Replacement: Annual Financial Report
The following amendment has been made to the 'Annual Financial Report' announcement released on 22 January 2016 at 07:00am under RNS No 6502M.
In the header to the announcement the Annual Financial Reporting period is incorrectly referenced as "THE PERIOD 2 OCTOBER 2014 TO 31 DECEMBER 2015". The correct reference should be to "THE PERIOD 2 OCTOBER 2014 TO 30 SEPTEMBER 2015". All other references in the document are correct.
All other details remain unchanged.
The full amended text is shown below.
22 January 2016
FOR IMMEDIATE RELEASE
RELEASED BY BNP PARIBAS SECURITIES SERVICES S.C.A., GUERNSEY BRANCH - ANNUAL FINANCIAL REPORT RESULTS ANNOUNCEMENT
THE BOARD OF DIRECTORS OF RIVER AND MERCANTILE UK MICRO CAP INVESTMENT COMPANY LIMITED ANNOUNCE ANNUAL FINANCIAL REPORT RESULTS FOR THE PERIOD 2 OCTOBER 2014 TO 30 SEPTEMBER 2015
STRATEGIC REPORT
financial highlights and performance summary
Financial highlights
On incorporation date 2 October 2014, the Company issued one redeemable ordinary share (the "ordinary shares") of £1 in the capital of the Company.
On 2 December 2014, the Company issued 50,643,163 ordinary shares at a price of £1 per ordinary share, raising gross proceeds of £50,643,163.
Number of ordinary shares in issue as at 30 September 2015:
50,643,164 ordinary shares
Market capitalisation as at 30 September 2015:
Ordinary share class: £53,934,970
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Performance summary |
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As at 30 September 2015 |
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Net asset value per ordinary share |
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£1.1036 |
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Ordinary share price (bid market) * |
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£1.0650 |
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Period highs and lows |
2015 |
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2015 |
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High |
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Low |
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Net asset value per ordinary share |
£1.1076 |
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£0.9738 |
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Ordinary share price (bid market)* |
£1.0950 |
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£1.0000 |
* - Source: Bloomberg
Key Performance Indicators
Net Asset Value ("NAV") on a total return basis increased by 12.61% from inception (net of issue cost).
Dividend history
No ordinary share dividend was declared or paid during the period.
Please refer to note 16 for further information subsequent to the reporting period.
CHAIRMAN'S STATEMENT
Introduction
In my last report I looked to set out the background to the launch of our Company and the rich history of the River and Mercantile name. The Company is not even a year old but is already building its own history, albeit there is a long way to go to match its namesake. I would like to take the opportunity in this inaugural annual report statement to briefly discuss the opportunities facing Micro Cap companies compared to their larger competitors.
It is widely accepted that we now live in a global world where trade is executed at lightning speed across both physical and virtual borders. This provides great opportunity for expansive companies, but it can also create difficulties for those pressing beyond their original borders in a manner that distracts them from their original strengths. Food Retailing is one such example and I am sure I am not alone in following the challenges faced by Tesco - a company that has stretched far and wide in what is seemingly proving to be a failed overseas expansion and has now begun to struggle in its original home markets. This occurrence is rarer to find in Micro Cap companies where frequently their domestic orientation provides them with focus and competitive advantages without the distractions associated with delivering on global expansion.
We have been through some testing economic conditions over the last ten years and naturally this has had an impact across a range of asset classes and markets. Different economies and companies can recover from cyclical downturns in an uncorrelated manner. Intuitively, smaller companies can begin to rebound in growing economies faster than larger companies because their collective fate is not tied directly to interest rates and other macro-economic factors to help them grow. In a similar fashion to a small boat on the river (no pun intended), smaller companies can move faster and navigate more precisely than their larger peers.
The product development cycle can be more flexible, decisions about new products and services and how to bring them to market can be implemented faster with small companies due to more efficient governance and management structures. Hence, when an economy begins to emerge from recession and starts growing again, small and micro cap stocks can respond to the positive environment quicker and potentially grow much faster than large cap stocks. In addition, small and micro cap companies typically raise most of their capital from markets as opposed to issuing bonds like larger companies, therefore higher interest rates have less negative impact on the ability of small companies to grow because they do not rely as heavily on loans and bonds to fund expansion.
It is this opportunity that our portfolio manager Philip Rodrigs is looking to exploit especially when it is combined with a paucity of stockbroker research of this sector in the market. This combination is very powerful over the longer term as has been evidenced by many academics over the years. The wonderful book "Small is Beautiful" by Fritz Schumacher looks more broadly at the concept as opposed to restricting this to the corporate state. His views on the effective size of cities and states were very clear and whilst much of his prognosis regarding these ideas has currently evolved, there is a sustainability behind his views on the opportunities available to the small business.
"Even today, we are generally told that gigantic organisations are inescapably necessary; but when we look closely we can notice that as soon as great size has been created there is often a strenuous attempt to attain smallness within bigness".
I think that is a sentiment that resonates across many companies and markets. So how has our small company fared since IPO?
Performance
Our portfolio manager, Philip Rodrigs has performed exceptionally well and I would like to take this opportunity to thank him for his endeavours on behalf of the Board and our shareholders. The NAV total return of the UK Micro Cap Portfolio over the period was 12.6%, which compares with the total return of 7.8% posted by the benchmark index.
Outlook
The UK remains amongst the top performing economies in Europe, and indeed globally, which attests to the judicious balance between prudent fiscal policy and accommodative monetary policy. In a defining event for the future of the UK - the general election - the result was a surprisingly conclusive backing of the prudent fiscal policies advocated by the Conservative Party. The decisive majority result has given a firm mandate to continue with the current approach, resulting in materially reduced uncertainty compared to a prior expectation for protracted coalition negotiations. It is therefore unsurprising that the domestically oriented (smaller cap) indices have outperformed over the period compared to the more globally oriented FTSE 100.
Global instability has been a recurrent theme of late, with another Greek crisis averted after protracted negotiations but a new crisis emerging with the implosion of the Chinese equity market bubble. Volatility was also aggravated by the change in direction of the renminbi as investors mulled the latest twist in the global currency devaluation war which is ultimately a zero sum game that is unlikely to confer lasting benefits to anyone. Ultimately however it is the extensive use of Exchange Traded Funds (ETFs) which exacerbated violent market moves, with the resultant volatility staying the hand of the Fed, leaving interest rates at record lows. In the meantime conditions remain healthy at the smaller end of the UK market, given that the lack of ETFs resulted in less disruption in the evaluation of exciting growth companies. With continued domestic and stock-specific growth, the outlook remains positive for UK Micro Caps.
Dividend Policy
The dividend policy of the Company is as follows:
"The Board does not expect income from the Portfolio to significantly exceed the anticipated annual running costs of the Company and therefore does not expect that the Company will pay significant, or any, dividends although it reserves the right to do so. "
For the period ended 30 September 2015 the Board confirms that no dividend is payable.
Conclusion
I am delighted to report the strong investment return and positive share price performance that has been achieved by the Fund Manager over the first ten months since IPO. As such, subsequent to the period end, we announced the successful utilisation of the placing program within the terms of the original prospectus with the raising of additional funds which take the Company closer to its long term target capacity of £100m and thereafter the prospect of capital returns to shareholders. The portfolio manager reports that there remains an unusual confluence of benign economic environment and very attractive valuations and therefore there are many further attractive micro cap companies to evaluate and invest in with the proceeds.
I look forward to writing to you again at the time of our interim results, but I would like to take the opportunity to thank all our shareholders for their vital support in funding the foundation of the Company. With strong progress already, I expect this annual report to be the first of many.
Andrew Chapman
Chairman
21 January 2016
executive sUMMARY
This Executive Summary is designed to provide information about the Company's business and results for the period ended 30 September 2015. It should be read in conjunction with the Chairman's Statement and the Portfolio Manager's report which gives a detailed review of investment activities for the period and an outlook for the future.
Corporate summary
The Company was incorporated on 2 October 2014, with registered number 59106, as a non-cellular company with liability limited by shares. The Company has been registered by the Guernsey Financial Services Commission ("GFSC") as a registered closed-ended collective investment scheme pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the Registered Collective Investment Scheme Rules ("RCIS Rules") 2008.
The Company's share capital is denominated in Sterling and each share carries equal voting rights.
On incorporation, the Company issued one ordinary share of £1 in the capital of the Company. On 2 December 2014, the Company announced the results of the initial placing of ordinary shares. The initial placing raised gross proceeds of £50,643,163 through the issue of 50,643,163 ordinary shares at an issue price of £1 per ordinary share. Application was made to the UK Listing Authority and the London Stock Exchange plc for the newly issued ordinary shares to be admitted to the Premium Segment of the Official List and to trading on the Main Market. The admission became effective on 2 December 2014.
The Company has appointed Carne Global AIFM Solutions (C.I.) Limited ("the Manager") to act as the Company's Alternative Investment Fund Manager ("AIFM"). The Manager has delegated portfolio management of the Company's investment portfolio to River and Mercantile Asset Management LLP ("the Portfolio Manager"). The Board will actively and continuously supervise both the Manager and the Portfolio Manager in the performance of their respective functions.
The Company is a member of the Association of Investment Companies ("AIC") and is regulated by the GFSC.
Company investment objective
The Company aims to achieve long term capital growth from investment in a diversified portfolio of UK Micro Cap Companies, typically comprising companies with a free float market capitalisation of less than £100 million at the time of purchase.
Company investment policy
The Company invests in a diversified portfolio of UK Micro Cap Companies, which comprises of companies that constitute the bottom 2% of the stock market by value. It is expected that the majority of the Company's investible universe will comprise companies whose securities are admitted to trading on Alternative Investment Market ("AIM").
While it is intended that the Company will be fully invested in normal market conditions, the Company may hold cash on deposit or invest on a temporary basis in a range of high quality debt securities and cash equivalent instruments. There is no restriction on the amount of cash or cash equivalent instruments that the Company may hold and there may be times when it is appropriate for the Company to have a significant cash position instead of being fully or near fully invested.
The Company will not be benchmark-driven in its asset allocation.
Diversification
The number of holdings in the portfolio will usually range between 30 and 50.
The portfolio is expected to be broadly diversified across sectors and, while there are no specific limits placed on exposure to any sector, the Company will at all times invest and manage the portfolio in a manner consistent with spreading investment risk.
Investment restrictions
No exposure to any investee company will exceed 10% of NAV at the time of investment.
The Company may from time to time take sizeable positions in portfolio companies. However, in such circumstances, the Company would not normally intend to hold more than 25% of the capital of a single investee company at the time of investment.
Although the Company would not normally expect to hold investments in securities that are unquoted it may do so from time to time but such investments will be limited in aggregate to 10% of NAV.
The Company may invest in other investment funds, including listed closed-ended investment funds, to gain investment exposure to UK Micro Cap Companies but such exposure will be limited, in aggregate, to 10% of NAV at the time of investment.
Borrowing and gearing policy
The Company does not normally intend to employ gearing but at certain times it may be opportune to do so, for both investment and working capital purposes. Accordingly, the Company may employ gearing up to a maximum of 20% of NAV at the time of borrowing.
Derivatives
The Company may use derivatives (both long and short) for the purposes of efficient portfolio management only. The Company will not enter into uncovered short positions.
Further information can be found in the Portfolio Manager's report which is incorporated within this annual financial report for informational purposes only.
Investment strategy and approach
The Company's investment strategy is to take advantage of the illiquid risk premium inherent in UK Micro Cap Companies and exploit fully the underlying investment opportunity in the UK Micro Cap market to deliver high and sustainable returns to shareholders, principally in the form of capital gains in line with the Company investment objective and policy.
The Company pursues its investment strategy through the appointment of the Manager as AIFM, whereby the Manager has been given responsibility, subject to the supervision of the Board, for the management of the Company in accordance with the Company's investment objective and policy. The Manager has delegated portfolio management to the Portfolio Manager. The Company depends on the diligence, skill, judgment and business contacts of the Portfolio Manager's investment professionals, in particular Philip Rodrigs, in identifying investment opportunities which are in line with the investment objective and policy of the Company. The Portfolio Manager attends all Board meetings at which the investment strategy and performance of the Company is discussed. BNP Paribas Securities Services S.C.A., Guernsey Branch (the "Administrator") have been appointed to provide administration, custodian and company secretarial services.
Key Performance Indicators (KPIs)
The Company's Board of Directors meets regularly to review performance and risk against a number of key measures.
Returns and Net Asset Value total return
The Board reviews and compares, at each meeting, the performance of the portfolio as well as the NAV, income and share price of the Company. The Directors regard the Company's NAV total return as being the overall measure of value delivered to shareholders over the long term. Total return reflects NAV growth of the Company.
The Board is committed to achieving long term capital growth and, where possible, returning such growth to shareholders throughout the life of the Company. Furthermore, the Portfolio Manager has advised the Board that it believes that a NAV of £100 million (at current market levels although this may change over time) would best position the Company to take advantage of a portfolio of Micro Cap Companies.
Accordingly, assuming that the NAV grows, the Directors intend to operate the redemption mechanism pursuant to which a portion of shareholders' shareholdings may be redeemed compulsorily so as to return the NAV back to around £100 million.
NAV on a total return basis increased by 12.61% from inception. Please refer to note 12 for further details regarding the redemption mechanism.
Concentration
The Directors review the industry and asset diversification of the investment portfolio to ensure that holdings are in line with the prospectus and also to monitor the concentration risk of the investment portfolio.
Please refer to note 8 for further details regarding investment limits and risk diversification policies.
As at 30 September 2015, the Company held 39 investment holdings of which no exposure in any investee company exceeded 10% of NAV at the time of investment.
Premium / Discount
The Directors review the trading price of the Company's ordinary shares and compare it against the NAVs of the ordinary shares of the Company to assess volatility in the discount or premium to the share prices during the period.
Principal risks and uncertainties
When considering the total return of the Company, the Board takes account of the risk which has been taken in order to achieve that return. The Board have carried out a robust assessment of the principle risks facing the company and have looked at numerous risk factors, an overview of which is set out below:
Investment and liquidity
An inappropriate investment strategy may lead to under performance against the Company's benchmark and peer companies resulting in the Company's shares trading on a discount. The Board monitors the implementation and results of the investment process with the Portfolio Manager who attends all Board meetings and reviews data which shows measures of the Company's risk profile.
The Company invests in a diversified portfolio of UK Micro Cap Companies, typically comprising companies with a free float market capitalisation of less than £100 million at the time of purchase. These securities are likely to have higher volatility and liquidity risk than securities on the London Stock Exchange Official List. The relatively small market capitalization of Micro Cap Companies could therefore have an adverse effect on the performance of these investments and can make the market in their shares illiquid. On this basis prices of Micro Cap Companies are often more volatile than prices of larger capitalisation stocks, and even small cap companies.
The Company may have difficulty in selling its investments which may lead to volatility in the market price of shares in the Company. The Company may not necessarily be able to realise its investments within a reasonable period, and any such realisations that may be achieved may be at a considerably lower price than prevailing indicative market prices. There can therefore be no guarantee that any realisation of an investment will be on a basis which necessarily reflects the valuation of that investment.
The Directors discuss these risk factors regularly at each Board meeting with the Portfolio Manager. The Directors placed investment restrictions and guidelines to limit these risks.
Portfolio concentration and macro-economic risks
The Company predominantly invests in securities in the UK and has no specific limits placed on its exposure to any industry sector. Changes in economic conditions in the UK, (for example, interest rates and rates of inflation, industry conditions, competition, political and diplomatic events and other factors), where the Company predominantly invests, could substantially and adversely affect the Company's prospects, as could changes in global economic conditions. This exposes the Company to concentration of geographical risk and may from time to time lead to the Company having significant exposure to portfolio companies from certain business sectors. Greater concentration of investments in any one geographical and / or industry sector may result in greater volatility in the value of the Company's investments, and consequently its NAV, and may materially and adversely affect the performance of the Company and returns to shareholders.
While the Company does not include any specific limits placed on exposures to any industry sector, the Company does have investment limits and risk diversification policies in place to mitigate market and concentration risk. Please refer to note 8 for further details.
Environmental and social issues
The Company is a closed-ended investment company and so its own direct environment impact is minimal. The Board notes that the companies in which the Company invests will have a social and environmental impact over which the Company has no control. The Board of Directors, the majority of whom are based in the Channel Islands, have held all their meetings in Guernsey and therefore the Company's greenhouse gas emissions and environmental footprint are negligible.
Board diversity
The Board has due regard for the benefits of experience and diversity in its membership, including gender, and strives to meet the right balance of individuals who have the knowledge and skillset to maximise Shareholder return while mitigating the risk exposure of the Company. The Board is made up of three male Directors and one female Director. All have held the position of Directors since incorporation. Further information about the Board's policy on diversity is contained within the Directors and Corporate Governance Report.
The Company has no employees and therefore there is nothing further to report in respect of gender representation within the Company.
Life of the Company
The Company has an indefinite life. The Directors shall propose one or more ordinary resolutions at the Annual General Meeting (the "AGM") to be held in 2019 and at every fifth AGM thereafter that the Company continues as a closed ended investment company (the "Continuation Resolution"). In the event that a Continuation Resolution is not passed, the Directors shall formulate proposals to be put to Shareholders as soon as is practicable but, in any event, by no later than six months after the Continuation Resolution is not passed, to reorganise or reconstruct the Company or for the Company to be wound up with the aim of enabling Shareholders to realise their holdings in the Company.
Future Strategy
The Board continues to believe that the investment strategy and policy adopted by the Company is appropriate for and is capable of meeting the Company's objectives.
The overall strategy remains unchanged and it is the Board's assessment that the Portfolio Manager's resources are appropriate to properly manage the Company's investment portfolio in the current and anticipated investment environment.
Please refer to the Portfolio Manager's report for detail regarding performance to date of the investment portfolio and the main trends and factors likely to affect those investments.
Going Concern
The Directors are required to satisfy themselves that it is reasonable to assume that the Company is a going concern from date of approval of the financial statements.
The Directors are satisfied that, at the time of approving the financial statements, no material uncertainties exist that may cast significant doubt concerning the Company's ability to continue for the foreseeable future. The Directors consider it appropriate to adopt the going concern basis in preparing the financial statements.
Viability Statement
Under the AIC Code, the Board is required to make a "viability statement" which considers the Company's current position and principal risks and uncertainties combined with an assessment of the prospects of the Company in order to be able to state that they have a reasonable expectation that the Company will be able to continue in operation over the period of their assessment.
The Company's prospects are driven by its business model and strategy. The Company's aim is to achieve long term capital growth from investment in a diversified portfolio of UK Micro Cap Companies, typically comprising companies with a free float market capitalization of less than £100 million at the time of purchase. At the launch of the Company the directors stated "The Board, advised by the Portfolio Manager, believes that the impact on Micro Cap Companies of a return to economic growth is particularly high because of the knock-on effect of improved market confidence. Over the medium term, the Portfolio Manager expects that confidence and risk appetite amongst investors will grow with improving economic activity. Typically, it would expect that this will result in valuation metrics rising which will enhance returns for investors during this period."
In this context, the Board's central case is that the prospects for economic activity in the UK will remain such that the investment objective, policy and strategy of the Company will be viable for the foreseeable future through a period of at least five years from the balance sheet date.
In making this judgement, the Board has assessed that the main risks to the long term viability of the Company are key global and market uncertainties driven by factors external to the Company which in turn can impact on the liquidity and NAV of the investment portfolio. A simulation has been designed to estimate the impact of these uncertainties on the NAV of the Company at times of stress based on historical performance data of the Company's benchmark, using techniques similar to the sensitivity analysis performed in note 8 - Financial Risk Management.
The Board is required to propose to the members an ordinary resolution that the Company continues its business as a closed-ended investment company (the "Continuation Vote") at the annual general meeting in 2019. Although the outcome of such a Continuation Vote there remains uncertain, having assessed the principal risks to the business and investment model, the Directors' current view is that a Continuation Vote will pass.
Taking account of the Company's current position and principal risks, therefore, the Board has a reasonable expectation the Company will be able to continue in operation and meet its liabilities as they fall due over the period of assessment.
The Strategic Report was approved by the Board of Directors on 21 January 2016 and signed on its behalf by:
Andrew Chapman
Director
Ian Burns
Audit Committee Chairman
BOARD MEMBERS
All directors are non-executive.
CHAIRMAN
Andrew Chapman, (independent). Appointed 2 October 2014.
Andrew holds both a BA and an MPhil in Economic & Social History. He began his career in 1978 as a UK equity fund manager.
In 1984, Andrew was appointed to the in-house investment management team at the British Aerospace Pension Fund, where he had responsibility for directly investing in a number of listed markets. In 1991, Andrew took the position of Investment Manager at United Assurance plc, where he was responsible for asset allocation and leading a team of in-house fund managers managing approximately £12 billion in assets. Andrew was subsequently a director of Teather & Greenwood Investment Management Limited, before joining Hewitt Associates as a Senior Consultant. From 1994 until 2003, Andrew was also a non-executive director of the Hambros Smaller Asian Companies Investment Trust plc (which subsequently became The Asian Technology Trust plc).
In 2003, Andrew was appointed as the first in-house Pension Investment Manager for the John Lewis Partnership Pension Fund, with responsibility for the overall investment strategy as well as the appointment and performance of 27 external fund managers across all asset classes. He retired from that role in 2012 and served as the CIO for The Health Foundation until September 2015.
Since 2012 Andrew has developed a portfolio of roles, including being a member of the investment committees of: The Pensions Trust; Homerton College, Cambridge; Coller Capital Partners; and the Property Charities Fund. He is also a non-executive director of Steadfast International Limited.
Andrew served for several years on the Investment Council of the National Association of Pension Funds and was Chair of the Advisory Board for the Pension Fund Investment Forum. He is currently Chair of the BUNAC Educational Scholarship Trust.
DIRECTORS
Ian Burns, (independent) - Chairman of the Audit Committee and Senior Independent Director. Appointed 2 October 2014.
Ian is a fellow of both the Institute of Chartered Accountants in England and Wales and the Chartered Institute for Securities & Investment.
He is the founder and an executive director of Via Executive Limited, a specialist management consulting company, and the Managing Director of Regent Mercantile Holdings Limited, a privately owned investment company.
Ian is currently a non-executive director and Audit Committee chairman of two UK listed companies, Phaunos Timber Fund Limited, Twenty Four Income Fund Limited and is the Finance Director of Fast Forward Innovations Limited, a company listed on the AIM market. He is also a non-executive director of Montreux Capital Corp, both of which are listed on the Toronto Stock Exchange, Darwin Property Investment Management (Guernsey) Limited, Curlew Capital Guernsey Limited, and Premier Asset Management (Guernsey) Limited. Until recently, Ian was the Finance Director of the AIM listed company, Polo Resources Limited.
Trudi Clark, (independent) - Chairman of the Remuneration and Nomination Committee and Management Engagement Committee. Appointed 2 October 2014.
Trudi graduated with a first class honours degree in business studies and is a qualified Chartered Accountant.
Trudi spent 10 years working in chartered accountancy practices in the UK and Guernsey. In 1991, she joined the Bank of Bermuda to head their European internal audit function before moving into private banking in 1993.
Between 1995 and 2005, Trudi worked for Schroders (C.I.) Limited, an offshore private bank and investment manager. She was appointed to the position of Banking Director in 2000 and Managing Director in 2003. In 2005, Trudi left Schroders to establish and run a private family office.
In July 2009, Trudi established the Guernsey practice of David Rubin & Partners LLP, an internationally known insolvency and liquidation specialist.
Trudi holds several non-executive directorships in private equity funds which include F & C Commercial Property Trust Limited, which is a UK listed fund and Sapphire (PCC) Limited - Sapphire IV Cell which is listed on the Channel Islands Securities Exchange.
Mark Hodgson. Appointed 2 October 2014.
Mark has over 25 years' financial services experience, with an extensive banking background having spent over 20 years with HSBC where he gained an in-depth knowledge of credit, financial markets and complex lending structures.
Prior to 2006, Mark was Regional Director for HSBC Invoice Finance (UK) Limited, where he was responsible for running the receivables finance business. In 2006, Mark moved to Jersey to head up HSBC's Commercial Centre, having full operational responsibility for credit and lending within the jurisdiction.
In 2008, Mark moved to Capita Fiduciary Group as Managing Director of Offshore Registration, a regulated role in which he had responsibility for Jersey, Guernsey and the Isle of Man. Mark also took on the regulated role of Managing Director of Capita Financial Administrators (Jersey) Limited, together with directorships of regulated and unregulated funds.
In April 2014, Mark joined Carne Global Financial Services (C.I.) Limited as Managing Director.
PORTFOLIO MANAGER'S REPORT
This Portfolio Manager Report is compiled with reference to the investment portfolio. Therefore all positions are calculated by reference to their official closing prices (as opposed to the closing bid prices basis within the financial statements). Where noted, reference is made to the investment performance since inception of the portfolio which is calculated from a starting value of 98% of gross IPO proceeds, being the Funds available for investment following the deduction of IPO expenses. The estimated unaudited NAV referenced below is calculated on a daily basis utilising closing bid prices and is inclusive of all estimated charges and accruals.
Review of performance
The first ten months of existence for the River and Mercantile UK Micro Cap Investment Company have been highly satisfactory. It was very important to build solid foundations to position the Company's portfolio soundly to achieve the objective of delivering attractive returns from the UK micro cap universe over the long term. With cash moving below 10% of the portfolio during calendar Q2 2015, the Company achieved fully invested status approximately six months after IPO. This period of time allowed the full assessment of the several hundred companies that meet the sub-£100m free float market cap criteria using River and Mercantile's PVT (Potential, Valuation and Timing) Investment Philosophy which targets these three factors when assessing a stock's potential to generate absolute and relative returns. It is estimated that holding cash during this assessment phase whilst the Company's benchmark rose led to a relative drag of around 2%. This was an 'investment' well worth making in order to fully assess interesting candidates for the portfolio and conduct dozens of meetings with the management teams of micro cap companies, including those which were ultimately not invested in. The result is that investment performance accumulated to a total of +17.1% since IPO which was substantially ahead of the benchmark for a relative outperformance of +9.3%. It should be noted that these investment returns are calculated using official market closing prices, compared to the calculation of the net asset value which utilises bid prices and includes accruals for fees and charges. Therefore, compared to the starting value of 98p, the NAV was reported to have risen +12.6% to 110.36p.
The particularly pleasing aspect of the above performance is witnessing theory becoming apparent in practice. The investment objective is to deliver attractive returns from both accessing the beta of the attractive micro cap segment of the UK market but also in applying a disciplined stock selection approach to produce attractive alpha generation. Turning to beta first, the volatility amongst global stock market indices has been well documented over the period, with many indices comprising larger companies falling considerably during the period under review. This compares to a robust positive return for the Company's benchmark as sustained faster earnings growth and relatively attractive valuations have helped support absolute gains. However, the greater contribution to return in the period was from alpha generation and this despite a 2% cash drag effect. The high conviction diversified yet concentrated portfolio of typically between 30 and 50 holdings allows the extraction of significant alpha if the endeavour to select the best risk adjusted returning stocks in the universe is achieved. The first ten months have delivered rewarding evidence of this endeavour, with 10 stocks contributing to portfolio return in excess of 1%, compared to just 3 which detracted more than 1%.
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Holdings |
Contribution to return |
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N/wide Accident Repair |
1.73% |
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KBC Advanced Technologies |
1.69% |
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Ideagen |
1.56% |
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Alkane Energy |
1.53% |
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Finsbury Food Group |
1.50% |
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NAHL Group |
1.35% |
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Premier Technical Svcs |
1.10% |
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STM Group |
1.06% |
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Trakm8 |
1.05% |
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K3 Business Technology |
1.03% |
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Epistem Holdings |
-1.25% |
|
Blur Group |
-1.37% |
|
Shanta Gold |
-1.66% |
Source: FactSet, held stocks contribution vs benchmark
At the top of the leader board is one of two take-overs already secured in the first ten months of the Company. Nationwide Accident Repair Services delivered a 54% return having purchased a 5.8% stake in this car repair firm at 65p. This was a significant 22% discount to the then prevailing market price, secured by responding swiftly to the opportunity to assist Quindell plc in its objective of divesting non-core units. Remarkably, despite it being April Fool's Day, a recommended 100p cash offer for the business was received within a month of the purchase. An even higher return of 79% was achieved with Alkane Energy, an electricity generator in the UK. Shares were purchased at the equivalent of circa 0.55x book value of the generation assets and the offer from an infrastructure firm at circa 1x book value was accepted.
The largest sector overweight - Technology - delivered considerable positive returns. Largest holding Ideagen rose 39% after the Company backed a fund raise to enable an attractive acquisition to further extend the firm's leadership in business-critical software for managing information flows - ever more important in this compliance and digital age. Hot on its heels is number two holding Trakm8 which raced up 30.5% following purchase in July at 155p. Trakm8 is a leading manufacturer of miniature telematics devices used to track both fleet vehicles and insured motorists. Strong growth looks set to continue as 'Usage Based Insurance' is set to increase, delivering fairer bespoke premiums to motorists. Meanwhile K3 Business Technologies steadily advanced, ringing up a 31% return as investors increasingly appreciated the strong global position the firm has in software for clothing retailers built on a Microsoft platform. With Microsoft strongly backing the firm globally there is a considerable ongoing opportunity. Finally, another software company attributed to the Oil & Gas sector is KBC Advanced Technologies which rose 40%. The kneejerk sell off suffered by the shares in late 2014 as the price of oil collapsed presented an exceptional valuation opportunity to buy into arguably by far the global leader in software and services for oil refineries - a customer base which is enjoying boom conditions for the first time in years as a result of the oil price decline.
NAHL Group and Finsbury Food Group are both excellent examples of a full cycle of ownership where returns have already been locked in as the positions were exited. Finsbury Food enjoyed robust demand for its cakes and breads leading to strong profit growth which supported an attractive c4.5% dividend yield at purchase. As the shares moved to reflect good progress, there was a sharp re-rating in the valuation as the market cap burst through the £100m mark, which seemingly is a threshold which drives increased investor interest in stocks. Finishing the period 47% higher than the purchase price, shares had reached a fairer valuation with a c3% dividend yield. In addition, the firm has a large workforce where it may be challenging to pass through National Living Wage related wage inflation to supermarkets. As a result a full exit was warranted into the market and almost complete by the end of the period under review, hence the 4.2% cash balance at period end. NAHL Group, the firm helping individuals to access cost-effective legal services via their 'Underdog' brand, also benefited from a sharply rerated valuation as it moved through £100m market cap. Whilst fundamentals remained attractive, the decision was taken to lock in gains with shares around 56% higher than the initial purchase price of 225p in order to recycle proceeds into new ideas. With a minimal cash balance in July, ideas such as Trakm8 catalysed this inaugural divestment.
Rounding off the Top 10 'over-one-percenters' are Premier Technical Services Group and STM Group. PTSG (+63%) is a consolidator of complex support service providers such as lightning conductor installation specialists. Rare skills justify strong margins and quality cash flows. STM (+56%) is one of very few fully approved providers of international pension schemes. Individuals migrating overseas are allowed to transfer their pension, with STM a specialist at handling the complexities efficiently.
As part of any diversified portfolio, not all goes to plan. It is disappointing that three holdings detracted more than 1%, although unusually all continue to merit an ongoing position in the portfolio. Shanta Gold ended the period down 42% from the average purchase price. This was a particularly frustrating performance against a backdrop of the price of gold only dropping c7% over the period of ownership. Moreover the company has outperformed many peers by meeting or beating guidance regularly and assured investors throughout that it would be able to deliver to original production guidance despite a slow start to the year. On that basis, and with attractive potential from its high grade deposits, not to mention the considerable upside should the price of gold start rising from what we view as a basing pattern, shares are being retained. Blur Group is about as far removed from the ancient art of mining as it is possible to get. When commenting on this, the strongest riser in calendar Q1 2015, it was observed that 'Blur remains a young business with both triple digit growth and associated growing pains with strongly defendable prospects given the amount of time it would take to replicate the network.' This remains the case, although by the end of the period it was the growing pains that predominated having closed 56% lower than the purchase price. We remain of the view that Blur is a unique and valuable asset, and are heartened by the fact that these qualities are attracting high calibre individuals to assist in realising the very substantial opportunity. We retain a modest position in what we consider to be one of the likeliest prospects amongst listed micro caps to become a UK internet 'unicorn' in due course.
Finally we come to Epistem, which is the most frustrating holding of the portfolio. This is because the news flow during the year in our opinion was so momentous that Epistem should have been the top positive contributor in the period. Instead we nurse a 35% loss. This is despite the shares rallying 42% immediately after the news that Indian regulatory approval had been confirmed, allowing the firm to launch its gene-detection technology into the market. This company making news confirms that the ground-breaking tablet-sized Genedrive diagnostics device works and can be used to save lives. With dozens of potential applications, this low cost gene detector has enormous commercial potential from detecting bio-hazards through to personalised medicine and life-saving diagnostics in tuberculosis, HIV, Hepatitis C and more. Epistem is the epitome of a hidden gem in plain sight within the micro cap universe.
Portfolio Statistics
Top 10 Holdings1
|
Holdings |
Weight (%) |
|
Ideagen |
4.9 |
|
Trakm8 |
4.3 |
|
WYG |
3.7 |
|
KBC Advanced Technologies |
3.6 |
|
dotDigital Group |
3.4 |
|
Alkane Energy |
3.3 |
|
Palace Capital |
3.2 |
|
K3 Business Technology |
3.2 |
|
ISG |
3.2 |
|
Cambria Automobiles |
3.0 |
|
Total of top ten holdings |
35.8 |
|
Total Portfolio Value (39 investments) |
£54.0m |
1: Source: River and Mercantile Asset Management LLP
Outlook
In conclusion, it has been highly encouraging to put theory into practice with the attractive returns already achieved from the UK micro cap universe in the Company's inaugural year. Hearteningly we exit this financial year with a very promising portfolio of exciting UK micro caps, not to mention the considerable further opportunity offered by stocks knocking on the door of the portfolio. With the encouraging backdrop as detailed in the Chairman's statement, we look forward to delivering attractive long term returns into the future.
I would like to thank all of the investors who supported the founding of the River and Mercantile UK Micro Cap Investment Company.
Philip Rodrigs
Portfolio Manager
21 January 2016
DIRECTORS' AND CORPORATE GOVERNANCE REPORT
The Directors present the Annual Financial Report of the Company for the period ended 30 September 2015. The results for the period are set out in these accounts.
Disclosure of Information to the Auditor
Each of the Directors who were members of the Board at the time of approving this Report confirms that:
· to the best of his or her knowledge and belief, there is no information relevant to the preparation of their report of which the Auditor was unaware; and
· he or she has taken all steps a Director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the Company's Auditor was aware of that information.
Directors interests
Information for each Director is shown in the Board Members section and details of Directors' remuneration and interests in shares can be found within the Directors' Remuneration Report.
Financial risk management objectives and policies
The Board is responsible for the Company's system of risk management and internal control and meets regularly in the form of Board meetings to assess the effectiveness of such controls in managing and mitigating risk.
The key financial risks that the Directors believe the Company is exposed to include credit risk, liquidity risk, market risk (including price risk and interest rate risk). Please refer to note 8 for reference to financial risk management disclosure, which explains in further detail the above risk exposures and policies and procedures in place to monitor and mitigate these risks.
The Administrator has established 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 effectiveness of these controls is assessed by the Administrator's compliance and risk departments on an on-going basis and by periodic review by external parties. The administrators compliance team will present an assessment of their review to the Board in line with the compliance monitoring program on a quarterly basis.
The Board has reviewed the effectiveness of the Company's system of risk management and internal control for the period ended 30 September 2015 and to the date of approval of this Annual Financial Report.
Fair, balanced and understandable
In assessing the overall fairness, balance and understandability of the Annual Financial Report the Board has performed a comprehensive review to ensure consistency and overall balance.
Borrowing limits
The Company does not have any external borrowings. The Directors may, if they feel it is in the best interests of the Company, borrow funds up to a maximum of 20% of NAV at the time of borrowing.
Greenhouse gas emissions
Please refer to the Strategic Report - "Environmental and social issues" for disclosure regarding greenhouse gas emissions.
Acquisition of own shares
To assist the Company in addressing any imbalance between the supply of and demand for Shares and thereby assist in controlling the discount to NAV at which the Shares may be trading, on 31 October 2014 the Directors were granted general authority to purchase in the market up to 14.99% of the Shares in issue immediately following admission. This authority expires on the date of the 2016 annual general meeting. During the period the Company did not purchase any shares in the market.
The Directors will seek a renewal of this authority from Shareholders at the Company's annual general meeting on 4 March 2016.
Shareholders' interests
As at 30 September 2015, the Company had been notified in accordance with Chapter 5 of the Disclosure and Transparency Rules (which covers the acquisition and disposal of major shareholdings and voting rights), of the following shareholders that had an interest of greater than 5% in the Company's issued share capital.
|
|
Number of Ordinary Shares |
Percentage of total voting rights (%) |
|
Investec Wealth & Investment Limited |
7,053,033 |
13.93 |
|
F&C Management Limited |
6,500,000 |
12.83 |
|
River and Mercantile Asset Management LLP |
5,000,000 |
9.87 |
|
Derbyshire Country Council |
4,000,000 |
7.90 |
|
Architas Multi-Manager Limited |
2,800,000 |
5.53 |
|
Smith and Williamson Holdings Limited |
2,680,000 |
5.29 |
Between 30 September 2015 and 21 January 2016, the following notifications were received:
|
|
Number of Ordinary Shares |
Percentage of total voting rights (%) |
|
Investec Wealth & Investment Limited |
12,153,817 |
17.74 |
|
City of Bradford Metropolitan District Council |
6,525,000 |
9.69 |
|
Bank of Montreal |
6,500,000 |
9.49 |
|
Architas Multi-Manager Limited |
2,800,000 |
4.09 |
Independent Auditor
PricewaterhouseCoopers CI LLP, have indicated their willingness to continue in office as auditor and a resolution proposing their re-appointment and to authorise the Directors to determine their remuneration will be proposed at the forthcoming Annual General Meeting.
Events after the Reporting Date
The Directors are not aware of any developments that might have a significant effect on the operations of the Company in subsequent financial periods not already disclosed in this report or note 16 of the attached financial statements.
Going concern
Under the AIC Code of Corporate Governance ("AIC Code") and applicable regulations, the Directors are required to satisfy themselves that it is reasonable to assume that the Company is a going concern from date of approval of the financial statements.
The Directors are satisfied that, at the time of approving the financial statements, no material uncertainties exist that may cast significant doubt concerning the Company's ability to continue for the foreseeable future. The Directors consider it appropriate to adopt the going concern basis in preparing the financial statements.
Corporate Governance Statement
a) Corporate Governance Codes
The Listing Rules and the Disclosure and Transparency Rules ("DTR") of the UK Listing Authority, require listed companies to disclose how they have applied the principles and complied with the provisions of the UK Corporate Governance Code (UK Code) as issued by the Financial Reporting Council ("FRC").
The Code of Corporate Governance published by the Association of Investment Companies in February 2015 (AIC Code) provides specific corporate governance guidelines to investment companies.
The Board considers that reporting against the principles and recommendations of the AIC Code and by reference to the AIC Guide (which incorporates the UK Code), will enable Shareholders to make a comprehensive assessment of the Company's governance principles.
The FRC has confirmed that AIC member companies who report against the AIC Code and who follow the AIC Guide will be meeting obligations in relation to the UK Code, paragraph 9.8.6 of the Listing Rules and associated disclosure requirements of the DTR.
The Company has delegated to third parties certain administrative and other functions, thus not all of the provisions of the AIC Code are directly applicable to the Company. The Company has no employees.
Copies of the AIC Code, the AIC Guide and the UK Code can be found on the respective organisations' websites www.theaic.co.uk and www.frc.org.uk.
b) Statement of compliance
The AIC Code comprises 21 principles and the Directors believe that during the period under review they have complied with the all the recommendations of the AIC Code and the relevant provisions of the UK Code insofar as they apply to the Company's business except as set out below:
· The role of the Chief Executive;
· Executive Directors' remuneration; and
· The need for an internal audit function.
For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to the position of the Company, being an externally managed investment company. In particular, all of the Company's day-to-day management and administrative functions are outsourced to third parties. As a result, the Company has no executive directors, direct employees or internal operations. The Company has therefore not reported further in respect of these provisions.
The Company complies with the corporate governance statement requirements pursuant to the UK Financial Conduct Authority's ("FCA") Disclosure and Transparency Rules by virtue of the information included in the Corporate Governance section of the Annual Financial Report.
c) The Board
Directors
The Board currently consists of four non-executive directors all of whom were appointed on 2 October 2014 (date of incorporation). The Directors are:
· Andrew Chapman (Independent non-executive Chairman)
· Ian Burns (Senior independent non-executive Director)
· Trudi Clark (Independent non-executive Director)
· Mark Hodgson (Non-executive Director)
Please refer to the Board Members section for biographies of each Director which demonstrates their professional knowledge and breadth of investment, accounting, banking and professional experience.
The Board is chaired by Andrew Chapman, who is independent of the Manager and Portfolio Manager at the time of his appointment and remains so. The Chairman is responsible for the leadership of the Board and ensuring its effectiveness in all aspects of its role.
Ian Burns has been appointed as the Senior Independent Director and provides assistance to the Chairman and serves as an intermediary for the other Directors where necessary.
Directors' Duties and Responsibilities
The Directors have adopted a set of reserved powers, which establish the key purpose of the Board and detail its major duties. These duties cover the following areas of responsibility:
· statutory obligations and public disclosure;
· approval of key investment decisions;
· strategic matters and financial reporting;
· Board composition and accountability to Shareholders;
· risk assessment and management, including reporting, compliance, monitoring, governance and control;
· responsible for financial statements; and
· other matters having material effects on the Company.
These reserved powers of the Board have been adopted by the Directors to demonstrate clearly the importance with which the Board takes its fiduciary responsibilities and as an ongoing means of measuring and monitoring the effectiveness of its actions.
The Board meets at least four times each year and monitors the Company's share price and NAV and regularly considers ways in which future share price and overall performance can be enhanced. The Board is responsible for the safeguarding of the assets of the Company and taking reasonable steps for the prevention and detection of fraud and other irregularities. The Portfolio Manager and Manager together with the Company Secretary also ensure that all Directors receive, in a timely manner, all relevant management, regulatory and financial information relating to the Company and its portfolio of investments. Directors unable to attend a Board meeting are provided with the Board papers and can discuss issues arising in the meeting with the Chairman or another non-executive Director.
Individual Directors may, at the expense of the Company, seek independent professional advice on any matter that concerns them in the furtherance of their duties.
Board and Committees
The Board has established three committees, the Audit Committee, the Management Engagement Committee and the Remuneration and Nomination Committee. All the independent directors, namely Andrew Chapman, Ian Burns and Trudi Clark have been appointed to all Committees.
Each committee operates within clearly defined terms of reference and duties. The terms of reference for each Committee have been approved by the Board and are available in full on the Company's website.
Audit Committee
The Audit Committee membership comprises all of the Directors with the exception of Mark Hodgson. The Chairman is a member of the Committee but he does not chair it. His membership of the Audit Committee is considered appropriate given his extensive knowledge of the financial services industry.
Ian Burns is the Chairman of the Audit Committee.
The report on the role and activities of this Committee and its relationship with the external auditors is set out in the Report of the Audit Committee Report.
Management Engagement Committee
Trudi Clark is the Chairman of the Management Engagement Committee. The Management Engagement Committee membership comprises all of the Directors with the exception of Mark Hodgson.
The Management Engagement Committee carries out its review of the Company's advisers through consideration of a number of objective and subjective criteria and through a review of the terms and conditions of the advisers' appointments with the aim of evaluating performance, identifying any weaknesses and ensuring value for money for the Company's shareholders. During 2015, the Management Engagement Committee formally reviewed the performance of the Portfolio Manager and other key service providers to the Company. During this review, no material weaknesses were identified. Overall the Management Engagement Committee confirmed its satisfaction with the services and advice received.
Remuneration and Nomination Committee
Trudi Clark is the Chairman of the Remuneration and Nomination Committee.
The Remuneration and Nomination Committee undertake an evaluation of the Board on an annual basis. The performance of each Director is considered as part of a formal review by the Remuneration and Nomination Committee.
The performance of the Board, its Committees and the Directors was reviewed by the Remuneration and Nomination Committee in September 2015. It was concluded that all Directors were independent of the Portfolio Manager, and that Andrew Chapman, Ian Burns and Trudi Clark were independent of the Manager. Mark Hodgson is the Managing Director of the Manager and is therefore not regarded as independent.
The Chairman of the Committee reviewed and discussed various areas, including investment matters, strategy, shareholder value, governance, and the process and style of meetings. In addition, the Board reviewed the performance of the Chairman in his role and evaluated all their personal contributions. It was concluded that all Directors had a good understanding of the investments and markets and felt well prepared and able to participate fully at Board meetings. It was agreed that Board meetings were effective and all relevant topics were fully discussed, with the Board having a good range of skills and competency. The Directors confirm that they have devoted sufficient time, as considered necessary, to the matters of the Company.
Attendance at scheduled meetings of the Board and its committees
|
|
Board
|
Audit Committee |
Remuneration and Nomination Committee |
Management Engagement Committee |
|
Number of meetings during the period from inception to 30 September 2015 |
6 |
2 |
1 |
1 |
|
|
|
|
|
|
|
Andrew Chapman |
6 |
2 |
1 |
1 |
|
Ian Burns |
6 |
2 |
1 |
1 |
|
Trudi Clark |
6 |
2 |
1 |
1 |
|
Mark Hodgson |
6 |
2 |
1 |
1* |
* - attended with permission from the Management Engagement Committee, however did not actively participate in the meeting.
Meetings of the Committees generally take place prior to a Company Board meeting. The Committee reports to the Board as part of a separate agenda item, on the activity of the Committee and matters of particular relevance to the Board in the conduct of their work.
Directors retirement and rotation
The AIC guide states that all non-executive Directors should be submitted for re-election by shareholders at the first AGM after their appointment and to re-election thereafter at intervals no more than three years. Non-executive directors serving more than nine years should be subject to annual re-election. Nomination for re-election should not be assumed but be based on disclosed procedures and continued satisfactory performance. The Articles of Association state that at each annual general meeting (AGM) of the Company, any Director who has been appointed by the Board since the last AGM shall retire from office and may offer himself for election or re-election by the members.
In accordance with best practice under the AIC Code, all Directors will stand for reappointment at the forthcoming Annual General Meeting to be held on 4 March 2016. It is intended that the Directors who held office at the time of the two preceding AGMs and who did not retire at either of them, or who has been a Director for a continuous period of nine years or more at the date of the AGM shall retire by rotation on a three yearly basis, commencing from the third AGM after inception. The retiring Directors will then be eligible for reappointment.
The Board considers that there is a balance of skills and experience within the Board and each of the directors contributes effectively.
Board Independence, Composition and Tenure
The Chairman and all Directors, with the exception of Mark Hodgson, are considered independent of the Manager and the Portfolio Manager. Mark Hodgson is the Managing Director of the Manager and is therefore not regarded as independent.
The Directors consider that there are no factors, as set out in principle 1 or 2 of the AIC Code, which compromise the Chairman's or other Directors' independence, other than stated above, and that they all contribute to the affairs of the Company in an adequate manner. The Board reviews the independence of all Directors annually. The Company Secretary, BNP Paribas Securities Services S.C.A., Guernsey Branch through its representative acts as Secretary to the Board and Committees and in doing so it: assists the Chairman in ensuring that all Directors have full and timely access to all relevant documentation; organises induction of new Directors; and is responsible for ensuring that the correct Board procedures are followed and advises the Board on corporate governance matters.
The Board is made up of three male Directors and one female Director. The Board supports the recommendations of the Davies Report (available at www.gov.uk) and believes in and values the importance of diversity, including gender, to the effective functioning of the Board. The Board, however, does not consider it appropriate or in the interest of the Company and its Shareholders to set prescriptive targets for gender or other diversity on the Board. Any future appointments would be primarily based on merit of skills, experience and knowledge that each appointment.
The Board has adopted a policy on tenure that is considered appropriate for an investment company. The Board does not believe that length of service, by itself, leads to a closer relationship with the Manager and the Portfolio Manager or necessarily affects a Director's independence and effectiveness.
The Board considers that boards of investment companies are more likely to benefit from a long association with a company in that they will experience a number of investment cycles.
The Board's tenure and succession policy seeks to ensure that the Board is well balanced and will be refreshed from time to time by the appointment of new Directors with the skills and experience necessary to replace those lost by Directors' retirements and meet future requirements. The Remuneration and Nomination Committee is committed to ensuring that any vacancies arising are filled by the most qualified candidates who have complementary skills or who possess the skills and experience which fill any gaps in the Board's knowledge or experience. Directors must be able to demonstrate their commitment and fiduciary responsibility to the Company. The Board seeks to encompass relevant past and current experience of various areas relevant to the Company's business.
Directors' remuneration and annual evaluation of the Board and that of its Audit Committee, Management Engagement Committee and Remuneration and Nomination Committee and individual Directors
The Remuneration and Nomination Committee periodically reviews the fees paid to the Directors and compares these with the fees paid by listed companies generally.
The Board shall, at least once every three years, engage a third party to perform an external review of the Board's performance, consultation and terms of reference to ensure that it is operating effectively and to recommend any changes it considers necessary.
The evaluation of the Board, Audit Committee, Management Engagement Committee and Remuneration and Nomination Committee and Directors considers the balance of skills, experience, independence and knowledge, its diversity, including gender, how the Board works together as a unit, and other factors relevant to its effectiveness.
Details of the remuneration arrangements for the Board and Audit Committee can be found in the Directors' Remuneration Report and in note 5 of the financial statements.
Directors' professional development
The Board believes that keeping up-to-date with key investment industry developments is essential for the Directors to maintain and enhance their effectiveness.
Current Directors and newly appointed Directors, if applicable, are given the opportunity to discuss training and development needs and are expected to take responsibility for identifying their training needs and to take steps to ensure that they are adequately informed about the Company and their responsibilities as a director. The Chairman of the Remuneration and Nomination Committee is responsible for agreeing and reviewing with each Director their training and development needs.
When a new Director is appointed to the Board, they will be provided with all relevant information regarding the Company and their duties and responsibilities as a Director. In addition, a new Director will also spend time with representatives of the Manager and the Portfolio Manager in order to learn more about their processes and procedures. No Directors (other than those appointed at inception) were appointed during the period.
The Board is confident that all its members have the knowledge, ability and experience to perform the functions required of a director of the Company.
d) Board meetings and relationship with the Manager and Portfolio Manager
Relationship with the Manager and Portfolio Manager
The Board has delegated various duties to external parties including the management of the investment portfolio, the custodial services (including the safeguarding of assets), the registration services and the day-to-day company secretarial, administration and accounting services. Each of these contracts was entered into after full and proper consideration by the Board of the quality and cost of services offered, including the control systems in operation in so far as they relate to the affairs of the Company.
The Board receives and considers reports regularly from both the Portfolio Manager and the Manager, with ad hoc reports and information supplied to the Board as required. The Portfolio Manager complies with the Company investment limits and risk diversification policies and has systems in place to monitor cash flow and the liquidity risk of the Company. The Manager, Portfolio Manager and the Administrator also ensure that all Directors receive, in a timely manner, all relevant management, regulatory and financial information. Representatives of the Manager, Portfolio Manager and Administrator attend each Board meeting as required, enabling the Directors to probe further on matters of concern.
The Directors have access to the advice and service 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, the Manager, Portfolio Manager and the Administrator operate in a supportive, co-operative and open environment and the Board will actively and continuously supervise both the Manager, Portfolio Manager and Administrator in the performance of their respective functions.
Primary focus
The Board meets regularly throughout the period and a representative of the Manager and the Portfolio Manager is in attendance at all times when the Board meets to review the performance of the Company's investments.
The Chairman with assistance from the Manager and the Portfolio Manager is responsible for ensuring that relevant financial information, including investment portfolio analysis and financial plans, including budgets and forecasts, are available to the Board and discussed at Board meetings. The Chairman encourages open debate to foster a supportive and co-operative approach for all participants.
The Board applies its primary focus on the following:
- investment performance, ensuring that investment objectives and strategy of the Company are met;
- ensuring investment holdings are in line with the Company's prospectus;
- review and monitoring financial risk management and operating cash flows, including cash flow forecasts and budgets of the Company; and
- review and monitoring of the key risks to which the Company is exposed as set out in the Strategic Report.
At each relevant meeting the Board undertakes reviews of key investment and financial data, transactions and performance comparisons, share price and NAV performance, marketing and Shareholder communication strategies, peer group information and industry issues.
Overall strategy
The Board meets regularly to discuss the investment objective, policy and approach of the Company to ensure sufficient attention is given to overall strategy of the Company.
The Board considers prospectus objectives, their continuing relevance and whether the investment policy continues to meet the Company's objectives.
The Board believes that the overall strategy of the Company remains appropriate.
Monitoring and evaluation of performance of and contractual arrangements with service providers
The Management Evaluation Committee is responsible for reviewing on a regular basis the performance of the Manager, Portfolio Manager and the Company's other third party service providers together with their anti-bribery and corruption policies to ensure that they comply with the Bribery Act 2010 and the Prevention of Corruption (Bailiwick of Guernsey) Law, 2003 and ensure their continued competitiveness and effectiveness and ensure that performance is satisfactory and in accordance with the terms and conditions of the respective appointments.
As part of the Committees' evaluation it will also review on an annual basis the contractual arrangements with the Manager, Portfolio Manager and major service suppliers.
Please refer to the Corporate Governance Statement for findings of review performed in September 2015. During this review, no material weaknesses were identified and overall the Management Engagement Committee confirmed its satisfaction with the services and advice received.
The Directors have adopted a procedure whereby they are required to report any potential acts of bribery and corruption in respect of the Company to the designated manager being BNP Paribas Securities Services S.C.A., Guernsey Branch.
Review of NAV and share price of ordinary share class
The Directors review the trading price of the Company's shares and compare them against the NAV of the Company's shares to assess volatility in the discount or premium to the share prices during the period.
e) Shareholder communications
Shareholder profile and communication
The Board views Shareholder relations and communications as high priority which ensures that the members of the Board have an understanding of the views of Shareholders about the Company.
The Board believes that the maintenance of good relations with Shareholders is important for the long-term prospects of the Company. It has, since admission, sought engagement with investors. Where appropriate the Chairman or Senior Independent Director, and other Directors are available for discussion about governance and strategy with major Shareholders and the Chairman ensures communication of Shareholders' views to the Board. The Board receives feedback on the views of Shareholders from its Corporate Broker and the Portfolio Manager, and Shareholders are welcome to contact the Directors. Shareholders wishing to communicate with the Chairman, or any Director, may do so by writing to the Company, for the attention of the Company Secretary, at the Registered Office.
The main method of communication with Shareholders is through the half year and annual financial report which aims to give Shareholders a clear and transparent understanding of the Company's objectives, strategy and results. This information is supplemented by the publication of the daily NAVs of the Company's ordinary shares on the London Stock Exchange Regulatory Information Service.
The Company's website - microcap.riverandmercantile.com, is regularly updated with quarterly factsheets and provides further information about the Company, including the Company's Financial Reports and Announcements. The maintenance and integrity of the Company website is the responsibility of the Directors. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Uncertainty regarding legal requirements is compounded as information published on the internet is accessible in many countries with different legal requirements relating to the preparation and dissemination of financial statements.
The Board believes that the AGM provides an appropriate forum for investors to communicate with the Board, and encourages participation. The AGM will be attended by at least the Chairman of the Audit Committee. There is an opportunity for individual Shareholders to question the Directors at the AGM. It is the intention of the Board that the Notice of the Annual General Meeting and related papers will be sent to Shareholders at least 20 working days before that meeting.
The Directors welcome the views of all Shareholders and place considerable importance upon them.
Other communications
All substantive communications regarding any major corporate issues are discussed by the Board taking into account representations from the Manager, Portfolio Manager, the Auditor, legal advisers, corporate brokers and the Company Secretary.
Alternative Investment Fund Manager Directive (AIFMD)
The Company (which is a non-EU AIF for the purposes of the AIFM Directive and related regimes in EEA member states) has appointed the Manager to act as its Alternative Investment Fund Manager ("AIFM"). The Manager is authorised by the Jersey Financial Services Commission to act as an AIFM on behalf of alternative investment funds ("AIFs") in accordance with the Financial Services (Jersey) Law 1998.
During 2014, the Company registered with the Guernsey Financial Services Commission, being the Company's competent regulatory authority, as a non-EU Alternative Investment Fund (AIF), and the AIFM has registered with the UK Financial Conduct Authority, under their relevant national private placement regime ("NPPRs").
The Manager has delegated portfolio management to the Portfolio Manager and the Board will actively and continuously supervise both the Manager and the Portfolio Manager in the performance of their respective functions.
As the Company and the AIFM are Non-EU domiciled no depositary has been appointed in line with the AIFM Directive, however BNP Paribas Securities Services S.C.A., Guernsey Branch has been appointed to act as custodian.
Information relating to the current risk profile of the Company and the risk management systems employed by the Manager and Portfolio Manager to manage those risks, as required under paragraph 4(c) of Article 23 of the AIFM Directive, is set out in note 8 - Financial Risk Management. Please refer to the Executive Summary report for the Board's assessment of the principal risks and uncertainties facing the Company.
Table of AIFM Remuneration
The total fees paid to the AIFM by the Company is disclosed in note 4.
Remuneration paid by the AIFM to its staff and other beneficiaries for services attributable directly to the Company, (as outlined in Article 22(2)(e) and 22(2)(f) of the AIFM Directive), will be disclosed in the annual financial report for the year ending 30 September 2016, being the Company's first full financial performance year post AIFM authorisation.
This Directors' and Corporate Governance Report was approved by the Board of Directors on 21 January 2016 and signed on its behalf by:
Andrew Chapman
Chairman
Ian Burns
Audit Committee Chairman
REPORT OF THE AUDIT COMMITTEE
Report of the Audit Committee
The Board has appointed an Audit Committee which operates within clearly defined Terms of Reference.
The Audit Committee includes all of the Directors with the exception of Mark Hodgson. Ian Burns is the Chairman of the Audit Committee and is independent as are all the other Directors that comprise the committee. All of the Audit Committee's members have recent and relevant financial experience. Biographical information pertaining to the members of the Audit Committee can be found in the section of this Annual Financial Report entitled, "Board Members".
Role of the Committee
The Audit Committee assists the Board in carrying out its responsibilities in relation to financial reporting requirements, risk management and the assessment of internal financial and operating controls. It also manages the Company's relationship with the external Auditor.
The Audit Committee's main functions are:
- to consider and make recommendations to the Board, to be put to shareholders for approval at the Annual General Meeting, in relation to the appointment, re-appointment and removal and the provisions of non-audit services of the external Auditors and to negotiate their remuneration and terms of engagement on audit and non-audit work;
- to meet regularly with the external Auditor in order to review their proposed audit programme and remit of work and the subsequent Audit Report and to assess the effectiveness of the audit process; any issues arising from the audit with respect to accounting or internal controls systems and the level of fees paid in respect of audit and non-audit work;
- to annually assess the external Auditor's independence, objectivity, effectiveness, resources and expertise;
- to review and monitor the integrity, fairness and balance of the financial statements of the Company including its half-year financial statements and annual accounts and reports to Shareholders;
- advising the Board on whether the Committee believes the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, position, business model and strategy; and
- to review the adequacy and effectiveness of the Company's financial reporting and internal control policies and procedures with respect to the Company's record keeping, asset management and operations for the identification, assessment and reporting of risks.
The Audit Committee's Terms of Reference are published on the Company's website at microcap.riverandmercantile.com
Internal controls
The Board is responsible for ensuring that suitable systems of risk management and internal control are implemented by the third-party service providers to the Company. The Directors have reviewed the BNP Paribas Securities Services ISAE 3402 report (on the description of controls placed in operation, their design and operating effectiveness for the period from 1 October 2014 to 30 September 2015) on Fund Administration and Middle Office Outsourcing dated 16 December 2015, and are pleased to note that no significant issues were identified.
In accordance with the Financial Reporting Council's Internal Control: Guidance to Directors, and the FRC's Guidance on Audit Committees, the Board confirms that there is an on-going process for identifying, evaluating and managing the significant internal control risks faced by the Company.
As the Company does not have any employees it does not have a "whistle blowing" policy in place, however has reviewed the whistleblowing procedures of the Portfolio Manager with no issues noted. The Company delegates its main administrative functions to third-party providers who report on their policies and procedures to the Board.
The Board believes that as the Company delegates its day-to-day administrative operations to third-parties (which are monitored by the Board), it does not require an internal audit function.
Since inception, the Audit Committee met on two occasions and the members' attendance record can be found in the Corporate Governance Statement of this Annual Report.
Significant risks in relation to the financial statements
The Audit Committee views the valuation of the Company investments as significant risks.
There is a risk that the AIM listed investments are not valued appropriately in accordance with the requirements set out in IFRS 13 due to the nature of the AIM market and the listed stocks not being highly liquid, or heavily traded.
The Committee reviews the regular reports from the Portfolio Manager and Administrator regarding the valuation of the investments and the Board reviews the NAV of the Company, together with the value and trading values of investments on a regular basis.
In addition to the above, Mark Hodgson chairs monthly AIFM Risk Committee meetings where the Company risk measurement framework is discussed, including market risk, credit risk, counterparty risk, operational risk and liquidity risk, in reference to the investment portfolio and the Company performance therefore. On a monthly basis, Mark Hodgson will report findings to the Board and is also asked to attend Audit Committee meetings by the Audit Committee Chairman to assist the Committee to gain assurance as to the appropriateness and robustness of the valuation methodology applied to the investment portfolio.
External audit process
The Company's external Auditor is PricewaterhouseCoopers CI LLP which was appointed on 21 October 2014.
The Audit Committee met with the Auditors prior to the commencement of the audit and agreed an audit plan that would adopt a risk based approach. The Audit Committee and the Auditors agreed that a portion of the Audit effort would include an examination of the title to and the existence of the Company investments and an examination of the procedures in place at the Administrator and the Portfolio Manager in respect of the valuation of the Company investments portfolio.
Upon completion of the audit, the Audit Committee discussed with the Auditors the effectiveness of the audit and considered the Auditor's independence from the Company since their appointment and throughout the audit process.
The significant risks regarding both fraud risk - management override of controls and valuation of investment portfolio was tracked through the period and the Audit Committee challenged the work performed by the Auditor to test management override of controls and in addition the audit work undertaken in respect of valuations of investments held.
For the period ended 30 September 2015 the Audit Committee was satisfied that there had been appropriate focus and challenge on the significant and other key areas of audit risk and assessed the quality of the audit process to be good.
During the period ended 30 September 2015, in addition to the audit services in respect to the audit of the Company's Annual Financial Report, the auditor provided non-audit services in respect of the review of the Company's Half Yearly Report for the period ended 31 March 2015, Reporting Accountant engagement for the listing of the Company and FATCA compliance.
To safeguard the objectivity and independence of the external Auditor from becoming compromised, the Committee has a formal policy governing the engagement of the external Auditor to provide non-audit services. The external Auditor and the Directors have agreed that all non-audit services require the pre-approval of the Audit Committee prior to commencing any work. Fees for non-audit services will be tabled annually so that the Audit Committee can consider the impact on the Auditor's objectivity.
The fees for the audit services were: £35,000 (period end audit) and the fees for non-audit services were and £16,000 for review of the Company's Half Yearly Report for the period ended 31 March 2015 and £5,000 for FACTA compliance advice.
The Audit Committee has discussed the report provided by the Auditors and the Audit Committee is satisfied as to the independence of the Auditors.
The Committee has reviewed PricewaterhouseCoopers CI LLP's independence policies and procedures and considers that they are fit for purpose.
Appointment and independence
The Audit Committee considers the reappointment of the external auditor, including the rotation of the audit engagement leader, and assesses their independence on an annual basis. The external auditor is required to rotate the engagement leader responsible for the Company audit every five years. The current engagement leader has been in place since inception (one year).
The Committee reviews the objectivity and effectiveness of the audit process on an annual basis and considers whether the Company should put the audit engagement out to tender. Having considered the need to tender the position for the current year, the Committee has provided the Board with its recommendation to the Shareholders on the reappointment PricewaterhouseCoopers CI LLP as external auditor for the year ending 30 September 2016.
Accordingly, a resolution proposing the reappointment of PricewaterhouseCoopers CI LLP as our auditor will be put to the Shareholders at the Annual General Meeting. There are no contractual obligations restricting the Committee's choice of external Auditor and we do not indemnify our external Auditor.
The Committee continues to consider the audit tendering provisions outlined in the revised UK Code.
This Report of the Audit Committee was approved by the Board of Directors on 21 January 2016 and signed on its behalf by:
For and on behalf of the Audit Committee
Ian Burns
Audit Committee Chairman
DIRECTORS' STATEMENT OF RESPONSIBILITIES
The Directors are responsible for preparing Annual Financial Report and financial statements in accordance with applicable Guernsey law and International Financial Reporting Standards ("IFRS").
Guernsey Law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit or loss for the period.
In preparing those financial statements, the Directors are required to:
· select suitable accounting policies and apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008, as amended ("Companies Law"). The Directors 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 confirm to the best of their knowledge that:
· the financial statements, which have been prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit of the Company;
· the Chairman's Statement includes a fair review of the information required by DTR 4.1.8 (indication of important events up to 30 September 2015 and a description of principal risks and uncertainties);
· the Chairman's Statement includes a fair review of the information required by DTR 4.1.9 and 4.1.10 (analysis of the development and performance of the Company and position at period end aided by the use of key performance indicators; and where appropriate information relating to environmental factors);
· the Chairman's Statement includes a fair review of the information required by DTR 4.1.11 (disclosure of important events that have occurred post period end; future developments; financial risk management objectives and policies and Company exposure to price, credit, liquidly and cash flow risk); and
· the Annual Financial Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company's performance, position, business model and strategy.
Andrew Chapman
Chairman
Ian Burns
Audit Committee Chairman
DIRECTORS' REMUNERATION REPORT
Annual Remuneration Statement
Dear Shareholder
This report meets the relevant rules of the Listing Rules of the Financial Conduct Authority and the AIC Code and describes how the Board has applied the principles relating to Directors' remuneration.
An ordinary resolution to ratify this report will be proposed at the Annual General Meeting on 4 March 2016.
Changes to the Board
The Board acted for the first time during the period.
In accordance with best practice under the AIC Code, all Directors will stand for reappointment at the forthcoming Annual General Meeting to be held on 4 March 2016.
Table of Directors Remuneration
|
Component |
Director |
Annual Rate (£) |
Purpose of reward |
|
Annual fee |
All Directors Andrew Chapman (Chairman) Ian Burns Trudi Clark Mark Hodgson |
£30,000 £20,000 £20,000 £20,000 |
For commitments as Directors |
|
Additional fee |
Ian Burns (Chairman of the Audit Committee) |
£5,000 |
For additional responsibilities and time commitment |
|
Expenses |
|
Ad hoc |
Reimbursement of expenses paid |
No other remuneration or compensation was paid or is payable by the Company during the period to any of the Directors. There has been no change to the Company's remuneration policy as detailed below.
The Company has no employees. Accordingly, there are no differences in policy on the remuneration of Directors and the remuneration of employees.
No Director is entitled to receive any remuneration which is performance-related.
Remuneration policy
The determination of the Directors' fees is a matter for the Remuneration and Nomination Committee. The Remuneration and Nomination Committee considers the remuneration policy annually to ensure that it remains appropriately positioned. Directors of the Committee will review the fees paid to the boards of directors of similar companies. No Director is to be involved in decisions relating to his or her own remuneration.
The Company's policy is for the Directors to be remunerated in the form of fees, payable quarterly in arrears. No Director has any entitlement to a pension, and the Company has not awarded any share options or long-term performance incentives to any of the Directors.
Directors are authorised to claim reasonable expenses from the Company in relation to the performance of their duties.
The Company's policy is that the fees payable to the Directors should reflect the time spent by the Board on the Company's affairs and the responsibilities borne by the Directors and should be sufficient to enable high calibre candidates to be recruited. The policy is for the Chairman of the Board and Chairman of the Audit Committee to be paid a higher fee than the other Directors in recognition of their more onerous roles and more time spent. The Board may amend the level of remuneration paid within the limits of the Company's Articles of Association.
The Company's Articles of Association limit the aggregate fees payable to the Board of Directors to a total of £150,000 per annum. There have been no changes to the Directors' fees since incorporation.
Service Contracts and Policy on Payment of Loss of Office
Directors are appointed with the expectation that they are initially appointed until the following Annual General Meeting when it is required that they be re-elected by Shareholders. All Directors have served since incorporation of the Company. Directors' appointments are reviewed during the annual board evaluation. The first evaluation took place during September 2015.
Directors have agreed letters of appointment with the Company. No Director has a service contract with the Company and Directors' appointments may be terminated at any time by one month's written notice with no compensation payable at termination upon leaving office for whatever reason.
In accordance with best practice and the AIC Code, all Directors will stand for reappointment at the forthcoming Annual General Meeting to be held on 4 March 2016.
Copies of the Directors' letters of appointment are available for inspection by Shareholders at the Company's Registered Office, and will be available at the Annual General Meeting. The dates of their letters of appointments are shown below.
Dates of letters of appointment
|
Director |
Date of letter of appointment |
|
Andrew Chapman |
21 October 2014 |
|
Ian Burns |
21 October 2014 |
|
Trudi Clark |
21 October 2014 |
|
Mark Hodgson |
21 October 2014 |
Director Interests
No Director has any other interest in any contract to which the Company is a party with the exception of Mark Hodgson who acts as the Managing Director of the Manager
As at the period end and the date of approval of the financial statements, Directors held the following number of ordinary shares in the Company:
|
Director |
Ordinary shares of held |
|
Andrew Chapman |
10,000 |
|
Ian Burns |
Nil |
|
Trudi Clark |
Nil |
|
Mark Hodgson |
Nil |
Information of each Director is shown in the Board Members section of this Annual Financial Report.
Advisers to the Remuneration and Nomination Committee
The Board has not sought the advice or services by any outside person, at this time, in respect of its consideration of the Directors' remuneration.
Statement of consideration of Shareholder views
An ordinary resolution to ratify the Directors' remuneration report will be proposed at the Annual General Meeting on 4 March 2016.
Trudi Clark
Remuneration and Nomination Committee Chairman
21 January 2016
Independent audit report to RIVER AND MERCANTILE UK MICRO CAP INVESTMENT COMPANY LIMITED
Report on the Financial Statements
We have audited the accompanying financial statements of River and Mercantile UK Micro Cap Investment Company Limited ("the Company") which comprise the statement of financial position as of 30 September 2015 and the Statement of Comprehensive Income, the Statements of Changes in Shareholders' Equity and the Statement of Cash Flows for the year then ended and a summary of significant accounting policies and other explanatory information.
Directors' Responsibility for the Financial Statements
The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards and with the requirements of Guernsey law. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the financial position of the Company as of 30 September 2015, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with the requirements of The Companies (Guernsey) Law, 2008.
Report on other Legal and Regulatory Requirements
We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. The other information comprises the Strategic Report, Board Members, Portfolio Manager's Report, Directors' and Corporate Governance Report, Report of the Audit Committee, Directors' Statement of Responsibilities and Directors Remuneration.
In our opinion the information given in the other information is consistent with the financial statements.
This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Section 262 of The Companies (Guernsey) Law, 2008 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters which we are required to review under the Listing Rules:
· the directors' statement set out in the Directors' and Corporate Governance Report in relation to going concern. As noted in the directors' statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Company has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors' use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Company's ability to continue as a going concern;
· the directors' statement that they have carried out a robust assessment of the principal risks facing the Company and the directors' statement in relation to the longer-term viability of the Company. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors' process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit;
· the part of the Corporate Governance Statement relating to the Company's compliance with the ten further provisions of the UK Corporate Governance Code specified for our review; and
· certain elements of the report to shareholders by the Board on directors' remuneration.
John Luff
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
21 January 2016
STATEMENT OF COMPREHENSIVE INCOME
For the period from 2 October 2014 (incorporation) to 30 September 2015
|
|
|
|
For the period from 2 October 2015 to 30 September 2015 |
|
|
|
|
|
|
|
|
Notes |
£ |
|
Income |
|
|
|
|
Investment income |
|
3 |
489,040 |
|
Net gain on financial assets designated at fair value through profit or loss |
|
6,983,977 |
|
|
|
|
|
7,473,017 |
|
Expenses |
|
|
|
|
Operating expenses |
|
4 |
(1,212,365) |
|
|
|
|
|
|
Profit before taxation |
|
|
6,260,652 |
|
Taxation |
|
|
- |
|
Profit after taxation and total comprehensive income |
|
6,260,652 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per ordinary share |
|
0.1236 |
|
|
|
|
|
|
All items in the above statement are derived from continuing operations. No operations were acquired or discontinued during the period.
The notes form an integral part of these financial statements.
STATEMENT OF FINANCIAL POSITION
As at 30 September 2015
|
|
|
30 September 2015 |
|
|
|
|
|
|
Notes |
£ |
|
Non-current assets |
|
|
|
Financial assets designated at fair value through profit or loss |
7 |
54,053,643 |
|
|
|
|
|
Current assets |
|
|
|
Cash and cash equivalents |
9 |
1,268,358 |
|
Trade receivables - securities sold awaiting settlement |
|
1,138,260 |
|
Other receivables |
6 |
28,497 |
|
Total current assets |
|
2,435,115 |
|
|
|
|
|
Total assets |
|
56,488,758 |
|
|
|
|
|
Current liabilities |
|
|
|
Other payables |
10 |
(597,805) |
|
Total current liabilities |
|
(597,805) |
|
|
|
|
|
Total liabilities |
|
(597,805) |
|
|
|
|
|
Net assets |
|
55,890,953 |
|
|
|
|
|
Capital and reserves |
|
|
|
Share capital |
12 |
49,630,301 |
|
Retained earnings |
12 |
6,260,652 |
|
Equity shareholders' funds |
|
55,890,953 |
|
|
|
|
The financial statements were approved and authorised for issue by the Board of Directors on 21 January 2016 and signed on its behalf by:
Andrew Chapman
Chairman
Ian Burns
Audit Committee Chairman
The notes form an integral part of these financial statements.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the period from 2 October 2014 (Incorporation) to 30 September 2015
|
|
|
Share capital |
Retained earnings |
Total |
|
|
Note |
£ |
£ |
£ |
|
Opening equity shareholders' funds at 2 October 2014 |
|
- |
- |
- |
|
Total comprehensive income for the period |
|
- |
6,260,652 |
6,260,652 |
|
Transactions with owners, recorded directly to equity |
|
|
|
|
|
Proceeds from issuance of ordinary shares |
12 |
50,643,164 |
- |
50,643,164 |
|
Share issue costs |
12 |
(1,012,863) |
- |
(1,012,863) |
|
Closing equity shareholders' funds at 30 September 2015 |
|
49,630,301 |
6,260,652 |
55,890,953 |
The notes form an integral part of these financial statements.
STATEMENT OF CASH FLOWS
For the period from 2 October 2014 (Incorporation) to 30 September 2015
|
|
|
For the period from 2 October 2015 to 30 September 2015 |
|
|
Notes |
£ |
|
Cash inflow from operating activities |
|
|
|
|
|
|
|
Profit after taxation and total comprehensive income for the period |
|
6,260,652 |
|
|
|
|
|
Adjustments to reconcile profit after tax to net cash flows: |
|
|
|
|
|
|
|
- Realised gain on financial assets designated at fair value through profit or loss |
7 |
(2,835,275) |
|
- Unrealised gain on financial assets designated at fair value through profit or loss |
7 |
(4,148,702) |
|
|
|
|
|
Purchase of financial assets designated at fair value through profit or loss |
7 |
(58,630,422) |
|
Proceeds from sale of financial assets designated at fair value through profit or loss |
7 |
11,560,756 |
|
|
|
|
|
Changes in working capital |
|
|
|
Increase in trade receivables |
|
(1,138,260) |
|
Increase in other receivables |
6 |
(28,497) |
|
Increase in other payables |
10 |
597,805 |
|
|
|
|
|
Net cash used in operating activities |
|
(48,361,943) |
|
|
|
|
|
Cash inflow from financing activities |
|
|
|
Proceeds from issuance of ordinary shares |
12 |
50,643,164 |
|
Ordinary share issue costs paid |
12 |
(1,012,863) |
|
Net cash from financing activities |
|
49,630,301 |
|
|
|
|
|
Net increase in cash and cash equivalents in the period |
|
1,268,358 |
|
|
|
|
|
Cash and cash equivalents at the end of the period |
|
- |
|
|
|
|
|
Cash and cash equivalents at the end of the period |
9 |
1,268,358 |
|
|
|
|
The notes form an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
1. General information
The Company was incorporated as a non-cellular company with liability limited by shares in Guernsey under The Companies (Guernsey) Law 2008 on 2 October 2014. It listed its ordinary shares on the Premium Segment of the Official List of the UK Listing Authority and was admitted to trading on the Main Market of the London Stock Exchange on 2 December 2014.
The Company has been registered by the GFSC as a registered closed-ended collective investment scheme pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the RCIS Rules 2008. The Company registered number is 59106.
The Company's registered address is BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA.
2. Accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied throughout the period presented.
2.1 Basis of preparation
(a) Statement of Compliance
The financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the FCA and with International Financial Reporting Standards ("IFRS") which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and interpretations issued by the International Financial Reporting Standards Interpretations Committee ("IFRIC") as approved by the International Accounting Standards Committee ("IASC") which remain in effect. The financial statements give a true and fair view of the Company's affairs and comply with the requirements of The Company (Guernsey) Law 2008, as amended.
The financial statements have been prepared under a going concern basis. The Directors are satisfied that, at the time of approving the financial statements, it is appropriate to adopt the going concern basis in preparing the financial statements.
(b) Basis of measurement
These financial statements have been prepared on a going concern basis under the historical cost basis adjusted to take account of the revaluation of financial assets designated at fair value through profit or loss.
(c) Functional and presentation currency
The Company's functional currency is Pounds Sterling, which is the currency of the primary economic environment in which it operates. The Company's performance is evaluated and its liquidity is managed in Pounds Sterling. Pounds Sterling is therefore considered as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in Pounds Sterling.
(d) Critical accounting assumptions, estimates and judgments
The preparation of the financial statements in conformity with IFRS, requires the Company to make judgements, estimates and assumptions that affect items reported in the Statement of Financial Position and Statement of Comprehensive Income and the disclosure of contingent assets and liabilities at the date of the financial statements. It also requires management to exercise its judgement in the process of applying the Company's accounting policies. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
As outlined in above in Note 2.1(c) the Directors have used their judgement to determine that the Company's presentational and functional currency is Pounds Sterling.
(e) New standards, amendments and interpretations
New standards, amendments and interpretations to existing standards that become effective in future accounting periods and have not been adopted by the Company;
|
International Financial Reporting Standards (IFRS) |
Effective for periods beginning on or after |
|
· IFRS 9 - Financial Instruments: Classification and Measurement |
1 January 2018 |
|
· IFRS 15 - Revenue from Contracts with Customers |
1 January 2018 |
|
· Amendment to IAS 1 - Presentation of Financial Statements - amendments resulting from the disclosure imitative |
1 January 2016 |
|
· Amendment to IFRS 7 - Financial Instruments: Disclosures - amendments resulting from September 2014 Annual Improvements to IFRSs |
1 January 2016 |
The Directors have not yet fully assessed the impact these new standards will have on the financial statements but their initial opinion is that it will not be significant.
2.2 Foreign currency translations
Foreign exchange gains and losses resulting from the settlement of transactions in foreign currencies and from the translation of monetary assets and liabilities at period end exchange rates to Pounds Sterling are recognised in the Statement of Comprehensive Income as foreign exchange translation gains / losses.
Non-monetary items such as financial assets designated at fair value through profit or loss measured at fair value in a foreign currency, are translated using exchange rates at the balance sheet date when the fair value was determined. Effects of exchange rate changes on non-monetary items measured at fair value on a foreign currency are recorded as part of the fair value gain or loss.
As at 30 September 2015 all financial assets designated at fair value through profit and loss are held in Pounds Sterling.
2.3 Financial instruments
Financial assets
a) Classification
The Company classifies its investments in equity securities as financial assets designated at fair value through profit or loss. These financial instruments are held for investment purposes. Financial assets also include cash and cash equivalents as well as other receivables which are measured at amortised cost using the effective interest rate method.
Financial assets designated at fair value through profit or loss at inception
Financial assets designated at fair value through profit or loss at inception are financial instruments that are not classified as held for trading but are managed, and their performance is evaluated on a fair value basis in accordance with the Company's documented investment strategy.
The Company's policy requires the Portfolio Manager and the Board of Directors to evaluate the information about these financial assets on a fair value basis together with other related financial information.
b) Recognition, measurement and derecognition
Purchases and sales of investments are recognised on the trade date - the date on which the Company commits to purchase or sell the investment. Financial assets designated at fair value through profit or loss are measured initially at fair value. Transaction costs are expensed as incurred and movements in fair value are recorded in the Statement of Comprehensive Income. Subsequent to initial recognition, all financial assets designated at fair value through profit or loss are measured at fair value.
Financial assets are derecognised when the rights to receive cash flows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership.
c) Fair value estimation
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
As at 30 September 2015, the Company held investments in a diversified portfolio of UK Micro Cap Companies, typically comprising companies with a free float market capitalisation of less than £100 million at the time of purchase, whose securities are admitted to trading on AIM.
Investments are valued at fair value, which are quoted bid prices for investments traded in active markets.
For investments which are not traded in active markets, unlisted and restricted investments, the Board in determining its assessment of fair value takes into account the latest traded prices, other observable market data and
asset values based on the latest available and relevant information for that investment.
As all the Company's financial assets are quoted securities, in the opinion of the Directors, the fair value of the financial assets is not subject to significant judgments, estimates or assumptions.
d) Valuation process
The Directors are in ongoing communications with the Portfolio Manager and hold meetings on a timely basis to discuss performance of the investment portfolio and the valuation methodology and in addition review monthly investment performance reports.
The Directors analyse the investment portfolio in terms of both investment mix and fair value hierarchy and consider the impact of general credit conditions and / or events that occur in the global corporate environments which may impact the economic conditions in the UK and ultimately on the valuation of the investment portfolio.
Financial liabilities
e) Classification
Amounts due to brokers represent payables for investments that have been contracted for but not yet settled or delivered on 30 September 2015. Financial liabilities include trade payables and other payables which are held at amortised cost using the effective interest rate method.
f) Recognition, measurement and derecognition
Financial liabilities are recognised initially at fair value, net of transaction costs incurred and are subsequently carried at amortised cost using the effective interest rate method. Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires.
2.4 Investment income, interest income and expenses
Dividends receivable on equity shares are recognised as revenue for the period on an ex-dividend basis. Interest income and expenses are recognised in the Statement of Comprehensive Income on an accruals basis using the effective interest rate method.
2.5 Operating expenses
Operating expenses are recognised on an accruals basis and are recognised in the Statement of Comprehensive Income.
2.6 Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits held at call with banks. Cash equivalents are short term, highly liquid investments with original maturities of three month or less that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.
2.7 Segmental reporting
In accordance with IFRS 8, the Board as a whole has been determined as constituting "the chief operating decision maker" of the Company. The Directors view the operations of the Company as one operating segment, being investment in UK Micro Cap Companies. All significant operating decisions are based upon analysis of the Company's investments as one segment. The financial results from this segment are equivalent to the financial results of the Company as a whole, which are evaluated regularly by the chief operating decision-maker (the Board with insight from the Portfolio Manager).
2.8 Contingent liabilities and provisions
A contingent liability is a possible obligation depending on whether some uncertain future event occurs; or a present obligation but payment is not probable or the amount cannot be measured reliably. A provision is recognised when:
- the Company has a present legal or constructive obligation as a result of past events;
- it is probable that an outflow of resources will be required to settle the obligation; and
- the amount has been reliably estimated.
2.9 Taxation
The Company has applied for and been granted exemption from liability to income tax in Guernsey under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 as amended by the Director of Income Tax in Guernsey for the current period. Exemption must be applied for annually and will be granted, subject to the payment of an annual fee, which is currently fixed at £1,200 per applicant, provided the Company qualifies under the applicable legislation for exemption.
It is the intention of the Directors to conduct the affairs of the Company so as to ensure that it continues to qualify for exempt company status for the purposes of Guernsey taxation.
2.10 Share capital
Ordinary shares are classified as equity in accordance with IAS 32 - "Financial Instruments: Presentation" as these instruments include no contractual obligation to deliver cash and the redemption mechanism is not mandatory.
Costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction from the proceeds.
Please refer to note 12 for details regarding the redemption mechanism of ordinary shares.
2.11 Capital risk management
The Board defines capital as financial resources available to the Company. The Company's capital as at 30 September 2015 comprises its share capital at a total of £49,630,301.
The Company's objectives when managing capital are to:
- safeguard the Company's ability to continue as a going concern;
- provide returns for shareholders; and
- maintain an optimal capital structure to minimise the cost of capital.
The Board monitors the capital adequacy of the Company on an on-going basis and both the Company's objectives regarding capital management have been met. The Company has no imposed capital requirements.
3. Investment income
|
|
Period ended 30 September 2015 |
|
|
£ |
|
Investment income |
441,704 |
|
Other income |
29,493 |
|
Bank interest |
17,843 |
|
Total income |
489,040 |
4. Operating expenses
|
|
Period ended 30 September 2015 |
|
|
£ |
|
Portfolio management fees |
331,036 |
|
Portfolio management performance fees |
426,025 |
|
Directors' fees |
90,184 |
|
AIFM fees |
52,839 |
|
Audit fees |
35,000 |
|
Non-audit fees - interim review services |
16,000 |
|
Administration fees |
72,500 |
|
Broker fees |
41,507 |
|
Custody fees |
7,371 |
|
Company secretariat fees |
29,807 |
|
Registrar fees |
7,833 |
|
Transaction fees |
66,336 |
|
Sundry expenses |
35,927 |
|
Total |
1,212,365 |
On 21 October 2014, the Company signed an AIFM agreement with the Manager to act as the Company's AIFM. Under the agreement, the Manager is entitled to an upfront set up fee of £20,000 and annual fixed fee of £54,000. The annual fixed fee is paid quarterly in arrears. Please note that the upfront set up fee is included as part of share issue costs. Please refer to note 12 for further detail. AIFM fees payable as at 30 September 2015 were £13,611.
On 21 October 2014, the Company signed a Global Custody Agreement with the Manager and the Administrator, whereby the Company appointed the Administrator to carry out custodian services. In its role as custodian, the Administrator is entitled to a fee payable by the Company on a transaction by transaction and ad-valorem fee basis.
On 21 October 2014, the Company signed an agreement with BNP Paribas Securities Services S.C.A., Guernsey Branch, (the "Administrator") to provide administrative, compliance oversight and company secretarial services to the Company. Under the administration agreement, the Administrator will be entitled to a minimum annual fixed fee of £85,000 with a cap of £115,000 for fund administration services and £35,000 annual fixed fee for company secretarial and compliance services. These fees are paid monthly in arrears. Ad hoc other administration services are chargeable on a time cost basis. In addition, the Company will reimburse the Administrator for any out of pocket expenses.
On 3 November 2014, the Company signed an Investment Management agreement with the Manager and the Portfolio Manager, whereby the Manager delegated to the Portfolio Manager overall responsibility for the discretionary management of the Company assets in accordance with the Company's investment objective and policy.
Under the agreement, the Portfolio Manager is entitled to receive a base fee and performance fee. The portfolio manager base fee is payable monthly in arrears at a rate of one-twelfth of 0.75% of NAV. A performance fee equal to 15% of the amount by which the Company's NAV outperforms the total return on the benchmark, (being Numis Smaller companies plus AIM (excluding investment companies) total return index), will be payable to the Portfolio Manager over a performance period.
The performance period is the period between two redemptions, being the first business day after the calculation date, (referable to the earlier redemption (opening date)), and the end day of the calculation date (referable to the later redemption (closing date)). The first opening date is the date of admission and in circumstances in which a performance fee may be payable upon termination of this Agreement, the final closing date shall be the date in which the agreement is terminated. The calculation date is the date determined by the Board for the calculation of the price to be paid on any particular exercise of the redemption mechanism. Please refer to note 12 for further detail regarding the redemption mechanism. During the period ended 30 September 2015, the Company incurred a performance fee of £426,025, of which £426,025 was payable at period end.
On 20 January 2015, the Company signed a Corporate Stockbroker and Financial Adviser agreement with Winterflood Investment Trusts (a division of Winterflood Securities Limited) (the "Corporate Broker"), to provide corporate stockbroker and financial adviser services to the Company. Under the agreement, the Corporate Broker will be entitled to a fee payable by the Company of £50,000 per annum payable half yearly in arrears. Broker fees payable as at 30 September 2015 were £41,507.
5. Directors' fees and interests
The Directors of the Company are remunerated for their services at a fee of £20,000 per annum (£30,000 for the Chairman). The Chairman of the Audit Committee receives an additional £5,000 for his services in this role.
The Company has no employees other than the Directors. Directors' fees payable as at 30 September 2015 were £23,944.
As at the date of approval of these financial statements, Andrew Chapman held 10,000 ordinary shares in the Company. No other Director holds shares in the Company.
No pension contributions were payable in respect of any of the Directors.
6. Other receivables
|
|
|
|
|
|
|
30 September 2015 |
|
|
|
|
£ |
|
|
|
Dividend receivable |
27,250 |
|
|
|
Prepayments |
1,238 |
|
|
|
Interest receivable |
8 |
|
|
|
Ordinary share receivable |
1 |
|
|
|
Total other receivables |
28,497 |
|
|
|
|
|
|
|
The Directors believe that these balances are fully recoverable.
7. Financial assets designated at fair value through profit or loss
|
|
|
|
|
||
|
|
|
|
|
30 September 2015 |
|
|
|
|
|
|
£ |
|
|
|
|
|
|
|
|
|
Financial assets designated at fair value through profit or loss |
|
|
|
54,053,643 |
|
|
|
|
|
|
|
|
During the period, the Company has invested the proceeds raised from the initial ordinary share issue in a portfolio of UK Micro Cap Companies in line with it investment strategy. These investments are predominantly comprised of companies whose securities are admitted to trading on the AIM, with a free float market capitalisation of less than £100 million at the time of purchase.
Fair value hierarchy
IFRS 13 'Fair Value Measurement' requires an analysis of investments valued at fair value based on the reliability and significance of information used to measure their fair value.
The Company categorises its financial assets according to the following fair value hierarchy detailed in IFRS 13, that reflects the significance of the inputs used in determining their fair values;
Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.
Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable variable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
|
|
|
|
|
||
|
|
Level 1 |
Level 2 |
Level 3 |
30 September 2015 Total |
|
|
|
£ |
£ |
£ |
£ |
|
|
Financial assets |
|
|
|
|
|
|
Financial assets designated at fair value through profit and loss |
54,053,643 |
- |
- |
54,053,643 |
|
Financial assets designated at fair value through profit or loss reconciliation
The following table shows a reconciliation of all movements in the fair value of financial assets categorised within Level 1 to 3 between the beginning and the end of the reporting period.
|
|
Level 1 |
Level 2 |
Level 3 |
30 September 2015 Total |
|
|
£ |
£ |
£ |
£ |
|
Opening valuation |
- |
- |
- |
- |
|
Movements in the period: |
|
- |
|
|
|
Purchases during the period |
58,630,422 |
- |
- |
58,630,422 |
|
Sales - proceeds during the period |
(11,560,756) |
- |
- |
(11,560,756) |
|
Realised gain on financial assets designated at fair value through profit or loss |
2,835,275 |
- |
- |
2,835,275 |
|
Unrealised gain on financial assets designated at fair value through profit or loss |
4,148,702 |
- |
- |
4,148,702 |
|
Closing valuation |
54,053,643 |
|
|
54,053,643 |
|
|
|
|
|
|
|
Total gains on financial assets for the period ended 30 September 2015 |
6,983,977 |
- |
- |
6,983,977 |
During the period ended 30 September 2015, there were no reclassifications between levels of the fair value hierarchy.
Please refer to note 2.3 for valuation methodology of financial assets designated at fair value through profit or loss. As at 30 September 2015, none of the investments held are deemed to be illiquid in nature and on this basis are not subject to any special arrangements.
8. Financial risk management
The Company's activities expose it to a variety of financial risks; market risk (including price risk, interest rate risk and foreign exchange risk), credit risk and liquidity risk.
8.1a Price risk
Price risk is the risk that the Company's performance will be adversely affected by changes in the markets in which it invests.
As at 30 September 2015, the Company held investments in a diversified portfolio of UK Micro Cap Companies, comprising companies with a free float market capitalisation of less than £100 million at the time of purchase.
The relatively small market capitalisation of Micro Cap Companies can make the market in their shares illiquid. Therefore prices of Micro Cap Companies are often more volatile than prices of larger capitalisation stocks, and even small cap companies.
While the Company does not include any specific limits placed on exposures to any industry sector, the Company does have investment limits and risk diversification policies in place to mitigate market and concentration risk. Investments limits in place include:
· the number of holdings in the investment portfolio will range from 30 to 50.
· no exposure in any investee company will exceed 10% of NAV at the time of the investment.
However, any significant event which affects a specific industry sector in which the investment portfolio has a significant holding could materially and adversely affect the performance of the Company. To mitigate market risk, the Board and Portfolio Manager actively monitor market prices throughout the financial period and meet regularly in order to consider investment strategy.
Please refer below for sensitivity analysis on the impact on the profit or loss account and NAV of the Company, if the fair value of the investments designated at fair value through profit or loss at the period end increased or decreased by 5%:
|
Current value |
30 September 2015 |
Increase by 5% |
Decrease by 5% |
|
|
|
|
Total |
|
|
|
|
|
£ |
|
|
|
Financial assets designated at fair value through profit or loss |
|
54,053,643 |
2,702,682 |
(2,702,682) |
|
|
|
|
|
|
The Directors consider a 5% movement to be reasonable given their assessment of the volatility of the AIM market during the period ended 30 September 2015. The above calculations are based on the investment valuation at the balance sheet date and are not representative of the period as a whole, and may not be reflective of future market conditions.
8.1b Interest rate risk
Interest rate risk is the risk that the fair value of financial instruments and related income from cash and cash equivalents will fluctuate due to changes in market interest rates.
The majority of the Company's interest rate exposure arises on the level of income receivable on cash deposits. Financial assets designated at fair value through profit and loss are equity investments and therefore the valuation of these investments and income receivable is not directly exposed to interest rate risk.
The following table details the Company's exposure to interest rate risks:
|
|
|
30 September 2015 |
30 September 2015 |
30 September 2015 |
|
|
|
Interest Bearing (*) |
Non-interest bearing |
Total |
|
|
|
£ |
£ |
£ |
|
Assets |
|
|
|
|
|
Financial assets designated at fair value through profit or loss |
- |
54,053,643 |
54,053,643 |
|
|
Cash and cash equivalents |
|
1,268,358 |
- |
1,268,358 |
|
Trade receivable - securities sold awaiting settlement |
|
- |
1,138,260 |
1,138,260 |
|
Other receivables (excluding prepayments) |
- |
27,259 |
27,259 |
|
|
Total assets |
|
1,268,358 |
55,219,162 |
56,487,520 |
|
Liabilities |
|
|
|
|
|
Other payables |
|
- |
(597,805) |
(597,805) |
|
Total liabilities |
|
- |
(597,805) |
(597,805) |
|
Total interest sensitivity gap |
|
1,268,358 |
54,621,357 |
55,889,715 |
* - floating rate and due within 1 month
Interest rate sensitivity analysis
If interest rates had changed by 50 basis points, (considered to be a reasonable illustration based on observation of current market conditions), with all other variables remaining constant, the effect on the net profit for the period would be as detailed below:
|
|
30 September 2015 |
|
|
£ |
|
Increase of 50 basis points |
6,342 |
|
Decrease of 50 basis points |
(6,342) |
8.1c Foreign currency risk
Foreign currency risk is the risk that the values of the Company's assets and liabilities are adversely affected by changes in the values of foreign currencies by reference to the Company's base currency. The functional currency of the Company is Pounds Sterling.
Throughout the period ended 30 September 2015, all transactions were in Pounds Sterling and on this basis the Company has not been exposed to any foreign currency risk during the period.
8.2 Credit risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Board of Directors has in place monitoring procedures in respect of counterparty risk which is reviewed on an ongoing basis.
The Company's credit risk is attributable to its financial assets designated at fair value through profit or loss, cash and cash equivalents and interest and other receivables.
In the opinion of the Board of Directors, the carrying amounts of financial assets best represent the maximum credit risk exposure at the balance sheet date. At the reporting date, the Company's financial assets exposed to credit risk amounted to the following:
|
|
|
|
|
|
|
30 September 2015 |
|
|
£ |
|
|
Financial assets designated at fair value through profit or loss |
54,053,643 |
|
|
Cash and cash equivalents |
|
1,268,358 |
|
Trade receivable - securities sold awaiting settlement |
|
1,138,260 |
|
Other receivables (excluding prepayments) |
|
27,259 |
|
Total assets |
|
56,487,520 |
The Company's main credit risk exposure is in its investment in UK Micro Cap Companies shown as financial assets designated at fair value through profit or loss. All investments held are admitted to trading on AIM.
The financial assets designated at fair value through profit or loss are held by BNP Paribas Securities Services S.C.A, Guernsey branch, the Company's custodian, in a segregated account. In the event of bankruptcy or insolvency of the Administrator, the Company's rights with respect to the securities held by the custodian may be delayed or limited.
All cash is placed with BNP Paribas Securities Services S.C.A., Guernsey Branch.
BNP Paribas Securities Services S.C.A, is a wholly owned subsidiary of BNP Paribas Securities Services S.A. which is publicly traded and a constituent of the S&P 500 Index with a long standing credit rating of A-1 from Standard & Poor's.
Credit risk of cash and custodian is mitigated by the Company's policy to only undertake significant transactions with leading commercial counterparties.
8.3 Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments as and when these fall due for payment.
Liquidity risk is monitored on an ongoing basis by the Board of Directors and Portfolio Manager so as to ensure that the Company maintains sufficient working capital in cash or near cash form so as to be able to meet the Company's ongoing requirements to pay accounts payable and accrued expenses.
In addition, the Company's liquidity management policy involves projecting cash flows and considering the level of liquid assets necessary to ensure the Company remains as a going concern.
The table below shows the residual contractual maturity of the financial liabilities as at 30 September 2015:
|
|
Less than 1 year |
1 to 5 years |
More than 5 years |
Total |
|
|
£ |
£ |
£ |
£ |
|
Financial liabilities |
|
|
|
|
|
Other payables |
(597,805) |
- |
- |
(597,805) |
|
Total undiscounted financial liabilities |
(597,805) |
- |
- |
(597,805) |
In accordance with Article 23(4)(a) and (b) of AIFMD Directive, the AIFM has assessed that the financial assets designated at fair value through profit or loss held by the Company are not deemed to be illiquid in nature, and as such, are not subject to any special liquidity arrangements and that the AIF has no new arrangements in place for managing liquidity.
9. Cash and cash equivalents
|
|
|
|
|
|
|
30 September 2015 |
|
|
|
£ |
|
Total cash and cash equivalents |
|
1,268,358 |
10. Other payables
|
|
30 September 2015 |
|
|
£ |
|
Portfolio management fees |
34,737 |
|
Portfolio management performance fees |
426,025 |
|
Administration fees |
7,083 |
|
AIFM fees |
13,611 |
|
Audit fees |
33,000 |
|
Broker fees |
41,507 |
|
Company Secretariat fees |
2,917 |
|
Custody fees |
642 |
|
Directors' fees |
23,944 |
|
Registrar fees |
625 |
|
Sundry expenses |
13,714 |
|
Total |
597,805 |
11. Contingent liabilities and commitments
As at 30 September 2015, the Company had no contingent liabilities or commitments.
12. Share capital
Authorised
The authorised share capital of the Company is represented by an unlimited number of redeemable ordinary shares at no par value.
Allotted, called up and fully-paid
|
Ordinary shares |
Number of shares |
Share premium £ |
Share capital £ |
|
Total issued share capital as at 2 October 2014 |
- |
- |
- |
|
Ordinary shares issued during the period |
50,643,164 |
- |
50,643,164 |
|
Total issued share capital as at 30 September 2015 |
50,643,164 |
- |
50,643,164 |
|
|
|
|
|
Ordinary shares
On incorporation, the Company issued one ordinary share at a price of £1.
On 27 November 2014, the Company issued a further 50,643,163 ordinary shares at a price of £1 per ordinary share, raising gross proceeds of £50,643,163 (net proceeds of £49,630,300). The costs and expenses of the initial placing of ordinary shares attributable to the Company amounted to a total of £1,012,863.
Each holder of ordinary shares is entitled to attend and vote at all general meetings that are held by the Company.
Each holder is also entitled to receive payment of a dividend should the Company declare such a dividend payment. Any dividends payable by the Company will be distributed to the holders of the Company ordinary shares, and on the winding-up of the Company or other return of capital (other than by way of a repurchase or redemption of shares in accordance with the provisions of the Articles and the Companies Law), the Company's surplus assets, after payment of all creditors, will be distributed among the holders of the Company ordinary shares.
The Board does not expect income from the investment portfolio to significantly exceed the anticipated annual running costs of the Company and therefore does not expect that the Company will pay significant, or any, dividends, although it reserves the right to do so.
No dividends have been declared or paid during the period.
Redemption mechanism
As the Company has been established as a closed-ended collective investment scheme, there is no right or entitlement attaching to the ordinary shares that allows them to be redeemed or repurchased by the Company at the option of the Shareholder.
The redemption mechanism allows the Board to redeem any number of shares at the prevailing NAV per share at the calculation date, (being the date determined by the Board for the calculation of the price to be paid on any particular exercise of the redemption mechanism), less the cost of redemption. This right will only be exercised in specific circumstances and for the purpose of returning capital growth.
Accordingly, assuming that the NAV exceeds £100 million, the Directors intend to operate the redemption mechanism to return the NAV back to around £100 million in order to:
· enable the Company to exploit fully the underlying investment opportunity and to deliver high and sustainable returns to shareholders, principally in the form of capital gains;
· enable portfolio holdings to have a meaningful impact on the Company's performance, which might otherwise be marginal within the context of a larger fund; and
· ensure that the Company can continually take advantage of the illiquidity risk premium inherent in Micro Cap Companies.
The Directors are not obliged to operate the redemption mechanism and will not do so if:
· calculation and publication of the NAV has been suspended; or
· the Directors are unable to make the solvency statement required by Guernsey law; or
· other circumstances exist that the Board believes make the operation of the redemption mechanism undesirable or impracticable.
Redemptions will, subject to compliance with all applicable law and regulation, be carried out pro rata to a shareholder's holding of ordinary shares, but all redemptions will normally be subject to a de minimis value to be returned of approximately £10 million (before costs). The Company will not redeem fractions of shares.
The price at which any ordinary shares are redeemed under the redemption mechanism will be calculated by reference to unaudited NAV calculations. To the extent that any redemption takes place at a time when the ordinary shares are trading at a significant premium to the prevailing unaudited NAV, shareholders may receive an amount in respect of their redeemed ordinary shares that is materially below the market value of those shares prior to redemption.
In order to facilitate any redemption, the Company may be required to dispose of assets within the investment portfolio. There is no certainty of the price that can be achieved on such sales and any sale price could be materially different from the carrying value of those assets. Consequently, the value received in respect of redeemed ordinary shares may be adversely affected where the Company is not able to realise assets at their carrying values. In addition, during any period when the Company is undertaking investment portfolio realisations, it may hold the sale proceeds (which could, in aggregate, be a material amount) in cash, which could impact the Company's returns, until the redemption is implemented and the cash is distributed to shareholders.
Investors should note that the redemption mechanism has a specific and limited purpose, and no expectation or reliance should be placed on the redemption mechanism being operated on any one or more occasions or as to the proportion of ordinary shares that may be redeemed or as to the price at which they will be redeemed. The redemption mechanism may also lead to a more concentrated and less liquid portfolio, which may adversely affect the Company's performance and value.
In the absence of the availability of the redemption mechanism, shareholders wishing to realise their investment in the Company will be required to dispose of their shares on the stock market. Accordingly, shareholders' ability to realise their investment at any particular price and/or time may be dependent on the existence of a liquid market in the shares.
13. Basic and diluted earnings per ordinary share
|
|
|
|
|
|
|
|
|
For the period from 2 October 2015 to 30 September 2015 |
|
|
|
|
£ |
|
Total comprehensive income for the period |
6,260,652 |
||
|
Weighted average number of shares during the period |
42,851,908 |
||
|
Basic and diluted earnings per share |
|
0.1461 |
|
|
|
|
|
|
|
|
|
|
|
14. Net asset value per share
|
|
|
|
|
|
|
30 September 2015 |
|
|
|
£ |
|
Net asset value |
|
55,890,953 |
|
Number of shares at period end |
50,643,164 |
|
|
Net asset value per share |
1.1036 |
|
|
|
|
|
|
|
|
|
15. Related party disclosure
The Manager and Portfolio Manager are deemed related parties and all transactions between these related parties were conducted on terms equivalent to those prevailing in an arm's length transaction. Please refer to note 4 for further detail.
The Directors are entitled to remuneration for their services. Please refer to note 5 for further detail.
For Director fees, portfolio management fees and AIFM fees payable as at 30 September 2015, please refer to note 10.
16. Material events after the Statement of Financial Position date
Management has evaluated subsequent events for the Company through 21 January 2016, the date the financial statements are available to be issued, and had concluded there are not any material events that require disclosure or adjustment of the financial statements other than those listed below:
On 29 October 2015, 16,679,405 new ordinary shares were issued at a price of 117.18 pence per share, raising gross proceeds of £19,544,927.
On 11 November 2015, 1,185,000 new ordinary shares were issued at a price of 118.25 pence per share, raising gross proceeds of £1,401,263.
17. Controlling party
In the Directors' opinion, the Company has no ultimate controlling party.
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Company information
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Board members |
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Advocates to the Company |
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Andrew Chapman (Chairman) |
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(as to Guernsey law) |
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Ian Burns (Chairman of the Audit Committee and Senior Independent Director) Trudi Clark (Chairman of the Remuneration and Nomination Committee and Management Engagement Committee) Mark Hodgson
All Directors were appointed on the 2 October 2014. |
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Carey Olsen P.O. Box 98 Carey House Les Banques St Peter Port Guernsey GY1 4BZ |
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Registered Office |
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Custodian |
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BNP Paribas House St Julian's Avenue |
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BNP Paribas Securities Services S.C.A., Guernsey Branch |
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St Peter Port Guernsey GY1 1WA
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BNP Paribas House St Julian's Avenue St Peter Port Guernsey GY1 1WA |
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Portfolio Manager |
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Independent Auditor |
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River and Mercantile Asset Management LLP 30 Coleman Street London EC2R 5AL
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PricewaterhouseCoopers CI LLP PO Box 321 Royal Bank Place 1 Glategny Esplanade St Peter Port Guernsey GY1 4ND |
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Manager |
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Administrator and Company Secretary |
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Carne Global AIFM Solutions (C.I.) Limited 8th Floor |
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BNP Paribas Securities Services S.C.A., Guernsey Branch |
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Union House Union Street St Helier Jersey JE2 3RF |
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BNP Paribas House St Julian's Avenue St Peter Port Guernsey GY1 1WA |
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BNP Paribas Securities Services S.C.A. Guernsey Branch is regulated by the Guernsey Financial Services Commission.
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Corporate Broker |
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Registrar |
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Winterflood Securities Limited The Atrium Building |
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Capita Registrars (Guernsey) Limited Longue Hougue House |
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Cannon Bridge House 25 Dowgate Hill London EC4R 2GA |
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St Sampson Guernsey GY2 4JN |
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Solicitors to the Company |
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Receiving Agent |
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(as to English law) CMS Cameron McKenna LLP |
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Capita Registrars Limited (trading as Capita Asset Services) |
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Mitre House 160 Aldersgate Street London EC1A 4DD |
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The Registry, 34 Beckenham Road Beckenham, Kent BR3 4TU
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Ends
Enquiries:
River and Mercantile UK Micro Cap Investment Company Limited - Andrew Chapman, Chairman
Tel: +44 (0) 1481 712171
River and Mercantile Asset Management LLP - Andrew Bollon, Chief Operating Officer
Tel: +44 (0) 20 7601 6262
BNP Paribas Securities Services S.C.A., Guernsey Branch - Kevin Curtis, Company Secretary
Tel: +44 (0) 1481 750858
A copy of the Company's Interim Financial Report will be available shortly from the Company Secretary, (BNP Paribas Securities Services S.C.A., Guernsey Branch, BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA), or will be circulated on the Company's website (microcap.riverandmercantile.com)
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.
River and Mercantile UK Micro Cap Investment Company Limited is regulated by the Guernsey Financial Services Commission
A copy of this announcement is and will be available, subject to certain restrictions relating to persons resident in restricted jurisdictions for inspection on the Company's website at microcap.riverandmercantile.com
This information is provided by RNS
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