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Aurora Investment (ARR)

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Thursday 20 April, 2017

Aurora Investment

Annual Financial Report

RNS Number : 9180C
Aurora Investment Trust PLC
20 April 2017
 

ANNUAL FINANCIAL REPORT ANNOUNCEMENT

 

AURORA INVESTMENT TRUST PLC

 

PERIOD ENDED 31 DECEMBER 2016

 

 

 

STRATEGIC REPORT

 

 

 

OBJECTIVE

 

To provide shareholders with long term returns through capital and income growth.

 

 

POLICY

 

Phoenix Asset Management Partners (Phoenix) was appointed Investment Manager on 28 January 2016.  Phoenix seeks to achieve the Objective by investing in a portfolio of UK listed equities.

 

The portfolio will be relatively concentrated. The exact number of individual holdings will very over time but typically the portfolio will consist of 15 to 20 holdings.    

 

 

BENCHMARK

 

Performance is benchmarked against the FTSE All-Share Index, total return, representing the overall London market.

 

 

DIVIDEND

An interim dividend of 2.0p per share was declared on 2 March 2017 and was paid on 10 April 2017.

 

The Directors do not recommend a final dividend (February 2016: 1.00p)

 

 

ANNUAL GENERAL MEETING

The Annual General Meeting of the Company will be held at the offices of Grant Thornton, 30 Finsbury Square, London EC2P 2YU on 8 June 2017 at 12.00 noon.

 

 

STRATEGIC REPORT

 

CHAIRMAN'S STATEMENT

 

This report covers the 10 month period from 29 February 2016 to 31 December 2016. The reason for the "short year" is to align Aurora's accounting period with that of its Investment Manager, Phoenix Asset Management Partners, following their appointment on 28 January 2016.

 

The performance for the period to end December 2016 was a 6.38% rise in net asset value (NAV), underperforming the benchmark FTSE All Share Index (total return), which rose by 19.5%.  

 

The share price of Aurora traded at a premium to NAV for substantially all of the period in question. The average premium for the year was 2.9%, which enabled us to issue new shares during the period.  Our intention is for the shares to continue to trade at a small premium to NAV.

2016: Phoenix's First Year as Investment Manager

 

Shareholders will recollect that Phoenix was appointed Investment Manager on 28 January 2016, which marked the beginning of a new era for Aurora. This was the conclusion of a process that had begun at the Aurora AGM in July 2014, when it was decided that a further continuation vote in 2017 would not be sought; but rather the Board and shareholders wanted an alternative future for the Trust via merger or new Investment Manager.

 

This was achieved by the appointment of Phoenix as Investment Manager.  Key features of the Phoenix Management Agreement are no management fees but an annual, performance only, fee, equal to one third of NAV per share total returns in excess of the FTSE all share return. This fee is subject to claw back and a high water mark and is capped at 4% of NAV p.a. in the case of an absolute increase in NAV per share; and 2% in the case of a decrease but with outperformance compared with the FTSE All Share. Aurora is managed with the same investment strategy as Phoenix's offshore open-ended Fund. Since its inception in 1998 this fund has delivered, net of fees, a cumulative NAV total return of 460.6% and annualised returns of 9.7% compared with 155.6% and 5.2% for the FTSE All-Share.

 

An important consideration for the Aurora Board in appointing the new Investment Manager was the extent to which they would be able to grow the size of the Trust and, therefore, improve its economic viability. Phoenix were confident that by marketing their track record, they could attract new investors to the Trust.  A Prospectus was issued to enable the issuance of up to 55 million new shares over a 12-month period. The initial placing in March was the first of several, which, together with the sale of 4 million shares that had previously been held in Treasury, resulted in approximately £32 million of new money being raised between 1 February and 31 December 2016. Consequently, the market capitalisation of the Trust, which had been £15m in January 2016, finished the year at £52m. Since 31 December the Company has raised a further £6 million, increasing the market capitalisation to £62 million

 

The growth in the size of the Trust has come from two main sources. Firstly, from existing clients of Phoenix and secondly Phoenix has attracted investors previously unknown to them by holding a number of "roadshow" events across the UK over the last 12 months. Today, therefore, we have a range of shareholders who support the Phoenix "value investing" approach, including family offices, wealth managers and private banks.

 

 

Phoenix Investment Philosophy

 

Unlike some value investors, Phoenix does not seek to buy into businesses at distressed prices. Rather, they aim to buy great businesses at attractive prices The Phoenix definition of a great business is of it having a high return on capital (15% or above), pricing power and that it can be observed, transparently, doing business in the real world. It is from understanding why a business earns such high returns that investment outperformance can be anticipated.  Phoenix builds up the required knowledge by studying the relevant industries and companies in detail - a learning process which can take several years. When it comes to price Phoenix is disciplined in only paying up to half of what they believe the business is worth. Inevitably, the opportunities to buy great businesses at half price are rare - frequently Phoenix will identify a business which fits their objectives, but where the price does not. Inevitably, therefore, Phoenix has to be patient. Having spent considerable time identifying great businesses, they usually have to wait further years before the price reaches a level at which they are willing to invest. This often arises when there has been bad news about a particular company and the stock falls out of favour. The rarity of suitable investment candidates, combined with the time consuming nature of the investment process, results in a concentrated portfolio, typically of between 15 and 20 investments maximum. The portfolio turnover is low, with only one or two new investments made each year.

 

Phoenix defines risk as being the potential for a permanent loss of capital - rather than share price volatility. They see permanent loss of capital as a function of an insufficiently thorough understanding of a business and the potential threats it faces. An ongoing monitoring and research programme for every stock in the portfolio seeks to mitigate this risk.  The in-depth and unusual nature of the research that Phoenix undertakes is the most distinguishing feature of its investment approach. They spend 80% of their time monitoring the businesses owned by the Funds they manage.  Shareholders may be interested in reading the historic track record of the Phoenix UK Fund since inception, which is an Appendix at the back of this Report and Accounts.

 

As noted above, the Company underperformed the benchmark, largely as a result of having no exposure to the cyclical resources sector.  As the Manager describes in his report, periods of underperformance are to be expected as a result of Manger's long-term value approach.

 

Going Forward

 

In last year's statement I mentioned that the objective was to increase the size of Aurora to £100m over the medium term.  This continues to be the case. The increase in size serves to reduce the ongoing cost per share and increases the marketability of the shares.

 

Dividend

 

The Board declared that an interim dividend of 2.0p per share be paid on 10 April to shareholders on the register as at 10 March 2017 and thus not to shareholders joining under the most recent placing.  The Board does not recommend a final dividend.  The Company expects to continue to pay an annual dividend, which could be lower than recent dividends and will comprise substantially all of the net revenues for the year.

 

AGM

A warm welcome is extended to shareholders to the AGM to be held at 12 noon on 8 June 2017 at the offices of Grant Thornton, 30 Finsbury Square, London EC2P 2YU.

 

Lord Flight

Chairman

20 April 2017

 

 

STATEMENT FROM THE CIO OF THE INVESTMENT MANAGER

 

The last period was a prime example of the Phoenix process of investing:

 

Discipline: We started with cash. This came from a combination of a lack of opportunity due to high values and various opportunities to sell some of our holdings in 2015. We entered June with over 25% of the Trust in cash.

 

Patience: Despite the persistence of the high cash position (it dates back to early 2015 in the Phoenix strategy although we were not managing Aurora at that time), we did not feel pressured to lower our hurdles or standards and invest.

 

Preparedness: When the post referendum selloff happened we were prepared. We always have a candidate universe of stocks that we would invest in given the right price. Understanding businesses, rating managements and being able to assess values takes considerable time and effort, it can't be left for when the opportunities arise because it takes too long.

 

Action: The vote to leave the EU sent the market into a sharp selloff, taking some of the businesses we know well into very attractive valuation territory. When many were paralysed with doom and fear, we acted. Within 2 weeks the cash position was under 10% and falling. By October we were almost fully invested.

 

Value: When we act it is to buy things we believe are trading at no more than half their intrinsic value. Being able to deploying cash into those kinds of opportunities significantly boosts the overall intrinsic value of the Trust which we expect in turn will result in a future rise in the NAV and share price. Our actions in 2016 we believe increased underlying value significantly.

 

Monitoring: our real world monitoring of our businesses gives us unique insights. In the week after Brexit our routine visits to building sites throughout the country told us that other than in Central London there was no impact from the referendum result on the housing market in the UK, houses were still selling at a good rate. This reinforced our confidence in our valuation estimates and showed us that the market was overreacting.

 

Our 19 years of investing with the same strategy have some discernible patterns: a build-up of cash when valuations become unattractive; a sharp drawdown in bad markets as we buy what is the cheapest and unpopular; a big increase in our estimate of the intrinsic value eventually resulting in a sharp rebound in the prices of our holdings. The period under review fits that pattern and the value we have accumulated in 2016 should serve us well in delivering strong returns from here.

 

Gary Channon

CIO Phoenix Asset Management Partners

20 April 2017

 

 

INVESTMENT MANAGER'S REVIEW AND OUTLOOK

 

The NAV per share of the Trust increased by 6.38% during the period, an underperformance of the market (which was up by 19.5%).  Investors did slightly better than this suggests, as the share price increased by 9.8%.  The shares traded at an average premium to NAV of 2.9% during the year, ending December at a 0.5% premium.

 

On the one hand, delivering a substantial return for investors and earning no fees at all is disappointing (we charge a zero management fee). On the other hand, our performance fee structure sets quite a specific expectation to you as investors that we will deliver a better return than the stock market. That definitively remains our belief although it is a simple fact that in some individual years that won't happen. We draw considerable heart from our 19-year track record of managing the Phoenix UK Fund (which has a very similar portfolio to Aurora). Over that period of time, we have beaten the FTSE All Share by an average annualised 4.5% per annum, after all fees. We have achieved this by beating the market considerably in some years and lagging it in others. We point to this as being the best guide to what to expect over coming years.

 

The remainder of this section comprises an overview of the major portfolio holdings. This will not extend to any crystal ball gazing when it comes to predictions about share prices. This is because we do not think that share prices can be predicted over the short term (which we think is a minimum of three years). Rather, we think that the undervalued shares we own will increase in value at some point in the future if the business fundamentals justify such a move.  Clearly, if we own shares in a business, it is because we think that's what going to happen and so we spend our time continually testing our investment hypotheses and it is through that lens that we consider company news.

 

Let's start with the investment that looks the worst in several respects, Sports Direct.  The share price fell by 31% over the course of the year as the business: issued a profit warning; was subject to a dogged campaign by the Guardian newspaper that unearthed some slightly rum working practises; parted company with the longstanding CEO and the head of finance; announced a change of property strategy in the core UK business; halted attempts to expand in Europe until the operating model has been proven to be sustainably profitable; all of which sounds like five years' worth of news rather than a summary of what happened in 2016. So what's going on and how concerned are we?

 

We could consider each of these issues in some detail although a general answer is probably what's called for here. Mike Ashley has grown Sports Direct from a standing start to being a major European business in a single generation. It is an extraordinary success story. And yet, during his interrogation by a UK Parliamentary committee earlier this year, he implied that the company had, in some ways, become too big for him to manage, that parts of the business were not being run as they should, especially with regards to staff welfare and working standards.  Later in the year, at a meeting for City analysts, he also implied that the European business was not developing in the way that he would like, admitting that this was largely because of a conscious decision he had taken many years earlier to delegate virtually all responsibility for Europe to his long standing CEO Dave Forsey. Dave Forsey has now left the business and Mike Ashley is back in day-to-day operational control of Sports Direct with an agenda to mend what's fixable and sell or close what isn't.

 

In terms of our assessment of the situation, we make a few points. Firstly, an observation: Phoenix has been invested in Sports Direct to varying degrees for nearly ten years and we have followed the business and management closely all that time. We first invested in the wake of the initial public offering, when the shares plunged in response to a profit warning, some terrible PR and some short term operational problems - plus ca change, plus c'est la meme chose. Today, in 2017, we don't think Mike Ashley has gone from being a great retailer to a twit in less than a year, although the press reports and share price might give you cause to think otherwise. Our national store visits and web-site monitoring suggest that Sports Direct currently retain their competitive advantage of being the lowest cost producer in the sector and the core UK business seems to be in fine shape. We will pay close attention to the new property strategy, which favours freeholds over leaseholds and to move part of the estate upmarket. We will watch with interest how the in-store offer develops, given Mike's intent to sell more expensive lines from the large third party suppliers such as Nike and Adidas.  Above all, we will look for signs that Mike remains the completely rational businessman that we have found him to be over the last ten years. If we are right about that, then there is plenty of reason to be excited about the investment, which we think is worth more than twice the current share price and is also why we increased the portfolio weight over the course of the year. Moreover, for all the bad publicity the Company has had recently, we believe that the management team has integrity and wants to do the right thing.

 

Last year, in the 2016 annual report, we summarised the many positive tailwinds currently being enjoyed by large housebuilders in the UK and remarked how fortunate we were to own Barratt Developments and Bellway, then valued at less than a ten times multiple of earnings. We talked about the undersupply of housing in the UK, ongoing low interest rates, reforms to the planning system and a raft of helpful government incentives. Well, this year, those tailwinds are all still blowing and those businesses are now valued at roughly eight times earnings. Their share prices fell sharply in the wake of the Brexit vote and haven't yet fully recovered. We leapt at the opportunity to buy more shares at much lower prices, adding to both holdings. The share price falls were probably driven by a combination of fears about both house price falls and fears that there could be a short-term drop in transaction volumes, both of which were very plausible short-term scenarios although neither of which we think makes much difference to the business's ultimate value. Why? Because (and apologies to those who have heard this from us before) falling house prices cause only a temporary decline in accounting earnings; the real damage caused to the business is far less than at first appears to be the case because falling house prices are compensated for by much lower land costs, land being a builder's single biggest cost. In other words, cheap land bought in a downturn turbocharges profits in future years.

 

During 2016 parts of the London housing market, especially new-build properties priced above £1 million, have seen a substantial fall in transaction volumes and falls in selling prices of around 10%. This was the case before the Brexit vote, and was most likely caused by both the new punitive stamp duty levy - that becomes disproportionately painful between £900k and £1m - and also the recent tax increases on both "Buy to Let" and second properties. It was this London slowdown (and the reasonable probability of it continuing or getting worse), that caused us to reduce the size of our holding in Barratt Developments. However, we used the proceeds from that sale to buy more Bellway shares and also to add a third housebuilding investment, Redrow. We continue to think that Barratt is a very attractive investment at these levels (we still retain a sizable shareholding, after all), although Redrow and Bellway are more attractively priced and come without exposure to the shaky part of the London market. For the year in question (i.e. March '16 - December '16) Bellway's and Redrow's shares are almost unchanged and Barratt has fallen over 16%. This is despite all three businesses reporting almost unalloyed strong trading conditions (except prime London as previously mentioned), increased sales and profits and the prospects of considerable further progress over coming years. We remain greatly enthused about our house-building investments, which we think are substantially undervalued. Also, and very importantly, we are not invested in any sector that is more "transparent" than housebuilding, which helps to gives us a high degree of comfort with the size of the investment we have made. "Transparent" is in quotation marks because it has a very specific meaning in the context in which it has been used here. Transparency means the degree to which our own research can effectively monitor the fundamentals in a business without us having to wait and read the financial results. In this case we can and do visit building sites nationwide, visit sales offices, speak to the numerous listed competitors, land suppliers and land buyers. Also, by monitoring internet activity we can track indicators of revenue in something close to real time.

 

Our supermarket businesses, Tesco and Morrisons - whose share prices rose 15% and 16% respectively during the period - both made fundamental progress during the year. The recent history doesn't bear repeating in any detail here. Suffice to say that, to varying degrees, both firms lost sight of how to delight their customers and then egregiously compounded the error by making some dubious capital allocation decisions that they would later reverse (witness Morrisons' half-hearted foray into convenience store retailing and Tesco's attempt to build a business in the US). Also, as most UK domestic food retailers were taking their eye off the ball, the formidable German discounters, Aldi and Lidl, were taking market share from everyone else. So, 2016, whilst not exactly the year that Tesco and Morrison's began to fight back (the competitive response to the Germans was earlier than that), it was the year that we started to see meaningful results from their efforts. Like all good retailers, Tesco and Morrisons now appear to be doing two important things: firstly, they are listening to what their customers want and then giving it to them, and secondly they are copying their competitor's good ideas. Both companies acknowledge that there is still some way to go, although they seem to be on the right track. When we have gone into Tesco or Morrisons stores this year, we think that both have improved compared to earlier visits, although we are still observing failings in some areas. The valuation of Tesco is, we think, further below our estimate of intrinsic value than Morrison's, although, having had a year of positive like-for-like sales in both, we remain enthusiastic about the prospects for both investments. 

 

Lloyds is an interesting case because we think that the business fundamentals have been on the turn (i.e. improving) for some time and yet the shares remain cheap. It is a good example of why it pays not to stick ones neck out and talk about when and why a share price might start to rise. Since 2010 the balance sheet has improved considerably and the Group now has a class-leading capital ratio, far fewer unwanted legacy or "run-off" assets and much less reliance on wholesale funding than in the past.   The management team have been reducing the cost base (by closing underperforming branches for example) and simplifying the operating model. Meanwhile, the business continues to enjoy high market shares and strong underlying profitability. For example, they have 25% of UK current accounts, 23% of UK retail deposits and 22% of UK mortgage balances. Importantly, our monitoring research continues to support the relatively simple hypothesis that we use to explain why Lloyds in particular (and UK banking in general) is such a strong business: customers in the UK are very loyal to their bank, often ignoring indifferent customer service and high product fees. It has been this way for many years despite it being relatively easy for customers to switch banks. Over the coming years Lloyds will be a high dividend payer. Also, it will soon have returned to full private ownership as the Government selling will soon have concluded.

 

We think that Lloyds' shares (that fell 10% over the period) are worth more than twice the current share price. We added to the holding following the Brexit vote and believe that eventually, the strong underlying business fundamentals will weigh on the valuation of the business. Just don't ask us when!

 

JD Wetherspoon had a year of steady, modest progress against a backdrop of increasing costs, most notably rising wages. They continue to open new pubs (951 and counting) in areas where the economics of doing so make sense, and to close pubs that are not pulling their weight. The intention over the long term continues to be to increase the proportion of freehold rather than leasehold properties. Ten years ago this split was 42/58 in favour of leasehold and today the mix is 51/49 in favour of freehold.  One of the consequences of this strategy has been for the debt level to gradually rise. Founder of the business, Tim Martin thinks that a higher freehold mix gives the business greater flexibility to add value from property development such as building hotel rooms above pubs in space that would otherwise be redundant. We continue to rate the pub operating business very highly and our research consistently reveals high standards of pub-keeping including clean toilets and food that, once ordered, arrives promptly. The share price increased 25% over the period and we watch with interest for signs that sufficient returns are being generated on the capital being deployed within the business.

A study of the history of the pharmaceutical industry, shows, among other things, a perpetual cycle of drug discovery and then, eventually, patent expiry; although the world's great pharma businesses tend to endure, their most important products (almost) never do. It is therefore fitting that Glaxo continues to reshape itself, as a suite of new products replace those of the past. During the year, the Group reported ongoing progress as a broader portfolio of new drugs and vaccines replaced lost revenue from "blockbusters" such as Advair. Also during the year, CEO Andrew Witty announced his retirement. He is to be replaced by Emma Walmsley, the current head of Glaxo's Consumer Healthcare business. The shares continue to trade significantly below our estimation of their intrinsic value.

 

In the 2016 Annual Report we said that Vesuvius was doing a good job in a difficult market for steel and, in a nutshell, that remains the case today. The vicissitudes of the steel market have some bearing on the business, although not as much as may be first assumed. Why should this be the case? Because unless you completely decommission a steel foundry, even if steel volumes decline substantially, the demand remains for the perishable steel production components that Vesuvius produces. We think the business is being well managed and using sensible self-help measures to cope with current market conditions. There are also plenty of signs that the underlying consumer demand for steel products (such as cars for example) continues to be robust and there are indications that the steel industry may have turned.  Despite rising 39% over the period, the shares are trading at a level considerably below our intrinsic value and we had increased the position during the year.

 

Our day job could be characterised as a hunt for first class businesses selling at reasonable prices (we never want to pay more than half what we think a business is worth). Every so often we come across a potential investment that is not necessarily an excellent business, but whose shares are so cheap that we are interested regardless. These are what Warren Buffett might call "Cigar Butt" investments - we call them "value plays". These morsels are opportunistic and comprise a very occasional and small part of our portfolio. CPP is one such example. The business offers "consumer assistance" products (lost credit card or wallet insurance for example) and ran into serious regulatory issues when they were found to have miss-sold policies to a number of customers. This led to the business being fined by the FCA and having to make redress payments to affected customers. Beyond that, this is probably not the place for too much detail about the Company's sad and sorry past. Suffice to say that these issues predate the investment we made this year and that the business now has a new management team and is mapping out a different future. We paid six pence per share for our holding in November 2016 and at the end of December they had risen to 14 pence. We are watching the Company's ongoing progress with considerable interest.

 

Outlook

 

Following a recent news binge (Sunday papers, Andrew Neil, Al Jazeera) I told my wife that if I heard the phrase "post-Brexit uncertainty" one more time, I wanted to spend the remainder of 2017 under a blanket. That was until she pointed out that the urge to enshroud myself may itself be a symptom of my own subconscious post-Brexit uncertainty, upon which I went for a stroll to clear my head.

 

Despite personal misgivings about the press blaming the Brexit vote for everything, it does seem reasonable for investors to acknowledge that it has been influencing some decisions and will continue to do so, even if part of that influence is nothing more than self-fulfilling prophecy. Clearly there is no way of knowing what the terms of the UK's exit from the EU will involve and we aren't going to play guessing games. It seems sensible to expect some periods of uncertainty, general doom and gloom as well as some genuine setbacks which, history suggests, are likely to feel scarier and more significant at the time than is warranted by a rational appraisal of the facts.

 

A foreseeable short-term factor that does merit a mention is the likelihood (in some cases imminence) of currency related inflation. For Tesco and Morrison's this is likely to be positive and reverse a relatively persistent recent trend of food price deflation. All other things being equal, a bit of inflation is probably a good thing for these businesses. It isn't a good thing for housebuilders, who will be seeing the price of some of their materials, such as timber (sourced in Euros, paid in sterling), increase substantially overnight. The impact will have been cushioned until now by long term supply agreements but at some point they will start paying higher prices. The good news is that the affected materials are a relatively small part of the overall cost base and that the rate of labour cost inflation (which, with land, are the most significant costs) has been coming down. The overall result is likely to be that build costs rise three to four per-cent this year, which won't have a material impact on profits. 

 

One other note of caution regarding the house building sector: a UK Government White Paper on housing has recently been published. The paper has outlined a series of Government measures intended to increase housebuilding. From the perspective of an investor in the sector, the paper seems to contain both carrots and sticks. The Paper is currently in the consultation phase and we will watch with interest to see whether some of the measures become enshrined in legislation. Our hope is that the "sticks" do not cause building firms to develop fewer houses, rather than more. If the White Paper ultimately does have some unintended consequences and leads to lower levels of house building, we would expect the counterproductive measures to be swiftly reversed.

 

Two notes to end on. Firstly, a historical context. For at least the last 500 years (and arguably much longer than that) Britain has managed to be one of the world's 10 largest economies even though it has only enjoyed membership of the EU since 1973. History suggests therefore, that Britain is, eventually, likely to make a relatively decent fist of things outside of the EU. Secondly, for 19 years Phoenix have followed an investment philosophy that results in us buying great business that we think will also be great investments over the long-term despite what is happening in the news at any one time. That remains the case today; we think we have a portfolio of undervalued winners where investment success is not dependent on a particular macro outcome, Brexit or otherwise.

 

 

Tristan Chapple

Investment Manager

Phoenix Asset Management Partners

20 April 2017

 

 

 

INVESTMENT POLICY AND PERFORMANCE

 

 

This report deals with the results of Aurora Investment Trust plc. The Company's former subsidiary AIT Trading Limited (AIT) has been dissolved.    

 

The Company adopted a revised Investment Policy on 28 January 2016, with the appointment of Phoenix Asset Management Partners ("Phoenix") as the Company's new Investment Manager.

 

INVESTMENT POLICY

 

The Company's objective is to provide shareholders with long term returns through capital and income growth by investing in a concentrated portfolio of UK listed equities.

 

The Company seeks to achieve its investment objective by investing in a portfolio of UK listed equities.  The portfolio will be relatively concentrated. The exact number of individual holdings will very over time but typically the portfolio will consist of 15 to 20 holdings.  The Company may use derivatives and similar instruments for the purpose of capital preservation.  There are no pre-defined maximum or minimum exposure levels for each individual holding or sector, but these exposures re reported to, and monitored by, the Board in order to ensure that adequate diversification is achieved.  The Company's policy is not to invest more than 15% of its gross assets in any one investment.

 

While there is a comparable index for the purposes of measuring performance over material periods, no attention is paid to the composition of this index when constructing the portfolio and the composition of the portfolio is likely to vary substantially from that of the index.  The Company may from time to time invest in other UK listed investment companies, but the Company will not invest more than 10% in aggregate of the total assets of the Company in other listed closed-ended funds other than closed-ended investment funds which themselves have published investment policies to invest no more than 15 per cent of their total assets in other listed closed-ended funds.  The Company will not invest in any other fund managed by the Company's investment manager.  

 

The Company does not currently intend to use gearing.  However, if the Board did decide to utilise gearing the aggregate borrowings of the Company would be restricted to 30 per cent of the aggregate of the paid up nominal capital plus the capital and revenue reserves.

 

Any material change to the investment policy of the Company will only be made with the approval of the Shareholders.

 

DIVIDEND POLICY

The revised investment policy does not include any fixed dividend policy.  However, the Board will distribute substantially all of the net revenue arising from the investment portfolio.  Accordingly, the Company is expected to continue to pay an annual dividend, but this could be lower than the level of recent dividends and may vary each year.

 

OBJECTIVES AND KEY PERFORMANCE INDICATORS (KPIs)

The Company's principal investment objective is to achieve capital growth.  The Company's success in attaining its objectives is measured by reference to KPIs as follows:

 

a)   To make an absolute total return for shareholders on a long-term basis.

b)   The Company's Benchmark is the FTSE All-Share Index (total return), against which the Net Asset Value (NAV) return is compared.  After achieving the goal of making absolute returns for shareholders, the next aim is to provide a better return from the portfolio than from the market as measured by the Benchmark.

c)   The Company seeks to ensure that the operating expenses of running the Company as a proportion of NAV (the Ongoing Charges Ratio) are reasonable.

 

PERFORMANCE

With effect from 28 January 2016, the Investment Manager has been Phoenix Asset Management Partners Limited, which is regulated by the FCA.  The Chief Investment Officer of Phoenix is Gary Channon.  Phoenix reports in detail upon the Company's activities in the IMR.    

 

Under the Investment Management Agreement no regular management fees are payable.  A performance fee is payable to the Investment Manager only if the benchmark is beaten.  

 

Upon the change of Investment Manager, the benchmark became the FTSE All-Share Index Total Return.  The Company's financial year end was brought forward from 28 February to 31 December.

 

Performance during the current period of ten months and during the period in January to February 2016 when the Phoenix was Investment Manager, was as follows:

 


Period 1 March 2016 to 

Period 28 January to


31 December 2016

29 February 2016




Net Asset Value per share

+6.38%

+4.50

Benchmark (total return)

+19.5%

+2.32

 

The Ongoing Charges ratio was as follows:

 


Period to 31 December 2016

Year to 29 February 2016




Ongoing Charges Ratio (annualised)

1.04%

2.48%

 

The ratio is calculated excluding finance costs but including operating expenses charged to capital and applied to the average NAV of the period/year.  Expenses of a type not expected to recur under normal circumstances are excluded from the calculation. 

    

REVENUE RESULT AND DIVIDEND

The Company's revenue profit after tax for the period amounted to £636,037 (Year to 29 February 2016: £203,622).   

 

On 2 March 2017 the directors declared an interim dividend of 2.00p per share, absorbing £614,526.  The directors do not propose a final dividend. The interim dividend was paid on 10 April 2017 to shareholders on the register at 10 March 2017; the ordinary shares were marked ex-dividend on 9 March 2017.  In accordance with International Financial Reporting Standards this dividend is not reflected in the financial statements for the period ended 31 December 2016.

 

In 2016 a final dividend of 1.00p per ordinary share was paid, absorbing £187,479.   

 

RISK ANALYSIS

The Board considers that the principal risks faced by the shareholders of the Company fall into two categories:

 

External Risks

Poor performance in the UK and/or world economies; poor corporate profits and dividends. 

 

Poor stock market performance caused by market-specific factors, such as rising interest rates, the unwinding of "bubbles" or disinvestment by institutions, superimposed on general economic factors, or caused by shocks, wars, disease etc.  The Board does not consider, however, that short-term volatility represents a risk for the long-term shareholder, since it regards long-term performance to be of primary importance.

 

Internal Risks

Poor asset management, which may include poor stock selection, excessive concentration of the portfolio, mistakes regarding currency movements, speculation in shares of companies without sound or established businesses and speculation in derivatives.

 

Poor governance, compliance or administration, including particularly the risk of loss of investment trust status.

 

All these and other risks can result in shareholders not making acceptable returns from their investment in the Company.

 

RISK CONTROLS

          

           External risks

As described in the Investment Policy section above, external risks are mitigated by diversification of the portfolio and by not utilising gearing.

 

Risk diversification

An element of risk is inherent in investment undertaken on a selective basis.  The Company seeks to mitigate the degree of risk by investing in securities in substantial organisations, normally listed and traded on the London Stock Exchange, and by spreading its investments across a range of such securities.   At 31 December 2016 the Company held 19 stocks, spread across 8 main sectors.

 

Gearing

The Company has discontinued the use of gearing as an element of its investment policy.  Under the articles, borrowings are permitted up to a maximum of 30% of NAV.  The Company's agreement with BNP also permits borrowing of up to 30% of NAV, but there is currently no intention to make use of this allowance. 

 

The Board will keep under review whether any provision should be made for the use of short-term borrowing for the sole purpose of meeting working capital requirements from time to time. 

 

Further details concerning currency risks, liquidity risks and interest rate risks are given in note 19.

 

Internal risks

The control of risks related to governance, compliance and administration is dealt with in the report on Corporate Governance.

 

VIABILITY STATEMENT

The Company is subject to continuation votes every three years.  As a consequence of the appointment of the new Investment Manager the Directors proposed the replacement of the pre-existing continuation vote schedule by a new three-year schedule, with the next vote falling due in 2019.  This was approved by the AGM held in July 2016.

 

The Directors consider that a three-year time frame, being the period up to the proposed date of the next continuation vote, is an appropriate period over which to assess the Company's viability.

 

After making inquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence and meet its liabilities as they fall due for at least three years from the date of approval of this document. 

 

In reaching this conclusion, the directors have considered each of the principal risks and uncertainties set out above.  They have considered the liquidity and solvency of the Company, the level of discount at which its shares trade, its income and expenditure profile including the absence of monthly management fees and the discontinuation of the use of gearing as an instrument of normal investment policy.  The Company's investments comprise readily realisable securities which could, if necessary, be sold to meet the Company's funding requirements.  The Company's plan to expand by the issue of new share capital and the sale of shares from treasury is kept under close, ongoing review by the Board.  Portfolio changes and market developments are also discussed at quarterly Board meetings. The internal control framework of the Company is subject to formal review on at least an annual basis.

 

The directors do not expect there to be any material increase in the annual ongoing charges of the Company over the period of their assessment.  The Company's income from investments and cash realisable from the sale of investments provide substantial cover to the Company's operating expenses and any other costs likely to be faced by the Company during the period under review. 

 

SOCIAL, ETHICAL, HUMAN RIGHTS AND ENVIRONMENTAL MATTERS 

Being an investment company, with no staff, premises, manufacturing or other operations of its own, the Company does not have any direct influence on social, ethical, human rights and environmental matters.  The Company has no greenhouse gas emissions to report from its operations, nor any responsibility for emission producing sources.

 

BOARDROOM DIVERSITY

The Company has no employees other than the Directors.  At 31 December 2016 the Company had five directors, all of whom were male.  The Company's policy is that the Board should have a broad range of skills; while keeping this in mind, consideration is given to the recommendations of the AIC Code and other guidance on boardroom diversity.

 

FIVE YEAR SUMMARY

The following data are all expressed as pence per share.  NAV figures are all calculated at bid prices.   

 

 

Year

NAV

Dividend in respect of year

Share price (mid market)


p

p

p

Year ended 28 February 2013

186.13

3.75

152.75

Year ended 28 February 2014

191.78

3.80

166.00

Year ended 28 February 2015

171.37

3.85

147.50

Year ended 29 February 2016

162.30

1.00

158.00

Period to 31 December 2016

172.66

2.00

173.50

 

 

OUTLOOK

The outlook for Aurora is discussed in the Chairman's Statement and the Manager's Review and Outlook.

 

 

TOP HOLDINGS

AT 31 DECEMBER 2016

 


Date of first purchase

Weight

By valuation

Avg. Cost

per share*

Share Price

Market Cap

Net Cash/

(Debt)



%

£

£

£

£

£









Bellway

Dec-15

14.7

7,585,970

23.15

24.76

3.0bn

26.5m

Tesco

Dec-15

12.7

6,543,359

1.77

2.07

16.8bn

(4.4bn)

Lloyds Banking Group

Dec-15

11.3

5,793,770

0.64

0.63

44.6bn

(12.2bn)

Sports Direct

Dec-15

8.1

4,166,880

3.38

2.79

1.6bn

(72m)

Barratt Developments

Dec-15

7.3

3,752,284

5.57

4.62

4.7bn

592m

Morrison Supermarkets

Dec-15

6.5

3,334,413

1.91

2.31

5.4bn

(1.3bn)

Vesuvius

Dec-15

5.3

2,704,777

3.34

3.95

1.1bn

(310m)

Glaxosmithkline

Dec-15

5.0

2,571,704

14.82

15.62

76.6bn

(14.9bn)

JD Weatherspoon

Jan-16

4.4

2,274,399

7.13

8.88

987m

(651m)

Redrow

Oct-16

4.0

2,071,753

4.02

4.29

1.6bn

(139m)

CPP Group

Oct-16

3.6

1,862,000

0.06

0.15

124m

4m









Other (<3%)


14.4






Total


97.3






Cash

 


2.7






Overall Total

 


100.0






 

*Net cost including sales

 

 

PORTFOLIO ANALYSIS

AT 31 DECEMBER 2016

 


Percentage of Portfolio

 

Retail

30.4

Construction

26.1

Financial

14.9

Leisure

9.5

Industrials

5.3

Pharmaceuticals

5.0

Food & Beverage

4.8

Insurance

1.3



Cash

2.7




100.0


 

 

ANALYSIS BY TYPE, MARKET AND CURRENCY

 

All investments are of Ordinary Shares, denominated in sterling.  All holdings carried at a value are in listed companies with the exception of Randall & Quilter, which is quoted on AIM.  The Company also has registered holdings in China Chaintek, but this has been written down to a valuation of £Nil.

 

 

This Strategic Report was approved by the Board on 20 April 2017.

 

For and on behalf of the Board

 

Lord Flight

Chairman

20 April 2017

 

 

GOVERNANCE

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES FOR THE ANNUAL REPORT

 

The directors are responsible for preparing the Strategic Report, the Directors' Report, the Remuneration Reports and the financial statements in accordance with applicable law and regulations.

 

Company law in the United Kingdom requires the directors to prepare financial statements for each financial year.  Under that law the directors have elected to prepare the Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.  Under company law the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company for that period.  In preparing these financial statements, the directors are required to:

 

·      select suitable accounting policies and then apply them consistently;

·      make judgements and accounting estimates which are reasonable and prudent;

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

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

 

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006.  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 website used by the Company.

 

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

 

Statement under the Disclosure and Transparency Rules 4.1.12

 

The directors confirm that to the best of their knowledge and belief;

 

(a)  The financial statements, 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 issuer; and

(b)  this annual report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces

 

Having taken advice from the Audit Committee, the Directors consider that 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 position and performance, business model and strategy.

 

For and on behalf of the Board

 

Lord Flight

Chairman

20 April 2017

 

 

 

FINANCIALS

 

STATEMENT OF

COMPREHENSIVE INCOME

FOR THE PERIOD ENDED 31 DECEMBER 2016

  


Period ended 31 December 2016


Year ended 29 February 2016

 



 

Revenue

 

Capital

 

Total


 

Revenue

 

Capital

 

Total

Note


£'000

£'000

£'000


£'000

 

£'000

 

£'000

 


Profits/(losses) on investments designated at fair value through profit or loss

-

2,144

2,144


-

( 826)

(826)










2

Investment income

944

-

944


671

-

671


Total income

944

2,144

3,088


671

(826)

(155)

3

Investment management fees

-

125

125


(66)

(191)

(257)

3

Other expenses

(308)

-

(308)


(341)

-

(341)


Profit/(loss) before finance costs and tax

636

2,269

2,905


264

(1,017)

(753)

6

Finance costs

-

-

-


(57)

(57)

(114)


Provision for gains/(losses) on investment in subsidiary

-

-

-


-

380

380


Profit/(loss) before tax

636

2,269

2,905


207

(694)

(487)

7

Tax

-

-



(3)

-

(3)


Profit/(loss) and total comprehensive income for the period

636

2,269

2,905


204

(694)

(490)










9

Earnings per share

3.00p

10.72p

13.72p


1.95p

(6.66p)

(4.71p)

The revenue and capital columns, including the revenue and capital earnings per share data, are supplementary information prepared under guidance published by the AIC. 

 

All revenue and capital items in the above statement derive from continuing operations.  No operations were acquired or discontinued during the period.  All revenue is attributable to the equity holders of the Company.    

 

The comparative period is not directly comparable to the period ended 31 December 2016, being of twelve months as compared to ten months.

 

The Board has declared an interim dividend of 2.00p per share (see note 8)

 

 

 

BALANCE SHEET

AT 31 DECEMBER 2016

 

 

 

 31 December


29 February

 




 

 

 2016


2016

 




Notes

 

£'000

 


£'000

 

 

 

NON-CURRENT ASSETS

 

 

 

 

10

Investments designated at fair value through profit or loss

49,849


14,445

 



49,849

 

14,445

 


CURRENT ASSETS

 

 

 

 


Other receivables

251


51

 


Cash and cash equivalents

1,403


4,145

 



1,654


4,196

 



 

 

 

 


TOTAL ASSETS

51,503


18,641

 



 

 

 

 


CURRENT LIABILITIES:

 

 

 

 


Other payables

65


201

 



65


201

 






 






 


TOTAL ASSETS LESS CURRENT LIABILITIES

51,438


18,440

 






 


EQUITY

 

 

 

 

12

Called up share capital

7,448

 

3,598

 


Capital redemption reserve

179


179

 


Share premium account

32,557


10,997

 

14

Investment holding gains/(losses)

2,111

 

(4,371)

 

14

Other capital reserves

8,208

 

7.551

 


Revenue reserve

935

 

486

 




 


 


TOTAL EQUITY

51,438

 

18,440

 



 

 

 

 

15

Net assets per ordinary share

172.66p

 

162.30p

 

 

Approved by the Board of Directors on 20 April 2017 and signed on their behalf by:

 

Lord Flight

 

Richard Martin

 

Company no. 03300814

 

In the balance sheet as at 29 February 2016 an amount of £1,513,000 arising from the sale of treasury shares has been reclassified from share premium account to other capital reserves

 

 

STATEMENT OF CHANGES IN EQUITY

FOR THE PERIOD ENDED 31 DECEMBER 2016

 

Period to 31 December

2016

Notes










Share capital

Capital redemption reserve

Share premium account

Investment holding losses

Other capital reserves

Revenue reserve

Total



£,000

£'000

£,000

£,000

£,000

£,000

£,000










Opening equity


3,598

179

10,997

(4,371)

7,551

486

18,440










Total comprehensive income/(loss) for the year


-

-

-

6,482

(4,213)

636

2,905










Sale of shares from treasury


-

-

-

-

4,870

-

4,870










Issue of new shares


3,850

-

21,861

-

-

-

25,711










Share issue costs


-

-

(301)

-

-

-

(301)










Dividends paid

8

-

-

-

-

-

(187)

(187)









Closing equity


179

32,557

2,111

8,208

935

51,438

 

 

Year to 29 February

2016

Notes








 



Share capital

Capital  redemption reserve

Share premium account

Investment holding losses

Other capital reserves

Revenue reserve

Total

 



£,000

£'000

£,000

£,000

£,000

£,000

£,000

 










 

Opening equity


3,598

179

10,997

(8,505)

10,866

682

17,817

 










 

Total comprehensive income/(loss) for the year


-

-

-

2,363

(3,057)

204

(490)

 










 

Provision for losses on investment in subsidiary

11

-

-

-

1,771

(1,771)

-

-

 










 

Sale of shares from treasury


-

-

-

-

1,513

-

1,513

 










 

Dividends paid

8

-

-

-

-

-

( 400)

( 400)

 










 

Closing equity


3,598

179

10,997

(4,371)

7,551

486

18,440

 










 










In the statement of changes in equity for the year ended 29 February 2016 an amount of £1,513,000 arising from the sale of treasury shares has been reclassified from share premium account to other capital reserves

 

 

CASH FLOW STATEMENT

FOR THE PERIOD ENDED 31 DECEMBER 2016

 

 



Period to 31 December


Year to 29 February



2016


2016



£'000


£'000







NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES





Cash inflow from investment income and interest

747


660


Cash outflow from management expenses

(322)


(400)







Payments to acquire non-current asset investments

(36,198)


(14,162)


Receipts on disposal of non-current asset investments

2,938


20,133







Foreign exchange difference received

-


1


Tax paid

-


(3)







NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES

(32,835)


6,229












CASH FLOWS FROM INVESTING ACTIVITIES





Decrease/(increase) in loans advanced to subsidiary

-


771







CASH FLOWS FROM FINANCING ACTIVITIES





Issues of new shares

25,410


-


Sale of treasury shares

4,870


1,513


Dividends paid

(187)


(400)


Decrease in bank borrowings

-


(4,000)


Finance charges and interest paid

-


(113)


NET CASH FLOW FROM FINANCING ACTIVITIES

30,093


(3,000)












(DECREASE)/INCREASE IN CASH

(2,742)


4,000

















Cash and cash equivalents at beginning of year

4,145


145







(Decrease)/increase in cash

(2,742)


4,000







Cash and cash equivalents at end of year

1,403


4,145

                                                                                

 

 

The comparative period is not directly comparable to the period ended 31 December 2016, being of twelve months as compared to ten months.

 

 

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

1.   ACCOUNTING POLICIES

 

   Basis of Accounting

The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the IASB and International Accounting Standards and Standing Interpretations Committee interpretations approved by the IASC that remain in effect, and to the extent that they have been adopted by the European Union.  

 

Under IFRS, the AIC Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in November 2014 has no formal status, but the Company adheres to the guidance of the SORP. 

 

The accounting policies are unchanged from those used in the last annual financial statements except where otherwise stated.  The particular accounting policies adopted are described below:

 

(a)         Accounting Convention

The accounts are prepared under the historical cost basis, except for the measurement of fair value of investments.   

 

(b)                       Subsidiary

The accounts are of the Company and do not consolidate its former subsidiary AIT Trading Limited ("AIT").  AIT became inactive during the year ended 29 February 2016 and has now been dissolved. There were no assets as at 29 February 2017.

 

(c)         Investments

As the Company's business is investing in financial assets with a view to profiting from their total return in the form of increases in fair value, investments are designated as fair value through profit or loss on initial recognition in accordance with IAS 39.  At this time, fair value is the consideration given, excluding material transaction or other dealing costs associated with the investment. 

 

After initial recognition such investments are valued at fair value.  For quoted investments this is established by reference to bid, or last, market prices depending on the convention of the exchange on which the investment is quoted. Gains or losses are recognised in the capital column of the Statement of Comprehensive Income.  All purchases and sales of investments are accounted for on a trade date basis.     

 

 (d)        Income from Investments

Investment income from ordinary shares is accounted for on the basis of ex-dividend dates.  Income from fixed interest shares and securities is accounted for on an accruals basis using the effective interest method. Special Dividends are assessed on their individual merits and are credited to the capital column of the Statement of Comprehensive Income if the substance of the payment is a return of capital; with this exception all investment income is taken to the revenue column of the Statement of Comprehensive Income.  Income from gilts and bank interest receivable is accounted for on an accruals basis using the effective yield.

 

(e)         Capital Reserves

The Company is not precluded by its Articles from making any distribution of capital profits by way of dividend, but the Directors have no current plans to do so.  Profits and losses on disposals of investments are taken to the other capital (gains on disposal) reserve.  Revaluation movements are taken to the investment holding reserve via the capital column of the Statement of Comprehensive Income.

 

(f)          Investment Management Fees, Finance Costs and Other Costs

Performance-related fees are charged to other capital reserves (gains on disposal) via the capital column of the Statement of Comprehensive Income.  Other costs are normally charged to revenue, unless there is a compelling reason to charge to capital.  Tax relief in respect of costs allocated to capital is credited to capital via the capital column of the Statement of Comprehensive Income on the marginal basis.     

 

(g)         Taxation

Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date. 

 

Deferred income taxes are calculated using the liability method on temporary differences.  Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases.  In addition, tax losses available to be carried forward as well as other income tax credits are assessed for recognition as deferred tax assets.

 

Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply at their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.  Deferred tax liabilities are always provided for in full.  Deferred tax assets are recognised to the extent that it is probable that they will be able to be offset against future taxable income.

 

Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to equity.

 

 (h)          Foreign currency

The currency of the primary economic environment in which the Company operates (the functional currency) is pounds sterling ("Sterling"), which is also the presentational currency of the Company.  Transactions involving currencies other than Sterling are recorded at the exchange rate ruling on the transaction date.  At each balance sheet date, monetary items and non-monetary assets and liabilities, which are fair valued and which are denominated in foreign currencies, are retranslated at the closing rates of exchange.   Such exchange differences are included in the Statement of Comprehensive Income and allocated to capital if of a capital nature or to revenue if of a revenue nature.  Exchange differences allocated to capital are taken to gains on disposal or investment holding losses, as appropriate.

 

(i)          Cash and cash equivalents   

Cash and Cash Equivalents in the Cash Flow Statement comprise cash held at bank.

 

(j)          Dividends payable to equity shareholders

Dividends payable to equity shareholders are recognised in the Statement of Changes in Equity when they are paid, or have been approved by shareholders in the case of a final dividend.

 

  (k)        Judgements and estimations

 

The directors have reviewed matters requiring estimation and/or judgement.  The preparation of the financial statements requires management to make judgements, estimations and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenue and expenses during the year.  However, the nature of the estimation means that actual outcomes could differ from those estimates.  There are no judgments or estimates that have had a significant effect on amounts recognised in the financial statements.

 

 

2.

INCOME

Period to 31 December


Year to 29 February



2016


2016


Income from investments:

£'000


£'000


Franked dividends from listed or quoted investments

795


368


Unfranked income from overseas dividends

149


209


Income from listed fixed interest securities

-


55


Interest income from subsidiary company

-


39



944


671


Other income:





Bank interest receivable

-


-








944


671






 

 

3.

INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES


2016




2015




Revenue

Capital

Total


Revenue

Capital

Total



£'000

£'000

£'000


£'000

£'000

£'000


Investment management fees

                              - monthly                                     -performance

 

-

-

 

-

-

 

-

-


 

66

-

 

66

125

 

132

125



-

-

-


66

191

257


Administration fees

79

-

79


76

-

76


Depository/custodian fees

60

-

60






Registrar's fees

22

-

22


20

-

20


Directors' fees

71

-

71


83

-

83


Auditors' fees - audit of the Company and of the consolidated financial statements

- audit of the subsidiary

29

 

 

 

-

-

 

 

 

-

29

 

 

 

-


33

 

 

 

2

-

 

 

 

-

33

 

 

 

2


-     audit-related assurance services 

-

-

-


9

-

9


Write off of investment income from subsidiary company

-

-

-


39

-

39


Miscellaneous expenses

47

-

47


79

-

79


Total other expenses

308

-

308


341

-

341

 

 









All expenses include any relevant irrecoverable VAT.  The amounts excluding VAT paid or accrued for the audit of the Company are £24,500 (2015: £27,000).  The Company formerly paid for the audit of the subsidiary, for which £2,000 was accrued in the Company's accounts at 29 February 2016.

 

 

4.      DIRECTORS' FEES

        The fees paid or accrued were £67,708 (year to 29 February2016: £75,241).  There were no other emoluments.  The gross figures shown for directors' fees in note 3 above include employers' National Insurance charges or VAT, as appropriate.  Full details of the fees of each director are given in the Directors' Remuneration Report.  

 

 

5.     TRANSACTION CHARGES

              



Period to 31


Year to 29



December


February

G


2016


2016



£'000


£'000







Transaction costs on purchases of investments

196


96


Transaction costs on sales of investments

4


46


Total transaction costs included in gains or losses on investments at fair value through profit or loss

200


142

 

 

6.    FINANCE COSTS

                                                                Period to 31 December                        Year to 29 February




2016




2016




Revenue

 

Capital

Total


Revenue

 

Capital

 

Total

 



£'000

£'000

£'000


£'000

£'000

£'000


Interest payable

-

-

-


30

30

60


Facility and arrangement fees and other charges

-

 

-

-


27

27



-

-

-


57

57

 

 

7.    TAXATION

                                                               Period to 31 December                         Year to 29 February




2016




2016




Revenue

Capital

Total


Revenue

 

Capital

 

 

Total

 

 



£'000

£'000

£'000


£'000

£'000

£'000


Corporation tax

-

-

-


-

-

-


Overseas tax

-

-

-


3

-

3


Tax charge in respect of the current year

-

-

-


3

-

3

 

 

             Current taxation

            The taxation charge for the year is different from the standard rate of corporation tax in the

             UK (20%).  The differences are explained below:     

            

                                                                                                         Period to 31         Year to 29

                                                                                                            December          February



2016


2016



£'000


£'000


Total profit/(loss) before tax

2,905


(487)







Theoretical tax at UK corporation tax rate of 20.00% (20.09%)

581


(98)


Effects of:





Capital profits/(losses) that are not taxable

(479)


140


UK dividends which are not taxable

(159)


(74)


Overseas dividends that are not taxable

(30)


(42)


Increase in excess tax losses

62


124


Expenses charged to capital account for which a deduction is claimed

25


(50)


Overseas tax written off/(recovered)

-


3


Actual current tax

-


3

 

 

The Company is an investment trust and therefore is not charged to tax on capital gains.

        
Factors that may affect future tax charges

The Company has tax losses of £8,805,985 (£8,623,228) in respect of management expenses and of £1,490,706 (£1,490,706) in respect of loan interest.  These amounts are available to offset future taxable revenue.  A deferred tax asset has not been recognised in respect of those expenses and will be recoverable only to the extent that the Company has sufficient future taxable revenue.

 

 

8.    ORDINARY DIVIDENDS                                                                                             





Period to


Year to





31 December


29 February





2016


2016





£'000


£'000

Dividends reflected in the financial statements:






Final dividend paid for the year 2016 at 1.00p per share (2015: 3.85p)


187


400






Dividends not reflected in the financial statements:





Final dividend for the year 2016 of 1.00p per share


-


187

Interim dividend for the year 2017 at 2.00p per share


615


-

 

The Company will file Interim Accounts at Companies House prior to making payment of the interim dividend.

 

9.     EARNINGS PER SHARE

Earnings per share are based on the profit of £2,905,495 (loss £490,295) attributable to the weighted average of 21,166,160 (10,411,919) ordinary shares of 25p in issue during the year, excluding shares held in Treasury.

 

Supplementary information is provided as follows: revenue earnings per share are based on the revenue profit of £636,037 (profit £203,622); capital earnings per share are based on the net capital profit of £2,269,458 (loss £693,917), attributable to 21,166,160 (10,411,919) ordinary voting shares of 25p.

 

10.   INVESTMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS

 



31 December


29 February



2016


2016



£'000


£'000


UK listed securities

49,849


14,445


Total non-current investments designated at fair value through profit or loss

49,849


14,445


Movements during the year:





Opening balance of investments, at cost

18,816


29,942


Additions, at cost

36,198


14,160







Disposals - proceeds received or receivable                              

(2,938)


(20,124)


                 - add realised losses/ less realised profits                                                   

(4,338)


(3,196)


                 - at cost

(7,276)


(23,320)







Investment in subsidiary

-


(1,966)


Cost of investments designated at fair value through profit or loss at 31 December/29 February

47,738


18,816







Revaluation of investments to market value:





Opening balance

(4,371)


(8,505)


Increase/(decrease) in unrealised appreciation debited to investment holding reserve

6,482


2,363


Provision for write-off of investment in subsidiary

-


1,771


Balance at 29 February

2,111


(4,371)







Market value of non-current investments designated at fair value through profit or loss at 29 February

49,849


14,445

 

 

11.        SUBSIDIARY

          The Company formerly had an investment in AIT Trading Limited (AIT), which was a wholly owned subsidiary registered in England and Wales. The investment comprised two ordinary shares of £1 each.  AIT undertook purchases of investments for re-sale in the shorter term, with the objective of achieving a trading profit. 

 

          AIT ceased trading during the year ended 29 February 2016.  The Company wrote off its investment in AIT and AIT has now been dissolved. The inclusion of AIT in the Company's accounts would not be material for the purpose of giving a true and fair view.

 

The profit before tax of AIT for the year ended 29 February 2016 was £341,213.  The net deficit of AIT written off during the year ended 29 February 2016 was £1,430,702 and at 29 February 2016 the net assets of AIT were Nil.  No dividend was paid from AIT to the Company.


Year ended 29 February 2016

Loan to AIT

1,196

Loan written off

(1,196)

Net Investment in subsidiary

-

Other receivables:


Loan interest

235

Interest written off

(235)

Other receivables

-

Provision for gains/(losses) on investment in subsidiary:


Provision brought forward

(1,772)

Movement in provision - capital

                                     - revenue

380

(39)

Provision written off

(1,431)

 

12.  SHARE CAPITAL

 




At 31


At 29




December 2016


February 2016


Allotted, called up and fully paid






    Ordinary shares of 25p

Number

29,792,305


14,391,389



£'000

7,448


3,598

 

The Company did not purchase any of its own shares during the period ended 31 December 2016 or the year ended 29 February 2016.  No shares were cancelled during either year. 

 

During the period ended 31 December 2016 3,029,520 shares were sold from Treasury for a gross amount of £4,882,617 (year ended 29 February 2016 964,810 sold from Treasury).  No shares were held in Treasury at 31 December 2016 (29 February 2016 3,029,520 held in Treasury).

 

The Company issued a prospectus dated 22 March 2016.  This provided for a Placing on 29 March 2016 and an ongoing Placing Programme, under which up to 55 million further shares could be issued from time to time during the period from 30 March 2016 to 21 March 2017.  The price at which shares may be issued under this Programme is the NAV per share at the time of issue plus a premium to cover the expenses of the issue as determined by the Board at the time of each issue. 

 

In the Placing dated 29 March 2016 the Company raised a gross amount of £8,098,079 for the issue of 4,858,750 new shares.  Two further Placings were carried out during the period ended 31December 2016: on 1 September 2016 5,965,750 new shares were issued for a gross amount of £9,774,881 and on 22 December a gross amount of £7,217,269 was raised for 4,200,727 new shares.

 

The Company also put in place a block listing facility for up to 3,850,028 new shares, to meet market demand arising from time to time.  Under this facility a total of 375,689 new shares were issued in the period ended 31 December 2016, for a gross consideration of £620,560.

 

At 31 December 2016, the Company had 29,792,305 (29 February2016 14,391,389) shares in issue.    The number of voting shares at 31 December was 29,792,305 (29 February 2016 11,361,869).

 

13.   TOTAL EQUITY

Total Equity includes, in addition to Share Capital, the following reserves:

 

Capital Redemption Reserve.  When any shares are redeemed or cancelled, a transfer of realised profit must be made to this reserve in order to maintain the level of capital that is not distributable. 

 

Share Premium Account.  When shares are issued at a premium to their nominal value, the "capital profit" arising on their allotment must be held in a Share Premium Account, which is not distributable in the ordinary course and may be utilised only in certain limited circumstances.

 

Capital profits arising from the Company's investment transactions are held as Capital Reserves, subdivided between Gains on Disposal for profits arising upon sales of investments and Investment Holding gains/losses for portfolio revaluations.  The movements on this account are analysed in note 14 below.  

 

The Company's Revenue Reserves are the net profits that have arisen from the Company's revenue income in the form of dividends and interest, less operating expenses and dividends paid out to the Company's shareholders.

 

14.   CAPITAL RESERVES

 

 



31 December


29 February

 



2016


2016

 



£'000


£'000

 


Investment holding gains/(losses)




 






 


Opening balance

(4,371)


(8,505)

 






 


Revaluation of investments  - listed

6,482


2,362

 






 


Exchange differences

-


1

 






 


Provision for impairment of holding in subsidiary

-


1,771

 






 


Balance of investment holding gains/(losses) account at 31 December (29 February)

2,111


(4,371)

 






 


Other capital reserves




 






 


Opening balance

7,551


10,866

 






 


Net gains and losses on realisation of investments

(4,370)


(3,189)

 


Capital distributions received

32


-

 


Provision for gains and losses on subsidiary

-


380

 


Expenses of capital management:   management fees

 

125


 

(191)

 


finance costs                                                 

-


(57)

 


Total of realised gains and losses reflected in the Statement of Comprehensive Income

(4,213)


(3,057)

 






 


Write-off of holding in subsidiary

-


(1,771)

 


Sale of treasury shares

4,870


1,513

 


Total gains and losses of other capital reserves

657


(3,315)

 


Balance of other capital reserves at 29 February

8,208


7,551







Total capital reserve at 29 February

10,319


3,180

 

 

15.   NET ASSETS PER ORDINARY SHARE

The figure for net assets per ordinary share is based on £51,438,261 (29 February 2016: £18,440,457) divided by 29,792,305 (29 February 2016: 11,361,869) voting ordinary shares in issue at 31 December 2016.

 

 

16.   RECONCILIATION OF PROFT BEFORE FINANCE COSTS AND TAX TO

        NET  INFLOW FROM OPERATING ACTIVITES








Period to


Year to



31 December 2016


29 February 2016



£'000


£'000







Profit/(loss) before finance costs and tax

2,905


(753)







(Increase)/decrease in non-current investments

(35,404)


6,798


Decrease/(increase) in other receivables

(200)


 60


(Decrease)/increase in other payables

(136)


127


Taxation (paid)/recovered

-


(3)







Net cash inflow from operating activities

(32,835)


6,229

 

 

17.   RELATED PARTY TRANSACTIONS

           Details of transactions with AIT Trading Limited are set out in note 11.

    

Details of the management, administration and secretarial contracts can be found in the Directors' Report.  Mr Chapple is a director of the company and an employee of Phoenix.  Fees payable to Phoenix and, prior to 28 January 2016, to Mars are shown in note 3. 

 

Other payables include accruals of administration fees of £8,056 (At 29 February 2016 £15,842 for two months). 

 

No provision has been made for a performance fee at 31 December 2016 (At 29 February £124,821). Any performance fee would be payable in shares after the end of the performance fee period, but the amount that would have be payable is provided in the accounts as an equivalent value of money. All figures include any appropriate VAT. 

 

 

 

18.   FINANCIAL ASSETS/LIABILITIES

Investments are carried in the balance sheet at fair value.  For other financial assets and financial liabilities, the balance sheet value is considered to be a reasonable approximation of fair value.

 

Financial assets

 

The Company's financial assets may include equity investments, fixed interest securities, short-term receivables and cash balances.  The currency and cash-flow profile of those financial assets was: 

 

                                                              31 December                                     29 February



2016




2016



Interest bearing

Non- interest bearing

Total


Interest bearing

Non- interest bearing

Total


£'000

£'000

£'000


£'000

£'000

£'000

Non-current investments at fair value through profit or loss:








£ sterling equities

-

49,849

49,849


-

14,445

14,445


-

49,849

49,849


-

14,445

14,445









Cash at bank:








Floating rate - £ sterling

-

1,403

1,403


-

4,145

4,145










-

1,403

1,403


-

4,145

4,145

 

Cash at bank includes £1,393,316 (29 February 2016: £4,090,097) held by the Group's Depository, BNP Paribas.

 

Financial liabilities

 

The Company finances its investment activities through its ordinary share capital and reserves.  It has discontinued the use of borrowing for such purposes.  The Company's financial liabilities comprise short-term trade payables. Foreign currency balances are stated in the accounts in sterling at the exchange rate as at the Balance Sheet date.

 

The Company no longer uses borrowing for investment management purposes.  Its facility from Coutts & Co was cancelled by mutual agreement on 2 November 2015. 

 

The currency and cash-flow profile of the financial liabilities of the Company was:

 


31 December


29 February


2016


2016


£'000


£'000





Non interest bearing:




Short term trade payables

-


-






-


-

 

 

 

 

19.        FINANCIAL INSTRUMENTS - RISK ANALYSIS

The general risk analysis undertaken by the Board and its overall policy approach to risk management are set out in the Strategic Report.  Issues associated with portfolio distribution and concentration risk are discussed in the Investment Policy section of the Strategic Report.  This note, which is incorporated in accordance with accounting standard IFRS7, examines in greater detail the identification, measurement and management of risks potentially affecting the value of financial instruments and how those risks potentially affect the performance and financial position of the Company. 

 

The risks concerned are categorised as follows:

          A) Potential Market Risks, which are principally (i) Currency Risk (ii) Interest Rate Risk and (iii) Other Price Risk. 

B) Liquidity Risk

C) Credit Risk

 

Each is considered in turn below:

 

            A (i) Currency Risk

The portfolio as at 31 December 2016 was invested entirely in sterling securities and there was no currency risk arising from the possibility of a fall in the value of sterling impacting upon the value of investments or income.                    

 

The Company had no foreign currency borrowings at 31 December 2016 or 29 February 2016 and no sensitivity analysis is presented for this risk.

 

A (ii) Interest Rate Risk

The Company did not hold fixed interest securities at 31 December 2016 or 29 February 2016. 

 

With the exception of cash, no interest rate risks arise in respect of any current asset.   All cash held as a current asset is sterling denominated, earning interest at the bank's or custodian's variable interest rates. 

 

The Company had no borrowing at 31 December 2016 or 29 February 2016.   

 

A (iii) Other Price Risk

The principal price risk for the Company is the price volatility of shares that are owned by the Company.  As described in the Investment Manager's Review, the Company spreads its investments across different sectors and geographies, but, as shown by the Portfolio Analysis in the Business Review, the Company may maintain relatively strong concentrations in particular sectors selected by the Investment Manager. 

 

B  Liquidity Risk

         Liquidity Risk is considered to be small, because the portfolio is invested in readily realisable securities.  As a consequence, cash flow risks are also considered to be small.  The Manager estimates that, under normal market conditions and without causing excessive disturbance to the prices of the securities concerned, the majority of the portfolio could be realised within 7 days.

 

C Credit Risk

The Company invests in quoted equities and fixed interest securities.  The Company's investments are held by BNP ("the Depository"), which is a large international bank with a high reputation.  The Company's normal practice is to remain fully invested at most times and not to hold very large

19.   FINANCIAL INSTRUMENTS - RISK ANALYSIS - continued

 

quantities of cash.  At 31 December 2016, cash at bank comprised £1,393,316 (29 February 2016: £4,090,097) held by the Depository and £10,078 held by Coutts & Co (29 February 2016: £54,557), also part of a large international bank with a very high credit rating.

 

Credit Risk arising on transactions with brokers relates to transactions awaiting settlement.  This risk is considered to be very low because transactions are almost always undertaken on a delivery versus payment basis with member firms of the London Stock Exchange.             

 

             D  Capital management policies and procedures

The Company' s capital management objectives are:

 

·     to ensure the Company's ability to continue as a going concern; and

·     to provide an adequate return to shareholders

 

by pursuing investment policies commensurately with the level of risk.

 

The Company monitors capital on the basis of the carrying amount of equity, less cash and cash equivalents as presented on the face of the statement of financial position.

 

The Company sets the amount of capital in proportion to its overall financing structure, i.e. equity and financial liabilities. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders (within the statutory limits applying to investment trusts), return capital to shareholders, issue new shares, or sell assets.

 

 

20.        FAIR VALUE HIERARCHY

Under IFRS13 investment companies are required to disclose the fair value hierarchy that classifies financial instruments measured at fair value at one of three levels according to the relative reliability of the inputs used to estimate the fair values.

 

Classification


Input




Level 1


Valued using quoted prices in active markets for identical assets

Level 2


Valued by reference to valuation techniques using observable inputs other than quoted prices included within Level 1

Level 3


Valued by reference to valuation techniques using inputs that are not based on observable market data

 

 

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.

 

Assessment of Hierarchy

 

The Company's subsidiary was held at cost less impairment and therefore its valuation as an investment in the Company's balance sheet did not fall within the fair value hierarchy.  The investment was written off in 2016.

 



31 December


29 February



2016


2016






Level 1


49,849


14,445

Level 2


-


-

Level 3


-


-

 

 

21.    Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Company

 

At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Company.

 

Information on new standards, amendments and interpretations that are expected to be relevant to the Company's financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Company's financial statements.

 

The Company intends to adopt these standards (where applicable) when they become effective.

 

·     IFRS 9 Financial Instruments - classification and measurement of financial assets and financial liabilities as defined in IAS39 (IASB effective date 1 January 2018).

 

It is not expected that the adoption of IFRS 9 will have any significant impact on the Company.

 

         

22.   POST BALANCE SHEET DATE EVENTS

 

Since 31 December 2016 the Company has made further issues from its block listing facility of 1,134,000 new shares.

 

The Company has effected on 15 March 2017 a further Placing of 2,352,913 new shares

 

As at 20 April 2017 the Company has 33,279,218 shares in issue and the number of voting shares is 33,279,218.

 

23.       Financial information

This announcement does not constitute the Company's statutory accounts. The financial information for the period to 31 December 2016 is derived from the statutory accounts for that period, which will be delivered to the registrar of companies following the Company's Annual General Meeting.  The statutory accounts for the year to 29 February 2016 have been delivered to the registrar of companies.  The auditors reported on the accounts for the year to 29 February 2016; their report was unqualified and did not include a statement under Section 498(2) or (3) of the Companies Act 2006.

 

The annual report for the period ended 31 December 2016 will be posted to shareholders and will be made available on the Investment Manager's website.

 

This announcement contains regulated information under the Disclosure Rules and Transparency Rules of the FCA.

 

The annual report will be submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/NSM   

 

24.       Annual general meeting

The Annual General Meeting will be held on 8 June 2017 at 12.00 noon at the offices of Grant Thornton (UK) LLP, 30 Finsbury Square, London EC1V 4RU.

 

20 April 2017

 

Secretary and registered office

PraxisIFM Fund Services Limited

Mermaid House

2 Puddle Dock

London EC4V 3DB

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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