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Threadneedle UK Sel (UKT)

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Friday 21 April, 2017

Threadneedle UK Sel

Annual Financial Report

RNS Number : 0513D
Threadneedle UK Select Trust Ltd
21 April 2017
 

Threadneedle UK Select Trust Limited

(the "Company")

Registered No:  475

 

21 April 2017

Announcement of Annual Results 

The information set out in this announcement is the full unedited Annual Financial Report for the year ended 31 December 2016 (the "AFR") of the Company as approved by the Board of Directors on 21 April 2017.  The AFR is expected to be sent to all shareholders during May 2017.

 

Enquiries:

Secretary

JTC Fund Solutions (Guernsey) Limited

Tel: + 44 (0) 1481 702400

 

 

Broker

Canaccord Genuity Limited                                                                        

Andrew Zychowski / Helen Goldsmith

Tel: +44 (0) 20 7523 8000


 

 

 

 

 

 

 

Threadneedle UK Select Trust Limited

 

 

 

 

Annual Financial Report for the year ended 31 December 2016

 

 

 

 

 



Threadneedle UK Select Trust Limited

 

Contents

Introductory Information and Investment Objective

2

Proposed reconstruction and winding up

2

Financial Highlights

3

Dividends

3

Directors and Advisers

4

Chairman's Statement        

5

Investment Manager's Report

7

The Portfolio

9

Industry Classification Benchmark Sector Distribution

10

Directors' Report

11

Viability Statement

23

Statement of Principal Risks and Uncertainties

24

Directors' Responsibilities Statement

26

Report of the Audit Committee

27

Independent Auditor's Report

32

Statement of Comprehensive Income

39

Statement of Financial Position

40

Statement of Changes in Net Assets Attributable to Shareholders

41

Statement of Cash Flows

42

Notes to the Financial Statements

43

Ten Year Record - Unaudited

60

                                                                               

 

Threadneedle UK Select Trust Limited

Introductory information

The ordinary shares of Threadneedle UK Select Trust Limited (the "Company") have been admitted to the Official List of the UK's Financial Conduct Authority and to trading on the London Stock Exchange's Main Market for listed securities.

The Company's share price is published daily under Investment Companies in the Share Information Section in the Financial Times.  In addition it is published every Monday on the business pages of The Guernsey Press and the Jersey Evening Post.

Proposed reconstruction and winding up of the Company

On 17 March 2017, the Company released an announcement stating that it had agreed heads of terms with the board of Henderson High Income Trust plc ("HHI") and Henderson Investment Funds Limited ("Henderson") in respect of the issue of new ordinary shares in HHI to the Company's Shareholders who elect to roll over their investment in the Company, to be effected by way of a members' voluntary solvent scheme of reconstruction of the Company (the "Scheme")(the "Proposals"). Under the Scheme, Shareholders will also be offered the opportunity to exit their investment in the Company for cash at close to net asset value. The Proposals will be subject to approval by the shareholders of both companies in addition to required regulatory and tax approvals. The Board expects to convene the relevant EGM of the Company in June 2017 and the Scheme is expected to become effective by the end of June 2017. The notice of EGM is expected to be sent to all Shareholders in late May, 2017.

Further details of the Proposals are given in the Chairman's Statement and the Directors' Report.

Investment objective and policy

The Company's current investment objective is to provide Shareholders with a total return in excess of the total return on the FTSE All-Share Index, together with a progressive dividend policy. 

The Company is permitted to invest in any security listed or quoted on any UK stock exchange provided that no less than 80 per cent of its gross assets at the time an investment is made are invested in constituents of the FTSE All-Share Index.

 

 



Financial Highlights












31 December 2016


31 December 2015

Net asset value per share



209.07p


189.40p

Equity Shareholders' interest (1)



£46.89m


£41.94m

Revenue return on ordinary activities for the financial year after taxation

£1.25m


£0.90m

Capital return on ordinary activities for the financial year after taxation

£4.22m


£1.41m

Revenue return per ordinary share


5.61p


4.05p

Capital return per ordinary share


18.97p


6.40p

Dividend per ordinary share (2)



4.55p


4.45p

Share Price(3)



182p


166.5p

Net asset value total return (4)



11.8%


5.7%

FTSE All-Share total return



16.8%


1.0%

Ongoing charges (5)



1.4%


1.4%

(1) At the start of 2016, the Company held 2,159,026 ordinary shares in treasury. From the shares held in treasury, 283,555 ordinary shares were issued as scrip dividends during the year. 1,875,471 ordinary shares were held in treasury as at 31 December 2016. These have been held for re-sale in order to satisfy general market demand and/or to satisfy elections under the scrip dividend scheme.

(2)  The dividend figures include the second interim dividend declared for the year.

(3)  Source: Daily Official List mid market closing price. 

(4)  Source: Datastream/Columbia Threadneedle Investments. Basis: Gross net income reinvested.

(5)  The ongoing charge expense excludes performance fee, withholding tax and finance costs.

Dividends 

Basic earnings per share for the year amounted to 24.58p (2015: 10.45p) and revenue earnings per share for the year amounted to 5.61p (2015: 4.05p). The Board declared an interim dividend of 1.95p per share (six months ended 30 June 2015: 1.90p), which was paid on 31 October 2016 to Shareholders registered as at close of business on 19 August 2016. 

A second interim dividend in respect of the year ended 31 December 2016 of 2.60p per share has been declared, which will be paid on Friday, 12 May 2017 to Shareholders registered as at close of business on Thursday, 16 March 2017 (2015: second interim dividend 2.55p). This brings the total dividend for the year to 4.55p (2015: 4.45p). 

If the proposed reconstruction and winding up of the Company does not become effective and if the continuation vote required to be proposed at the Company's next annual general meeting (which will be held if the reconstruction and winding up proposals do not become effective) is passed, the Company intends to continue with the policy of paying two interim dividends per year.

 

Directors

D J Warr (Chairman), resident in Guernsey, Non-executive Chairman. He is a fellow of the Institute of Chartered Accountants in England and Wales and joined the Board in 2006. He is also a non-executive director of Breedon Group Plc, Acorn Income Fund Limited, Aberdeen Frontier Markets Investment Company Limited and Hadrian's Wall Secured Investments Limited.

J G West FCA, resident in the UK, Non-executive and senior independent director. He joined the Board in 1997.  He is a chartered accountant, who has spent his career in asset management.  He is currently the Chairman of CQS New City High Yield Fund Limited and a director of a number of public and private companies, including JP Morgan Income and Capital Trust Plc. He is also Chairman of Associated British Foods Pension Fund Limited and former chief executive of Lazard Asset Management Limited.

S A Farnon, resident in Guernsey, Non-executive director and Audit Committee Chairman. She joined the board in 2012. She is a chartered accountant and was a banking and finance Partner with KPMG Channel Islands from 1990 until 2001, Head of Audit KPMG Channel Islands and a former member of The States of Guernsey Public Accounts Committee. She is a former Commissioner of The Guernsey Financial Services Commission and currently a non-executive director of Ravenscroft Limited, HICL Infrastructure Fund Limited, Breedon Group Plc, Standard Life Investments Property Income Trust Limited and Apax Global Alpha Limited.

R P King, resident in Guernsey, Non-executive director and Risk Committee Chairman. He joined the board in 2014. He is a non-executive director for a number of open and closed ended investment funds and companies including Chenavari Capital Solutions Limited and Weiss Korea Opportunities Fund Limited. Prior to becoming an independent non-executive director, he worked in the offshore finance industry specialising in the operational administration of offshore open and closed ended investment funds.

Advisers
 

Secretary, Administrator and Registered Office                         Registrar

JTC Fund Solutions (Guernsey) Limited                                         Capita Registrars (Guernsey) Limited

Ground Floor                                                                                        Mont Crevelt House

Dorey Court                                                                                          Bulwer Avenue

Admiral Park                                                                                         St Sampson

St Peter Port                                                                                          Guernsey GY2 4LH

Guernsey GY1 2HT                                                                              0870 162 3100

01481 702400                                                                                        

 

Investment Manager                                                                           Broker

Threadneedle Asset Management Limited                                      Canaccord Genuity Limited

78 Cannon Street                                                                                  88 Wood Street

London EC4N 6AG                                                                              London EC2V 7QR

020 7464 5000                                                                                        020 7523 8000

                                                                                               

 

Banker and Custodian                                                                       Auditor

HSBC Bank plc                                                                                     Deloitte LLP

8 Canada Square                                                                                  Regency Court                                                    

London E14 5HQ                                                                                 Glategny Esplanade                                            

020 7991 888                                                                                          St Peter Port                                         

                                                                                                                Guernsey GY1 3HW                           

Solicitors and adviser                                                                         01481 724011

Dickson Minto 

Broadgate Tower

20 Primrose St

London EC2A 2EW

020 7628 445


 

Chairman's Statement

 

Review of Performance

I am pleased to present your Company's Annual Financial Report for the 12 months to 31 December 2016.

For the year, the net asset value total return was 11.8% which compares with the 16.8% total return from the FTSE All-Share Index, the benchmark against which the Investment Manager's performance is measured. A more detailed explanation of the investment performance is provided in the Investment Manager's Report on page 7.

Share Price and Discount

The discount at which the shares trade, relative to their net asset value, was 12.9% at the end of the year compared with 12.1% at the start of the year. Following the Company's announcement on 17 March 2017 of a proposed reconstruction and winding up of the Company the Company's discount has narrowed to 3.2% as at 31 March 2017.

Continuation Vote and the Company's Future

As indicated above, on 17 March 2017, the Company announced that it had entered into Heads of Terms with the Board of Henderson High Income Trust plc ('HHI') in relation to a reconstruction and winding up of the Company (the "Proposals"). Under the Proposals, UKT shareholders are being offered the opportunity to elect to receive new ordinary shares issued by HHI and/or to exit their investment for cash at close to net asset value. The Proposals are subject to approval by shareholders of both companies in addition to the required regulatory and tax approvals.

With a Continuation Vote required at the 2017 Annual General Meeting the Board decided to conduct an extensive review of the options available with regard to the future of the Company. As a consequence of this review the Board concluded that it was not in the interests of shareholders for the Company to continue in existence as a listed company given its modest market capitalisation, relatively high ongoing charge ratio and the lack of liquidity in the Company's shares.

Having reached the above conclusion, the Board then considered if an orderly wind down of the Company was most appropriate or whether it was preferable to seek the alternative of rolling over into a larger, more liquid closed ended company thus offering shareholders a choice. After considering a number of potential rollover candidates, the Board concluded that HHI offered a solution, as outlined above, which would be attractive to shareholders and an alternative to electing to receive cash.

It is envisaged that a circular and notice of the general meeting setting out details of the Proposals will be sent to shareholders in May 2017 with the relevant general meeting likely to be convened for late June 2017.

Gearing

During the year the Company had a revolving loan facility of £5 million with Lloyds Bank Plc which is more fully described in note 12 to these Financial Statements. At the year end the Company had utilised £3m of this facility. As explained in note 12 this facility ceased at the renewal date of 26 March 2017.

Earnings and Dividend per Share

The revenue return per share for 2016 was 5.61p (2015: 4.05p)

 

A first interim dividend of 1.95p per share in respect of the financial year 2016 was declared on 13 August 2016 and on 3 March 2017 a second interim dividend of 2.60p per share was declared.

Chairman's Statement (continued)

 

Annual General Meeting

The Company's Annual General Meeting is scheduled for 17 August 2017 but will be subject to the outcome of the EGM to be held in late June relating to the proposals referred to above.

Conclusion

Given that the Company has been in existence since 1959 it is disappointing that the Board has been unable to find an efficient means by which the Company can maintain its independence. I would though like to emphasise that the Board have been diligent in their responsibilities to shareholders and mindful of the Company's relevance in a changing investment environment and believe that the Proposals are equitable and in the best interest of shareholders.

I would like to take this opportunity to thank my Board colleagues for their commitment over what has been a challenging period for the Company. I would also like to thank Dickson Minto for helping guide us to this point and also our Investment Manager who has remained committed to the task of providing a positive investment performance.

 

D J Warr

Chairman

21 April 2017



 

Investment Manager's Report

 

Market Background

The FTSE All-Share index delivered a total return of 16.8% in 2016. Large-caps and overseas earners led the rally; the FTSE 100 outperformed the broader index and finished 2016 at new highs. The energy sector was one of the best performers within the benchmark. Materials also performed strongly, tracking gains in commodity prices. However, telecommunications suffered as did real estate stocks.

In early 2016, domestic and overseas equities were rattled by low and volatile oil prices, disappointing Chinese economic data and central banks' actions. Later, market participants focused on the 'Brexit' referendum. The unexpected result rocked markets but UK equities subsequently recovered, led by overseas earners as sterling weakened. Markets also cheered Theresa May's swift appointment as the new prime minister, and some positive post-referendum indicators. The Bank of England ("BoE") announced stimulus measures in August (rate cuts, cheaper bank funding and more quantitative easing) but later suggested another rate cut in 2016 was unlikely.

In November 2016, the High Court ruled that parliamentary approval was necessary to invoke Article 50; the government subsequently appealed to the Supreme Court. The new UK chancellor announced an increase in infrastructure spending in the Autumn Statement but also stated that fiscal deficits and government debt were likely to exceed March's estimates.

Towards year-end, investors turned their attention to politics elsewhere - notably Donald Trump's unexpected election victory and Italian voters' rejection of constitutional reforms. Oil recouped earlier losses as the Organisation of Oil Producing Countries ("OPEC") announced plans to cut output.

Performance Review

In 2016, the portfolio generated a total gross return of 15.0%, but underperformed its benchmark (the FTSE All-Share) which rose 16.8%.

The fund's relative underperformance was largely attributable to unfavourable asset allocation decisions. Our overweight in consumer discretionary stocks and underweight in energy proved particularly unhelpful. However, our decision to underweight financials and marginally overweight materials added some value.

Security selection detracted in aggregate, chiefly stock picks in financials and materials. However, our selections of industrial and consumer discretionary stocks had a favourable impact on performance. Therefore, in aggregate, our positions in these sectors added alpha as the positive effects from stock selection offset the negative effects from asset allocation.

At the stock level, our decision to exclude Vodafone and Lloyds Banking Group proved advantageous. Shares of Lloyds were initially hurt by the government's decision to postpone the sale of its stake in the bank and later by the Brexit-induced uncertainty. Vodafone's shares suffered towards year-end due to the sell-off in defensives following Trump's victory and as investors reacted unfavourably to the company's announcement that it had sold its fixed-line operations to Deutsche Telekom. Our holdings in energy company John Wood Group and miner Rio Tinto added value as the prices of oil and most other commodities strengthened in 2016.

The zero weights in BP and Glencore proved unhelpful as did the absence of HSBC when it rallied. We sold HSBC earlier in the year as we felt that it faced relative diseconomies of scale.

 

Other detractors included Crest Nicholson, as market sentiment turned against house builders in the run-up to and aftermath of the Brexit referendum, and BT. The telecommunications company was initially hurt by investors' concerns about the scale and speed of the company's restructuring and later by Brexit-related concerns.

Investment Manager's Report (continued)
 
Outlook

 

While the overall market environment is not changing materially, we feel that a little more caution is now required as we move into the post-reporting 'quiet' season in the UK.

The Federal Reserve is clearly on a tightening path which will ultimately lead to a slowing in the US economy, and the 'Trump Trade' seems to be tiring as its iconic figurehead appears incapable of enacting policies while valuations have clearly moved way ahead of fundamentals.

In the UK, we are now seeing evidence of falling real wage growth and there are constraints on the ability of consumers to borrow.

We remain wary of commodities. We are also cautious towards banks and lending companies; the sector could face headwinds if the countercyclical capital buffer (which was removed post-Brexit) is re-imposed. Furthermore, in our view, the BoE will be keen to clamp down on imprudent lending behaviour.

We are looking at the defensive growth areas of the market for incremental purchases. These stocks generally have strong track records of downside protection in unfavourable market conditions and also offer investors the ability to benefit from the power of compounding earnings.

A snap UK General Election has been called, which will be held on the 8th June. Political headlines will continue to create some volatility in global markets, but this will provide more opportunities for investors who are willing and able to focus on long-term fundamentals.

 

Chris Kinder

Portfolio Manager

Columbia Threadneedle Investments

 

21 April 2017

 

 

 



The Portfolio as at 31 December, 2016

 


Company

Market Value


Company

 Market Value

 



£'000



£'000

 







 

1

Royal Dutch

     2,316

43

Berendsen

        453

 

2

Glaxosmithkline

     1,983

44

Breedon

        434

 

3

Prudential

     1,686

45

Barclays Ordinary

        434

 

4

Imperial Tobacco

     1,570

46

Pearson

        423

 

5

Astrazeneca

     1,541

47

Bellway

        417

 

6

BT Group

     1,488

48

Derwent London

        398

 

7

Unilever

     1,488

49

Rolls Royce Holdings

        396

 

8

Reckitt Benckiser Group

     1,457

50

Grainger

        388

 

9

Legal And General

     1,428

51

Inchcape

        387

 

10

Rio Tinto

     1,410

52

Booker Group Plc

        361

 

11

British American Tobacco

     1,333

53

Howden Joinery Group

        354

 

12

Diageo

     1,273

54

Stagecoach Group

        328

 

13

London Stock Exchange

     1,228

55

Greene King

        326

 

14

Reed Elsevier

     1,164

56

PZ Cussons

        264

 

15

Wood Group John

     1,148

57

Wetherspoon (JD)

        261

 

16

Intercontinental Hotels

     1,129

58

Headlam Group

        248

 

17

Smith & Nephew

     1,082

59

Aggreko

        228

 

18

ITV

     1,003

60

Hunting

        226

 

19

CRH

        966

61

Rolls Royce RTS

        3

 

20

GKN

        933




 

21

Wolseley

        933


Total Valuation

48,397

 

22

Crest Nicholson

        891




 

23

Sage Group

        837




 

24

Johnson Matthey

        835




 

25

Compass Group

        814




 

26

St James's Place

        807




 

27

Carnival

        755




 

28

Rentokil

        717




 

29

BAE Systems

        649




 

30

RSA Insurance Group

        623




 

31

Merlin Entertainment

        618




 

32

Royal Mail

        603




 

33

Standard Chartered

        594




34

Melrose Industries

        576




35

Daily Mail & General Trust

        564




 

36

Smiths Group

        549




 

37

FDM Group

        537




 

38

Burberry

        518




 

39

Smith (DS)

        515




 

40

Land Securities Group

        514




 

41

Intermediate Capital Group

        510




 

42

Schroders

        483




 







 

Industry Classification Benchmark ("ICB") Sector Distribution



Total

Total



2016

2015

Sector Classification


%

%

Oil  and Gas




Oil and gas producers


4.9

4.8

Oil Equipment, Services and Distribution


2.9

1.9



7.8

6.7

Industrials




Construction and materials


4.2

0.9

Aerospace and defence


2.3

3.1

General industrials


2.3

3.0

Industrial engineering


-

1.9

Support services


5.7

6.3

Industrial transportation


1.4

1.2



15.9

16.4

Basic Materials




Chemicals


1.8

1.3

Mining


3.0

2.1



4.8

3.4

Consumer goods




Automobiles and parts


2.0

2.2

Beverages


2.7

2.3

Household goods and home construction


6.4

6.6

Tobacco


6.3

6.4

Personal goods


4.8

4.5



22.2

22.0

Consumer Services




Travel and leisure


9.0

9.1

Food and drug retailers


0.8

1.5

General retailers


0.8

-

Media


6.7

5.2



17.3

15.8

Health Care




Pharmaceuticals and biotechnology


7.5

7.5

Health care equipment and Services


2.3

2.2



9.8

9.7

Telecommunications




Fixed line telecommunications


3.2

4.6



3.2

4.6

Technology




Software and computer services


2.9

3.3

Technology hardware & Equipment


-

0.5



2.9

3.8

Financials




Banks


2.2

4.2

Financial services


4.7

4.1

Real estate investments & services


0.8

0.9

Real estate investment trusts


1.9

1.3

Non-life insurance


1.3

1.1

Life assurance


8.4

8.1



19.3

19.7

Net current liabilities


(3.2)

(2.1)

Net assets


100.0

100.0

Note: The distribution of investments is based on the valuations at 31 December 2016 and at 31 December 2015. All of the investments are listed or quoted on the London Stock Exchange.



Directors' Report

 

The directors present their report and the annual financial statements for the year ended 31 December 2016 with comparatives for the year ended 31 December 2015. The directors confirm that the annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.

Principal activities
 

The principal activity of the Company during the year was that of acting as an investment company. The Company is an authorised closed-ended investment scheme regulated by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended.  The Company's ordinary shares have been admitted to the Official List of the UK Listing Authority with a premium listing and to trading on the London Stock Exchange's Main Market for listed securities.

Revenue and dividend

The statement of comprehensive income set out on page 39 shows a profit for the year amounting to £5,472,000 (2015:  £2,309,000).  The directors have declared a second interim dividend of 2.60p which, together with the first interim dividend of 1.95p, makes a total of 4.55p for the year (2015: 4.45p)

The second interim dividend will be paid on 12 May 2017 to ordinary Shareholders on the register on 17 March 2017 and a scrip dividend alternative has been offered.

Assets

At the year end, the net assets attributable to the ordinary Shareholders were £46,888,000 (2015: £41,940,000).  Based on this figure, the net asset value attributable to each ordinary share was 209.07p (2015: 189.40p).

Share capital 

During the year, no ordinary shares were repurchased by the Company. The authority allowing the Company to purchase its own shares expires on the date of the 2017 annual general meeting and the Board may seek renewal of this authority at that annual general meeting, subject to the outcome of the extraordinary general meeting intended to be held in June 2017, further details of which are given on pages 21 and 22 of this directors' report.

During the year, in the ordinary course of business, 283,555 ordinary shares were issued from the treasury reserve to satisfy elections by ordinary Shareholders to receive shares in lieu of cash dividends (2015:  254,894). 

Save for issues of treasury shares to satisfy demand for scrip, issues of treasury shares into the market for cash cannot be made at a discount to NAV and will be subject to pre-emption rights unless the Company has shareholder authority to sell such shares without regard to pre-emption, which authority is sought at each annual general meeting.  For the avoidance of doubt, pre-emption rights do not apply in respect of the shares issued out of treasury to satisfy existing Shareholders' elections for scrip. 

Further details of the sales of treasury shares are given in note 14 to the financial statements.



Directors' Report (continued)

Share buyback policy

The Board may from time to time use its share buyback powers with the objective of narrowing any discount to their underlying net asset value at which the Company's shares trade in normal market conditions. However, Shareholders should note that the Board is not bound to undertake share buybacks and will do so entirely at its own discretion bearing in mind, inter alia, available cash, the remaining shareholder authority the Company has to conduct share buybacks and the ability of the Company to satisfy the statutory solvency test or any other Guernsey companies law requirements. There is no guarantee that the Board will decide to exercise its buyback powers in any particular case or that it will be successful in achieving its objective.   

Substantial shareholdings 

As at 31 December 2016, the following had notified the Company or were recorded on the Company's share register as holding notifiable interests in the Company's voting rights:


31 March 2017

31 December 2016




Ameriprise Financial Inc

22.13%

22.13%

Mr J.M. & Mrs A.E. Le Pelley

10.59%

10.59%

State Street Nominees Limited

17.30%

17.30%

Huntress (CI) Nominees Limited

10.93%

10.93%

Mr G.E. Green

6.73%

6.73%

Vidacos Nominees Limited

4.69%

4.69%

 
As at 31 December 2016, there had been no other notifiable interests in the Company's voting rights reported to the Company. 

 

Directors

The directors are responsible for the determination of the Company's investment objective and policy and have overall responsibility for the Company's activities. The directors have put procedures in place to ensure that the Company meets current corporate governance good practices.

Details of the current Board's composition, including each director's role and other significant commitments, are provided on page 4. 

None of the directors has a contract of service with the Company and no contract or arrangement in which any director was materially interested and which was significant in relation to the Company's business subsisted during or at the end of the year.  Furthermore, the directors are not entitled to any minimum period of notice or to compensation in the event of their removal as a director.

The directors who served on the Board during the year, together with their beneficial interests and those of their spouses and dependent children as at 31 December, 2015 and 2016 were as follows:


31 December, 2016

31 December, 2015


Shares

Shares

D.J. Warr

152,688

148,652

S.A. Farnon (2015: S.A Farnon and as Executor of CRW Best)

120,737

94,954

R.P. King

-

-

J.G. West

34,584

34,584

Directors' Report (continued)

Directors (continued)

There have been no changes in the current directors' interests in the shares of the Company between 31 December 2016 and 31 March 2017.

Gearing

The Company previously entered into a £5 million revolving loan facility agreement with Lloyds Bank Plc, which expired on 26 March 2017.  The facility was used during the year under review to gear the Company's investment portfolio, with the aim of enhancing returns to Shareholders, and the Board sought to target a level of borrowing approximately equal to 10% to 20% of the Company's net asset value.  Interest accrued on the loan at 1.1% over LIBOR and it was repayable at the option of the Company.  A non-utilisation fee of 0.39% per annum was payable on any portion of the facility not drawn down. 

After the year end and in light of the proposed reconstruction and potential winding up of the Company, the Board agreed that it would not be in the Company's best interests to incur the costs of renewal of the loan facility and accordingly the loan was repaid when the loan facility expired on 26 March 2017.

Corporate governance 

a) Statements of compliance

The UK Financial Conduct Authority's Disclosure Guidance and Transparency Rules require all overseas companies with a premium listing (which includes the Company) to include a corporate governance statement in its directors' report, which must contain a reference to the corporate governance code to which the Company is subject and / or the corporate governance code which the Company may have voluntarily decided to apply and / or all relevant information about the corporate governance practices applied beyond the requirements under the Company's own national law. 

The Association of Investment Companies (the "AIC"), of which the Company is a member, has published its Code of Corporate Governance for Investment Companies dated February 2015 (the "AIC Code") and the Corporate Governance Guide for Investment Companies, also dated February 2015 (the "AIC Guide"), which incorporates the UK Financial Reporting Council's (the "FRC") UK Corporate Governance Code and the AIC Code.  The FRC has confirmed that "it remains our view that by following the AIC Corporate Governance Guide boards of investment companies should fully meet their obligations in relation to the UK Corporate Governance Code and Paragraph 9.8.6 of the Listing Rules."

The Board has considered the principles and recommendations of the AIC Guide. The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Corporate Governance Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to the Company. The Board considers that reporting against the principles and recommendations of the AIC Code will provide better information to Shareholders.

The directors believe that the Company has complied with the provisions of the AIC Code, where appropriate, and that it has complied throughout the year with the provisions where the requirements are of a continuing nature.



Directors' Report (continued)

Corporate governance (continued) 

a) Statements of compliance (continued)

The Board has noted the publication by the AIC of an updated AIC Code of Corporate Governance and Corporate Governance Guide in July 2016 (the "Updated AIC Code & Guide") following the FRC's publication of an updated version of the UK Corporate Governance Code in April 2016, which applies to accounting periods beginning on or after 17 June 2016.  The directors have put in place further measures designed to ensure compliance with the Updated AIC Code and Guide and, if the Company continues in its current form into 2018, the Board expects to report against the Updated AIC Code and Guide in the next annual financial report for the year ended 31 December 2017.

On 30 September 2011, the Guernsey Financial Services Commission published its Finance Sector Code of Corporate Governance (the "GFSC Code"), which came into effect on 1 January 2013. The GFSC Code provides a framework which applies to all regulated companies in the finance sector in Guernsey. The GFSC Code deals with governance issues under several topics including the Board, accountability, risk management, disclosure and reporting, remuneration and Shareholder relations. Companies which report against the AIC Code are deemed to meet the requirements of the GFSC Code.

b) The Board 

The Company is led and controlled by a Board comprising non-executive directors, all of whom have wide experience and are considered to be independent.  The Board believes that it is in the Shareholders' best interests for the Chairman, Mr Warr, and the senior independent director, Mr West, to be the two primary points of contact for all matters relating to the governance of the Company.

The appointment of directors is considered by the Board who sit on the Nomination Committee, further information on which is given below.

The Board meets regularly, normally quarterly, with additional meetings should it be considered appropriate to discuss specific issues.  The table below lists the number of Board and Committee meetings attended by each director during the year ended 31 December 2016.


Scheduled

Board

Other

Board

Audit Committee

Nomination Committee

Risk Committee

*M.E.& R. Committee

Number of Meetings

4

8

4

1

4

1

D.J. Warr

4

7

4

1

4

1

J. G. West

4

0

4

1

4

1

S.A. Farnon

4

7

4

1

4

1

R.P. King

4

6

4

1

4

1

 

*Management Engagement and Remuneration Committee.

During the year the Board held eight ad hoc meetings at short notice to deal with various operational matters.  Because of the short notice and the cost to Shareholders which would ensue if Mr West attended, such meetings were held between the Guernsey-resident directors, with Mr West making his views on any proposals known to the Board in advance of such meetings whenever possible.

The Company did not employ any personnel. 



Directors' Report (continued)

Corporate governance (continued)

c) Committees

The Board has an Audit Committee chaired by Mrs Farnon, a separate report from such committee being provided below, and the Board also has a Nomination Committee chaired by Mr Warr. The Board has also created a Management Engagement and Remuneration Committee, chaired by Mr Warr.  As part of its compliance with the Alternative Investment Fund Managers Directive (the "AIFMD"), as implemented by the FCA, the Board maintains a Risk Committee under the chairmanship of Mr King.

d) Nomination Committee, Board Composition and Succession Planning

In addition to conducting an evaluation on the composition of the Board, in terms of size, skills and expertise, a formal evaluation of the Board's own performance, as well as its Committees, is undertaken annually by the Nomination Committee. The Nomination Committee consists of all non-executive directors.

The objectives of Board planning in terms of its composition and succession are to ensure that the Board collectively comprises of fit and proper individuals with the capability to direct the Company in the best interests of its Shareholders.  All new directors are provided with an induction by the Secretary and the Board.

The Board currently consists of four non-executive directors, all of whom are independent of the Investment Manager. Mr Warr and Mr West have served on the Board for more than nine years. Under the AIC Code, Mr Warr and Mr West are not considered to be fully independent by reason of their appointment as directors of the Company for more than nine years. However, the Board takes the view that they are independent in judgement and character. Therefore the Board has resolved that all directors will stand for re-appointment at each AGM, so that the Shareholders have the opportunity to consider each director's continuing involvement with the Company.

Directors' fees are recommended by the full Board. The emoluments of the directors for the year, with comparative figures for 2015, were as follows:


2016 Fees

2015 Fees





£

£

D.J. Warr

36,000

32,250

S.A. Farnon

27,000

27,000

R.P. King

27,000

18,710

J.G. West

24,000

24,000

J.M. Le Pelley (retired 29 May 2015)

-

12,340


114,000

114,300

 

The figures above represent emoluments earned as directors during the relevant financial year, which are paid quarterly in arrears. The directors receive no other remuneration or benefits from the Company other than the fees stated above. The directors are paid out of pocket expenses for attendance at Board meetings and for any other expenditure they incur when acting on the Company's behalf.



Directors' Report (continued)

Corporate governance (continued)

e) Management Engagement and Remuneration Committee

The Management Engagement and Remuneration Committee consists of all non-executive directors and meets when necessary, usually at least annually. The Committee has been delegated the responsibility for monitoring, reviewing and making recommendations to the Board on all aspects of the management and administration of the Company's assets and corporate records and other ancillary services provided by each of Threadneedle Asset Management Limited, JTC Fund Solutions (Guernsey) Limited, Canaccord Genuity Limited, Capita Asset Services and HSBC Bank Plc, as well as any other significant or long-term service providers.  The Management Engagement and Remuneration Committee also makes recommendations to the Board on any proposed variation of the terms of the Investment Management Agreement and any relevant agreement with any other service provider which the Committee considers necessary or desirable.

The Committee is authorised to seek any information it requires from any employee or agent of the Company in order to perform its duties. All agents of the Company are directed to co-operate with any reasonable request made by the Committee. 

The Committee is authorised by the Board to obtain, at the Company's expense, outside legal or other professional advice on any matters within its terms of reference if it considers necessary.

f) Risk Committee

As stated above, the Board has a Risk Committee under the chairmanship of Mr King as part of its compliance with the AIFMD.

The principal function of the Risk Committee is to review on a continual basis the Company's risk management systems, which allow the Company to identify, measure, manage and control investment risks and other related risks to which the Company may be exposed. The Committee receives regular risk management reporting from the Investment Manager and also meets regularly with the Administrator to discuss matters relevant to its oversight duties.  This Committee has a responsibility to provide such reporting as requested by the Audit Committee to enable the Audit Committee to review the effectiveness of the Company's risk management function.

g) Committees' Terms of Reference 

The Terms of Reference for all Committees are available for inspection at the Company's registered office during normal business hours. 

h) Relations with shareholders 

All Shareholders are encouraged to participate in the Company's annual general meeting (the "AGM")  and any such extraordinary general meetings (each an "EGM") as may be convened from time to time to consider specific proposals.  All directors and one or more representatives of the Investment Manager normally attend the AGM, at which Shareholders have the opportunity to ask questions and discuss matters with the directors and the Investment Manager.  All directors normally attend EGMs.

It is recognised that the AIC Code requires notices of AGMs to be despatched at least 20 working days before the meeting.  The Company will continue to comply with this provision in 2017 should the 2017 AGM be convened.



Directors' Report (continued)

Corporate governance (continued)

i) Accountability and audit

a) Statement of going concern

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

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

·      The values of the Company's assets were as at 31 December 2016 and as at the date of this report greater than the values of its liabilities;

·      The Company had sufficient liquidity to meet all on-going expenses as at 31 December 2016;

·      The portfolio of investments held by the Company consists mostly of listed investments which are readily realisable and therefore the Company expects, in the event that insufficient income is received to meet its operating expenses, to be able to realise sufficient investments for cash to meet its liabilities as they fall due; and

·      As at 31 December 2016, the Company had £3 million of external borrowings.  The loan facility expired on 26 March 2017, on which date the entire amount outstanding under the facility, together with all accrued interest thereon, was repaid, so the Company now has no external borrowings, nor any other form of material financial indebtedness.

 

In accordance with the Company's Articles of Incorporation the Shareholders are due to have an opportunity to vote on the Company's continuation at the 2017 AGM. However, that vote will not be required and the 2017 AGM not held, if the proposals in relation to the reconstruction and winding up of the Company to be put to Shareholders at the EGM expected to be held in late June 2017 are approved and become effective. This creates a material uncertainty on going concern which is further explained in this director's report, note 2b of the financial statements as well as in the separate long-term viability statement included later in this annual financial report.

b) Internal controls

The directors acknowledge that they are responsible for establishing and maintaining the Company's system of internal controls and reviewing its effectiveness. Internal control systems are designed to manage rather than eliminate the failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. They have therefore established an ongoing process designed to meet the particular needs of the Company in managing the risks to which it is exposed, consistent with the guidance provided by the AIC. Such review procedures have been in place throughout the financial year and up to the date of the approval of this annual financial report.

The Board has contractually delegated to Threadneedle Asset Management Limited the management of the Company's investments. The Investment Management Agreement between the Company and the Investment Manager sets out the matters over which the Investment Manager has authority and the limits above which Board approval must be sought. Other matters reserved for the approval of the Board include the annual financial report, communications with Shareholders (other than monthly factsheets produced by the Investment Manager) and decisions on strategy.

The Company's investments are held in safe custody by HSBC Plc. JTC Fund Solutions (Guernsey) Limited has been contracted to provide the Company's administration, secretarial and accounting functions and Capita Registrars (Guernsey) Limited provides its share registration, transfer agency and paying agency functions. The Management Engagement and Remuneration Committee regularly reviews the performance of the services provided by these companies.



Directors' Report (continued)

Corporate governance (continued)

i) Accountability and audit (continued)

b) Internal controls (continued)

The Investment Manager and JTC Fund Solutions (Guernsey) Limited maintain their own systems of internal controls, on which they have reported to the Board. The Company, in common with other investment companies, does not have an internal audit function.

The systems are designed to ensure effectiveness and efficient operations, internal control, and compliance with laws and regulations. In establishing the systems of internal control, regard is paid to the materiality of relevant risks, the likelihood of costs being incurred and costs of control. It follows therefore that the systems of internal control can only provide reasonable but not absolute assurance against the risk of material misstatement or loss.

There are well established budgeting and forecasting procedures in place and reports are presented to the Board detailing variances against budget and prior year and other performance data. The effectiveness of the internal control systems is reviewed annually by the Board and the Audit Committee. The Audit Committee has a discussion at least annually with the Company's auditor to ensure that there are no unknown issues of concern in relation to the audit opinion on the accounts and, if necessary, representatives of the Investment Manager or the secretary and Administrator would be excluded from those discussions.

The Board regularly takes steps to embed internal controls and risk management further into the operations of the Company and to deal with areas of improvement which come to the Board's attention.  In December, 2015 the directors visited the Investment Manager's office to review the operations and processes of the Investment Manager and to discuss such systems with relevant members of staff.  This visit included a detailed review of the internal controls, risk management and investment selection process on behalf of the Company.

The Board concluded that it was satisfied with the Investment Manager's internal control systems at that time and no matters of concern have since come to the Board's attention.

Investment objective and policy

The Company's investment objective is to provide Shareholders with a total return in excess of the total return on the FTSE All-Share Index, together with a progressive dividend.

The Company is permitted to invest in any security listed or quoted on any UK stock exchange provided that no less than 80 per cent of its gross assets at the time an investment is made are invested in constituents of the FTSE All-Share Index.

There are no minimum or maximum limits on the number of investments in the portfolio but it is expected that the portfolio will generally comprise shares and securities in 50 to 90 companies. The Company seeks to manage risk in part through heeding the following investment restrictions:

·      The top five holdings in the Company's portfolio may not exceed 40 per cent of the total value of the portfolio.

·      The top three Industry Classification Benchmark ("ICB") sectors represented in the portfolio may not exceed 50 per cent of the total value of the portfolio. 

·      The securities of no one company may represent more than 10 per cent of the value of the Company's portfolio measured at the time of acquisition and subsequently, when additions are made to the holding.

·      The Company will not hold more than 5 per cent of the issued share capital (or voting shares) in any one company.



Directors' Report (continued)

Investment objective and policy (continued)

While the Company may hold shares in other investment companies (including investment trusts), the Company will not invest more than 10 per cent in aggregate, of the value of its total assets in other listed closed-ended investment funds (save to the extent that such closed-ended investment funds have published investment policies to invest no more than 15 per cent of their total assets in such other listed closed-ended investment funds).

No material changes to the Company's investment objective and policy will be made without the sanction of an ordinary resolution passed by a simple majority of the Company's shareholders in general meeting. If the proposed reconstruction and winding up becomes effective, Shareholders who elect to rollover their shareholding in the Company will, following implementation of the proposals, be invested in a Company with a different investment objective and policy to the Company's current investment objective and policy.  The proposals to be voted upon by shareholders at the EGM to be held in late June 2017 are explained later in this directors' report.

Cash

The Company intends to be fully invested in normal market conditions, but may hold up to 20 per cent of net asset value in cash on deposit (or in short-term money market instruments) during periods in which the Investment Manager believes markets are overvalued or expects them to fall.

Gearing

Gearing may be used selectively in order to leverage the Company's portfolio to enhance returns where the Board in conjunction with the Investment Manager considers it appropriate to do so.  The Company's gearing stood at 6.40% as at 31 December 2016 (2015: 7.15%).  Since the expiry of the revolving loan facility with Lloyds Bank Plc on 26 March 2017 and repayment of the outstanding balance, the Company has no external borrowings.

Derivatives

Subject to the Board's prior approval, the Investment Manager is permitted to invest in options and other derivatives for the purposes of efficient portfolio management only. 

Investment Process, Implementation of Investment Policy and Continued Appointment of the Investment Manager

The Investment Manager's investment approach is driven by stock selection, with a focus on risk and reward. Reward is derived from valuation and profit opportunity. In terms of risk, it is the level of business risk rather than index weight that determines position size in the portfolio, with portfolio risk minimised through diversification. Considerable emphasis is placed on identifying companies which are well managed, have sustainable franchises, strong balance sheets and cash flow generation, and which trade on attractive valuations relative to peers and history.

During the year under review, the assets of the Company were invested in accordance with the Company's investment policy. Further details of the performance of the Company and the extent to which the Company's objectives were achieved can be found in the Chairman's Statement and Investment Manager's Report.

The Company's portfolio consisted of 61 investments, primarily UK issuers, as at 31 December 2016.  The top 10 holdings comprised 34.91% of total net assets (2015: 32.68%).

 

The Company's financial instruments comprise investments, cash and various items such as debtors, creditors etc. that arise directly from the Company's operations.  The main purpose of these instruments is the investment of Shareholders' funds.



Directors' Report (continued)

Investment Process, Implementation of Investment Policy and Continued Appointment of the Investment Manager (continued)

The investment strategy of the Company was delegated to the Investment Manager under an agreement dated 27 July 2012, which agreement was amended and restated on 23 September 2014.  The Investment Manager operates within agreed parameters and the Board monitors its performance on a regular basis.

As required by Listing Rule LR 15.6.2(2), the directors confirm that, having reviewed the performance of the Investment Manager during the year under review and up to the date of this report, they are of the opinion that the continuing appointment of the Investment Manager on the terms agreed is in the interests of shareholders as a whole. However, in the light of the proposed reconstruction and winding up of the Company, the Company has served notice on the Investment Manager, such termination of appointment to be effective from 11.59 p.m. on 27 June 2017 or such later date as the scheme of reconstruction and winding up shall become effective.

The Alternative Investment Fund Managers Directive ('AIFMD')

The AIFMD, which was required to be transposed by EU Member States into national law by 22 July 2014, seeks to regulate alternative investment fund managers ('AIFMs') established in the EU and prohibits such managers from managing any alternative investment fund (an 'AIF') or marketing shares in such funds to investors in the EU unless the AIFM has been authorised.

Following implementation of the AIFMD by H.M. Treasury in the United Kingdom, the Company elected to be a self-managed AIF and accordingly notified both the FCA in the UK and the Guernsey Financial Services Commission in May 2014. In deciding on the self-managed option, the Board was mindful that the reporting requirements and consequential costs of so doing were less than would have been the case if the Investment Manager had been appointed as the AIFM and therefore considered this approach to be both practical and cost effective.  The Board remains of this opinion as of the date of this report.

As the Company has notified the FCA, the Company is able to continue marketing its shares into the UK under the UK's National Private Placement Regime.

The Board has implemented the necessary measures to facilitate compliance with AIFMD, which included the establishment of the Risk Committee. The Board have also implemented policies and risk based controls to monitor both the investment and operational risks that impact the Company. The Risk Committee meets each quarter and receives monthly reporting on the risks associated with the management of the investment portfolio.

The Board is cognisant of the European Union's ongoing discussions regarding, inter alia, passporting arrangements for AIFs and ESMA's recommendations as regards to so called "third countries", i.e. non-EU member states.  The Board and its advisers monitor developments to ensure continued compliance and to ensure that any potential opportunities are not missed, although progress with passporting for companies incorporated in certain third countries, including Guernsey, has been delayed by the UK's vote to leave the European Union and it cannot yet be forecasted when such passporting might be possible.

Retail Distribution

On 1 January 2014, the UK's Financial Conduct Authority (the "FCA") introduced rules relating to the restrictions on the retail distribution of unregulated collective investment schemes and close substitutes (non-mainstream pooled investments). UK investment trusts are excluded from these restrictions, as are other "excluded securities" as defined by the FCA.

 



Directors' Report (continued)

Retail Distribution (continued)

As reported in last year's annual report, the Board believes that the Company's shares are "excluded securities" under category (a) of the FCA's definitions of such and, as a result, the FCA's restrictions on retail distribution do not apply.  This status is reviewed regularly and the Board intends to conduct the Company's affairs to retain such status for the foreseeable future, subject to the restructuring proposals to be voted upon in June, 2017.

Taxation, FATCA and the OECD's Common Reporting Standard

The Company has been granted exemption by States of Guernsey Income Tax from Guernsey income tax and Guernsey levies no other relevant taxes on the Company, such as capital gains tax or inheritance tax.  Although the Company cannot provide taxation advice and all Shareholders are responsible for their own taxation affairs, the Company does monitor relevant developments and has taken action to ensure compliance, including registration under the United States' Foreign Account Tax Compliance Act ("FATCA") and the appointment of Capita Asset Services as its agent to collate and report relevant data under FATCA and the Common Reporting Standard of the Organisation for Economic Co-operation and Development (the "OECD").  The Board takes advice from independent tax advisers when deemed necessary or desirable.

Auditor

Deloitte LLP has expressed its willingness to continue in office as auditor and, if the Company is required to have its accounts for the year ended 31 December 2017 audited, a resolution to re-appoint them will be proposed at the forthcoming AGM, should it be held.

Disclosure of information to the auditor

As at the date of approval of the financial statements, the directors confirm that:

·      so far as they are aware, there is no relevant audit information of which the Company's auditor is unaware; and

·      they have taken all steps they ought to have taken as directors to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of section 249 of The Companies (Guernsey) Law, 2008, as amended.

Extraordinary General Meeting and Annual General Meeting

As announced on 17 March 2017, being cognisant of the continuation vote required by the Company's articles to be proposed at the 2017 AGM and taking account of Shareholders' views, the Board spent a considerable amount of time reviewing the options available to grow the Company to a credible and sustainable size and to reduce the consistent discount to their prevailing net asset value at which the Company's shares have traded.   Having undertaken a thorough review of the options, the Board reached the conclusion that Shareholders would be unlikely to support the continuation of the Company in its current form and that it would be in the Company's and Shareholders' best interests to propose either an orderly wind down of the Company or the alternative of rolling over into a larger, more liquid closed ended company. The Board undertook a review of potential rollover candidates and, following a beauty parade process with a shortlist of suitable candidates, decided to recommend a reconstruction and winding up of the Company with Henderson High Income Trust plc ("HHI") as the Company's rollover option (the "Proposals").

 



Directors' Report (continued)

Extraordinary General Meeting and Annual General Meeting (continued) 

The Board has agreed heads of terms with the Board of HHI and Henderson Investment Funds Limited ("Henderson"), the investment manager of HHI, in relation to the Proposals. Under the Proposals, Shareholders will also be offered the opportunity to exit their investment for cash at close to net asset value if they do not wish to rollover their investment into HHI.

 

The Proposals will, in addition to required regulatory and tax approvals, be subject to approval by the Shareholders of both companies and the Board intends to publish a circular including a notice of the EGM at which Shareholders will be asked to approve the Proposals, in late May 2017.  The Board is of the opinion that the Proposals are in the best interests of Shareholders and intends to recommend that Shareholders vote in favour of the Proposals.

In the event that the Proposals are not approved by Shareholders at the EGM, the Board will convene the 2017 AGM to be held on or around 17 August 2017, at which, as required by the Company's articles of incorporation, a resolution for the continuation of the Company will be proposed.

 

By order of the Board

 

D J Warr                                                                S A Farnon

21 April 2017

Viability Statement

C.2.1 and C.2.2 of the UK Corporate Governance Code and AIC principle 21 recommends that companies publish a viability statement and this statement is intended to meet that requirement.

The directors regularly assess the viability of the Company and consider the Company's current financial position and the principal risks to which it is exposed.  Those risks are described in more detail in the statement of Principal Risks and Uncertainties below and in the notes to the financial statements.

The directors have assessed the principal risks and, together with the Investment Manager, have adopted procedures and strategies to mitigate these risks.  The Investment Manager has an established investment management policy and set of procedures that limits the various elements of portfolio risk, including exposure to any one particular security, sector, asset class or geographical area.  The Investment Manager regularly updates the directors on the Company's portfolio and the overall status of the market.  The directors perform a solvency test before any dividend is declared. In performing its viability analysis, the Board has made the assumption that interest rates in most developed economies will remain relatively low and that global growth will show steady but modest improvement over the foreseeable future.

The Board also monitors cash flow and liquidity at each regular meeting, as well as monitoring the Company's total expense ratio to ensure that its operating costs are reasonable in the current market environment and do not exceed materially those of its competitors.  The Company is primarily invested in large cap, liquid issuers, which under normal trading conditions ensures that it can realise its investments to raise cash and meet its expenses when they fall due.  As a result, the directors are confident that the Company  will be able to continue in operation and has sufficient assets to meet its liabilities as they fall due over the next three years. However, as referred to in the Chairman's Statement and Directors' Report the Board intends to convene an EGM for late June 2017 at which Shareholders will be asked to approve a proposed reconstruction and winding up of the Company. If approved, the Company will be placed into voluntary winding up as at the date of the EGM.

Further to the above, if the reconstruction and winding up proposals are not approved or are approved but not subsequently implemented, the Board is obliged under the Company's articles of incorporation to propose a continuation resolution to Shareholders at the 2017 AGM.  If that continuation resolution is not passed, the directors will be required to formulate alternative proposals for the Company, which may or may not involve the restructuring or winding up of the Company, for submission to the Company's Shareholders.

In light of the above, the Directors, having considered the risks facing the Company, their mitigation and the strategy of holding large Cap investments that are realisable on any normal trading day, have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment. However, as stated above and in more detail in the Chairman's Statement, the proposed reconstruction and winding up of the Company is recommended by the directors. If the proposed reconstruction and winding up is approved at the forthcoming EGM then the Company will be placed into voluntary winding up. However, if the proposals are not approved, the company remains a going concern and is viable subject then to a continuation vote at the AGM to be held on or around 17 August 2017.



Statement of Principal Risks and Uncertainties

The risks detailed below are considered by the Board to be the principal risks relating to an investment in the shares of the Company but are not the only risks relating to the Company. Additional risks and uncertainties of which the Company is presently unaware or that the Company currently believes are immaterial may also adversely affect its business, financial status, operating capabilities or the value of the shares.

The Board has undertaken a robust assessment of the principal risks which may affect the Company, including those that would threaten its business model, future performance, solvency or liquidity. The Board has adopted a controls based approach to its risk monitoring requiring each of its service providers, including the Investment Manager, to establish the necessary controls to ensure that all known risks are monitored and managed in accordance with agreed procedures.  The Board receives periodic updates at their board meetings on key risks and have adopted their own control review to ensure, where possible, that risks are monitored appropriately.

Investment Risk

The Board has considered how the Company is exposed to the UK market conditions and investment selection risk that may impact on the portfolio and its potential failure to perform in accordance with the Company's investment objective and policy, where markets move adversely or if the Investment Manager fails to comply with the investment policy. The Board reviews reports from the Investment Manager each month and at each quarterly Board meeting, with a focus on the investment performance of the portfolio on a risk based approach. The liquidity of the portfolio is monitored as part of this review. The Board also considers the level of gearing that is being utilised in the management of the investment portfolio, which also includes a review of interest rate risk, and believes that this currently has minimal impact on the Company's investment portfolio.

The Company does not undertake any currency or interest rate hedging.

Tax, legal and regulatory risk

The Company is exposed to tax, legal and regulatory changes, which may impact on how the portfolio is managed, distributions are made to investors and future marketing opportunities. There is also the risk that it may fail to maintain accurate accounting records and meet its obligations as a publicly listed company. The Administrator, Broker and Investment Manager provide regular updates to the Board on compliance with regulatory requirements and changes in applicable law and regulations.

Dependence on the Investment Manager

The Company is dependent on the ability of the Investment Manager to manage the portfolio in accordance with the agreed mandate and retain the necessary staff to ensure the appropriate investment selection is made within a risk controlled environment. The directors meet with the Investment Manager periodically to ensure an appropriate level of expertise is maintained.

Share Price Discount

The Company is exposed to Shareholder dissatisfaction owing to the challenge in influencing the share price discount to NAV. The Board in conjunction with the Company's Broker monitors share price discount (and premium) continually and has instructed share buy-backs from time to time to help reduce any such discount.  The Board believes that it has access to sufficiently liquid assets to support share buy backs as determined from time to time.

 

 

 

 

Statement of Principal Risks and Uncertainties (Continued)
 
Stability of Income Generation

The Company has historically provided a consistent income return to Shareholders but, owing to changing income on the underlying investment portfolio, there is a risk that insufficient income will be generated to maintain future dividend payments. The Board monitors income levels closely and also has the ability to utilise capital returns to finance dividends.

Operational Risk

The Company is exposed to the risk arising from any failures of systems and controls in the operations of the Investment Manager, Administrator, Custodian and other service providers appointed by the Company. The Board and its Committees regularly review reports from the Investment Manager and the Administrator on their internal controls. The Administrator will report to the Investment Manager any valuation issues which will be brought to the Board for final approval as required. The Management Engagement Committee performs an annual review of the Investment Manager and also other service providers as appropriate. The last review of the Investment Manager was in January 2017, at which time the Management Engagement and Remuneration Committee and the Board reviewed the performance and fees of all service providers.  The Board agreed that the performance of all service providers was satisfactory and that no change of service provider was either necessary or desirable at that time.  However, if the proposed reconstruction and winding up of the Company is approved by Shareholders at the EGM expected to be held in late June 2017, the Company will, at that meeting, be placed into voluntary winding up and the appointments of all service providers will be terminated either immediately or shortly thereafter.

Financial Risks

The financial risks, including market, credit interest, currency, investment concentration and liquidity risk faced by the Company are set out in note 17 of the Annual Financial Report on pages 55 to 58. The controls in place to reduce the financial risks are reviewed by the Board at the quarterly board meetings.

Fraud Risk

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

Directors' Responsibilities Statement

The directors are responsible for preparing the annual financial report in accordance with applicable law and regulations.

The Companies (Guernsey) Law, 2008 (the "Companies Law") requires the directors to prepare financial statements for each financial year. Under the Companies Law the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards ("IFRS").

Under the Companies Law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that the directors:

·      properly select and apply accounting policies;

·      present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·      provide additional disclosures when compliance with the specific requirements in IFRS's are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

·      make an assessment of the Company's ability to continue as a going concern.

 

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Law. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in Guernsey and the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

To the best of the knowledge of the directors:

The financial statements, which have been prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

The Chairman's Statement, Investment Manager's Report and Notes to the Financial Statements are incorporated herein by reference and include a true and fair review of the development and performance of the Company and a description of the principal risks and uncertainties that it faces, as required by DTR 4.1.8 of the Disclosure and Transparency Rules; and

The annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company's performance, business model and strategy.

By order of the Board

 

D J Warr                                                                S A Farnon

 

21 April 2017



Report of the Audit Committee

Role and responsibility

This is the report of the Audit Committee which has been prepared with reference to the AIC Code and describes the work of the Committee in discharging its responsibilities.

The Company has established an Audit Committee in compliance with the Financial Conduct Authority's (FCA's) Disclosure and Transparency Rule 7.1 and the AIC Code, which reports formally twice each year to the main Board. It has formally delegated duties and responsibilities within written terms of reference which are reviewed and reapproved annually.

The Audit Committee is mandated by the Board to investigate any activity within its terms of reference and to consult externally with legal or other independent professional advisers, as required, to ensure that the Committee adequately discharges its duties and responsibilities, which include:

a)     consider and make recommendations to the Board concerning the appointment, re-appointment and removal of the External Auditor and assess the independence and objectivity, effectiveness and performance of the External Auditor in accordance with the AIC Corporate Governance Code requirements;

b)    oversee the process for selecting the External Auditor and make appropriate recommendations through the Board for the Shareholders to consider at the annual general meeting;

c)     review annually the terms of the External Auditor's engagement letter and their proposed remuneration. To make recommendations to the Board regarding the annual external audit fee;

d)    discuss with the External Auditor, before the audit commences, the nature and scope of the audit (or any review of the interim financial statements which might in future be requested) and to review the Auditor's Audit Plan, quality control procedures and steps taken by the External Auditors to respond to changes in regulatory and other requirements;

e)     develop and implement policy on the engagement of the External Auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and report to the Board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken;

f)     review and challenge where necessary, in relation to the half-yearly and annual financial reports before submission to the Board, paying particular attention to:

§ Any changes in accounting policies and practice;

§ Major judgmental areas;

§ Significant adjustments arising from the audit;

§ The going concern and long term viability assumption;

§ Compliance with accounting standards (and in particular accounting standards adopted in the financial year for the first time);

§ Compliance with applicable legal and regulatory requirements (including inter alia, those of the Financial Conduct Authority, the London Stock Exchange, the Guernsey Financial Services Commission and The Companies (Guernsey) Law, 2008, as amended); and

§ Compliance with the AIC Code of Corporate Governance;

g)    discuss problems and reservations arising from the final audit, and any other matters which the auditor may wish to discuss (in the absence of the Company's agents where necessary);

h)    review the External Auditor's Report to the Audit Committee and any response thereto;



Report of the Audit Committee (continued)

Role and responsibility (continued)

i)      review on behalf of the Board, the Company's system of internal control (including financial, operational, compliance and risk management) and make recommendations to the Board. With regard to risk management the Board has specifically delegated to the Risk Committee matters detailed in their Terms of Reference. The Audit Committee is responsible for monitoring the effectiveness of the Risk Committee;

j)      review from time to time the appropriateness of internal audit reporting by the Company's agents;

k)     consider the major findings of internal investigations and management's response;

l)      review the Company's operating, financial and accounting policies and practices;

m)    provide advice to the Board on whether the annual financial report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy;

n)    monitor the effectiveness of the system of accounting and internal control and review the Company's statement on internal control systems before endorsement by the Board;

o)    review the Investment Manager's internal controls Report and the Company's internal control review prepared by the Investment Manager and Administrator;

p)    review the Company's procedure for prevention, detection and reporting of fraud;

q)    the Committee shall review the Company's arrangements for the Investment Manager's employees raising concerns in confidence, about possible wrong doing in financial reporting or other matters.  The Committee shall ensure these arrangements allow proportionate and independent investigation and appropriate action;

r)     consider any other matters specifically delegated to the Committee by the Board from time to time;

s)     the committee may review any matter that it considers appropriate not withstanding that it is not specifically mentioned in the above list of duties; and

t)     any or all powers of the Committee may be delegated by resolution of the Committee unless otherwise determined by the Board.

The Audit Committee may review any matter that it considers appropriate, whether or not it is specifically mentioned in the above list of duties.

Where non-audit services are provided by the auditor, these engagements are pre-approved by the Audit Committee to ensure that the auditor's independence and objectivity is not breached. No non-audit services were provided during the year ended 31 December 2016 (2015: £Nil).

 

Report of the Audit Committee (continued)

Composition

Mrs Farnon is the Chairman of the Audit Committee and Messrs King, Warr and West are additional members serving on the Committee. The Audit Committee and the members do not have any links with the Company's External Auditor. They are also independent of the management teams of the Investment Manager, Administrator and all other service providers. The Audit Committee meets formally no less than twice a year in Guernsey and on an ad hoc basis if required. In addition, it meets the External Auditor at least twice a year. The membership of the Audit Committee and its terms of reference are kept under review.

Significant issues considered regarding the Annual Financial Report

In discharging its responsibilities, the Audit Committee has specifically considered the following significant issues relating to the financial statements:-

Significant issue

How the issue was addressed

Valuation of the Company's Investments

The Board reviews the portfolio valuations on a regular basis throughout the year.  The Board meets with the Investment Manager at least quarterly and seeks assurance that the pricing basis is appropriate and in line with relevant accounting standards as adopted by the Company and that the carrying values are materially correct.

 

The Company's net asset value is calculated on a daily basis by the Administrator, JTC Fund Solutions (Guernsey) Limited and published in the Financial Times.

 

 

Significant issue

How the issue was addressed

Ownership of the Company's Investments

The Company's investments are held in safe custody by HSBC Bank Plc. The Board monitors the performance of the Custodian and also considers the security of the investments held by the Custodian.

 

The Investment Manager has procedures to ensure that investments can only be made to the extent that the appropriate contractual and legal arrangements are in place to protect the Company's assets. The Administrator reconciles the investments held according to their records with the Custodian's records. The Board satisfies itself with these procedures by reviewing the internal control documents of the Administrator.

 

 

Report of the Audit Committee (continued)

Significant issues considered regarding the Annual Financial Report (continued)

Significant issue

How the issue was addressed

Accuracy of calculation of investment management and performance fees

The management fee and any performance fee is calculated in accordance with the contractual terms in the Investment Management Agreement by the Administrator, JTC Fund Solutions (Guernsey) Limited.  These calculations are prepared on a daily basis as part of the daily net asset value calculation.

 

The Board monitors the investment management fee and any performance fee on an ongoing basis. The standard schedule used to calculate the performance fee has been created by the Administrator and reviewed and approved by the Board before being used.  The Board also approves any performance fee prior to payment.

 

 

Auditor and audit tenure

The Company's auditor, Deloitte LLP, has acted in this role since 1974 under its current trading name of Deloitte LLP as well as predecessor trading names. The Committee, in conjunction with the Board, is committed to reviewing this appointment on a regular basis to ensure that the Company is receiving an optimal level of service. The appointment of the auditor is reviewed annually and we are satisfied that sufficient safeguards are put in place by the auditor to mitigate risks associated with long association such as regular partner rotation. The audit partner was rotated following the completion of the 31 December 2013 audit. There are no contractual obligations which restrict the Company's choice of auditor.

 

Assessment of the external audit process

The Audit Committee considers the nature, scope and results of the auditor's work and monitors the independence of the External Auditor. The Audit Committee also has a responsibility to monitor the effectiveness of the audit process. Formal reports are received from the auditors on an annual basis relating to the extent of their work. The work of the auditors in respect of any significant audit issues and consideration of the adequacy of that work is discussed.

 

The Chairman of the Audit Committee liaises with the Investment Manager and Administrator to discuss the extent of audit work completed to ensure all matters of risk are covered while the Committee assesses the quality of the draft financial statements prepared by the Administrator.

 

The Audit Committee has an active involvement and oversight of the preparation of both half yearly and annual financial statements. Ultimate responsibility for reviewing and approving the annual financial report remains with the Board.

Conclusion in respect of the Annual Financial Report

The production of the Company's annual financial report is a comprehensive process requiring input from a number of different parties. One of the key governance requirements of the Company's annual financial report is that it is fair, balanced and understandable. The Board has requested that the Committee advise on whether it considers that the annual financial report fulfil these requirements.



 

Report of the Audit Committee (continued)

Conclusion in respect of the Annual Financial Report (continued)

As a result of the work performed, the Committee has concluded that the annual financial report for the year ended 31 December 2016, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholder's to assess the Company's performance, business model and strategy and has reported on these findings to the Board. The Board's conclusions in this respect are set out in the Directors' Report on page 11. 

 

 

 

 

S A Farnon

Chairman of Audit Committee                                           

21 April 2017

 


 

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF THREADNEEDLE UK SELECT TRUST LIMITED

 

Opinion on financial statements of Threadneedle UK Select Trust Limited

 

In our opinion:

·            the financial statements give a true and fair view of the state of the company's affairs as at 31 December 2016 and of its profit for the year then ended;

·           have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and

·           have been prepared in accordance with the requirements of The Companies (Guernsey) Law 2008.

 

The financial statements that we have audited comprise:

·            the Statement of Comprehensive Income;

·            the Statement of Financial Position;

·            the Statement of Cash Flows;

·            the Statement of Changes in Net Assets; and

·            the related notes 1 to 19.

 

The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union.

 

Emphasis of matter - Going concern

As described in Note 2b to the financial statements, there is an upcoming vote at an extraordinary general meeting ("EGM") in late June 2017 on a proposed reconstruction and winding up of the company. If the proposals are passed, the company will no longer be a going concern as the Company will be restructured and after the completion of the restructuring, the directors will commence the orderly wind up of the Company. If the proposals are not passed, the Board will propose a continuation resolution to Shareholders at the 2017 AGM. If that resolution is not passed, the directors will be required to formulate alternative proposals for the company for submission to the company's Shareholders, which may or may not involve the restructuring or winding up of the company.

 

Whilst we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate, these conditions indicate the existence of a material uncertainty which may give rise to significant doubt over the company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Summary of our audit approach

Key risks

 

The key risks that we identified in the current year were:

·     Valuation of investments

·     Ownership of investments

·     Accuracy of performance fee calculation

 

Within this report, any new risks are identified with  and any risks which are the same as the prior year identified with.

Materiality

The materiality that we used in the current year was £468,000 which was determined on the basis of 1% of net assets.

 

Scoping

Our audit was scoped by obtaining an understanding of the entity and its environment, including internal control, and assessing the risks of material misstatement using both quantitative and qualitative measures.

Significant changes in our approach

There has not been any significant change in our approach.

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF THREADNEEDLE UK SELECT TRUST LIMITED (continued)

 

Going concern and the directors' assessment of the principal risks that would threaten the solvency or liquidity of the company

We have reviewed the directors' statement regarding the appropriateness of the going concern basis of accounting contained within note 2 to the financial statements and the directors' statement on the longer-term viability of the company on page 23.

 

We are required to state whether we have anything material to add or draw attention to in relation to:

•           the directors' confirmation on page 24 that they have carried out a robust assessment of the principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity;

•           the disclosures on pages 55-58 that describe those risks and explain how they are being managed or mitigated;

•           the directors' statement in note 2 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the company's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and

•           the directors' explanation on page 23 as to how they have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Aside from the matters disclosed in the emphasis of matter paragraph above, we have nothing else material to add or draw attention to in respect of these matters.

 

We agreed with the directors' adoption of the going concern basis of accounting and identified a material uncertainty as disclosed in the emphasis of matter paragraph above. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the company's ability to continue as a going concern.

 

Independence


We are required to comply with the Financial Reporting Council's Ethical Standards for Auditors and confirm that we are independent of the company and we have fulfilled our other ethical responsibilities in accordance with those standards.

We confirm that we are independent of the company and we have fulfilled our other ethical responsibilities in accordance with those standards. We also confirm we have not provided any of the prohibited non-audit services referred to in those standards.

 

Our assessment of risks of material misstatement

The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team.

 

 



INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF THREADNEEDLE UK SELECT TRUST LIMITED (continued)

 

Valuation ofinvestments

Risk description

 

Investments of £48.4m are classified as Level 1 investments at year-end as disclosed in note 10 to the Financial Statements. There is a risk that the Company's pricing methodology does not accurately reflect the potential exit price at the year-end date. This risk is heightened when current market conditions may impair the liquidity of the investment portfolio as an element of judgement may need to be incorporated into the valuation.

 

There is also a risk that investments could be illiquid and hence they could be incorrectly classified as level 1.

 

Further details are provided in the audit committee discussion in the Audit Committee Report on page 29.

How the scope of our audit responded to the risk

 

Our audit procedures included:

 

Evaluating the design and implementation of controls around the valuation of investments;

 

Testing 100% of the year-end prices to prices obtained independently from reliable third party sources;

 

• Reviewing exchange rates used to translate foreign currency assets and liabilities at the year-end date against a reliable third party source for reasonableness;

 

• Checking the liquidity of the whole portfolio to market data as at the year-end date to assess trading volumes and whether any adjustments to establish the fair value of illiquid or otherwise suspended for trading equities were required; and

 

• Reviewing post balance sheet events and movements in valuations to assess the accuracy and completeness of post balance sheet disclosures regarding the underlying investments.

Key observations

 

Based on our procedures above, we conclude that the valuation of investments is appropriate.

 

 

Ownership of investments

Risk description

 

 

 

There is a risk that the Company has not retained the rights and obligations of its investment portfolio, or that the investments portfolio is not recognised on a trade date basis which may result in gains and losses on investments being recognised in an incorrect period.

 

Further details are provided in the audit committee discussion in the Audit Committee Report on page 29.

How the scope of our audit responded to the risk

 

Our audit procedures included:

 

• Evaluating the design and implementation of controls around the custody of investments;

 

• Receiving direct confirmation of all positions from the Custodian on both a trade date and settlement date basis and reconciled the trade date basis to the

Company's records in order to test for the recognition of gains and losses in the correct period; and

 

• Discussing with the Investment Manager and reviewing the bank statements to determine if the Custodian has undertaken any stock lending activities in the year under review; and

 

• Evaluating the Board's assessment of the Custody Risk associated to investments and the Custodian.

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF THREADNEEDLE UK SELECT TRUST LIMITED (continued)

 

Key observations

 

 

 

Based on our procedures above, we concur that the company has the rights and obligations of its investment portfolio.

Accuracy of performance fees calculation

Risk description

 

 

 

The performance fee of £17,000 (2015: £104,000) is payable to the Investment Manager, based on the excess total return of the Company's net assets compared to the total return of the FTSE All-Share Index, over a 2 year period.

 

The calculation requires reference to a third party index and adjustment to the Company's net asset value ("NAV") to reflect the Company's total return over the specified performance period. As this calculation is complex and considered to be a related party transaction, and therefore material by nature, it has been identified as a key risk.

 

During the year to 31 December 2016, the Fund has performed behind the benchmark. However, during the prior year the Fund performed ahead of the benchmark and as a result the Investment Manager is entitled to a performance fee in line with the calculations as stipulated in the Investment Management Agreement.

 

Further details are provided in the Audit Committee Report on page 30.

 

How the scope of our audit responded to the risk

 

Our audit procedures included:

 

• Evaluating the design and implementation of controls around the calculation of performance fees;

 

• Calculating an expectation of the fees by following the calculation methodology detailed in the agreements entered into by the Company and comparing this to the Company's records. For our expectation of the fees, we utilised third party market data in respect of the performance fee benchmark and checked the calculation of the Company's NAV total return; and

 

• Reviewing the Company's own calculation of the performance fees and agreeing the prior year fee to the invoice and bank statements to ensure no historic issues with its payment.

 

Based on our procedures above, we conclude that performance fees have been accurately stated.

 

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 



INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF THREADNEEDLE UK SELECT TRUST LIMITED (continued)

 

Our application of materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

 

Materiality

 

£468,000 (2015: £419,000)

Basis for determining materiality

 

1% (2015: 1%) of net assets

Rationale for the benchmark applied

In determining materiality, we considered the balances on which the users of the financial statements would judge the performance of the Company. As the investment objective of the Company is primarily to invest for capital appreciation, we consider the net asset value of the Company to be a key performance indicator for shareholders.

 

 

 

Please click on the link below to view the Auditor Report graph
http://www.rns-pdf.londonstockexchange.com/rns/0513D_-2017-4-21.pdf

 

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £9k (2015: £8k), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.  We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

 

 

An overview of the scope of our audit

Our audit was scoped by obtaining an understanding of the entity and its environment, including internal control, and assessing the risks of material misstatement. Audit work to respond to the risks of material misstatement was performed directly by the audit engagement team.

 

The Administrator maintains the books and records of the entity. Our audit therefore included obtaining an understanding of this service organisation (including obtaining and reviewing their controls assurance report) and its relationship with the entity.

 

 

 

 

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF THREADNEEDLE UK SELECT TRUST LIMITED (continued)

 

Matters on which we are required to report by exception

Adequacy of explanations received and accounting records

Under the Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion:

·     we have not received all the information and explanations we require for our audit; or

·     proper accounting records have not been kept; or

·     the financial statements are not in agreement with the accounting records.

 

We have nothing to report in respect of these matters.

Corporate Governance Statement

Under the Listing Rules we are also required to review part of the Corporate Governance Statement relating to the company's compliance with certain provisions of the UK Corporate Governance Code.

 

We have nothing to report arising from our review.

Our duty to read other information in the Annual Report

Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:

·     materially inconsistent with the information in the audited financial statements; or

·     apparently materially incorrect based on, or materially inconsistent with, our knowledge of the company acquired in the course of performing our audit; or

·     otherwise misleading.

 

In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors' statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed.

 

We confirm that we have not identified any such inconsistencies or misleading statements.

 

Respective responsibilities of directors and auditor

As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.

 

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

 



INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF THREADNEEDLE UK SELECT TRUST LIMITED (continued)

 

Scope of the audit of the financial statements

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

 

 

  

 

David Becker

for and on behalf of Deloitte LLP

Chartered Accountants and Recognised Auditor

Guernsey, Channel Islands

21 April 2017



Statement of Comprehensive Income

for the year ended 31 December 2016






 

 2016


 

2015




Notes


Revenue


Capital


Total


Revenue


      Capital


Total






£'000


£'000


£'000


£'000


         £'000


£'000

Income














Dividend revenue

3


1,745


-


1,745


1,507


-


1,507

Other income

3


3


-


3


-


-


-

Net gains on financial assets at fair value through profit or loss                  

10


-


4,443


4,443


-


1,698


1,698

Net foreign exchange gains



-


-


-


-


1


1




1,748


4,443


6,191


1,507


1,699


3,206

















Expenses
















Investment management fees

4


54


163


217


53


159


212

Performance fees

4


4


13


17


26


78


104

Administration fees




108


-


108


108


-


108

Registrar's fees


          


31


-


31


16


-


16

Auditor's fees



26


-


26


26


-


26

Directors' fees and expenses

    16      


114


-


114


115


-


115

Other expenses



147


-


147


252


-


252

Total operating expenses before finance costs



484


176


660


596


237


833














Operating profit before finance costs



1,264


4,267


5,531


911


1,462


2,373

















Finance costs















Interest and other finance cost


12


15


44


59


16


48


64














Profit for the year



1,249


4,223


5,472


895


1,414


2,309















Basic and diluted return per ordinary share

7


5.61p


18.97p


24.58p


4.05p


6.40p


10.45p

 

The total column of this statement is the Statement of Comprehensive Income of the Company, with the revenue and capital columns representing supplementary information.

 

All revenue and capital items in the above statement derive from continuing operations. All income is attributable to the ordinary Shareholders of the Company.

 

The notes on pages 43 to 59 are an integral part of these financial statements.


Statement of Financial Position

as at 31 December 2016

 

 


Notes


 

 2016


 

 2015





£'000


£'000

Assets






Cash and cash equivalents

8


1,565


2,266

Other receivables and accrued income

9


104


94

Financial assets at fair value through profit or loss

10


48,397


42,827

Total assets




50,066


45,187








Liabilities







Other payables and accrued expenses


11


178


247

Borrowings


12


3,000


3,000

Total liabilities




3,178


3,247








Net assets attributable to shareholders



46,888


41,940








Represented by:







Share Capital


14


2,430


2,430

Treasury share reserve


14


(3,404)


(3,879)

Other reserves



47,862


43,389

Net assets attributable to shareholders



46,888


41,940







Number of ordinary shares in issue (net of treasury shares)

15


22,426,621


22,143,066







Net asset value per share

15


209.07


189.40

 

These financial statements were approved by the Board on [Date] and are signed on behalf of the Board by:

 

 

 

 

 

                                                                               

D J Warr                                                                S A Farnon

 

21 April 2017

 

The notes on pages 43 to 59 are an integral part of these financial statements.

 

 

 

 

Statement of Changes in Net Assets Attributable to Shareholders

for the year ended 31 December 2016

 


Issued share capital

Treasury

share

reserve

Share premium reserve

Capital redemption reserve

Capital reserve-realised

Capital reserve- unrealised

Revenue reserve

Total


£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

At 1 January 2016

2,430

(3,879)

11,307

4,308

17,511

5,472

4,791

41,940










Cash dividends:









-2015 second interim dividend

-

-

-

-

-

-

(316)

(316)

-2016 first interim dividend

-

-

-

-

-

-

(208)

(208)

Shares issued for scrip dividends

-

475

-

-

(475)

-

-

-

Profit/(Loss) for the year

-

-

-

-

(114)

4,337

1,249

5,472

At 31 December 2016

2,430

(3,404)

11,307

4,308

16,922

9,809

5,516

46,888

 

There were no other recognised income and expenses for the year ended 31 December 2016.

 

for the year ended 31 December 2015

 


Issued share capital

Treasury

share

reserve

Share premium reserve

Capital redemption reserve

Capital reserve-realised

Capital reserve- unrealised

Revenue reserve

Total


£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

At 1 January 2015

2,430

(3,724)

11,307

4,308

16,714

5,296

4,425

40,756










Shares repurchased

-

(596)

-

-

-

-

-

(596)

Cash dividends:









-2014 second interim dividend

-

-

-

-

-

-

(302)

(302)

-2015 first interim dividend

-

-

-

-

-

-

(227)

(227)

Shares issued for scrip dividends

-

441

-

-

(441)

-

-

-

Profit for the year

-

-

-

-

1,238

176

895

2,309

At 31 December 2015

2,430

(3,879)

11,307

4,308

17,511

5,472

4,791

41,940

 

 

There were no other recognised income and expenses for the year ended 31 December 2015.
 

 

 
The notes on pages 43 to 59 are an integral part of these financial statements.


Statement of Cash Flows

for the year ended 31 December 2016












Notes

 2016


 2015



£'000


£'000

Cash flows from operating activities




Payments for purchase of financial investments


(7,925)


(5,232)

Proceeds from sale of financial investments


6,799


8,053

Dividend received from investments


1,738


1,507

Investment management fee paid


(213)


(209)

Other operating expenses


(517)


(615)






Net cash (outflow)/inflow from operating activities


(118)


3,504






Cash flows from financing activities





Interest paid


(59)


(84)

Share repurchase

14

-


(596)

Equity dividends paid

6

(524)


(529)

Decrease in borrowings

12

-


(1,000)

Net cash outflow from financing activities


(583)


(2,209)






Net (decrease)/increase in cash and cash equivalents

(701)


1,295






Effect of exchange rate changes on cash and cash equivalents


-


1






Cash and cash equivalents at the beginning of the year


2,266


970






Cash and cash equivalents at the end of the year

8

1,565


2,266

 

 

 

 

 

The notes on pages 43 to 59 are an integral part of these financial statements.

 

 

 

Notes to the Financial Statements

 

1.         General information

 

The Company is an authorised closed-ended investment Company incorporated under The Companies (Guernsey) Law, 2008, as amended, with its registered office situated at Ground Floor Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 2HT.  The Company's shares have been admitted to the Official List of the UK Listing Authority with a premium listing and to trading on the London Stock Exchange's Main Market for listed securities.

 

The objective of the Company is to provide Shareholders with a total return in excess of the total return on the FTSE All-Share Index, together with a progressive dividend policy.

 

The Company has no employees.

 

2.         Accounting policies

 

a.         Basis of preparation

 

The financial statements have been prepared in accordance with the applicable International Financial Reporting Standards ("IFRS") and interpretations adopted by the International Accounting Standards Board ("IASB"), and in accordance with the guidelines included in the AIC Statement of Recommended Practice for Financial Statements of Investment Trust Companies issued in January 2003 and revised in January 2014 ("AIC SORP") to the extent that it is not in conflict with IFRS. The financial statements have been prepared on a historical cost basis except for financial assets held at fair value through profit or loss, which have been measured at fair value.

 

In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income.

 

Critical accounting judgements and key sources of estimation uncertainty

 

The preparation of financial statements in conformity with IFRS requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

 

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

 

The critical judgments and key sources of estimation uncertainty are detailed within the accounting policies note below.

 

 
Notes to the Financial Statements (continued)

 

2.         Accounting policies (continued)

 

b.         Going concern

 

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

 

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

 

·      the Company had sufficient liquidity to meet all on-going expenses at 31 December 2016;

·      the portfolio of investments held by the Company materially consists of listed investments which are readily realisable and therefore the Company will have sufficient resources to meet its liquidity requirements; and

·      As at 31 December 2016, the Company had £3 million of external borrowings.  Since the year end, the Company allowed the loan facility with Lloyds Bank Plc to mature on 26 March 2017 and all outstanding amounts under that facility, including accrued interest, were repaid.  As at the date of approval of this report, the Company had no external borrowings or other material financial indebtedness.

 

In accordance with the Company's articles of incorporation, the Shareholders are due to have an opportunity to vote on the Company's continuation at the 2017 annual general meeting.  However, the Board is intending to publish a circular in late May 2017 including a notice convening an extraordinary general meeting of the Company (the "EGM") to be held in late June 2017, at which Shareholders will be asked to approve proposals in relation to the reconstruction and winding up of the Company.  If those proposals are approved by Shareholders and become effective, the 2017 AGM will not be held and no continuation vote will take place. This creates material uncertainty that may cast significant doubt on the Company's ability to continue as a going concern. If the proposals are passed, the Company will be restructured and after completion of the restructuring, the liquidator will commence the orderly wind up of the Company.

 

c.         Adoption of new and revised standards

 

Standards not yet affecting the reported results nor the financial position

 

The same accounting policies, presentation and methods of computation are followed in these annual financial statements as those followed in the preparation of the Company's audited financial statements for the year ended 31 December 2015.

 

At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective.

 

IFRS 9                                    Financial instruments - effective 1 January 2018

IFRS 15                                  Revenue from Contracts from Customers - effective 1 January 2018

IFRS 16                                  Leases - effective 1 January 2019; early adoption permitted only if entity adopts IFRS 15

 

The directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements in future periods, except that IFRS 9 may impact both the measurement and disclosures of financial instruments and IFRS 15 may have an impact on revenue recognition and related disclosures. Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 and IFRS 15 until a detailed review has been completed.

 



 

Notes to the Financial Statements (continued)

 

2.         Accounting policies (continued)

 

d.                Other receivables

 

Other receivables do not carry any interest, are short-term in nature, and are accordingly stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.

 

Sales of financial assets are recognised at the trade date. Where trades have been executed but are awaiting settlement from the broker, these are accounted for as due from brokers on the Statement of Financial Position.

 

e.         Financial assets

 

(i)            Classification

 

The Company classifies its investments at fair value through profit or loss in accordance with IAS 39. All other financial assets are held at amortised cost.

 

(ii)           Recognition

 

Financial assets are recognised on the trade date where a purchase is under contract whose terms require delivery within the timeframe established by the market concerned.

 

(iii)         Initial measurement

 

As the Company's business is investing in financial assets with a view to profiting from their total return in the form of interest, dividends or increases in fair value and are managed on a portfolio basis to meet the objectives of the Company, listed equities and fixed income securities are designated as fair value through profit or loss on initial recognition and material transaction costs on acquisition and all transaction costs on disposal of the financial asset are expensed as a capital item.

 

(iv)          Subsequent measurement

 

After initial measurement, the Company measures its financial assets, which are classified as fair value through profit or loss at fair value. In accordance with IFRS 13, the Company has applied the definition of fair value as set out under fair value measurement.

 

Subsequent changes in the fair value of the Company's financial assets are recorded in the Statement of Comprehensive Income under net gains/(losses) on financial assets at fair value through profit or loss. Foreign exchange gains and losses for financial assets at fair value through profit or loss are included within the changes in its fair value.

 

(v)            Derecognition

 

Financial assets are derecognised where:

 

·      a sale is under contract whose terms require delivery within the timeframe established by the market concerned; or

·      it is evident, following an impairment review, that the Company can no longer recover any value from the financial asset.

              



 

Notes to the Financial Statements (continued)

 

2.         Accounting policies (continued)

 

 (vi)         Impairment

 

The Company is required to evaluate the financial assets in its portfolio to determine if any of the securities are impaired.

 

Fair value and impairment estimates are made at a specific point in time based on market conditions and information about the financial asset. These estimates are subjective in nature and involve uncertainties and matters of significant judgement.

 

The Company materially invests in listed or quoted equities and therefore at the reporting date, there were no sources of significant judgement or uncertainty.

 

(vii)         Fair value measurement

 

'Fair value' is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date in principal or, in its absence, the most advantageous market to which the Company has access at that date. When available, the Company measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as 'active' if transactions for the asset take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The Company measures financial assets quoted in an active market at bid price.

 

If there is no quoted price in an active market, then the Company uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation techniques incorporate all of the factors that market participants would take into account in pricing a transaction.

 

The Company recognises transfers between levels of fair value hierarchy as at the end of the accounting period during which the change has occurred.

 

f.          Net gains/(losses) on financial assets at fair value through profit or loss

 

Net gains/(losses) on financial assets at fair value through profit or loss includes changes in the fair value of financial assets held at fair value through profit or loss.

 

Unrealised gains and losses comprise changes in the fair value of financial assets for the year and from reversal of prior year's unrealised gains and losses for financial assets which were realised in the reporting period.

 

Realised gains and losses on disposals of financial assets classified as fair value through profit or loss are calculated using the average method. They represent the difference between a financial asset's initial carrying amount and its disposal amount.

 

g.         Financial liabilities and equity

 

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. A financial liability is any liability that contractually obligates the Company to deliver cash or another financial asset or exchange financial assets or financial liabilities that are potentially unfavourable to the Company, or a contract that will or may be settled in the Company's own equity instruments.  An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. As the ordinary shares have no fixed rights to redemption or income they are classified as equity.

 

Notes to the Financial Statements (continued)

 

2.         Accounting policies (continued)

 

h.         Bank borrowings

 

Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs, finance charges, including premiums payable on settlement or redemption and direct issue costs.  Interest is accounted for on an accruals basis in the Statement of Comprehensive Income using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

 

i.          Other payables

 

Other payables are not interest-bearing and are stated at their nominal value.

 

Purchases of financial assets are recognised at the trade date. Where trades have been executed but the Broker requires funds for settlement of the trade, these have been accounted for as due to Brokers on the Statement of Financial Position.

 

j.          Dividend revenue, interest revenue and other revenue

 

Dividend revenue is brought into the Statement of Comprehensive Income as a revenue item on the ex-dividend date or, where no ex-dividend date is quoted, when the Company's right to receive payment is established.  All dividends are shown gross of withholding tax. 

 

Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the amount of the cash dividend is recognised as dividend revenue in the Statement of Comprehensive Income.

 

Fixed returns on non-equity investments and on debt securities are recognised as a revenue item in the Statement of Comprehensive Income on a time apportionment basis so as to reflect the effective yield on the investment.  Other returns on non-equity shares are recognised when the right to the return is established. 

 

Deposit interest is recognised as interest revenue and is included in the Statement of Comprehensive Income on an accruals basis.

 

Other revenue, such as underwriting commission, is recognised on a received basis as the timing of receipts of this nature is uncertain and therefore the received basis is deemed the most appropriate method to account for this revenue.

 

k.         Functional and presentation currency

 

The Company's functional and presentation currency is Sterling, which is the currency of the primary economic environment in which the Company operates. The Company's performance is evaluated and its liquidity is managed in Sterling, therefore Sterling is considered as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.

 

l.          Foreign currency translations

 

Foreign currency monetary assets and liabilities are translated into Sterling at the rate of exchange ruling at the Statement of Financial Position date.  Transactions during the year in foreign currencies are translated into Sterling at the rate ruling at the date of the transaction.  Realised and unrealised foreign exchange gains and losses are recognised in the Statement of Comprehensive Income.

 

Notes to the Financial Statements (continued)

 

2.         Accounting policies (continued)

 

m.        Statement of Cash Flows

 

The Company is required to prepare a Statement of Cash Flows in accordance with IFRS and has elected to prepare the Statement of Cash Flows on a direct basis.

 

n.         Expenses

 

All expenses are accounted for on an accruals basis. Expenses are charged through the Statement of Comprehensive Income as revenue except as follows:

·      expenses which are incidental to the acquisition of an investment are deducted from gains on investments through the Statement of Comprehensive Income as capital;

·      expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment; and

·      expenses are charged to the Statement of Comprehensive Income as capital realised where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. In this respect, the Investment Manager's fee and performance fee have been allocated 75% to the capital reserve - realised and 25% to the revenue reserve in line with the Board's expected long-term split of returns in the form of capital gains and income respectively from the investment portfolio of the Company.

 

o.         Finance costs

 

Finance costs are accounted for on an accruals basis.  Finance costs are allocated, insofar as they relate to the financing of the Company's investments, 75% to capital reserve - realised and 25% to revenue account, in line with the Board's expected long-term split of returns, as outlined in the expenses note above.

 

p.         Segment Reporting

 

A business segment is a distinguishable component of the Company that is engaged in providing products and services and that is subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of the Company that is engaged in providing products and services and that is subject to risks and returns that are different from those of other economic environments. The Board is of the opinion that the Company is organised in one main business segment, namely the management of the Company's investments in order to achieve the Company's investment objectives as described in note 1 to the financial statements. The Board is further of the opinion that the Company's secondary segment reporting format is also organised into one main geographical unit as the location of all investments is materially all within the United Kingdom.

 

q.         Treasury shares

 

Where the Company purchases its own share capital, the consideration paid, which includes any directly attributable costs, is recognised as a deduction from net assets attributable to Shareholders through the treasury share reserve.

 

When such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs, is recognised as an increase in equity and the resulting surplus or deficit on the transaction is transferred to/from the treasury share reserve.

 

 

 

Notes to the Financial Statements (continued)

 

3.         Dividend and other income

 


2016


2015


£'000


£'000

Dividend revenue from investments designated at fair value through profit or loss:




Dividends

1,745


1,507

Other income

3


-

Total income

1,748


1,507

 

4.         Investment management and performance fees

 

Threadneedle Asset Management Limited was appointed as Investment Manager under an Investment Management Agreement with the Company dated 27 July 2012. On 23 September 2014, the Investment Management Agreement was amended and restated. No changes to the management or performance fees were made. The investment management fee is calculated as 0.5% per annum of the value of the funds under management on each Valuation Date in respect of each quarter or such other date or fee as shall be agreed from time to time between the Company and the Manager. The first Valuation Date for the purpose of the management fee was 31 December 2012.

 

The Investment Manager is also entitled to a performance fee, which is calculated as 10% of the total return NAV out-performance of the FTSE All-Share Index (total return) both expressed as a percentage of that as indicated at the end of that year and that of the immediately preceding financial year. The performance fee percentage calculated may not exceed 0.25% over a period of 12 months. A performance fee of £17,000 is attributable for the year ended 31 December 2016 (31 December 2015: £104,000). This performance fee shall be payable within 23 days of 31 March 2017. 

 

5.         Taxation

 

The Company is exempt from Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinances 1989 to 1997 and is charged an annual exemption fee of £1,200, which is included within other expenses in the Statement of Comprehensive Income.

 

The Company suffered £25,239 (2015: £148,400) of withholding tax on foreign dividends during the year and this expense has been included in other expenses in the statement of comprehensive income.

 

6.         Dividends

 


2016


2015


£'000


£'000

Equity dividends




Ordinary shares








Second interim dividend for 2015: 2.55p (gross) on 12,424,144 shares paid in 2016

316


302

Second interim dividend for 2015 taken as scrip dividend issued in 2016: 153,932 shares issued at a cost of 161.07p per share

248


249

First interim dividend for 2016: 1.95p (gross) on  10,658,551 shares paid in 2016

208


227

First interim dividend for 2016 taken as scrip dividend issued in 2016: 129,623 shares issued at a cost of 175.00p per share

227


192


999


970



Notes to the Financial Statements (continued)

 

7.         Basic return per ordinary share







2016

2015


Revenue

Capital

Total

Revenue

Capital

Total


pence

pence

pence

pence

pence

pence








Return

5.61

18.97

24.58

4.05

6.40

10.45

 

Return per ordinary share is based on the net revenue on ordinary activities of £1,249,000 (2015: return £895,000) and on 22,262,244 ordinary shares, being the weighted average number of ordinary shares in issue during the year (2015: 22,097,140).

 

Capital return per ordinary share is based on a net capital profit for the financial year of £4,223,000 (2015: return £1,414,000) and on 22,262,244 ordinary shares, being the weighted average number of ordinary shares in issue during the year (2015: 22,097,140).

 

8.         Cash and cash equivalents

 

Cash and cash equivalents comprises bank balances and cash held by the Company including short-term deposits with an original maturity of three months or less. The carrying amount of these assets approximates to their fair value.

 

9.         Other receivables and accrued income





Other receivables

2016


2015


£'000


£'000

Accrued income

93


83

Prepayments

11


11


104


94

The directors consider that the carrying amount of receivables approximates to their fair value.

 

10.       Financial assets at fair value through profit or loss






2016

2015






Fair Value

% of net assets

Fair Value

% of net assets




£'000

%

£'000

%








Financial assets at fair value through profit or loss





- Listed equity securities


48,397

103.22

42,827

102.11

 

Net gains on financial assets at fair value through profit or loss














2016


2015






£'000


£'000









Realised gains




106


1,522

Unrealised gains

4,337


176







4,443


1,698

 


Notes to the Financial Statements (continued)

 

10.       Financial assets at fair value through profit or loss (continued)

 

Fair value measurements

 

The Company adopted the amendment to IFRS 13, effective 1 January 2014. IFRS 13 establishes a fair value hierarchy that prioritises the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under IFRS 13 are as follows:

 

Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

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

 

Level 3 fair value measurements are those derived from valuation techniques that include inputs for the  asset or liability that are not based on observable market data (that is, unobservable inputs).

 

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

 

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

 

The following tables present the Company's financial assets and liabilities by level within the valuation hierarchy as of 31 December 2016 and 2015:

 


 

2016

Percentage of net assets

 

2015

Percentage of net assets

Level 1 fair value assets

£'000

%

£'000

%

Investments valued at fair value

48,397

103.22

42,827

102.11






 



Notes to the Financial Statements (continued)

 

11.       Other payables and accrued expenses

 

Other payables

2016


2015


£'000


£'000

Administrative fees

54


54

Audit fees

14


19

Investment management fees

56


52

Loan facility fee and interest payable

12


13

Performance fee

17


104

Registrars fees

10


1

Sundry expenses

15


4


178


247





The directors consider that the carrying amount of payables approximates to their fair value.

 

12.       Loan facility

 

On 26 March 2014 the Company entered into a one year £5 million revolving loan facility with Lloyds Bank Plc (the "Bank"), secured on the assets of the Company, for investment purposes, which was extended on 19 March, 2015 until 26 March 2017. The Board resolved not to seek renewal of the loan facility upon its expiry on 26 March, 2017 and all amounts outstanding under the facility, including interest accrued thereon, have already been repaid. As at 31 December 2016, £3,000,000 of the loan facility was being utilised. Interest was payable at a rate of Sterling LIBOR plus 1.1%, payable quarterly in arrears, and the borrowing was held at amortised cost. Loan interest of £51,000 was paid during the year. A fee of 0.39% per annum was payable on the undrawn amount of this facility, resulting in £4,500 being paid for the year under review. £3,700 of the £10,000 loan arrangement fee was amortised over the year and also included in finance costs. In addition, the Company was required to comply with the following covenants imposed by the Bank:

 

·      the Company was required to ensure that the borrowing did not at any time exceed 20% of the Adjusted Gross Asset Value*;

·      the Company was required to maintain the Net Worth (meaning net asset value adjusted for such items as intangible assets and unrealised gains or losses accrued since the date of the audited annual financial reports) at not less that £20,000,000;

·      the Company was required to ensure that the investment portfolio included holdings in not less than 25 separate businesses; and

·      the Company was required not to change its investment policy without the written permission of the Bank.

 

* Adjusted Gross Asset Value meant the market value of Total Gross Assets adjusted by deducting:

a) The value of unlisted investments;

b) The amount by which any single investment exceeded 7.5% of the investment portfolio;

c) The amount by which the investment in a single ICB Investment Sector exceeded 20% of the investment             portfolio; and

d) The amount by which the largest 10 investments exceeded 50% of the investment portfolio.

Notes to the Financial Statements (continued)

 

13.       Business and geographical segments

 

As described in the accounting policies in note 2 to the financial statements, the Board is of the opinion that the Company is organised in one main business segment, namely the management of the Company's investments in order to achieve the Company's investment objectives as described in note 1 to the financial statements, and considers this to be the primary reporting format for segment information and no further business segment information not already included in other parts of the financial statements is required.

 

The Board is also of the opinion that the Company's secondary segment reporting format is also organised into one main geographical unit as the location of all of its investments is materially all within the United Kingdom.

 


Income


Net Assets


2016


2015


2016


2015


£'000


£'000


£'000


£'000

United Kingdom

1,748


1,507


46,888


41,940


1,748


1,507


46,888


41,940









Geographical locations are determined by the Company based on the country of primary listing for listed instruments and the country of incorporation for unlisted instruments.

 

14.       Share capital

 







2016


2015







£'000


£'000










Authorised








Unlimited number of shares

-


-

 

The holders of the ordinary shares are entitled to receive notice of and to attend and vote at general meetings of the Company. At such meetings on a show of hands each Shareholder shall have one vote and on a poll each Shareholder shall have one vote for each share held by them.  The Company is not entitled to any votes in respect of any ordinary shares held in treasury.

 

On a winding-up, any surplus assets remaining after the payment of all creditors shall be divided amongst the Shareholders in the same proportion as the capital attributable to them on the winding-up date.



Notes to the Financial Statements (continued)

 

14.       Share capital (continued)

 







  2016


 2015








£'000


£'000


Issued, called up and fully paid:












24,302,092 (2015: 24,302,092) ordinary shares of 10p each including 1,875,471 treasury shares (2015: 2,159,026)

2,430


2,430


















                                 2016







Treasury share reserve

Shares in issue

Share Premium







Shares

Cost

Shares

Cost

Cost







Nominal

£'000

Nominal

£'000

£'000

Balance at 1 January 2016




2,159,026

  3,879

24,302,092

2,430

11,307

Shares purchased and held in treasury

-

-

-

-

-

Shares sold from treasury in lieu of dividends

(283,555)

(475)

-

-

-

Balance at 31 December 2016




(1,875,471)

  (3,404)

24,302,092

2,430

11,307


















2015








Treasury share reserve

Shares in issue

Share Premium







Shares

Cost

Shares

Cost

Cost







Nominal

£'000

Nominal

£'000

£'000

Balance at 1 January 2015




2,070,920

3,724

24,302,092

2,430

11,307

Shares purchased and held in treasury

343,000

   596

-

-

-

Shares sold from treasury in lieu of dividends

(254,894)

   (441)

-

-

-

Balance at 31 December 2015



2,159,026

  3,879

24,302,092

2,430

11,307












During 2016 and 2015 no shares were purchased for cancellation.


 

15.       Net asset value per share

The net asset value per ordinary share is calculated based on net assets attributable to the ordinary Shareholders of £46,888,000 (2015: £41,940,000) and on 22,426,621 (2015: 22,143,066) ordinary shares, being the number of ordinary shares in issue at the end of the year, excluding treasury shares.

Notes to the Financial Statements (continued)

16.       Related party transactions

The members of the Board are listed on page 4 of the annual report. Fees earned by the directors of the Company during the year were £114,000 (2015: £114,300), of which £Nil (2015: £nil) was outstanding at the period end.  Allowable expenses claimed by the directors in the course of their duties amounted to £2,000 for the year (2015: £1,000).

Ameriprise Financial Inc. ("Ameriprise"), the parent of the Investment Manager, controlled the voting rights attached to 22.13% of the Company's shares as at 31 December 2016. Ameriprise exercises discretion over these shares held on behalf of its clients.

 

The Investment Manager earned investment management fees of £217,000-- (2015: £212,000) during the year, of which £56,000 (2015: £52,000) was outstanding at the reporting date.  In addition £17,000 performance fees were accrued for the year (2015: £104,000).

17.       Financial risk management

Introduction

The Company's objective in managing risk is the creation and protection of Shareholder value. Risk is inherent in the Company's activities, but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. The process of risk management is critical to the Company's continuing profitability. The Company is exposed to market risk (which includes interest rate risk and price risk), credit risk and liquidity risk arising from the financial assets it holds.

Capital risk management

The capital structure of the Company consists of the cash and cash equivalents, borrowings and equity attributable to ordinary Shareholders, comprising issued share capital, treasury share reserve, share premium reserve, capital redemption reserve, capital reserves and revenue reserve as disclosed in the Statement of Changes in Net Assets Attributable to Shareholders. The Company does not have any externally imposed capital requirements.

The investment objective of the Company is to invest over 80% of its gross assets by value in the UK and the investment policy aims to provide a total return to Shareholders in excess of the net total return on the FTSE All-Share Index and a progressive dividend policy. The Company aims to deliver its objective by investing available cash and using leverage whilst maintaining sufficient liquidity to meet ongoing expenses and dividend payments.

The Company's policy is to provide net income for distribution from the dividend income earned from a portfolio of mainly UK equity securities which are listed on the London Stock Exchange. Further, the Company has allocated to capital 75% of its investment management fee and performance fee in line with the Board's expectation of long-term returns in the form of capital gains from the investment portfolio of the Company.

During the year under review, the assets of the Company were invested in accordance with the Company's Investment Manager's strategy. The Company invests in various sectors and businesses to mitigate the primary risk of the Company, price risk. In addition, price-volatility levels are reviewed and monitored daily. 



 

Notes to the Financial Statements (continued)

17.       Financial risk management (continued)

Concentration risk

Concentration risk is the risk that the Company's portfolio is not suitably diversified and therefore the Company could become materially exposed to sector specific price fluctuations.

As at 31 December 2016, the Company's portfolio consisted of 61 investments spread over 9 industries. Further, the portfolio only held investments issued in the United Kingdom.

The Board has also adopted investment restrictions to manage the risk profile, which are:

·      The top five holdings in the Company's portfolio may not exceed 40 per cent of the total value of the portfolio.

·      The top three ICB sectors represented in the portfolio may not exceed 50 per cent of the total value of the portfolio. 

·      The securities of no one company may represent more than 10 per cent of the value of the Company's portfolio measured at the time of acquisition and subsequently, when additions are made to the holding.

·      The Company will not hold more than 5 per cent of the issued share capital (or voting shares) in any one company.

 

While the Company may hold shares in other investment companies (including investment trusts), the Company will not invest more than 10 per cent, in aggregate, of the value of its total assets in other listed closed-ended investment funds (save to the extent that such closed-ended investment funds have published investment policies to invest no more than 15 per cent of their total assets in such other listed closed-ended investment funds).

·      The Board monitors investment restrictions by utilising the Investment Manager's and the Administrator's compliance functions. Investment strategy and allocation is monitored by the Board through the use of an Investment Manager.

 

 

 

Credit risk

 

Credit risk is the risk that an issuer or counterparty may be unable or unwilling to meet a commitment that it has entered into with the Company.

The Company's principal financial assets are bank balances and cash, other receivables and investments as set out in the Statement of Financial Position which represents the Company's maximum exposure to credit risk in relation to the financial assets. The credit risk on bank balances is limited because the counterparties are banks with high credit ratings of A-1+ assigned by international credit-rating agencies.

All transactions in listed securities are settled upon delivery using approved brokers. The risk of default is considered minimal as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligations.

Notes to the Financial Statements (continued)

17.       Financial risk management (continued) 

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its liabilities as they fall due.

The Company's assets comprise securities that can be readily realised to meet obligations. As a result, the Company is able to realise its investments in these instruments at an amount close to their fair value in order to meet its liquidity requirements. Dividend income is also expected to be sufficient to cover short-term liquidity requirements.

The loan facility expires on 26 March 2017.

No liquidity analysis for the Company's financial assets and liabilities has been provided for in the current or prior year as liquidity risk is not considered material.

 

 

Country risk

The Board has reviewed the disclosures contained within the annual financial report and believes that no additional disclosures are required since the Company is primarily invested in UK listed equities.

Market risk

Market risk is the possibility that future changes in market prices may make a financial instrument less valuable or more onerous.

The Company's market risk is managed by the Investment Manager through diversification of the investment portfolio in accordance with the Company's investment policy.

a) Price risk

Price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices whether those changes are caused by factors specific to the individual financial instrument or its issuers, or factors affecting similar financial instruments traded in the market.

In accordance with the Company's investment objectives, the Company does not hedge against its exposure to market price risk.



Notes to the Financial Statements (continued)

17.       Financial risk management (continued)

a) Price risk (continued)

The investment strategy of the Company has been delegated to the Company's Investment Manager under an agreement dated 27 July 2012, as amended and restated on 23 September 2014.  The Investment Manager operates under agreed parameters and the Board monitors its performance on a regular basis.

Price sensitivity

The following table details the Company's sensitivity to a 10% increase and decrease in the market prices while all other variables were held constant. 10% is the sensitivity rate used when reporting price risk internally to key management personnel and represents management's assessment of the possible change in market prices. A positive number indicates an increase in net assets attributable to holders of shares where the market price of the relevant financial instrument increases and a negative number indicates a decrease where the market price of the relevant financial instrument decreases.


Net Assets


Net Assets


10% increase in price


10% decrease in price










Impact on financial assets at fair value through profit or loss


Impact on financial assets at fair value through profit or loss




2016


2015


2016


2015


£'000


£'000


£'000


£'000









Increase/(decrease) in net assets attributable to shareholders








-Designated as at fair value through profit or loss

4,840


4,283


(4,840)


(4,283)


4,840


4,283


(4,840)


(4,283)

 

In practice the actual trading results may differ from the sensitivity analysis above and the difference could be material.

b) Interest rate risk

Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in interest rates associated with that financial instrument.

The Company's interest rate sensitive assets and liabilities mainly comprise of cash and cash equivalents and borrowings. The cash and cash equivalents and borrowings are subject to floating rates and are considered to be part of the investment strategy of the Company.  No other hedging is undertaken in respect of this interest rate risk. As such, the Board does not believe the Company suffers any material interest rate risk.

Notes to the Financial Statements (continued)

18.       Parent and ultimate controlling party

The Board is of the opinion that there is no immediate parent or ultimate controlling party of the Company.

19.       Events after the reporting date

A second interim dividend of 2.60p per Ordinary Share has been declared for 2016 (2015: 2.55p).  In accordance with the requirements of IFRS, as this was not declared until after the Statement of Financial Position date, no accrual has been reflected in these financial statements for this amount. This dividend will be payable on Friday, 12 May 2017, to Shareholders on the register as at close of business on Friday, 17 March 2017.  This, together with the first interim dividend of 1.95p (six months ended 30 June 2015: 1.90p) paid during the year, makes a total of 4.55p for the year.  Subject to the approval by Shareholders and implementation of the proposed reconstruction and winding up of the Company (further details of which can be found in the Chairman's Statement), the Company intends to continue with the policy of paying a second interim dividend each year to Shareholders in May of the following year in place of a final dividend. Scrip election forms were sent to all Shareholders on Friday, 24 March 2017 and the latest date for receipt by the Registrar of scrip elections is Tuesday, 25 April 2017.

The loan facility granted to the Company by Lloyds Bank Plc expired on 26 March, 2017 and all outstanding amounts under the loan facility, including interest accrued thereon, were repaid on that date.

In accordance with the Company's articles of incorporation, Shareholders are due to have an opportunity to vote on the Company's continuation at the 2017 annual general meeting.  However, the Board is intending to publish a circular in late May 2017 (including a notice convening an extraordinary general meeting to be held in late June 2017 (the "EGM")) in relation to the approval by Shareholders of proposals concerning the reconstruction and winding up of the Company.  If those proposals are approved by Shareholders and implemented, the 2017 AGM will not be held and no continuation vote will take place.

In the light of the proposed reconstruction and winding up of the Company, the Company has served notice on the Investment Manager, such termination of appointment to be effective from 11.59 p.m. on 27 June 2017 or such later date as the scheme of reconstruction and winding up shall become effective.

 

  

 
Ten Year Record- Unaudited

 

The Ten Year Record set out below has been prepared from the accounting records of the Company. While it does not form part of the financial statements, it should be read in conjunction with them and the Auditor's report thereon.


 

 

 

 

Gross revenue


 

 

Net revenue after taxation


 

Revenue return per ordinary share


 

Gross dividends per ordinary share


Ordinary share capital eligible for dividends


 

Net asset value of ordinary shares (Ex-div)

Year ended 31 December

£'000 (1&2)


£'000


p


p(3)


£'000


p













2006

1,041


648


3.12


3.10


2,083


152.9

2007

1,241


824


3.96


3.25


2,071


158.3

2008

1,449


1,042


5.04


3.63


2,073


106.9

2009

1,075


746


3.61


3.75


2,058


149.8

2010

1,043


692


3.36


3.90


2,069


161.7

2011

1,307


907


4.38


4.10


2,074


142.1

2012

834


354


1.72


4.15


2,066


147.4

2013

1,152


704


3.30


4.25


2,189


181.3

2014

1,434


850


3.83


4.35


2,223


183.3

2015

1,507


895


4.05


4.45


2,214


189.4

2016

1,748


1,248


5.61


4.55


2,243


209.1

Notes:

(1)   The information provided prior to 2006 in the above statement is prepared in accordance with UK GAAP and not IFRS.

(2)   Following the introduction of FRS 16 (IAS 12) all dividends receivable from 1999 have been shown gross of withholding tax whereas previously they were shown net.

(3)   Following the introduction of FRS 21 (IAS 10) all dividends paid by the Company from 2004 are accounted for in the period in which the Company is liable to pay them.  Such treatment is also consistent with International Financial Reporting Standards. In previous years, the Company accrued dividends in the period in which the net revenue, to which those dividends related, was accounted for.


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