London, November 30
Invesco Perpetual Enhanced Income Limited
Annual Financial Report
For the year ended 30 September 2016
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
|Balance sheet at 30 September||2016||2015||CHANGE|
|Shareholders’ funds (£’000)||99,964(1)||84,322||+18.6|
|Net asset value per ordinary share||74.5p||68.7p||+8.4|
|Premium per ordinary share||3.9%||1.6%|
(1) reflects 11,450,000 ordinary shares issued in the year.
|Year Ended||Year Ended|
|30 September||30 September|
|3 month LIBOR rate||+0.4%||+0.6%|
|Net asset value (‘NAV’)*||+15.7%||+1.5%|
Source: Invesco/Thomson Reuters Datastream.
* The increase in total return NAV includes a 0.32% enhancement to NAV generated by the issue of ordinary shares during the year at a premium.
|Year Ended||Year Ended|
|30 September||30 September|
|Gross income (£’000)||6,729||6,697|
|Net revenue available for ordinary shares (£’000)||5,743||5,753|
|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|
|– ongoing charges||1.32%||1.28%|
|– performance fee||0.96%||0.00%|
|Return per Ordinary Share#|
# 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.
The year to the end of September 2016 has been punctuated by several major market events, starting with the fears over China’s slowing economy causing investors globally to sell risk assets in February. Markets then recovered strongly in the months running up to the UK’s European Union referendum, although the subsequent vote to leave the EU resulted in increased market volatility. Investors have now driven the FTSE All-Share Index once again to trade at near all-time highs despite concerns over the UK’s access to the EU common market, post-Brexit.
Over the period, your Company’s Net Asset Value (NAV) total return was 15.7% which compares to a total return for the Merrill Lynch European High Yield Bond index (Sterling Hedged) of 9.5%; the Sterling Investment Grade Bond Index return of 16.3%; and United Kingdom Gilts returning 13.2%. (Source: Bank of America Merrill Lynch.)
The low yields available from large parts of the high yield bond market combined with the greater capital risk associated serves to highlight the importance of a strategy that is focussed on generating a sustainable source of relatively high income combined with lower volatility and capital preservation.
Results for the Year
I am pleased to report that the Company has performed very strongly with a total return to shareholders, based on the share price with dividends reinvested, of 19.0%. The Company’s share price rose from 69.8p at the start of the year to 77.4p, an increase of 10.9%.
As a result of the Company’s good performance as measured by its NAV total return, a performance fee of £848,000 has been earned by the portfolio managers for the year. Further details of the management agreement, including fees, can be found in the annual financial report. In addition, the Company’s strong performance, combined with the shares issued throughout the year (see later in my statement) have resulted in the market capitalisation of the Company exceeding £100 million.
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 Statement in last year’s annual financial report, the Board intends that the Company will maintain the annual dividend of not less than 5p per share, paid equally and quarterly, in the absence of unforeseen circumstances. Although there might be an argument to say that the year has seen at least one unforeseen circumstance with the surprise Brexit result, the Board has maintained the 5p annual dividend and the fourth interim dividend of 1.25p per share was declared on 28 September 2016 (2015: 5p).
The shortfall of revenue earned versus dividend paid of 0.5p is the equivalent of £615,000 (2015: £173,000). This has been funded from retained revenue reserve. The Company has over a number of years retained revenue reserve for this very purpose. After payment of the year’s dividend and current shares in issue of 136,056,456, this reserve still covers 1.6 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; and 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, fully cognisant of the greater capital volatility which that 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 will vary the level according to their view of prevailing market conditions. During the recent very low interest rate environment, the use of gearing has enabled the portfolio managers to maintain a consistent level of income. However, 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 39% and, as reported at the half year stage, this was decreased so that at the year end gross borrowing was 25%. Taking the Company’s cash position into account, net borrowing fell from 33% to 16%, and average net borrowing for the year was 21.0% (2015: 30.6%). As at 25 November 2016 (the latest practical date before publication) the level of borrowing is 24.5% (gross) and 19.5% (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, and within the range 0.2% to 4.4%. In order to satisfy market demand the Company issued 11,450,000 new shares at an average price of 73.25p during the year to 30 September 2016. This enhanced the NAV by £286,000 (0.3%). For the period after the year end and up to 18 October 2016, an additional 1,859,677 new shares were issued. The new shares were issued at a premium ranging from 3.38% to 3.60%.
In aggregate, new shares issued have reached the maximum authorised by shareholders at the last Annual General Meeting (AGM), this number of shares being 12,359,777 based on 10% of the then issued share capital. With ongoing demand in the market, the Board consider that it would be in the best interests of the Company for the same special resolution to be put to shareholders at the forthcoming AGM. 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 cum dividend NAV.
Share Buy Backs
Your Directors are seeking the authority in special resolution 7 to buy back up to 20,394,862 shares (14.99% of the Company’s issued share capital as at 30 November 2016) subject to the restrictions referred to in the notice of the AGM. This authority will expire at the AGM in 2018. 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.
The Board continues to be committed to maintaining the highest standards of corporate governance and is accountable to you as shareholders for the governance of the Company’s affairs. The Directors believe that, during the year under review, they have complied with the provisions of the AIC Code of Corporate Governance. As part of the Company’s commitment to good corporate governance, the Board undertook their annual evaluation during the year and where areas to address were identified, an action has been put in place.
During the year the Directors considered how to give a sharper identity to the Audit Committee in recognition of its important and specialised function. Consequently, in order to distinguish more clearly the roles of both the Board and the Audit Committee, it was resolved that the Audit Committee should be reconstituted such that its membership does not include either myself or the other long-serving director of the Company, Gordon Neilly. Whilst the Board considers that our independence is not compromised by length of service, the change will ensure that the composition of the Audit Committee is consistent with general views of best practice.
Board Composition and Succession Planning
Gordon Neilly has notified the Board of his intention to stand down as a Director of the Company at the conclusion of the Annual General Meeting on 31 January 2017. Gordon has made a significant contribution to the success of the Company which has benefited from his energy, knowledge and commitment for which I would like to record my thanks and that of his colleagues.
The Board has started to identify qualifications and expertise sought in a new candidate that can bring complementary skills to the Board.
The Company’s Notice of AGM is contained on pages 60 to 62 in the annual financial report and will be held at 10.00am on 31 January 2017. A summary of the special business is set out in the Directors’ Report on pages 34 and 35, 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 you will read in the Portfolio Managers’ Report which follows, 2016 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 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 political uncertainties 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 predominantly invested in bonds from low duration asset classes, such as the high yield market. Nonetheless, with global interest rates finishing 2016 at such low levels the possibility of a rising interest rate environment is another factor for consideration in 2017. Indeed, this environment may offer the portfolio managers opportunities to acquire higher yielding investments in more duration-sensitive parts of the market. The portfolio managers continue to focus on managing a portfolio which provides shareholders with a relatively high, sustainable income. Thorough credit analysis and the understanding of credit risk remain the core elements in preserving the Company’s NAV.
30 November 2016
PORTFOLIO MANAGERS’ REPORT
The year to 30 September 2016 has been positive for the high yield bond market. From a high of 6.6% in mid-January, the average yield of the European currency high yield bond market fell to a low of 4.2% in early September.
The year began with concerns over the European banking sector, uncertainty about the amount of support central banks were prepared to provide and ongoing weakness in commodity markets all driving down sentiment. Parts of the financial sector came under significant pressure with negative sentiment also affecting high yield bonds and corporate hybrids. However, the market’s appetite for risk increased from February amid anticipation of significant further monetary easing from the European Central Bank (ECB). The ECB’s subsequent policy announcement exceeded expectations with a broad range of measures designed to stimulate the economy.
For bond markets, one of the ECB’s most significant announcements was the Corporate Sector Purchase Programme (CSPP). Through this programme the ECB is buying corporate bonds directly. Anticipation of the CSPP, which although announced in March did not begin until June, helped euro investment grade corporate bonds to rally strongly. In turn, high yield bonds also rallied as investors sought to maintain income. As at 14 October 2016, the ECB had bought €33.8 billion of bonds through the scheme.
Sentiment has been further helped by the strengthening of commodity markets. The price for a barrel of Brent crude oil rose from a low of US$27.9 in mid-January to a peak of US$52.5 in mid-June. This increase has been particularly supportive for the US high yield market, which has a high concentration of energy related companies.
The high yield bond market fell sharply immediately after the UK’s vote for Brexit in late June. However, in line with other markets high yield bonds had recouped these losses by mid-August. In part, this recovery was helped by the announcement of the Bank of England’s (BoE) programme of monetary easing, which included a US$10 billion Corporate Bond Purchase Scheme (CBPS). As with the ECB’s CSPP, the CBPS is targeted at investment grade bonds, but its affect has been felt across bond markets.
Levels of issuance within the high yield bond sector followed the peaks and troughs in demand for the sector. During January and February, issuance levels were very low, however, the corporate bond purchase programmes of the ECB and BoE saw issuance spike higher as companies sought to take advantage of the cheap financing available. Overall, issuance levels for 2016 remain sharply lower than 2015.
According to data from Merrill Lynch, European Currency high yield bonds had a total return for the 12 month period under review of 9.5% with yields in aggregate falling 173 basis points (bps) to 4.35%. (Total returns, sterling hedged.)
In terms of positioning we remain defensive, with a relatively high allocation to liquidity (cash and government bonds). Our exposure is skewed toward high quality, high yield bonds that we consider carry a lower risk of default. Many of our holdings are in the financial sector, particularly subordinated bank capital where our largest exposure is to Additional Tier 1 (AT1) bonds. The volatility we have seen in the financial sector over the past 12 months has given us opportunities to add exposure to names in this sector at relatively attractive prices. Financials as a whole have underperformed the wider credit market and we feel that the yields available offer value compared to many other areas. By 30 September 2016, we had raised AT1 exposure to 8%. In our view, the creditworthiness of the banking sector, which has improved significantly since the global financial crisis remains an important supportive factor for this sector.
We also hold a number of hybrid bonds across other sectors and took the opportunity to increase exposure during periods of market weakness. As at 30 September 2016, non-financial hybrid bond exposure represented 10% of the Company.
In the lead up to the Brexit referendum, the market’s expectation was that there would be a ‘remain’ vote. We believed this offered us an opportunity to hedge against a ‘leave’ vote and we took a number of measures to mitigate the negative effect we expected this would have on risk markets. This included increasing our exposure to the US dollar and raising our allocation to cash and US Treasuries. We are pleased to report these measures proved effective.
In the year under review, the total NAV return including dividends was 15.7%. The NAV rose from 68.7p to 74.5p. We commenced the year with net borrowing of 33% and with net assets of £84.3 million. Gross borrowing was reduced over the twelve months from 39% to 25% of NAV, while net assets rose to £100 million. Funding costs remain relatively low.
The corporate bond buying programmes initiated by the ECB and BoE have significantly impacted European corporate bond markets. Looking ahead, these programmes will likely continue to provide bond markets with strong support. However, the bond positive aspect of these programmes needs to be set against the ever diminishing level of income available to investors. The market meanwhile, remains vulnerable to sharp reversals such as we have seen over the past 12 months. But, as has been the case this year, such risk-off periods can provide the opportunity to lock in attractive yields. Taking these factors into consideration, our strategy remains defensive and patient.
Paul Read/Paul Causer/Rhys Davies
30 November 2016
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 £100 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 Capita Registrars (Jersey) Limited to act as registrar and with BNY Mellon Trust & Depositary (UK) Limited as depositary. The depositary delegates safekeeping of the Company’s investments to The Bank of New York Mellon (London Branch) which was previously the Company’s custodian and retains that function under delegated authority. 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.
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.
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.
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.
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;
• 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 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 15.7% (2015: 1.5%) and the share price increasing 19.0% (2015: 0.2%). For a longer term view, the graph on the bottom of page 3 in the annual financial report shows the movements in these for the five years ended 30 September 2016.
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 0.2% to 4.4% and ended the year at a premium of 3.9%. The graph below shows the premium throughout the year.
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 eight financial years to 30 September 2016. 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 1.3% which compares with 1.3% for the previous year.
As at 30 September 2016, the Company’s net assets were £100 million (2015: £84 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 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 2016, net borrowing was 16% (2015: 33%). The Company also has available an uncommitted short-term overdraft facility with the custodian for settlement and liquidity purposes.
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 in the next section.
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.
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.
The investment process employed by the Manager is set out in the first paragraph under Investment Policy and Risk on page 10 of 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 22 years and 23 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 15 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.
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 as shown by the five year total return performance graph on page 3, and the stable level of dividend paid by the Company over the last eight years, as set out on page 3. 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 trade and the issuance of over 11 million shares during the year – equivalent to over 9.3% 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 on pages 13 and 14 in the annual financial report. 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 on page 21 in the annual financial report. Even though a majority of the portfolio is formally ranked as non-investment grade, the portfolio remains defensively positioned. The Portfolio Managers’ Report 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 seven 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.
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 30 November 2016.
R&H Fund Services (Jersey) Limited
at 30 September 2016
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 66 in the annual financial report.
Bonds and Equity Investments
|MARKET VALUE||% OF|
|UniCredit International Bank||8.125% FRN Perpetual||B1/B+||2,874||2.4|
|Santos Finance||8.25% FRN 22 Sep 2070||NR/BB+||2,698||2.3|
|Achmea||6% 04 Apr 2043||NA/BBB–||1,883||1.6|
|Origin Energy||7.875% 16 Jun 2071||Ba2/BB||1,830||1.6|
|Obrascon Huarte Lain||5.5% 15 Mar 2023 (SNR)||B3/NR||1,812||1.6|
|Telecom Italia||5.25% 17 Mar 2055||Ba1/BB+||1,769||1.5|
|Intesa Sanpaolo||8.375% FRN Perpetual||Ba3/B+||974||1.5|
|Telefonica Europe||7.625% Perpetual||Ba1/BB+||1,404||1.2|
|Vougeot Bidco||FRN 15 Jul 2020 (SNR)||B2/B||1,387||1.2|
|Algeco Scotsman Global Finance||9% 15 Oct 2018||Caa1/NR||1,144||1.0|
|Solvay Finance||5.869% Var Perpetual||Ba1/BB||866||1.0|
|Paprec||7.375% 01 Apr 2023 (SNR)||B2/B–||614||0.9|
|5.25% 01 Apr 2022 (SNR)||B1/B+||458|
|Constellium||4.625% 15 May 2021||Caa1/CCC+||534||0.8|
|7% 15 Jan 2023 (SNR)||Caa1/CCC+||416|
|Galapagos||FRN 15 Jun 2021||B1/B||840||0.7|
|Rapid||6.625% 15 Nov 2020 (SNR)||B2/B+||833||0.7|
|VRX Escrow||4.5% 15 May 2023 (SNR)||B3/B–||805||0.7|
|Royal Bank of Scotland||FRN 14 Jun 2022||Ba2/BB+||728||0.6|
|Picard||FRN 01 Aug 2019||B1/BB–||717||0.6|
|Enel||5% Var 15 Jan 2075||Ba1/BB+||652||0.6|
|Banco Popular Espanol||11.5% COCO Perpetual||NR/NR||618||0.6|
|UBS||5.75% Var Perpetual||NR/BB+||576||0.5|
|Trinseo||6.375% 01 May 2022||B3/NR||522||0.5|
|Synlab Bondco||6.25% 01 Jul 2022 (SNR)||B2/B+||456||0.4|
|Mercury Bondco||8.25% 30 May 2021 (SNR)||B3|B||446||0.4|
|CNP Assurances||FRN Perpetual||NA/NR||441||0.4|
|Kerneos||FRN 01 Mar 2021||B1/B+||433||0.4|
|Sisal||7.25% 30 Sep 2017||B1/B+||346||0.3|
|BNP Paribas Fortis||Cnv FRN Perpetual||Ba3/BB+||273||0.2|
|Inovyn Finance||6.25% 15 May 2021 (SNR)||B2/B||259||0.2|
|Aviva||6.125% FRN 05 Jul 2043||Baa1/BBB||240||0.2|
|Paternoster||8.5% 15 Feb 2023 (SNR)||Caa1/CCC+||205||0.2|
|Spectrum Brands||4% 01 Oct 2026 (SNR)||B2/BB–||202||0.2|
|Lloyds Bank||6.375% Perpetual||NR/BB–||140||0.1|
|Manutencoop Facility Management||8.5% 01 Aug 2020||B3/B–||100||0.1|
|Enterprise Inns||6.5% 06 Dec 2018 (SNR)||NR/BB–||2,682||2.3|
|NWEN Finance||5.875% 21 Jun 2021 (SNR)||NR/BB+||2,622||2.3|
|NGG Finance||5.625% FRN 18 Jun 2073||Baa3/BBB||2,467||2.1|
|Enel||7.75% 10 Sep 2075||Ba1/BB+||1,593||2.1|
|6.625% 15 Sep 2076||Ba1/BB+||822|
|Iron Mountain||6.125% 15 Sep 2022||Ba3/BB–||2,058||1.8|
|Premier Foods Finance||6.5% 15 Mar 2021 (SNR)||B2/B||2,021||1.8|
|Pizza Express (formerly Twinkle Pizza)||6.625% 01 Aug 2021||B2/B||1,949||1.7|
|Electricite De France||6% Perpetual||Baa3/BB||1,302||1.6|
|Standard Chartered||5.125% 06 Jun 2034||A3/BBB–||1,861||1.6|
|Balfour Beatty||10.75p Convertible Preference||NA/NR||1,833||1.6|
|Jaguar Land Rover||3.875% 01 Mar 2023||Ba1/BB+||1,633||1.4|
|Arqiva Broadcast Finance||9.5% 31 Mar 2020||B3/NR||1,507||1.3|
|Virgin Media Finance||5.125% 15 Jan 2025 (SNR)||Ba3/BB–||1,342||1.2|
|Telefonica Europe||6.75% Perpetual||Ba1/BB+||1,174||1.0|
|Time Warner Cable||5.25% 15 Jul 2042||Ba1/BBB||1,156||1.0|
|New Look||6.5% 01 Jul 2022 (SNR)||B1/B||1,153||1.0|
|Société Genérale||8.875% FRN Perpetual||Ba2/BB+||1,100||1.0|
|AA Bond Co||5.5% Var 31 Jul 2043 (SNR)||NR/BB–||1,087||0.9|
|Lloyds Bank||7% Var Perpetual||NA/BB–||1,054||0.9|
|Moy Park||6.25% 29 May 2021||B1/BB–||1,038||0.9|
|William Hill||4.875% 07 Sep 2023 (SNR)||Ba1/BB+||997||0.9|
|Stretford 79||6.25% 15 Jul 2021 (SNR)||B2/B||955||0.8|
|BHP Billiton||6.5% Var 22 Oct 2077||Baa2/BBB+||900||0.8|
|Deutsche Bank||7.125% Perpetual||B1/B+||876||0.8|
|Scottish Widows||5.5% 16 Jun 2023||Baa1/BBB+||869||0.8|
|Barclays||7.875% Var Perpetual||Ba2/B+||862||0.7|
|Koninklijke KPN||6.875% FRN 14 Mar 2073||Ba2/BB||862||0.7|
|RAC Bond||4.87% Var 06 May 2046 (SNR)||NR/BBB–||818||0.7|
|Wm Morrison Supermarkets||4.75% 04 Jul 2029||Baa3/NR||736||0.6|
|InterGen Services||7.5% 30 Jun 2021||B1/B||646||0.5|
|Wagamama Finance||7.875% 01 Feb 2020 (SNR)||B2/B||587||0.5|
|AXA||5.453% FRN Perpetual||Baa1/BBB||528||0.5|
|UniCredit International Bank||8.5925% FRN Perpetual||B1/B+||525||0.5|
|Thames Water||5.875% 15 Jul 2022 (SNR)||B1/NR||522||0.5|
|Anglian Water||5% 30 April 2023 (SNR)||Ba3/NR||520||0.5|
|Odeon & UCI Finco||9% 01 Aug 2018||B3/B–||513||0.4|
|Legal & General||6.385% FRN Perpetual||Baa2/BBB+||508||0.4|
|Tesco||5.2% 05 Mar 2057||Ba1/BB+||465||0.4|
|Boparan Finance||5.5% 15 Jul 2021||B2/B+||461||0.4|
|J Sainsbury||6.5% Var Perpetual||NA/NR||437||0.4|
|TVL Finance||8.5% 15 May 2023 (SNR)||B3/B–||421||0.4|
|Cognita Financing||7.75% 15 Aug 2021 (SNR)||B2/B||377||0.3|
|Standard Life||5.5% 04 Dec 2042||Baa2/BBB+||372||0.3|
|Gala Finance||8.875% 01 Sep 2018||Ba3/B+||296||0.3|
|Rothesay Life||8% 30 Oct 2025||NA/NR||261||0.2|
|CIS General Insurance||12% FRN 08 May 2025||NA/NR||110||0.1|
|General Motors||Wts 10 Jul 2019||NR/NR||3,263||2.8|
|US Treasury||2.5% 15 Feb 2046||Aaa/AAA||3,103||2.7|
|TimeWarner||4.65% 01 Jun 2044||Baa2/BBB||2,530||2.2|
|Celanese||4.625% 15 Nov 2022||Baa3/BBB–||1,681||1.5|
|Stora Enso||7.25% 15 Apr 2036||Ba2/BB||1,668||1.5|
|J. C. Penney||8.125% 01 Oct 2019 (SNR)||B3/B–||1,003||1.1|
|6.375% 15 Oct 2036||B3/B–||264|
|Catlin Insurance||7.249% FRN Perpetual||NA/BBB+||1,206||1.1|
|Constellium||8% 15 Jan 2023||Caa1/CCC+||801||1.0|
|5.75% 15 May 2024||Caa1/CCC+||353|
|Banco Santander||6.375% Var Perpetual||Ba1/NR||968||0.8|
|SFR||7.375% 01 May 2026 (SNR)||B1/B+||899||0.8|
|XPO Logistics||6.5% 15 Jun 2022 (SNR)||B2/B||785||0.8|
|6.125% 01 Sep 2023||B2/B||95|
|Chemours||6.625% 15 May 2023 (SNR)||B1/B+||659||0.7|
|7% 15 May 2025||B1/B+||190|
|Royal Bank Of Scotland||8% Cnv FRN Perpetual||NR/B||363|
|8.625% FRN Perpetual||NR/B||336||0.7|
|7.5% Cnv FRN Perpetual||NR/B||149|
|Diamond 1||5.45% 15 Jun 2023||Baa3/BBB–||810||0.7|
|Standard Chartered||5.7% 26 Mar 2044||A3/BBB–||807||0.7|
|Tesco||6.15% 15 Nov 2037 (SNR)||Ba1/BB+||770||0.7|
|Owens- Brockway||5.875% 15 Aug 2023||B2/B||757||0.7|
|Greenko||8% 01 Aug 2019||NR/B+||748||0.7|
|Verizon Communications||4.272% 15 Jan 2036||Baa1/BBB+||670||0.6|
|Altice||7.5% 15 May 2026||B1/BB–||505||0.6|
|6.625% 15 Feb 2023||B1/BB–||156|
|UBS||6.875% Var Perpetual||NR/BB+||652||0.6|
|BHP Billiton||6.75% FRN 19 Oct 2075||Baa2/BBB+||619||0.5|
|ESAL||6.25% 05 Feb 2023 (SNR)||NR/BB||596||0.5|
|BNP Paribas||7.375% Var Perpetual||Ba1/BBB–||594||0.5|
|VRX Escrow||5.375% 15 Mar 2020||B3/B–||478||0.4|
|Fiat Chrysler Automobiles||4.5% 15 Apr 2020||B1/BB||393||0.3|
|Bombardier||7.5% 15 Mar 2025||B3/B–||380||0.3|
|Rothschilds Continuation Finance||FRN Perpetual||NA/NR||348||0.3|
|CGG Veritas||6.5% 01 Jun 2021 (SNR)||Caa2/CCC||262||0.2|
|UniCredit||8% FRN Perpetual||NR/NR||260||0.2|
|HSBC||6.375% Cnv Perpetual||Baa3/NR||197||0.2|
|Barclays||7.875% Var Perpetual||Ba2/B+||159||0.1|
|FAGE International||5.625% 15 Aug 2026 (SNR)||B1/BB–||158||0.1|
|Abengoa||7.75% 01 Feb 2020 (SNR)||Ca/CCC–||21||—|
|Peabody Energy||4.75% Cnv 15 Dec 2066||WR/D||9||—|
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
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 (‘IFRSs’) as adopted by the European Union. 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.
Signed on behalf of the Board of Directors
30 November 2016
STATEMENT of comprehensive income
for the year ended 30 September
|Profit/(loss) on investments at fair value||—||14,760||14,760||—||(5,586)||(5,586)|
|(Loss)/profit on derivative instruments – currency hedges||—||(3,442)||(3,442)||—||832||832|
|Investment management fees and performance fee||4||(424)||(1,272)||(1,696)||(401)||(401)||(802)|
|Profit/(loss) before finance costs and taxation||5,959||7,964||13,923||5,985||(4,728)||1,257|
|Profit/(loss) before taxation||5,836||7,841||13,677||5,834||(4,879)||955|
|Profit/(loss) after taxation||5,743||7,841||13,584||5,753||(4,879)||874|
|Return/(loss) per ordinary share||5||4.5p||6.3p||10.8p||4.9p||(4.2)p||0.7p|
The total column of this statement represents the Company’s statement of comprehensive income, prepared in accordance with International Financial Reporting Standards. The profit/(loss) 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.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September
|At 30 September 2014||5,618||114,390||(51,367)||12,932||81,573|
|Total comprehensive income for the year||—||—||(4,879)||5,753||874|
|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|
|At 30 September 2016||6,710||129,233||(48,405)||12,426||99,964|
as at 30 September
|Investments held at fair value through profit or loss||115,438||105,118|
|Cash and cash equivalents||8,737||4,631|
|Derivative financial instruments – unrealised loss||(283)||(207)|
|Securities sold under agreements to repurchase||(25,171)||(32,654)|
|Total assets less current liabilities||100,218||84,322|
|Issued capital and reserves attributable to equity holders|
|Total shareholders’ funds||99,964||84,322|
|Net asset value per ordinary share||8||74.5p||68.7p|
These financial statements were approved and authorised for issue by the Board of Directors on 30 November 2016.
STATEMENT OF CASH FLOWS
for the year ended 30 September
|Cash flow from operating activities|
|Profit before taxation||13,677||955|
|Purchases of investments||(24,671)||(33,976)|
|Sales of investments||34,629||25,356|
|Decrease from securities sold under agreements to repurchase||(7,483)||(737)|
|(Profit)/loss on investments||(14,760)||5,586|
|Net cash movement from derivative instruments – currency hedges||76||591|
|Operating cash flows before movements in working capital||1,325||(1,303)|
|Decrease/(increase) in receivables||250||(27)|
|Increase/(decrease) in payables||896||(1,355)|
|Net cash flows from operating activities after taxation||2,471||(2,685)|
|Cash flows from financing activities|
|Finance cost paid||(261)||(299)|
|Net proceeds from issue of shares||7,845||7,736|
|Net equity dividends paid||6||(6,245)||(5,861)|
|Net cash generated by financing activities||1,339||1,576|
|Net increase/(decrease) in cash and cash equivalents||3,810||(1,109)|
|Cash and cash equivalents at beginning of year||4,631||6,441|
|Cash and cash equivalents at end of year||8,737||4,631|
|Reconciliation of cash and cash equivalents to the Balance Sheet is as follows:|
|Cash held at custodian||2,047||1,172|
|Short-Term Investment Company (Global Series) plc, money market fund||6,690||3,459|
|Cash and cash equivalents||8,737||4,631|
|Cash flow from operating activities includes:|
|Deposit interest received||2||9|
|Bond interest received||6,449||6,860|
NOTES TO THE FINANCIAL STATEMENTS
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 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).
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 financial year, except for the allocation of management fee and finance costs (see note 2(h) in the annual financial report).
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
|Income from investments|
|UK bond interest||2,690||2,949|
|Overseas bond interest||3,947||3,668|
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.
|Investment management fee||424||424||848||401||401||802|
Details of the investment management agreement are disclosed in the Directors’ Report in the annual financial report. At the year end the management fee accrued was £225,000 (2015: £202,000).
A performance fee of £848,000 (2015: £nil) 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 £254,000 (2015: nil) 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 126,281,410 (2015: 118,346,693) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.
Dividends represent the return of income less expenses to shareholders. Dividends are paid as an amount per ordinary share held.
|Dividends paid and recognised in the year:|
|Return of unclaimed dividends from previous years||—||—||—||(1)|
Set out below are the dividends that have been declared in respect of the financial years ended 30 September:
|Dividends in respect of the year:|
Dividends paid in respect of the year have been charged to revenue except for £39,000 (2015: £65,000) 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 2016 was paid on 28 October 2016 to shareholders on the register on 7 October 2016.
7. Share Capital
The share capital represents the total number of shares in issue, for which dividends accrue.
|200,000,000 ordinary shares of 5p each (2015: 200,000,000 shares)||10,000||10,000|
|Allotted, called-up and fully paid:|
|134,196,779 ordinary shares of 5p each (2015: 122,746,779 shares)||6,710||6,137|
During the year 11,450,000 (2015: 10,379,253) ordinary shares were issued at an average share price of 73.25p per share (2015: 75.45p).
Subsequent to the year end 1,859,677 ordinary shares were issued at an average price of 76.78p 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 ordinary share and the net assets attributable at the year end were as follows:
|NET ASSET VALUE |
PER ORDINARY SHARE
|NET ASSETS |
Net asset value per ordinary share is based on net assets at the year end and on 134,196,779 (2015: 122,746,779) 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’ remuneration and interests have been disclosed on pages 30 and 31 in the annual financial report 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 page 33 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 2015 and for the year ended 30 September 2016 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 2016 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 31 January 2017 at 10.00am.
By order of the Board
R&H Fund Services (Jersey) Limited
Invesco Fund Managers Limited
Tel - 020 3753 1000