Acorn Income Fund - Annual Financial Report

Acorn Income Fund Limited

Annual Financial Report
For the year ended 31 December 2016

The Company has today, in accordance with DTR 6.3.5, released its Annual Financial Report for the year ended
31 December 2016. The Report will shortly be available via the Investment Manager’s website https://www.premierfunds.co.uk/media/941577/acorn-income-fund-annual-report-2016.pdf and will also be available for inspection online at www.morningstar.co.uk/uk/NSM website.

Investment Objectives and Policy

Investment Objectives

The investment objective and policy of Acorn Income Fund Limited (the “Company” or “Acorn”) is to provide Shareholders with high income and also the opportunity for capital growth.

The Company’s assets comprise investments in equities and fixed interest securities in order to achieve its investment objective. The Company’s investments are held in two portfolios. Approximately 70% to 80% of the Company’s assets are invested in smaller capitalised United Kingdom companies, admitted to the Official List of the Financial Conduct Authority (the “FCA”) and traded on the main market of the London Stock Exchange (the “LSE”) or traded on the Alternative Investment Market (“AIM”) at the time of investment. The Company also aims to enhance income for Ordinary Shareholders by investing approximately 20% to 30% of the Company’s assets in high yielding instruments which are predominantly fixed interest securities but may include up to 15% of the Company’s overall portfolio (measured at the time of acquisition) in high yielding investment company shares.

The proportion of the overall portfolio held in the Smaller Companies Portfolio and the Income Portfolio varies from day to day as the market prices of investments move. The Directors retain discretion to transfer funds from one portfolio to the other and generally expect between 70% to 80% of the investments to be held in the Smaller Companies Portfolio.

While the Company’s investment policy is to spread risk by maintaining diversified portfolios, there are no restrictions on the proportions of either of the portfolios which may be invested in any one geographical area, asset class or industry sector. However, not more than 7.5% of the Company’s gross assets may be invested in securities issued by any one company as at the time of investment, save that (i) in respect of the Income Portfolio only, investments may be made in other investment funds subject only to the restriction set out in paragraph (c) of the section headed “Investment Restrictions” below; and (ii) in respect of the Smaller Companies Portfolio only, provided that not more than 10% of the Company’s gross assets are invested in securities issued by any one company at any time, the 7.5% limit may be exceeded on a short term basis, with Board approval, where a company whose securities form part of the Smaller Companies Portfolio issues new securities (for example by way of a rights issue).

The Company’s capital structure is such that the underlying value of assets attributable to the Ordinary Shares is geared relative to the rising capital entitlements of the Preference Shares (“ZDP Shares”). The Company’s gearing policy is not to employ any further gearing through long-term bank borrowing. Save with the prior sanction of ZDP Shareholders, the Company will incur no indebtedness other than short term borrowings in the normal course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares.

Investment Restrictions

For so long as required by the LSE Listing Rules in relation to closed-ended investment companies, the Company has adopted the following investment and other restrictions:

(a)     the Company will at all times invest and manage its assets in a way which is consistent with its objective of spreading investment risk and in accordance with its published investment policy;

(b)    the Company will not conduct any significant trading activity; and

(c)     not more than 10% in aggregate of the value of the total assets of the Company at the time the investment is made will be invested in other listed closed-ended investment funds. The Listing Rules provide an exception to this restriction to the extent that those investment funds which have stated investment policies to invest no more than 15% of their total assets in other listed closed-ended investment companies.

Derivatives

The Company may invest in derivatives, money market instruments and currency instruments including contracts for differences, futures, forwards and options. These investments may be used for hedging positions against movements in, for example, equity markets, currencies and interest rates, for investment purposes and for efficient portfolio management. The Company's use of such instruments for investment purposes is limited to 5 per cent. of the total assets of the Company. The Company will not use such instruments to engage in any significant trading activity. The Company will not maintain derivative positions should the total underlying exposure of these positions (excluding any currency hedges) exceed one times adjusted total capital and reserves.

Performance Summary
for the year ended 31 December 2016

	31/12/2016	31/12/2015	% change/return
Total Return Performance*
Total Return on Gross Assets*##			6.73%
Numis Smaller Companies (Ex Investment Companies) Index	19,074.80	17,171.76	11.08%
FTSE All Share Index	6,424.25	5,502.42	16.75%
FTSE Small Cap (Ex Investment Companies) Index	6,802.34	6,044.52	12.54%
Share Price and NAV Returns
Ordinary Shares
Share Price	359.00p	400.00p	-10.25%
NAV**	407.23p	395.94p	2.85%
IFRS NAV#	407.20p	395.50p	2.96%
Total return on Net Assets*			6.91%
Ordinary Share Price Total Return			-6.32%
Discount (-) Premium (+) to NAV on Ordinary Shares	-11.84%	+1.02%
ZDP Shares
Share Price	139.38p	131.75p	5.79%
NAV**	137.26p	128.89p	6.49%
IFRS NAV	137.28p	129.22p	6.24%
Discount (-) Premium (+) to NAV on ZDP Shares	+1.54%	+2.21%
Other
Total Assets less Current Liabilities~	64,787,950	89,812,543	-27.86%
Package Discount (-) Premium (+) to
NAV Combined Ordinary and ZDP Shares	-7.67%	+1.39%
ZDP Liability**	29,314,857	27,310,997	7.34%
Net Assets**	64,793,038	62,501,546	3.67%
Gearing Level	45.24%	43.70%	3.52%
Total Expenses Ratio (calculated on year end Gross Assets)	1.04%	1.09%	-4.59%
Ongoing Charges (calculated on average Net Assets)	1.63%	1.69%	-3.55%
Dividends and Earnings
Revenue return per ordinary share	20.38p	18.49p	10.22%
Dividends declared per ordinary share	15.50p	13.75p	12.73%

^~ During the year ended 31 December 2016 the ZDP Shares were reclassified on the Statement of Financial Position as a current liability as the maturity date is within one year. In January 2017 the ZDP Shares were refinanced and the life of the ZDP Shares was extended to 28 February 2022.
* assumes dividends reinvested
** calculated in accordance with the Articles
# calculated in accordance with International Financial Reporting Standards
# # adjusted for debt repayment and the issue of new Ordinary Shares and ZDP Shares
Sources: Index data: Bloomberg, total return on gross and net assets, PFM, JP Morgan Cazenove
 

Company Summary

History
The Company was incorporated on 5 January 1999 and commenced its activities on 11 February 1999. The portfolio was divided into two sub portfolios, a Smaller Companies Portfolio representing approximately 70-80% of the total with the balance invested in an Income Portfolio investing in fixed income securities, investment company shares and more recently in structured investments. The Company has always been leveraged, initially through bank debt and now through Zero Dividend Preference Shares. In December 2016 shareholders approved the extension of the Zero Dividend Preference Shares setting a new redemption date of
28 February 2022.

Capital Structure

Zero Dividend Preference Shares (1p each)	21,357,174 (excluding treasury shares) The ZDP Shares in issue at the year end had a final capital entitlement of 138 pence per ZDP on 31 January 2017. Following shareholder approval of a scheme to extend the life of the ZDPs and to give shareholders the opportunity to elect to remain invested, the redemption date of the ZDP shares was extended to 28 February 2022 with a redemption price of 167.2 pence per share, subject to there being sufficient capital in the Company. The ZDP Shares are not entitled to any dividends. ZDP Shareholders rank ahead of the Ordinary Shareholders in regards to rights as to capital. The ZDP Shareholders have the right to receive notice of all general meetings of the Company, but do not have the right to attend or vote unless the business of the meeting involves an alteration of the rights attached to the ZDP Shares, in which case the holders of ZDP Shares can attend and vote.
Ordinary Shares (1p each)	15,910,692 (excluding treasury shares) The Ordinary Shares are entitled to participate in all dividends and distributions of the Company. On a winding-up holders of Ordinary Shares are entitled to participate in the distribution and the holders of Ordinary Shares are entitled to receive notice of and attend and vote at all general meetings of the Company.
Treasury Shares	As at 31 December 2016 there were 1,275,972 Ordinary and 1,712,757 ZDP Shares held in treasury.
Shareholder Funds (calculated in accordance with IFRS)	£64.79 million as at 31 December 2016
Market Capitalisation of the Ordinary Shares	£57.12 million as at 31 December 2016

Company Details

The Board	The Board consists of three independent non-executive directors (“the Directors”), Helen Green (Chairman), Nigel Ward and David Warr.
Investment Manager	Premier Asset Management (Guernsey) Limited (“PAMG”), is a subsidiary of Premier Asset Management Limited (“PAM”). PAM had approximately £5.2bn of funds under management as at 31 December 2016. PAMG is licensed under the provisions of the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, by the Guernsey Financial Services Commission to carry on controlled investment business.
Investment Advisers	Premier Fund Managers Limited (“PFM”) – the Company’s Income Portfolio is managed by Paul Smith. Unicorn Asset Management Limited (“Unicorn”) – the Company’s Smaller Companies Portfolio is managed by Simon Moon and Fraser Mackersie.
Secretary/Administrator	Northern Trust International Fund Administration (Guernsey) Limited.
Corporate Broker	Numis Securities Limited (“Numis”) provide all corporate broking services.
Management Fee	0.7% per annum (Total Assets) charged 75% to capital and 25% to revenue, plus performance fee. Minimum annual management fee £100,000.
Registrar	Anson Registrars Limited

Financial Calendar

Company’s year end	31 December
Annual results announced	March/April
Company’s half year end	30 June
Annual General Meeting	15 August 2017
Half year results announced	August
Dividend payments	At the end of March, June, September and December

Company Website

https://www.premierfunds.co.uk/investors/investments/investment-trusts/acorn-income-fund

Chairman’s Statement
Year to 31 December 2016

Dear Shareholder

2016 has been a year that has brought many unexpected twists and turns some of which have been beneficial to the Company and some not. The return to shareholders was challenging due to small companies having a difficult first half of the year compounded by Acorn’s Ordinary Shares moving to a wider discount to net asset value (NAV). However the portfolio continued to deliver strong revenue returns enabling the directors to increase the quarterly dividend by 14.3% in June and then nine months later, post the year end, by a further 12.5%. A strong recovery in the NAV towards the end of the year has carried over into 2017. Following shareholder approval on 20 December 2016, the life of the Zero Dividend Preference shares was extended for a further five years at an accrual rate of 3.85%, enabling Ordinary shareholders to benefit from a considerably lower cost of gearing than had applied for the previous five years.

Investment Performance

The broad UK market as measured by the FTSE All-Share Total Return Index rose 16.75% over the 12 months to
31 December 2016. The Numis Smaller Companies (ex investment companies) Total Return Index lagged the broader market with an increase of 11.08%. Acorn suffered from the relative weakness of the small company sector, some underperformance of the Numis Index and a widening of the discount to NAV at which its Ordinary Shares traded. The total return on Acorn’s gross assets over the year was 6.73% and on net assets 6.91%.  With a widening of the discount the total return to Acorn Ordinary shareholders was -6.32% (share price plus dividends).

There were two principal factors responsible for this outcome for Acorn. First was the poor sentiment towards smaller companies that persisted for most of the year. At the start of the year smaller companies were tending to lag the broader market and then, following the unexpected EU Referendum result, sentiment towards smaller companies moved sharply negative. The small company indices fell further than the FTSE 100 and FTSE All-Share indices and recovered more slowly. Larger companies recovered quickly from the initial shock as investors focused on the increased value of overseas earnings which would result from weak sterling. Smaller companies were perceived to have more of a domestic focus and hence to be more exposed to the slowing of the UK economy that many economists and commentators expected to arise as a consequence of leaving the EU.  The last two months of the year saw improvement in the sentiment towards smaller companies as the downbeat forecasts for the UK economy retreated and, as investors differentiated between those small company stocks that would benefit from weaker sterling and those that might be under pressure from a slowing domestic economy, the small company indices and Acorn’s net asset value began to move ahead to levels that exceeded the pre-Referendum level. 

The second factor giving rise to the disappointing return for shareholders was the fact that the rating of the Ordinary Shares deteriorated significantly over the year. Indeed at the start of the year the Ordinary Shares had been trading at a premium to NAV of 1.02% and by the year-end were trading at an 11.84% discount. The discount arose when sentiment towards smaller companies deteriorated following the Referendum.

The Zero Dividend Preference Shares appreciated in value by 5.79% over the year. The ZDP Shares closed the year at a price of 139.38 pence, trading at a premium to their net asset value.

As in previous years the Company’s broker Numis has carried out an analysis of Acorn’s performance and volatility against funds in the small and mid cap sectors and in the equity income sector over the last 5 years. Acorn remains in the top left quadrant on both charts indicating that, measured on NAV total return, Acorn achieved above average returns with below average volatility relative to other funds in those sectors.

Asset Allocation

The split between the Smaller Companies Portfolio and the Income Portfolio started the year at approximately 77.5% to the Smaller Companies Portfolio and 22.5% to the Income Portfolio.  Following the Referendum result the exposure to smaller companies was agreed to be increased, with the portfolio split moving to 80% to the Smaller Companies Portfolio and 20% to the Income Portfolio. This change was made as the Investment Advisers considered that the outlook for bond markets had deteriorated following the Referendum whilst the setback in equity markets and the disruption to valuations in the smaller company sector was creating investment opportunities.  

Discontinuance vote

As required by the Company’s Articles of Association, Shareholders were given the opportunity to vote at the AGM held in September for the discontinuance of the Company in its present form. An overwhelming majority of shareholders voted against this resolution thereby securing the future of the Company for the next five years.

The Zero dividends preference Shares (ZDPs)

With the ZDPs due to redeem on 31 January 2017 and  with the future of the Company secured until the AGM in 2021 your Company published proposals in November 2016 to extend the life of the ZDPs for a further 5 years and one month to 28 February 2022. The accrual rate on the ZDPs was reset at 3.85% per annum from their 138 pence NAV on 31 January 2017 to 167.2 pence per ZDP Share on redemption. Existing shareholders were given the opportunity to elect to remain invested or to receive 138 pence per ZDP Share shortly after 31 January 2017. Shareholders approved the scheme and 91.4% of ZDP shareholders elected to remain invested. As your board wished to maintain the same structure and level of gearing, the Company’s brokers replaced the ZDPs that had been redeemed through a placing of new ZDPs. The price for this placing was determined through a book build by the Company’s broker and the level of demand enabled the shares to be placed on 31 January 2017 at 140 pence per share, a premium of 1.4% to their NAV.

Discount Management

The Company’s articles provide shareholders with an opportunity to vote every 5 years on whether they wish the Company to continue in its present form. The Directors consider this to be an important component of a long term discount management policy. In the intervening periods the Company will seek the necessary authorities to buy back shares and in determining a discount level at which to exercise these powers the Directors will have regard to the general level of discount prevailing in comparable investment company sectors, the degree to which the buyback would be NAV enhancing for ongoing shareholders and the benefits of improved short term liquidity against the disadvantages of a declining market capitalisation. The Directors consider that, in addition to long term delivery of strong income and capital return, effective marketing and promotion of the Company to existing and potential shareholders is an important factor in maintaining a healthy secondary market and relatively narrow discount. When buying back shares the Directors will generally seek to buy back both classes of shares in ratio to their existing issue sizes so as to maintain the capital structure of the Company. Ordinary Shares would only be bought back on their own if the Directors considered it appropriate to increase gearing and after consideration of the impact of such a buyback on the interests of the ZDP shareholders.

No Ordinary Shares were bought back during the period.

Share issuance

In early January 2016 the Company issued two tranches of new shares totalling 125,000 Ordinary Shares and 167,790 ZDP Shares raising approximately £716,000.  The issue was priced at a premium to the package net asset value (the NAV of Ordinary Shares and ZDPs combined). 

In conjunction with the ZDP proposals outlined above, the Company issued a Prospectus for the issue of new Ordinary Shares through a placing and offer for subscription that was to close in January 2017. The price at which the new Ordinary Shares would be issued was set at a premium of 1% to the NAV as struck on 25 January 2017. The proposals also provided for new ZDPs to be issued through a placing in such number as would preserve the ratio of ZDPs to Ordinary Shares.  These proposals were approved by shareholders and on 30 January 2017 the Company announced that 5,995 new Ordinary Shares had been issued. The Company had received applications for a greater number of Ordinary Shares however as the Ordinary Shares had been trading at a significant discount to NAV and therefore to the Initial Issue Price, all applicants were given the opportunity to withdraw and the vast majority did so. New ZDPs in appropriate ratio to the new Ordinary Shares were issued at 140 pence per share through the placing along with the ZDPs that were replacing the redeeming ZDP shareholders.

Earnings and Dividends

The quarterly dividend was increased by 14.3% from 3.5 pence to 4.0 pence per Ordinary Share in the second quarter. Over the year the total dividend distribution was 15.5 pence per Ordinary Share.  Earnings per share for the year of 20.38 pence covered the dividend distribution by 131.5% and resulted in an addition to revenue reserves. At the year-end, revenue reserves were the equivalent of 15.79 pence per Ordinary Share, representing 102% of the 2016 dividend. The Board are encouraged not only by the significant growth in earnings during 2016 but also by the dividend growth prospects that our Investment Adviser is seeing in investee companies held in the Smaller Companies Portfolio. Following the year-end the Company has brought forward the June 2017 dividend increase and announced a 12.5% uplift to the first interim for 2017 from 4.0 pence to 4.5 pence per Ordinary Share.

Outlook

Your Board remains positive on the prospects for the Smaller Companies Portfolio. The Investment Adviser is continuing to find attractive and overlooked investment opportunities among smaller companies and a weak sterling is not only boosting earnings for portfolio companies with a high proportion of overseas business but is proving a stimulus for merger and acquisition activity from foreign buyers.  The allocation of 80% of Acorn to the Smaller Companies Portfolio reflects our conviction that there is both value and opportunity within our investment universe.  However there remain many economic and policy unknowns both in the UK, Europe and the US and this suggests a degree of caution is required.  Within the Income Portfolio our Investment Adviser is prepared both for increasing inflation, rising interest rates and a potential widening of credit spreads by holding structured investments that will benefit from these market outcomes and which will act as a hedge against weakness in bond markets.  Furthermore as well as holding conventional fixed interest investments the portfolio has index linked exposure, convertibles and alternative asset exposure through investment companies.

Contact with Shareholders

Shareholders are always welcome to attend the General Meeting in August however I recognise that for most shareholders a trip to Guernsey may not be practicable. To provide you with an alternative way of communicating with the Board I have set up an email address through which you are welcome to contact me with any questions you may have. Just email me on [e-mail].

Helen Green
Chairman

Investment Advisers’ Report

The Smaller Companies Portfolio

During the twelve month period to 31st December 2016 the Smaller Companies Portfolio generated a total return 8.6% (860 basis points) before allowing for costs and management fees - underperforming a rise of 11.1% by the Numis Smaller Companies (Ex Investment Companies) Index (NSCI).

The period under review was a challenging year defined by tumultuous events and political surprises. In the UK the EU Referendum was clearly a pivotal moment for the performance of the portfolio during the period under review. The portfolio was not positioned to benefit from any specific outcome of the referendum and as such carried its usual exposure to domestic earners. Smaller, domestically focused companies were especially hard hit in the immediate aftermath of the vote as Sterling devalued dramatically with investors taking a more cautious view of the UK economy.

As the post-referendum period saw an outperformance in larger companies compared to smaller, the year as a whole saw a stark effect of a significant rebound in resource stocks. As the Smaller Companies Portfolio invests at the lower end of the market scale and filters out resource-focused stocks, it found itself facing two major headwinds in terms of relative performance over the year. The contribution of the mining sectors to the total return of the NSCI was around 6% of the 11% total, in light of this we feel the portfolio’s return of 8.6% was respectable. 

Towards the end of the year the result of the US presidential election provided another political shock with Donald Trump being chosen as the new US President. His selection was taken as broadly positive by equity markets which now expect increased inflation and interest rates fuelled by anticipated high levels of infrastructure spending; an environment that should be relatively favourable for equities. As such, companies that generate a high proportion of earnings in the US have generally performed better than those that are more domestically focused.

The number of holdings within the portfolio increased to 50 during the period following the addition of twelve new holdings and disposal of seven positions.  Overall 2016 proved to be a fairly busy year in terms of corporate activity with the portfolio participating in four Initial Public Offerings (IPOs) and receiving bid approaches for three investee companies.

Outside of the IPO market the eight new additions to the portfolio were BBA Aviation, the global provider of aviation support services; Wincanton, the logistics company; RPS Group, the global consultancy business; Chesnara, the closed life consolidator; Dairy Crest, the producer of consumer dairy products; New River Retail, the retail property REIT; Greene King, the UK pub operator and Card Factory, the greetings card retailer. 

The portfolio also participated in four IPOs during the period, all of which ended the year in positive territory, generating a combined contribution to performance of 109 bps.  These additions to the portfolio were Warpaint, a manufacturer and distributor of cosmetic products; Van Elle, a specialist provider of piling equipment and services; Midwich Group, a distributor of audio visual equipment and Morses Club, a consumer lending business.

In total seven positions were exited in full during the period. British Polythene Industries was acquired during the period by RPC Group in a cash and shares deal, and the residual holding in RPC was also exited prior to the period end.  Long term holdings in both VP and Diploma were also exited on yield compression grounds, following strong multi-year periods of share price performance. A small holding in DX Group was also sold, drawing a line under this disappointing investment. The position in pub group Marstons was also exited towards the end of the year, in favour of our new position in Greene King. 

Unusually for the portfolio, the position in New River Retail was bought and sold during the period as we looked to reduce retail property exposure following the EU referendum result.

The strongest contribution to performance came from Somero, the manufacturer of laser guided concrete spreading and levelling equipment, which added 170 bps to performance.  The Company continued to enjoy strong demand for its products around the world and also benefited from the strength of the US dollar.

In addition to the bid approach for British Polythene Industries further approaches were made for UK Mail and Lavendon during the period, as overseas buyers looked to take advantage of the weakness in sterling. In August Deutsche Post announced a cash offer for UK Mail, moving the shares sharply higher and generating a contribution to performance of 117 bps. UK Mail endured a tough year in 2015 however we remained convinced in the underlying value of the business and it was pleasing to see our patience pay off following the bid approach.  An approach for the equipment rental business Lavendon in November by Belgian firm TVH Group sparked further interest from French rival Loxam SAS – with both companies bidding for the firm during the period.  By the end of the year Lavendon had generated a contribution to performance of 148 bps – marking a significant return on the investment we made at the end of 2015.

The Company’s largest holding, Clipper Logistics, also enjoyed another strong period of operational and share price performance, generating a return of 112 bps during the year.  Further strong returns were also provided by BBA Aviation (88 bps), Amino Technologies (78 bps) and Hill & Smith Holdings (73 bps).

The largest detractor from performance was Secure Trust Bank, which cost the portfolio 107 bps of performance.  The shares were sold off sharply in line with all the challenger banks following the EU referendum, and only partially recovered this lost ground by the end of the year. Secure Trust remains a core long term holding within the portfolio and the position was increased by over 20% during the period as we looked to take advantage of the short term share price weakness. 

Sprue Aegis, the manufacturer of smoke and carbon monoxide alarms also struggled during the year as a non-safety critical technical issue with one of their products resulted in an expensive increase in the warranty provision.  Our position was increased by 25% during the period on share price weakness however it did have a negative impact of 99 bps on performance.

In a period which is becoming increasingly defined by moves away from the political status quo we feel that our focus on profitable, cash generative, well financed, dividend paying stocks at the lower end of the market capitalisation scale leaves us well positioned to generate strong returns over our mid to long term investment horizon.

Fraser Mackersie and Simon Moon
Unicorn Asset Management Limited

The Income Portfolio

The Income Portfolio delivered a fairly smooth and stable return path throughout what proved to be an extremely volatile year for fixed income markets. Whilst it did not fully participate in the large post-UK referendum rally due to lower duration exposure, it has been much more defensive and protected capital as bond markets have sold off since late summer. Investment discipline and not chasing unjustified valuations has been key to this.

The China and US driven risk-off environment seen in the first quarter was soon exacerbated by the shock UK referendum result, which drove gilt yields down to all-time lows. Since August however, global yields have rebounded spectacularly, inflicting material losses on instruments which had been held as safe haven assets. The sharp reversal in yields has principally developed from a change in mind-set which has seen global deflationary fears transformed into inflation concerns for a number of reasons. The stabilisation of oil prices at much higher levels from their lows saw the deflationary drag from energy reverse across observed global inflation baskets as can be seen from the chart below which shows the Consumer Price Indices for the US, UK and Germany all moving higher over the last 9 months.

Inflation (CPI) in US, UK and Germany

Inflation expectations have also shifted markedly higher as Donald Trump’s presidential victory in the US has brought great expectations of a policy mix change in the US, moving away from exclusive reliance on ultra-loose monetary policy towards a more balanced dependence on deregulation and economic activity supported by expansionary fiscal policy. With expectation comes the possibility of disappointment and we wait to see what policies the new President prioritises and what support he has in executing them. Certainly the endeavour for expansionary policy is there and with the economy already around full employment the concern is that the Federal Reserve Bank may be forced to raise rates faster than they had anticipated.

Meanwhile in the UK, gilt yields ended the year around double the level of their post-referendum lows, inflicting large losses on those investors which assumed the Bank of England’s policy of monetary loosening would be a backstop for the bond market. For now at least, the economy appears to be holding up well and could put the Bank of England in a more neutral mind-set following the pre-emptive rate cut in response to the referendum. Indeed the service and manufacturing sector Purchasing Managers’ Index surveys bounced back strongly in December with low unemployment supporting the consumer and sterling’s weakness providing a boost to export competitiveness. However the collapse in sterling has also introduced imported inflation risks which will erode the real return of gilts. Inflation is also likely to present a challenge to consumer real incomes whilst the lack of visibility to firms regarding Brexit negotiations is likely to curtail corporate spending.

Despite the recent rise in yields, valuations of investment grade corporate bonds continue to look rich with the scope for credit spreads to tighten further being limited and almost certainly less than the potential for them to widen if growth or default expectations worsen. The credit market has been highly manipulated with central bank quantitative easing programmes further driving down yields and spreads through direct repurchases of corporate bonds, which have already experienced a tailwind from buybacks of sovereign issues. The European Central Bank and Bank of England’s intervention in corporate bond markets where the search for yield has already created crowded activity has arguably added to liquidity problems and make them vulnerable to a withdrawal of technical supports such as tapering.

We remain cautious on duration and the tight levels of investment grade credit and endeavour to seek opportunities where risk and reward profiles are most attractive. Overall, the current uncertainty requires cautious positioning within both duration and spreads with both still at historically low levels and either vulnerable to rising in a variety of positive or negative economic scenarios, especially given liquidity constraints in the bond markets. For these reasons we are investing in alternative strategies to provide some diversification from traditional fixed income investments. These strategies include exposures to convertible bonds, index linked bonds, investment companies and structured investments.

Paul Smith
Premier Fund Managers Limited

Schedule of Principal Investments
as at 31 December 2016

				Percentage of Total Assets 2016	Percentage of Total Assets 2015
Position	Company	Market Value £’000	Percentage of Portfolio
Smaller Companies Portfolio
1	Clipper Logistics plc	2,850,000	3.96	3.01	2.91
2	Conviviality Retail plc	2,481,125	3.45	2.62	3.44
3	Safestyle UK plc	2,322,000	3.22	2.46	2.63
4	Macfarlane Group	2,280,000	3.17	2.41	3.21
5	Secure Trust Bank plc	2,258,550	3.14	2.39	3.10
6	Acal plc	2,205,000	3.06	2.33	3.00
7	Somero Enterprises inc	2,200,000	3.06	2.33	1.82
8	Lavendon Group plc	2,190,358	3.04	2.32	0.82
9	Castings plc	1,845,850	2.56	1.95	2.32
10	Park Group plc	1,825,000	2.53	1.93	2.48
11	Numis Corporation plc	1,824,375	2.53	1.93	2.01
12	Primary Health Properties plc	1,768,000	2.46	1.87	2.65
13	Wincanton plc	1,722,000	2.39	1.82	–
14	James Halstead plc	1,695,750	2.36	1.79	2.24
15	FDM Group Holdings plc	1,695,000	2.35	1.79	1.71
16	Gateley Holdings plc	1,677,000	2.33	1.77	1.40
17	Alumasc Group plc	1,672,000	2.32	1.77	2.44
18	Mucklow A&J Group plc	1,624,845	2.26	1.72	1.80
19	Epwin Group plc	1,604,000	2.23	1.70	2.27
20	Quarto Group inc	1,535,046	2.13	1.62	1.12
		39,275,899	54.55	41.53
Income Portfolio
1	Real Estate Credit Pref Shs NPV	943,500	6.22	1.00	0.80
2	DW Catalyst Fund Limited	632,838	4.17	0.67	0.12
3	United Kingdom 2.50% IL Treasury 2020	519,624	3.43	0.55	–
4	British Telecoms 5.75% 2028	401,005	2.64	0.42	0.27
5	HSBC 6% 29/03/2040	360,312	2.37	0.38	0.39
6	JPMorgan Global Convertibles Income Fund Limited	360,000	2.37	0.38	–
7	Glencore Finance Dubai 2.625% 2018	354,556	2.34	0.37	0.28
8	Itv 2.125% 2022	352,043	2.32	0.37	0.16
9	F&C Global Smaller Companies CULS 3.5%	343,700	2.27	0.36	0.35
10	Natixis Structured 0.00% 08/09/2017	340,831	2.25	0.36	–
11	Tesco Personal Finance 1.00% 2019	339,135	2.24	0.36	0.22
12	EDF 6.125% 02/06/2034	334,180	2.20	0.35	0.34
13	UBS 7.25% 22/02/2022	325,632	2.15	0.34	0.47
14	Investec Bank 0.00% 08/09/2020	302,094	1.99	0.32	–
15	Heathrow 7.075% 04/08/2028	286,202	1.89	0.31	0.30
16	St Modwen Properties 2.875% 06/03/19	283,170	1.87	0.31	0.34
17	Credit Agricole SA 8.125% 2033 - 18	261,178	1.72	0.28	0.25
18	Northumbrian Water Finance plc 6.875% 2023	259,306	1.71	0.27	0.28
19	Spirit Issuer 5.472% 28/12/2034	258,911	1.71	0.27	0.28
20	Aviva 5.9021% Perp - 2020	255,313	1.67	0.27	0.28
TOTAL		7,513,530	49.53	7.94

Directors’ Biographies
for the year ended 31 December 2016

Directors
The Directors for the whole year ended 2016 were as follows:

Helen Green
Nigel Ward
David Warr

 

All three Directors of the Board are non-executive Directors and are considered independent of the Investment Manager.

Both Helen Green and David Warr are chartered accountants and all three have extensive non-executive director experience. Further details of the qualifications and suitability of each of the Director’s appointments are as follows:

Helen Foster Green (Chair)

Helen joined the Company in January 2007 and has been Chairman of the Company since 22 August 2012. She was re-elected as Chairman of the Company in August 2013. Helen is a chartered accountant. She has been employed by Saffery Champness, a top 20 firm of chartered accountants, since 1984. She qualified as a chartered accountant in 1987 and became a partner in the London office in 1997. Since 2000 she has been based in the Guernsey office where she is client liaison director responsible for trust and company administration. Helen serves on the boards of both LSE listed companies and AIM listed companies*. Helen is a resident of Guernsey.

John Nigel Ward

Nigel joined the Company in December 2011. Nigel has over 40 years experience of international investment markets, credit and risk analysis, portfolio management, corporate and retail banking, corporate governance, compliance and the managed funds industry gained at Nat West, TSB Bank, Baring Asset Management and Bank Sarasin. Nigel is a full- time non-executive director serving on a number of company boards which have LSE or Channel Island Securities Exchange listings.* He is a founding Commissioner of the Guernsey Police Complaints Commission, an Associate of the Institute of Financial Services, a member of the Institute of Directors and holder of the IoD Diploma in Company Direction. Nigel is a resident of Guernsey.

David John Warr

David joined the Company in August 2012. David is a Fellow of the Institute of Chartered Accountants in England and Wales having qualified as a chartered accountant in 1976. In 1981 David was appointed a partner in Reads & Co. a Guernsey based firm of chartered accountants, which he helped develop into a more broadly based financial services business leading up to its sale at the end of 1998. David’s experience at Reads & Co. included audit, trust and company administration. David now acts as a non-executive director on a number of UK listed companies* whilst combining those responsibilities with charitable work most noticeably as Vice-Chairman of the Guernsey Community Foundation LBG. David is a resident of Guernsey.

*Details of the Directors’ other directorships for public companies can be found in the Directors' Report.

Directors’ Report
for the year ended 31 December 2016

The Directors have pleasure in presenting their business review, report and financial statements of the Company for the year ended 31 December 2016.

Principal Activities and Business Review

The principal activity of the Company is to carry on business as an investment company. The Directors do not envisage any change in these activities for the foreseeable future. A description of the activities of the Company in the period under review is given in the Chairman’s Statement.

Business and Tax Status

The Company is a closed-ended investment company, incorporated with limited liability in Guernsey  on 5 January 1999, registered number 34778. The Company operates under The Companies (Guernsey) Law, 2008, (the “Law”), the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended and the Authorised Closed Ended Investment Scheme Rules 2008.

The Company’s Ordinary Shares and ZDP Shares are traded on the LSE with the Ordinary Shares having a premium listing and the ZDP Shares having a standard listing, as defined by the LSE.

The Company’s management and administration takes place in Guernsey and the Company has been granted exemption from income tax within Guernsey by the Administrator of Income Tax. It is the intention of the Directors to continue to operate the Company so that each year this tax-exempt status is maintained.

Alternative Investment Fund Managers Directive (“AIFMD”)

The Company is an ‘Alternative Investment Fund’ (“AIF”), as defined by the Alternative Investment Fund Managers Directive (“AIFMD”) and is self managed. The Company was approved as an AIF and submitted an Article 42 Notification to the FCA under the National Private Placement Regime on 3 August 2015.

The Directors have set a maximum gearing level for the purpose of AIFMD of 400% for both the commitment exposure level and gross leverage level. As at 31 December 2016 the commitment exposure level was 56% and the gross leverage level was 53%.

Regulatory disclosures, including the Company’s Investor Disclosure Document, are provided on the Company's website www.premierfunds.co.uk/investors/investments/ investment-trusts/acorn-income-fund.

Foreign Account Tax Compliance Act (“FATCA”)

FATCA requires certain financial institutions outside the United States (“US”) to pass information about their US customers to the US tax authorities, the Internal Revenue Service (the “IRS”). A 30% withholding tax is imposed on the US source income and disposal of assets of any financial institution within the scope of the legislation that fails to comply with this requirement. On 13 December 2013, the Intergovernmental Agreement between the United States and the States of Guernsey implementing FATCA was signed.

On 22 October 2013 an Intergovernmental Agreement between the United Kingdom (“UK”) Government and the States of Guernsey to implement a similar provision between the States of Guernsey and the UK was signed. The Board of the Company has taken all necessary steps to ensure that the Company is FATCA compliant and confirms that the Company is registered and has been issued a Global Intermediary Identification Number (“GIIN”) by the IRS. The Company will use its GIIN to identify that it is FATCA compliant to all financial counterparties.

Common Reporting Standard

The Common Reporting Standard (“CRS”) is a global standard for the automatic exchange of financial account information developed by the Organisation for Economic Co-operation and development (“OECD”), which has been adopted in Guernsey and which came into effect in January 2016. The CRS has replaced the inter-governmental agreement between the UK and Guernsey to improve international tax compliance that had previously applied in respect of 2014 and 2015. However, it was still necessary to submit the 2014 and 2015 reports for the UK IGA by 30 June 2016. The first report for CRS will be made to the Director of Income Tax by 30 June 2017.

The Company is subject to Guernsey regulations and guidance on the automatic exchange of tax information and the Board will therefore take the necessary actions to ensure that the Company is compliant in this regard.

Discontinuation Vote

At the Annual General Meeting held on 26 September 2016, shareholders were given the opportunity in accordance with Article 53.1 of the Articles of incorporation of the Company to vote for the discontinuance of the Company. The Directors recommended that shareholders vote against the special resolution thereby supporting the continuance of the Company in its present form.    The special resolution was not carried and it was noted that the Company would continue in its present form.

Going Concern

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

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

•        the Company has sufficient liquidity to meet all ongoing expenses. The Company has net liabilities of £22,384,312 (includes the ZDP Shares which have been reclassified on the Statement of Financial Position as a current liability as the maturity date is within one year) at the year end. In January 2017 the ZDP Shares were refinanced and the life of the ZDP Shares was extended to 28 February 2022. In addition the Board regularly reviews the cash flow of the Company and is confident that the Company will have sufficient resources to meet all future obligations;

•        both the Income and Smaller Companies Portfolios consist substantially of listed investments which are readily realisable and therefore the Company has sufficient resources to meet its liquidity requirements; and

•        as at 31 December 2016, the Company had no borrowings other than the ZDP Shares which, as explained in Note 13, had a final capital entitlement on the 31 January 2017. A proposal by the Company to extend the life of the ZDPs for a further 5 years and one month to 28 February 2022 with the ZDPs accruing at a rate of 3.85% from the 138p NAV on 31 January 2017 to 167.2p on redemption was approved by 91.4% of ZDP Shareholders.

The Company’s brokers replaced the ZDPs that had been redeemed through a placing of new ZDPs. The price for this placing was determined through a book build by the Company’s broker and the level of demand enabled the shares to be placed at 140p, a premium of 1.4% to their NAV.

Viability Statement

In accordance with provision C.2.2 of the UK Corporate Governance Code, published by the Financial Reporting Council in September 2014 (the “Code”), the Directors have assessed the prospects of the Company over the three year period to 31 December 2019. The Directors consider that three years is an appropriate period to assess the viability of an investment company for the purpose of giving assurance to Shareholders.

In determining the appropriate period of assessment the Directors had regard to the general advice that equity investment should be made on a medium to longer term view (perhaps 3 to 10 years) but also to evidence that the average holding time for an equity investment is under 3 years. The Directors consider that 3 years is a sufficient investment time horizon to be relevant to shareholders and that choosing a longer time period can present difficulties given the lack of longer term economic visibility.

In its assessment of the viability of the Company, the Directors have considered each of the Company’s principal risks and uncertainties detailed in the principal risks section below (and in Note 18) and, in particular, the impact of a significant fall in regional equity markets on the value of the Company’s investment portfolio. The Directors have also considered the Company’s income and expenditure projections and the fact that the Company’s investments comprise readily realisable securities which can be expected to be sold to meet funding requirements if necessary. The Directors also noted that the next Discontinuation Resolution will be proposed at the annual general meeting in 2021.

Based on the Company’s processes for monitoring operating costs, share price discount, the Manager’s compliance with the investment objective, asset allocation, the portfolio risk profile, gearing, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is 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 to 31 December 2019.

Gearing Policy

The Company’s gearing policy is not to employ any gearing through long-term bank borrowing. Save with the prior sanction of the ZDP Shareholders the Company will not incur any indebtedness other than short term borrowings in the normal course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares.

Results and Dividends

The results attributable to Ordinary Shareholders for the period are shown in the Statement of Comprehensive Income. The Company made a revenue return for the year of 20.38 pence (2015: 18.49 pence) per Ordinary Share and a capital return of 6.81 pence (2015: 55.60 pence) per Ordinary Share.

Principal Risks

The Board has an on-going process in place for identifying, evaluating and managing the significant risks faced by the Company. The responsibility for carrying out the risk review is now undertaken by the Risk Committee (see Directors’ Report for details of the Risk Committee), which meets at least four times per year. The results of the risk evaluations are then reported back to the Board. The last risk assessment took place on 6 February 2017. Prior to the establishment of the Risk Committee, the Audit Committee undertook the role of reviewing the Company’s risk and that process of review had been in place since the Company’s incorporation. The current process is in line with the Association of Investment Companies (“AIC”) Code of Corporate Governance (the “AIC Code”).

Company Risks

Risks of the Structure of the Company and gearing

The Company’s business could be materially and adversely affected by a number of risks. External factors to the Company may either adversely or favourably affect the volatility and liquidity of the Smaller Companies Portfolio and Income Portfolio (the“Portfolios”), as well as their values. These can be caused by economic conditions, changes to tax laws, competition and a number of other factors.

Investors holding either Ordinary Shares or ZDP Shares should have carefully considered whether these investments, given the risks attached, are suitable for them.

The market value of ZDP Shares will be affected by changes in general interest rates, with upward movements in interest rates likely to lead to reductions in the market value of ZDP Shares although not affecting the ultimate redemption value.

Although the holders of ZDP Shares have a priority entitlement to the other assets of the Company (after payment of its liabilities) on a winding-up, if the gross assets of the Company fall to a level that is insufficient to redeem the ZDP Shares in full, investors in the ZDP Shares would receive a lower payment than the Fixed Capital Entitlement on the ZDP Shares repayment date.

In certain circumstances, such as a major fall in the capital value of the Portfolios such that the Final Capital Entitlement of the ZDP Shares is significantly uncovered but where the Company’s Portfolios are still generating revenue, the interests of ZDP Shareholders and  the Ordinary Shareholders may conflict. In such circumstances, the Directors may find it impossible to meet fully, both sets of expectations and so will need to act in a manner which they consider to be fair and equitable to both Ordinary Shareholders and ZDP Shareholders but having regard to the entitlements of each class of shares.

Further risks to the ZDP Shares include the lower level of regulatory protection than applies to premium listed shares.

The Ordinary Shares are geared by the ZDP Shares and should be regarded as carrying above average risk since a positive Net Asset Value (“NAV”) for the Ordinary Shareholders will be dependent upon the Company’s assets being sufficient to meet those prior entitlements of the holders of ZDP Shares. As a consequence of the gearing, a decline in the value of the Company’s investment portfolio will result in a greater percentage decline in the NAV of the Ordinary Shares.

Ordinary Shareholders do not have a right for their shares to be redeemed and those Ordinary Shareholders wishing to realise their investment will be required to dispose of their shares on the stock market.

Market liquidity in the shares of companies such as the Company is less than market liquidity in shares issued by larger companies traded on the LSE. There can be no guarantee that a liquid market will exist for the Ordinary Shares or the ZDP Shares which may prevent any holder of Ordinary Shares or ZDP Shares from disposing of such shares at a price or at such time that they wish.

The Company’s future performance depends on the success of its strategy, the skill and judgement of the Investment Manager and of the Investment Advisers. The departure of key personnel of either provider may have an adverse effect on the performance of the Company.

The Company may use derivatives to hedge exposure to currency risk and interest rate risk. No assurance can be given that any hedging strategies which may be used by the Company will be successful under all or any market conditions and, if unsuccessful, could have an adverse effect on the Company’s financial position.

Risk associated with investment in other investment companies

The Income Portfolio may contain higher yielding investment company shares (including shares of split capital investment trusts). As a result of the gearing in some investment company shares, any increase or decrease in the value of the investments held by those investment companies might magnify movements in their NAV and consequently affect the value of the Income Portfolio. In accordance with the Listing Rules, where appropriate, the Company makes Stock  Exchange announcements detailing its holdings in other UK listed investment companies which themselves do not have a stated investment policy to invest no more than 15% of their gross assets in other UK listed investment companies (including investment trusts).

Currency risk

The majority of the Company’s assets and all of its liabilities are denominated in sterling however some of the investments in the Income Portfolio may be denominated in foreign currencies. Generally, these exposures are hedged back to sterling and there is unlikely to be any significant direct currency risk.

Market price risk

Since the Company invests in financial instruments, market price risk is inherent in these investments. In order to minimise this risk, a detailed analysis of the risk/reward relationship of each investee company is undertaken by the Investment Advisers prior to making investments.

Interest rate risk

The Company's investment portfolios, particularly the Income Portfolio, include investments bearing interest at fixed rates. Generally when interest rates rise the market prices of fixed interest securities fall and when interest rates fall the prices of fixed interest securities rise. The Company will therefore be exposed to movements in interest rates. The Company has fixed rate leverage through its ZDP Shares. Post the year end, the redemption date of the Company’s ZDP shares was extended to 28 February 2022 at a rate of 3.85% per annum.  Replacing this leverage in 2022 might involve the Company paying a higher accrual rate on an issue of new ZDP Shares if interest rates have risen.

Liquidity risk

Liquidity risk is the risk that the Company will encounter dfficulties in meeting its obligations associated with its financial liabilities that are settled by delivery of cash or another financial asset. Some of the Company’s investments in smaller company equities and in certain bond issues may have relatively low levels of daily turnover such that it might take several days or even weeks to sell a holding into the market.

Discount volatility

Being a closed-end fund, the Company’s shares may trade at a discount or premium to their NAV. The magnitude of this discount or premium fluctuates daily and can vary significantly. Thus, for a given period of time, it is possible that the market price could decrease despite an increase in the Company’s NAV.

The Directors review the discount levels regularly. The Investment Advisers actively communicate with the Company’s major shareholders and potential new investors, with the aim of managing discount levels.

Brexit

The UK’s vote to leave the EU has introduced new uncertainties and instability into the financial markets. As the process of a major country leaving the EU has no precedent, the Board and the Investment Manager expect an ongoing period of market uncertainty as the implications are processed.

Company Performance

Key Performance Indicators and Analysis of Company’s Performance

At each quarterly board meeting the Directors consider a number of performance measures in order to assess the Company’s success in achieving its objectives. The key areas reviewed are as follows:

•        Review of the history of the NAV.

•        Receive an update on the market activity of the Ordinary Shares and the ZDP Shares by Numis Securities Limited, the Company’s corporate broker.

•        Receive updates on the performance of both the Income Portfolio and the Smaller Companies Portfolio from the Investment Advisers.

•        Consideration of the revenue projection.

On-going Charges and Total Expense Ratio (the “TER”)

The annual on-going charges figure for the year was 1.65% (2015: 1.69%). This figure which has been prepared in accordance   with the recommended methodology provided by the Association of Investment Companies and represents the annual percentage reduction in shareholder returns as a result of recurring operational expenses. In 2016 and 2015 a performance fee was not payable.

The TER of the Company is calculated as a percentage of costs against total assets at the year end and is capped at 1.5%. For 2016 the TER was 1.04% (2015: 1.09%). The calculation of costs excludes performance fees, non-routine administration and professional fees. The net management fee charged in 2016 was £623,080 (2015:  £596,754).

Share Price Rating and Discount Management including information on treasury shares

At the Annual General Meeting on 26 September 2016 the Directors obtained shareholder approval to issue up to an aggregate nominal amount of £31,821.38 Ordinary Shares and an aggregate nominal amount of £42,714.34 ZDP Shares, also obtaining the necessary pre-emption waiver from the ZDP Shareholders in respect of any new issue of ZDP Shares.

The shareholders approved renewal of the Company’s authority to buy back Ordinary Shares and ZDP Shares up to 25% of the issued Ordinary and ZDP Shares as at 26 September 2016 specifically 5,569,151 Ordinary Shares and 7,472,875 ZDP Shares and authority to buyback a further 5% (of the shares in issue as at 26 September 2016) to manage any discount.

The Directors also obtained authority to sell from treasury Ordinary Shares at a discount to the prevailing NAV per Ordinary Share, provided that the authority conferred was limited to issues or sales of Ordinary Shares at the same time as ZDP Shares are issued or sold from treasury at a premium, such that, the combined effect of the issue or sale of Ordinary Shares and the issue or sale of ZDP Shares at a premium is that; (i) the NAV per Ordinary Share is thereby increased; and (ii) gearing is not thereby increased.

The Company intends to seek annual renewal of these authorities from shareholders at each future general meeting to be held under section 199 of the Law. In accordance with the Law, any share buy backs will be affected by the purchase of a package of Ordinary Shares and ZDP Shares (in a specified ratio as set out in the Company’s Prospectus) in the market for cash at a package price which in aggregate is at a discount to the prevailing NAVs of each class of Share, where the Directors believe such a purchase will enhance shareholder value. Shares which are purchased may be cancelled or held in Treasury.

Investment Management and Administration

Management Agreement and Fees

The Board is responsible for the determination of the Company’s investment policy and has overall responsibility for the Company’s day-to-day activities. The Company has, however, entered into a Management Agreement with PAMG, a wholly-owned, Guernsey incorporated subsidiary of Premier Asset Management Limited.

The Manager has discretion to make minor changes to the portfolios and also has discretion to move cash from the Smaller Companies Portfolio to the Income Portfolio. The Manager will refer any proposals to the Board to materially alter the split of assets between the Income Portfolio and the Smaller Companies Portfolio. The Board determines when any potential investment limits can be exceeded, dividend levels and the appropriate issue size for the ZDP Shares and hence the level of gearing.

Under separate Investment Adviser Agreements, PAMG has delegated a number of its duties and responsibilities to PFM and Unicorn. In relation to the Income Portfolio and Smaller Companies Portfolio respectively, both PFM and Unicorn act as Investment Advisers who are responsible for the identification and analysis of investments meeting the investment objectives and strategy of the Company. PFM and Unicorn are authorised and regulated by the FCA.

The Board keeps under review the performance of the Investment Manager and the Investment Advisers. In the opinion of the Directors the continuing appointment of the Investment Manager on the terms agreed is in the interest of shareholders as a whole, due to the experience and proven track record of the fund management team in the chosen markets. The Directors consider the investment performance of the Company is satisfactory relative to the markets in which the Company invests.

A list of the top 20 holdings for each portfolio is shown in the Schedule of Principal Investments of this report and the top 10 holdings for each portfolio is included in the monthly fund factsheet, available on the Company’s website.

For the Company’s full holdings information please refer to the Unaudited Full List of Investment Holdings Listing.

Administration Agreement

The administration of the Company is undertaken by Northern Trust International Fund Administration Services (Guernsey) Limited (“Northern Trust”).

Custodian

The custodian of the Company is Northern Trust (Guernsey) Ltd.

Segmental Reporting

The Company has two reportable segments, being the Income Portfolio and the Smaller Companies Portfolio. Each of these portfolios is managed separately, entail different investment objectives and contain investments in different products. A more comprehensive disclosure can be found within Note 2 of the Notes to the Financial Statements.

Corporate Governance

On 1 October 2013, the Company became a member of the AIC, and on 19 November 2013 the Company formally resolved to adopt and comply with the AIC Code.

The Financial Reporting Council has confirmed that an AIC member which reports against the AIC Code and who follows the AIC Corporate Governance Guide for Investment Companies (the “AIC Guide”), will be meeting their Listing Rule obligations in relation to reporting against The UK Code of Corporate Governance (the “UK Code”).

Statement of Compliance with the UK Code

The Board of the Company has considered the principles and recommendations of the AIC Code by reference to the AIC Guide. The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to the Company.

The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the UK Code), will provide better information to shareholders.

Due to the Ordinary Shares having a premium listing on the LSE, the Company must comply with Listing Rule 9.8.6(5) which requires the Company to apply the provisions of the UK Code to the extent that they are considered relevant to the Company. By complying with the AIC Code the Company is meeting its obligation under the UK Code and as such is not required to report further on issues contained in the UK Code which are irrelevant to it. The Directors place a high degree of importance on ensuring that high standards of corporate governance are maintained within the Company.

The AIC Code is available for download from the AIC website: www.theaic.co.uk.

With effect from 1 January 2012, the Company was also required to comply with the Guernsey Financial Services Commission Financial Sector Code of Corporate Governance (the “Guernsey Code”). As the Company reports under the AIC Code it is deemed to meet the Guernsey Code and the Board has undertaken to evaluate its corporate governance compliance on an on-going basis.

The Company has complied with the recommendations of the AIC Code and the relevant provisions of the UK Code throughout the year, except as set out below.

The UK Code includes provisions relating to:

•               the role of the chief executive;

•               executive directors’ remuneration; and

•               the need for an internal audit function.

For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to the Company, being an externally managed investment company. In particular, all of the Company’s day to day management and administrative functions are outsourced to third parties. As a result, the Company has no executive directors, employees or internal operations. The Company therefore has not reported further in respect of these provisions.

Other areas of non-compliance with the AIC Code by the Company, and the reasons therefore, are as follows:

The Company has not appointed a Senior Independent Director. This is not in accordance with the recommendations in principle 1 of the AIC Code but is felt to be appropriate for the size and nature of the Company.

The non-executive Directors of the Company do not meet without the Chairman present to appraise the Chairman’s performance. This is not in accordance with principle 1 of the AIC Code. However, the Company has a Chairman’s Performance Evaluation Questionnaire which is completed by all Directors (other than the Chairman) and analysed annually to facilitate the review of the Chairman’s performance.

The Company does not comply with principle 3 of the AIC code; as per the Company’s Articles of Incorporation, the Directors are not subject to re-election by the Shareholders except in their first year of appointment, nor are they appointed for specific terms as required by these provisions, as this is not felt to be appropriate for the size and nature of the Company. However, the Board has determined in order to facilitate good corporate governance practice in line with principle 2 of the AIC Code, each director, subsequent to 2016, will offer themselves for re-election every 3 years until their ninth year of service. Any Director with over nine years shall be eligible for re-election every year thereafter. As a result of this principle the Directors were elected as follows:

Helen Green was re-elected in 2013, and is next eligible for re- election in 2017.

David Warr was elected in 2013, and is eligible for re- election in 2019.

Nigel Ward will be eligible for re-election in 2018.

In accordance with principle 5 of the AIC Code the following details are of all other public Company directorships and employment held by each director and shared directorships of any commercial company held by two or more Directors:

Helen Green
•               John Laing Infrastructure Fund Limited*
•               City Natural Resources High Yield Trust Plc*
•               Landore Resources Limited**
•               Aberdeen Emerging Markets Investment Company Limited*
•               UK Mortgages Limited#

David Warr
•               Aberdeen Frontier Markets Investment Company  Limited**
•               Threadneedle UK Select Trust Limited*
•               Breedon  Group Plc**
•               Hadrian’s Wall Secured Investments Limited*

Nigel Ward
•               Crystal Amber Fund Limited**
•               Fair Oaks Income Fund Limited^#
•               Hadrian’s Wall Secured Investments Limited*

* Listed on the Main Market of the LSE
** Traded on the AIM of the LSE
# Traded on the Specialist Fund Segment of the LSE

The Company does not comply with principle 9 of the AIC Code as it does not have a formal policy on diversity, however the Company has established a Nomination Committee that adheres to formal terms of reference and which is responsible for identifying any gaps on the Company’s board that need to be filled. When considering candidates the Board has due regard to the benefits of diversity on the board and amongst other considerations this includes gender.

Conflicts of Interest

None of the Directors nor any persons connected with them had a material interest in any of the Company’s transactions, arrangements or agreements at the date of this report and none of the Directors has or had any interest in any transaction which is or was unusual in its nature or conditions or significant to the business of the Company, and which was effected by the Company during the reporting period.

David Warr holds 63,000 Ordinary Shares in the capital of the Company, which represented an interest of 0.40% of the Company’s Ordinary Shares in issue as at 31 December 2016.

At the date of this report, there are no outstanding loans or guarantees between the Company and any director.

Board Responsibilities

The Board comprises three non-executive Directors, who meet at least quarterly to consider the affairs of the Company in a prescribed and structured manner. All Directors are considered independent of the Investment Manager for the purposes of the AIC Code and Listing Rule 15.2.12A. Biographies of the Directors appear in the Directors’ Biographies section demonstrating the wide range of skills and experience they bring to the Board.

As at the beginning of 2016 the Chairman had served on the Board for over nine years. The Board has taken the view that independence is not necessarily compromised by the length of tenure on the Board and experience can add significantly to the Board's strength. It has therefore determined that in performing her role as Director, the Chairman remains wholly independent.

The Directors, in the furtherance of their duties, may take independent professional advice at the Company’s expense, which is in accordance with principle 13 of the AIC Code. The Directors also have access to the advice and services of the Company Secretary through its appointed representatives who are responsible to the Board for ensuring that the Board’s procedures are followed and that applicable rules and regulations are complied with. To enable the Board to function effectively and allow the Directors to discharge their responsibilities, full and timely access is given to all relevant information.

The Directors are requested to confirm their continuing professional development is up to date and any necessary training is identified during the annual performance reviews carried out and recorded by the Nomination Committee.

Substantial Shareholdings

There were no substantial interests to be disclosed as at 18 April 2017 the latest practicable date for disclosure in this report.

None of the Directors has a contract of service with the Company.

Shareholder Communication

In line with principle 19 of the AIC Code the Investment Advisers communicate with both the Chairman and Shareholders and are available to communicate and meet with major shareholders. The Company has also appointed Numis to liaise with all major shareholders together with PFM and Unicorn, all of who report back to the Board at quarterly board meetings ensuring that the Board is fully aware of shareholder sentiment and expectation.

Director Attendance

During the year ended 31 December 2016 the number of Board meetings attended were as follows:

	Quarterly Board Meetings	Adhoc Board Meetings	Committee Meetings
Helen Green	4 of 4	3 of 3	7 of 7
Nigel Ward	4 of 4	2 of 3	7 of 7
David Warr	4 of 4	2 of 3	7 of 7

Committees

The Company has established four committees; the Audit Committee, the Nomination Committee, The Remuneration and Management Engagement Committee and the Risk Committee (together the “Committees”). Each Committee consists of the whole Board. Due to the size of the Company the Board consider it would be overly burdensome to establish separate committees that do not comprise all of the non-executive directors of the Company. The Terms of Reference for each committee is available on request to the Administrator.

The Audit Committee

A full report regarding the Audit Committee can be found in the Audit Committee Report.

Nomination Committee

In accordance with the AIC Code, a Nomination Committee has been established. David Warr has been appointed Chairman. The Nomination Committee meets at least once a year in accordance with the terms of reference and reviews, inter alia, the structure, size and composition of the Board. When the appointment of a non-executive director is being considered the Nomination Committee will make recommendations to the Board after evaluating candidates from a wide range of backgrounds. Whilst considering the composition of the Board, the Nomination Committee will be mindful of diversity, inclusiveness and meritocracy and, in considering a new candidate, the Nomination Committee will apply comparative analysis of candidates’ qualifications and experience, applying pre-established clear, neutrally formulated and unambiguous criteria to determine the most suitable candidate sought for the specific position.

Other duties of the Nomination Committee are to give full consideration to succession planning for Directors, to regularly review the leadership needs of the non-executive Directors, ensure non-executive Directors receive a formal letter of appointment and to review the results of the Board’s performance evaluation process.

Remuneration and Management Engagement (RME) Committee

Nigel Ward has been appointed Chairman of the RME Committee. The RME Committee meets at least once a year to determine and agree with the Board the framework for the remuneration of the Company’s Chairman, Directors and service providers, taking into account remuneration trends and all other factors which it deems necessary. The RME Committee also reviews contractual terms and performance of all service providers to ensure their satisfactory conduct and performance.

Details of the Directors’ remuneration can be found in Note 6.

Risk Committee

The Risk Committee was established on 19 November 2014. Nigel Ward has been appointed the chairman of the Risk Committee which will meet at least four times per year. The Risk Committee reviews the effectiveness of the Company’s internal controls and risk management systems and procedures on a quarterly basis, actively seeking to identify, manage and monitor risks such as Market, Credit, Liquidity, Counterparty, Operational and Leverage. In doing so the Risk Committee reviews a quarterly report from the Investment Adviser and reviews arrangements for monitoring investment risk. The Risk Committee also ensures that the risk profile of the Company’s portfolios are appropriate to the size; structure and investment strategies applied and reports its findings and recommendations to the Board quarterly.

Internal Control and Financial Reporting

The Board is responsible for establishing and maintaining the Company’s systems of internal control ensuring that they are designed to meet the particular needs of the Company and the risks to which it is exposed, and by their very nature provide reasonable, but not absolute, assurance against material misstatement or loss. The key procedures which have been established to provide effective internal control are as follows:

Investment advice is provided by PFM and Unicorn under Investment Adviser Agreements. The Board is responsible for setting the overall investment policy and monitors the actions of the Investment Advisers at regular board meetings. Both PFM and Unicorn provide the Board with updates at each quarterly board meeting and at any other time that the Board requests.

The administration and company secretarial duties of the Company are performed by Northern Trust International Fund Administration Services (Guernsey) Ltd.

Registrar duties are performed by Anson Registrars Limited.

The Custody of assets, is undertaken by Northern Trust (Guernsey) Limited.

The duties of investment management, accounting and the custody of assets are segregated. The procedures of the individual parties are designed to complement one another.

The Directors of the Company clearly define the duties and responsibilities of their agents and advisers. The appointment of agents and advisers is conducted by the Board after consideration of the quality of the parties involved; the Board monitors their on-going performance and contractual arrangements. A detailed annual review of the main service providers is undertaken by the RME Committee and their findings are reported to the Board.

Mandates for authorisation of investment transactions and expense payments are set out by the Board.

The Board reviews detailed financial information produced by the Investment Advisers and the Administrator on a regular basis.

The Board is provided, on a quarterly basis, with a Compliance Report produced by a specialist Compliance and Legal department at PAM. The monitoring programme ensures that all activities of PFM, for the year under review, have been in accordance with both internal procedures and with FCA principles for firms and individuals. The Compliance team also makes regular external visits to both Unicorn and the Administrator, the latest visit being to Unicorn on 15 February 2016. A visit to Northern Trust took place in April 2016. The Secretary provides a report at each quarterly Board meeting which highlights any areas of non compliance with any applicable regulations and laws. The Board has access, at all times, to all relevant compliance personnel.

The Company does not have an internal audit department. All the Company’s management and administration functions are delegated to independent third parties and it is therefore felt there is no need for the Company to have an internal audit facility.

No significant findings were found during the internal controls review.

Relations with Shareholders

All holders of Ordinary Shares in the Company have the right to receive notice of, and attend and vote at the general meetings of the Company. The holders of ZDP Shares have the right to receive notice of all general meetings but only have the right to attend and vote if the business of the meeting proposes a resolution which will vary, modify or abrogate any of the special rights attached to the ZDP Shares.

At each general meeting of the Company the Board and the Investment Advisers are available to discuss issues affecting the Company. This is in accordance with principle 19 of the AIC Code. Only Ordinary Shares carry full voting rights, holders of ZDP Shares are only entitled to vote on issues affecting their share class. The primary responsibility for shareholder relations lies with PFM. However, the Directors are always available to enter into dialogue with shareholders and the Chairman is always willing to meet major shareholders as the Company believes such communication to be important.

Anti-Bribery and Corruption Policy

The Company has adopted a zero tolerance policy towards bribery and is committed to carrying out business fairly, honestly and openly.

Voting and Stewardship code

The Investment Manager is committed to the principles of the Financial Reporting Council’s UK Stewardship Code (the ‘Code’) and this also constitutes the disclosure of that commitment required under the rules of the FCA (Conduct of Business Rule 2.2.3).

Signed on behalf of the Board by:

Helen Green
Chairman

18 April 2017

Statement of Directors’ Responsibility in Respect of the Annual Financial Report
for the year ended 31 December 2016

Statement of Directors’ Responsibilities

The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations.

The Law requires the Directors to prepare financial statements for each financial year. In accordance with section 243 (3) (a) of the Law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards as issued by the IASB and applicable law.

The financial statements are required by the 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. The accounts of the Company comply with the Law as enacted as at 31 December 2016.

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

•        select suitable accounting policies and then apply them consistently;

•        make judgements and estimates that are reasonable and prudent;

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

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

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Law. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors who held office at the date of approval of the Directors’ Report confirm that they consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.

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

The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.

Disclosure of information to auditors

The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s Auditor is unaware; and each Director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information.

Reappointment of auditor

The Auditor, KPMG Channel Islands Limited, has expressed its willingness to continue in office as Auditor. A resolution proposing their reappointment will be submitted at the forthcoming general meeting to be held pursuant to section 199 of the Law.

Directors’ Responsibility Statement

The Directors confirm to the best of their knowledge that:

(a)     The Management Report (comprising the Chairman’s Statement, the Investment Advisers’ Report, Directors’ Report and  Audit Committee 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 the Company faces; and

(b)    The financial statements, prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB), give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company.

Signed on behalf of the Board by:

Helen Green
Chairman

18 April 2017

Audit Committee Report
for the year ended 31 December 2016

In accordance with the AIC Code an Audit Committee has been established consisting of David Warr, Helen Green, and Nigel Ward. David Warr is the Chairman of the Audit Committee.

The Audit Committee meets at least twice a year and, where requested, provides advice to the Board on whether the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides information necessary for the shareholders to assess the Company’s performance, business model and strategy. The Audit Committee also reviews, inter alia, the financial reporting process and the system of internal control and management of financial risks including understanding the current areas of greatest financial risk and how these are managed by the Investment Manager, reviewing the annual report and accounts, assessing the fairness of preliminary and interim statements and disclosures and reviewing the external audit process. The Audit Committee is responsible for overseeing the Company’s relationship with the external auditor (the ‘Auditor’), including making recommendations to the Board on the appointment of the Auditor and their remuneration.

The Audit Committee considers the nature, scope and results of the Auditor’s work and reviews, and develops and implements a policy on the supply of any non-audit services that are to be provided by the Auditor. The Audit Committee annually reviews the independence and objectivity of the Auditor and also considers the appointment of an appropriate Auditor.

At the Audit Committee meeting on 28 November 2016 the appointment of the Auditor was considered and the Board subsequently decided that the Auditor was sufficiently independent and was appropriately appointed in order to carry out the audit for year ended 31 December 2016. During the year under review, the Auditor was not engaged to provide any non-audit services to the Company.

The valuation of the Company’s investments, given that they represent the majority of net assets of the Company is considered to be a significant area of focus. In discharging its responsibilities the Audit Committee has specifically considered the valuation of investments as follows:

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

•        The Company’s net asset value is calculated twice weekly using a third party pricing source.

•        The Audit Committee receives and reviews reports from the Investment Advisers and the Auditor relating to the Company’s annual report and accounts. The Audit Committee focuses particularly on compliance with legal requirements, accounting standards and the Listing Rules and ensures that an effective system of internal financial and non-financial controls is maintained. The ultimate responsibility for reviewing and approving the annual financial report and accounts remains with the Board.

•        The Audit Committee holds an annual meeting to approve the Company’s annual financial report and accounts before its publication. At a meeting held on 28 November 2016 the Audit Committee met with the Auditor to discuss the audit plan and approach. During this meeting it was agreed with the Auditor that the area of significant audit focus related to the valuation of investments given that they represent the majority of net assets of the Company. The scope of the audit work in relation to this balance was discussed. At the conclusion of the audit, the Audit Committee met with the Auditor and discussed the scope of their annual audit work and also their audit findings.

•        The Audit Committee reviews the scope and results of the audit, its cost effectiveness together with the independence and objectivity of the Auditor. The Audit Committee has particular regard to any non-audit work that the Auditor may undertake and the terms under which the Auditor may be appointed to perform non-audit services. In order to safeguard the Auditor’s independence and objectivity, the Audit Committee ensures that any other advisory and/or consulting services provided by the Auditor does not conflict with their statutory audit responsibilities.

To fulfil its responsibilities regarding the independence of the Auditor, the Audit Committee considered:

•        a report from the Auditor describing their arrangements to identify, report and manage any conflicts of interest; and

•        the extent of the non-audit services provided by the Auditor.

To assess the effectiveness of the Auditor, the committee reviewed:

•        the Auditor’s fulfilment of the agreed audit plan and variations from it;

•        the audit findings report highlighting any major issues that arose during the course of the audit; and

•        the effectiveness and independence of the Auditor having considered the degree of diligence and professional scepticism demonstrated by them.

The Audit Committee is satisfied with KPMG Channel Islands Limited’s (“KPMG”) effectiveness and independence as Auditor.

As KPMG has been previously engaged to provide the annual audit the Board was able to rely on both; their previous experiences with KPMG and their conduct during the current year audit.

KPMG have been engaged as Auditor to the Company for 18 years, during which time their appointment has not been put out to tender. As the Company is not a FTSE 350 company it is not necessary to put the appointment of the Auditor out to tender. Further, having satisfied itself that the Auditor remains independent and effective, the Audit Committee has recommended to the Board that KPMG be reappointed as Auditor   for   the   year   ending 31 December 2017 but has also recommended that the audit be put out to tender thereafter.

The terms of reference of the Audit Committee are available from the Administrator on request.

During the year the Audit Committee met three times and of those meetings all Audit Committee members were in attendance.

David Warr
Chairman of the Audit Committee

18 April 2017

Independent Auditor’s Report To The Members Of Acorn Income Fund Limited

Opinions and conclusions arising from our audit

Opinion on financial statements 

We have audited the financial statements of Acorn Income Fund Limited (the “Company”) for the year ended 31 December 2016 which comprise the statement of comprehensive income, the statement of financial position, the statement of cash flows, the statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRS”).  In our opinion, the financial statements: 

·      give a true and fair view of the state of the Company’s affairs as at 31 December 2016 and of its total comprehensive income for the year ended 31 December 2016; 

·      have been properly prepared in accordance with IFRS; and 

·    comply with the Companies (Guernsey) Law, 2008. 

Our assessment of risks of material misstatement

The risks of material misstatement detailed in this section of this report are those risks that we have deemed, in our professional judgment, to have had the greatest effect on: the overall audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team. Our audit procedures relating to these risks were designed in the context of our audit of the financial statements as a whole. Our opinion on the financial statements is not modified with respect to any of these risks, and we do not express an opinion on these individual risks.

In arriving at our audit opinion above on the financial statements, the risk of material misstatement that had the greatest effect on our audit was as follows:

Valuation of investments (£87,172,262)

Refer to page 28 of the Audit Committee Report, Note 1 Accounting Policies and Note 10 Financial Assets Designated as at Fair Value through Profit or Loss disclosures

·    The risk – The Company has invested 135% of its net assets as at 31 December 2016 into listed equities and bonds and structured investments. The Company’s listed investments (99% of investments) are valued based on market prices while its structured investments (1% of investments) are valued based on price quotes obtained from a third party pricing provider. The valuation of the Company’s investments, given that they represent the majority of net assets of the Company is considered to be a significant area of our audit.

·    Our response – Our audit procedures with respect to the valuation of listed investments included, but were not limited to, use of our own valuation specialist to independently price the investments to a third party source and assess the trading volume behind such prices. For structured investments, our audit procedures included, but were not limited to, use of our own valuation specialist to assist us with the assessment of the quality and integrity of the price quotes, through comparison to available quotes from independent sources or through applying a valuation model based on contractual terms and market data.

We also considered the Company’s disclosures (see Note 1) in relation to the use of estimates and judgments regarding valuation of investments and the Company’s valuation policies adopted and fair value disclosures in Note 10 for compliance with IFRS.

Our application of materiality and an overview of the scope of our audit

Materiality is a term used to describe the acceptable level of precision in financial statements. Auditing standards describe a misstatement or an omission as “material” if it could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The auditor has to apply judgment in identifying whether a misstatement or omission is material and to do so the auditor identifies a monetary amount as “materiality for the financial statements as a whole”.

The materiality for the financial statements as a whole was set at £1,943,000.  This has been calculated using a benchmark of the Company’s net asset value (of which it represents approximately 3%) which we believe is the most appropriate benchmark as net asset value is considered to be one of the principal considerations for members of the Company in assessing the financial performance of the Company.

We agreed with the audit committee to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of £97,000, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.

Our audit of the Company was undertaken to the materiality level specified above, which has informed our identification of significant risks of material misstatement and the associated audit procedures performed in those areas as detailed above.  The audit was performed at the offices of the administrator.

Whilst the audit process is designed to provide reasonable assurance of identifying material misstatements or omissions it is not guaranteed to do so. Rather we plan the audit to determine the extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements does not exceed materiality for the financial statements as a whole. This testing requires us to conduct significant depth of work on a broad range of assets, liabilities, income and expense as well as devoting significant time of the most experienced members of the audit team, in particular the Responsible Individual, to subjective areas of the accounting and reporting process.

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

Disclosures of principal risks

Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to: 

·      the Directors’ Viability Statement on page 18, concerning the principal risks, their management, and, based on that, the Directors’ assessment and expectations of the Company continuing in operation over the 3 years to 31 December 2019; or

·    the disclosures in note 1 of the financial statements concerning the use of the going concern basis of accounting.

Matters on which we are required to report by exception 

Under International Standards on Auditing (“ISAs”) (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the Annual Financial Report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.

In particular, we are required to report to you if:

·      we have identified material inconsistencies between the knowledge we acquired during our audit and the Directors’ statement that they consider that the Annual Financial Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for members to assess the Company’s performance, business model and strategy; or

·      the Audit Committee Report does not appropriately address matters communicated by us to the audit committee.

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

·      the Company has not kept proper accounting records; or

·      the financial statements are not in agreement with the accounting records; or

·      we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit.

Under the Listing Rules we are required to review the part of the Corporate Governance Statement on Pages 22 and 23 relating to the Company’s compliance with the eleven provisions of the UK Corporate Governance Code specified for our review.

We have nothing to report in respect of the above responsibilities.

Scope of report and responsibilities

The purpose of this report and restrictions on its use by persons other than the Company’s members as a body

This report is made solely to the Company’s members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, 2008 and, in respect of any further matters on which we have agreed to report, on terms we have agreed with the Company. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

As explained more fully in the Statement of Directors’ Responsibilities set out on Page 27, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and ISAs (UK and Ireland). Those standards require us to comply with the UK Ethical Standards for Auditors. 

Barry T. Ryan
For and on behalf of KPMG Channel Islands Limited 
Chartered Accountants and Recognised Auditors
Guernsey
18 April 2017

Statement of Comprehensive Income
for the year ended 31 December 2016

								Year ended 31 Dec 2016
										Year ended 31 Dec 2015
				Revenue		Capital		Total		Total
		Notes		GBP		GBP		GBP		GBP
Net gains on financial assets designated as at
fair value through profit or loss		10		-		3,901,649		3,901,649		10,835,045
(Losses)/gains on derivative financial instruments		4		-		(465,564)		(465,564)		4,019
Investment income		3		3,704,675		165,000		3,869,675		3,412,408
Total income and gains				3,704,675		3,601,085		7,305,760		14,251,472
Expenses		5		(462,599)		(587,724)		(1,050,323)		(1,133,014)
Return on ordinary activities before finance costs
and taxation				3,242,076		3,013,361		6,255,437		13,118,458
Interest payable and similar charges		7		-		(1,929,208)		(1,929,208)		(1,593,477)
Return on ordinary activities before taxation				3,242,076		1,084,153		4,326,229		11,524,981
Taxation on ordinary activities				-		-		-		-
Other comprehensive income				-		-		-		-
Total comprehensive income for the year
attributable to ordinary shareholders				3,242,076		1,084,153		4,326,229		11,524,981
				Pence		Pence		Pence		Pence
Return per Ordinary share		9		20.38		6.81		27.19		74.09
Dividend per Ordinary Share		8		15.50		0.00		15.50		13.75
Return per ZDP Share		9		-		9.03		9.03		7.63

The supplementary revenue return and capital return columns have been prepared in accordance with the Statement of Recommended Practice (“SORP”) issued by the Association of Investment Companies (“AIC”).

In arriving at the results for the financial year, all amounts above relate to continuing operations. No operations were acquired or discontinued in the year.

The notes form an integral part of these financial statements.

Statement of Financial Position
as at 31 December 2016

			31 Dec 2016		31 Dec 2015
	Notes		GBP		GBP
NON-CURRENT ASSETS
Financial assets designated as at fair value through profit or loss	10		87,172,262		86,634,633
CURRENT ASSETS
Receivables	11		2,242,217		617,154
Cash and cash equivalents			5,071,818		2,933,049
Derivative financial instruments	18		91,470		8,746
			7,405,505		3,558,949
TOTAL ASSETS			94,577,767		90,193,582
CURRENT LIABILITIES
Derivative financial instruments	18		-		141,151
Payables - due within one year	12		469,872		239,888
ZDP Shares	13		29,319,945		-
			29,789,817		381,039
NON-CURRENT LIABILITIES
ZDP Shares	13		-		27,380,779
TOTAL LIABILITIES			29,789,817		27,761,818
NET ASSETS			64,787,950		62,431,764
EQUITY
Share capital	14		171,867		171,867
Share premium			27,436,022		27,436,022
Treasury reserve	15		(4,568,238)		(5,064,352)
Revenue reserve			2,511,830		1,735,911
Special reserve	18		10,000,000		10,000,000
Capital reserve	18		29,236,469		28,152,316
TOTAL EQUITY			64,787,950		62,431,764
			Pence		Pence
Net asset value per Ordinary Share (per Articles)			407.23		395.94
Net asset value per Ordinary Share (per IFRS)			407.20		395.50
Net asset value per ZDP Share (per Articles)			137.26		128.89
Net asset value per ZDP Share (per IFRS)			137.28		129.22

The financial statements were approved by the Board of Directors and authorised for issue on 18 April 2017 and signed on its behalf by:

Helen Green
Chairman

The notes form an integral part of these financial statements.

Statement of Cash Flows
for the year ended 31 December 2016

		31 Dec 2016		31 Dec 2015
	Notes	GBP		GBP
Operating activities
Return on ordinary activities before taxation		4,326,229		11,524,981
Net gains on financial assets designated as at fair value through profit or loss	10	(3,901,649)		(10,835,045)
Investment income	3	(3,869,675)		(3,412,408)
Interest expense	7	1,929,208		1,593,477
(Increase)/decrease in derivative financial assets	18	(82,724)		27,994
(Decrease)/increase in derivative financial liabilities	18	(141,151)		97,491
Increase in payables and appropriations	12	19,984		25,777
(Increase)/decrease in receivables excluding accrued investment income and due from brokers
	11	(9,400)		223,360
Net cash flow used in operating activities before investment income		(1,729,178)		(754,373)
Investment income received		4,090,590		3,420,617
Net cash flow from operating activities before taxation		2,361,412		2,666,244
Tax paid		-		-
Net cash flow from operating activities		2,361,412		2,666,244
Investing activities
Purchase of financial assets	10	(22,830,886)		(36,586,284)
Sale of financial assets		24,358,328		36,937,572
Net cash flow from investing activities		1,527,442		351,288
Financing activities
Equity dividends paid	8	(2,466,157)		(2,136,253)
Treasury shares sold		496,114		1,232,793
Buyback of Ordinary Shares		-		(435,875)
Buyback of ZDP Shares		-		(263,514)
ZDP shares sold out of treasury		221,063		560,062
Cost of issue of ZDP Shares		(1,105)		(2,801)
Net cash flow used in financing activities		(1,750,085)		(1,045,588)
Increase in cash and cash equivalents		2,138,769		1,971,944
Cash and cash equivalents at beginning of year		2,933,049		961,105
Cash and cash equivalents at end of year		5,071,818		2,933,049

The notes form an integral part of these financial statements.

Statement of Changes in Equity
as at 31 December 2016

	Share Capital 31 Dec 2016	Share Premium 31 Dec 2016	Treasury Reserve 31 Dec 2016	Revenue Reserve 31 Dec 2016	Special Reserve 31 Dec 2016	Capital Reserve 31 Dec 2016	Total 31 Dec 2016
	GBP	GBP	GBP	GBP	GBP	GBP	GBP
Balances as at 1 January 2016	171,867	27,436,022	(5,064,352)	1,735,911	10,000,000	28,152,316	62,431,764
Total comprehensive income for the year attributable to shareholders
	-	-	-	3,242,076	-	1,084,153	4,326,229
Dividends	-	-	-	(2,466,157)	-	-	(2,466,157)
Treasury shares sold	-	-	496,114	-	-	-	496,114
Balances as at
31 December 2016	171,867	27,436,022	(4,568,238)	2,511,830	10,000,000	29,236,469	64,787,950

The notes form an integral part of these financial statements

Statement of Changes in Equity
as at 31 December 2015

	Share Capital 31 Dec 2015	Share Premium 31 Dec 2015	Treasury Reserve 31 Dec 2015	Revenue Reserve 31 Dec 2015	Special Reserve 31 Dec 2015	Capital Reserve 31 Dec 2015	Total 31 Dec 2015
	GBP	GBP	GBP	GBP	GBP	GBP	GBP
Balances as at 1 January 2015	173,533	27,870,231	(6,297,145)	996,144	10,000,000	19,503,355	52,246,118
Total comprehensive income for the year attributable to shareholders	-	-	-	2,876,020	-	8,648,961	11,524,981
Dividends	-	-	-	(2,136,253)	-	-	(2,136,253)
Treasury shares sold	-	-	1,232,793	-	-	-	1,232,793
Buyback of Ordinary Shares	-	-	(435,875)	-	-	-	(435,875)
Cancellation of Ordinary Shares	(1,666)	(434,209)	435,875	-	-	-	-
Balances as at
31 December 2015	171,867	27,436,022	(5,064,352)	1,735,911	10,000,000	28,152,316	62,431,764

The notes form an integral part of these financial statements

Notes to the Financial Statements
for the year ended 31 December 2016

1       ACCOUNTING POLICIES

(a)     Basis of preparation

The financial statements, which give a true and fair view, have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), the Association of Investment Companies (“AIC”) Statements of Recommended Practice (“SORP”) (as revised in November 2014) where this is consistent with the requirements of IFRS and in compliance with the Companies (Guernsey) Law, 2008. All accounting policies adopted for the period are consistent with IFRS issued by the IASB. The financial statements have been prepared on an historical cost basis except for the measurement at fair value of financial assets designated as at fair value through profit or loss and derivative financial instruments.

The accounts have been prepared on a going concern basis. The disclosure on going concern in the Report of the Directors forms part of the financial statements.

The following Standards or Interpretations have been adopted in the current year.

IFRS 7 Financial instruments: Amendments resulting from September 2014 Annual improvements to IFRSs, effective for annual periods beginning on or after 1 January 2016.

IAS 1 Presentation of Financial Statement: Disclosure initiative effective 1 January 2016.

The following Standards or Interpretations have been issued by the IASB but not yet adopted by the Company:

IFRS 7 Financial Instruments: Disclosures – Deferral of mandatory effective date of IFRS 9 and amendments relating to additional hedge accounting disclosure (and consequential amendments). Applied only when IFRS 9 is adopted, which is effective for annual periods beginning on or after 1 January 2018.

IFRS 9 Financial Instruments – classification and measurement of financial assets effective for annual periods beginning on or after 1 January 2018. The standard contains revised guidance including new general hedge accounting requirements that align hedge accounting more closely with an entities risk management approach and a new expected credit loss model for calculating impairment on financial assets.

Other requirements of IFRS 9 relating to accounting for liabilities and derecognition of financial instruments are effective for annual periods beginning on or after 1 January 2018.

The Directors have considered the above and are of the opinion that these Standards and Interpretations are not expected to have an impact on the Company’s financial statements except for the presentation of additional disclosures and changes to the presentation of components of the financial statements. These items will be applied in the first financial period for which they are required.

(b)     Use of estimates and judgements

The preparation of the financial statements in conformity with IFRS requires the Directors to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

The Directors use judgements in allocating expenses between Revenue and Capital and in ascertaining the risk disclosures contained in Note 18. The Directors use judgements in valuing the market value of the investments contained in Note 10.

No significant estimates have been used.

(c)     Share Capital

Ordinary shares are classified as equity. Share capital includes the nominal value of ordinary shares that have been issued and any premiums received on the initial issuance of shares. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds.

When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury reserve. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity and the resulting surplus or deficit on the transaction is presented within share premium.

(d)     Zero Dividend Preference Shares

Under IAS 32, the ZDP Shares are classified as financial liabilities and are held at amortised cost. Appropriation for the period in respect of ZDP Shares is included in the Statement of Comprehensive Income as a finance cost and is calculated using the effective interest rate method (“EIR”). The costs of issue of the ZDP shares are being amortised over the period until the ZDP shares will be redeemed.

(e)     Taxation

The Company has been granted exemption under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 from Guernsey Income Tax, and has elected to remain exempt following changes to in the Guernsey tax regime. The Company paid an annual fee of £1,200 (2015: £1,200).

(f)     Capital Reserve

The following are accounted for in this reserve:

–       gains and losses on the realisation of investments;

–       expenses charged to this account in accordance with the expenses policy below;

–       increases and decreases in the valuation of the investments held at the year end; and

–       unrealised exchange differences of a capital nature.

(g)    Expenses

All expenses are accounted for on an accruals basis and are recognised in profit or loss. Expenses are charged to the capital reserve where a connection with the maintenance or enhancement of the value of the investments can be demonstrated.

75% of the Company’s management fee and financing costs are charged to the capital reserve in line with the Board’s expected long-term split of returns between income and capital gains from the investment portfolio.

100% of any performance fee, commissions paid and the appropriation in respect of ZDP Shares is charged to the capital reserve.

All other expenses are charged through the revenue reserve.

(h)    Investment income

Interest income and distributions receivable are accounted for on an accruals basis. Interest income relates only to interest on bank balances. Bond income is accounted for using the EIR basis. Dividends are recognised on the ex-dividend date. Investment income is treated as a revenue item, except for special dividends of a capital nature which are treated as a capital item, in the Statement of Comprehensive Income.

(i)     Foreign currency translation

The currency of the primary economic environment in which the Company operates (the functional currency) is Great British Pounds (GBP) which is also the presentational currency.

Transactions denominated in foreign currencies are translated into GBP at the rate of exchange ruling at the date of the transaction.

Monetary assets and liabilities, other than investments, denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in profit or loss in the Statement of Comprehensive Income. Foreign exchange differences relating to investments are taken to the capital reserve. Realised and unrealised foreign exchange differences on non-capital assets or liabilities are taken to profit or loss in the Statement of Comprehensive Income in the period in which they arise.

(j)     Cash and cash equivalents

Cash and cash equivalents are defined as cash in hand, demand deposits and short term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash, deposits at bank and money market deposits with a maturity of less than 3 months.

(k)    Investments

All investments have been designated as financial assets at “fair value through profit or loss”. Investments are initially recognised on the date of purchase at fair value, with transaction costs recognised in profit or loss of the Statement of Comprehensive Income. Unrealised gains and losses on movement in fair value of investments are recognised in profit or loss in the Statement of Comprehensive Income. Investments are derecognised on the date of sale. Gains and losses on the sale of investments, which is the difference between its initial cost and sale value, will be taken to profit or loss in the Statement of Comprehensive Income in the period in which they arise. For investments actively traded in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices as at the close of business on the reporting date.

For investments not actively traded, the Directors will consider where practical, multiples used in recent transactions in comparable stocks. Where there are no comparable listed or unlisted stocks the Directors will take into consideration the performance of the stock, maturity date and finance arrangements to determine the fair value.

(l)     Derivatives

Derivatives consist of forward exchange contracts which are initially measured at fair value and any directly attributable transaction costs are recognised in profit or loss in the Statement of Comprehensive Income as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are generally recognised in profit or loss in the Statement of Comprehensive Income. Derivatives contracts in a receivable position (positive fair value) are reported as financial assets at fair value through profit or loss. Derivatives contracts in a payable position (negative fair value) are reported as financial liabilities at fair value through profit or loss.

(m)   Trade date accounting

All “regular way” purchases and sales of financial assets are recognised on the “trade date”, i.e. the date that the entity commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of the asset within the timeframe generally established by regulation or convention in the market place.

(n)    Segmental reporting

The Company retains two Investment Advisers, Unicorn Asset Management Limited and Premier Fund Managers Limited for the Smaller Companies Portfolio and Income Portfolio respectively. As the Board reviews the performance of each portfolio separately and decides on the allocation of resources based on this performance, the Board, as chief operating decision maker, has determined that the Company has two reportable segments (2015: two).

The Board is charged with setting the Company’s investment strategy in accordance with the Prospectus. They have delegated the day to day implementation of this strategy to its Investment Advisers but retain responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions. The investment decisions of the Investment Advisers are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board. The Investment Advisers have been given full authority to act on behalf of the Company, including the authority to purchase and sell securities and other investments on behalf of the Company and to carry out other actions as appropriate to give effect thereto. Whilst the Investment Advisers may make the investment decisions on a day to day basis regarding the allocation of funds to different investments, any changes to the investment strategy or major allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Advisers. The Board, therefore, retains full responsibility as to the major allocation decisions made on an ongoing basis. The Investment Advisers will always act under the terms of the Prospectus.

The key measure of performance used by the Board to assess the Company’s performance and to allocate resources is the total return on the Company’s net asset value (“NAV”), as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

The schedule of principal investments held as at the year end are presented in the Schedule of Principal Investments section.

(o)     Offsetting

Financial assets and liabilities are offset and the net amount is reported in the Statement of Financial Position when there is currently a legally and contractually enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. A current legally and contractually enforceable right to offset must not be contingent on a future event. Furthermore, it must be legally and contractually enforceable in (i) the normal course of business; (ii) the event of default; and (iii) the event of insolvency or bankruptcy of the Company and all of the counterparties.

2       OPERATING SEGMENTS

The Company has two reportable segments, being the Income Portfolio and the Smaller Companies Portfolio. Each of these portfolios is managed separately as they entail different investment objectives and strategies and contain investments in different products.

For each of the portfolios, the Board reviews investment management reports on a quarterly basis. The objectives and principal investment products of the respective reportable segments are as follows:

Segment	Investment objectives and principal investments products
Income Portfolio	To maximise income through investments in sterling denominated fixed interest securities including corporate bonds, preference and permanent interest bearing shares, convertibles, reverse convertibles, debentures and other similar securities.
Smaller Companies Portfolio	To maximise income and capital growth through investments in smaller capitalised UK companies.

Information regarding the results of each reportable segment follows. Performance is measured based on the increase in value of each portfolio, as included in the investment management reports that are reviewed by the Board.

Segmental information is measured on the same basis as those used in the preparation of the Company’s financial statements.

				Income Portfolio		Smaller Companies Portfolio		Unallocated		Total
				GBP		GBP		GBP		GBP
2016
External revenues:
Net gains on financial assets designated as at fair value
through profit or loss				954,587		2,947,062		-		3,901,649
Losses on derivative financial instruments				(465,564)		-		-		(465,564)
Bank interest				-		-		2,365		2,365
Dividend income				146,359		3,071,816		-		3,218,175
Bond income				649,135		-		-		649,135
Total income and gains				1,284,517		6,018,878		2,365		7,305,760
Expenses				-		-		(1,050,323)		(1,050,323)
Interest payable and similar charges				-		-		(1,929,208)		(1,929,208)
Total comprehensive income for the year attributable
to shareholders				1,284,517		6,018,878		(2,977,166)		4,326,229

   

				Income Portfolio		Smaller Companies Portfolio		Unallocated		Total
				GBP		GBP		GBP		GBP
2016
Financial assets designated as at fair value through
profit or loss				15,171,128		72,001,134		-		87,172,262
Receivables				219,640		2,022,577		-		2,242,217
Derivative financial instruments				91,470		-		-		91,470
Cash and cash equivalents				2,406,640		2,665,178		-		5,071,818
Total assets				17,888,878		76,688,889		-		94,577,767
Payables				-		-		469,872		469,872
Total current liabilities				-		-		469,872		469,872

   

				Income Portfolio		Smaller Companies Portfolio		Unallocated		Total
				GBP		GBP		GBP		GBP
2015
External revenues:
Net gains on financial assets designated as at fair value
through profit or loss				587,228		10,247,817		-		10,835,045
Gains on derivative financial instruments				4,019		-		-		4,019
Bank interest				-		-		609		609
Dividend income				53,253		2,505,468		-		2,558,721
Bond income				853,078		-		-		853,078
Total income and gains				1,497,578		12,753,285		609		14,251,472
Expenses				-		-		(1,133,014)		(1,133,014)
Interest payable and similar charges				-		-		(1,593,477)		(1,593,477)
Total comprehensive income for the year attributable
to shareholders				1,497,578		12,753,285		(2,725,882)		11,524,981

   

				Income Portfolio		Smaller Companies Portfolio		Unallocated		Total
				GBP		GBP		GBP		GBP
2015
Financial assets designated as at fair value through
profit or loss				18,103,395		68,531,238		-		86,634,633
Receivables				316,275		297,639		3,240		617,154
Derivative financial instruments				8,746		-		-		8,746
Cash and cash equivalents				796,660		2,136,389		-		2,933,049
Total assets				19,225,076		70,965,266		3,240		90,193,582
Derivative financial instruments				141,151		-		-		141,151
Payables				-		-		239,888		239,888
Total current liabilities				141,151		-		239,888		381,039

Geographical information

In presenting information on the basis of geographical segments, segment revenue is based on the domicile countries of the investees and counterparties to derivative transactions. The table below excludes net gains on financial assets designated at fair value through profit or loss and gains or losses on derivative instruments.

UK

Guernsey

Jersey

Other Europe

Rest of the world

Total

GBP

GBP

GBP

GBP

GBP

GBP

31 December 2016

External revenues

Total Revenue

3,307,930

177,633

-

224,460

159,652

3,869,675

UK

Guernsey

Jersey

Other Europe

Rest of the world

Total

GBP

GBP

GBP

GBP

GBP

GBP

31 December 2015

External revenues

Total Revenue

3,075,400

135,133

702

89,093

112,080

3,412,408

The Company did not hold any non-current assets during the year other than financial instruments (2015: £nil).

Major customers

The Company regards its shareholders as customers. The Company’s only shareholder with a holding greater than 10% at the year end was HSBC Issuer Services Common Depositary Nominee (UK) Limited (2015: The Company’s only shareholder with a holding greater than 10% at the year end was HSBC Issuer Services Common Depositary Nominee (UK) Limited).

3       INVESTMENT INCOME

				Year ended 31 Dec 2016		Year ended 31 Dec 2015
				GBP		GBP
Bank interest				2,365		609
Dividend income				3,218,175		2,558,721
Bond income				649,135		853,078
				3,869,675		3,412,408

4       (LOSSES)/GAINS ON DERIVATIVE FINANCIAL INSTRUMENT

				Year ended 31 Dec 2016		Year ended 31 Dec 2015
				GBP		GBP
Unrealised gain/(loss) on forward foreign currency contracts				223,875		(125,485)
Realised (loss)/gain on forward foreign  currency contracts				(689,439)		129,504
				(465,564)		4,019

5       EXPENSES

			Year ended 31 Dec 2016						Year ended 31 Dec 2015
			Revenue		Capital		Total		Revenue		Capital		Total
			GBP		GBP		GBP		GBP		GBP		GBP
Manager's fee*			155,770		467,310		623,080		149,292		447,462		596,754
Administrator's fee**			91,911		-		91,911		94,859		-		94,859
Registrar's fee			16,340		-		16,340		20,332		-		20,332
Directors' fees			78,307		-		78,307		77,430		-		77,430
Custody fees			23,452		-		23,452		29,482		-		29,482
Audit fees			32,782		-		32,782		29,000		-		29,000
Directors' and Officers' insurance			3,428		-		3,428		7,522		-		7,522
Annual fees			29,756		-		29,756		22,330		-		22,330
Bank charges			-		-		-		329		-		329
Commission paid			-		120,414		120,414		-		149,164		149,164
Legal and professional fees			5,267		-		5,267		6,861		-		6,861
Broker fees			40,412		-		40,412		35,860		-		35,860
Sundry costs			35,284		-		35,284		65,571		-		65,571
Gain on foreign exchange			(50,110)		-		(50,110)		(2,480)		-		(2,480)
			462,599		587,724		1,050,323		536,388		596,626		1,133,014

Manager’s fee

* The Company has entered into a Management Agreement with Premier Asset Management (Guernsey) Limited, a wholly-owned, Guernsey incorporated subsidiary of Premier Asset Management Limited. The Investment Manager receives a management fee of 0.7% per annum of total assets (subject to a minimum of £100,000) calculated monthly and payable quarterly in arrears, out of which it pays fees to the Investment Advisers. The Investment Manager is also paid a shareholder communication and support fee, currently £3,100 for the twelve months from 1 April 2016 to 31 March 2017. Please refer to Note 1(h) for details on how expenses are charged to the capital reserve and revenue account. The Management Agreement may be terminated by either party on 12 months’ written notice.

Performance fee

The Investment Manager is also potentially entitled to a performance fee equal to 15% of any excess of the NAV per Ordinary Share (together with any dividends paid) over the higher of the first benchmark or the second benchmark. The first benchmark is the NAV per share immediately following the tender in January 2007 increasing at 10% per annum compound. The second benchmark is the highest NAV per Ordinary Share as of the last calculation day in any preceding financial period commencing after completion of the tender in January 2007 in respect of which a performance fee has been paid compounded at 10% per annum. A performance fee was not payable to the Investment Manager for the year ended 2016 (2015: Nil).

Administrator’s fee

** The Company entered into an Administration Agreement with Northern Trust International Fund Administration Services (Guernsey) Limited on 1 April 2015. The Company shall pay the Administrator a fee of 12 basis points per annum on the net assets between £0 – £100 million, 10 basis points per annum on the net assets between £100 million – £150 million and 8 basis points per annum on the net assets over £150 million subject to a minimum of £7,000 per month. The Administration Agreement may be terminated by either party on ninety days notice.

6       DIRECTORS’ REMUNERATION

Under their terms of appointment, each Director is paid a fee of £25,000 per annum by the Company, except for the Chairman, who receives £27,500 per annum. During the year ended 31 December 2016 each Director received an ad hoc transaction fee of £4,000 in relation to the extra work undertaken in relation to the refinancing of the ZDP Shares.

A special resolution was passed on 20 December 2016 for the new Articles of Incorporation which included that the ordinary remuneration of the Directors shall not exceed in aggregate of £200,000 per annum. Effective from 1 February 2017, each Director is paid a base fee of £25,000 with an additional £10,000 per annum to the Chairman, £7,500 to the Audit Committee Chairman and an additional £5,000 per annum to Mr Ward to reflect marketing and Risk Committee duties.

7       INTEREST PAYABLE AND SIMILAR CHARGES

				Year ended 31 Dec 2016
				Revenue	Capital	Total
				GBP	GBP	GBP
Appropriation in respect of ZDP shares				-	1,622,138	1,622,138
Amortisation of ZDP issue costs				-	97,070	97,070
ZDP issue costs (2022)				-	210,000	210,000
				-	1,929,208	1,929,208
				Year ended 31 Dec 2015
				Revenue	Capital	Total
				GBP	GBP	GBP
Appropriation in respect of ZDP shares				-	1,495,289	1,495,289
Amortisation of ZDP issue costs				-	98,188	98,188
				-	1,593,477	1,593,477

8       DIVIDENDS IN RESPECT OF ORDINARY SHARES

			Year ended				Year ended
			31 Dec 2016				31 Dec 2015
					Pence				Pence
			GBP		per share		GBP		per share
First interim payment			556,873		3.50		502,721		3.25
Second interim payment			636,428		4.00		541,391		3.50
Third interim payment			636,428		4.00		545,767		3.50
Fourth interim payment			636,428		4.00		546,374		3.50
			2,466,157		15.50		2,136,253		13.75

9       EARNINGS PER SHARE

Ordinary Shares

The total return per Ordinary Share (per IFRS) is based on the total gain on ordinary activities for the year attributable to Ordinary Shareholders of £4,326,229 (2015: gain of £11,524,981) and on 15,908,774 (2015: 15,556,337) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gains per share are identical.

The revenue return per Ordinary Share (per IFRS) is based on the revenue return on ordinary activities for the year attributable to Ordinary Shareholders of £3,242,076 (2015: £2,876,020) and on 15,908,774 (2015: 15,556,337) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gains per share are identical.

The capital return per Ordinary Share (per IFRS) is based on the capital return on ordinary activities for the year attributable to Ordinary Shareholders of £1,084,153 (2015: capital return of £8,648,961) and on 15,908,774(2015: 15,556,337) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gains per share are identical.

ZDP shares

The return per ZDP Share is based on the appropriation in respect of ZDP Shares, the amortisation of ZDP Share issue costs and ZDP Share issue costs (2022) accruals totalling £1,929,208 (2015: £1,593,477) and on 21,355,157 (2015: 20,881,947) shares, being the weighted average number of ZDP Shares in issue during the year.

10     FINANCIAL ASSETS DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS

							31 Dec 2016		31 Dec 2015
							GBP		GBP
INVESTMENTS
Opening portfolio cost							67,722,601		62,431,660
Purchases at cost							22,830,886		36,586,284
Sales
- proceeds							(26,194,906)		(36,937,572)
- realised gains on sales							7,745,792		8,055,355
- realised losses on sales							(2,699,306)		(2,413,126)
Closing book cost							69,405,067		67,722,601
Unrealised appreciation on investments							20,697,555		22,195,364
Unrealised depreciation on investments							(2,930,360)		(3,283,332)
Fair value							87,172,262		86,634,633
Realised gains on sales							7,745,792		8,055,355
Realised losses on sales							(2,699,306)		(2,413,126)
(Decrease)/increase in unrealised appreciation on investments							(1,497,809)		8,476,148
Decrease/(increase) in unrealised depreciation on investments							352,972		(3,283,332)
Net gains on financial assets designated as at fair value through profit or loss							3,901,649		10,835,045

As at 31 December 2016, the closing fair value of investments comprises £72,001,134 (Dec 2015: £68,531,238) of Smaller Companies Portfolio, £15,171,128 (Dec 2015: £18,064,090) of Income Portfolio and an asset of £132,661 (Dec 2015: asset of £39,305) in respect of long gilts held.

IFRS 13 requires the fair value of investments to be disclosed by the source of inputs using a three-level hierarchy as detailed below:

Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);

Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2);

Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

Details of the value of each classification are listed in the table below. Values are based on the market value of the investment as at the reporting date:

Financial assets designated as at fair value through profit or loss

			31 Dec 2016		31 Dec 2016		31 Dec 2015		31 Dec 2015
			Market value		Market value		Market value		Market value
			%		GBP		%		GBP
Level 1			84.53		73,688,748		79.15		68,570,543
Level 2			15.47		13,483,142		20.79		18,012,917
Level 3			0.00		372		0.06		51,173
Total			100.00		87,172,262		100.00		86,634,633

Bonds and structured investments are priced by reference to market quotations which incorporate assessment of yield, maturity and the instrument's terms and conditions. 

During the current year, equity securities held within the Income Portfolio have been reclassified from Level 2 to Level 1 in order to better reflect the source of inputs for these securities.

The following table is a reconciliation of investments the Company held during the years ended 31 Dec 2016 and 31 Dec 2015 at fair value using unobservable inputs (Level 3):

					31 Dec 2016		31 Dec 2015
					Market value		Market value
					GBP		GBP
Balance at 1 January					51,173		48,829
Unrealised (loss)/gain on investments					(50,801)		2,344
Balance at 31 December					372		51,173

For investments categorised in Level 3 as at 31 December 2016, the below details the valuation methodologies used:

Lehman Brother Holdings Capital Trust V 6.9% – These bonds were subordinated and are in default and the Investment Adviser does not expect any return of capital or interest and the bonds are valued at zero.

Petromena AS 10.85% 2014 – The bonds are in default and are priced from a Bloomberg bond valuation model.

Silverdell plc – The stock is suspended and is valued at zero. The Investment Adviser does not expect any return of capital.

Derivative financial assets and liabilities designated as at fair value through profit or loss

			31 Dec 2016		31 Dec 2016		31 Dec 2015		31 Dec 2015
			Market value		Market value		Market value		Market value
			%		GBP		%		GBP
Level 2 derivative financial assets			100.00		91,470		100.00		8,746
Level 2 derivative financial liabilities			-		-		100.00		141,151

It is the Company’s policy to recognise all the transfers into the levels and transfers out of the levels at the end of the reporting year. Transfers into each level shall be disclosed and discussed separately from transfer out of each level.

The derivative financial instruments held by the Company have been classified as Level 2. This is in accordance with the fair value hierarchy. The Company uses widely recognised valuation models for determining fair value of derivative financial instruments that use only observable market data and require little management judgement and estimation.

11     RECEIVABLES

							31 Dec 2016		31 Dec 2015
							GBP		GBP
Due from brokers							1,836,578		-
Prepayments							17,687		5,047
Accrued income							387,952		608,867
Sundry receivables							-		3,240
							2,242,217		617,154

12     PAYABLES

							31 Dec 2016		31 Dec 2015
							GBP		GBP
Accrued expenses							99,992		82,911
Trade creditors							159,880		156,977
ZDP issue costs (2022)							210,000		-
							469,872		239,888

13     ZDP SHARES

							31 Dec 2016		31 Dec 2015
							GBP		GBP
ZDP Share entitlement							29,319,945		27,380,779
The above entitlement comprises the following:
21,189,384 ZDP Shares issued to date up to 31 Dec 2015							22,768,091		-
201,348 Buyback of ZDP Shares during the year to 31 Dec 2015							-		(263,514)
167,790 ZDP shares sold out of treasury during the year to 31 Dec 2016							221,063		-
425,998 ZDP shares sold out of treasury during the year to 31 Dec 2015							-		560,062
27,032,008 ZDP Shares issued to date up to 31 Dec 2014							-		22,471,543
ZDP Premium							(13,501)		(174,160)
Appropriation in respect of ZDP Shares							6,339,204		4,717,066
ZDP value (calculated in accordance with the Articles)							29,314,857		27,310,997
ZDP issue costs							(105,483)		(202,566)
Issue costs amortised							97,070		98,188
Add back ZDP Premium							13,501		174,160
ZDP value (calculated in accordance with IFRS)							29,319,945		27,380,779

The fair value of the ZDP Shares as at 31 December 2016 was £29,767,629 (31 December 2015: £27,917,997).

ZDP Shares carry no entitlement to income distributions made by the Company. The ZDP Shareholders will not receive dividends but will have a final capital entitlement at the end of their life on 31 January 2017 of 138 pence. It should be noted that the predetermined capital entitlement of a ZDP Share is not guaranteed and is dependent upon the Company’s gross assets being sufficient on 31 January 2017 to meet the final capital entitlement of the ZDP Shares. If the Company had been wound up on
31 December 2016, the ZDP Shares would have had an entitlement of 137.26 pence each. The ZDP Shareholders have the right to receive notice of and attend, but shall not have the right to vote at, any general meeting.

Under the Articles of Association, the Company is obliged to redeem all of the ZDP Shares on 31 January 2017 (if such redemption has not already been effected).

The number of authorised ZDP Shares is 50,000,000. The number of issued ZDP Shares is 21,357,174 (2015: 21,189,384). The number of ZDP Shares held in treasury as at 31 December 2016 was 1,712,757 (2015: 1,880,547). The non-amortisation of the ZDP Shares in line with the Articles has the effect of increasing NAV per Ordinary Shares by 0.03 pence.

The ZDP Shares have been reclassified on the Statement of Financial Position as a current liability as the maturity date is within one year.

14     SHARE CAPITAL

Authorised						GBP
Ordinary Shares of 1p each						unlimited
Issued						Number of
						Shares
The issue of Ordinary Shares took place as follows:
Ordinary Shares					11 Feb 1999	29,600,002
Tender offer					17 Jan 2007	(20,660,212)
Purchase of treasury shares - Year ended 31 December 2011						(215,000)
Placing - Year ended 31 December 2013						6,438,339
Purchase of treasury shares - Year ended 31 December 2013						(1,756,000)
Shares sold out of Treasury - Year ended 31 December 2013						1,971,000
Issue of shares - Year ended 31 December 2014						2,500,205
Buyback of Ordinary Shares - Year ended 31 December 2014						(2,650,000)
Shares sold out of Treasury - Year ended 31 December 2014						390,000
Buyback of Ordinary Shares - Year ended 31 December 2015						(150,002)
Shares sold out of Treasury - Year ended 31 December 2015						317,360
Number of shares in issue at 31 December 2015						15,785,692
Shares sold out of Treasury during the year						125,000
Number of shares in issue at 31 December 2016						15,910,692
Issued and fully paid capital as at 31 December 2016						£171,867

The Ordinary Shares (excluding treasury shares) are entitled to participate in all dividends and distributions of the Company. On a winding-up holders of Ordinary Shares are entitled to participate in the distribution and the holders of Ordinary Shares are entitled to receive notice of and attend and vote at all general meetings of the Company.

The issued and fully paid capital as at 31 December 2016 was £171,867 (31 December 2015: £171,867).

15     TREASURY RESERVE

				31 Dec 2016		31 Dec 2015
				GBP		GBP
Balance as at 1 January				(5,064,352)		(6,297,145)
Treasury shares sold during the year				496,114		1,232,793
Buyback of Ordinary Shares during the year				-		(435,875)
Cancellation of Treasury Shares during the year				-		435,875
Balance as at 31 December				(4,568,238)		(5,064,352)
				31 Dec 2016		31 Dec 2015
				No. Shares		No. Shares
Balance as at 1 January				1,400,972		1,735,000
Buyback of shares during the year				-		150,000
Treasury shares sold during the year				(125,000)		(317,360)
Cancellation of Treasury Shares during the year				-		(166,668)
Balance as at 31 December				1,275,972		1,400,972

There were no Treasury Shares purchased during the year ended 31 December 2016. In the prior year the Treasury Shares were purchased in the market at various prices ranging from £2.83 to £3.06 and held by the Company in treasury.

16     RELATED PARTIES

Premier Asset Management (Guernsey) Limited is the Company’s Investment Manager and operates under the terms of the Management Agreement in force which delegates its authority over the Company’s investment portfolios.

£623,080 (2015: £596,754) of costs were incurred by the Company with this related party in the year, of which £159,880 (2015: £156,977) was due to this related party as at 31 December 2016.

Directors’ remuneration is disclosed in Note 6.

David Warr holds 63,000 Ordinary Shares in the capital of the Company, which represented an interest of 0.40% of the Company’s Ordinary Shares in issue as at 31 December 2016.

17     FINANCIAL INSTRUMENTS

The Company’s main financial instruments comprise:

(a)     Cash and cash equivalents that arise directly from the Company’s operations;

(b)    Investments in listed entities, receivables and payables;

(c)     ZDP Shares; and

(d)    Derivative financial instruments.

18     FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The following table details the categories of financial assets and liabilities held by the Company at the reporting date:

							31 Dec 2016		31 Dec 2015
							GBP		GBP
Financial Assets
Financial assets designated as at fair value through profit or loss							87,172,262		86,634,633
Derivative financial assets							91,470		8,746
Total financial assets at fair value through profit or loss							87,263,732		86,643,379
Loans and receivables
Cash and receivables							5,071,818		2,933,049
Receivables							2,224,530		612,107
Total assets							94,560,080		90,188,535
							31 Dec 2016		31 Dec 2015
							GBP		GBP
Financial liabilities
Financial liabilities at fair value through profit or loss:
Derivative financial liabilities							-		141,151
Total financial liabilities at fair value through profit or loss							-		141,151
Financial liabilities measured at amortised cost
ZDP Shares							29,319,945		27,380,779
Payables							469,872		239,888
Total Financial liabilities measured at amortised cost							29,789,817		27,620,667
Total liabilities excluding net assets attributable to holders of Ordinary Shares							29,789,817		27,761,818

Loans and receivables presented above represents cash and cash equivalents, balances due from brokers and other receivables (excluding prepayments) as detailed in the Statement of Financial Position.

Financial liabilities measured at amortised cost presented above represents accrued expenses and ZDP Shares as detailed in the Statement of Financial Position.

Derivative financial assets and liabilities presented above represent forward foreign exchange contracts. Unrealised gains and losses on movement in fair value are recognised in the Statement of Comprehensive Income.

The main risks arising from the Company’s financial instruments are market price risk, credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Board regularly reviews and agrees policies for managing each of these risks and these are summarised in notes 18(a) to 18(e).

(a)     Market Price Risk

Market price risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Investment Advisers actively monitor market prices and report to the Board as to the appropriateness of the prices used for valuation purposes. The Investment Advisers also attempt to minimise market price risk by undertaking a detailed analysis of the risk/reward relationship of each investee company prior to any investment being made.

Unicorn monitors the industry concentration exposure for the Smaller Companies Portfolio. The concentration exposure is presented in a graph on page 12 of the published Financial Statements which will shortly be available via the Investment Manager’s website https://www.premierfunds.co.uk/media/941577/acorn-income-fund-annual-report-2016.pdf.

Details of the Company’s Investment Objective and Policy are given at the beginning of this Report.

Price sensitivity

The following details the Company’s sensitivity to a 15% increase and decrease in the market prices, with 15% being the sensitivity rate used when reporting price risk internally to key management personnel and representing management’s assessment of the possible change in market prices.

At 31 December 2016, if market prices had been 15% higher with all the other variables held constant, the return attributable to shareholders for the year would have been £13,075,839 (2015: £12,995,195) greater, due to the increase in the fair value of financial assets at fair value through profit or loss. This would represent an increase in Net Assets of 20.18% (2015: 20.82%).

If market prices had been 15% lower with all the other variables held constant, the return attributable to shareholders for the year would have been £13,075,839 (2015: £12,995,195) lower, due to the decrease in the fair value of financial assets at fair value through profit or loss. This would represent a decrease in Net Assets of 20.18% (2015: 20.82%).

(b)     Credit Risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Company. The Directors receive financial information on a regular basis which is used to identify and monitor risk. It is the Company's policy not to invest, at the time of investment, more than 10% of the Company's gross assets in any one smaller company equity, more than 7.5% in any one fixed interest security and more than 20% in any one investment company or fund.

The Company has no significant concentration of credit risk, with exposure spread over a large number of counterparties. At 31 December 2016 the Company’s largest exposure to a single investment was £2,850,000 (2015: £3,101,000), 3.01% (2015: 3.44%) of total assets.

Investors should be aware that the prospective returns to Shareholders mirror the returns under the quoted securities held or entered into by the Company and that any default by an issuer of any such quoted security held by the Company would have a consequential adverse effect on the ability of the Company to pay some or all of the entitlement to its Shareholders. Such a default might, for example, arise on the insolvency of an issuer of a quoted security.

The Company’s financial assets exposed to credit risk are as follows:

							31 Dec 2016		31 Dec 2015
							GBP		GBP
Financial assets designated as at fair value through profit or loss
(fixed income securities only)							13,350,853		18,103,395
Cash and cash equivalents							5,071,818		2,933,049
Interest, dividends and other receivables							2,224,530		617,154
Derivatives financial instruments							91,470		(132,405)
							20,738,671		21,521,193

The credit ratings of the bonds, as rated by Moody’s Investor Services Inc (“Moodys”) were:

Rating							31 Dec 2016		31 Dec 2015
Aaa							0.00%		4.88%
Aa							3.43%		3.53%
A							12.54%		11.12%
Baa							26.66%		20.20%
Ba							5.30%		7.39%
B							2.59%		3.96%
Other Sourced Ratings							10.47%		18.61%
No ratings available							39.01%		30.31%

The cash and cash equivalents were held with Northern Trust (Guernsey) Limited, a fully owned subsidiary of The Northern Trust Company, which at the year ended 31 December 2016 held a credit rating, as rated by Moody’s, of Aa2. The long gilt future is held with J.P. Morgan who at the year ended 31 December 2016 held a credit rating, as rated by Moody’s, of Aa2. The Investment Adviser for the Income Portfolio selects investments having regard to their potential return and the credit risk associated with them. The Investment Adviser carries out its own assessment of credit risk and the rating provided by a credit rating agency is just one of the factors taken into account. The absence of a rating is not necessarily a reflection on credit risk. The board review the whole portfolio at quarterly board meetings.

(c)     Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting its obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s main financial commitments are its ongoing operating expenses and the settlement of the obligation upon maturity of the ZDP Shares on 31 January 2017.

The ZDP Shares will not pay dividends but will have a final capital entitlement at the end of their life on 31 January 2017 of 138 pence. Following approval of shareholders on 20 December 2016, the life of the ZDP Shares was extended to 28 February 2022 with over 91% of ZDP Shareholders electing to remain invested. The cash payment to ZDP shareholders who redeemed their shares on 31 January 2017 was financed by a placing of 2022 ZDP Shares with new investors. It should be noted that the predetermined capital entitlement of the 2022 ZDP Shares is not guaranteed and is dependent upon the Company’s gross assets being sufficient on 28 February 2022 to meet the final capital entitlement of the ZDP Shares.

The Investment Advisers ensure that the Company has sufficient liquid resources available to fulfil its operational plans and to meet its financial obligations as they fall due. This is monitored by carrying out a solvency calculation on a quarterly basis by reference to management accounts and revenue projections. The Board will approve a Solvency Certificate resolution prior to declaring any interim distributions.

The Board intends to monitor the financial position of the Company to ensure that it has sufficient liquid resources available to fulfil its obligation upon maturity of the ZDP Shares.

The table below details the residual contractual undiscounted maturities of financial liabilities:

							As at 31 December 2016			As at 31 December 2015
							1-3 months		Over 1 year	1-3 months		Over 1 year
							GBP		GBP	GBP		GBP
Financial liabilities including derivatives
Payables - due within one year							469,872		-	239,888		-
Derivative financial instruments							-		-	141,151		-
ZDP Share entitlement							29,472,900		-	-		29,241,350
							29,942,772		-	381,039		29,241,350

(d)     Interest Rate Risk

The Company could hedge interest rate risk using various different methods.

The following table details the Company’s exposure to interest rate risks. It includes the Company’s assets and liabilities at fair values, categorised by the earlier of contractual re-pricing or maturity date measured by the carrying value of the assets and liabilities:

As at 31 December 2016:

				Less than 1 month		Fixed interest		Non-interest Bearing		Total
				GBP		GBP		GBP		GBP
Financial Assets
Financial assets at fair value through profit or loss on
initial recognition				-		13,350,853		73,821,409		87,172,262
Cash and cash equivalents				5,071,818		-		-		5,071,818
Interest, dividends and other receivables				-		-		2,224,530		2,224,530
Derivative Financial instruments				-		-		91,470		91,470
Total Financial Assets				5,071,818		13,350,853		76,005,120		94,560,080
Financial Liabilities
Payables				-		-		469,872		469,872
ZDP Share entitlement				-		29,319,945		-		29,319,945
Total Financial Liabilities				-		29,319,945		469,872		29,789,817
Total Interest sensitivity gap				5,071,818		(15,969,092)

As at 31 December 2015:

				Less than 1 month		Fixed interest		Non-interest Bearing		Total
				GBP		GBP		GBP		GBP
Financial Assets
Financial assets at fair value through profit or loss on
initial recognition				-		18,103,395		68,531,238		86,634,633
Cash and cash equivalents				2,933,049		-		-		2,933,049
Interest, dividends and other receivables				-		-		617,154		617,154
Derivative Financial instruments				-		-		8,746		8,746
Total Financial Assets				2,933,049		18,103,395		69,157,138		90,193,582
Financial Liabilities
Derivative Financial instruments				-		-		141,151		141,151
Payables				-		-		239,888		239,888
ZDP Share entitlement				-		27,380,779		-		27,380,779
Total Financial Liabilities				-		27,380,779		381,039		27,761,818
Total Interest sensitivity gap				2,933,049		(9,277,384)

Interest rate sensitivity takes account of the effect of interest rate movements on cash balances, loan amounts and fixed interest securities. Interest rate risk does not affect the cash flows of the fixed interest securities but does affect the fair value and as such this sensitivity has been reflected in the market price risk disclosures at Note 18(a).

Interest rate sensitivity

If interest rates had been 25 basis points higher and all other variables were held constant, the Company’s return attributable to Ordinary Shareholders for the year ended 31 December 2016 would have increased by approximately

£12,680 (2015: £7,333) or 0.013% (2015: 0.008%) of Total Assets, due to an increase in the amount of interest receivable on the bank balances.

If interest rates had been 25 basis points lower and all other variables were held constant, the Company’s return attributable to Ordinary Shareholders for the year ended 31 December 2016 would have decreased by approximately

£12,680 (2015: £7,333) or 0.013% (2015: 0.008%) of Total Assets, due to a decrease in the amount of interest receivable on the bank balances.

(e)     Foreign Exchange Risk

Forward currency transactions are used to hedge the foreign currency exposure in bonds, other investments and cash balances held within the Income Portfolio. The purpose of the hedge is to protect the Company’s assets from a decline in value that might arise from the depreciation of a foreign currency against Sterling.

At 31 December 2016, the Company’s holdings in derivatives translated into GBP were as specified below:

			Expiration		Underlying		Notional amount of contracts outstanding		Fair value assets GBP
Type of contract
Forward			January 2017		Purchased EUR		1,670,000		79,144
Forward			January 2017		Purchased USD		2,150,000		12,326
									91,470

At 31 December 2015, the Company’s holdings in derivatives translated into GBP were as specified below:

			Expiration		Underlying		Notional amount of contracts outstanding		Fair value assets GBP
Forward			February 2016		Purchased EUR		1,900,000		(41,095)
Forward			February 2016		Sold EUR		(250,000)		8,006
Forward			February 2016		Purchased EUR		3,300,000		(100,056)
Forward			February 2016		Sold EUR		(89,531)		740
									(132,405)

Exchange rate exposures are managed by minimising the amount of foreign currency held at any one time and entering into forward exchange contracts.

The following table sets out the Company’s total exposure to foreign currency risk and the net exposure to foreign currencies of the monetary assets and liabilities:

31 December 2016
			Monetary Assets		Monetary Liabilities		Forward FX Contracts		Net exposure
			GBP		GBP		GBP		GBP
Euro			1,476,958		-		(1,425,944)		51,014
US Dollar			1,926,026		-		(1,739,387)		186,639
Australian Dollar			15		-		-		15
31 December 2015
			Monetary Assets		Monetary Liabilities		Forward FX Contracts		Net exposure
			GBP		GBP		GBP		GBP
Euro			1,213,516		-		(1,216,753)		(3,237)
US Dollar			2,208,820		-		(2,178,059)		30,761
Australian Dollar			13		-		-		13

Amounts in the above table are based on the carrying value of monetary assets and liabilities and the underlying principal amount of forward currency contracts.

(f)     Capital Management

The principal investment objectives of the Company are to provide shareholders with a high income and also the opportunity for capital growth.

The Company’s investments are held in two portfolios. The Company’s assets comprise investments in equities and fixed interest and other income-bearing securities in order to achieve its investment objectives. Approximately 70%–80% of the portfolio are invested in smaller capitalised United Kingdom companies, admitted to the Official List of the Financial Conduct Authority (the “FCA”) and traded on the London Stock Exchange (the “LSE”) or traded on the AIM at the time of investment. The Company also aims to further enhance income for Shareholders by investing approximately 20%–30% of its assets in high yielding securities which will be predominantly fixed income securities (including corporate bonds, preference and permanent interest bearing shares, convertible and reverse convertible bonds and debentures) but may include up to 15% of the portfolio (measured at time of acquisition) in high yielding investment company shares.

As the Company’s Ordinary Shares are traded on the LSE, the Ordinary Shares may trade at a discount or premium to their Net Asset Value per Share on occasion. However, the Directors and the Manager monitor the discount on a regular basis and can use share buy backs to manage the discount.

The Company monitors capital on the basis of the carrying amount of equity as presented on the face of the Statement of Financial Position. Capital for the reporting periods under review is summarised as follows:

						GBP
Distributable reserves						12,511,830
Share capital and share premium						27,607,889
Non distributable reserves						29,236,469
Treasury reserve						(4,568,238)
Total						64,787,950

The distributable reserves comprises the revenue reserve and the special reserve. The non distributable reserves comprise the capital reserve and the treasury reserve. The special reserve was created on the cancellation of part of the Company’s share premium account.

(g)    Dividend levels

Dividends paid on the Company’s Ordinary Shares rely on receipt of interest payments and dividends from the securities in which the Company invests. The Company’s revenue levels are monitored on a regular basis by the Board and the Investment Advisers.

19     SUBSEQUENT EVENTS

These Financial Statements were approved for issue by the Board on 18 April 2017. Subsequent events have been evaluated until this date.

A dividend of 4.5p was declared on 15 February 2017 and was paid to Ordinary Shareholders on 31 March 2017.

ZDP Shares – On 30 January 2017 the Company announced that existing Shareholders were given the opportunity to elect to remain invested for a further five years and one month to 28 February 2022 with the ZDPs accruing at a rate of 3.85% from the 138p NAV in 31 January 2017 to 167.2p on redemption or to receive 138p shortly after 31 January 2017. Shareholders approved the scheme and 91.4% of ZDP Shareholders elected to remain invested. 

Ordinary Shares – On 30 January 2017 the Company announced that 5,995 new Ordinary Shares had been issued through the Initial Placing and Offer for Subscription.

Unaudited Full List of Investment Holdings Listing

				Percentage of Total Assets 2016
Company		Nominal Holdings	Valuation GBP
Smaller Companies Portfolio
Clipper Logistics plc		750,000	2,850,000	3.01
Conviviality Retail plc		1,150,000	2,481,125	2.62
Safestyle UK plc		800,000	2,322,000	2.46
Macfarlane Group		3,800,000	2,280,000	2.41
Secure Trust Bank plc		105,000	2,258,550	2.39
Acal plc		980,000	2,205,000	2.33
Somero Enterprises inc		1,000,000	2,200,000	2.33
Lavendon Group plc		829,681	2,190,358	2.32
Castings plc		449,112	1,845,850	1.95
Park Group plc		2,500,000	1,825,000	1.93
Numis Corporation plc		750,000	1,824,375	1.93
Primary Health Properties plc		1,600,000	1,768,000	1.87
Wincanton plc		700,000	1,722,000	1.82
James Halstead plc		350,000	1,695,750	1.79
FDM Group Holdings plc		300,000	1,695,000	1.79
Gateley Holdings plc		1,300,000	1,677,000	1.77
Alumasc Group plc		1,100,000	1,672,000	1.77
Mucklow A&J Group plc		349,429	1,624,845	1.72
Epwin Group plc		1,600,000	1,604,000	1.70
Quarto Group inc		515,116	1,535,046	1.62
BBA Aviation plc		533,299	1,510,303	1.60
Manx Telecom plc		750,000	1,492,500	1.58
Telecom Plus plc		125,000	1,466,250	1.55
Flowtech Fluidpower plc		1,100,000	1,397,000	1.48
Jarvis Securities plc		415,000	1,390,250	1.47
Amino Technologies plc		800,000	1,376,000	1.45
Tyman plc		500,000	1,370,000	1.45
Warpaint London plc		1,000,000	1,350,000	1.43
River & Mercantile Group plc		650,000	1,339,000	1.42
Photo-Me International plc		800,000	1,312,000	1.39
Card Factory plc		500,000	1,264,500	1.34
Van Elle Holdings plc		1,000,000	1,260,000	1.33
Ocean Wilson Holdings Limited		120,610	1,224,192	1.29
Lower & Bonar plc		1,908,250	1,221,280	1.29
Brewin Dolphin Holdings plc		400,000	1,216,400	1.29
Greene King plc		173,000	1,204,945	1.27
Hill & Smith Holdings plc		100,000	1,198,000	1.27
Headlam Group plc		245,000	1,192,538	1.26
Midwich Group plc		500,000	1,125,000	1.19
Palace Capital plc		296,802	1,068,487	1.13
Morses Club plc		950,000	1,030,750	1.09
Hostelworld Group plc		438,514	925,265	0.98
Pendragon plc		2,863,824	887,785	0.94
Dairy Crest Group plc		142,630	880,740	0.93
Sprue Aegis plc		500,000	875,000	0.93
Harvey Nash Group plc		1,132,728	679,637	0.72
RPS Group plc		302,500	673,063	0.71
Braemar Shipping Services plc		200,000	552,000	0.58
Chesnara plc		67,601	242,350	0.26
Silverdell plc		3,090,546	-	-
TOTAL			72,001,134	76.15

   

					Percentage of Total Assets 2016
Company			Nominal Holdings	Valuation GBP
Income Portfolio
Real Estate Credit Pref Shs NPV			925,000	943,500	1.00
DW Catalyst Fund Limited			53,359	632,838	0.67
United Kingdom 2.50% IL Treasury 2020			140,000	519,624	0.55
British Telecoms 5.75% 2028			300,000	401,005	0.42
HSBC 6% 29/03/2040			300,000	360,312	0.38
JPMorgan Global Convertibles Income Fund Limited			400,000	360,000	0.38
Glencore Finance Dubai 2.625% 2018			400,000	354,556	0.37
Itv 2.125% 2022			400,000	352,043	0.37
F&C Global Smaller Companies CULS 3.5%			280,000	343,700	0.36
Natixis Structured 0.00% 08/09/2017			400,000	340,831	0.36
Tesco Personal Finance 1.00% 2019			300,000	339,135	0.36
EDF 6.125% 02/06/2034			250,000	334,180	0.35
UBS 7.25% 22/02/2022			400,000	325,632	0.34
Investec Bank 0.00% 08/09/2020			300,000	302,094	0.32
Heathrow 7.075% 04/08/2028			200,000	286,202	0.30
St Modwen Properties 2.875% 06/03/19			300,000	283,170	0.30
Credit Agricole SA 8.125% 2033 - 18			300,000	261,178	0.28
Northumbrian Water Finance plc 6.875% 2023			200,000	259,306	0.27
Spirit Issuer 5.472% 28/12/2034			250,000	258,911	0.27
Aviva 5.9021% Perp - 2020			250,000	255,313	0.27
Firstgroup plc 8.75% 2021			200,000	253,552	0.27
Fidelity International 7.125% 2024			200,000	250,656	0.27
Investec Bank 9.625% 2022			200,000	241,757	0.26
Thames Water Utili 4.00% 2025			200,000	232,692	0.25
France Telecom 8.125% 2028			150,000	232,090	0.25
Anheuser-Busch Inbev 9.75% 2024			150,000	231,263	0.24
Sse plc 6.25% 2038			150,000	229,198	0.24
Marks & Spencer 4.75% 2025			200,000	224,680	0.24
Unite Group plc 6.125% 2020			200,000	219,281	0.23
Everything Everywhere 4.375% 2019			200,000	215,253	0.23
AT&T 4.25% 2043			200,000	214,802	0.23
Bakkavor Finance plc 8.75% 2020			200,000	213,616	0.23
Pepsi 2.5% 2022			200,000	213,315	0.23
Royal Bank Of Canada 0.00% 2018			200,000	212,980	0.23
Morrison (WM) Supermarkets 3.50% 2026			200,000	207,555	0.22
Hadrian's Wall Secured Investment Limited			192,805	203,409	0.22
Gli Finance Limited Red Zdp 2019 Npv			205,806	201,175	0.21
Investec Bank 0.00% 11/01/2021			200,000	200,014	0.21
Enterprise Funding Limited 3.50% 2020			200,000	192,500	0.20
Finmeccanica Spa 4.50% 2021			200,000	192,250	0.20
Helical Bar Jersey 4.00% 2019 convertible			200,000	192,100	0.20
JPMorgan Structured Programme 0.00% 17/03/2021			200,000	190,265	0.20
HSBC Holdings 6.25% 2018			200,000	183,190	0.19
Tesco Property Finance 5.4111% 2044			197,065	182,785	0.19
South Eastern Power Networks 3.053% 2023			100,000	181,640	0.19
Barclays plc 8% Perp - 20			200,000	180,048	0.19
House Of Fraser Funding 2020			200,000	179,000	0.19
BPCE SA 2.75% 2026 -21			200,000	176,846	0.19
Old Mutual 8.00% 2021			150,000	169,820	0.18
Kelda Finance (No 3) plc 5.75% 2020			150,000	164,548	0.17
Punch Taverns Finance 7.32% 2026			135,900	162,179	0.17
RL Finance Bonds plc 6.125% 2043			150,000	158,962	0.17
Aberforth Geared Income Trust plc			100,000	156,500	0.17
3i Group 6.875% 2023			100,000	125,362	0.13
Mitchells & Butlers Finance 5.574% 2030			103,637	119,324	0.13
Verizon Communications 2.45% 2022			150,000	117,255	0.12
BAE Systems 4.125% 2022			100,000	112,611	0.12
Whitbread Group 3.375% 2025			100,000	106,600	0.11
SQN Asset Finance Income Fund Limited			100,000	102,750	0.11
UK Mortgages Limited			100,000	94,250	0.10
Edinburgh Dragon Trust 3.50% 2018			87,574	90,201	0.10
Natwest Bank plc 9% Non Cumulative Preference			50,000	66,750	0.07
Nationwide Building Society 10.25%			500	65,540	0.07
Punch Taverns Finance 7.274% 2026			50,000	59,971	0.06
P2P Global Investments plc			4,550	36,354	0.04
Juridica Ordinary Shares			200,000	32,999	0.03
Petromena AS 10.85% 2014			82,990	371	-
Lehman Brthers Holdings Capital Trust V 6.9%			100,000	-	-
Bond futures
Fut. Long Gilt Icf Mar17			-	(134,068)	(0.14)
Fut. Msci Asia Eux Mar 17			-	1,407	-
				15,171,128	16.03
TOTAL				87,172,262	92.18

Glossary

Cover

The Cover on the ZDP Shares measures the amount by which the final redemption value of the ZDP Shares is covered by the total assets of the Company allowing for all prior ranking liabilities and the accrual of expenses to capital over the remaining period to the redemption of the ZDP Shares. The calculation used in this report is for non-cumulative cover and represents a fraction where the numerator is equal to the gross assets of the Company less current liabilities (other than debt and liabilities to ZDP Shareholders) less the Company’s revenue reserves and the denominator is the aggregate amount payable to ZDP Shareholders on the repayment date plus any other borrowing plus the cumulative management fee charged to capital over the remaining period to the repayment date. The full definition of the calculation is set out in the Company’s prospectus that can be found on the Company’s website.

Cover Test

A required Cover of not less than 2.0 times.

Discount/Premium

If the share price of an investment company is lower than the NAV per share, the shares are said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, the shares are said to be trading at a premium.

Gearing

Also known as leverage. Gearing is introduced when a company borrows money or issues prior ranking share classes such as ZDP Shares, to buy additional investments. The objective is to enhance returns to ordinary shareholders but there is the risk of the opposite effect if the additional investments fall in value.

Yield

The annual interest payments on a fixed-interest security, or the annual dividends on an equity (less any withholding tax) expressed as a percentage of the current market value of the security.

Net Asset Value (“NAV”)

NAV is the assets attributable to Ordinary Shareholders expressed as an amount per individual share. Within this report two different methods are used for calculating NAV. One using the accounting standards specified by International Financial Reporting Standards (IFRS) and one which has been calculated in accordance with the Company’s Articles of Association. The latter is the method which would be used to calculate the amount due to Ordinary Shareholders on a winding up of the Company. However, the Financial Statements are prepared in accordance with IFRS. Where the IFRS method has been used it will be indicated.

Alternative Performance Measures

In accordance with ESMA Guidelines on Alternative Performance Measures ("APMS") the Board has considered what APMs are included in the annual report and accounts which require further clarification. An APM is defined as a financial measure of historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. The APM included in the annual report and accounts, which is unaudited and outside the scope of IFRS is deemed to be Net Assets calculated in accordance with the Articles.

Ordinary Shares			NAV per Share (pence)			ZDP Shares				NAV per Share (pence)
Net Assets (per Articles)	64,793,038		407.23			ZDP value (per Articles)		29,314,857		137.26
ZDP issue costs	105,483		0.66			ZDP issue costs		(105,483)		(0.49)
Issue costs amortised	(97,070)		(0.61)			Issue costs amortised		97,070		0.45
ZDP Premium	(13,501)		(0.08)			ZDP premium		13,501		0.06
Net Assets (per IFRS)	64,787,950		407.20			ZDP value (per IFRS)		29,319,945		137.28

Total Return

The combined effect of any dividends paid, together with the rise or fall in the share price or NAV. Total return statistics enable the investor to make performance comparisons between companies with different dividend policies. Any dividends (after tax) received by a shareholder are assumed to have been reinvested in either additional shares of the Company at the time the shares go ex-dividend (the share price total return) or in the assets of the Company at its NAV per share (the NAV total return).

Directors, Advisers and Contacts

Directors
Helen Foster Green (Chairman)
John Nigel Ward
David John Warr

Investment Manager
Premier Asset Management (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: [phone]
Contact: Nigel Sidebottom

Investment Adviser – Smaller Companies Portfolio
Unicorn Asset Management Limited
Preacher’s Court
The Charterhouse
Charterhouse Square
London EC1M 6AU
Tel: [phone]
Contact: Simon Moon

Investment Adviser – Income Portfolio
Premier Fund Managers Limited
Eastgate Court
High Street
Guildford GU1 3DE
Tel: [phone]
Contact: Nigel Sidebottom

Administrator and Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL

Custodian
Northern Trust (Guernsey) Limited
PO Box 71
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3DA

Corporate Broker
Numis Securities Limited
10 Paternoster Square
London EC4M 7LT
Tel: [phone]

Independent Auditors
KPMG Channel Islands Limited
Glategny Court
Glategny Esplanade
St Peter Port
Guernsey GY1 1WR

Registrar
Anson Registrars Limited
PO Box 426
Anson House
Havilland Street
St Peter Port
Guernsey GY1 3WX
Tel: [phone]
Email: [e-mail]

Company’s Registered Office
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL

Company Details
Company Number: 34778
GIIN Number: CY0IXM.99999.SL.831

Ordinary Shares
ISIN: GB0004829437
Ticker: AIF

ZDP Shares
ISIN: GG00B4W1FT21
Ticker: AIFZ
 

Notice of Class Meeting

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.  If you are in any doubt about the contents of this document or the action you should take, you should consult immediately your stockbroker, bank manager, solicitor, accountant or other financial adviser, authorised under the Financial Services and Markets Act 2000 (as amended).

If you have sold or otherwise transferred all of your ZDP Shares in Acorn Income Fund Limited, please send this document and Form of Proxy, as soon as possible, to the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

Acorn Income Fund Limited

(Company No. 34778)

NOTICE OF CLASS MEETING

Notice is hereby given that a Class Meeting of holders of ZDP Shares of Acorn Income Fund Limited (the "Company") will be held at the offices of Northern Trust International Fund Administration Services (Guernsey) Limited, Trafalgar Court, Les Banques, St Peter Port, Guernsey, Channel Islands on 15 August 2017 at 11am.

Resolution on Form of Proxy	Agenda
	Business to be proposed as an Ordinary Resolution:
1.	THAT the holders of the ZDP Shares hereby sanction and consent to the passing and carrying into effect, as an ordinary resolution of the Company, of Resolution 6 contained in the notice of annual general meeting of the Company dated 18 April 2017 and any variation or abrogation and/or deemed variation or abrogation of the rights attached to the ZDP Shares which will, or may, result from the passing and carrying into effect of such resolution.
	Any Other Business.

By Order of the Board

For and on behalf of

Northern Trust International Fund Administration

Services (Guernsey) Limited

Secretary

18 April 2017

Notes:

1       A member entitled to attend and to speak and vote at the meeting is entitled to appoint one or more proxies to speak and vote instead of them. A proxy need not be a member of the Company. Completion and return of the Class Meeting Form of Proxy will not preclude members from attending or voting at the meeting, if they so wish.

2        More than one proxy may be appointed provided each proxy is appointed to exercise the rights attached to different shares.

3        To be valid the Class Meeting Form of Proxy, together with the power of attorney or other authority, if any, under which it is executed (or a notarially certified copy of such power of authority) must be deposited with the Registrar: Anson Registrars, Limited, PO Box 426, Anson House, Havilland Street, St Peter Port, Guernsey GY1 3WX no later than 11am on 10 August 2017 or not less than forty-eight (48) hours before the time for holding any adjourned meeting. A Class Meeting Form of Proxy is enclosed with this notice.

4        All persons recorded on the register of members as holding ZDP Shares in the Company as at 11a.m. on 10 August 2017 or, if the meeting is adjourned, as at 48 hours before the time of any adjourned meeting, shall be entitled to attend and vote (either in person or by proxy) at the meeting and shall be entitled to one vote per share held.

5        The quorum for the Class Meeting is two persons present in person or by proxy and holding at least one third of the issued ZDP Shares at the date of the Meeting. If the meeting is not quorate, it will be adjourned to the same time and place fourteen clear days later, whereupon one person holding ZDP Shares and present in person or by proxy shall form the quorum.

6        Where there are joint registered holders of any ZDP Shares, such persons shall not have the right of voting individually in respect of such shares but shall elect one of their number to represent them and to vote whether in person or by proxy in their name. In default of such election, the person whose name stands first on the register of ZDP Members shall alone be entitled to vote.

7        On a poll, votes may be given either personally or by proxy and a holder of ZDP Shares entitled to more than one vote need not use all their votes or cast all the votes he uses in the same way.

8        Any corporation which is a member may by resolution of its directors or other governing body, authorise such person as it thinks fit to act as its representative at this meeting. Any person so authorised shall be entitled to exercise on behalf of the corporation which he represents the same powers (other than to appoint a proxy) as the corporation could exercise if it were an individual member of the Company.

9        Pursuant to the Articles, every member (being an individual) present in person or by proxy or (being a corporation) present by a duly authorised representative shall have one vote on a show of hands, subject to any special voting powers or restrictions, and one vote per ZDP Share on a poll (other than the Company itself where it holds its own shares as treasury shares), subject to any special voting powers or restrictions.

10      As at 18 April 2017 (being the last practicable date prior to the publication of this Notice) the total number of votes exercisable by holders of ZDP Shares is 21,365,221.

11      Capitalised terms used in this Notice of Class Meeting but not defined shall bear the same meanings as set out in the Company's Articles of Incorporation.

Notice of Annual General Meeting

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.  If you are in any doubt about the contents of this document or the action you should take, you should consult immediately your stockbroker, bank manager, solicitor, accountant or other financial adviser, authorised under the Financial Services and Markets Act 2000 (as amended).

If you have sold or otherwise transferred all of your Shares in Acorn Income Fund Limited please send this document and Form of Proxy, as soon as possible, to the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

Acorn Income Fund Limited

(Company No. 34778)

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the 2017 Annual General Meeting of Acorn Income Fund Limited (the "Company") will be held at the offices of Northern Trust International Fund Administration Services (Guernsey) Limited, Trafalgar Court, Les Banques, St Peter Port, Guernsey, Channel Islands on 15 August 2017 at 11.15am.

Resolution on Form of Proxy	Agenda
	Business to be proposed as Ordinary Resolutions:
1.	To receive and adopt the Annual Financial Report for the year ended 31 December 2016.
2.	To re-appoint KPMG Channel Islands Limited as Auditor to the Company until the conclusion of the next Annual General Meeting.
3.	To authorise the Directors to determine the Auditor’s remuneration.
4.	To re-elect Helen Foster Green as a Director of the Company.
	Special Business to be proposed as Ordinary Resolutions:
5.	THAT, the Directors of the Company be and are hereby generally and unconditionally authorised in accordance with the Articles to issue new Ordinary Shares in the Company PROVIDED THAT: (i)     such powers shall be limited to issue up to 3,183,337 new Ordinary Shares (approximately 20% of the issued Ordinary Shares, excluding treasury shares, as at the date of this Notice); and (ii)     the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2018 unless such authority is renewed, varied or revoked by the Company in general meeting (save that the Company may, at any time before such expiry, make an offer or agreement which would or might require Ordinary Shares to be issued after such expiry and the Directors may issue Ordinary Shares after such expiry in pursuance of such offer or agreement as if the authority conferred hereby had not expired).
6.	THAT, subject to and conditional upon the passing of the proposed resolution of the Class Meeting of ZDP Members convened for 15 August 2017 at 11.00 am, the Directors of the Company be and are hereby generally and unconditionally authorised in accordance with the Articles to issue new ZDP Shares in the Company PROVIDED THAT: (i)     such powers shall be limited to issue up to 4,273,044 new ZDP Shares (approximately 20% of the issued ZDP Shares, excluding treasury shares, as at the date of this Notice) in circumstances where the Cover Test is met or Cover is maintained or is otherwise increased, in each case, immediately following such issue; and (ii)    the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2018 unless such authority is renewed, varied or revoked by the Company in general meeting (save that the Company may, at any time before such expiry, make an offer or agreement which would or might require ZDP Shares to be issued after such expiry and the Directors may issue ZDP Shares after such expiry in pursuance of such offer or agreement as if the authority conferred hereby had not expired).
	Special Business to be proposed as Special Resolutions:
7.	THAT the Directors be and are hereby empowered (pursuant to Resolution 5 or otherwise) to issue and sell from treasury up to 4,775,006 Ordinary Shares for cash otherwise than pro rata to existing Ordinary Members at: (i)      a price equal to or greater than the prevailing Net Asset Value per Ordinary Share; or (ii)     a discount to the prevailing Net Asset Value per Ordinary Share in circumstances where ZDP Shares are issued at the same time at a premium to Net Asset Value such that the combined effect of the issue or sale of Ordinary Shares at a discount to the prevailing Net Asset Value per Ordinary Share and the issue of ZDP Shares at a premium to Net Asset Value is that (i) Net Asset Value per Ordinary Share is thereby increased; and (ii) gearing is not thereby increased, PROVIDED THAT the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2018 unless such authority is renewed, varied or revoked by the Company in general meeting (save that the Company may at any time before such expiry make an offer or agreement which might require Ordinary Shares to be issued or sold after such expiry and the Directors may issue or sell Ordinary Shares after such expiry in pursuance of such offer or agreement as if the authority conferred hereby had not expired).

   

8.	THAT, the Company be generally and, subject as hereinafter appears, unconditionally authorised in accordance with section 315 of the Companies Law to make market acquisitions (within the meaning of section 316 of the Companies Law) of its issued Ordinary Shares, PROVIDED THAT: (i)      the maximum aggregate number of Ordinary Shares hereby authorised to be purchased shall be 5,569,248 Ordinary Shares; (ii)     the minimum price (exclusive of expenses) payable by the Company for each Ordinary Share shall be £0.01; (iii)    the maximum price (exclusive of expenses) payable by the Company for each Ordinary Share shall be the higher of (a) an amount equal to 105% of the average value of an Ordinary Share for the five business days prior to the day the purchase is made and (b) the higher of the price of the last independent trade and the highest independent bid at the time of the purchase for any number of Ordinary Shares on the trading venue where the trade is carried out; (iv)    the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2018 unless such authority is varied, revoked or renewed prior to such time; and (v)     the Company may make a contract to purchase Ordinary Shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiration of such authority and may make an acquisition of Ordinary Shares pursuant to any such contract.
9.	THAT, the Company be generally and, subject as hereinafter appears, unconditionally authorised in accordance with section 315 of the Companies Law to make market acquisitions (within the meaning of section 316 of the Companies Law) of its issued ZDP Shares, PROVIDED THAT: (i)      the maximum aggregate number of ZDP Shares hereby authorised to be purchased shall be 7,475,690 ZDP Shares; (ii)     the minimum price (exclusive of expenses) payable by the Company for each ZDP Share shall be £0.01; (iii)    the maximum price (exclusive of expenses) payable by the Company for each ZDP Share shall be the higher of (a) an amount equal to 105% of the average value of a ZDP Share for the five business days prior to the day the purchase is made and (b) the higher of the price of the last independent trade and the highest independent bid at the time of the purchase for any number of ZDP Shares on the trading venue where the trade is carried out; (iv)    the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2018 unless such authority is varied, revoked or renewed prior to such time; and (v)     the Company may make a contract to purchase ZDP Shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiration of such authority and may make an acquisition of ZDP Shares pursuant to any such contract.
	Any Other Business.

By Order of the Board

For and on behalf of
Northern Trust International Fund Administration  Services (Guernsey) Limited
Secretary

18 April 2017

Notes:

1              A member entitled to attend and to speak and vote at the meeting is entitled to appoint one or more proxies to speak and vote instead of them.  A proxy need not be a member of the Company.  Completion and return of the Form of Proxy will not preclude members from attending or voting at the meeting, if they so wish.

2              More than one proxy may be appointed provided each proxy is appointed to exercise the rights attached to different shares.

3              To be valid the Form of Proxy, together with the power of attorney or other authority, if any, under which it is executed (or a notarially certified copy of such power of authority) must be deposited with the Registrar: Anson Registrars, Limited, PO Box 426, Anson House, Havilland Street, St Peter Port, Guernsey GY1 3WX no later than 11.15am on 10 August 2017 or not less than forty-eight (48) hours before the time for holding any adjourned meeting. A Form of Proxy is enclosed with this Notice.

4              All persons recorded on the register of members as holding Ordinary Shares in the Company as at 11.15 a.m. on 10 August 2017 or, if the meeting is adjourned, as at 48 hours before the time of any adjourned meeting, shall be entitled to attend and vote (either in person or by proxy) at the meeting and shall be entitled to one vote per share held.

5              The quorum for the Annual General Meeting is one or more members present in person or by proxy and holding 5% or more of the voting rights available at such meeting.  If the meeting is not quorate, it will be adjourned to the same time and place fourteen clear days later, whereupon such member or members who shall attend in person or by proxy at any such adjourned meeting shall form the quorum.

6              Where there are joint registered holders of any Ordinary Shares such persons shall not have the right of voting individually in respect of such shares but shall elect one of their number to represent them and to vote whether in person or by proxy in their name.  In default of such elections, the person whose name stands first on the register of Ordinary Members shall alone be entitled to vote.

7              On a poll, votes may be given either personally or by proxy and a member entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.

8              Any corporation which is a member may by resolution of its directors or other governing body, authorise such person as it thinks fit to act as its representative at this meeting. Any person so authorised shall be entitled to exercise on behalf of the corporation which he represents the same powers (other than to appoint a proxy) as the corporation could exercise if it were an individual member of the Company.

9              Pursuant to the Articles, every member (being an individual) present in person or by proxy or (being a corporation) present by a duly authorised representative shall have one vote on a show of hands, subject to any special voting powers or restrictions, and one vote per Ordinary Share on a poll (other than the Company itself where it holds its own shares as treasury shares), subject to any special voting powers or restrictions.

10            As at 18 April 2017 (being the last practicable date prior to the publication of this Notice) the total number of votes exercisable by holders of Ordinary Shares is 15,916,687.

11            Capitalised terms used in this Notice of Annual General Meeting but not defined shall bear the same meanings as set out in the Company's Articles of Incorporation.

Explanatory Notes to the Resolutions

Ordinary Business:

Resolution 1 - To receive and adopt the Annual Report and Financial Statements

The Annual Report and Financial Statements for the year ended 31 December 2016 will be presented to the Annual General Meeting (the “AGM”). These Financial Statements accompanied this Notice of Meeting and members will be given an opportunity to ask questions at the AGM.

Resolutions 2 - Re-appointment of auditors

Resolution 2 relates to the re-appointment of KPMG Channel Islands Limited as the Company’s independent auditors to hold office until the next AGM of the Company.

Resolution 3 - To authorise the Directors to determine the Auditor’s remuneration.

Resolution 4 - To re-elect Helen Green as a Director of the Company.

To re-elect Helen Green as a Director of the Company in accordance with the Company’s policy on Directors’ tenure, which is that in order to facilitate good corporate governance practice in line with principle 2 of the AIC Code, each Director will offer themselves for re-election every 3 years until their ninth year of service and any Director with over nine years’ service shall be eligible for re-election every year thereafter.

The Board believes it is in the Company’s best interest that Helen Green be re-elected due to her extensive experience as a chartered accountant and also as a non-executive director, having served on the boards of a number of other investment companies admitted to the Official List of the FCA (see further details contained within the Annual Accounts).

Special Business to be proposed as Ordinary Resolutions:

The Company's existing authorities to issue new shares, sell shares from treasury and make market purchases of shares expire at the forthcoming AGM.

Resolution 5 - Authority to issue Ordinary shares

Resolution 5 will authorise the directors to issue up to 3,183,337 new Ordinary Shares (being approximately 20% of the issued Ordinary Shares at the date of this document, excluding treasury shares). 

Resolution 6 - Authority to issue ZDPs

Resolution 6 will authorise the directors to issue up to 4,273,044 new ZDP Shares (being approximately 20% of the issued ZDP Shares at the date of this document, excluding treasury shares), such authority being conditional on the prior approval of such issuance at the Class Meeting of holders of Zero Dividend Preference shares to be held immediately prior to the AGM.  The resolution provides that new ZDPs will only be issued if the Cover Test is met (see the Glossary on page 65 for explanation of Cover Test) or if the cover immediately following the issue is either maintained or increased.

Special Business to be proposed as Special Resolutions:

Resolution 7 – Authority to dis-apply pre-emption rights in certain circumstances on the issue or sale from treasury of new Ordinary Shares and to issue or sell new Ordinary Shares at less than Net Asset Value.

When Ordinary Shares are to be allotted for cash, the Articles provide that existing Ordinary Members have pre-emption rights such that the new Ordinary Shares must be offered first to such members in proportion to their existing holding of Ordinary Shares. However, members can, by special resolution, authorise the Directors to allot Ordinary Shares otherwise than by a pro rata issue to existing members.

In addition, under the Listing Rules, the issue of new Ordinary Shares (including sales of treasury shares) at prices representing a discount to NAV per Ordinary Share, other than on a pre-emptive basis, is only permitted if Members have authorised such issues.

Accordingly, resolution 5 will give the Company authority to dis-apply pre-emption rights when issuing new Ordinary Shares provided the new Ordinary Shares are issued or sold at a premium to NAV per Ordinary Share or, if sold at a discount to NAV per Ordinary Share, only in those circumstances where ZDP Shares are issued at the same time at a premium to Net Asset Value so that:

(i)            Net Asset Value per Ordinary Share is thereby increased; and

(ii)           gearing is not thereby increased.

The power to dis-apply pre-emption rights and to issue Ordinary Shares at less than Net Asset Value will be limited to 4,775,006 new Ordinary Shares in aggregate (being 30% of the issued Ordinary Shares at the date of this document, excluding treasury shares). This power will expire (unless renewed) at the annual general meeting in 2018.

This should give the Company greater flexibility in managing its share capital, and improve liquidity in its shares.

Resolutions 8 and 9 – Authority to buy back Ordinary Shares and ZDP Shares

Under the Listing Rules, purchases of 15% or more of any class of shares may only be made without the making of a tender offer if the full terms of the buyback have been specifically approved by members.

The Company is seeking authority under resolution 8 to make market acquisitions of up to 34.99% of the issued ordinary shares, at the date of this document, to (a) facilitate its discount management policy in respect of 14.99% of the issued shares, and (b) facilitate repurchases of newly issued shares into treasury for future sale to meet market demand in respect of 20% of the issued shares.

The Company is also seeking a similar authority under resolution 9 to make market acquisitions of up to 34.99% of the issued ZDP shares, at the date of this document to (a) facilitate its discount management policy in respect of 14.99% of the issued shares, and (b) facilitate repurchases of newly issued shares into treasury for future sale to meet market demand in respect of 20% of the issued shares.

RECOMMENDATION

The Board considers the resolutions to be proposed at the forthcoming Annual General Meeting to be in the best interest of the Company and the members as a whole and recommends that members vote in favour of the resolutions to be proposed at the forthcoming Annual General Meeting.

Copyright l 18 PR Newswire