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Invesco Perp Enh Inc (IPE)

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Thursday 07 December, 2017

Invesco Perp Enh Inc

Annual Financial Report

Invesco Perpetual Enhanced Income Limited

Annual Financial Report

For the year ended 30 September 2017


Performance Statistics

Terms marked † are defined in the Glossary of Terms in the annual financial report.

Balance sheet at 30 September 2017 2016 CHANGE
Shareholders’ funds (£’000)(1) 125,325 99,964 +25.4
Net asset value per ordinary share 77.5p 74.5p +4.0
Share price 80.3p 77.4p +3.7
Premium per ordinary share 3.6% 3.9%
Gross borrowing 23% 25%
Net borrowing 16% 16%

(1)  reflects 27,570,224 (2016: 11,450,000) ordinary shares issued in the year.

Year Ended Year Ended
30 September 30 September
Total Return 2017 2016
3 month LIBOR rate +0.3% +0.4%
Net asset value (‘NAV’) * +10.7% +15.7%
Share price +10.5% +19.0%

Source: Invesco/Thomson Reuters Datastream.

* The increase in total return NAV includes a 0.4% enhancement to NAV generated by the issue of ordinary shares during the year at a premium.

Year Ended Year Ended
30 September 30 September
2017 2016
Gross income (£’000) 7,499 6,729
Net revenue available for ordinary shares (£’000) 6,484 5,743
Dividends per ordinary share:
  – first interim 1.25p 1.25p
  – second interim 1.25p 1.25p
  – third interim 1.25p 1.25p
  – fourth interim 1.25p 1.25p
  – Total 5.00p 5.00p
Ongoing Charges
  – ongoing charges 1.22% 1.32%
  – performance fee 0.93% 0.96%
Return per Ordinary Share#
Revenue return 4.5p 4.5p
Capital return 3.1p 6.3p
Total return 7.6p 10.8p

#  The return per ordinary share is the amount of profit (or loss) generated for the financial year divided by the weighted average number of ordinary shares in issue for the financial year.




I write this report with the backdrop of economic data having improved, central bank policy still remaining highly accommodative, and the election of centrist governments in France and Germany soothing market nerves. Despite elements of uncertainty existing in the UK relating to the ongoing negotiations to exit the European Union, the environment overall has remained supportive for high yield bond markets during the first half of 2017. New bond issuance has remained strong with yields continuing to fall and default rates muted.

Despite the backdrop remaining supportive, the Board is in agreement with the portfolio managers, that a cautious stance needs to be maintained as yields become ever more compressed, not fully reflecting the risks of individual issuers, whilst the Central Bank policy backdrop is likely to be of a more hawkish tone over the coming months. The yield to maturity of the ICE Bank of America Merrill Lynch (BofAML) European Currency High Yield Index at 30 September 2017 was 3.5%, near the lowest level in its 20 year history and this trend has continued after the year end, to the extent that European high yield now offers a return which is lower than US Treasury yield.

Over the period, your Company’s Net Asset Value (NAV) total return was 10.7% which compares to a total return for the ICE BofAML European Currency High Yield Bond index (Sterling Hedged) of 8.9%; the Sterling Investment Grade Bond Index return of 0.1%; and United Kingdom Gilts returning –3.7%. (Source: BofAML)

The low yields available from much of the high yield bond market and the associated capital risk continues to highlight the importance of a strategy that is highly selective and focused on generating a sustainable source of relatively high income combined with lower NAV volatility and capital preservation.

Results for the Year

I am pleased to report that the Company has performed strongly with a total return to shareholders, based on the share price with dividends reinvested, of 10.5%. The Company’s share price rose from 77.4p at the start of the year to 80.3p, an increase of 3.7%.

As a result of the Company’s good performance as measured by its NAV total return, a performance fee of £1,018,000 has been earned by the Manager for the year. Further details of the management agreement, including fees, can be found in the annual financial report. Shareholders attention is drawn to the ‘clawback’ element which provides some protection in the event of poorer performance being experienced in the year to 30 September 2018.

In the current low interest rate environment your Board continues to believe that shareholders place great value on the Company’s consistent dividend stream and has prioritised revenue generation through investment in relatively high-yielding and secure debt positions. Market yields remain at historically low levels but even so your portfolio managers have managed to generate a revenue return of 4.5p per share. As I reported in my Chairman’s Statements in previous annual financial reports in the absence of unforeseen circumstances, it is the Board’s current intention that the Company will maintain the annual dividend of not less than 5p per share, paid equally and quarterly. The Board has maintained the 5p annual dividend and the fourth interim dividend of 1.25p per share was declared on 19 September 2017.

The shortfall of revenue earned versus dividend paid of 0.5p is the equivalent of £836,000 (2016: £615,000). This has been funded from revenue reserve which the Company has accumulated over a number of years for this very purpose. After payment of the year’s dividend and based on the current number of shares in issue of 164,294,855, this reserve would still be adequate to cover 1.2 times the annual dividend of 5p.


The Company uses repo financing which the Board believes remains a flexible and relatively low cost method of providing additional capital when appropriate. The very low interest rate environment affords the portfolio managers the ability to achieve an attractive profit margin on the investments. The level of gearing is carefully monitored by the Board which is fully cognisant of the greater capital volatility that it entails.

The portfolio managers use borrowings to gear the portfolio during most market conditions. The Company’s upper limit for gearing is 50% of shareholders’ funds and the portfolio managers working with the Board will vary the level according to their view of prevailing market conditions. During the year to 30 September 2017 the level of gearing has not approached the upper level. It should be noted that preservation of the Company’s NAV remains a key consideration. As a result, the portfolio managers have sought to focus the Company’s holdings towards generally lower risk bonds as a way to mitigate capital volatility.

The Company started the year with gross borrowing of 25% and this has decreased marginally so that at the year end gross borrowing was 23%. Taking the Company’s cash position into account, net borrowing remained at 16%, and average net borrowing for the year was 17.8% (2016: 21.0%). As at 5 December 2017 (the latest practical date before publication) the level of borrowing is 25% (gross) and 20% (net).

Share Discount/Premium and Share Issuance

The Board monitors the price of the Company’s shares in relation to their NAV and the premium/discount at which they trade. Throughout the year the shares traded at a premium, within the range 2.7% to 7.9%. In order to satisfy market demand the Company issued 27,570,224 new shares at an average price of 78.81p during the year to 30 September 2017. This enhanced the NAV by £481,000 (0.43%). For the period after the year end and up to 25 October 2017, an additional 2,527,852 new shares were issued. The new shares were issued at an average price of 79.77p and enhanced the NAV by just under £50,000.

On 5 July 2017 an Extraordinary General Meeting (EGM) was held to obtain the shareholder authority to authorise the Company to issue up to 14,996,210 new shares based on 10% of the then issued share capital. The previous authority granted by shareholders at the Company’s Annual General Meeting (AGM) held on 31 January 2017 of 13,605,645 shares had been fully utilised. In aggregate, new shares issued have almost reached the maximum authorised by shareholders at the EGM. The rules have changed to allow shareholders to authorise up to 20% of issued share capital (previously 10%) without issuing a prospectus. Given the costs involved in issuing a prospectus and the continuing demand in the market for the Company’s shares the Board, having consulted with a number of independent shareholders of the Company, considers that it would be in the best interests of the Company and shareholders to request shareholders’ authority to issue up to 20%. Accordingly, a special resolution has been included in the Notice of Annual General Meeting. I would like to stress that when considering any issue of new shares, your Board is mindful that existing shareholders’ interests are paramount and will always ensure that issues of new shares take place at an appropriate premium to the cum dividend NAV. In determining the appropriate premium, the Board will aim for a minimum premium of 3.5% before expenses.

Share Buy Backs

Your Directors are seeking the authority in special resolution 8 to buy back up to 24,627,798 shares (14.99% of the Company’s issued share capital) subject to the restrictions referred to in the notice of the AGM. This authority will expire at the AGM in 2019. It is the Board’s current intention to buy back shares at a discount to NAV where it is in the Company’s interests to do so. Your Directors are proposing that shares bought back by the Company either be cancelled or, alternatively, be held as treasury shares with a view to their resale, if appropriate, or later cancellation.

Board Composition and Corporate Governance

At the conclusion of the Company’s AGM on 31 January 2017 Gordon Neilly retired as a Director of the Company. The Board and I would like to reiterate our thanks for his years of service and his valuable and insightful contributions.

As reported previously, during the year the Board has carried out a review of its composition and succession planning. Following a rigorous externally facilitated search, Richard Williams was appointed to the Board on 11 July 2017. He is a qualified actuary with significant fixed interest experience and broader knowledge of the investment world gained at a senior level. With effect from 19 September 2017, he was appointed Chairman of the Management Engagement Committee in recognition of his particular knowledge and experience of the commercial terms of engagement of a wide range of different types of asset management providers. Peter Yates remains a member of the MEC and Chairman of the Audit Committee. The MEC is continuing its role of reviewing the terms of engagement and performance of all of the Company’s service providers.


The Company’s Notice of AGM is contained on pages 62 to 64 in the annual financial report and will be held at 10.00am on 29 January 2018. A summary of the special business is set out in the Directors’ Report in the annual financial report, and two of the special resolutions are explained above. The Directors have considered all the resolutions proposed in the Notice of AGM and, in their opinion, consider them to be in the interests of shareholders as a whole. The Directors therefore recommend that shareholders vote in favour of each resolution, as they will do so in respect of their own shareholdings.


As you will read in the Portfolio Managers’ Report which follows, 2017 has proven to be a year of mixed fortunes in the bond markets. In this context, the Company has performed strongly. The market overall still remains sensitive to price fluctuations and it is during these periods that your portfolio managers can seek to lock in attractive yields for bonds they like whilst being careful to avoid taking undue risk. Low yields in the high yield bond markets and central banks shifting toward normalising monetary policy provide a challenging backdrop for next year. The impact of duration on a bond portfolio is a factor that the portfolio managers must contend with. However, it should be noted that the Company is predominately invested in bonds from parts of the bond market with relatively low sensitivities to interest rate changes, such as the high yield bond market. Nonetheless, with the Bank of England raising UK interest rates and the European Central Bank considering tapering its asset purchase programme, a period in which monetary policy is tightened is an important factor for the portfolio managers to consider in 2018. The portfolio managers continue to focus on managing a portfolio to provide shareholders with a relatively high, sustainable income. The current elevated valuation of the high yield market provides challenges in the short and medium term but thorough credit analysis and the understanding of credit risk remain the core elements in safeguarding the Company’s NAV.

Donald Adamson


6 December 2017



Market Background

The twelve months to the 30 September 2017 have been positive for the high yield bond market. From a high of 4.6% in early December, the average yield of the European currency high yield bond market has fallen steadily to a low of 3.5% in late September. Meanwhile, the premium companies in this part of the market need to pay to borrow over government bonds (the credit spread) fell over the twelve months from 428 basis points (bps) to 277bps.

The strong performance of the asset class can be attributed to a number of factors. First, economic data has shown continuous improvement within the Eurozone. For example, the latest GDP data shows annual growth to end of June 2017 in the region of 2.3%. This is the highest level of economic growth in the Eurozone since the first quarter of 2011 and importantly is broad based across the region. Second, after the rise of populism in 2016, political risk has fallen during 2017 with the election of market friendly candidates in the Netherlands, Italy, France and Germany. Third, the election of Donald Trump to the office of US President raised expectations of tax reforms and a shift toward fiscal stimulus. Fourth, inflation has generally remained benign. The UK has been the main exception with annualised Consumer Price Inflation above the Bank of England’s 2% target since February. Finally, central bank policy has remained accommodative. In the UK and Eurozone this has included corporate bond purchase programmes.

Against this supportive backdrop, default rates within the high yield sector have fallen in both US and European high yield bond markets. For example, Moody’s global speculative-grade default rate fell to 2.9% in August. This is the first time the rate has fallen below 3% since October 2015.

The best performing part of the high yield bond market has been the financial sector. This is in spite of a number of negative headlines about bank bailouts and rescues. In fact these rescues have had a positive impact by removing the weaker parts of the banking system to leave a stronger sector overall.

Levels of issuance within the high yield bond sector have been very strong over the twelve months. Barclays reported that to the end of September, year-to-date supply in European high yield bond markets was up 44% compared with the same period in 2016.

Portfolio Strategy

The portfolio holds a core (33%) of non-financial high yield corporate bonds, focused on seasoned issuers that we consider have a low likelihood of default. In addition, we have significant exposure to areas of the market, which we believe offer relatively attractive yield. Approximately 19% of the portfolio is invested in bank capital, predominantly in the debt of large European banks. We also have around a 9% allocation to subordinated bonds in the insurance sector. Elsewhere we also have holdings in non-financial corporate hybrid capital instruments (bonds with some equity-like characteristics). These instruments are held across various sectors including telecoms and utilities. The recent new share issuances by the Company provided us with the opportunity to selectively add some bonds to the portfolio. We currently use borrowing to try and enhance the portfolio’s income.

In the year under review, the total return NAV was 10.7%. The NAV rose from 74.5p to 77.5p. Net borrowing remained at 16% over the twelve months. Gross borrowing was 23% at the year end, down slightly from 25%.


Our view on the high yield market remains cautious. Yields are exceptionally low and credit spreads are relatively tight. However, default rates remain low, and all else being equal, we would expect the default outlook to remain benign in the months ahead.

The focus of our markets has now switched to the tapering of the European Central Bank’s asset purchase programme. Discussion around this will be an important factor for markets and could cause yields to rise. Meanwhile other risks have reduced. Politics in Europe is now supportive of markets and the Eurozone economy continues to show signs of strength. Furthermore, the rescue of troubled banks in Italy, Spain and the UK has taken some of the risk out of the banking sector.

Our overall approach in this ongoing low yield environment remains focused on seeking to deliver a consistent and attractive level of income.

Paul Read/Paul Causer/Rhys Davies

Portfolio Managers

6 December 2017



Background to the Company

The Company is a Jersey based, London listed investment company which at the year end had a portfolio of investments with a market value in excess of £140 million. The Company’s investment objective is shown below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are set out below and have been approved by shareholders.

The business model the Company has adopted to achieve its objective has been to contract the services of:

–        Invesco Fund Managers Limited (the ‘Manager’) to manage the portfolio in accordance with the Board’s strategy; and

–        R&H Fund Services (Jersey) Limited (‘R&H’) to provide company secretarial and general administration services.

All administrative support is provided by third parties. In addition to the management and administrative functions of the Manager and R&H, the Company has contractual arrangements with Link Market Services (Jersey) Limited (formerly known as Capita Registrars (Jersey) Limited) to act as registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as the depositary and custodian.  BNYMIL became the depositary following novation of the depositary agreement from BNY Mellon Trust & Depositary (UK) Limited on 1 December 2017.   This transfer has no substantive effect on the services received by the Company.

The Board has oversight of the Company’s service providers, and monitors them on a formal and regular basis. The portfolio managers responsible for the day-to-day management of the portfolio are Paul Read, Paul Causer and Rhys Davies.

For the purposes of the Alternative Investment Fund Managers Directive, the Company is an alternative investment fund. This has had no impact on the business model adopted by the Company.

Investment Policy

The Company’s Investment Policy comprises its investment objective, investment policy and risk and investment limits and is designed so as to provide shareholders with information on the policies that the Company will follow relating to asset allocation, risk diversification and gearing, including maximum exposures.

The Manager monitors the investment portfolio on an ongoing basis to ensure adherence to the Company’s Investment Policy.

Investment Objective

The Company’s principal objective is to provide shareholders with a high level of income whilst seeking to maximise total return through investing in a diversified portfolio of high yielding corporate and government bonds. The Company may also invest in equities and other instruments that the Manager considers appropriate.

The Company seeks to balance the attraction of high yield securities with the need for protection of capital and to manage volatility. The Company generally employs gearing in its Investment Policy.

Investment Policy and Risk

The investment portfolio is constructed in order to gain exposure to attractive ideas within the investment parameters of the investment portfolio and to express the Company’s views on fixed interest markets. The investment process comprises three key elements which drive portfolio construction – macroeconomic analysis, credit analysis and value assessment. The Manager aims to control stock-specific risk by ensuring that the investment portfolio is appropriately diversified. In-depth, continual analysis of the fundamentals of all holdings gives the Manager an understanding of the financial risks associated with any particular stock.

The Company may enter into derivative transactions (including, but not limited to, options, futures, and contracts for difference, credit derivatives and interest rate swaps) periodically for the purposes of efficient portfolio management. Derivative transactions may only be entered into if they are compatible with the Company’s Investment Policy and fall within the limits determined by the Board from time to time. The Company will not enter into derivative transactions for speculative purposes.

Efficient portfolio management may include the reduction of risk, reduction of cost and the enhancement of capital or income, including transactions designed to hedge all or part of the investment portfolio, to replicate or gain synthetic exposure to a particular investment position where this can be done more effectively or efficiently through the use of derivatives than through investment in physical securities, or to transfer risk or obtain protection from a particular type of risk which might attach to portfolio investments.

The Company may enter into a derivative transaction provided the maximum exposure (including any initial outlay in respect of the transaction) to which the Company is committed by virtue of the transaction, when aggregated with all other outstanding derivative positions, is covered by the Company’s net assets.

The Manager may invest in money market instruments and currencies.

The Company may borrow for investment purposes and principally does so using repo agreements. Under the repo financing, the Company sells fixed interest securities held by it to a counterparty for consideration that is less than such assets’ market value and agrees to repurchase on a fixed date the same assets for a fixed price above the consideration received by it on the sale. The difference in these two amounts equates to the cost (effectively interest) of the repo financing.

Investment Limits

The Board has prescribed limits on the Investment Policy, among which are the following:

–        investments in equities are restricted to no more than 20% of the Company’s investment portfolio;

–        no single investment (bond or equity) may exceed 10% of gross assets;

–        no more than 5% of gross assets may be exposed to unquoted investments;

–        no more than 15% of the Company’s gross assets will be invested in other investment companies (including investment trusts); and

–        repo financing and other borrowings may be used to raise the exposure to bonds and equities. Net borrowings (comprising aggregate borrowings less cash) may not, at the time of drawdown, exceed 50% of shareholders’ funds (as determined under the Company’s normal accounting policies).

For the purpose of the investment limits, excluding the borrowing limit, gross assets is defined as the investment portfolio plus cash and the limits are measured at the time of investment.

Gearing Policy

Under the Company’s Investment Policy, borrowings may be used to raise exposure to bonds and equities and may not exceed 50% of shareholders’ funds after such adjustments, exclusions and deductions as are specified in the Company’s Articles. Gearing levels will change from time to time in accordance with the Board and the Manager’s assessment of risk and reward.

From time to time, the Company arranges facilities for repo financing with counterparties. The Company manages counterparty exposure to ensure that under normal circumstances its exposure to the creditworthiness or solvency of any one counterparty does not exceed 20% of its gross assets. The Company’s exposure to any one counterparty is calculated for these purposes as the difference between the aggregate amount owed by that counterparty to the Company less the aggregate amount owed by the Company to that counterparty.

The effective cost of the repo financing is allocated over the period to repurchase at a constant rate and is charged 50% to revenue and 50% to capital. Each repo financing arrangement typically has a fixed life of between one and six months. The short-term nature of the repo financing means that the effective cost of the Company’s borrowings will fluctuate from time to time in accordance with the market rates of repo financing (which are closely related to interest rates).

Key Performance Indicators

The Board reviews performance by reference to a number of Key Performance Indicators which include the following:

•         portfolio performance;

•         net asset value (NAV);

•         share price;

•         premium/discount;

•         dividends; and

•         ongoing charges.

The Company’s focus has been on absolute returns. The portfolio performance of the Company is commented on in both the Chairman’s Statement above and, in more detail, in the Portfolio Managers’ Report immediately following. These also set out the NAV per share and share price total return performance for the year, with the NAV per share increasing 10.7% (2016: 15.7%) and the share price increasing 10.5% (2016: 19.0%). For a longer term view, the graph on the bottom of page 3 shows the movements in these for the five years ended 30 September 2017.

The Board monitors the price of the Company’s shares in relation to their NAV and the premium/discount at which they trade. A small premium implies that there is demand for the shares and that there are sufficient shares in the market to satisfy that demand. Over the year the shares have traded at a premium within the range 2.7% to 7.9% and ended the year at a premium of 3.6%.

The Board and Manager closely monitor movements in the Company’s ordinary share price and dealings in the Company’s ordinary shares. To enable the Board to take action to deal with any significant overhang or shortage of ordinary shares in the market, it seeks approval from shareholders every year to allow for the buy back of ordinary shares (for cancellation or to be held as treasury shares). This may assist in the management of any discount the Company may trade at, but the primary reason for buying back ordinary shares is to enhance investor value.

Any buy back of shares will be made within guidelines established from time to time by the Board and the making and timing of any buy backs will be at the absolute discretion of the Board. Buy backs will only be made where the Directors consider it to be in the interests of shareholders as a whole, taking into consideration the working capital and cashflow requirements of the Company.

The Board also has the power to issue new ordinary shares if it is in shareholders’ interests to do so.

Dividends are a key component of the total return to shareholders, and the level of potential dividend payable and income from the portfolio is reviewed at every board meeting. The Company has paid 5p each year in respect of the nine financial years to 30 September 2017. The Company will only pay dividends in respect of a year to the extent that it has accumulated revenue reserves available for that purpose.

The expenses of managing the Company are carefully monitored by the Board at every meeting. It is the intention of the Board to minimise the ongoing charges which provide a guide to the effect on performance of all annual operating costs of the Company. The ongoing charges figure for the past year, which excludes the performance fee, was 1.22% which compares with 1.32% for the previous year.

Financial Position

As at 30 September 2017, the Company’s net assets were £125 million (2016: £100 million). These comprised a portfolio of predominantly corporate bonds. Due to the realisable nature of the majority of the Company’s assets, cash flow does not have the same significance as for an industrial or commercial company. The Company’s principal cash flows arise from the purchases and sales of investments, repo financing, proceeds from the issue of shares and the income from investments against which must be set the costs of borrowing and management expenses.

As explained previously, the ordinary shares are geared by borrowings, principally in the form of repo financing. As at 30 September 2017, net borrowing was 16% (2016: 16%) The Company also has available an uncommitted short-term overdraft facility with the custodian for settlement and liquidity purposes.

Future Trends

Details of the main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Managers’ Report above. Further details as to the risks affecting the Company are set out below.

Principal Risks and Uncertainties

The audit committee regularly undertakes a robust assessment of the principal risks facing the Company, on the Board’s behalf.

Investment Policy (incorporating the Investment Objective)

There is no guarantee that the Company’s investment objective will be achieved or provide the returns sought by shareholders. The Board monitors the performance of the Company and has established guidelines to ensure that the investment policy that has been approved is pursued by the Manager.

Market Risk

The majority of the Company’s investments are traded on the major securities markets. The principal risk for investors in the Company is of a significant fall in the markets and/or a prolonged period of decline in the markets relative to other forms of investment. The value of investments held within the investment portfolio is influenced by many factors including the general health of the world economy, interest rates, inflation, government policies, industry conditions, political and diplomatic events, tax laws, competition, environmental laws and by changing investor demand. The Portfolio Managers’ Report summarises particular macro economic factors affecting performance during the year and the portfolio managers’ views on those most relevant to the outlook for the portfolio. The Manager strives to maximise the total return within certain risk parameters from the investments held, but these investments are influenced by market conditions and the Board acknowledges the external influences on investment portfolio performance.

Investment Risk

The investment process employed by the Manager is set out in the first paragraph under Investment Policy and Risk in the annual financial report.

Investment portfolio performance is dependent on the performance of high yield corporate bonds. These stocks are particularly influenced by prevailing interest rates, government monetary policy and by demand for income. The Manager strives to maximise within its mandate both capital growth and high income from the investment portfolio. The inherent risk of investment is that the stocks selected for the portfolio do not perform.

The Company is likely, from time-to-time, to maintain a more concentrated investment portfolio (both in terms of individual holdings and in terms of its exposure to particular industries) than those of many other investment funds. Accordingly, shareholders should be aware that the investment portfolio potentially carries a higher level of risk than a more diversified investment portfolio.

The Company is permitted from time to time to invest in other listed investment companies (including investment trusts) subject to a limit on such investment of 15% of its gross assets. As a consequence of these investments, the Company may itself be indirectly exposed to gearing through the borrowings of these other investment companies. The Company is not currently invested in any listed investment companies (including investment trusts).

The Portfolio Managers’ Report sets out the portfolios’ strategy and results for the year, as well as their outlook. The performance of the Manager is carefully monitored both during the year and post year end by the Board. The continuation of the Manager’s mandate is reviewed each year and investment performance is a principal consideration in this review.

Past performance of the Company is not necessarily indicative of future performance.

Foreign Exchange Risk

The movement of exchange rates may have an unfavourable or favourable impact on returns as the Company holds non-sterling denominated investments and cash. This risk is partially mitigated by the use of non-sterling denominated repo financing and the use of forward currency contracts. The foreign currency exposure of the Company is monitored by the Manager on a daily basis and formally at Board meetings.


The market value of the ordinary shares of the Company will be affected by a number of factors, including the dividend yield from time to time of the ordinary shares, prevailing interest rates and supply and demand for those ordinary shares, along with wider economic factors. The market value of, and the income derived from, the Company’s ordinary shares can fluctuate and may go down as well as up.

While it is the intention of Directors to pay dividends to shareholders on a quarterly basis, the ability to do so will largely depend on the amount of income the Company receives on its investments, the timing of such receipts and its costs including the repo financing. Any reduction in income receivable by the Company, or increase in the costs, will lead to a reduction in earnings per share and therefore in the Company’s ability to pay dividends. Accordingly, the amount of dividends payable by the Company may fluctuate. The Board monitors the level of net revenue available for distribution at each Board meeting and prior to the declaration of each dividend.

The market value of the ordinary shares may not always reflect the NAV per ordinary share. The Directors seek powers to issue and buy back the Company’s shares each year, which can be used to help manage the level of discount or premium. Both the Board and the Manager monitor the share price and level of discount/premium on a regular basis, as well as formally at Board meetings.

Gearing Returns Using Borrowings

Borrowing levels may change from time-to-time in accordance with the Manager’s assessment of risk and reward. As a consequence, any reduction in the value of the Company’s investments may lead to a correspondingly greater percentage reduction in its NAV (which is likely to adversely affect the Company’s share price). Any reduction in the number of ordinary shares in issue (for example, as a result of buy backs) will, in the absence of a corresponding reduction in borrowings, result in an increase in the Company’s gearing. Net borrowing may not exceed 50% of shareholders’ funds and this is monitored on a daily basis by the Manager.

There is no guarantee that it will be possible to re-finance the repo financing or any other borrowings on their maturity either at all or on terms that are acceptable to the Company. If it were not possible to roll over any repo financing, the amounts then owing by the Company under the repo financing arrangement would become payable to the counterparty. Also, although the repo financing requires the counterparties to sell the assets to the Company on the repurchase date at a fixed price, if a counterparty failed to do so the Company would be left with a contractual claim against the defaulting counterparty and there is no guarantee the Company would be able to recover all or any of the value of the assets from that counterparty. In adverse market conditions, the risks of counterparty default may be greater than at other times.

The Company currently has arranged facilities for repo financing with three counterparties. All borrowings, including repo financing, are actively managed by the Manager and monitored by the Board. If one or more of the counterparties with which the Company enters into repo financing decided to stop accepting non-investment grade bonds as collateral for repo financing or decided otherwise to restrict the repo financing currently provided to the Company then the Company may be unable, or it may be impracticable, to continue utilising repo financing and/or to replace its current repo financing as it expires. In certain circumstances, such as a material increase in the margins payable on repo financing, it may be uneconomical for the Company to continue utilising repo financing. The counterparties may force closure of the repo financing positions in which case the Company may be forced to repay the repo financing at short notice and the Company may be forced to sell assets at short notice to repay that debt and may not be able to realise the expected market value of those assets.

High Yield Corporate Bonds

Corporate bonds are subject to credit, liquidity, duration and interest rate risks. Adverse changes in the financial position of an issuer of corporate bonds or in general economic conditions may impair the ability of the issuer to make payments of principal and interest or may cause the liquidation or insolvency of an issuer.

The majority of the Company’s investment portfolio at the year end consists of non-investment grade securities. To the extent that the Company invests in non-investment grade securities, the Company may realise a higher current yield than the yield offered by investment grade securities, but investment in such securities involves a greater volatility of price and a greater risk of default by the issuers of such securities, with consequent loss of interest payment and principal. Non-investment grade securities are likely to have greater uncertainties of risk exposure to adverse conditions and will be speculative with respect to an issuer’s capacity to meet interest payments and repay principal in accordance with its obligations.

A lack of liquidity in corporate bonds may make it difficult for the Company to sell those bonds at or near their purported value. This may particularly be the case if the Company is forced to sell assets quickly, for example, to repay any repo financing that becomes unexpectedly repayable or which it is not possible to rollover or in the event of a liquidation of the Company. A lack of liquidity in corporate bonds may also make it difficult or impossible to rebalance the Company’s investment portfolio as and when it believes it would be advantageous to do so. To mitigate these risks, the portfolio managers monitor daily both the ratings and liquidity of the bond portfolio in relation to the Company’s known repo financing requirements, and the Board receives regular reports which it reviews throughout the year.


The Company may enter into derivative transactions for the purposes of efficient portfolio management (‘EPM’), as set out in the investment policy. The Company may also hedge against exposure to changes in currency rates to the extent that repo financing has not offset such exposure. The Manager has systems in place to monitor derivative levels on a daily basis. These also ensure exposure levels are in accordance with EPM and investment limits.

Derivative instruments can be highly volatile and expose investors to a higher risk of loss. Derivatives enable a higher degree of leverage than might be acquired in respect of a direct investment in the underlying asset. As a result, relatively small fluctuations in the value of the underlying asset or the subject of the derivative may result in a substantial fluctuation in the value of the derivative, either up or down. Daily limits on price fluctuations and position limits on exchanges may prevent prompt liquidation of positions resulting in potentially greater losses.

Where derivatives are used for hedging, there is a risk that the returns on the derivative do not exactly correlate to the returns on the underlying investment, obligation or market sector being hedged against. If there is an imperfect correlation, the Company may be exposed to greater loss than if the derivative had not been entered into.

Trading in derivatives markets may be unregulated or subject to less regulation than other markets.

Reliance on External Service Providers

The Company has no employees and the Directors have all been appointed on a non-executive basis. The Company is reliant upon the performance of third party service providers for its executive function. The Company’s most significant contract is with the Manager, to whom the responsibility for the Company’s portfolio is delegated. The Company has other contractual arrangements with third parties to act as company secretary, registrar, depositary and broker. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to pursue successfully its investment policy and expose the Company to reputational risk. The Company has limited exposure to cyber risk. However, the Company’s operations or reputation could be affected if any of its service providers suffered a major cyber security breach. The Board monitors the preparedness of its service providers in this regard and is satisfied that the risk is given due priority.

The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.

The Board seeks to manage these risks, and others, in a number of ways:

•         The Manager monitors the performance of all third party providers in relation to agreed service standards on a regular basis, and any issues and concerns would be dealt with promptly and reported to the Board. The Manager formally reviews the performance of all third party providers and reports to the Board on an annual basis.

•         The Board monitors the performance of the Manager at every board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.

•         The day-to-day management of the portfolio is the responsibility of Paul Read and Paul Causer, who are Co-Heads of the Invesco Perpetual Fixed Interest Team and Rhys Davies, portfolio manager. Messrs Read and Causer have 23 years and 24 years’ experience in fixed income markets respectively, and have been the portfolio managers of the Company since 2001. In 2002, Mr Davies joined Invesco and has 16 years experience in fixed income markets. He has been associated with the Company’s portfolio for a number of years and was appointed portfolio co-manager in May 2016. The Board has adopted guidelines within which the portfolio managers are permitted wide discretion. Any proposed variation outside these guidelines is referred to the Board and the guidelines themselves are reviewed at every board meeting.

•         The risk that any one of the portfolio managers might be incapacitated or otherwise unavailable is mitigated by the fact that they work closely with each other and they also work within the wider Invesco Perpetual Fixed Interest team.


The Company is subject to various laws and regulations by virtue of its status as a Company registered under the Companies (Jersey) Law 1991, as an investment company and its listing on the London Stock Exchange. A serious breach of regulatory rules may lead to suspension from the London Stock Exchange or a qualified Audit Report. Other control failures, either by the Manager or any other of the Company’s service providers, may result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.

Any changes in the Company’s tax status or in taxation legislation or accounting practice could affect the value of investments held by the Company, affect the Company’s ability to provide returns to shareholders or alter the post-tax returns to shareholders.

To mitigate regulatory risk, the Manager reviews compliance with regulatory requirements on a regular basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers all risks, the measures in place to control them and the possibility of any other risks that could arise. The Board ensures that satisfactory assurances are received from service providers. The Manager’s compliance and internal audit officers produce regular reports for review by the Company’s Audit Committee.

Additionally, the depositary monitors stock, cash, borrowings and investment restrictions throughout the year. The depositary reports formally once a year and also has access to the Company Chairman and the Audit Committee Chairman if needed during the year.

Viability Statement

An investment company, such as this Company, is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. Long term for this purpose is considered to be at least three years and so the Directors have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.

The main risk to the Company’s continuation is shareholder dissatisfaction through failure to meet the Company’s investment objective, through poor investment performance or the investment policy not being appropriate in prevailing market conditions. The Board actively reviews the Company’s performance against its investment objective and policy as well as reviewing the Company’s objective to ensure that this continues to meet shareholder requirements. Accordingly, in 2013 the Company changed its name and investment policy. This change was well received by both shareholders, who voted for it, and the stock market. Performance has been strong for many years and through different, and difficult, market cycles and the stable level of dividend paid by the Company over the last nine years. Throughout these times there has been no change in Manager and the five-yearly continuation vote in 2014 was passed with 96.7% for shareholders voting in favour. The next continuation vote is due in 2019 and the Directors have no grounds to reason that shareholders will not pass this vote, or that performance will not continue to be satisfactory. This is confirmed by recent and ongoing contact with major shareholders and demonstrated by demand for the Company’s shares, as evidenced by the premium to net asset value at which they continue to trade and the issuance of over 27 million shares during the year – equivalent to over 20.5% of the Company’s share capital at the start of the year.

Nonetheless, the Board considers failure to meet the Company’s investment objective, and the contributory market and investment risks, to be principal risks to the Company, as set out above. Performance and demand for the Company’s shares are not things that can be forecast, but there are no current indications that either or both of these may falter materially over the next three years.

Other principal risks arise from the make-up of the portfolio, especially as it contains a high level of non-investment grade (or so-called ‘junk’) bonds which have theoretically a higher risk of default, and the use of gearing to enhance returns. The portfolio managers constantly monitor the portfolio and its ratings, a bond rating analysis of which is shown below. Even though a majority of the portfolio is formally ranked as non-investment grade, the portfolio remains defensively positioned. The Portfolio Managers’ Report above sets out the current portfolio strategy, with exposure positioned towards higher quality issuers where risk of default is considered remote, and high levels of liquidity. The Company’s investment limits permit borrowings of up to 50% of shareholders’ funds. At this level, borrowings are twice covered. At the year end, net gearing as a result of borrowings was 16% and thus 6 times covered.

Based on the above analysis of the Company’s current position and prospects, the Directors confirm that 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 three-year period of their assessment.

Board Diversity

The Board as a whole performs the function of a Nomination Committee and considers diversity, including the balance of skills, knowledge, diversity (including gender) and experience amongst other factors when reviewing the composition of the Board and appointing new directors, but does not consider it appropriate to establish targets or quotas in this regard. The Board comprises five male non-executive directors and their summary biographical details are set out on page 22 in the annual financial report. The Company has no employees.

Social and Environmental Matters

As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While an investee company’s policy towards the environment and social responsibility, including with regard for human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not make its investment decisions on environmental and social grounds alone. The Company does not have a human rights policy, although the Manager does apply the United Nations Principles for Responsible Investment.

Approved by the Board of Directors on 6 December 2017.

R&H Fund Services (Jersey) Limited
Company Secretary



at 30 September 2017

All investments are fixed interest bonds unless otherwise stated; floating rates notes are depicted by FRN.

The definitions of the Moody/Standard & Poor ratings below are set out on page 68 in the annual financial report.

Bonds and Equity Investments

Origin Energy 7.875% 16 Jun 2071 Ba2/BB 3,230  2.2
UniCredit International Bank 8.125% FRN Perpetual B1/B+ 2,962  2.0
Intesa Sanpaolo 8.375% FRN Perpetual Ba3/B+ 1,000 1.6
7% Perpetual Ba3/B+ 846
7.75% Perpetual Ba3/B+ 494
Achmea 6% 04 Apr 2043 NA/BBB- 2,042  1.4
Telecom Italia 5.25% 17 Mar 2055 Ba1/BB+ 2,041  1.4
Telefonica Europe 7.625% Perpetual Ba2/BB+ 1,485  1.0
Vougeot Bidco FRN 15 Jul 2020 (SNR) B2/B 1,417  1.0
UPC 6.75% 15 Mar 2023 (SNR) B2/B 1,402  0.9
Solvay Finance 5.869% Var Perpetual Ba1/BB+ 964  0.8
5.118% Perpetual Ba1/BB+ 297
Maxeda DIY 6.125% 15 Jul 2022 (SNR) B2/B- 1,235  0.8
Paprec 7.375% 01 Apr 2023 (SNR) B2/B- 666     0.7
5.25% 01 Apr 2022 (SNR) B1/B+ 470  0.7
Constellium 4.625% 15 May 2021 Caa1/CCC+ 628
7% 15 Jan 2023 (SNR) Caa1/CCC+ 467  0.6
Mercury Bondco 8.25% 30 May 2021 (SNR) B3/B 463
7.125% 30 May 2021 (SNR) B3/B 459  0.6
Picard Bondco 7.75% 01 Feb 2020 B3/B- 919
La Financiere Atalian 4% 15 May 2024 (SNR) B2/B+ 919  0.6
Banco Sabadell 6.5% FRN Perpetual B2/NR 895  0.6
VRX Escrow 4.5% 15 May 2023 (SNR) Caa1/B- 887  0.6
Royal Bank of Scotland FRN 14 Jun 2022 Ba1/BB+ 852  0.6
CNP Assurances FRN Perpetual NA/NR 737  0.5
Picard FRN 01 Aug 2019 B1/BB- 732  0.5
HEMA 8.5% 15 Jan 2023 (SNR) Caa2/CCC 731  0.5
Spectrum Brands 4% 01 Oct 2026 (SNR) B2/BB- 730  0.5
Quintiles IMS 3.25% 15 Mar 2025 (SNR) Ba3/BB+  716  0.5
Burger King France FRN 01 May 2023 B3/B- 472  0.5
6% 01 May 2024 (SNR) B3/B- 228
Enel 5% Var 15 Jan 2075 Ba1/BB+ 678  0.4
UBS 5.75% Var Perpetual NR/BB+ 641  0.4
Avantor 4.5% 01 Oct 2024 (SNR) B3e/B 637  0.4
PrestigeBidCo 6.25% 15 Dec 2023 (SNR) B2/B 575  0.4
Belden 4.125% 15 Oct 2026 (SNR) Ba3/BB- 525  0.4
Loxam SAS 6% 15 Apr 2025 (SNR) NR/B 406  0.3
Caixabank 6.75% FRN Perpetual B1u/BB- 374  0.3
BNP Paribas Fortis Cnv FRN Perpetual Ba3/BB+ 370  0.2
Almaviva The Italian Inn 7.25% 15 Oct 2022 B2e/NR 367  0.2
Thomas Cook 6.25% 15 Jun 2022 (SNR) B1/B 345  0.2
Aviva 6.125% FRN 05 Jul 2043 Baa1/BBB 257  0.2
Inovyn Finance 6.25% 15 May 2021 (SNR) B2/B+ 212  0.1
Lloyds Bank 6.375% FRN Perpetual NR/BB- 152  0.1
 36,925  24.7
Virgin Media Finance 5.125% 15 Jan 2025 (SNR) Ba3/BB- 1,900 2.0
7.0% 15 Apr 2023 (SNR) B2/B 1,062
NWEN Finance 5.875% 21 Jun 2021 (SNR) NR/BB+ 2,682  1.8
Enterprise Inns 6.375% 15 Feb 2022 (SNR) NR/BB- 2,259  1.8
6.5% 06 Dec 2018 (SNR) NR/BB- 421
Premier Foods Finance 6.5% 15 Mar 2021 (SNR) B2/B 2,035  1.8
FRN 15 Jul 2022 (SNR) B2/B 593
Enel 7.75% 10 Sep 2075 Ba1/BB+ 1,639  1.7
6.625% 15 Sep 2076 Ba1/BB+ 857
NGG Finance 5.625% FRN 18 Jun 2073 Baa3/BBB 2,485  1.7
TVL Finance FRN 15 May 2023 (SNR) B3/B- 1,569 1.6
8.5% 15 May 2023 (SNR) B3/B- 795
Stonegate FRN 15 Mar 2022 (SNR) B2/B 1,353  1.4
4.875% 15 Mar 2022 (SNR) B2/B 818
Standard Chartered 5.125% 06 Jun 2034 Baa1/BBB- 2,068 1.4
Iron Mountain 6.125% 15 Sep 2022 Ba3/BB-  2,036  1.4
Electricite De France 6% Perpetual Baa3/BB 1,381  1.3
5.875% Perpetual Baa3/BB 619
Virgin Money 8.75% Perpetual NA/NR 1,999  1.3
Balfour Beatty 10.75p Cnv Preference NA/NR 1,810  1.2
Société Genérale 8.875% FRN Perpetual Ba2/BB+ 1,780  1.2
Aviva 6.125% Perpetual Baa1/BBB 1,691  1.1
Drax Finco 4.25% 01 May 2022 (SNR) NR/BB+ 966  1.0
FRN 01 May 2022 NR/BB+ 639
ELM 6.3024% FRN Perpetual A3/A 1,601 1.0
Pension Insurance 8% 23 Nov 2016 NA/NR 1,528  1.0
Wagamama Finance 4.125% 01 Jul 2022 (SNR) B2/B 1,495  1.0
Arqiva Broadcast Finance 9.5% 31 Mar 2020 B3/NR 1,482  1.0
Orange 5.875% Perpetual Baa3/BBB- 1,242  0.8
Deutsche Bank 7.125% Perpetual B1/B+ 1,236  0.8
Telefonica Europe 6.75% Perpetual Ba2/BB+ 1,217  0.8
Ocado 4% 15 Jun 2024 (SNR) Ba3/NR 1,189  0.8
AA Bond Co 5.5% Var 31 Jul 2043 (SNR) NR/B+ 1,132  0.8
Time Warner Cable 5.25% 15 Jul 2042 Ba1/BBB- 1,127  0.8
Lloyds Bank 7% Var Perpetual NA/BB- 1,113  0.8
Ladbrokes 5.125% 08 Aug 2023 (SNR) NR/BB 1,082  0.7
Bracken Midco One 10.5% 15 Nov 2021 NR/B 1,069  0.7
Moy Park 6.25% 29 May 2021 B1/B+ 1,029  0.7
William Hill 4.875% 07 Sep 2023 (SNR) Ba1/BB+ 992  0.7
Barclays 7.875% Var Perpetual Ba2/B+ 972  0.7
Pizza Express 6.625% 01 Aug 2021 B2/B- 949  0.6
Scottish Widows 5.5% 16 Jun 2023 Baa1/BBB+ 891  0.6
Koninklijke KPN 6.875% FRN 14 Mar 2073 Ba2/BB 874  0.6
New Look 6.5% 01 Jul 2022 (SNR) B3/CCC+ 843  0.6
Bupa Finance 5% 08 Dec 2026 Baa2/NR 799  0.5
RAC Bond 4.87% Var 06 May 2046 (SNR) NR/BBB- 779  0.5
Moto Finance 4.5% 01 Oct 2022 NR/NR 756  0.5
Miller Homes FRN 15 Oct 2023 (SNR) NR/NR 548  0.5
5.5% 15 Oct 2023 (SNR) NR/NR 196
OneSavings Bank 9.125% FRN Perpetual NA/NR 742  0.5
Wm Morrison Supermarkets 4.75% 04 Jul 2029 Baa3/NR 739  0.5
AMC Entertainment 6.375% 15 Nov 2024 B2/B+ 707  0.5
JRP Group 9% 26 Oct 2026 NA/NR 631  0.4
AXA 5.453% FRN Perpetual Baa1/BBB+ 562  0.4
Thames Water 5.875% 15 Jul 2022 (SNR) B1/NR 546  0.4
Anglian Water 5% 30 April 2023 (SNR) Ba3/NR 541  0.4
UniCredit International Bank 8.5925% FRN Perpetual B1/B+ 525  0.3
Tesco 5.2% 05 Mar 2057 Ba1/BB+ 495  0.3
J Sainsbury 6.5% Var Perpetual NA/NR 446  0.3
Standard Life 5.5% 04 Dec 2042 Baa2/BBB+ 388  0.3
Cognita Financing 7.75% 15 Aug 2021 (SNR) B3/B 373  0.3
Rothesay Life 8% 30 Oct 2025 NA/NR 289  0.2
Boparan Finance 5.5% 15 Jul 2021 B2/B 118  0.1
CIS General Insurance 12% FRN 08 May 2025 NA/NR 110  0.1
68,810  46.2
US Dollar
US Treasury 2.5% 15 Feb 2046 Aaa/AAA 2,702  1.8
SFR 7.375% 01 May 2026 (SNR) B1/B+ 2,490  1.7
BBVA 9% Perpetual NR/NR 2,317  1.6
TimeWarner 4.65% 01 Jun 2044 Baa2/BBB 2,183  1.5
Stora Enso 7.25% 15 Apr 2036 Ba2/BB+ 1,832  1.2
XPO Logistics 6.5% 15 Jun 2022 (SNR) B2/BB- 1,563  1.1
6.125% 01 Sep 2023 B2/BB- 93
Celanese 4.625% 15 Nov 2022 Baa3/BBB- 1,613  1.1
Fiat Chrysler Automobiles 4.5% 15 Apr 2020 B1/BB  1,554  1.0
Altice 6.625% 15 Feb 2023 B1/BB- 949   0.9
7.5% 15 May 2026 B1/BB- 516
Catlin Insurance 7.249% FRN Perpetual NA/BBB+ 1,414  0.9
HSBC 6.375% Cnv Perpetual Baa3/NR  1,394  0.9
J. C. Penney 8.125% 01 Oct 2019 (SNR) B3/B 956  0.8
6.375% 15 Oct 2036 (SNR) B3/B 317
Ziggo Bond Finance 5.875% 15 Jan 2025 B2/B 1,240  0.8
Softbank 4.75% 19 Sep 2024 (SNR) Ba1/BB+ 1,153  0.8
Beazley 5.875% 04 Nov 2026 NR/NR 1,122  0.8
Banco Santander 6.375% Var Perpetual Ba1/NR 1,064  0.7
Trinseo 5.375% 01 Sep 2025 (SNR) B3/BB- 905  0.6
Marfrig 7% 15 Mar 2024 NR/B+ 902  0.6
Standard Chartered 5.7% 26 Mar 2044 Baa1/BBB- 849  0.6
Société Genérale 7.875% FRN Perpetual Ba2/BB+ 827  0.6
Hertz 7.625% 01 Jun 2022 B1/BB- 808  0.5
Iron Mountain 4.875% 15 Sep 2027 Ba3/BB- 804  0.5
Diamond 1 5.45% 15 Jun 2023 Baa3/BBB- 801  0.5
Royal Bank Of Scotland 8% Cnv FRN Perpetual Ba3u/B 414   0.5
8.625% FRN Perpetual Ba3u/B 364
Tesco 6.15% 15 Nov 2037 (SNR) Ba1/BB+ 778  0.5
Owens-Brockway 5.875% 15 Aug 2023 B1/BB- 760  0.5
UBS 6.875% Var Perpetual NR/BB+ 707  0.5
Cott 5.5% 01 Apr 2025 B2/B 685  0.5
BNP Paribas 7.375% Var Perpetual Ba1/BBB- 648  0.4
BHP Billiton 6.75% FRN 19 Oct 2075 Baa2/BBB+ 625  0.4
Codere Finance 2 (Luxembourg) S.A. 7.625% 01 Nov 2021 B2/B 625  0.4
Verizon Communications 4.272% 15 Jan 2036 Baa1/BBB+ 606  0.4
Petra Diamonds 7.25% 01 May 2022 (SNR) B2/B+ 560  0.4
Rothschilds Continuation Finance FRN Perpetual NA/NR 551  0.4
VRX Escrow 5.375% 29 Feb 2020 Caa1/B-  496  0.3
Chemours 6.625% 15 May 2023 (SNR) B1/B+ 302  0.3
7% 15 May 2025 B1/B+ 99
AXA 6.463% FRN Perpetual Baa1/BBB 382  0.3
Constellium 5.75% 15 May 2024 Caa1/CCC+ 375  0.3
Bombardier 7.5% 15 Mar 2025 B3/B- 350  0.2
UniCredit 8% FRN Perpetual NR/NR 314  0.2
CGG Veritas 6.5% 01 Jun 2021 (SNR) WR/D 236  0.2
PGH Capital 5.375%  06 Jul 2027 NR/NR 218  0.2
Millicom International Cellular 5.125% 15 Jan 2028 Ba2/NR 217  0.2
Barclays 7.875% Var Perpetual Ba2/B+ 170  0.1
Royal Bank Of Scotland 7.5% Cnv FRN Perpetual Ba3u/B 165  0.1
FAGE International 5.625% 15 Aug 2026 (SNR) B1/BB- 156  0.1
American Greetings 7.875% 15 Feb 2025 (SNR) B3/BB- 121  0.1
Lamb Weston 4.625% 01 Nov 2024 Ba3/BB 109  0.1
Peabody Energy Common stock NR/NR 14
 43,415 29.1
Total investments 149,150 100.0


Top Ten Investments

at 30 September 2017

2017 2016
UniCredit International Bank 8.125% FRN Perpetual 2,962 2.3 2,874 2.9
8.5925% FRN Perpetual 525 525
Origin Energy 7.875% 16 Jun 2071 3,230 2.2 1,830 1.6
Enel 7.75% 10 Sep 2075 1,639 2.1  1,593 2.7
6.625% 15 Sep 2076 857  822
5% Var 15 Jan 2075 678  652
Virgin Media Finance 5.125% 15 Jan 2025 (SNR) 1,900 2.0 1,342 1.2
7.0% 15 Apr 2023 (SNR) 1,062
Standard Chartered 5.125% 06 Jun 2034 2,068 2.0 1,861 2.3
5.7% 26 Mar 2044 849 807
Iron Mountain 6.125% 15 Sep 2022 2,036 1.9 2,058 1.8
4.875% 15 Sep 2027 804
Telefonica Europe 7.625% Perpetual 1,485 1.8 1,404 2.2
6.75% Perpetual 1,217 1,174
US Treasury 2.5% 15 Feb 2046 2,702 1.8 3,103 2.7
NWEN Finance 5.875% 21 Jun 2021 (SNR) 2,682 1.8 2,622 2.3
Enterprise Inns 6.375% 15 Feb 2022 (SNR) 2,259 1.8 2.3
6.5% 06 Dec 2018 (SNR) 421 2,682



at 30 September 2017

Standard and Poors Ratings, investment grade is BBB– and above.

For the definitions of these ratings see the Glossary of Terms on page 68 in the annual financial report.

2017 2016
Investment Grade:
AAA 1.8 1.8 2.7 2.7
A 1.0 2.8 2.7
BBB+ 3.3 6.1 4.8 7.5
BBB 4.8 10.9 7.4 14.9
BBB– 8.9 19.8 8.3 23.2
Non-investment Grade
BB+ 15.7 35.5 17.3 40.5
BB 5.9 41.4 7.2 47.7
BB– 11.4 52.8 10.2 57.9
B+ 11.5 64.3 11.1 69.0
B 11.9 76.2 10.6 79.6
B– 5.6 81.8 3.9 83.5
CCC+ 1.6 83.4 2.1 85.6
CCC 0.5 83.9 0.2 85.8
D 0.2 84.1 85.8
NR (including equities and warrant) 15.9 100.0 14.2  100.0
100.0 100.0



in respect of the Preparation of the Annual Financial Report

The Directors are responsible for ensuring that the annual financial report is prepared in accordance with applicable laws and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (‘IFRSs’). The financial statements are required by law to 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.

International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation and presentation of financial statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs.

In preparing these financial statements, the Directors are required to:

•         properly select and apply accounting policies and then apply them consistently;

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

•         provide additional disclosures when compliance with specific requirements in IFRSs 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 which enable them to ensure that the accounts comply with the Companies (Jersey) Law 1991. 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.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, a Corporate Governance Statement and a Directors’ Report that comply with that law and those regulations.

The Directors of the Company, each confirm to the best of their knowledge that:

•         the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

•         this annual financial 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; and

•         the annual report and accounts, 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.

Donald Adamson


Signed on behalf of the Board of Directors

6 December 2017



for the year ended 30 September

2017 2016
NOTES £’000 £’000 £’000 £’000 £’000 £’000
Profit on investments at fair value  5,594  5,594 14,760 14,760
Exchange differences (542) (542) (2,081) (2,081)
Profit/(loss) on derivative instruments – currency hedges  1,071  1,071 (3,442) (3,442)
Income 3  7,499  7,499 6,729 6,729
Investment management fees and performance fee 4 (509) (1,527) (2,036) (424) (1,272) (1,696)
Other expenses (342) (2) (344) (346) (1) (347)
Profit before finance costs and taxation  6,648  4,594  11,242 5,959 7,964 13,923
Finance costs (108) (108) (216) (123) (123) (246)
Profit before taxation  6,540  4,486  11,026 5,836 7,841 13,677
Taxation (56)  — (56) (93) (93)
Profit after taxation  6,484  4,486  10,970 5,743 7,841 13,584
Return per ordinary share 5 4.5p  3.1 p  7.6 p 4.5p 6.3p 10.8p

The total column of this statement represents the Company's statement of comprehensive income, prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The profit after taxation is the total comprehensive income. The supplementary revenue and capital columns are both prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.




NOTES £’000 £’000 £’000 £’000 £’000
At 30 September 2015 6,137 121,542 (56,246) 12,889 84,322
Total comprehensive income
  for the year 7,841 5,743 13,584
Shares issued 573 7,730 8,303
Dividends paid 6 (39) (6,206) (6,245)
At 30 September 2016 6,710  129,233 (48,405)  12,426  99,964
Total comprehensive income
  for the year  4,486  6,484  10,970
Shares issued  1,378  20,094  21,472
Dividends paid 6 (103) (6,978) (7,081)
At 30 September 2017  8,088  149,224 (43,919)  11,932  125,325

The accompanying notes are an integral part of these financial statements.



as at 30 September

2017 2016
NOTES £’000 £’000
Non-current assets
  Investments held at fair value through profit or loss 149,150 115,438
Current assets
  Other receivables 2,874 2,417
  Derivative financial instruments - unrealised net gain  1,112
  Cash and cash equivalents 7,839 8,737
11,825 11,154
Total assets 160,975 126,592
Current liabilities
  Other payables (7,121) (920)
  Derivative financial instruments – unrealised net loss (283)
  Securities sold under agreements to repurchase (28,223) (25,171)
(35,344) (26,374)
Total assets less current liabilities 125,631 100,218
Provision (306) (254)
Net assets 125,325 99,964
Issued capital and reserves attributable to equity holders
Share capital 7 8,088 6,710
Share premium 149,224 129,233
Capital reserve (43,919) (48,405)
Revenue reserve 11,932 12,426
Total shareholders’ funds 125,325 99,964
Net asset value per ordinary share 8 77.5p 74.5p

These financial statements were approved and authorised for issue by the Board of Directors on 6 December 2017.

Donald Adamson



for the year ended 30 September

2017 2016
NOTES £’000 £’000
Cash flow from operating activities
Profit before taxation 11,026 13,677
Tax (56) (93)
Adjustments for:
  Purchases of investments (54,539) (24,671)
  Sales of investments 32,320 34,629
(22,219) 9,958
Increase/(decrease) from securities sold under agreements to repurchase 3,052 (7,483)
Profit on investments (5,594) (14,760)
Exchange differences (504) (296)
Net cash movement from derivative instruments – currency hedges (1,395) 76
Finance costs 216 246
Operating cash flows before movements in working capital (15,474) 1,325
(Increase)/decrease in receivables (692) 250
Increase in payables 444 896
Net cash flows from operating activities after taxation (15,722) 2,471
Cash flows from financing activities
Finance cost paid (212) (261)
Net proceeds from issue of shares 21,613 7,845
Net equity dividends paid 6 (7,081) (6,245)
Net cash generated by financing activities 14,320 1,339
Net (decrease)/increase in cash and cash equivalents (1,402) 3,810
Exchange differences 504 296
Cash and cash equivalents at beginning of year 8,737 4,631
Cash and cash equivalents at end of year 7,839 8,737
Reconciliation of cash and cash equivalents to the Balance Sheet is as follows:
Cash held at custodian 4,729  2,047
Short-Term Investment Company (Global Series) plc, money market fund 3,110 6,690
Cash and cash equivalents 7,839  8,737
Cash flow from operating activities includes:
Dividend received 189 90
Interest received 6,832 6,451
7,021  6,541



1.     Principal Activity

The Company is a closed-end investment company incorporated in Jersey and it operates under the Companies (Jersey) Law 1991. The Company was incorporated on 10 September 1999. The principal activity of the Company is investment in a diversified portfolio of high yielding corporate and government bonds and, to a lesser extent, equities and other instruments as appropriate to its Investment Policy.

2.     Principal Accounting Policies

The principal accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the current year and the preceding year, unless otherwise stated. The accounts have been prepared on a going concern basis. The disclosure on going concern on page 30 in the Directors’ Report in the annual financial report forms part of the financial statements.

(a)     Basis of Preparation

(i)      Accounting Standards Applied

The financial statements have been prepared on an historical cost basis, except for the measurement at fair value of investments and derivatives, and in accordance with the applicable International Financial Reporting Standards (IFRS) as adopted by the European Union and interpretations issued by the International Financial Reporting Interpretations Committee. The standards are those endorsed by the European Union and effective at the date the financial statements were approved by the Board.

Where presentational guidance set out in the Statement of Recommended Practice (SORP) ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’, issued by the Association of Investment Companies in November 2014 as updated in January 2017, is consistent with the requirements of IFRS, the Directors have prepared the financial statements on a basis compliant with the recommendations of the SORP. The supplementary information which analyses the statement of comprehensive income between items of a revenue and a capital nature is presented in accordance with the SORP.

(ii)     Adoption of New and Revised Standards

New and revised standards and interpretations that became effective during the year had no significant impact on the amounts reported in these financial statements but may impact accounting for future transactions and arrangements.

At the date of authorising these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU).

•         IFRS 9: Financial Instruments (2014) (effective 1 January 2018).

•         Amendment to IAS 7: Disclosure initiative – Statement of cash flows (effective 1 January 2017).

•         Amendment to IAS 12: Recognition of deferred tax assets for unrealised losses (effective 1 January 2017).

•         IFRS 15: Revenue from contracts with customers (effective 1 January 2017).

The Directors do not expect the adoption of above standards and interpretations (or any other standards and interpretations which are in issue but not effective) will have a material impact on the financial statements of the Company in future periods.

(iii)    Critical Accounting Estimates and Judgements

The preparation of the financial statements requires the Company to make estimations where uncertainty exists. It also requires the Company to make judgement, estimates and assumptions, in the process of applying the accounting policies. There have been no significant judgements, estimates or assumptions for the current or preceding year, except for the allocation of management fee and finance costs (see note 2(h) in the annual financial report).

3.     Income

This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.

2017 2016
£’000 £’000
Income from investments
UK bond interest 2,810 2,690
Overseas bond interest 4,500 3,947
7,310 6,637
UK dividends 170 71
Overseas dividends 18 19
7,498 6,727
Other income
Deposit interest 1 2
Total income 7,499 6,729

4.     Investment Management and Performance Fees

This note shows the fees paid to the Manager. These are made up of the base management fee payable per annum and a performance fee calculated annually.

2017 2016
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Investment management fee 509 509 1,018 424 424 848
Performance fee 1,018 1,018 848 848
509 1,527 2,036 424 1,272 1,696

Details of the investment management agreement are disclosed in the Directors’ Report. At the year end the management fee accrued was £281,000 (2016: £225,000).

A performance fee of £1,018,000 (2016: £848,000) is accrued at the year end of which 30% is deferred and only becomes payable if positive total returns are achieved at the balance sheet date of any one of the next three years. The excess carried forward for the year is £306,000 (2016: £254,000) and is shown as a provision in note 15 in the annual financial report.

5.     Return per Share

Return per share is the amount of profit (or loss) generated for the financial year divided by the weighted average number of ordinary shares in issue.

The basic revenue, capital and total return per ordinary share is based on each of the returns on ordinary activities after taxation and on 144,860,901 (2016: 126,281,410) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.

6.     Dividends

Dividends represent the return of income less expenses to shareholders. Dividends are paid as an amount per ordinary share held.

2017 2016
PENCE £’000 PENCE £’000
Dividends paid and recognised in the year:
  Fourth interim 1.25 1,686 1.25 1,534
  First interim 1.25 1,701 1.25 1,545
  Second interim 1.25 1,828 1.25 1,558
  Third interim 1.25 1,866 1.25 1,608
5.00 7,081 5.00 6,245

Set out below are the dividends that have been declared in respect of the financial years ended 30 September:

2017 2016
PENCE £’000 PENCE £’000
Dividends in respect of the year:
  First interim 1.25 1,701 1.25 1,545
  Second interim 1.25 1,828 1.25 1,558
  Third interim 1.25 1,866 1.25 1,608
  Fourth interim 1.25 2,028 1.25 1,686
5.00 7,423 5.00 6,397

Dividends paid in respect of the year have been charged to revenue except for £103,000 (2016: £39,000) which was charged to share premium. This amount is equivalent to the income accrued on the new shares issued in the year. This income accrued represented the income element of the net asset value at the time of each individual new share issue.

The fourth interim dividend for 2017 was paid on 27 October 2017 to shareholders on the register on 6 October 2017.

7.     Share Capital

The share capital represents the total number of shares in issue, for which dividends accrue.

2017 2016
£’000 £’000
200,00,000 (2016: 200,000,000) ordinary shares of 5p each 10,000 10,000
Allotted, called-up and fully paid:
161,767,003 (2016: 134,196,779) ordinary shares of 5p each 8,088 6,710

During the year 27,570,224 (2016: 11,450,000) ordinary shares were issued at an average share price of 78.81p per share (2016: 73.25p).

Subsequent to the year end 2,527,852 ordinary shares were issued at an average price of 79.77p per share.

8.     Net Asset Value per Share

The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue.

The net asset value per share and the net assets attributable at the year end were as follows:

2017 2016 2017 2016
PENCE PENCE £’000 £’000
Ordinary shares 77.5 74.5 125,325 99,964

Net asset value per ordinary share is based on net assets at the year end and on 161,767,003 (2016: 134,196,779) ordinary shares, being the number of ordinary shares in issue at the year end.

9.     Related Party Transactions and Transactions with the Manager

A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. The Manager is not considered a related party.

Under International Financial Reporting Standards, the Company has identified the Directors as related parties. The Directors’ interests and remuneration have been disclosed on pages 30 and 31 with additional disclosure in note 6. No other related parties have been identified.

Details of the Manager’s services and fees are disclosed in the Directors’ Report on pages 33 and 34 and in note 5 in the annual financial report.

This annual financial report announcement is not the Company's statutory accounts. The statutory accounts for the year ended 30 September 2016 and for the year ended 30 September 2017 received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. The statutory accounts for the financial year ended 30 September 2017 have been approved and audited but not yet filed.

The audited annual financial report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the Company's Registered Office, Ordnance House, 31 Pier Road, St.Helier, Jersey, JE4 8PW or the Manager's website at:

The Annual General Meeting of the Company will be held at the offices of R&H Fund Services (Jersey) Limited, Ordnance House,

31 Pier Road, St.Helier, Jersey, JE4 8PW on 29 January 2018 at 10.00am.

By order of the Board

R&H Fund Services (Jersey) Limited

Company Secretary


Invesco Fund Managers Limited

Nick Black

Kelly Nice

Tel - 020 3753 1000

a d v e r t i s e m e n t