value per ordinary share (pence) |
164.41 |
148.54 |
|
Diluted: |
|
|
|
Net assets attributable to ordinary shareholders (£'000) |
199,959 |
173,547 |
|
Ordinary shares in issue at end of year if subscription shares converted |
121,620,000 |
122,650,000 |
|
Net asset value per ordinary share (pence) |
164.41 |
141.50 |
As at 30 September 2014 there were no potentially dilutive shares in issue.
The diluted net asset value per ordinary share at 30 September 2013 was calculated on the assumption that 17,800,000 subscription shares in issue were converted at 100 pence per share, resulting in a total number of shares in issue of 122,650,000.
21 Cash and Cash Equivalents
Cash and cash equivalents include the following for the purpose of the Cash Flow Statement:
|
|
30 September 2014 £'000 |
30 September 2013 £'000 |
|
Cash at bank |
- |
565 |
|
Cash held at derivative clearing houses |
13 |
279 |
|
Bank overdraft |
(110) |
- |
|
|
(97) |
844 |
22 Transactions with the Investment Manager and Related Party Transactions
(a) Transactions with the Manager
Under the terms of an agreement dated 26 May 2010 the Company has appointed Polar Capital LLP ('Polar Capital') to provide investment management, accounting, secretarial and administrative services. Details of the fee arrangement for these services are given in the Strategic Report. The total fees, paid under this agreement to Polar Capital in respect of the year ended 30 September 2014 were £1,479,000 (2013: £1,219,000) of which £260,000 (2013: £113,000) was outstanding at the year-end.
(b) Related party transactions
The Company has no employees and therefore key management personnel. The Company paid
£107,000 (2013: £95,000) to the Directors and the Remuneration Report is set out on pages 34 to 36.
23 Derivatives and Other Financial Instruments
Risk management policies and procedures for the Company
The Company invests in equities and other financial instruments for the long-term to further the investment objective set out on page 15.
This exposes the Company to a range of financial risks that could impact on the assets or performance of the Company.
The main risks arising from the Company's pursuit of its investment objective are market risk, liquidity risk and credit risk and the Directors' approach to the management of them is set out below.
The Company's exposure to financial instruments can comprise:
- Equity and non-equity shares and fixed interest securities which may be held in the investment
portfolio in accordance with the investment objective.
- Bank overdrafts, the main purpose of which is to raise finance for the Company's operations.
- Cash, liquid resources and short-term receivables and payables that arise directly from the
Company's operations.
- Derivative transactions which the Company enters into may include equity or index options, index futures contracts, and forward foreign exchange contracts.
The purpose of these is to manage the market price risks and foreign exchange risks arising from the Company's investment activities.
The overall management of the risks is determined by the Board and its approach to each risk identified is set out below. The Board and the Investment Manager co-ordinate the risk management and the Investment Manager assesses the exposure to market risk when making each investment decision.
(a) Market Risk
Market risk comprises three types of risk: market price risk (see note 23(a)(i)), currency risk (see note 23(a)(ii)), and interest rate risk (see note 23(a)(iii)).
(i) Market Price Risk
The Company is an investment company and as such its performance is dependent on its valuation of its investments. Consequently, market price risk is the most significant risk that the Company faces.
Market price risk arises mainly from uncertainty about future prices of financial instruments used in the Company's operations.
It represents the potential loss the Company might suffer through holding market positions in the face of price movements.
A detailed breakdown of the investment portfolio is given on pages 11 to 14. Investments are valued in accordance with the accounting policies as stated in Note 2(g).
At the year end, the Company did not hold any derivative instruments (2013: nil).
Management of the risk
In order to manage this risk it is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a particular healthcare sub sector. The allocation of assets to international markets, together with stock selection covering small, medium and large companies, and the use of index options, are other factors which act to reduce price risk. The Investment Manager actively monitors market prices throughout the year and reports to the Board which meets regularly in order to consider investment strategy.
Market price risks exposure
The Company's exposure to changes in market prices at 30 September on its investments was as follows:
|
|
Year ended 30 September 2014 £'000 |
Year ended 30 September 2013 £'000 |
|
Non-current asset investments at fair value through profit or loss |
199,459 |
155,308 |
|
|
199,459 |
155,308 |
Market price risk sensitivity
The following table illustrates the sensitivity of the return after taxation for the year and the value of shareholders' funds to an increase or decrease of 15% in the fair values of the Company's investments.
This level of change is considered to be reasonably possible based on observation of current market conditions and historic trends.
The sensitivity analysis is based on the Company's investments at each balance sheet date, with all other variables held constant.
|
|
Year ended 30 September 2014 |
Year ended 30 September 2013 |
||
|
Increase in fair value £'000 |
Decrease in fair value £'000 |
Increase in fair value £'000 |
Decrease in fair value £'000 |
|
|
Statement of Comprehensive Income - |
|
|
|
|
|
Revenue return |
(51) |
51 |
(39) |
39 |
|
Capital return |
29,716 |
(29,716) |
23,138 |
(23,138) |
|
Change to the profit after tax for the year |
29,665 |
(29,665) |
23,099 |
(23,099) |
|
Change to equity attributable to shareholders |
29,665 |
(29,665) |
23,099 |
(23,099) |
(ii) Currency Risk
The Company's total return and net assets can be significantly affected by currency translation movements as the majority of the Company's assets and revenue are denominated in currencies other than sterling.
Management of the risk
The Investment Manager mitigates risks through an international spread of investments.
Foreign currency exposure
The table below shows, by currency, the split of the Company's monetary assets, liabilities and investments that are priced in currencies other than sterling.
|
|
Year ended 30 September 2014 £'000 |
Year ended 30 September 2013 £'000 |
|
Monetary Assets: |
|
|
|
Cash and short-term receivables |
|
|
|
Swiss francs |
169 |
134 |
|
US dollars |
136 |
1,730 |
|
Japanese yen |
129 |
143 |
|
Australian dollars |
46 |
38 |
|
Canadian dollars |
12 |
10 |
|
Euros |
7 |
- |
|
Norwegian krona |
- |
3 |
|
Monetary Liabilities: |
|
|
|
Other payables |
|
|
|
US dollars |
- |
(1,875) |
|
Euros |
- |
(1,383) |
|
Foreign currency exposure on net monetary items |
499 |
(1,200) |
|
Non-Monetary Items: |
|
|
|
Investments at fair value through profit or loss that are equities |
|
|
|
US dollars |
93,595 |
75,237 |
|
Swiss francs |
28,777 |
21,983 |
|
Japanese yen |
13,369 |
10,849 |
|
Euros |
16,392 |
9,272 |
|
Danish krone |
5,312 |
- |
|
Australian dollars |
4,997 |
3,849 |
|
Canadian dollars |
2,602 |
2,103 |
|
Singapore dollars |
1,600 |
1,174 |
|
Norwegian krona |
491 |
392 |
|
Brazilian real |
115 |
134 |
|
Total net foreign currency exposure |
167,749 |
123,793 |
During the financial year, movements against sterling in the four major currencies noted above were:
US dollar depreciated by 0.1% (2013: depreciated by 0.3%), Swiss franc depreciated by 5.8% (2013: appreciated by 3.5%), Japanese yen depreciated by 11.9% (2013: depreciated by 26.5%),
Euro depreciated by 7.3% (2013: appreciated by 4.7%).
Foreign currency sensitivity
The following table illustrates the sensitivity of the profit after tax for the year and the value of equity attributable to shareholders in regard to the financial assets and financial liabilities and the exchange rates for the £/US dollar, £/Swiss francs, £/Japanese yen and £/Euro.
Based on the year end position, if sterling had depreciated by a further 10% against the currencies shown, this would have the following effect:
|
|
Year ended 30 September 2014 £'000 |
|||
|
US dollars |
Swiss Francs |
Japanese Yen |
Euros |
|
|
Statement of Comprehensive Income - profit after tax |
|
|
|
|
|
Revenue return |
15 |
19 |
14 |
1 |
|
Capital return |
10,399 |
3,197 |
1,485 |
1,821 |
|
Change to the profit after tax for the year |
10,414 |
3,216 |
1,499 |
1,822 |
|
|
Year ended 30 September 2013 £'000 |
|||
|
US |
Swiss |
Japanese Yen |
Euros |
|
|
Statement of Comprehensive Income - profit after tax |
|
|
|
|
|
Revenue return |
12 |
15 |
16 |
- |
|
Capital return |
8,332 |
2,443 |
1,205 |
877 |
|
Change to the profit after tax for the year |
8,344 |
2,458 |
1,221 |
877 |
Based on the year end position, if sterling had appreciated by a further 10% against the currencies shown, this would have the following effect:
|
|
Year ended 30 September 2014 £'000 |
|||
|
US |
Swiss |
Japanese Yen |
Euros |
|
|
Statement of Comprehensive Income - profit after tax |
|
|
|
|
|
Revenue return |
(12) |
(15) |
(12) |
(1) |
|
Capital return |
(8,509) |
(2,616) |
(1,215) |
(1,490) |
|
Change to the profit after tax for the year |
(8,521) |
(2,631) |
(1,227) |
(1,491) |
|
|
Year ended 30 September 2013 |
|||
|
US |
Swiss |
Japanese Yen |
Euros |
|
|
Statement of Comprehensive Income - profit after tax |
|
|
|
|
|
Revenue return |
(9) |
(12) |
(13) |
- |
|
Capital return |
(6,817) |
(1,998) |
(986) |
(717) |
|
Change to the profit after tax for the year |
(6,826) |
(2,010) |
(999) |
(717) |
In the opinion of the Directors, while these are regarded as reasonable estimates, neither of the above sensitivity analyses are representative of the year as a whole since the level of exposure changes frequently as part of the currency risk management process used to meet the Company's objectives.
(iii) Interest Rate Risk
Although the majority of the Company's financial assets are equity shares which pay dividends, not interest, the Company will be affected by interest rate changes as interest is earned on any cash balances and paid on any overdrawn balances.
Given the interest rate risk exposure noted below, the impact of any interest rate change is not considered to be significant and as such, no sensitivity analysis has been provided. Interest rate changes will also have an impact on the valuation of equities, although this forms part of price risk, which has already been considered separately above.
Management of the risk
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions.
Derivative contracts are not used to hedge against the exposure to interest rate risk.
Interest rate exposure
At the year-end, financial assets and liabilities exposed to floating interest rates were as follows:
|
|
Year ended 30 September 2014 £'000 |
Year ended 30 September 2013 £'000 |
|
Cash at bank |
13 |
844 |
|
Bank overdraft |
(110) |
- |
|
|
(97) |
844 |
The above year-end amounts may not be representative of the exposure to interest rates in the year ahead since the level of cash held during the year will be affected by the strategy being followed in response to the Board's and Manager's perception of market prospects and the investment opportunities available at any particular time.
(b) Liquidity Risk
Liquidity risk is the possibility of failure of the Company to realise sufficient assets to meet its financial liabilities.
Management of the risk
The Company's assets mainly comprise readily realisable securities which may be sold to meet funding requirements as necessary.
Liquidity risk exposure
At 30 September the financial liabilities comprised:
|
|
30 September 2014 £'000 |
30 September 2013 £'000 |
|
Due within 1 month: |
|
|
|
Balances due to brokers |
- |
3,478 |
|
Accruals |
424 |
261 |
|
Bank overdraft |
110 |
- |
|
|
534 |
3,739 |
(c) Credit Risk
Credit risk is the exposure to loss from failure of a counterparty to deliver securities or cash for acquisitions or disposals of investments or to repay deposits.
Management of the risk
The Company manages credit risk by using brokers from a database of approved brokers and by dealing through Polar Capital. All cash balances are held with approved counterparties.
HSBC Bank plc is the custodian of the Company's assets. The Company's assets are segregated from HSBC's own trading assets and are therefore protected in the event that HSBC were to cease trading.
These arrangements were in place throughout the current and prior year.
Credit risk exposure
The maximum exposure to credit risk at 30 September 2014 was £836,000 (2013: £4,018,000) comprising:
|
|
30 September 2014 £'000 |
30 September 2013 £'000 |
|
Balances due from brokers |
353 |
2,733 |
|
Accrued Income |
470 |
441 |
|
Cash at bank |
13 |
844 |
|
|
836 |
4,018 |
All of the above financial assets are current, their fair values are considered to be the same as the values shown and the likelihood of a material credit default is considered low. None of the Company's assets are past due or impaired. All deposits were placed with banks that had a rating of A or higher.
(d) Capital Management Policies and Procedures
The Company's capital, or equity, is represented by its net assets which amounted to £199,959,000 for the year ended 30 September 2014 (2013: £155,747,000), which are managed to achieve the Company's investment objective set out on the inside front cover.
The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:
(i) the need to issue or buy back equity shares for cancellation, which takes account of the difference between the net asset value per share and the share price (i.e. the level of share price discount or premium); and
(ii) the determination of dividend payments.
The Company is subject to externally imposed capital requirements through the Companies Act with respect to its status as a public company. In addition, in order to pay dividends out of profits available for distribution by way of dividend, the Company has to be able to meet one of two capital restriction tests imposed on investments by company law.
These requirements are unchanged since the previous year end and the Company has complied with them.
Status of announcement
The figures and financial information contained in this announcement are extracted from the Audited Annual Report for the year ended 30 September 2014 and do not constitute statutory accounts for the period. The Annual Report and Financial Statements include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or Section 498(3) of the Companies Act 2006.
The Annual Report and Financial Statements for the year ended 30 September 2014 have not yet been delivered to the Registrar of Companies. The figures and financial information for the period ended 30 September 2013 are extracted from the published Annual Report and Financial Statements for the period ended 30 September 2013 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements for the period ended 30 September 2013 has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or Section 498(3) of the Companies Act 2006
The Directors Remuneration Report and certain other helpful shareholder information has not been included in this announcement but forms part of the Annual Report which will be available on the Company's website and will be sent to shareholders in December 2014.
(www.polarcapitalglobalhealthcaretrust.com).
AGM
The Annual Report and separate Notice of Meeting for the Annual General Meeting will be posted to shareholders in December 2014 and will be available thereafter the company secretary at the Registered Office, 4 Matthew Parker Street London SW1H 9NP or from the Company's website.
Forward Looking Statements
Certain statements included in the Annual Report and Financial Statements contain forward-looking information concerning the Company's strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors or markets in which the Company operates. By their nature, forward-looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which are within the Company's control or can be predicted by the Company. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differ materially from those set out in the forward-looking statements. For a detailed analysis of the factors that may affect our business, financial performance or results of operations, we urge you to look at the principal risks
and uncertainties included in the Strategic Report Section on pages 02 to 21 of the Annual Report and
Financial Statements.
No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in Polar Capital Global Healthcare Growth and Income Trust plc or any other entity, and must not be relied upon in any way in connection with any investment decision.
The Company undertakes no obligation to update any forward-looking statements.
Neither the contents of the company's website nor the contents of any website accessible from hyperlinks on the company's website (or any other website) is incorporated into, or forms part of, this announcement.
This information is provided by RNS
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