Acorn Income Fund - Annual Financial Report

Acorn Income Fund Limited

Annual Financial Report
or the year ended 31 December 2017

LEI: 213800UAZN7G46AHQM67
L(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)

The Company has today, in accordance with DTR 6.3.5, released its Annual Financial Report for the year ended
31 December 2017. The Report will shortly be available via the Investment Manager’s website https://www.premierfunds.co.uk/media/657458/acorn-income-fund-annual-report-2017.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 difference, 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.

Dividend Policy

The Company’s policy is to provide Ordinary Shareholders with a high income relative to the average dividend yield of the UK Smaller companies comprised in the Numis Smaller Companies Index ex Investment Companies. The Company aims to pay a regular quarterly dividend in March, June, September and December. It is intended to distribute substantially all of the Company’s net income after expenses and taxation, however the Company may retain a proportion of the Company’s income in each year as a revenue reserve to assist in providing long term stability in dividend distributions. Dividends may be paid to holders of Ordinary Shares whenever the financial position of the Company, in the opinion of the Directors, justifies such payment, subject to the Company being able to satisfy the solvency test, as defined under the Companies (Guernsey) Law 2008. The Board is alert to the potential for new share issuance to dilute earnings and accordingly will have regard to the size and timing of new share issues. The ZDP shares do not carry a right to a dividend.

Performance Summary
for the year ended 31 December 2017

	31/12/2017	31/12/2016	% change/return
Total Return Performance*
Total Return on Gross Assets*##			17.86%
Numis Smaller Companies (Ex Investment Companies) Index	22,794.71	19,074.80	19.50%
FTSE All Share Index	7,265.66	6,424.25	13.10%
FTSE Small Cap (Ex Investment Companies) Index	7,864.09	6,802.34	15.61%
Share Price and NAV Returns
Ordinary Shares
Share Price	463.50p	359.00p	29.11%
NAV**	486.84p	407.23p	19.55%
IFRS NAV#	486.65p	407.20p	19.51%
Total return on Net Assets*			24.17%
Ordinary Share Price Total Return			34.52%
Discount (-) Premium (+) to NAV on Ordinary Shares	-4.79%	-11.84%
ZDP Shares
Share Price	151.25p	139.38p	8.52%
NAV**	142.83p	137.26p	4.06%
IFRS NAV	142.97p	137.28p	4.14%
Discount (-) Premium (+) to NAV on ZDP Shares	+5.90%	+1.54%
Other
Total Assets less Current Liabilities~	£108,003,413	£64,787,950	66.70%
Package Discount (-) Premium (+) to
NAV Combined Ordinary and ZDP Shares	-1.77%	-7.67%
ZDP Liability**	£30,515,004	£29,314,857	4.09%
Net Assets**	£77,488,409	£64,793,038	19.59%
Gearing Level	39.38%	45.24%	-12.95%
Total Expenses Ratio (calculated on year end Gross Assets)	1.04%	1.04%	0.00%
Ongoing Charges (calculated on average Net Assets)	1.53%	1.63%	-6.13%
Dividends and Earnings
Revenue return per ordinary share	20.36p	20.38p	-0.10%
Dividends declared per ordinary share	18.00p	15.50p	16.13%

~ 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 was 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 is 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 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	21,365,221 (excluding treasury shares)
(1pence each)	The ZDP Shares will have a final capital entitlement of 167.2 pence per ZDP Share on 28 February 2022 following the extension of the life of the existing shares from 31 January 2017, 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 (1pence each)	15,916,687 (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 2017 there were 1,275,972 Ordinary and 1,712,757 ZDP Shares held in treasury.
Shareholder Funds	£77.46 million as at 31 December 2017
(calculated in accordance with IFRS)
Market Capitalisation of the Ordinary	£73.77 million as at 31 December 2017
Shares

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 Group PLC (“PAM”). PAM had approximately £6.4bn of funds under management as at 31 December 2017. PAMG Ltd 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. Minimum annual management fee £100,000.
	In addition, a performance fee is payable at the year-end if the target set out in Note 5 is achieved. This is charged 100% to capital.
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	20 August 2018
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 2017

Dear Shareholder

Despite the political and economic uncertainties that provided a backdrop throughout the year stock markets prospered and Acorn had a successful year. Ordinary shareholders in Acorn enjoyed a very satisfying return of 34.52% delivered through a 29.11% increase in the share price and 18 pence of dividends paid over the course of the year. Strong revenue performance enabled the directors to bring forward the annual dividend increase from June to March. Ordinary shareholders benefitted from the lower accrual rate on the Zero Dividend Preference Shares which came into play at the start of the year and from the narrowing in the ordinary share discount to NAV which moved from 11.84% at the start of the year to 4.79% at the year end.

Investment Performance

Equity markets generally performed well and smaller UK companies had a particularly successful year.  The broad UK stock market represented by the FTSE All-Share Total Return Index returned 13.1% over the year whilst the FTSE Small Cap index (ex investment companies) provided a total return of 15.61% and the more widely based Numis Smaller Companies (ex investment companies) total return index rose by 19.50%. The total return on Acorn’s gross assets was 17.86% and on net assets 24.17%. The bull market in bonds continued and the Merrill Lynch Sterling Non Gilts index rose by 4.33% over the year. 

The Smaller Companies Portfolio generated a return of 24.85% over the year (before costs) which was well ahead of the Numis index. The investment approach based on the selection of stocks with sound earning prospects and with a distribution policy and market valuation that provides for an above average dividend yield, has once again proved successful and was the principal driver of performance over the year. Given the strength of equity markets it was to be expected that the Income Portfolio would generate a lower level of return but this element of the overall fund provides a useful regulator of risk and volatility.

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 continues to be well placed in relation to its peers when taking account of both risk and performance.

The strong performance triggered a performance fee which was being accrued within the published NAVs during the course of the year. The fee is charged at 100% to capital. This is the first performance fee that has been paid since 31 December 2013.

Asset Allocation

Acorn’s investment advisers have remained positive on the outlook for the UK smaller companies in which they are invested and cautious about the outlook for bond markets. Your directors supported these views. As a consequence asset allocation at the start of the year was 80% to the Smaller Companies Portfolio and 20% to the Income Portfolio. Relative performance led to a gradual increase in the allocation to the Smaller Companies Portfolio and although this took the smaller company exposure above the top end of the normal range neither the board nor the advisers were minded to rebalance and at the year end the weighting was 17% in the Income Portfolio and 83% in the Smaller Companies Portfolio.     

Zero Dividend Preference Shares (“ZDPs”)

At the start of the year, with shareholders’ approval, the life of the ZDP shares was extended from their original   31 January 2017 redemption date to 28 February 2022 but with the ZDPs accruing at a rate of 3.85% from the 138p NAV on 31 January 2017 to 167.2p on redemption. Existing shareholders were given the opportunity to elect to remain invested or to receive 138p per share redemption price at the end of January 2017.  91.4% of ZDP shareholders elected to remain invested. The same structure and level of gearing was maintained with a small placing of new ZDPs at a 1.4% premium to NAV to replace those that had been redeemed.

Share issuance and buy backs

The Company has power to issue shares at a premium to net asset value and to buy back into Treasury or for cancellation at a discount. These transactions are generally executed in both classes of share in the correct ratio to maintain the capital structure. Issues are done at a premium to the package net asset value (the NAV of ordinary shares and ZDPs combined) and buy backs at a discount to the package net asset value, such that the transaction will always enhance cover for the ZDP shares and be NAV enhancing for the ordinary shares. 

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 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 although market conditions were not favourable to raising new money 5,995 new Ordinary shares and matching ZDP shares were issued at a premium to the package net asset value.

There were no buy backs during the course of the year. 

In December 2017 with the combined valuation of the ordinary shares and the ZDPs moving to a premium the Company announced that it would consider issuing new shares if demand for the shares at a premium to asset value was sustained.

Earnings and Dividends

The first interim dividend of 4.5p was paid in March 2017. This was an increase of 12.5% on the 4.0p level dividends that had been paid over the previous three quarters and as the increase was brought forward by a quarter it was up 28.6% on the dividend of 3.5p that had been paid in the first quarter of the previous year. A quarterly dividend of 4.5p was maintained throughout the year making a total distribution for the year of 18.0p (2016: 15.5p). Earnings per share for the year of 20.36p covered the dividend distribution by 113% and resulted in an addition to revenue reserves. At the year-end revenue reserves were the equivalent of 18.14p per share representing 101% of the 2017 dividend.

Auditor

During the year the board reviewed the audit arrangement as KPMG had held the position of auditor since the Company’s inception in 1999. Although under Guernsey law there is no requirement to change the auditor after a specified period your directors decided to put the audit contract out to competitive tender. KPMG was invited to enter the tender process. After interviewing the shortlisted candidates it was decided to retain KPMG as the board was satisfied that they brought the required high level of expertise and resource to the audit process and that they remained fully independent of the board. Taking account of the administration costs involved in moving the contract the directors concluded that reappointing KPMG was also the most economical solution for shareholders.

Regulation

Updates in the Markets in Financial Instruments Directive (“MiFID II”) became effective on 3 January 2018.  One of the main changes introduced by the Directive relates to investment research. Under MiFID II, investment managers are only permitted to receive external research from third parties when it is paid for from a separate Research Payment Account (“RPA”) managed in accordance with the rules of the Financial Conduct Authority (“FCA”). Until 31 December 2017, external investment research was paid for by the Company, funded from commissions paid when investments were traded. 

Our Investment Advisers have advised the Company that they will meet the cost of external investment research. Transaction commissions are likely to be incurred at a lower rate than previously as they will not include an implicit research cost.

MiFID II is not expected to lead to a material change in returns or overall costs for the Company.

In compliance with the new Packaged Retail and Insurance-based Investment Products regulations which came into effect on 3 January 2018 the Company has published a Key Information Documents (“KIDs”) which can be viewed on the Company’s website.

Outlook

The board is encouraged by the continuing investment opportunities to be found in the UK small cap universe. As a sector UK smaller companies are looking moderately undervalued in comparison with larger companies when measured on valuation metrics such as forecast price/earnings, dividend yield and dividend cover. Your board remains positive on the prospects for the Smaller Companies Portfolio. Our Investment Adviser continues to hold strong conviction that Acorn’s smaller company investments have the potential to provide earnings and dividend growth over the longer term.

The Company’s Investment Adviser for the Income Portfolio remains cautious on the outlook for bond markets but is comfortable maintaining positioning which is away from bond index exposures and the highest rated corporate bonds which essentially track sovereign performance. The portfolio is focused instead on exploiting opportunities available from selective short dated bonds and through alternative investments in the investment company sector and structured investments.

Contact with Shareholders

Shareholders are always welcome to attend the General Meeting in August or to contact me directly through the email address [e-mail].

Helen Green

Chairman

Investment Advisers’ Report

The Smaller Companies Portfolio

During the twelve month period to 31 December 2017 the Smaller Companies portfolio generated a total return 24.85% (2,485 basis points) before expenses - outperforming a rise of 19.50% by the Numis Smaller Companies Index (Ex Investment Companies).

The period under review was a positive year for Small and Mid-Cap UK equities and the Acorn Smaller Companies portfolio benefitted from this supportive backdrop.  Pleasingly the confidence which had started to return to the sector towards the end of the prior year continued throughout 2017.  Performance was driven by the continued strong operational performance of our investee companies.  In contrast to market expectations immediately following the EU referendum in 2016 it is pleasing to report that domestically focused stocks, as well as those with more international earnings, contributed to strong returns.

The year under review was an eventful one for the UK. In March the government triggered ‘Article 50’, starting a two-year period during which the terms of exit from the EU must be agreed. A few weeks later Theresa May called a snap general election seeking to capitalise on the Conservative’s strong lead in the polls at the time, attempting to secure a larger parliamentary majority and thereby establishing a strong mandate with which to negotiate Britain’s exit from the EU. This gamble backfired, as the Conservative Party lost its majority and was forced into forming a minority government with the help of the Democratic Unionist Party. As a consequence, Mrs. May now leads a weakened government with a diminished, rather than a strengthened negotiating position.

The backdrop of political uncertainty, weak sterling, subsequent inflationary pressures, and an increasing interest rate environment combined to create a tough environment for the average UK consumer. Against such a setting it is particularly pleasing to see the underlying portfolio, of primarily domestically focussed stocks, outperform.

The number of holdings within the portfolio fell by one to forty nine during the period following the addition of ten new holdings and disposal of eleven positions.  The portfolio participated in three Initial Public Offerings (IPOs) during the period.  All three (Alpha FX, Xafinity and Sabre Insurance) ended the year in positive territory, contributing a combined 177 bps to performance.   Of the eleven disposals, three (Lavendon, UK Mail, Berendsen) were a result of bid approaches – the later of which was announced during the period, adding 49 bps to performance.

In addition to the three IPOs outlined above new positions were also added in Polar Capital, the asset manager; Berendsen, the linen rental business (which was subsequently subject of a bid approach); Hollywood Bowl, the ten pin bowling operator; 4imprint, the supplier of branded promotional goods in North America; Severfield, the leading manufacturer of structural steelwork; Vesuvius, the supplier of consumables to the global steel industry and Regional REIT, which specialises in regional UK commercial property.   All of the new additions made positive contributions to performance during the period.

Eleven positions were exited in full during the period, which included three companies subject to successful bid approaches from overseas buyers (two of which were announced in the prior period but completed during the year).  In addition to previously flagged deals for UK Mail and Lavendon, Berendsen was also approached during the year by the French firm Elis.  We had exited this position in 2015 largely as a result of yield compression but decided to re-introduce the company to the portfolio during the period following a sharp fall in the share price after short term trading issues were discovered in their UK division.  The remaining disposals from the Fund were Jarvis Securities, Photo-Me International, Morses Club, Harvey Nash, Sprue Aegis, Pendragon, Safestyle UK and Quarto Group.

The strongest contributor to performance during the year came from Conviviality, the alcohol retail and distribution business, which added 266 bps to performance. Significant profits were locked in from this investment during the period, in line with our policy of crystallising profits from investments that have performed well and suffered yield compression.

Post the year end, and following a trading commentary in line with market expectations at the time of the interim results at the end of January, the company communicated to the market with a disappointing trading update in early March. The shares were subsequently suspended when the company then announced it would be unable to make a scheduled payment to HMRC. They remain suspended following an unsuccessful attempt to raise £125m from equity investors.  We wrote down the value of our remaining holding to zero after the suspension of the shares however we remain in positive territory overall on this investment as a result of active profit taking and dividend income received during our holding period of over four and a half years.

The second largest contributor to performance was Midwich, adding 225 bps to performance.  The company, Europe’s leading distributor of AV equipment, was added to the portfolio at IPO in 2016 at a share price of 208p and ended the year at 480p.  Another company which listed in 2016 and performed strongly during the year was Warpaint London, a cosmetics business, which added 164 bps to performance. 

Pleasingly the strong performance during the period was fairly broad-based, with further notable contributions made by DiscoverIE (formally Acal, 159 bps), FDM Group (154 bps), River and Mercantile (128 bps), Somero Enterprises (127 bps), Hostelworld (111 bps), Alpha FX (109 bps), Numis Corporation (101 bps), Macfarlane Group (98 bps), Polar Capital (93 bps) and Gateley Holdings (93 bps).

The largest detractor from Fund performance was Quarto Group, the publisher of illustrated books, which endured a difficult period as weaker consumer demand for its titles and erroneous market guidance led to significant earnings downgrades.  These issues and our concerns about the long term prospects for the dividend payment led us to exit this position in full during the period.  Prior to disposal the company made a negative contribution of 130 bps to performance.  

We also exited our position in Safestyle Group during the period, as the domestic double glazing market softened considerably during the year.  Prior to disposal the company made a negative contribution to performance of 56 bps however our disposal did crystallise a significant gain on our initial investment at IPO at the end of 2013, when the shares listed at 100p per share.  Our average disposal price in 2017 was significantly higher at 230p, in addition dividends in excess of 45p per share we received during the holding period.

The only other negative performer with a contribution in excess of 50 bps was Van Elle, the specialist piling plant hire business, which cost the portfolio 55 bps of performance. The company endured a challenging year as the unpredictable timing of rail contracts led to forecast downgrades.  We remain supporters of the company and increased our position by 20% during the period.

This was clearly a strong period for the portfolio and we enter 2018 in good shape.  As ever our focus will remain on identifying the very best smaller companies we can find that offer an attractive combination of earnings growth and strong, sustainable, growing dividend payments.  Whilst we remain mindful of a number of external factors which may cause sentiment towards UK Small and Mid-Caps to deteriorate in the short term, we continue to invest with a long term investment horizon.

Fraser Mackersie and Simon Moon

Unicorn Asset Management Limited

The Income Portfolio

2017 remained a very complacent year for fixed income markets with sovereign yields range-bound and credit spreads continuing to grind tighter. Indeed, it is difficult to know when the extended multi-decade bond bull market will finally come to an end. However with yields around all-time lows and the global economy enjoying a period of synchronised growth, they remain extremely vulnerable to any upside surprise to growth and inflation, especially given the fading support from global central bank policy which have supported demand and dampened volatility.

Inflation also feels like an under-priced risk in bond markets given the synchronised bout of global growth currently being enjoyed and the tightness of many labour markets. This may yet translate into improving wages which have so far been weak relative to the recovery in economic activity.  Purchasing a gilt at any maturity now will mean locking in a return which is below the Bank of England’s medium term inflation target of 2% and the risks are that investors could reprice the amount of return they demand over longer periods to account for future uncertainty over inflation and interest rates.

Meanwhile the rich valuations at which corporate bonds trade appear to have very limited scope to improve further and whilst the global macro outlook is looking firmer than it has done, the undiscerning nature of the credit rally makes us nervous – the reach for yield comes with a disproportionate extension of risk. We expect there to be more volatility in credit going forward as central bank intervention reduces, sovereign bond volatility increases and the supportive technical demand and supply dynamic becomes more challenged. We are therefore highly selective in choosing bonds with relatively attractive risk-return characteristics, endeavouring to earn carry whilst controlling downside risks.

In this environment, we are adopting a more absolute return and are comfortable maintaining positioning which is away from bond index exposures and allocating more to alternative investments. We have added holdings such as investment trusts and derivative investments, where we have seen more attractive risk-reward characteristics. We expect the weighting of the Income Portfolio to remain at the lower end of the normal range in the short to medium term, whilst uncompelling bond valuations persist.

Paul Smith

Premier Fund Managers Limited

Schedule of Principal Investments

 as at 31 December 2017

				Percentage of Total Assets 2017	Percentage of Total Assets 2016
Position	Company	Market Value £’000	Percentage of Portfolio
Smaller Companies Portfolio
1	DiscoverIE Group plc	3,275,287	3.75	3.01	-
2	Macfarlane Group plc	2,926,000	3.35	2.69	2.41
3	Somero Enterprises Inc	2,832,000	3.24	2.60	2.33
4	Warpaint London plc	2,793,283	3.19	2.57	1.45
5	Clipper Logistics plc	2,625,000	3.00	2.41	3.01
6	Conviviality Retail plc	2,508,868	2.87	2.31	2.62
7	Numis Corporation plc	2,448,750	2.80	2.25	1.93
8	FDM Group Holdings plc	2,240,400	2.56	2.06	1.79
9	Secure Trust Bank plc	2,220,000	2.54	2.04	2.39
10	Park Group plc	2,156,250	2.47	1.98	1.93
11	Polar Capital Holdings plc	2,008,125	2.30	1.85	-
12	Mucklow A&J Group plc	2,004,000	2.29	1.84	1.72
13	Midwich Group plc	1,953,000	2.23	1.79	1.19
14	Telecom Plus plc	1,916,800	2.19	1.76	1.55
15	Vesuvius plc	1,898,000	2.17	1.74	-
16	Primary Health Properties plc	1,864,000	2.13	1.71	1.87
17	Wincanton plc	1,864,000	2.13	1.71	1.82
18	Tyman plc	1,806,250	2.07	1.66	1.45
19	Flowtech Fluidpower plc	1,793,000	2.05	1.65	1.48
20	Alumasc Group plc	1,782,000	2.04	1.64	1.77
		44,915,013	51.37	41.27
Income Portfolio
1	Bank of America  7.75% 30/04/18	1,022,262	6.44	0.94	-
2	Apq Global Limited 3.5% CULS 30/09/24	537,499	3.39	0.49	-
3	United Kingdom 2.50% IL Treasury 2020	510,779	3.22	0.47	0.55
4	St Modwen Properties 2.875% Convertible 06/03/2019	501,875	3.16	0.46	0.31
5	HSBC 6% 29/03/2040	413,250	2.61	0.38	0.38
6	EJF Investments Ltd	400,000	2.52	0.37	-
7	Burford Capital 6.5% 2022	385,330	2.43	0.35	-
8	Itv 2.125% 2022	372,534	2.35	0.34	0.37
9	Tesco Personal Finance 1.00% 2019	352,527	2.22	0.32	0.36
10	EDF 6.125% 02/06/2034	342,401	2.16	0.31	0.35
11	DW Catalyst Fund Limited	321,974	2.03	0.30	0.67
12	Heathrow 7.075% 04/08/2028	284,258	1.79	0.26	0.31
13	Spirit Issuer 5.472% 28/12/2034	275,000	1.73	0.25	0.27
14	Aviva 5.9021% Perp - 2020	271,000	1.71	0.25	0.27
15	Telefonica Emisiones 5.375% 02/02/18	270,994	1.71	0.25	-
16	Vodafone Group Plc 8.125% 26/11/18	266,040	1.68	0.25	-
17	Fidelity International 7.125% 2024	251,358	1.58	0.23	0.27
18	Northumbrian Water Finance plc 6.875% 2023	249,625	1.57	0.23	0.27
19	Investec Bank 9.625% 2022	249,414	1.57	0.23	0.26
20	Firstgroup plc 8.75% 2021	244,042	1.54	0.22	0.27
TOTAL		7,522,162	47.41	6.90

Directors’ Biographies

for the year ended 31 December 2017

Directors

The Directors for the whole year ended 2017 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 2017. Helen is a Fellow of the Institute of Chartered Accountants in England and Wales having qualified as a chartered accountant in 1988. 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 War

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 The International Stock 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 Director’s Report.

Directors’ Report

for the year ended 31 December 2017

The Directors have pleasure in presenting their business review, report and financial statements of the Company for the year ended 31 December 2017.

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.

In respect of the Criminal Finances Act 2017 which has introduced a new corporate criminal offence (“CCO”) of ‘failing to take reasonable steps to prevent the facilitation of tax evasion’, the Board confirms that they are committed to zero tolerance towards the criminal facilitation of tax evasion.

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 2017 the commitment exposure level was 47% and the gross leverage level was 43%.

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.

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 was 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 special resolution was not carried and it was noted that the Company would continue in its present form. The next discontinuation resolution will be proposed at the Annual General Meeting in 2021.

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 current assets of £4,704,594 at the year end. In January 2017 the ZDP Shares were refinanced and their life 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 2017, the Company had no borrowings other than the ZDP Shares which, as explained in Note 13, have a final capital entitlement on 28 February 2022.

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 2020. 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 2020.

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 20.36 pence (2016: 20.38 pence) per Ordinary Share and a capital return of 77.09 pence (2016:  6.81  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 undertaken by the Risk Committee (details of the Risk Committee is shown below in this report), 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 30 November 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 judgements 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. In January 2017, 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 difficulties 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 1.53% (2016: 1.65%). 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 2017, a performance fee amounting to £559,967 (2016: Nil) was accrued.

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 2017 the TER was 1.04% (2016: 1.04%). The calculation of costs excludes performance fees, non-routine administration and professional fees. The net management fee charged in 2017 was £729,457 (2016:  £623,080).

Share Price Rating and Discount Management including information on treasury shares

At the Annual General Meeting on 15 August 2017 the Directors obtained shareholder approval to issue up to 3,183,337 Ordinary Shares and 4,273,044 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 34.99% to facilitate its discount management policy in respect of 14.99% of the issued shares, and facilitate repurchases of newly issued shares into treasury for future sale to meet market demand in respect of 20% of the issued shares. As at 15 August 2017 5,569,248 Ordinary Shares and 7,475,690 ZDP Shares were authorised to be purchased.

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 Group PLC.

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 Unaudited Full List of Investment Holdings Listing section.

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) Limited.

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, offers themselves for re-election every 3 years until their ninth year of service. Any Director with over nine years service 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 2017, and is next eligible for re-election in 2018.

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

Nigel Ward will next 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**

-    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 2017.

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 above 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 24 April 2018 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 2017 the number of Board meetings attended were as follows:

	Quarterly Board	Ad hoc Board	Committee
	meetings	Meetings	Meetings
Helen Green Nigel Ward David Warr	4 of 4 4 of 4 4 of 4	4 of 4 3 of 4 4 of 4	10 of 10 10 of 10 10 of 10

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 6 April 2017. 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.

  Packaged Retail and Insurance-based Investment Products (“PRIIPs”)

As a listed closed-ended fund, the Company falls under the definition of a retail investment product for PRIIPs Regulation issued by the FCA which came into effect 1 January 2018. As such, the Company is required to produce KIDs which are available on the Company’s website www.premierfunds.co.uk/investors/investments/investment trusts/acorn-income-fund.

  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

24 April 2018

Statement of Directors’ Responsibility in Respect of the Annual Financial Report

for the year ended 31 December 2017

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

Company law requires the Directors to prepare financial statements for each financial year.  Under that law they are required to prepare the financial statements in accordance with International Financial Reporting Standards as issued by the IASB and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period.  In preparing these financial statements, the Directors are required to: 

-    select suitable accounting policies and then apply them consistently;

-    make judgements and estimates that are reasonable, relevant  and reliable;

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

-    assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and 

-    use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. 

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Guernsey) Law, 2008.  They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and 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 are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website.  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 aware, there is no relevant audit information of which the Company’s Auditor is unaware; and that 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.

Responsibility statement of the Directors in respect of the annual financial report 

We confirm that to the best of our knowledge: 

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

-    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 issuer, together with a description of the principal risks and uncertainties that they face.  

We consider the annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. 

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.

Helen Green

Chairman

24 April 2018

Audit Committee Report

for the year ended 31 December 2017

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, when 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 30 November 2017 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 the year ended 31 December 2017. 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 Advisers 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 financial report. 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 remains with the Board.

-    The Audit Committee holds an annual meeting to approve the Company’s annual financial report before its publication. At a meeting held on 30 November 2017 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 asset class 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.

Audit Tender

During the year the Audit Committee initiated and completed the process of tendering the external audit of the Company for the financial year ending December 2018. The Audit Committee issued a request for a proposal to four firms in September 2017 following a review by the Audit Committee to determine which firms to invite to tender.

The members of the Audit Committee met in November 2017 with two of the four firms who were invited to tender following a review of the initial responses.

Following a review of the two tender presentations, the Audit Committee members unanimously agreed to recommend the continuing appointment of KPMG as auditors, deeming this course of action to be in the best interests of shareholders, by virtue of the strength of the KPMG audit team in terms of their depth, spread of knowledge of the sector and that they remain fully independent of the board.

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

24 April 2018

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

Our opinion is unmodified

We have audited the  financial statements of Acorn Income Fund Limited (the “Company”), which comprise the statement of financial position as at 31 December 2017, the statements of comprehensive income, cash flows and changes in equity for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying financial statements:

-    give a true and fair view of the financial position of the Company as at 31 December 2017, and of the Company’s financial performance and the Company’s cash flows for the year then ended;

-    are prepared in accordance with International Financial Reporting Standards (IFRS); and

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

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Company in accordance with, UK ethical requirements including FRC Ethical Standards as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion.

Key audit matters: our assessment of the risks of material misstatement

Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team.  These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.  In arriving at our audit opinion above, the key audit matter was as follows (unchanged from 2016):

	The risk	Our response
Valuation of investments (Financial assets designated as at fair value through profit or loss) £103,298,819; (2016 £87,172,262) Refer to the Audit Committee Report, notes 1 and 10	Basis: As at 31 December 2017 the Company had invested 133.4% of its net assets in listed equities and bonds and structured notes (together, the “investments”) The Company’s listed investments are valued based on market prices while its structured notes are valued based on price quotes obtained from a third party pricing provider Risk: The valuation of the Company’s investments, given that it represents the majority of the Company’s net assets is considered to be a significant area of our audit.	Our audit procedures included, but were not limited to: -   Use of KPMG valuation specialist to independently price listed investments to a third party pricing source -   For structured notes our valuation specialist assisted 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 Assessing disclosures: We also considered the Company’s disclosures (see note 1(b)) in relation to the use of judgements 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 for the financial statements as a whole was set at £2,323,000, determined with reference to a benchmark of net assets of £77,458,203, of which it represents approximately 3% (2016: approximately 3%).

We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding £116,000, in addition to other identified misstatements that 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.

We have nothing to report on going concern

We are required to report to you if we have anything    material to add or draw attention to in relation to the directors’ statement in note 1(a) to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements.  We have nothing to report in this respect. 

We have nothing to report on the other information in the annual report

The directors are responsible for the other information presented in the annual report together with the financial statements. Our opinion on the financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.

Disclosures of principal risks and longer-term viability

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

-     the directors’ confirmation within viability statement that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity;

-     the Principal Risks disclosures describing these risks and explaining how they are being managed or mitigated; and

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

Corporate governance disclosures

We are required to report to you if:

-     we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy; or 

-     the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.

We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the 2016 UK Corporate Governance Code specified by the Listing Rules for our review. 

We have nothing to report to you in these respects.

We have nothing to report on other matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us 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.

Respective responsibilities

Directors’ responsibilities 

As explained more fully in their statement set out in Statement of Directors’ Responsibility in Respect of the Annual Financial Report, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. 

Auditor’s responsibilities 

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report.  Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.  Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. 

A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 

We are required to report to you if we have anything material to add or draw attention to in relation to the directors’ statement in note 1(a) to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements.  We have nothing to report in this respect. 

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.

Barry T. Ryan

For and on behalf of KPMG Channel Islands Limited 

Chartered Accountants and Recognised Auditors, Guernsey

24 April 2018

Statement of Comprehensive Income

for the year ended 31 December 2017

							Year ended 31 Dec 2017		Year ended 31 Dec 2016
			Revenue		Capital		Total		Total
		Notes	GBP		GBP		GBP		GBP
Net gains on financial assets designated as at
fair value through profit or loss		10	-		14,859,164		14,859,164		3,901,649
Gains/(losses) on derivative financial instruments		4	-		27,491		27,491		(465,564)
Investment income		3	3,848,631		-		3,848,631		3,869,675
Total income and gains			3,848,631		14,886,655		18,735,286		7,305,760
Expenses		5	(608,585)		(1,279,141)		(1,887,726)		(1,050,323)
Return on ordinary activities before finance costs
and taxation			3,240,046		13,607,514		16,847,560		6,255,437
Interest payable and similar charges		7	-		(1,337,797)		(1,337,797)		(1,929,208)
Return on ordinary activities before taxation			3,240,046		12,269,717		15,509,763		4,326,229
Taxation on ordinary activities			-		-		-		-
Other comprehensive income			-		-		-		-
Total comprehensive income for the year
attributable to ordinary shareholders			3,240,046		12,269,717		15,509,763		4,326,229
			Pence		Pence		Pence		Pence
Return per Ordinary Share		9	20.36		77.09		97.45		27.19
Dividend per Ordinary Share		8	18.00		-		18.00		15.50
Return per ZDP Share		9	-		6.28		6.28		9.03

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 2017

			31 Dec 2017		31 Dec 2016
			GBP		GBP
NON-CURRENT ASSETS
Financial assets designated as at fair value through profit or loss	10		103,298,819		87,172,262
CURRENT ASSETS
Receivables	11		534,936		2,242,217
Cash and cash equivalents			4,976,255		5,071,818
Derivative financial instruments			29,577		91,470
			5,540,768		7,405,505
TOTAL ASSETS			108,839,587		94,577,767
CURRENT LIABILITIES
Derivative financial instruments			972		-
Payables - due within one year	12		835,202		469,872
ZDP Shares	13		-		29,319,945
			836,174		29,789,817
NON-CURRENT LIABILITIES
ZDP Shares	13		30,545,210		-
TOTAL LIABILITIES			31,381,384		29,789,817
NET ASSETS			77,458,203		64,787,950
EQUITY
Share capital and premium	14 & 18		27,633,383		27,607,889
Revenue reserve	18		2,886,872		2,511,830
Capital reserve	18		41,506,186		29,236,469
Other reserves	15 & 18		5,431,762		5,431,762
TOTAL EQUITY			77,458,203		64,787,950
			Pence		Pence
Net asset value per Ordinary Share (per Articles)			486.84		407.23
Net asset value per Ordinary Share (per IFRS)			486.65		407.20
Net asset value per ZDP Share (per Articles)			142.83		137.26
Net asset value per ZDP Share (per IFRS)			142.97		137.28

The financial statements were approved by the Board of Directors and authorised for issue on 24 April 2018 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 2017

		31 Dec 2017		31 Dec 2016
	Notes	GBP		GBP
Operating activities
Return on ordinary activities before taxation		15,509,763		4,326,229
Net gains on financial assets designated as at fair value through profit or loss	10	(14,859,164)		(3,901,649)
Investment income	3	(3,848,631)		(3,869,675)
Interest expense	7	1,337,797		1,929,208
Decrease/(increase) in derivative financial assets		61,893		(82,724)
Increase/(decrease) in derivative financial liabilities		972		(141,151)
Increase in payables and appropriations excluding amount due to brokers	12	575,330		19,984
Decrease/(increase) in receivables excluding accrued investment income and due from brokers
	11	9,584		(9,400)
Net cash flow used in operating activities before investment income		(1,212,456)		(1,729,178)
Investment income received		3,709,750		4,090,590
Net cash flow from operating activities before taxation		2,497,294		2,361,412
Tax paid		-		-
Net cash flow from operating activities		2,497,294		2,361,412
Investing activities
Purchase of financial assets designated at fair value through profit or loss	10	(31,758,253)		(22,830,886)
Sale of financial assets designated at fair value through profit or loss		32,327,436		24,358,328
Net cash flow from investing activities		569,183		1,527,442
Financing activities
Equity dividends paid	8	(2,865,004)		(2,466,157)
Treasury shares sold	15	-		496,114
Issue of Ordinary Shares	14	25,494		-
ZDP shares redeemed	13	(2,531,141)		-
ZDP Shares issued	13	2,579,090		-
ZDP shares sold out of treasury	13	-		221,063
Cost of issue of ZDP Shares	7	(370,479)		(1,105)
Net cash flow used in financing activities		(3,162,040)		(1,750,085)
(Decrease)/increase in cash and cash equivalents		(95,563)		2,138,769
Cash and cash equivalents at beginning of year		5,071,818		2,933,049
Cash and cash equivalents at end of year		4,976,255		5,071,818

   The notes form an integral part of these financial statements.

Statement of Changes in Equity

As at 31 December 2017

	Share Capital and Premium	Revenue Reserve	Capital Reserve	Other Reserves	Total
	31 Dec 2017	31 Dec 2017	31 Dec 2017	31 Dec 2017	31 Dec 2017
	GBP	GBP	GBP	GBP	GBP
Balances as at 1 January 2017	27,607,889	2,511,830	29,236,469	5,431,762	64,787,950
Total comprehensive income for the year attributable to ordinary shareholders
	-	3,240,046	12,269,717	-	15,509,763
Dividends	-	(2,865,004)	-	-	(2,865,004)
Issue of Ordinary Shares	25,494	-	-	-	25,494
Balances as at 31 December 2017	27,633,383	2,886,872	41,506,186	5,431,762	77,458,203

As at 31 December 2016

	Share Capital and Premium	Revenue Reserve	Capital Reserve	Other Reserves	Total
	31 Dec 2016	31 Dec 2016	31 Dec 2016	31 Dec 2016	31 Dec 2016
	GBP	GBP	GBP	GBP	GBP
Balances as at 1 January 2016	27,607,889	1,735,911	28,152,316	4,935,648	62,431,764
Total comprehensive income for the year attributable to ordinary 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	27,607,889	2,511,830	29,236,469	5,431,762	64,787,950

  The notes form an integral part of these financial statements.

Notes to the Financial Statements

for the year ended 31 December 2017

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.

At the reporting date of these Financial Statements, the following standards, interpretations and amendments, which have not been applied in these Financial Statements, were in issue but not yet effective:

- IFRS 9 Financial Instruments (Effective 1 January 2018)

IFRS 9 'Financial Instruments' amends IAS 39. IFRS 9 specifies how an entity should classify and measure financial assets, including some hybrid contracts. The standard requires all financial assets to be classified on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of IAS 39. The standard applies a consistent approach to classifying financial assets and replaces the numerous categories of financial assets in IAS 39, each of which had its own classification criteria.

The requirements for financial liabilities are mostly carried forward unchanged from IAS39. However, some changes were made to the fair value option for financial liabilities to address the issue of own credit risk.

The standard also results in one impairment method, replacing the numerous impairment methods in IAS 39 that arise from the different classification.

General approach

With the exception of purchased or originated credit impaired financial assets, expected credit losses ("ECL") are required to be measured through a loss allowance at an amount equal to:

- the 12-month ECL (ECL that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or

- full lifetime ECL (ECL that result from all possible default events over the life of the financial instrument).

It is anticipated that the application of IFRS 9 will not change the measurement and presentation of the Company’s financial instruments.

No new accounting standards were effected or adopted during the year having an effect on the financial statements.

(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 on-going 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)      Dividend Policy

The Company aims to pay a regular quarterly dividend in March, June, September and December. It is intended to distribute substantially all of the Company’s net income after expenses and taxation; however the Company may retain a proportion of the Company’s income in each year as a revenue reserve to assist in providing long term stability in dividend distributions.

(d)     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 included in other reserves in the Statement of Financial Position. 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.

(e)     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.

(f)      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 (2016: £1,200).

(g)     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.

(h)     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 100% 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.

(i)      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.

(j)      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.

(k)     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 change 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.

(l)      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 in 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 the 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.

(m)    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.

(n)     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.

(o)     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 (2016: 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.

(p)     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.

						Smaller
				Income		Companies
				Portfolio		Portfolio		Unallocated		Total
				GBP		GBP		GBP		GBP
31 December 2017
External revenues:
Net gains on financial assets designated as at fair value
through profit or loss				778,843		14,080,321		-		14,859,164
Gains on derivative financial instruments				27,491		-		-		27,491
Bank interest				-		-		2,019		2,019
Dividend income				129,263		3,296,888		-		3,426,151
Bond income				420,461		-		-		420,461
Total income and gains				1,356,058		17,377,209		2,019		18,735,286
Expenses				-		-		(1,887,726)		(1,887,726)
Interest payable and similar charges				-		-		(1,337,797)		(1,337,797)
Total comprehensive income for the period  attributable
to shareholders				1,356,058		17,377,209		(3,223,504)		15,509,763

   

						Smaller
				Income		Companies
				Portfolio		Portfolio		Unallocated		Total
				GBP		GBP		GBP		GBP
31 December 2017
Financial assets designated as at fair value through
profit or loss				15,862,279		87,436,540		-		103,298,819
Receivables				277,100		257,836		-		534,936
Derivative financial instruments				29,577		-		-		29,577
Cash and cash equivalents				2,058,116		2,918,139		-		4,976,255
Total assets				18,227,072		90,612,515		-		108,839,587
Derivative financial instruments				972		-		-		972
Payables				-		-		835,202		835,202
Total current liabilities				972		-		835,202		836,174

   

						Smaller
				Income		Companies
				Portfolio		Portfolio		Unallocated		Total
				GBP		GBP		GBP		GBP
31 December 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

   

						Smaller
				Income		Companies
				Portfolio		Portfolio		Unallocated		Total
				GBP		GBP		GBP		GBP
31 December 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

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.

Other

Rest of

UK

Guernsey

Jersey

Europe

the world

Total

GBP

GBP

GBP

GBP

GBP

GBP

31 December 2017

External revenues

Total Revenue

3,277,389

198,415

-

109,224

263,603

3,848,631

Other

Rest of

UK

Guernsey

Jersey

Europe

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

The Company did not hold any non-current assets during the year other than financial instruments (2016: £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 (2016: 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		Year ended
				31 December 2017		31 December 2016
				GBP		GBP
Bank interest				2,019		2,365
Dividend income				3,426,151		3,218,175
Bond income				420,461		649,135
				3,848,631		3,869,675

4      GAINS/(LOSSES) ON DERIVATIVE FINANCIAL INSTRUMENT

				Year ended		Year ended
				31 December 2017		31 December 2016
				GBP		GBP
Unrealised (loss)/gain on forward foreign currency contracts				(62,888)		223,875
Realised gain/(loss) on forward foreign  currency contracts				90,379		(689,439)
				27,491		(465,564)

5       EXPENSES

			Year ended 31 Dec 2017			Year ended 31 Dec 2016
			Revenue	Capital	Total	Revenue	Capital	Total
			GBP	GBP	GBP	GBP	GBP	GBP
Manager's fee*			182,364	547,093	729,457	155,770	467,310	623,080
Administrator's fee***			91,485	-	91,485	91,911	-	91,911
Registrar's fee			26,535	-	26,535	16,340	-	16,340
Directors' fees			95,731	-	95,731	78,307	-	78,307
Custody fees			39,892	-	39,892	23,452	-	23,452
Audit fees			30,400	-	30,400	32,782	-	32,782
Directors' and Officers' insurance			8,745	-	8,745	3,428	-	3,428
Annual fees			32,351	-	32,351	29,756	-	29,756
Performance fee**			-	559,967	559,967	-	-	-
Commissions and charges paid			-	172,081	172,081	-	120,414	120,414
Legal and professional fees			26,716	-	26,716	5,267	-	5,267
Broker fees			37,785	-	37,785	40,412	-	40,412
Sundry costs			15,234	-	15,234	35,284	-	35,284
Loss/(gain) on foreign exchange			21,347	-	21,347	(50,110)	-	(50,110)
			608,585	1,279,141	1,887,726	462,599	587,724	1,050,323

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 2017 to 31 March 2018. 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. The Company has entered into an agreement with the Investment Manager for the provision of AIFM reporting services for a fee of £19,450 per annum from 1 September 2017.

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 amounting to £559,967 was accrued for the year ended 31 December 2017 (2016: 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 £35,000 per annum.

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. During the Remuneration and Management Engagement Committee on 28 November 2016, a recommendation was made to the Board to increase Director Fees as follows:

Chairman of Board:                             £25,000 + £10,000

Chairman of Audit Committee:        £25,000 + £7,500

Chairman of Risk Committee:           £25,000 + £5,000

    The proposal was approved at a board meeting on 6 February 2017 and became effective from 1 February 2017.

7        INTEREST PAYABLE AND SIMILAR CHARGES

				Year ended 31 Dec 2017
				Revenue	Capital	Total
				GBP	GBP	GBP
Appropriation in respect of ZDP shares				-	1,177,318	1,177,318
ZDP issue costs (2022)				-	160,479	160,479
				-	1,337,797	1,337,797

   

				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

8      DIVIDENDS IN RESPECT OF ORDINARY SHARES

			Year ended				Year ended
			31 Dec 2017				31 Dec 2016
					Pence				Pence
			GBP		per share		GBP		per share
First interim payment			716,251		4.50		556,873		3.50
Second interim payment			716,251		4.50		636,428		4.00
Third interim payment			716,251		4.50		636,428		4.00
Fourth interim payment			716,251		4.50		636,428		4.00
			2,865,004		18.00		2,466,157		15.50

Refer to Dividend’s Policy section above for further details.

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 £15,509,763 (2016: gain of £4,326,229) and on 15,916,178 (2016: 15,908,774) 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 £3,240,046 (2016: £3,242,076) and on 15,916,178 (2016: 15,908,774) 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 £12,269,717 (2016: capital return of £1,084,153) and on 15,916,178 (2016: 15,908,774) 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 totalling £1,337,797 (2016: £1,929,208) and on 21,306,025 (2016: 21,355,157) 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 2017		31 Dec 2016
						GBP		GBP
INVESTMENTS
Opening portfolio cost						69,405,067		67,722,601
Purchases at cost						31,758,253		22,830,886
Sales
- proceeds						(30,490,860)		(26,194,906)
- realised gains on sales						8,328,032		7,745,792
- realised losses on sales						(2,438,901)		(2,699,306)
Closing book cost						76,561,591		69,405,067
Unrealised appreciation on investments						29,091,144		20,697,555
Unrealised depreciation on investments						(2,353,916)		(2,930,360)
Fair value						103,298,819		87,172,262
Realised gains on sales						8,328,032		7,745,792
Realised losses on sales						(2,438,901)		(2,699,306)
Increase/(decrease) in unrealised appreciation on investments						8,393,589		(1,497,809)
Decrease in unrealised depreciation on investments						576,444		352,972
Net gains on financial assets designated as at fair value through profit or loss						14,859,164		3,901,649

As at 31 December 2017, the closing fair value of investments comprised £87,436,540 (Dec 2016: £72,001,134) of Smaller Companies Portfolio, £15,862,279 (Dec 2016: £15,171,128) of Income Portfolio. The Market value of open Futures totalled £10,387 (Dec 2016: £132,661). Refer to Unaudited Full List of Investment Holdings Listing section for further details.

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 2017		31 Dec 2017		31 Dec 2016		31 Dec 2016
		Market value		Market value		Market value		Market value
		%		GBP		%		GBP
Level 1		85.93		88,768,979		84.53		73,688,748
Level 2		13.75		14,207,406		15.47		13,483,142
Level 3		0.32		322,434		0.00		372
Total		100.00		103,298,819		100.00		87,172,262

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

The following table is a reconciliation of investments the Company held during the years ended 31 Dec 2017 and 31 Dec 2016 at fair value using unobservable inputs (Level 3):

			31 Dec 2017	31 Dec 2016
			Market value	Market value
			GBP	GBP
Balance at 1 January			372	51,173
Transfer from Level 1 to Level 3			321,974	-
Unrealised gain/(loss) on investments			88	(50,801)
Balance at 31 December			322,434	372

For investments categorised in Level 3 as at 31 December 2017, the below details the valuation methodologies used:

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.

DW Catalyst Fund – The stock is suspended as the company has been placed in liquidation, following a vote by shareholders, to enable its assets to be sold and the proceeds distributed to shareholders.  At 31 December 2017 two distributions had been made with at least two further distributions expected.

The investment DW Catalyst is valued by reference to the net asset value estimate announced by the company’s directors adjusted for distributions already made and then applying a discount to allow for realization costs. The discount selected was 7% giving a value for the holding of £321,974. If the discount level adopted was increased to 9% this would result in a reduction in Acorn’s year end NAV per share of 0.0089% and if the discount adopted was reduced to 5% this would result in an increase in Acorn’s year end NAV per share of 0.0089%. 

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

			31 Dec 2017	31 Dec 2017		31 Dec 2016	31 Dec 2016
			Market value	Market value		Market value	Market value
			%	GBP		%	GBP
Level 2 derivative financial assets			100.00	29,577		100.00	91,470
Level 2 derivative financial liabilities			100.00	972		-	-

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.

There was a transfer from Level 1 to Level 3 during the year for DW Catalyst Fund.

There was no transfer from Level 1 to Level 2 during the year.

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 2017		31 Dec 2016
						GBP		GBP
Due from brokers						-		1,836,578
Prepayments						8,103		17,687
Accrued investment income						526,833		387,952
						534,936		2,242,217

12    PAYABLES

						31 Dec 2017		31 Dec 2016
						GBP		GBP
Accrued expenses						86,979		99,992
Trade creditors						188,256		159,880
Performance fee						559,967		-
ZDP issue costs (2022)						-		210,000
						835,202		469,872

13    ZDP SHARES

							31 Dec 2017		31 Dec 2016
							GBP		GBP
ZDP Share entitlement							30,545,210		29,319,945
The above entitlement comprises the following:
21,357,174 ZDP Shares issued to date up to 31 Dec 2016							22,989,154		-
21,189,384 ZDP Shares issued to date up to 31 Dec 2015							-		22,768,091
1,842,207 ZDP Shares issued during the year up to 31 December 2017							2,579,090		-
1,834,160 ZDP Shares redeemed during the year up to 31 December 2017							(2,531,141)		-
167,790 ZDP shares sold out of treasury during the year to 31 Dec 2016							-		221,063
ZDP Premium							(30,206)		(13,501)
Appropriation in respect of ZDP Shares							7,508,107		6,339,204
ZDP value (calculated in accordance with the Articles)							30,515,004		29,314,857
ZDP issue costs							-		(105,483)
Issue costs amortised							-		97,070
Add back ZDP Premium							30,206		13,501
ZDP value (calculated in accordance with IFRS)							30,545,210		29,319,945

The fair value of the ZDP Shares as at 31 December 2017 was £32,314,897 (31 December 2016: £29,767,929).

The ZDP shares are classified under Level 1 (2016: level 1) based on unadjusted quoted prices in active markets. Since valuations are based on quoted prices that are readily and regularly available in an active market, the valuation does not entail a significant degree of judgement.

A Continuation Offer was made to ZDP Shareholders whereby such holders were given an opportunity to either receive their 2017 Final Capital Entitlement of 138p or to continue their investment in the existing ZDP Shares.

Following the proposals, 19,523,014 ZDP Shares were elected for the Continuation Offer with a further 1,842,207 New ZDP Shares being issued through an Initial Placing at 140.0p which represented a premium of 1.4% to the opening NAV per New ZDP Share.

1,834,160 ZDP Shares were elected for Redemption at their 2017 Final Capital Entitlement of 138p.

ZDP Shares carry no entitlement to income distributions to be made by the Company. The ZDP Shares will not pay dividends but have a final capital entitlement at the end of their life on 28 February 2022 of 167.2 pence following the extension of the life of the existing ZDP Shares from 31 January 2017.

The ZDP shares were classified on the Statement of Financial Position as a current liability for the year ended 31 December 2016 as the maturity date (31 January 2017) was within one year before extension of their life to 28 February 2022.

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 28 February 2022 to meet the final capital entitlement of ZDP Shares.

Under the Articles of Incorporation, the Company is obliged to redeem all of the ZDP Shares on 28 February 2022 (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 21,365,221 (31 Dec 2016: 21,357,174). The non-amortisation of the ZDP Shares in line with the Articles has the effect of increasing the NAV per Ordinary Share by 0.19 pence.

14    SHARE CAPITAL AND PREMIUM

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
Shares sold out of Treasury - Year ended 31 December 2016						125,000
Number of shares in issue at 31 December 2016						15,910,692
Issue of shares						5,995
Number of shares in issue at 31 December 2017						15,916,687
Issued and fully paid capital as at 31 December 2017						£197,106

   

					Share Capital	Share Premium	Total
					31 Dec 2017	31 Dec 2017	31 Dec 2017
					GBP	GBP	GBP
Opening share capital and premium					171,867	27,436,022	27,607,889
Issue of ordinary Shares					25,239	255	25,494
Closing share capital and premium					197,106	27,436,277	27,633,383

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 2017 was £197,106 (31 December 2016: £171,867).

15    OTHER RESERVES

Treasury Reserve

				31 Dec 2017		31 Dec 2016
				GBP		GBP
Balance as at 1 January				(4,568,238)		(5,064,352)
Treasury shares sold during the year				-		496,114
Balance as at 31 December				(4,568,238)		(4,568,238)

The other reserves presented on the Statement of Financial Position comprise the treasury reserve of (£4,568,238) and special reserve of £10,000,000 totalling £5,431,762.

				31 Dec 2017		31 Dec 2016
				No. Shares		No. Shares
Balance as at 1 January				1,275,972		1,400,972
Treasury shares sold during the year				-		(125,000)
Balance as at 31 December				1,275,972		1,275,972

A Special reserve of £10,000,000 was created on the cancellation of part of the Company’s Share premium account.

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.

£729,457 (2016: £623,080) of costs were incurred by the Company with this related party in the year, of which £188,256 (2016: £159,880) was due to this related party as at 31 December 2017.

During the year ended 31 December 2017, £559,967 (31 December 2016: £Nil) was charged as performance fees of which, £559,967 (31 December 2016: £Nil) remained payable at year end.

Directors’ remuneration is disclosed in Note 6.

David Warr holds 63,000 (31 Dec 2016: 63,000) Ordinary Shares in the capital of the Company, which represented an interest of 0.40% (31 Dec 2016: 0.40%) of the Company’s Ordinary Shares in issue as at 31 December 2017.

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 2017		31 Dec 2016
							GBP		GBP
Financial Assets
Financial assets designated as at fair value through profit or loss							103,298,819		87,172,262
Derivative financial assets							29,577		91,470
Total financial assets at fair value through profit or loss							103,328,396		87,263,732
Loans and receivables
Cash and receivables							4,976,255		5,071,818
Receivables							526,833		2,224,530
Total assets							108,831,484		94,560,080
							31 Dec 2017		31 Dec 2016
							GBP		GBP
Financial liabilities
Financial liabilities at fair value through profit or loss:
Derivative financial liabilities							972		-
Total financial liabilities at fair value through profit or loss							972		-
Financial liabilities measured at amortised cost
ZDP Shares							30,545,210		29,319,945
Payables							835,202		469,872
Total Financial liabilities measured at amortised cost							31,380,412		29,789,817
Total liabilities excluding net assets attributable to holders of Ordinary Shares							31,381,384		29,789,817

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.

Details of the Company’s Investment Objective and Policy are given inside the front cover 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 2017, 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 £15,494,823 (2016: £13,075,839) 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 20.00% (2016: 20.18%).

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 £15,494,823 (2016: £13,075,839) 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 20.00% (2016: 20.18%).

(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 2017 the Company’s largest exposure to a single investment was £3,275,287 (2016: £2,850,000), 3.01% (2016: 3.01%) 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 2017		31 Dec 2016
							GBP		GBP
Financial assets designated as at fair value through profit or loss
(fixed income securities only)							14,529,840		13,350,853
Cash and cash equivalents							4,976,255		5,071,818
Interest, dividends and other receivables							526,833		2,206,843
Derivatives financial instruments							29,577		91,470
							20,062,505		20,720,984

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

Rating							31 Dec 2017		31 Dec 2016
Aa							4.47%		3.43%
A							19.58%		12.54%
Baa							24.51%		26.66%
Ba							5.97%		5.30%
B							0.00%		2.59%
Other Sourced Ratings							10.36%		10.47%
No ratings available							35.11%		39.01%

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 2017 held a credit rating, as rated by Moody’s, of Aa2 (31 Dec 2016: Aa2) . The long gilt future is held with J.P. Morgan who at the year ended 31 December 2017 held a credit rating, as rated by Moody’s, of Aa2 (31 Dec 2016: 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 reviews 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.

The ZDP Shares will not pay dividends but will have a final capital entitlement at the end of their life on 28 February 2022 of 167.2 pence. 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 2017			As at 31 December 2016
				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				835,202		-	469,872		-
Derivative financial instruments				972		-	-		-
ZDP Share entitlement				-		35,722,650	29,472,900		-
				836,174		35,722,650	29,942,772		-

(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 2017:

				Less than				Non-interest
				1 month		Fixed interest		Bearing		Total
				GBP		GBP		GBP		GBP
Financial Assets
Financial assets at fair value through profit or loss on
initial recognition				-		14,529,840		88,768,979		103,298,819
Cash and cash equivalents				4,976,255		-		-		4,976,255
Interest, dividends and other receivables				-		-		526,833		526,833
Derivative financial instruments				-		-		29,577		29,577
Total Financial Assets				4,976,255		14,529,840		89,325,389		108,831,484
Financial Liabilities
Derivative financial instruments				-		-		972		972
Payables				-		-		835,202		835,202
ZDP Share entitlement				-		30,545,210		-		30,545,210
Total Financial Liabilities				-		30,545,210		836,174		31,381,384
Total Interest sensitivity gap				4,976,255		(16,015,370)

As at 31 December 2016:

				Less than				Non-interest
				1 month		Fixed 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		76,137,409		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)

Interest rate sensitivity takes account of the effect of interest rate movements on cash balances. 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 2017 would have increased by approximately £12,441 (2016: £12,680) or 0.011% (2016: 0.013%) 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 £12,441 (2016: £12,680) or 0.011% (2016: 0.013%) 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 2017, the Company’s holdings in derivatives translated into GBP were as specified below:

							Notional
							amount of		Fair value
							Contracts		assets
Type of contract			Expiration		Underlying		outstanding		GBP
Forward			January 2018		Purchased EUR		1,738,570		10,431
Forward			January 2018		Purchase USD		1,060,026		19,146
Forward			January 2018		Sold EUR		(430,000)		(972)
									28,605

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

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

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 2017
			Monetary		Monetary		Forward
			Assets		Liabilities		FX Contracts		Net exposure
			GBP		GBP		GBP		GBP
Euro			1,171,562		-		(1,161,930)		9,632
US Dollar			791,590		-		(783,312)		8,278
Australian Dollar			14		-		-		14
31 December 2016
			Monetary		Monetary		Forward
			Assets		Liabilities		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

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 Investment 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				8,318,634
Share capital and share premium				27,633,383
Non distributable reserves				41,506,186
Total				77,458,203

The distributable reserves comprises the revenue reserve and other reserves. The other reserves presented on the Statement of Financial Position comprise the treasury reserve and special reserve as detailed in Note 15. The special reserve of £10,000,000 was created on the cancellation of part of the Company’s share premium account. The non distributable reserves comprise the capital reserve.

(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 24 April 2018. Subsequent events have been evaluated until this date.

A dividend of 4.95p was declared on 7 February 2018 and was paid to ordinary shareholders on 29 March 2018.

Unaudited Full List of Investment Holdings Listing

				Percentage of Total Assets 2017
Company		Nominal Holdings	Valuation              GBP
Smaller Companies Portfolio
DiscoverIE Group plc		884,615	3,275,287	3.01
Macfarlane Group		3,800,000	2,926,000	2.69
Somero Enterprises inc		960,000	2,832,000	2.60
Warpaint London plc		1,188,631	2,793,283	2.57
Clipper Logistics plc		625,000	2,625,000	2.41
Conviviality Retail plc		628,002	2,508,868	2.31
Numis Corporation plc		750,000	2,448,750	2.25
FDM Group Holdings plc		240,000	2,240,400	2.06
Secure Trust Bank plc		125,000	2,220,000	2.04
Park Group plc		2,500,000	2,156,250	1.98
Polar Capital Holdings plc		375,000	2,008,125	1.85
Mucklow A&J Group plc		400,000	2,004,000	1.84
Midwich Group plc		390,600	1,953,000	1.79
Telecom Plus plc		160,000	1,916,800	1.76
Vesuvius plc		325,000	1,898,000	1.74
Primary Health Properties plc		1,600,000	1,864,000	1.71
Wincanton plc		800,000	1,864,000	1.71
Tyman plc		500,000	1,806,250	1.66
Flowtech Fluidpower plc		1,100,000	1,793,000	1.65
Alumasc Group plc		1,100,000	1,782,000	1.64
Card Factory plc		600,000	1,770,000	1.63
Palace Capital plc		539,763	1,754,230	1.61
Dairy Crest Group plc		300,000	1,729,500	1.59
Amino Technologies plc		900,000	1,710,000	1.57
River & Mercantile Group plc		474,460	1,684,333	1.55
Hill & Smith Holdings plc		125,000	1,673,750	1.54
James Halstead plc		375,000	1,658,438	1.52
Hollywood Bowl Group Plc		800,000	1,622,000	1.49
Hostelworld Group plc		425,000	1,615,000	1.48
Castings plc		360,030	1,586,832	1.46
Regional Reit Ltd		1,550,000	1,573,250	1.45
4imprint Group plc		85,000	1,538,500	1.41
Ocean Wilson Holdings Limited		140,610	1,525,619	1.40
Gateley Holdings plc		885,000	1,504,500	1.38
Brewin Dolphin Holdings plc		380,000	1,479,720	1.36
BBA Aviation plc		420,000	1,468,740	1.35
Chesnara plc		376,911	1,467,126	1.35
Xafinity plc		750,000	1,436,250	1.32
Manx Telecom plc		750,000	1,432,500	1.32
Alpha FX Group plc		292,108	1,387,513	1.27
Sabre Insurance Group plc		513,383	1,387,418	1.27
RPS Group plc		500,000	1,355,000	1.24
Braemar Shipping Services plc		500,000	1,315,000	1.21
Epwin Group plc		1,572,727	1,301,432	1.20
Headlam Group plc		223,995	1,291,331	1.19
Greene King plc		200,000	1,110,000	1.02
Severfield plc		1,400,000	1,071,000	0.98
Van Elle Holdings plc		1,200,000	1,043,999	0.96
Lower & Bonar plc		1,908,250	1,016,142	0.93
Xafinity Group Holdings		57,692	12,404	0.01
Silverdell plc		3,090,546	-	-
TOTAL			87,436,540	80.33

   

				Percentage of Total Assets 2017
Company		Nominal Holdings	Valuation              GBP
Income Portfolio
Bank of America  7.75% 30/04/18		1,000,000	1,022,262	0.94
Apq Global Limited 3.5% CULS 30/09/24		100	537,499	0.49
United Kingdom 2.50% IL Treasury 2020		140,000	510,779	0.47
St Modwen Properties 2.875% 06/03/19		500,000	501,875	0.46
HSBC 6% 29/03/2040		300,000	413,250	0.38
EJF Investments Ltd		400,000	400,000	0.37
Burford Capital 6.5% 2022		350,000	385,330	0.35
Itv 2.125% 2022		400,000	372,534	0.34
Tesco Personal Finance 1.00% 2019		300,000	352,527	0.32
EDF 6.125% 6/2034		250,000	342,401	0.31
DW Catalyst Fund Limited		53,359	321,974	0.30
Heathrow 7.075% 04/08/2028		200,000	284,258	0.26
Spirit Issuer 5.472% 28/12/2034		250,000	275,000	0.25
Aviva 5.9021% Perp - 2020		250,000	271,000	0.25
Telefonica Emisiones 5.375% 02/02/18		270,000	270,994	0.25
Vodafone Group Plc 8.125% 26/11/18		250,000	266,040	0.24
Fidelity International 7.125% 2024		200,000	251,358	0.23
Northumbrian Water Finance plc 6.875% 2023		200,000	249,625	0.23
Investec Bank 9.625% 2022		200,000	249,414	0.23
Firstgroup plc 8.75% 2021		200,000	244,042	0.22
Phoenix Group, 6.625% 18/12/2025		200,000	238,600	0.22
F&C Global Smaller Companies CULS 3.5%		170,909	237,136	0.22
France Telecom 8.125% 2028		150,000	230,487	0.21
Credit Agricole SA 8.125% 2033 - 18		300,000	230,164	0.21
Sse plc 6.25% 2038		150,000	226,294	0.21
Thames Water Utilities 4.00% 2025		200,000	225,587	0.21
Tesco Property Finance 5.4111% 2044		195,262	225,556	0.21
Anheuser-Busch Inbev 9.75% 2024		150,000	222,250	0.20
Imperial Brands Finance Plc 7.750% 24/06/19		200,000	219,223	0.20
SG Issuer 0.00% 07/09/2021		300,000	217,934	0.20
AT&T 4.25% 2043		200,000	216,722	0.20
Unite Group plc 6.125% 2020		200,000	213,806	0.20
Pepsi 2.5% 2022		200,000	212,274	0.20
Hadrian's Wall Secured Investment Limited		220,000	211,200	0.19
Workspace Group Plc 6.00% 09/10/19		200,000	210,612	0.19
Citigroup 7.625% 03/04/2018		205,000	208,506	0.19
Everything Everywhere 4.375% 2019		200,000	208,016	0.19
Barclays plc 8% Perp - 20		200,000	204,165	0.19
Royal Bank Of Canada 0.00% 2018		200,000	203,720	0.19
Investec Bank 0.00% 11/01/2021		200,000	200,978	0.19
Helical Bar Jersey 4.00% 2019 convertible		200,000	200,750	0.19
National Australia Bank 0.875% 26/06/2020		200,000	198,948	0.18
Finmeccanica Spa 4.50% 2021		200,000	198,450	0.18
BPCE SA 2.75% 2026 -21		200,000	189,312	0.17
JPMorgan Structured Programme 0.00% 17/03/2021		200,000	187,420	0.17
South Eastern Power Networks 3.053% 2023		100,000	183,307	0.17
HSBC Holdings 6.25% 2018		200,000	179,855	0.17
Old Mutual 8.00% 2021		150,000	174,552	0.16
RL Finance Bonds plc 6.125% 2043		150,000	172,622	0.16
Kelda Finance (No 3) plc 5.75% 2020		150,000	161,495	0.15
Wells Fargo 1.375% 6/2022		150,000	148,843	0.14
British Telecoms 5.75% 2028		100,000	128,335	0.12
3i Group 6.875% 2023		100,000	122,250	0.11
PhoenixLife 7.25% pp		105,000	116,251	0.11
Mitchells & Butlers Finance 5.574% 2030		96,846	113,308	0.10
BAE Systems 4.125% 2022		100,000	111,157	0.10
Verizon Communications 2.45% 2022		150,000	108,692	0.10
Gli Finance Limited Red Zdp 2019 Npv		104,006	108,166	0.10
Morrison (WM) Supermarkets 3.50% 2026		100,000	107,919	0.10
Whitbread Group 3.375% 2025		100,000	105,401	0.10
Real Estate Credit Pref Shs NPV		60,000	100,350	0.09
Tetragon Financial Group Ltd		10,000	100,166	0.09
City Natural Resources High Yield Trust Plc 3.5% 30/09/2018		100,000	98,250	0.09
Edinburgh Dragon Trust 3.50% 2018		87,574	98,083	0.09
Supermarket Income REIT plc		90,000	90,000	0.08
Natwest Bank plc 9%		50,000	85,125	0.08
Nationwide Building Society 10.25%		500	78,563	0.07
SQN Asset Finance Income Fund Limited		85,294	76,338	0.07
UK Mortgages Limited		85,000	76,075	0.07
The Royal Bank of Scotland Group Plc 4.015%		100,000	73,370	0.07
Aberforth Split Level Income Plc ZDPs		66,992	72,687	0.07
Petromena AS 10.85% 2014		82,990	460	0.00
Bond futures
Fut. Long Gilt Icf Mar18		-	13,300	0.01
Fut. Msci Asia Eux Mar18		-	(2,913)	0.00
			15,862,279	14.57
TOTAL			103,298,819	94.90

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 the 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)	77,488,409		486.84			ZDP value (per Articles)		30,515,004		142.83
ZDP Premium	(30,206)		(0.19)			ZDP premium		30,206		0.14
Net Assets (per IFRS)	77,458,203		486.65			ZDP value (per IFRS)		30,545,210		142.97

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

Shareholders are welcome to contact the Chairman directly by emailing her at: Acorn_Income_Fund [e-mail]

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
Email: [e-mail]

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: GG00BYMS7X48
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 20 August 2018 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 8 contained in the notice of annual general meeting of the Company dated 24 April 2018 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

24 April 2018

    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 15 August 2018 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 15 August 2018 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 24 April 2018 (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 2018 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 20 August 2018 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 2017.
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.
5.	To re-elect John Nigel Ward as a Director of the Company.
6.	To receive and approve the Company’s Dividend Policy as contained within the Annual Financial Report of the Company for the year ended 31 December 2017.
	Special Business to be proposed as Ordinary Resolutions:

   

7.	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 1,591,668 new Ordinary Shares (approximately 10% 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 2019 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).
8.	THAT, subject to and conditional upon the passing of the proposed resolution of the Class Meeting of ZDP Members convened for 20 August 2018 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 2,136,522 new ZDP Shares (approximately 10% 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 2019 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:

   

9.	THAT, the Directors be and are hereby empowered (pursuant to Resolution 7 or otherwise) to issue and sell from treasury up to 2,867,640 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 2019 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).
10.	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 2,385,911 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 2019 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.

   

11.

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 3,202,646 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 2019 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

  24 April 2018

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 15 August 2018 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 15 August 2018 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 24 April 2018 (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 2017 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).

Resolution 5 - To re-elect John Nigel Ward as a Director of the Company.

To re-elect John Nigel Ward 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 section B.7.1 of the UK Corporate Governance Code, each Director will offer themselves for re-election every year after their ninth year of service and shall be eligible for re-election every year thereafter.

The Board believes it is in the Company’s best interest that John Nigel Ward be re-elected due to his extensive experience as a non-executive director, having served on the boards of a number of other investment companies admitted to the Official List of the LSE (see further details contained within the Annual Accounts).

Resolution 6 – To receive and approve the Company’s Dividend Policy

The Dividend Policy is outlined in the Annual Financial Report and will be presented at the AGM for approval.

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 7 - Authority to issue Ordinary shares

Resolution 7 will authorise the directors to issue up to 1,591,668 new Ordinary Shares (being approximately 10% of the issued Ordinary Shares at the date of this document, excluding treasury shares). 

Resolution 8 –  Authority to issue ZDPs

Resolution 8 will authorise the directors to issue up to 2,136,522 new ZDP Shares (being approximately 10% 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 of the Annual Report for explanation of Cover Test) or if the cover immediately following the issue is either maintained or increased.

Special Business to be proposed as Ordinary Resolutions:

Resolution 9 – 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 9 will give the Company authority to dis-apply pre-emption rights when issuing or selling from treasury 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 (subject to the provisos stated above) will be limited to 2,867,640 new Ordinary Shares in aggregate. This figure represents the aggregate of 1,591,668 Ordinary Shares proposed to be authorised for issued under resolution 7 and 1,275,972 Ordinary Shares held in treasury at the date of this document. This power will expire (unless renewed) at the annual general meeting in 2019.

The Board recognises that this pre-emption waiver is beyond the 10% typically sought by investment companies, but believes that it is appropriate as it should give the Company greater flexibility in managing its share capital and, importantly for the Company as a relatively small entity, provides the potential for improved liquidity in its shares.

Resolutions 10 and 11 – Authority to buy back Ordinary Shares and ZDP Shares

The Company is seeking authority under resolutions 10 and 11 to make market acquisitions of up to 14.99% of the issued ordinary and ZDP shares, at the date of this document, to facilitate its discount management policy.

RECOMMENDATION

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

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