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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Twentyfour Select Monthly Income Fund Limited | LSE:SMIF | London | Ordinary Share | GG00BJVDZ946 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -1.40 | -1.69% | 81.60 | 81.60 | 83.20 | 81.80 | 81.60 | 81.80 | 609,512 | 14:41:46 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Investors, Nec | 0 | 26.94M | 0.0421 | 19.38 | 522.19M |
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TIDMSMIF
LEI: 549300P9Q5O2B3RDNF78
(Classified Regulated Information, under DTR Annex Section 1.2)
17 January 2018
TWENTYFOUR SELECT MONTHLY INCOME FUND LIMITED
REPORT AND AUDITED FINANCIAL STATEMENTS
For the year ended 30 September 2017
The Directors of TwentyFour Select Monthly Income Fund Limited announce the
results for the year ended 30 September 2017. The Report will shortly be
available via the Company's Portfolio Manager's website www.twentyfouram.com
and will shortly be available for inspection online at www.hemscott.com/nsm.do.
SUMMARY INFORMATION
The Company
TwentyFour Select Monthly Income Fund Limited (the "Company") was incorporated
with limited liability in Guernsey, as a closed-ended investment company on 12
February 2014. The Company's shares were listed with a Premium Listing on the
Official List of the UK Listing Authority and admitted to trading on the Main
Market of the London Stock Exchange ("LSE") on 10 March 2014.
Investment Objective and Investment Policy
The Company's investment objective is to generate attractive risk adjusted
returns, principally through income distributions.
The Company's investment policy is to invest in a diversified portfolio of
credit securities.
The portfolio can be comprised of any category of credit security, including,
without prejudice to the generality of the foregoing, bank capital, corporate
bonds, high yield bonds, leveraged loans, payment-in kind notes and asset
backed securities. The portfolio will include securities of a less liquid
nature. The portfolio will be dynamically managed by TwentyFour Asset
Management LLP (the "Portfolio Manager") and, in particular, will not be
subject to any geographical restrictions.
The Company maintains a portfolio diversified by issuer; the portfolio
comprises at least 50 Credit Securities. No more than 5% of the portfolio value
will be invested in any single Credit Security or issuer of Credit Securities,
tested at the time of making or adding to an investment in the relevant Credit
Security. Uninvested cash, surplus capital or assets may be invested on a
temporary basis in:
- Cash or cash equivalents, money market instruments, bonds, commercial
paper or other debt obligations with banks or other counterparties having a
"single A" or higher credit rating as determined by any internationally
recognised rating agency which, may or may not be registered in the EU; and
- Any "government and public securities" as defined for the purposes of
the Financial Conduct Authority (the "FCA") Rules.
Efficient portfolio management techniques are employed by the Company, such as
currency hedging, interest rate hedging and the use of derivatives to manage
key risks such as interest rate sensitivity and to mitigate market volatility.
The Company's currency hedging policy will only be used for efficient portfolio
management and not to attempt to enhance investment returns.
The Company will not employ gearing or derivatives for investment purposes. The
Company may use borrowing for short-term liquidity purposes, which could be
achieved through its loan facility or other types of collateralised borrowing
instruments including repurchase transactions and stock lending. The Articles
restrict the borrowings of the Company to 10% of the Company's Net Asset Value
("NAV") at the time of drawdown.
At launch the Company had a target net total return on the original issue price
of between 8% and 10% per annum. This comprised a target dividend payment of 6p
and a target capital return of 2p-4p both based on the original issue amount of
100p. There is no guarantee that this can or will be achieved, particularly
given the recent low interest rate environment. As such the total return
generated has been lower than initially anticipated, although the 6p dividend
per annum has consistently been met and the Portfolio Manager is confident that
this dividend target will be maintained in the coming year. Refer to note 19 to
the Financial Statements for details of the Company's dividend policy.
In accordance with the Listing Rules, the Company can only make a material
change to its investment policy with the approval of its Shareholders by
Ordinary Resolution.
Shareholder Information
Maitland Institutional Services Limited ("Maitland") is responsible for
calculating the NAV per share of the Company. Maitland delegated this
responsibility to Northern Trust International Fund Administration Services
(Guernsey) Limited (the "Administrator") however Maitland still performs an
oversight function. The unaudited NAV per Ordinary Share will be calculated as
at the close of business on every Wednesday that is also a business day and the
last business day of every month and will be announced by a Regulatory
Information Service the following business day.
Financial Highlights
30.09.17 30.09.16
Total Net Assets GBP155,207,957 GBP136,821,841
Net Asset Value per Share 96.44p 89.97p
Share price 99.50p 92.00p
Premium to NAV 3.17% 2.27%
Dividends declared during the period 6.56p 6.85p
Dividends paid during the period 6.85p 6.53p
As at 15 January 2018, the premium had moved to 2.33%. The estimated NAV per
share and share price stood at 97.14p and 99.4p, respectively.
Ongoing Charges
Ongoing charges for the year ended 30 September 2017 of 1.20% (30 September
2016: 1.21%) have been calculated in accordance with the Association of
Investment Companies (the "AIC") recommended methodology.
CHAIRPERSON'S STATEMENT
for the year ended 30 September 2017
The twelve month period ending 30th September 2017 experienced considerable
change in the global political arena and also in central bank policy, which
increased investor uncertainty as the year progressed. However, underlying
market volatility was mitigated by the continuation of strong market technical
support as investor demand for yield outstripped general supply.
The steady tightening of credit spreads through the year resulted in a
challenging period for the Portfolio Manager to source suitable assets for the
portfolio. This slowdown impacted the demand the Manager had for new funds, as
a result the total shares issued was limited to 8,850,000 shares, taking the
shares in issue from 152,079,151 to 160,929,151. Through the period the
Company's NAV increased 13.4% (including dividends paid).
The market conditions were generally supportive for credit spread performance
as market technicals dominated fundamentals and idiosyncratic events took place
during the year. The election of Donald Trump in the US initially led to
expectations of significant fiscal stimulus, which resulted in additional
support for credit product, and even though it soon became apparent that
President Trump would struggle to get all his policies passed into legislation,
the tighter squeeze in credit continued through the summer months of 2017.
Obviously a side-effect of the strong technicals and credit spread tightening
was a lack of suitable assets that the Portfolio Manager could source for the
portfolio. A prolonged period of credit spread tightening creates a
re-investment risk for the portfolio, meaning the Portfolio Manager has paid
close attention to the investment composition of the Company to ensure it
adheres to acceptable levels of diversity and target yield; there were no
immediate issues in achieving the pre-determined gross monthly dividend of 0.5p
per share but the Portfolio Manager is monitoring it closely for the coming
year.
The Portfolio Manager and the Company's Board continue to adhere to a strict
discipline of only accepting new share issuance to meet investor demand and
only when there are suitable investment opportunities in the marketplace. For
the period in question the opportunities for new assets were limited, as
mentioned above, and yield is becoming an ever scarce commodity. However, as
global central banks embark on a tightening phase, credit conditions should
become more volatile offering the Portfolio Manager an opportunity to source
attractive assets, which in turn could increase the opportunity to see an
increase in new share unit issuance.
Mark-to-market performance is expected to be relatively benign over the near
term, although expected interest rate increase in the US and a potential
reversal of the rate cut by the Bank of England ("BoE") may create some
additional volatility, along with the tapering announcement from the European
Central Bank ("ECB") at their October 26th meeting. However, there are no
indicators that the strong technical backdrop will change in the short-term and
asset prices are expected to remain range-bound.
During the year, the Board commissioned Optimus Group Limited ("Optimus") to
conduct an evaluation of the performance of the Board, its committees and its
individual Directors. The Board was appraised by mapping its performance to
the Code, the AIC Code and the AIC Handbook for Directors of Investment
Companies. The conclusion of the evaluation was positive and Optimus were
satisfied that the Board is compliant with the Code in those areas reviewed.
The review did however prompt the Board to create the Remuneration and
Nomination Committee.
Mr Thomas Emch retired from the Board effective 30 September 2017. I join my
fellow Directors in thanking him for his valid contribution and service on the
Board and for helping steer the Company through its initial years of
establishment.
An Extraordinary Resolution was proposed at the AGM on 6 July 2017 to dis-apply
pre-emption rights to equity shares allotted by the Directors of the Company
for cash, as if the pre-emption rights contained in the Articles in respect of
such equity securities did not apply. It was not carried by the necessary 75%
of votes in favour. Following this, an Extraordinary General Meeting was held
on
13 September 2017 proposing the same Extraordinary Resolution which was
subsequently carried by the necessary 75% of votes in favour.
Claire Whittet
Chair
17 January 2018
PORTFOLIO MANAGER'S REPORT
for the year ended 30 September 2017
Economic Background
The twelve month period to 30 September 2017 was dominated by a mixture of
major political change and central bank activity; although volatility in credit
markets was generally curtailed by strong market technical support.
The start of the period was dominated completely by the run-up to the US
presidential election, which saw some of the most negative campaigns in
history, culminating in Hilary Clinton being investigated by the FBI for
alleged email abuse. Investor uncertainty spread and there was a partial
breakdown in fixed income correlation as 10yr United States Treasury ("UST")
yields widened 20bps ahead of the election and credit spreads slightly
softened. Closer to home, the UK government was frustrated by having to apply
to the Supreme Court to argue its case that it had a legal mandate to trigger
Article 50. When the US election result was announced there was an element of
shock to the markets, with the promise of an unprecedented package of fiscal
stimulus enough to send 10yr UST yields up 20bps on inflationary concerns but a
strong green light for investors to buy corporate bonds. Here in Europe, Italy
was back in the limelight as Prime Minister Matteo Renzi put his role on the
line as he called a referendum on constitutional reforms; which ultimately
backfired as the electorate rejected his arguments and rekindled support for EU
sceptic parties. However, as the 2016 year-end approached Mario Draghi calmed
any fears the market may have had by announcing a 9 month extension to the
ECB's Asset Purchase Programme ("APP"); albeit with a reduction in the monthly
amount from EUR80bn to EUR60bn, but offset by the removal of the ban in purchasing
bonds below the -40bp deposit rate.
The start of 2017 saw the inauguration of Donald Trump as the 45th President of
the USA but market sentiment was relatively benign as investors adopted a
classic 'wait and see approach' to the new regime. Here in Europe there was
little in the way of market moving news, with the UK Supreme Court upholding
the decision to ensure that Article 50 was decided by Parliament and not by the
cabinet. On a micro level the earnings season was viewed as reasonably
positive, with the banking sector particularly buoyant with enhanced profits
and capital buffers across many of the large lenders on both sides of the
Atlantic. New issue volumes though remained on the light side despite the low
yield environment and tightening credit spreads.
Markets became a bit more interesting in March as the Federal Reserve System
("Fed") triggered its third rate hike of the cycle taking the Fed funds range
up 0.25% to 0.75-1.00%, which pushed 10yr UST yield up to a peak of 2.63%
before increasing investor uncertainty (surrounding Brexit, French elections
and Italy) sent yields tumbling back down to 2.38% within a couple of weeks.
President Trump was defeated in his attempt to repeal the Obama Care Health
Bill which began to sow the seeds of doubt about his other key policies and
resulted in some selling across US HY credits, but the strong technical
imbalance saw prices rebound fairly swiftly.
Spring was threatened by populist victory in the French presidential elections
but the ultimate victory by Emmanuel Macron, a centrist pro-European, quickly
restored positive sentiment in the credit market. In the US, Treasury market
yields spent most of April in a tight range, although this ended abruptly when
rumours emerged that President Trump had shared classified information with
Russian officials at a White House meeting, which led to calls for him to be
impeached. Closer to home market uncertainty picked up in June as a shock
result in the snap UK election left the Conservative party requiring DUP
support to rule, clearly weakening the Government's position, adding to market
concerns.
In the financial sector the Single Resolution Board ("SRB") decreed that Banco
Popular of Spain was failing or likely to fail, and it was declared to have hit
its Point of Non Viability ("PoNV"). This resulted in both its AT1 and Tier 2
bonds effectively being written down to zero, leaving subordinated bond holders
nursing severe losses, while Santander acquired the resulting 'cleaner' bank
for EUR1 (protecting both senior bond holders and deposit holders). In Italy, the
domestic regulator decided that rather than finding a resolution both Veneto
Banca and Banca Popolare di Vicenza should be liquidated, with a bad bank
created from the stressed assets and the 'good' assets being transferred to
Banca Intesa with the state setting aside a package of potential guarantees and
compensation to protect Intesa's capital ratios. Overall this was a positive
outcome for the market and a clear sign that the subordinated banks sector has
matured as both events were viewed as idiosyncratic with minimal contagion seen
across the rest of the sector. Draghi kept market participants alert over the
typically quiet summer period when, at a speech in Portugal at the end of June
he mentioned 'reflationary dynamics slowly taking hold' which the market
presumed to be tapering guidance and despite some ECB officials saying his
comments were misinterpreted, 10yr Bond yields rose 25bps to 0.60%.
On the geopolitical front North Korea did its best to upset the status quo by
firing ballistic missiles over the north island of Japan, but with China and
Russia joining the United Nations in condemning the actions the market was
relatively sanguine about further escalation in the region, so far.
As the period drew to a close attention moved back to central bank watching,
with market expectations focusing on the chance of a Fed hike by the year end
and the BoE raising UK rates at the November meeting. This, coupled with the
ECB announcing a reduction in the monthly APP after the end of the period,
weighed on credit spreads as we approach the year-end, despite the strong
technical backdrop that remained in place.
Performance Review
The Company's aim is to produce an attractive level of income, generating a
minimum monthly income of 0.5p, with any excess income annually distributed to
investors. This is a high conviction strategy based on relative value bonds in
the credit markets, with an emphasis on securities that exhibit a degree of
liquidity premium assets that are primarily buy-to-hold.
As mentioned in the commentary above, the past 12 months have been generally
supportive for credit spreads, which has been to the benefit of investors,
despite the significant macro-economic events and political changes that have
taken place. Consequently, the Company's turnover has stayed fairly low for the
period.
Foreign Exchange Accounting
The Company's policy is to hedge foreign currency risk and had exposure to
Sterling, Euro and US Dollar denominated securities during the period. While
the EUR/GBP rate finished 1.80% higher at year end, significant volatility was
experienced during the period with moves in the range of 11.2% seen between the
lows experienced in April and the highs in September when EUR/GBP reached 0.93.
Large currency moves were also felt in the USD/GBP rate, which similarly saw a
large movement of 12.6% between the currency's high and low during the period.
Exposure to Euro denominated assets represented approximately 44% of the
Portfolio at the end of the period, with US Dollar denominated securities
approximately 17%. All currency exposures are hedged back to Sterling to
minimise any currency risk.
The net foreign currency loss on the portfolio (recorded within net gain on
financial assets at fair value through profit or loss) and the net foreign
currency gains on the forward currency contracts (included within net foreign
currency gain/(loss)) are recognised in accordance with the hedging policy and
IFRS, within the Statement of Comprehensive Income.
Investment Outlook
The Company was established to take advantage of the liquidity premium that
exists in the
non-government sectors of the fixed income universe, whilst only hedging
excessive duration risk. However, with the ongoing central bank support the
Portfolio Manager currently considers that hedging is an unnecessary drag on
performance and hence there are no interest rate positions in the Fund.
With the central banks now generally undertaking a period of tightening,
markets may endure a pick-up in volatility, although the Portfolio Manager
still expects the key central banks to remain accommodative and on guard with
terminal rates in the major markets expected to remain relatively low compared
to historic cycle peaks. As always the markets face a number of uncertainties
in the coming period, with key elections in the Eurozone (particularly Italy)
and key positional changes at the Fed. The Portfolio Manager remains hopeful
that this scenario will increase the opportunity to add suitable assets at
attractive levels than is currently possible, thereby alleviating the concerns
of re-investment risk currently faced.
TwentyFour Asset Management LLP
17 January 2018
TOP TWENTY HOLDINGS
As at 30 September 2017
Credit Percentage
of
Nominal/ Security Fair Value Net Asset
*
Shares Sector GBP Value
Nationwide Bldg Society 10.25 29/06/ 30,000 Banks 4,673,447 3.01
2049
Bracken Midco1 10.50 15/11/2021 3,575,000 HighYield-European 3,838,768 2.47 Coventry Bldg Society 6.375 29/12/ 3,540,000 Banks 3,655,156 2.36 2049 Santander Uk 2,000,000 Banks 3,512,420 2.26 Jubilee CDO BV 2014-12X F 15/07/2027 3,950,000 ABS 3,481,776 2.24 Ard Finance 6.625 15/09/2023 3,000,000 HighYield-European 2,825,446 1.82 Arbour Clo 2 15/05/2030 3,000,000 ABS 2,656,110 1.71 Aldermore Group 11.875 31/12/2049 2,300,000 Banks 2,612,536 1.68 Credit Suisse Group 7.5 31/12/2049 3,000,000 Banks 2,532,330 1.63 Capital Bridging Finance 1 MEZZ 05/ 2,500,000 ABS 2,512,500 1.62 07/2018 SC Germany Consumer 2015-1 E 13/12/ 2,500,000 ABS 2,455,789 1.58 2028 Shawbrook Group 8.50 28/10/2025 2,300,000 Banks 2,440,810 1.57 Ruby Tuesday 7.625 15/05/2020 3,250,000 HighYield-US 2,411,792 1.55 Societe Generale 7.375 31/12/2049 2,960,000 Banks 2,393,602 1.54 Paragon Group of Companies 7.25 09/ 2,200,000 Banks 2,368,333 1.53 09/2026 Onesavings Bank 9.125 31/12/2049 2,200,000 Banks 2,354,000 1.52 Garfunkelux Holdco 8.50 01/11/2022 2,150,000 HighYield-European 2,324,094 1.50 Barclays PLC 7.875 31/12/2049 2,065,000 Banks 2,263,813 1.46 Banco Bilbao Vizcaya Argentaria 2,200,000 Banks 2,256,649 1.45 8.875 29/12/2049 Cabot Financial 7.50 01/10/2023 2,000,000 HighYield-European 2,184,961 1.41 Total 55,754,332 35.91 * Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The full portfolio listing as at 30 September 2017 can be obtained from the Administrator on request. BOARD MEMBERS Biographical details of the Directors are as follows: Claire Whittet - (Chair) (age 62) Ms Whittet is a resident of Guernsey and has 40 years' experience in the banking industry. She joined Rothschild Bank International Ltd in 2003 as a Director and was latterly Managing Director and Co-Head before becoming a Non-Executive Director on her retirement in 2016. She began her career at the Bank of Scotland where she was for 19 years in a variety of personal and corporate finance roles. Subsequently, Ms Whittet joined Bank of Bermuda and was Global Head of Private Client Credit before joining Rothschild. Ms Whittet is a Non-Executive Director of 5 other listed, Guernsey registered funds. Ms Whittet holds an MA from Edinburgh University, is a member of the Chartered Institute of Bankers in Scotland, a member of the Chartered Insurance Institute, a Chartered Banker, a member of the Institute of Directors and holds the Institute of Directors Diploma in Company Direction. Ms Whittet was appointed to the Board on 12 February 2014. Christopher F. L. Legge - (Non-executive Director) (age 62) Mr Legge is a Guernsey resident and worked for Ernst & Young in Guernsey from 1983 to 2003. Having joined the firm as an audit manager in 1983, he was appointed a partner in 1986 and managing partner in 1998. From 1990 to 1998, he was head of Audit and Accountancy and was responsible for the audits of a number of banking, insurance, investment fund, property fund and other financial services clients. He also had responsibility for the firm's training, quality control and compliance functions. He was appointed managing partner for the Channel Islands region in 2000 and merged the business with Ernst & Young LLP in the United Kingdom. He retired from Ernst & Young in 2003. Mr Legge currently holds a number of non-executive directorships in the financial services sector and also chairs the Audit Committees of several UK listed companies. He is an FCA and holds a BA (Hons) in Economics from the University of Manchester. Mr Legge was appointed to the Board on 12 February 2014. Thomas H. Emch - (Non-executive Director) (age 74) Mr Emch is an independent Board member and consultant. He graduated from the University of Zurich (lic.oec.publ.) and IMD (PED) in Lausanne. During his professional career he successively was European Treasurer of Litton International, SVP of Banque Paribas Suisse, EVP of Lombard Odier & Co. and CEO of Royal Bank of Canada (Suisse), a position he held for 11 years until his retirement in 1999. Throughout his banking career, he served on the Boards of numerous companies and professional associations in Switzerland and abroad. Mr Emch was appointed to the Board on 12 February 2014. He retired from the Board on the 30 September 2017. Ian Martin - (Non-executive Director) (age 54) Ian Martin has over 30 years' experience in finance gathered in a variety of multi asset investment focused roles in the UK, Hong Kong, Switzerland and Uruguay. More recently he was the CIO and Head of Asset Management and Research at Lloyds Bank in Geneva and then Head of Bespoke Portfolio Management and Advisory for key clients in UBP Bank in Geneva. Previous roles have included senior roles in equity derivatives and trading as well as CIO and Managing Director of a Fund of Hedge fund company in the UK. Currently he is a Director of Bedlam Family Office. Mr Martin was appointed to the Board on 15 July 2014. DISCLOSURE OF DIRECTORSHIPS IN PUBLIC COMPANIES LISTED ON RECOGNISED EXCHANGES The following summarises the Directors' directorships in other public listed companies: Company Name Stock Exchange Claire Whittet (Chair) BH Macro Limited London Eurocastle Investment Amsterdam Limited International Public Partnerships London Limited Riverstone Energy Limited London Third Point Offshore Investors London Limited Christopher Legge Ashmore Global Opportunities Limited London John Laing Environmental Assets Group Limited London Sherborne Investors (Guernsey) B London Limited Sherborne Investors (Guernsey) C London Limited Third Point Offshore Investors London Limited DIRECTORS' REPORT The Directors present their Annual Report and Audited Financial Statements for the year ended 30 September 2017. Business Review The Company TwentyFour Select Monthly Income Fund Limited (the "Company") was incorporated with limited liability in Guernsey, as a closed-ended investment company on 12 February 2014. The Company's Shares were listed with a Premium Listing on the Official List of the UK Listing Authority and admitted to trading on the Main Market of the LSE on 10 March 2014. Investment Objective and Policy The investment objective and policy is set out in the Summary Information. Discount/Premium to Net Asset Value The Board monitors and manages the level of the share price discount/premium to NAV. In managing this, the Company can operate a share buyback facility whereby it may purchase, subject to various terms as set out in its Articles and in accordance with The Companies (Guernsey) Law, 2008, up to 14.99% of the Company's Ordinary Redeemable Shares in issue immediately following Admission for trading in the LSE. The Company also offers investors a Quarterly Tender, contingent on certain factors, to provide Shareholders with a quarterly opportunity to submit Ordinary Shares for placing or repurchase by the Company at a price representing a discount of no more than 2% to the then prevailing NAV. For additional information refer to note 16 (ii) to the Financial Statements. Shareholder Information Shareholder information is set out in the Summary Information. Going Concern The Directors believe that, having considered the Company's investment objective (see Summary Information), financial risk management (see note 16 to the Financial Statements) and in view of the Company's holding in cash and cash equivalents, the liquidity of investments and the income deriving from those investments, the Company has adequate financial resources and suitable management arrangements in place to continue as a going concern for at least twelve months from the date of approval of the financial statements. Viability Statement Under the UK Corporate Governance Code, the Board is required to make a "viability statement" which considers the Company's current position and principal risks and uncertainties combined with an assessment of the prospects of the Company in order to be able to state that they have a reasonable expectation that the Company will be able to continue in operation over the period of their assessment. The Board considers that three years is an appropriate period to assess the viability of the Company given the uncertainty of the investment world and the strategy period. In selecting this period the Board considered the environment within which the Company operates and the risks associated with the Company. The Company's prospects are driven by its business model and strategy. The Company's aim is to provide investors with an attractive level of income and a focus on capital preservation in uncertain times, by investing in less liquid, high yielding credit securities. The Board confirms they have performed a robust assessment of the principal risks facing the Company and the Board's assessment of the Company over the three year period has been made with reference to the Company's current
position and prospects, the Company's strategy, and the Board's risk appetite
having considered each of the Company's principal risks and uncertainties
summarised under note 16.
The Board has also considered the Company's cash flows and income flows, its
likely ability to pay dividends and the portfolio analysis, including but not
limited to liquidity analysis, foreign exchange analysis, credit analysis and
valuation analysis. The analysis has taken the form of stress tests on the
Company as well as cash flow modelling based on a range of different market
scenarios. All of the foregoing have been considered against the background of
the Company's dividend target.
Key assumptions considered by the Board in relation to the viability of the
Company are as follows:
Dividend Target
The ongoing viability of the Company and the validity of the going concern
basis depend on the Company meeting its dividend target annually during the
three-year period. In the event that the Company does not meet the dividend
target as disclosed in note 19 to the Financial Statements, the Directors will
convene a general meeting in accordance with the Continuation Vote requirements
set out in note 16 to the Financial Statements.
Quarterly Tenders
The Company has incorporated into its structure a mechanism for a quarterly
tender to reduce the risk of Ordinary Shares trading at a discount to NAV. It
is anticipated that the Company will tender on a quarterly basis for up to 20%
of the Ordinary Shares in issue as at the relevant Quarter Record Date, subject
to an aggregate limit of 50% of the Ordinary Shares in issue in any twelve
month period ending on the relevant Quarter Record Date. In the event that
quarterly tender applications, on any tender submission deadline, exceed the
50% limit, the Directors will convene a General Meeting in accordance with the
Continuation Vote requirements set out in note 16 to the Financial Statements.
The quarterly tenders will be at the discretion of the Board. Ordinary Shares
trading at a discount to NAV over a long period of time may impact the
viability of the Company.
The Board having considered the analysis above, have a reasonable expectation
that the Company will remain viable over the three year period to 30 September
2020.
Results
The results for the year are set out in the Statement of Comprehensive Income.
The Directors paid income distributions of GBP10,358,956 for the year ended 30
September 2017, a breakdown of which can be found in note 19 to the Financial
Statements. The 30 September 2017 distribution which was declared on 12 October
2017 was paid on 31 October 2017.
Distributions made with respect to any income period comprise (a) the total
income of the portfolio for the period, and (b) an additional amount paid out
of capital to reflect any additional income in the course of any share
subscriptions that took place during the period. Including additional income in
this way ensures that the income yield of the shares is not diluted as a
consequence of the issue of new shares during an income period and (c) any
income on the foreign exchange contracts caused by the libor differentials
between each foreign exchange currency pair.
Key Performance Indicators ("KPIs")
At each Board meeting, the Directors consider a number of performance measures
to assess the Company's success in achieving its objectives. Below are the main
KPIs which have been identified by the Board for determining the progress of
the Company:
- Net Asset Value;
- Share Price;
- Discount/Premium;
- Ongoing Charges; and
- Monthly Dividends.
A record of these measures is disclosed in the Financial Highlights.
Portfolio Manager
The portfolio management fee is payable to the Portfolio Manager, TwentyFour
Asset Management LLP, monthly in arrears at a rate of 0.75% per annum of the
lower of NAV, which is calculated weekly on each valuation day and on the last
business day of each month, or market capitalisation of each class of share.
For additional information refer to note 14 to the Financial Statements.
The Board considers that the interests of Shareholders, as a whole, are best
served by the ongoing appointment of the Portfolio Manager to achieve the
Company's investment objectives.
Alternative Investment Fund Manager ("AIFM")
Alternative investment fund management services are provided by Maitland
Institutional Services Limited ("Maitland") (formerly Phoenix Fund Services
(UK) Limited). The AIFM fee is payable quarterly in arrears at a rate of 0.07%
of the NAV of the Company below GBP50 million, 0.05% on Net Assets between GBP50
million and GBP100 million and 0.03% on Net Assets in excess of GBP100 million. For
additional information refer to note 15 to the Financial Statements.
Custodian and Depositary
Custody and Depositary services are provided by Northern Trust (Guernsey)
Limited. The terms of the Depositary agreement allow Northern Trust (Guernsey)
Limited to receive professional fees for services rendered. The Depositary
agreement includes custodian duties. For additional information refer to note
15 to the Financial Statements.
Directors
The Directors of the Company during the year and at the date of this Report are
set out in the Corporate Information.
Directors' and Other Interests
The Directors of the Company held the following Ordinary Shares beneficially:
30.09.17 30.09.16
Shares Shares
Claire Whittet 25,000 25,000
Christopher Legge 50,000 50,000
Thomas Emch* 25,000 25,000
Ian Martin 35,000 35,000
* Shareholding sold trade date 27 October 2017.
Corporate Governance
The Board is committed to high standards of corporate governance and has
implemented a framework for corporate governance which it considers to be
appropriate for an investment company in order to comply with the principles of
the UK Corporate Governance Code (the "UK Code"). The Company is also required
to comply with the Code of Corporate Governance (the "GFSC Code") issued by the
Guernsey Financial Services Commission.
The UK Listing Authority requires all UK premium listing companies to disclose
how they have complied with the provisions of the UK Code. This Corporate
Governance Statement, together with the Going Concern Statement, Viability
Statement and the Statement of Directors' Responsibilities, indicates how the
Company has complied with the principles of good governance of the UK Code and
its requirements on Internal Control.
The Company is a member of the AIC and by complying with the AIC Code of
Corporate Governance (the "AIC Code") is deemed to comply with both the UK Code
and the GFSC Code.
The Board has considered the principles and recommendations of the AIC Code, by
reference to the guidance notes provided by the AIC Guide, and consider that
reporting against these will provide better information to shareholders. To
ensure ongoing compliance with these principles the Board reviews a report from
the Corporate Secretary at each quarterly meeting, identifying how the Company
is in compliance and identifying any changes that might be necessary.
The AIC Code and the AIC Guide are available on the AIC's website,
www.theaic.co.uk. The UK Code is available in the Financial Reporting Council's
website, www.frc.org.uk.
Throughout the year ended 30 September 2017, the Company has complied with the
recommendations of the AIC Code and thus the relevant provisions of the UK
Code, except as set out below.
The UK Code includes provisions relating to:
- the role of the Chief Executive;
- Executive Directors' remuneration;
- Annually assessing the need for an internal audit function;
- Senior Independent Director;
For the reasons set out in the AIC Guide, the Board considers that the first
three provisions are not relevant to the position of the Company as it is an
externally managed investment company. The Company has therefore not reported
further in respect of these provisions.
There have been no other instances of non-compliance, other than those noted
above.
Role, Composition and Independence of the Board
The Board is the Company's governing body and has overall responsibility for
maximising the Company's success by directing and supervising the affairs of
the business and meeting the appropriate interests of shareholders and relevant
stakeholders, while enhancing the value of the Company and also ensuring
protection of investors. A summary of the Board's responsibilities is as
follows:
- statutory obligations and public disclosure;
- strategic matters and financial reporting;
- risk assessment and management including reporting compliance,
governance,
monitoring and control; and
- other matters having a material effect on the Company.
The Board's responsibilities for the Annual Report and Audited Financial
Statements are set out in the Statement of Directors' Responsibilities below.
The Board currently consists of three non-executive Directors, all of whom are
considered to be independent of the Portfolio Manager and as prescribed by the
Listing Rules. Mr Thomas Emch retired from the Board effective 30 September
2017.
The Board does not consider it appropriate to appoint a Senior Independent
Director because they are all deemed to be independent by the Company. The
Board considers it has the appropriate balance of diverse skills and
experience, independence and knowledge of the Company and the wider sector, to
enable it to discharge its duties and responsibilities effectively and that no
individual or group of individuals dominates decision making. The Chair is
responsible for leadership of the Board and ensuring its effectiveness.
Chair
The Chair is Claire Whittet. The Chair of the Board must be independent for the
purposes of Chapter 15 of the Listing Rules. Claire Whittet is considered
independent because she:
- has no current or historical employment with the Portfolio Manager; and
- has no current directorships in any other investment funds managed by
the
Portfolio Manager.
Biographies for all the Directors can be found in the Board Members section.
The Board needs to ensure that the Annual Report and Audited 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. In seeking to achieve this, the
Directors have set out the Company's investment objective and policy and have
explained how the Board and its delegated Committees operate and how the
Directors review the risk environment within which the Company operates and set
appropriate risk controls. Furthermore, throughout the Annual Report and
Audited Financial Statements the Board has sought to provide further
information to enable shareholders to have a fair, balanced and understandable
view.
The Board has contractually delegated responsibility for the management of its
investment portfolio, the arrangement of custodial and depositary services and
the provision of accounting and company secretarial services.
The Board is responsible for the appointment and monitoring of all service
providers to the Company.
The Directors are kept fully informed of investment and financial controls and
other matters by all services providers that are relevant to the business of
the Company and should be brought to the attention of the Directors.
The Company has adopted a policy that the composition of the Board of
Directors, which is required by the Company's Articles to comprise of at least
two persons, is at all times such that a majority of the Directors are
independent of the Portfolio Manager and any company in the same group as the
Portfolio Manager; the Chair of the Board of Directors is free from any
conflicts of interest and is independent of the Portfolio Manager and of any
company in the same group as the Portfolio Manager; and that no more than one
director, partner, employee or professional adviser to the Portfolio Manager or
any company in the same group as the Portfolio Manager may be a Director of the
Company at any one time.
The Board has a breadth of experience relevant to the Company and the Directors
believe that any changes to the Board's composition can be managed without
undue disruption. With any new director appointment to the Board, consideration
will be given as to whether an induction process is appropriate.
The Board has also given careful consideration to the recommendations of the
Davies Review. The Board has reviewed its composition and believes that the
current appointments provide an appropriate range of skills, experience and
diversity. In order to maintain its diversity, the Board is committed to
continuing its implementation of the recommendations of the Davies Review as
part of its succession planning over future years and complying with the
disclosure requirements of DTR 7.2.8 in terms of the Company's diversity
policy.
Directors' Attendance at Meetings
The Board holds quarterly Board meetings, to discuss general management,
structure, finance, corporate governance, marketing, risk management,
compliance, asset allocation and gearing, contracts and performance. The
quarterly Board meetings are the principal source of regular information for
the Board enabling it to determine policy and to monitor performance,
compliance and controls but these meetings are also supplemented by
communication and discussions throughout the year.
A representative from each of the Portfolio Manager, AIFM, Administrator,
Custodian and Depositary and Corporate Broker attends each Board meeting either
in person or by telephone thus enabling the Board to fully discuss and review
the Company's operation and performance. Each Director has direct access to the
Portfolio Manager and Company Secretary and may, at the expense of the Company,
seek independent professional advice on any matter.
Both appointment and removal of these parties is to be agreed by the Board as a
whole.
The Audit Committee meets at least twice a year, the Management Engagement
Committee meets at least once a year, a dividend meeting is held monthly and
there are additional meetings covering the Quarterly Tender as and when
necessary. In addition, ad hoc meetings of the Board to review specific items
between the regular scheduled quarterly meetings can be arranged. Between
formal meetings there is regular contact with the Portfolio Manager, AIFM,
Administrator, Custodian and Depositary and the Corporate Broker.
A Remuneration and Nomination Committee was created during the year for which
one meeting was held on the 13 September 2017.
Attendance at the Board, Audit and Management Engagement Committee meetings
during the year was as follows:
Board Meetings Audit Committee Management Remuneration Ad hoc
Meetings Engagement and Nomination Committee
Committee Committee Meetings
Meetings Meetings
Held Attended Held Attended Held Attended Held Attended Held Attended
Claire Whittet 4 4 3 3 1 1 1 1 18 15
Christopher 4 4 3 3 1 1 1 1 18 16
Legge
Thomas Emch 4 4 3 3 1 1 1 N/A 18 8
Ian 4 4 3 3 1 1 1 1 18 12
Martin
At the Board meetings the Directors review the management of the Company's
assets and liabilities and all other significant matters so as to ensure that
the Directors maintain overall control and supervision of the Company's
affairs.
Election of Directors
The election of Directors is set out in the Directors' Remuneration Report.
Board Performance and Training
During the year, the Board commissioned Optimus Group Limited ("Optimus") to
conduct an evaluation of the performance of the Board, its committees and its
individual Directors. The Board was appraised by mapping its performance to
the UK Code, the AIC Code and the AIC Handbook for Directors of Investment
Companies.
The conclusion of the evaluation was positive and Optimus were satisfied that
the Board is compliant with the Code in those areas reviewed. Following the
review the Board created the Remuneration and Nomination Committee which held
their first meeting in September.
On appointment to the Board, the Directors were offered relevant training and
induction. Training is an on-going matter as is discussion on the overall
strategy of the Company and the Board met with the Portfolio Manager early in
the year to discuss these matters and have met again in January 2018.
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.
Retirement by Rotation
Under the terms of their appointment, each Director is required to retire by
rotation and be subject to re-election at least every three years. The
Directors are also required to seek re-election if they have already served for
more than nine years. The Company may terminate the appointment of a Director
immediately on serving written notice and no compensation is payable upon
termination of office as a director of the Company becoming effective.
Notwithstanding the foregoing, all Directors have agreed to stand for
re-election annually.
Board Committees and their Activities
Terms of Reference
All Terms of Reference of the Board's Committees are available from the
Administrator upon request.
Management Engagement Committee
The Board has established a Management Engagement Committee with formal duties
and responsibilities. The Management Engagement Committee commits to meeting at
least once a year and comprises the entire Board with Thomas Emch appointed as
Chair. Ian Martin has been appointed Chair following Mr Emch's retirement.
These duties and responsibilities include the regular review of the performance
of and contractual arrangements with the Portfolio Manager and other service
providers and the preparation of the Committee's annual opinion as to the
Portfolio Manager's services.
The Management Engagement Committee carried out its review of the performance
and capabilities of the Portfolio Manager at its meeting during the year and
the Board recommended the continued appointment of TwentyFour Asset Management
LLP as Portfolio Manager to be in the interest of the Company.
Audit Committee
An Audit Committee has been established consisting of all Directors with
Christopher Legge appointed as Chair. The terms of reference of the Audit
Committee provide that the committee shall be responsible, amongst other
things, for reviewing the Interim and Annual Financial Statements, considering
the appointment and independence of external auditors, discussing with the
external auditors the scope of the audit and reviewing the Company's compliance
with the AIC Code.
Further details on the Audit Committee can be found in the Audit Committee
Report.
Remuneration and Nomination Committee
A Remuneration and Nomination Committee was established during the year
following an independent board evaluation by Optimus with Christopher Legge
appointed as Chair.
The report noted that the current remuneration was in the lower quartile of the
market for similar companies. It was therefore proposed that remuneration be
increased as detailed in the remuneration report below and reviewed again in
three years' time.
The Committee discussed Mr Emch's retirement which would be effective 30
September 2017. It discussed the Board's policy on gender diversity which would
be raised to 33% following Mr Emch's retirement, thus remaining within
guidelines.
The draft Succession Plan was also raised and it was agreed that a Skills
Matrix be created ahead of the retirement of the next Director in order to
ensure the balance of the necessary skills and experience in line with the
Company's strategy.
International Tax Reporting
For purposes of the US Foreign Account Tax Compliance Act, the Company
registered with the US Internal Revenue Service ("IRS") as a Guernsey reporting
Foreign Financial Institution ("FFI"), received a Global Intermediary
Identification Number (E5XSVA.99999.SL.831), and can be found on the IRS FFI
list.
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 on
1 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.
The Board ensures that the Company is compliant with Guernsey regulations and
guidance in this regard.
Strategy
The strategy for the Company is to capture the illiquidity premium that is
associated with 'off the run' bond issues in the secondary markets. As part of
the general search for high conviction, relative value securities the Portfolio
Manager continually came across interesting investment opportunities but too
often these bonds did not offer sufficient liquidity to use in the typical
daily mark-to-market UCITs funds, however they are suitable for closed ended
vehicles. By remaining highly selective and without conceding on underlying
credit quality, the strategy expects to generate a minimum monthly distribution
of 0.5p per share, with all excess income being distributed to investors at the
year-end of the Company.
Internal Controls
The Board is ultimately responsible for establishing and maintaining the
Company's system of internal financial and operating control and for
maintaining and reviewing its effectiveness. The Company's risk matrix
continues to be the core element of the Company's risk management process in
establishing the Company's system of internal financial and reporting control.
The risk matrix is prepared and maintained by the Board which initially
identifies the risks facing the Company and then collectively assesses the
likelihood of each risk, the impact of those risks and the strength of the
controls operating over each risk. The system of internal financial and
operating control is designed to manage rather than to eliminate the risk of
failure to achieve business objectives and by their nature can only provide
reasonable and not absolute assurance against misstatement and loss.
These controls aim to ensure that assets of the Company are safeguarded, proper
accounting records are maintained and the financial information for publication
is reliable. The Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks faced by the
Company.
This process has been in place for the year under review and up to the date of
approval of this Annual Report and Audited Financial Statements and is reviewed
by the Board and is in accordance with the AIC Code.
The AIC Code requires Directors to conduct at least annually a review of the
Company's system of internal financial and operating control, covering all
controls, including financial, operational, compliance and risk management. The
Board has evaluated the systems of internal controls of the Company. In
particular, it has prepared a process for identifying and evaluating the
significant risks affecting the Company and the policies by which these risks
are managed. The Board also considers whether the appointment of an internal
auditor is required and has determined that there is no requirement for a
direct internal audit function.
The Board has delegated the day to day responsibilities for the management of
the Company's investment portfolio, the provision of depositary services and
administration, registrar and corporate secretarial functions including the
independent calculation of the Company's NAV and the production of the Annual
Report and Financial Statements which are independently audited.
Formal contractual agreements have been put in place between the Company and
providers of these services. Even though the Board has delegated responsibility
for these functions, it retains accountability for these functions and is
responsible for the systems of internal control. At each quarterly Board
meeting, compliance reports are provided by the Administrator, Company
Secretary, Portfolio Manager, AIFM and Depositary. The Board also receives
confirmation from the Administrator of its accreditation under its Service
Organisation Controls 1 report.
The Company's risk exposure and the effectiveness of its risk management and
internal control systems are reviewed by the Audit Committee at its meetings
and annually by the Board. The Board believes that the Company has adequate and
effective systems in place to identify, mitigate and manage the risks to which
it is exposed. Principal Risks and Uncertainties are set out below.
Principal Risks and Uncertainties
The Board is responsible for the Company's system of internal financial and
reporting controls and for reviewing its effectiveness. The Board is satisfied
that by using the Company's risk matrix as its core element in establishing the
Company's system, internal financial and reporting controls while monitoring
the investment limits and restrictions set out in the Company's investment
objective and policy, that the Board has carried out a robust assessment of the
principal risks and uncertainties facing the Company.
The principal risks which have been identified and the steps which are taken by
the Board to mitigate them are as follows:
Market risk
The underlying investments comprised in the Portfolio are subject to market
risk. The Company is therefore at risk that market events may affect
performance and in particular may affect the value of the Company's investments
which are valued on a marked to market basis. Market risk is the risk
associated with changes in market prices, including spreads, economic
uncertainty, changes in laws and political (national and international)
circumstances. While the Company, through its investments in Credit Securities
intends to hold a diversified Portfolio of assets, factors such as levels of
sovereign debt or political events may have a material impact which could be
materially detrimental to the performance of the Company's investments.
Under extreme market conditions the portfolio may not benefit from
diversification. For additional information refer to note 16 to the Financial
Statements.
Liquidity risk
Investments made by the Company may be illiquid and this may limit the ability
of the Company to realise its investments for the purposes of cash management,
such as generating cash for dividend payments to Shareholders or buying back
Ordinary Shares under the Quarterly Tenders or in the market. Substantially all
of the assets of the Company are invested in Credit Securities. There may be no
active market in the Company's interests in Credit Securities and the Company
may be required to provide liquidity to fund Tender Requests or repay any
borrowings. The Company does not have redemption rights in relation to any of
its investments. As a consequence, the value of the Company's investments may
be materially adversely affected. For additional information refer to note 16
to the Financial Statements.
Credit risk
The Company may not achieve the Dividend Target and investors may not get back
the full value of their investment because the Company invests in Credit
Securities issued by other companies, trusts or other investment vehicles
which, compared to bonds issued or guaranteed by governments, are generally
exposed to greater risk of default in the repayment of the capital provided to
the issuer or interest payments due to the Company. The amount of credit risk
is indicated by the issuer's credit rating which is assigned by one or more
internationally recognised rating agencies. This does not amount to a guarantee
of the issuer's creditworthiness but generally provides a good indicator of the
likelihood of default. Securities which have a lower credit rating are
generally considered to have a higher credit risk and a greater possibility of
default than more highly rated securities. There is a risk that an
internationally recognised rating agency may assign incorrect or inappropriate
credit ratings to issuers. Issuers often issue securities which are ranked in
order of seniority which, in the event of default, would be reflected in the
priority in which investors might be paid back.
The level of defaults in the Portfolio and the losses suffered on such defaults
may increase in the event of adverse financial or credit market conditions.
In the event of a default of a Credit Security, the Company's right to recover
will depend on the ability of the Company to exercise any rights that it has
against the borrower under the insolvency legislation of the jurisdiction in
which the borrower is incorporated. As a creditor, the Company's level of
protection and rights of enforcement may therefore vary significantly from one
country to another, may change over time and may be subject to rights and
protections which the relevant borrower or its other creditors might be
entitled to exercise. Refer to Investment Objective and Policy in the Summary
Information for information regarding investment restrictions currently in
place in order to manage credit risk. For additional information refer to note
16 to the Financial Statements.
Foreign currency risk
The Company is exposed to foreign currency risk through its investments
denominated in currencies other than Sterling. The Company's share capital is
denominated in Sterling and its expenses are incurred in Sterling. The
Company's Financial Statements are maintained and presented in Sterling. At
year end, of the foreign currency investments, approximately 44% are in Euros
and 17% are in US Dollars. Amongst other factors affecting the foreign exchange
markets, events in the Eurozone and U.S. may have an impact upon the value of
the Euro and US dollar which in turn will impact the value of the Company's
Euro and US dollar denominated investments. The Company manages its exposure to
currency movements by using spot and forward foreign exchange contracts, which
are rolled forward periodically. For additional information refer to note 16 to
the Financial Statements.
Reinvestment risk
Quantitative easing resulted in lower yields across all fixed income products
and tightening credit spreads. This could pose a challenge for the Portfolio
Manager when it comes to reinvesting any monies that result from portfolio
asset redemptions and income payments. The Portfolio Manager has recognised
this potential challenge and performed ongoing cash flow analysis on the
current portfolio; encouragingly the redemptions and expected income payments
over the coming 12 months do not pose a significant challenge. Trying to
predict market conditions years ahead is notoriously difficult, however the
Portfolio Manager recognises there may be a requirement to be more
opportunistic in terms of timing for new investments i.e. aim to reinvest when
the market is most volatile and also to remain vigilant to requests for
issuance of new shares. For further information refer to note 16 to the
Financial Statements.
Other Risks and Uncertainties
The Board has identified the following other risks and uncertainties along with
steps taken to mitigate them:
Operational risks
The Company is exposed to the risk arising from any failures of systems and
controls in the operations of the Portfolio Manager, Administrator, AIFM and
the Custodian and Depositary amongst others. The Board and its Audit Committee
regularly review reports from the Portfolio Manager, the AIFM, Administrator
and Custodian and Depositary on their internal controls. The Administrator will
report to the Portfolio Manager any valuation issues which will be brought to
the Board for final approval as required.
Accounting, legal and regulatory risks
The Company is exposed to the risk that it may fail to maintain accurate
accounting records, fail to comply with requirements of its Admission document
and fail to meet listing obligations. The accounting records prepared by the
Administrator are reviewed by the Portfolio Manager. The Portfolio Manager,
Administrator, AIFM, Custodian and Depositary and Corporate Broker provide
regular updates to the Board on compliance with the Admission document and
changes in regulation. Changes in legal or regulatory environment can have a
major impact on some classes of debt. The Portfolio Manager and Board monitor
this and take appropriate action where needed.
Income recognition risk
The Board considers income recognition as another risk and uncertainty of the
Company. The Portfolio Manager estimates the remaining life of the security and
its likely terminal value, which has an impact on the effective interest rate
of the Credit Securities which in turn impacts the calculation of interest
income. The Board asked the Audit Committee to consider this risk with work
undertaken by the Audit Committee as discussed in the Audit Committee Report.
As a result of this work, the Board is satisfied that income is appropriately
stated in all material aspects in the Financial Statements.
Cyber security risks
The Company is exposed to risk arising from a successful cyber-attack through
its service providers. The Company requests of its service providers that they
have appropriate safeguards in place to mitigate the risk of cyber-attacks
(including minimizing the adverse consequences arising from any such attack),
that they provide regular updates to the Board on cyber security, and conduct
ongoing monitoring of industry developments in this area. The Board is
satisfied that the Company's service providers have the relevant controls in
place to mitigate this risk.
Shareholder Engagement
The Board welcomes shareholders' views and places great importance on
communication with its shareholders. Shareholders wishing to meet with the
Chair and other Board members should contact the Company's Administrator.
The Portfolio Manager and Listing Sponsor maintain a regular dialogue with
institutional shareholders, the feedback from which is reported to the Board.
The Company's Annual General Meeting ("AGM") provides a forum for shareholders
to meet and discuss issues of the Company and shareholders with the opportunity
to vote on the resolutions as specified in the Notice of AGM. The Notice of the
AGM and the results are released to the LSE in the form of an announcement.
An Extraordinary Resolution was proposed at the AGM on 6 July 2017 to dis-apply
pre-emption rights to equity shares allotted by the Directors of the Company
for cash, as if the pre-emption rights contained in the Articles in respect of
such equity securities did not apply. It was not carried by the necessary 75%
of votes in favour. Following this, an Extraordinary General Meeting was held
on
13 September 2017 proposing the same Extraordinary Resolution which was
subsequently carried by the necessary 75% of votes in favour.
In addition, the Company maintains a website which contains comprehensive
information, including links to regulatory announcements, share price
information, financial reports, investment objective and investor contacts.
Significant Shareholdings
Shareholders with holdings of more than 3.0% of the Shares of the Company at 15
January 2018 were as follows:
Percentage
of
Number of issued share
shares capital
Nortrust Nominees Limited (TDS) 11,428,639 7.10%
The Bank Of New York (Nominees) Limited 9,372,671 5.82%
Pershing Nominees Limited (CCCLT) 7,849,376 4.88%
State Street Nominees Limited (OM04) 5,922,960 3.68%
W B Nominees Limited 5,879,159 3.65%
Those invested directly or indirectly in 3.0% or more of the issued share
capital of the Company will have the same voting rights as other holders of the
Shares.
Independent Auditors
A resolution for the reappointment of PricewaterhouseCoopers CI LLP will be
proposed at the forthcoming AGM.
Signed on behalf of the Board of Directors on 17 January 2018 by:
Chair
Director
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Audited
Financial Statements in accordance with applicable Guernsey law and
regulations.
Guernsey Company law requires the Directors to prepare Financial Statements for
each financial year. Under that law they have elected to prepare the Financial
Statements in accordance with International Financial Reporting Standards
("IFRS") and applicable law.
The Financial Statements are required by law to give a true and fair view of
the state of affairs of the Company and of the profit or loss of the Company
for that period.
In preparing these Financial Statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the Financial
Statements; and
- prepare the Financial Statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors confirm that they have complied with these requirements in
preparing the Financial Statements.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the Financial Statements have been
properly prepared in accordance with The Companies (Guernsey) Law, 2008. They
have general responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Company and to prevent and detect fraud and
other irregularities.
So far as the Directors are aware, there is no relevant audit information of
which the Company's auditors are unaware, and each Director has taken all the
steps that he or she ought to have taken as a Director in order to make himself
or herself aware of any relevant audit information and to establish that the
Company's auditors are aware of that information.
The Directors are responsible for the oversight of the maintenance and
integrity of the corporate and financial information in relation to the Company
website; the work carried out by the auditors does not involve consideration of
these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors confirm that to the best of their knowledge (a) The Financial Statements have been prepared in accordance with IFRS and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company as at and for the year ended 30 September 2017. (b) The Annual Report includes information detailed in the Chair's Statement, Portfolio Manager's Report, Directors' Report, Directors' Remuneration Report, Audit Committee Report, Alternative Investment Fund Manager's Report and Depositary Statement provides a fair review of the information required by: (i) DTR 4.1.8 and DTR 4.1.9 of the Disclosure and Transparency Rules, being a fair review of the Company business and a description of the principal risks and uncertainties facing the Company; and (ii) DTR 4.1.11 of the Disclosure and Transparency Rules, being an indication of important events that have occurred since the end of the financial year and the likely future development of the Company. In the opinion of the Board, the Financial Statements taken as a whole, are fair, balanced and understandable and provide the information necessary to assess the Company's position and performance, business model and strategy. By order of the Board, Chair Director 17 January 2018 DIRECTORS' REMUNERATION REPORT The Directors' remuneration report has been prepared in accordance with the UK Code as issued by the UK Listing Authority. An ordinary resolution for the approval of the annual remuneration report was put to the shareholders at the AGM held on 6 July 2017. Remuneration policy The Company's policy in regard to Directors' remuneration is to ensure that the Company maintains a competitive fee structure in order to recruit, retain and motivate non-executive Directors of excellent quality in the overall interests of shareholders. It is the responsibility of the Remuneration and Nomination Committee to determine and approve the Directors' remuneration, who will have given the matter proper consideration, having regard to the level of fees payable to non-executive Directors in the industry generally, the role that individual Directors fulfil in respect of Board and Committee responsibilities and the time committed to the Company's affairs. The Chair's remuneration is decided separately and is approved by the Board as a whole. No element of the Directors' remuneration is performance related, nor does any Director have any entitlement to pensions, share options or any long term incentive plans from the Company. Remuneration The Directors of the Company are remunerated for their services at such a rate as the Directors determine, provided that the aggregate amount of such fees does not exceed GBP150,000 per annum. Directors are remunerated in the form of fees, payable quarterly in arrears, to the Director personally. No Directors have been paid additional remuneration by the Company outside their normal Director's fees and expenses. In the year ended 30 September 2017 the Directors received the following annual remuneration in the form of Directors' fees: Claire Whittet (Chair of the Board) GBP35,000 Christopher Legge (Audit Committee GBP32,500 Chairman) Thomas Emch (retired from the Board GBP30,000 30.09.2017) Ian Martin (MEC Chairman) GBP30,000 Total GBP127,500 Following the Remuneration and Nomination Committee meeting of the 13 September 2017 and the Board evaluation report from Optimus (Directors' Report), the Directors' fees were increased effective 1 October 2017 as follows: Claire Whittet (Chair of the Board) GBP42,000 Christopher Legge (Audit Committee GBP37,000 Chairman) Ian Martin (MEC Chairman) GBP32,000 Total GBP111,000 Appropriate Directors' and Officers' liability insurance cover is maintained by the Company on behalf of the Directors. The Directors were appointed as non-executive Directors by letters issued in February and July 2014. Each Director's appointment letter provides that, upon the termination of his/her appointment, that he/she must resign in writing and all records remain the property of the Company. The Directors' appointments can be terminated in accordance with the Articles and without compensation. There is no notice period specified in the Articles for the removal of Directors. The Articles provide that the office of Director shall be terminated by, among other things: (a) written resignation; (b) unauthorised absences from board meetings for six months or more; (c) unanimous written request of the other Directors; and (d) an ordinary resolution of the Company. Under the terms of their appointment, each Director is required to retire by rotation and be subject to re-election at least every three years but have opted for annual re-election. The Directors are required to seek re-election if they have already served for more than nine years. The Company may terminate the appointment of a Director immediately on serving written notice and no compensation is payable upon termination of office as a director of the Company becoming effective. The amounts payable to Directors shown in note 14 to the Financial Statements are for services as non-executive Directors. No Director has a service contract with the Company, nor are any such contracts proposed. Signed on behalf of the Board of Directors on 17 January 2018 by: Chair Director AUDIT COMMITTEE REPORT On the following pages, we present the Audit Committee's Report, setting out the responsibilities of the Audit Committee and its key activities for the year ended 30 September 2017. The Audit Committee has scrutinised the appropriateness of the Company's system of risk management and internal financial and operating controls, the robustness and integrity of the Company's financial reporting, along with the external audit process. The Audit Committee has devoted time to ensuring that controls and processes have been properly established, documented and implemented. During the course of the year, the information that the Audit Committee has received has been timely and clear and has enabled the Committee to discharge its duties effectively. The Audit Committee is supportive of the latest UK Code recommendations and other corporate governance organisations such as the AIC, and believes that the revised AIC Code allows the Audit Committee to further strengthen its role as a key independent oversight Committee. Role and responsibilities The primary function of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities. This includes reviewing the financial reports and other financial information and any significant financial judgement contained therein, before publication. In addition, the Audit Committee reviews the systems of internal financial and operating controls on a continuing basis that the Administrator, Portfolio Manager, AIFM, and Custodian and Depositary and the Board have established with respect to finance, accounting, risk management, compliance, fraud and audit. The Audit Committee also reviews the accounting and financial reporting processes, along with reviewing the roles, independence and effectiveness of the external auditor. The ultimate responsibility for reviewing and approving the Annual and Interim Financial Statements remain with the Board. The Audit Committee's full terms of reference can be obtained by contacting the Company's Administrator. Risk management and internal control The Board, as a whole, consider the nature and extent of the Company's risk management framework and the risk profile that is acceptable in order to achieve the Company's strategic objectives. As a result, it is considered that the Board has fulfilled its obligations under the AIC Code. The Audit Committee continues to be responsible for reviewing the adequacy and effectiveness of the Company's on-going risk management systems and processes. Its system of internal controls, along with its design and operating effectiveness, is subject to review by the Audit Committee through reports received from the Portfolio Manager, AIFM and Custodian and Depositary, along with those from the Administrator and external auditor. Fraud, Bribery and Corruption The Board has relied on the overarching requirement placed on the service providers under the relevant agreements to comply with applicable law, including anti-bribery laws. A review of the service provider policies took place at the Management Engagement Committee Meeting on 6 July 2017. The Board receives confirmation from all service providers that there has been no fraud, bribery or corruption. Financial reporting and significant financial issues The Audit Committee assesses whether suitable accounting policies have been adopted and whether the Portfolio Manager has made appropriate estimates and judgements. The Audit Committee reviews accounting papers prepared by the Portfolio Manager and Administrator which provides details on the main financial reporting judgements. The Audit Committee also reviews reports by the external auditors which highlight any issues with respect to the work undertaken on the audit.
The significant issues considered during the year by the Audit Committee in
relation to the Financial Statements and how they were addressed are detailed
below:
(i) Valuation of investments:
The Company's investments had a fair value of GBP148,499,775 as at 30 September
2017
(30 September 2016: GBP127,968,371) and represent a substantial portion of net
assets of the Company. As such this is the largest factor in relation to the
consideration of the Financial Statements. These investments are valued in
accordance with the Accounting Policies set out in note 2 and note 3 to the
Financial Statements. The Audit Committee considered the valuation of the
investments held by the Company as at 30 September 2017 to be reasonable based
on information provided by the Portfolio Manager, AIFM, Administrator,
Custodian and Depositary on their processes for the valuation of these
investments.
(ii) Income Recognition:
The Audit Committee considered the calculation of income from investments
recorded in the Financial Statements as at 30 September 2017. As disclosed in
note 3(ii)(b) of the Notes to the Financial Statements, the estimated life of
Credit Securities is determined by the Portfolio Manager, impacting the
effective interest rate of the Credit Securities which in turn impacts the
calculation of income from investments. The Audit Committee reviews the
Portfolio Manager's processes at least annually for determining the expected
life of the Company's investments and have found them to be reasonable based on
the explanations provided and information obtained from the Portfolio Manager.
The Audit Committee was therefore satisfied that income was appropriately
stated in all material aspects in the Financial Statements.
Following a review of the presentations and reports from the Portfolio Manager
and Administrator and consulting where necessary with the external auditor, the
Audit Committee is satisfied that the Financial Statements appropriately
address the critical judgements and key estimates (both in respect to the
amounts reported and the disclosures). The Audit Committee is also satisfied
that the significant assumptions used for determining the value of assets and
liabilities have been appropriately scrutinised, challenged and are
sufficiently robust.
The Company's reporting currency is Sterling while a significant proportion of
the investments owned are denominated in foreign currencies. The Company
operates a hedging strategy designed to mitigate the impact of foreign currency
rate changes on the performance of the Company. The Audit Committee has used
information from the Administrator and Portfolio Manager to satisfy itself
concerning the effectiveness of the hedging process, as well as to confirm that
realised and unrealised foreign currency gains and losses have been correctly
recorded.
At the Audit Committee meeting to review the Annual Report and Audited
Financial Statements, the Audit Committee received and reviewed a report on the
audit from the external auditors. On the basis of its review of this report,
the Audit Committee is satisfied that the external auditor has fulfilled its
responsibilities with diligence and professional scepticism. The Audit
Committee advised the Board that these Annual Financial Statements, taken as a
whole, are fair, balanced and understandable.
The Audit Committee is satisfied that the judgements made by the Portfolio
Manager and Administrator are reasonable, and that appropriate disclosures have
been included in the Financial Statements.
External Auditors
The Audit Committee has responsibility for making a recommendation on the
appointment, re-appointment and removal of the external auditors.
PricewaterhouseCoopers CI LLP ("PwC") were appointed as the first auditors of
the Company. During the year the Audit Committee received and reviewed audit
plans and reports from the external auditors. It is standard practice for the
external auditors to meet privately with the Audit Committee without the
Portfolio Manager and other service providers being present at each Audit
Committee meeting.
To assess the effectiveness of the external audit process, the auditors were
asked to articulate the steps that they have taken to ensure objectivity and
independence, including where the auditor provides non-audit services. The
Audit Committee monitors the auditors' performance, behaviour and effectiveness
during the exercise of their duties, which informs the decision to recommend
reappointment on an annual basis.
The Company generally does not utilise external auditors for internal audit
purposes, secondments or valuation advice. Services which are in the nature of
audit, such as tax compliance, private letter rulings, accounting advice and
disclosure advice are normally permitted but all non-audit services are
required to be pre-approved by the Audit Committee.
The following table summarises the remuneration paid to PwC and to other PwC
member firms for audit and non-audit services in respect of the year ended 30
September 2017 and for the period ended 30 September 2016.
Year ended Year ended
30.09.17 30.09.16
PricewaterhouseCoopers CI LLP - Assurance work GBP GBP
- Annual audit of the Company 48,925 50,000
- Interim review 16,000 16,000
PricewaterhouseCoopers CI LLP - Non assurance work
- Tax consulting and compliance services 15,000 15,000
- Ratio of assurance to non-assurance 81% / 19% 81% / 19%
work
The Company does not qualify as an EU Public Interest Entity and is therefore
not subject to the restrictions on non-audit services provided by its auditor
under this regime.
For any questions on the activities of the Audit Committee not addressed in the
foregoing, a member of the Audit Committee remains available to attend each AGM
to respond to such questions.
The Audit Committee Report was approved by the Audit Committee on 17 January
2018 and signed on behalf by:
Christopher Legge
Chairman, Audit Committee
ALTERNATIVE INVESTMENT MANAGER'S REPORT
Maitland Institutional Services Ltd acts as the Alternative Investment Fund
Manager ("AIFM") of TwentyFour Select Monthly Income Fund Limited ("the
Company") providing portfolio management and risk management services to the
Company.
The AIFM has delegated the following of its alternative investment fund
management functions:
- It has delegated the portfolio management function for listed and unlisted
investments to TwentyFour Asset Management LLP.
The AIFM is required by the Alternative Investment Fund Managers Directive
2011, 61/EU (the "AIFM Directive") and all applicable rules and regulations
implementing the AIFM Directive in the UK (the "AIFM" Rules):
- to make the annual report available to investors and to ensure that the
annual report is prepared in accordance with applicable accounting standards,
the Company's articles of incorporation and the AIFM Rules and that the annual
report is audited in accordance with International Standards on Auditing;
- be responsible for the proper valuation of the Company's assets, the
calculation of the Company's net asset value and the publication of the
Company's net asset value; and,
- to make available to the Company's shareholders, a description of all
fees, charges and expenses and the amounts thereof, which have been directly or
indirectly borne by them,
- ensure that the Company's shareholders have the ability to monitise their
share in the capital of the Company in a manner consistent with the principle
of fair treatment of investors under the AIFM Rules and in accordance with the
Company's tender policy and its obligations.
The AIFM is required to ensure that the annual report contains a report that
shall include a fair and balanced review of the activities and performance of
the Company, containing also a description of the principal risks and
investment or economic uncertainties that the Company might face.
AIFM Remuneration
Under the Alternative Investment Fund Managers Directive, acting as the AIFM,
Maitland Institutional Services Ltd is required to disclose how those whose
actions have a material impact on the Company are remunerated.
Due to the nature of the activities conducted by Maitland Institutional
Services Ltd, it has deemed itself as a lower risk firm in accordance with SYSC
19B and the remuneration code. The only employees at Maitland Institutional
Services Ltd permitted to have a material impact on the risk profile of the AIF
are the Board and the Head of Risk and Compliance.
The delegated Portfolio Manager, TwentyFour Asset Management LLP, is subject to
regulatory requirements on remuneration that are broadly equivalent to those
detailed in the Alternative Investment Fund Managers Directive, which include
the Capital Requirements Directive or Markets in Financial Instruments
Directive. While a portion of the remuneration paid by the Portfolio Manager
is variable and based, in part, on the performance of the investment portfolio,
the investment discretion of the Portfolio Manager is strictly controlled
within certain pre-defined parameters as detailed in the prospectus of the
Company.
Under the AIFM Directive, the AIFM is required to stipulate how much it pays to
its staff, in relation to fixed and variable remuneration and how much, in
relation to the Company, is firstly attributed to all staff and those that are
deemed, under the directive, to have an impact on the risk profile of the
Company. Maitland Institutional Services Ltd does not pay any form of variable
remuneration.
September 2017 Number of Total remuneration Fixed remuneration
Beneficiaries paid
Total remuneration paid by 63 GBP74,566 GBP74,566
the AIFM during the year for
work performed on the AIF
Remuneration paid to 5 GBP13,422 GBP13,422
employees of the AIFM who
have a material impact on
the risk profile of the AIF
In so far as the AIFM is aware:
- there is no relevant audit information of which the Company's auditors or
the Company's board of directors are unaware; and
- the AIFM has taken all steps that it ought to have taken to make itself
aware of any relevant audit information and to establish that the auditors are
aware of that information.
We hereby certify that this report is made on behalf of the AIFM, Maitland
Institutional Services Ltd.
D. Jones
S. Georgala
Directors
Maitland Institutional Services Limited
17 January 2018
DEPOSITARY STATEMENT
for the year ended 30 September 2017
Report of the Depositary to the Shareholders
Northern Trust (Guernsey) Limited has been appointed as Depositary to
TwentyFour Select Monthly Income Fund Limited (the "Company") in accordance
with the requirements of Article 36 and Articles 21(7), (8) and (9) of the
Directive 2011/61/EU of the European Parliament and of the Council of 8 June
2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC
and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (the
"AIFM Directive").
We have enquired into the conduct of Maitland Institutional Services Limited
(the "AIFM") and the Company for the year ended 30 September 2017, in our
capacity as Depositary to the Company.
This report including the review provided below has been prepared for and
solely for the Shareholders in the Company. We do not, in giving this report,
accept or assume responsibility for any other purpose or to any other person to
whom this report is shown.
Our obligations as Depositary are stipulated in the relevant provisions of the
AIFM Directive and the relevant sections of Commission Delegated Regulation
(EU) No 231/2013 (collectively the "AIFMD legislation") and The Authorised
Closed Ended Investment Scheme Rules 2008.
Amongst these obligations is the requirement to enquire into the conduct of the
AIFM and the Company and their delegates in each annual accounting period.
Our report shall state whether, in our view, the Company has been managed in
that period in accordance with the AIFMD legislation. It is the overall
responsibility of the AIFM and the Company to comply with these provisions. If
the AIFM, the Company or their delegates have not so complied, we as the
Depositary will state why this is the case and outline the steps which we have
taken to rectify the situation.
The Depositary and its affiliates is or may be involved in other financial and
professional activities which may on occasion cause a conflict of interest with
its roles with respect to the Company. The Depositary will take reasonable care
to ensure that the performance of its duties will not be impaired by any such
involvement and that any conflicts which may arise will be resolved fairly and
any transactions between the Depositary and its affiliates and the Company
shall be carried out as if effected on normal commercial terms negotiated at
arm's length and in the best interests of Shareholders.
Basis of Depositary Review
The Depositary conducts such reviews as it, in its reasonable discretion,
considers necessary in order to comply with its obligations and to ensure that,
in all material respects, the Company has been managed (i) in accordance with
the limitations imposed on its investment and borrowing powers by the
provisions of its constitutional documentation and the appropriate regulations
and (ii) otherwise in accordance with the constitutional documentation and the
appropriate regulations. Such reviews vary based on the type of Fund, the
assets in which a Fund invests and the processes used, or experts required, in
order to value such assets.
Review
In our view, the Company has been managed during the period, in all material
respects:
(i) in accordance with the limitations imposed on the investment and borrowing
powers of the
Company by the constitutional document; and by the AIFMD legislation; and
(ii) otherwise in accordance with the provisions of the constitutional
document; and the AIFMD
legislation.
For and on behalf of
Northern Trust (Guernsey) Limited
17 January 2018
INDEPENT AUDITOR'S REPORT
TO THE MEMBERS OF TWENTYFOUR SELECT MONTHLY INCOME FUND LIMITED
Report on the audit of the financial statements
______________________________________________________________________________________
Our opinion
In our opinion, the financial statements give a true and fair view of the
financial position of TwentyFour Select Monthly Income Fund Limited (the
"Company") as at 30 September 2017, and of its financial performance and its
cash flows for the year then ended in accordance with International Financial
Reporting Standards and have been properly prepared in accordance with the
requirements of The Companies (Guernsey) Law, 2008.
______________________________________________________________________________________
What we have audited
The Company's financial statements comprise:
- the Statement of Financial Position as at 30 September 2017;
- the Statement of Comprehensive Income for the year then ended;
- the Statement of Changes in Equity for the year then ended;
- the Statement of Cash Flows for the year then ended; and
- the Notes to the Financial Statements, which include a summary of
significant accounting policies.
______________________________________________________________________________________
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
("ISAs"). Our responsibilities under those standards are further described in
the Auditor's responsibilities for the audit of the financial statements
section of our report.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
______________________________________________________________________________________
Independence
We are independent of the Company in accordance with the International Ethics
Standards Board for Accountants' Code of Ethics for Professional Accountants
("IESBA Code"). We have fulfilled our other ethical responsibilities in
accordance with the IESBA Code.
__________________________________________________________________________________
____
Our audit approach
Overview
______________________________________________________________________________________
Materiality
- Overall Company materiality was GBP3.1 million which represents 2% of net
assets.
__________________________________________________________________________________
Audit scope
- The Company is incorporated and based in Guernsey.
- We conducted our audit of the financial statements from information
provided by Northern Trust International Fund Administration Services
(Guernsey) Limited (the "Administrator") to whom the board of directors has
delegated the provision of certain functions. The Company engages TwentyFour
Asset Management LLP (the "Portfolio Manager") to manage the investment
portfolio. We had significant interaction with the Portfolio Manager in
completing aspects of our audit work.
- We conducted all of our audit work in Guernsey, with the exception of our
on site visit to the Portfolio Manager in London at the planning stage of the
audit.
__________________________________________________________________________________
Key audit matters
- Valuation of investments
______________________________________________________________________________________
Audit scope
As part of designing our audit, we determined materiality and assessed the
risks of material misstatement in the financial statements. In particular, we
considered where the directors made subjective judgements; for example, in
respect of significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain. As in all of our
audits, we also addressed the risk of management override of internal controls,
including among other matters, consideration of whether there was evidence of
bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to
enable us to provide an opinion on the financial statements as a whole, taking
into account the structure of the Company, the accounting processes and
controls, and the industry in which the Company operates.
______________________________________________________________________________________
Materiality
The scope of our audit was influenced by our application of materiality. An
audit is designed to obtain reasonable assurance whether the financial
statements are free from material misstatement. Misstatements may arise due to
fraud or error. They 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.
Based on our professional judgement, we determined certain quantitative
thresholds for materiality, including the overall Company materiality for the
financial statements as a whole as set out in the table below. These, together
with qualitative considerations, helped us to determine the scope of our audit
and the nature, timing and extent of our audit procedures and to evaluate the
effect of misstatements, both individually and in aggregate on the financial
statements as a whole.
Overall Company materiality GBP3.1 million
How we determined it 2% of net assets
Rationale for the We believe that net assets is the most
materiality benchmark appropriate benchmark because this is the key
metric of interest to members of the Company.
We agreed with the Audit Committee that we would report to them misstatements
identified during our audit above GBP155,000, as well as misstatements below that
amount that, in our view, warranted reporting for qualitative reasons.
______________________________________________________________________________________
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of
most significance in our audit of the financial statements of the current
period. 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.
Key audit matter How our audit addressed the Key audit matter
Valuation of - We understood and evaluated the internal
investments control environment in place at the Administrator
Investments, valued at and the Portfolio Manager over the valuation of the
GBP148.5 million at year investment portfolio.
end, as shown within
note 9 and covered - We assessed the accounting policy for
within note 16 and 17, investment valuation for compliance with
are measured at fair International Financial Reporting Standards. We
value through profit or performed testing to check that the investment
loss and comprise a valuation had been accounted for and applied
diverse portfolio of consistently in accordance with the stated
credit securities. accounting policy.
Investments represent - We tested the valuation of investments using
the most significant independent third party price providers to reprice
balance on the the portfolio. Prices were obtained from a range of
Statement of Financial sources, which included exchange traded and
Position and, due to consensus prices. We sought to reprice the entire
the market liquidity portfolio, however all investments that we were
and assumptions unable to reprice, or investments that were repriced
underlying each yet exceeded a tolerable variance threshold from the
security, the Company's own final year end prices, were followed
valuations are subject up by the engagement team and supporting evidence
to management estimate for these prices was obtained from the Administrator
and judgment, as and/or the Portfolio Manager. We assessed the
detailed under note 3 independence, reputation and reliability of the
(ii)(a). providers of the supporting evidence provided in
these instances. No misstatements were identified
which required reporting to those charged with
governance.
- For a sample of disposals, we compared the
sales transaction price to the most recently
recorded valuation prior to the disposal, which
allowed us to assess the reliability of the
valuation data at that point. No matters were noted
which required reporting to those charged with
governance.
Other information
The directors are responsible for the other information. The other information
comprises all information listed within the Contents page of the Annual Report
and Audited Financial Statements (but does not include the financial statements
and our auditor's report thereon).
Other than as specified in our report, our opinion on the financial statements
does not cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is
to read the other information identified above and, in doing so, consider
whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard.
______________________________________________________________________________________
Responsibilities of directors for the financial statements
The directors are responsible for the preparation of financial statements that
give a true and fair view in accordance with International Financial Reporting
Standards, the requirements of Guernsey law and for such internal control as
the directors determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, the directors are responsible for
assessing the Company's ability to continue as a going concern, disclosing, as
applicable, matters relating to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the Company or to
cease operations, or have no realistic alternative but to do so.
______________________________________________________________________________________
Auditor's responsibilities for the audit of the financial statements
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 an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs 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
these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment
and maintain professional scepticism throughout the audit. We also:
- Identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a
material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
- Obtain an understanding of internal control relevant to the audit in
order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control.
- Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by the
directors.
- Conclude on the appropriateness of the directors' use of the going
concern basis of accounting and, based on the audit evidence obtained, whether
a material uncertainty exists related to events or conditions that may cast
significant doubt on the Company's ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw
attention in our auditor's report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our
auditor's report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
- Evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves fair
presentation.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the financial
statements of the current period and are therefore the key audit matters. We
describe these matters in our auditor's report unless law or regulation
precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our
report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
______________________________________________________________________________________
Report on other legal and regulatory requirements
Under The Companies (Guernsey) Law, 2008 we are required to report to you if,
in our opinion:
- we have not received all the information and explanations we require for
our audit;
- proper accounting records have not been kept; or
- the financial statements are not in agreement with the accounting
records.
We have no exceptions to report arising from this responsibility.
We have nothing to report in respect of the following matters which we have
reviewed:
- the directors' statement set out in the Directors' Report in relation to
going concern. As noted in the directors' statement, the directors have
concluded that it is appropriate to adopt the going concern basis in preparing
the financial statements. The going concern basis presumes that the Company has
adequate resources to remain in operation, and that the directors intend it to
do so, for at least one year from the date the financial statements were
signed. As part of our audit we have concluded that the directors' use of the
going concern basis is appropriate. However, because not all future events or
conditions can be predicted, these statements are not a guarantee as to the
Company's ability to continue as a going concern;
- the directors' statement that they have carried out a robust assessment
of the principal risks facing the Company and the directors' statement in
relation to the longer-term viability of the Company. Our review was
substantially less in scope than an audit and only consisted of making
inquiries and considering the directors' process supporting their statements;
checking that the statements are in alignment with the relevant provisions of
the UK Corporate Governance Code; and considering whether the statements are
consistent with the knowledge acquired by us in the course of performing our
audit; and
- the part of the Corporate Governance Statement relating to the Company's
compliance with the ten further provisions of the UK Corporate Governance Code
specified for our review.
This report, including the opinion, has been prepared for and only for the
members as a body in accordance with Section 262 of The Companies (Guernsey)
Law, 2008 and for no other purpose. We do not, in giving this opinion, accept
or assume responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
Evelyn Brady
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
17 January 2018
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September 2017
Year ended Year ended
30.09.17 30.09.16
Notes GBP GBP
Income
Interest income 11,253,737 10,810,286
Net foreign currency gain/(loss) 8 159,755 (11,251,978)
Net gain on financial assets
at fair value through profit or loss 9 11,113,207 7,938,726
Total income 22,526,699 7,497,034
Expenses
Portfolio management fees 14 (1,095,655) (995,849)
Directors' fees 14 (127,500) (127,500)
Administration fees 15 (107,946) (101,667)
AIFM management fees 15 (73,744) (68,036)
Audit fee (62,630) (58,500)
Custody fees 15 (18,297) (16,368)
Broker fees 15 (50,000) (50,000)
Depositary fees 15 (25,157) (25,000)
Legal fees (58,983) (34,895)
Other expenses (132,363) (128,311)
Total expenses (1,752,275) (1,606,126)
Total comprehensive income for the year 20,774,424 5,890,908
Earnings per Ordinary Share -
Basic & Diluted 4 0.132 0.039
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these Financial Statements.
STATEMENT OF FINANCIAL POSITION
as at 30 September 2017
30.09.17 30.09.16
Assets Notes GBP GBP
Current assets
Financial assets at fair value through profit
and loss
- Investments 9 148,499,775 127,968,371
- Derivative assets: Forward currency 16 77,788 -
contracts
Amounts due from broker - 1,132,190
Other receivables 10 2,762,950 2,477,965
Cash and cash equivalents 8,169,355 8,039,495
Total current assets 159,509,868 139,618,021
Liabilities
Current liabilities
Amounts due to broker 3,676,479 2,297,691
Other payables 11 442,699 219,031
Financial liabilities at fair value through
profit and loss
- Derivative liabilities: Forward currency 16 182,733 279,458
contracts
Total current liabilities 4,301,911 2,796,180
Total net assets 155,207,957 136,821,841
Equity
Share capital account 12 157,001,121 148,691,163
Other reserves (1,793,164) (11,869,322)
Total equity 155,207,957 136,821,841
Ordinary Shares in issue 12 160,929,151 152,079,151
Net Asset Value per Ordinary Share (pence) 6 96.44 89.97
The Financial Statements were approved by the Board of Directors on 17 January
2018 and signed on its behalf by:
Chair
Director
The accompanying notes are an integral part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2017
Share Other
Capital
Account Reserves Total
GBP GBP GBP
Balance at 01 October 2016 148,691,163 (11,869,322) 136,821,841
Issue of shares 4,746,518 - 4,746,518
Reissue of treasury shares 3,705,827 - 3,705,827
Share issue costs (100,022) - (100,022)
Income equalisation on new issues (42,365) 42,365 -
Distributions paid - (10,740,631) (10,740,631)
Total comprehensive income for the year - 20,774,424 20,774,424
Balance at 30 September 2017 157,001,121 (1,793,164) 155,207,957
Share Other
Capital
Account Reserves Total
GBP GBP GBP
Balance at 01 October 2015 142,609,447 (8,049,103) 134,560,344
Reissue of treasury shares 6,193,760 - 6,193,760
Share issue costs (62,197) - (62,197)
Income equalisation on new issues (49,847) 49,847 -
Distributions paid - (9,760,974) (9,760,974)
Total comprehensive income for the year - 5,890,908 5,890,908
Balance at 30 September 2016 148,691,163 (11,869,322) 136,821,841
The accompanying notes are an integral part of these Financial Statements.
STATEMENT OF CASH FLOWS
for the year ended 30 September 2017
Year ended Year ended
30.09.17 30.09.16
Notes GBP GBP
Cash flows used in operating activities
Total comprehensive income for the year 20,774,424 5,890,908
Adjustments for:
Net gain on financial assets at fair value (11,113,207) (7,938,726)
through profit or loss
Amortisation adjustment under effective 9 (1,180,151) (1,087,382)
interest rate method
Unrealised gain on derivatives 8 (174,516) (388,127)
(Increase)/decrease in other receivables 10 (284,985) 316,846
Increase/(decrease) in other payables 11 223,668 (26,109)
Purchase of investments (119,732,379) (75,295,581)
Sale of investments 114,005,314 85,664,732
Net cash generated from operating 2,518,168 7,136,561
activities
Cash flows from financing activities
Proceeds from issue of ordinary shares 12 4,746,518 -
Proceeds from re-issuance of treasury 12 3,705,827 6,193,760
shares
Share issue costs 12 (100,022) (62,197)
Dividend distribution 19 (10,740,631) (9,760,974)
Net cash outflow from financing activities (2,388,308) (3,629,411)
Increase in cash and cash equivalents 129,860 3,507,150
Cash and cash equivalents at beginning of 8,039,495 4,532,345
year
Cash and cash equivalents at end of year 8,169,355 8,039,495
The accompanying notes are an integral part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017
1. General Information
TwentyFour Select Monthly Income Fund Limited (the "Company") was incorporated
with limited liability in Guernsey, as a closed-ended investment company on 12
February 2014. The Company's Shares were listed with a Premium Listing on the
Official List of the UK Listing Authority and admitted to trading on the Main
Market of the London Stock Exchange ("LSE") on
10 March 2014.
The investment objective and policy is set out in the Summary Information.
The Portfolio Manager of the Company is TwentyFour Asset Management LLP (the
"Portfolio Manager").
2. Principal Accounting Policies
a) Basis of preparation and Statement of compliance
The Financial Statements have been prepared in accordance with International
Financial Reporting Financial Standards ("IFRS") as issued by the International
Accounting Standards Board ("IASB") and are in compliance with the Companies
(Guernsey) Law, 2008.
b) Presentation of information
The Financial Statements have been prepared on a going concern basis under the
historical cost convention adjusted to take account of the revaluation of the
Company's financial assets and liabilities at fair value through profit or
loss.
c) Standards, amendments and interpretations issued but not yet effective
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 15 Revenue from Contracts with Customers (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 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 current financial instruments as they will
continue to be measured at fair value through profit or loss.
No new accounting standards were effected or adopted during the year having an
effect on the financial statements.
d) Financial assets at fair value through profit or loss
Classification
The Company classifies its investments in credit securities and derivatives as
financial assets at fair value through profit or loss.
This category has two sub-categories: financial assets or financial liabilities
held for trading; and those designated at fair value through profit or loss at
inception.
(i) Financial assets and liabilities held for trading
A financial asset or financial liability is classified as held for trading if
it is acquired or incurred principally for the purpose of selling or
repurchasing in the near term or if on initial recognition is part of a
portfolio of identifiable financial investments that are managed together and
for which there is evidence of a recent actual pattern of short-term profit
taking. Derivatives are categorised as held for trading. The Company does not
classify any derivatives as hedges in a designated hedging relationship and
therefore does not apply hedge accounting.
(ii) Financial assets and financial liabilities designated at fair value
through profit or loss
Financial assets and financial liabilities designated at fair value through
profit or loss at inception are financial instruments that are not classified
as held for trading but are managed, and their performance is evaluated on a
fair value basis in accordance with the Company's documented investment
strategy.
The Company's policy requires the Portfolio Manager and the Board of Directors
to evaluate the information about these financial assets and liabilities on a
fair value basis together with other related financial information.
Recognition, derecognition and measurement
Regular purchases and sales of investments are recognised on the trade date,
the date on which the Company commits to purchase or sell the investment.
Financial assets and financial liabilities at fair value through profit or loss
are initially recognised at fair value. Transaction costs are expensed as
incurred in the Statement of Comprehensive Income. Financial assets are
derecognised when the rights to receive cash flows from the investments have
expired or the Company has transferred substantially all risks and rewards of
ownership.
The Company may invest in any category of credit security, including, without
prejudice to the generality of the foregoing, bank capital, corporate bonds,
high yield bonds, leveraged loans, payment-in-kind notes and asset backed
securities.
The Company records any principal repayments as they arise and realises a gain
or loss in the net gains on financial assets at fair value through profit or
loss in the Statement of Comprehensive Income in the period in which they
occur.
The interest income arising on these Credit Securities is recognised on a
time-proportionate basis using the effective interest rate method and shown
within income in the Statement of Comprehensive Income.
i) Credit Securities traded or dealt on an active market or exchange
Credit Securities that are traded or dealt on an active market or exchange are
valued by reference to their quoted mid-market price as at the close of trading
on the reporting date as the Directors deem the mid-market price to be a
reasonable approximation of an exit price.
ii) Credit Securities not traded or dealt on an active market or exchange
Credit Securities which are not traded or dealt on active markets or exchanges
are valued by reference to their mid-price, as at the close of business on the
reporting date as determined by an independent price vendor. If a price cannot
be obtained from an independent price vendor, or where the Portfolio Manager
determines that the provided price is not an accurate representation of the
fair value of the Credit Security, the Portfolio Manager will source mid-price
quotes at the close of business on the reporting date from independent third
party brokers/dealers for the relevant security. If no mid-price is available
then a bid-price will be used.
In cases where no third party price is available (either from an independent
price vendor or independent third party brokers/dealers), or where the
Portfolio Manager determines that the provided price is not an accurate
representation of the fair value of the Credit Security, the Portfolio Manager
will determine the valuation based on the Portfolio Manager's valuation policy.
This may include the use of a comparable arm's length transaction, reference to
other securities that are substantially the same, discounted cash flow analysis
and other valuation techniques commonly used by market participants making the
maximum use of market inputs and relying as little as possible on
entity-specific inputs.
Over-the-counter derivative contracts such as Interest Rate Swaps are valued on
a weekly basis. This may be done using reference to data supplied from an
independent data source or an alternative vendor as deemed suitable by the
Directors. Where data from an independent data source is not available, the
valuation may be done by using the counterparty's valuation provided that the
valuation is approved or verified by a party who is approved for the purpose by
the Directors and who is independent of the counterparty.
Forward foreign currency contracts
Forward foreign currency contracts are derivative contracts and as such are
recognised at fair value on the date on which they are entered into and
subsequently measured at their fair value. Fair value is determined by rates in
active currency markets. All forward foreign currency contracts are carried as
assets when fair value is positive and as liabilities when fair value is
negative. Gains and losses on forward currency contracts are recognised as part
of net foreign currency gains in the Statement of Comprehensive Income.
Interest rate swaps
Interest rate swaps are derivative contracts and as such are recognised at fair
value on the date on which they are entered into and subsequently measured at
their fair value. Fair value is determined by rates provided by brokers. All
interest rate swaps are carried as assets when fair value is positive and as
liabilities when fair value is negative. Gains and losses on interest rate
swaps are recognised as part of net gains and losses on financial assets at
fair value through profit or loss in the Statement of Comprehensive Income.
Impairment
Financial assets that are stated at cost or amortised cost are reviewed at each
reporting date to determine whether there is objective evidence of impairment.
If any such indication exists, an impairment loss is recognised in the
Statement of Comprehensive Income as the difference between the asset's
carrying amount and the present value of estimated future cash flows discounted
at the financial asset's effective interest rate.
Any impairment losses impacting the amortised cost disclosed for the financial
assets at fair value through profit and loss are recognised in the Statement of
Comprehensive Income as realised losses within the net gain/loss on financial
assets at fair value through profit or loss.
e) Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the
Statement of Financial Position when there is a legally 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. Derivatives
are not settled on a net basis and therefore derivative assets and liabilities
are shown gross.
f) Amounts due from and due to brokers
Amounts due from and to brokers represent receivables for securities sold and
payables for securities purchased that have been contracted for but not yet
settled or delivered on the statement of financial position date respectively.
These amounts are recognised initially at fair value and subsequently measured
at amortised cost using the effective interest rate method.
g) Income
Interest income is recognised on a time-proportionate basis using the effective
interest rate method. Discounts received or premiums paid in connection with
the acquisition of Credit Securities are amortised into interest income using
the effective interest rate method over the expected life of the related
security.
The effective interest rate method is a method of calculating the amortised
cost of a financial asset or financial liability and of allocating the interest
income or interest expense over the relevant period. The effective interest
rate is the rate that exactly discounts estimated future cash payments or
receipts throughout the expected life of the financial instrument, or, when
appropriate, a shorter period, to the net carrying amount of the financial
asset or financial liability.
When calculating the effective interest rate, the Portfolio Manager estimates
cash flows considering the expected life of the financial instrument, including
future credit losses and deferred interest payments. The calculation includes
all fees and points paid or received between parties to the contract that are
an integral part of the effective interest rate and all other premiums or
discounts.
h) Cash and cash equivalents
Cash and cash equivalents comprises deposits held at call with banks and other
short-term investments in an active market with original maturities of three
months or less and bank overdrafts. Bank overdrafts are included in current
liabilities in the Statement of Financial Position.
i) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of Ordinary Shares are shown in equity as a
deduction, net of tax, from the proceeds and disclosed in the Statement of
Changes in Equity.
Repurchased Tendered Shares are treated as a distribution of capital and
deducted from the Share Capital account.
j) Other reserves
Other reserves consist of equalisation on issues of new shares, distributions
paid and total comprehensive income for the year.
k) Foreign currency translation
Functional and presentation currency
Items included in the financial statements are measured using Sterling, the
currency of the primary economic environment in which the Company operates (the
"functional currency"). The Financial Statements are presented in Sterling,
which is the Company's presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign
currency assets and liabilities are translated into the functional currency
using the exchange rate prevailing at the Statement of Financial Position date.
Foreign exchange gains and losses relating to the financial assets and
liabilities carried at fair value through profit or loss are presented in the
Statement of Comprehensive Income.
l) Transaction costs
Transaction costs on financial assets at fair value through profit or loss
include fees and commissions paid to agents, advisers, brokers and dealers.
Transaction costs, when incurred, are immediately recognised in the Statement
of Comprehensive Income.
m) Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Board. The
Directors are of the opinion that the Company is engaged in a single segment of
business, being investments in Credit Securities. The Directors manage the
business in this way. For additional information refer to note 18.
n) Expenses
All expenses are included in the Statement of Comprehensive Income on an
accruals basis and are recognised through profit or loss in the Statement of
Comprehensive Income.
o) Other receivables
Other receivables are amounts due in the ordinary course of business. If
collection is expected in one year or less, they are classified as current
assets. If not, they are presented as non-current assets. Other receivables are
recognised initially at fair value and subsequently measured at amortised cost
using the effective interest rate method, less provision for impairment.
p) Other payables
Other payables are obligations to pay for services that have been acquired in
the ordinary course of business. Other payables are classified as current
liabilities if payment is due within one year or less. If not, they are
presented as non-current liabilities. Other payables are recognised initially
at fair value and subsequently measured at amortised cost using the effective
interest rate method.
q) Dividend distributions
Dividend distributions to the Company's shareholders are recognised as
liabilities in the Company's financial statements and disclosed in the
Statement of Changes in Equity in the period in which the dividends are
approved by the Board.
r) Income equalisation on new issues
In order to ensure there are no dilutive effects on earnings per share for
current shareholders when issuing new shares, a transfer is made between share
capital and income to reflect that amount of income included in the purchase
price of the new shares.
s) Treasury Shares
The Company has the right to issue and purchase up to 14.99% of the total
number of its own shares, as disclosed in note 12.
Shares held in Treasury are excluded from calculations when determining
Earnings per Ordinary Share or Net Asset Value per Ordinary Share as detailed
in notes 4 and 6.
3. Significant accounting judgements, estimates and assumptions
The preparation of the Company's Financial Statements requires
management to make judgements, estimates and assumptions that affect the
reported amounts of revenues, expenses, assets and liabilities and the
accompanying disclosures. Uncertainty about these assumptions and estimates
could result in outcomes that require a material adjustment to the carrying
amount of assets or liabilities affected in future periods.
(i) Judgements
In the process of applying the Company's accounting policies, management has
made the following judgements, which have the most significant effect on the
amounts recognised in the Financial Statements:
Functional currency
As disclosed in note 2(k), the Company's functional currency is Sterling.
Sterling is the currency in which the Company measures its performance and
reports its results, as well as the currency in which it receives subscriptions
from its investors. Dividends are also paid to its investors in Sterling. The
Directors believe that Sterling best represents the functional currency.
(ii) Estimates and assumptions
The key assumptions concerning the future and other key sources of
estimation uncertainty at the reporting date, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year, are described below. The Company based its
assumptions and estimates on parameters available when the Financial Statements
were prepared. Existing circumstances and assumptions about future
developments, however, may change due to market changes or circumstances
arising which are beyond the control of the Company. Such changes are reflected
in the assumptions when they occur.
(a) Fair value of securities not quoted in active markets
The Company carries its investments in Credit Securities at fair value, with
changes in value being recognised in the Statement of Comprehensive Income. In
cases where prices of Credit Securities are not quoted in an active market, the
Portfolio Manager will obtain prices determined at the close of business on the
reporting date from an independent price vendor. The Portfolio Manager
exercises its judgement on the quality of the independent price vendor and
information provided. If a price cannot be obtained from an independent price
vendor or where the Portfolio Manager determines that the provided price is not
an accurate representation of the fair value of the Credit Security, the
Portfolio Manager will source prices from independent third party brokers or
dealers for the relevant security, which may be indicative rather than
tradable. Where no third party price is available, or where the Portfolio
Manager determines that the third party quote is not an accurate representation
of the fair value, the Portfolio Manager will determine the valuation based on
the Portfolio Manager's valuation policy. This may include the use of a
comparable arm's length transaction, reference to other securities that are
substantially the same, discounted cash flow analysis and other valuation
techniques commonly used by market participants making the maximum use of
market inputs and relying as little as possible on entity-specific inputs. No
Credit Securities were priced by the Portfolio Manager during the year or any
previous year.
(b) Estimated life of Credit Securities
In determining the estimated life of the Credit Securities held by the Company,
the Portfolio Manager estimates the remaining life of the security with respect
to expected prepayment rates, default rates and loss rates together with other
information available in the market underlying the security. The estimated life
of the Credit Securities, as determined by the Portfolio Manager, impacts the
effective interest rate of the Credit Securities which in turn impacts the
calculation of income as discussed in note 2(g).
(c) Determination of observable inputs
As discussed in note 17, when determining the levels of investments
within the fair value hierarchy, the determination of what constitutes
'observable' requires significant judgement by the Company. The Company
considers observable data to be market data that is readily available,
regularly distributed or updated, reliable and verifiable, not proprietary, and
provided by independent sources that are actively involved in the relevant
market.
4. Earnings per Ordinary Share - Basic & Diluted
The earnings per Ordinary Share - Basic and Diluted of 13.2p (30 September
2016: 3.9p) has been calculated based on the weighted average number of
Ordinary Shares of 156,992,064 (30 September 2016: 149,767,982) and a net gain
for the year of GBP20,774,424 (30 September 2016: GBP5,890,908).
5. Income on equalisation of new issues
In order to ensure there were no dilutive effects on earnings per share
for current shareholders when issuing new shares, earnings have been calculated
in respect of the accrued income at the time of purchase and a transfer has
been made from share capital to income to reflect this. The transfer for the
year amounted to GBP42,365 (30 September 2016: GBP49,847).
6. Net Asset Value per Ordinary Share
The net asset value of each Share of 96.44p (30 September 2016: GBP89.97p) is
determined by dividing the net assets of the Company attributed to the Shares
of GBP155,207,957 (30 September 2016: GBP136,821,841) by the number of Shares in
issue at 30 September 2017 of 160,929,151 (30 September 2016: 152,079,151).
7. Taxation
The Company has been granted Exempt Status under the terms of The Income
Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its
liability for Guernsey taxation is limited to an annual fee of GBP1,200 (30
September 2016: GBP1,200).
8. Net foreign currency gains/(losses)
Year ended Year ended
30.09.17 30.09.16
GBP GBP
Movement in net unrealised gain on forward currency 174,516 388,127
contracts
Movement in unrealised gain on spot currency 503 -
contracts
Realised loss on forward currency contracts (335,369) (11,954,408)
Realised currency gain on receivables/payables 335,299 304,581
Unrealised income exchange (loss)/gain on receivables (15,194) 9,722
/payables
159,755 (11,251,978)
9. Investments
Year ended Year ended
30.09.17 30.09.16
GBP GBP
Financial assets at fair value through profit and loss:
Unlisted Investments:
Opening amortised 128,103,985 139,639,982
cost
Purchases at cost 121,111,167 75,703,701
Proceeds on sale/principal repayment (112,873,124) (85,563,502)
Amortisation adjustment under effective interest rate 1,180,151 1,087,382
method
Realised gain on sale/principal 9,282,593 3,162,474
repayment
Realised loss on sale/principal (9,068,701) (5,926,052)
repayment
Closing amortised 137,736,071 128,103,985
cost
Unrealised gain on investments 12,539,146 8,171,289
Unrealised loss on investments (1,775,442) (8,306,903)
Fair value 148,499,775 127,968,371
Realised gain on sale/principal 9,282,593 3,162,474
repayment
Realised loss on sale/principal (9,068,701) (5,926,052)
repayment
Increase in unrealised gain 4,367,856 6,511,825
Decrease in unrealised loss 6,531,459 4,190,479
Net gain on financial assets at fair value through 11,113,207 7,938,726
profit or loss
10. Other receivables
As at As at
30.09.17 30.09.16
GBP GBP
Interest income receivable 2,635,034 2,348,525
Prepaid expenses 14,833 14,413
Dividends receivable 112,580 115,027
Spot currency 503 -
contracts
2,762,950 2,477,965
11. Other payables
As at As at
30.09.17 30.09.16
GBP GBP
Portfolio management fees payable 290,302 84,266
Directors' fees 31,350 31,875
payable
Administration fees payable 28,004 25,705
AIFM management fees payable 18,528 17,706
Audit fees 50,000 47,500
payable
Other expenses payable 21,301 8,806
Depositary fees 2,054 2,049
payable
Custody fees payable 1,160 1,124
442,699 219,031
12. Share Capital
Authorised Share Capital
The Directors may issue an unlimited number of Ordinary Shares at no par value
and an unlimited number of Ordinary Shares with a par value.
Issued Share Capital
As at As at
30.09.17 30.09.16
GBP GBP
Ordinary Shares
Share Capital at the beginning of the 148,691,163 142,609,447
year
Issue of shares 4,746,518 -
Share issue costs (100,022) (62,197)
Purchase of own shares into - -
treasury
Re-issuance of treasury 3,705,827 6,193,760
shares
Income equalisation on new issues (42,365) (49,847)
Total Share Capital at the end of the 157,001,121 148,691,163
year
30.09.17 30.09.16
GBP GBP
Treasury Shares
Share Capital at the beginning of the 3,705,827 9,899,587
year
Re-issued shares (3,705,827) (6,193,760)
Total Treasury Shares at the end of the - 3,705,827
year
Reconciliation of number of Shares
30.09.17 30.09.16
Shares Shares
Ordinary Shares
Shares at the beginning of the 152,079,151 145,335,881
year
Issue of shares 5,019,383 -
Re-issuance of treasury 3,830,617 6,743,270
shares
Total Shares in issue at the end of the year 160,929,151 152,079,151
The Ordinary Shares carry the following rights:
a) the Ordinary Shares carry the right to receive all income of the Company
attributable to the Ordinary Shares.
b) the Shareholders present in person or by proxy or present by a duly
authorised representative at a general meeting has, on a show of hands, one
vote and, on a poll, one vote for each Share held.
Reconciliation of number of Treasury Shares
30.09.17 30.09.16
Shares Shares
Treasury Shares
Shares at the beginning of the year 3,830,617 10,573,887
Reissue of treasury shares (3,830,617) (6,743,270)
Total Shares held in treasury at the end of - 3,830,617
the year
The Company has the right to issue and purchase up to 14.99% of the total
number of its own shares at GBP0.01 each, to be classed as Treasury Shares and
may cancel those Shares or hold any such Shares as Treasury Shares, provided
that the number of Shares held as Treasury Shares shall not at any time exceed
10% of the total number of Shares of that class in issue at that time or such
amount as provided in the Companies Law.
On 13 February 2015 the Company purchased 14,173,887 Ordinary Shares of GBP0.01
at a price of 94.90p to be held in treasury. The total amount paid to purchase
these shares was GBP13,451,019 and has been deducted from the shareholders'
equity. The Company has the right to re-issue these shares at a later date. All
shares issued were fully paid. During the year all 3,830,617 (30 September
2016: 6,743,270) remaining treasury shares were re-issued for a total
consideration of GBP3,705,827 (30 September 2016: GBP6,193,760).
Shares held in Treasury are excluded from calculations when determining
Earnings per Ordinary Share or Net Asset Value per Ordinary Share as detailed
in notes 4 and 6.
13. Analysis of Financial Assets and Liabilities by Measurement Basis as per
Statement of Financial Position
Financial
assets at
fair
value Loans and
through
profit and receivables Total
loss
GBP GBP GBP
30 September 2017
Financial Assets
Financial assets at fair value through profit
and loss
-Investments
-Bonds 101,672,047 - 101,672,047
-Asset backed 46,827,728 - 46,827,728
securities
-Derivative assets: Forward currency 77,788 - 77,788
contracts
Other receivables (excluding prepaid expenses) - 2,748,117 2,748,117
Cash and cash - 8,169,355 8,169,355
equivalents
148,577,563 10,917,472 159,495,035
Financial
liabilities Other
at fair
value financial
through
profit and liabilities Total
loss
GBP GBP GBP
30 September 2017
Financial Liabilities
Amounts due to - 3,676,479 3,676,479
broker
Other payables - 442,699 442,699
Financial liabilities at fair value through
profit and loss
-Derivative liabilities: Forward currency 182,733 - 182,733
contracts
182,733 4,119,178 4,301,911
Financial
assets at
fair
value Loans and
through
profit and receivables Total
loss
GBP GBP GBP
30 September 2016
Financial Assets
Financial assets at fair value through profit
and loss
-Investments
-Bonds 83,880,600 - 83,880,600
-Asset backed 44,087,771 - 44,087,771
securities
Amounts due from broker - 1,132,190 1,132,190
Other receivables (excluding prepaid expenses) - 2,463,552 2,463,552
Cash and cash - 8,039,495 8,039,495
equivalents
127,968,371 11,635,237 139,603,608
Financial
liabilities Other
at fair
value financial
through
profit and liabilities Total
loss
GBP GBP GBP
30 September 2016
Financial Liabilities
Amounts due to - 2,297,691 2,297,691
broker
Other payables - 219,031 219,031
Financial liabilities at fair value through
profit and loss
-Derivative liabilities: Forward currency 279,458 - 279,458
contracts
279,458 2,516,722 2,796,180
14. Related Parties
a) Directors' Remuneration & Expenses
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine. The aggregate fees of the Directors will not exceed
GBP150,000.
The Directors' fees for the year and the outstanding fees at year end are as
follows.
30.09.17 30.09.16
GBP GBP
Claire Whittet (Chair of the Board) 35,000 35,000
Christopher Legge (Audit Committee Chairman) 32,500 32,500
Thomas Emch (retired from the Board 30.09.17) 30,000 30,000
Ian Martin (MEC Chairman) 30,000 30,000
Total Directors' fees 127,500 127,500
As at As at
30.09.17 30.09.16
GBP GBP
Directors' fee payable (note 11) 31,350 31,875
Following the Remuneration and Nomination Committee meeting of the 13 September
2017 the Directors' fees were increased effective 1 October 2017 as follows:
Claire Whittet (Chair of the Board) GBP42,000
Christopher Legge (Audit Committee GBP37,000
Chairman)
Ian Martin (MEC Chairman) GBP32,000
Total GBP111,000
b) Shares held by related parties
The Directors of the Company held the following shares beneficially:
30.09.17 30.09.16
Shares Shares
Claire Whittet 25,000 25,000
Christopher Legge 50,000 50,000
Thomas Emch* 25,000 25,000
Ian Martin 35,000 35,000
*Shareholding sold trade date 27 October 2017.
Directors are entitled to receive the dividends on any shares held by them
during the period. Dividends declared by the Company are set out in note 19.
As at 30 September 2017, the Portfolio Manager held no Shares (30 September
2016: no Shares) of the Issued Share Capital. Partners and employees of the
Portfolio Manager decreased their holdings during the year, and held 1,031,766
(30 September 2016: 1,535,826), which is 0.64%
(30 September 2016: 1.01%) of the Issued Share Capital.
c) Portfolio Manager
The portfolio management fee is payable to the Portfolio Manager, TwentyFour
Asset Management LLP, monthly in arrears at a rate of 0.75% per annum of the
lower of NAV, which is calculated weekly on each valuation day, or market
capitalisation of each class of shares. Total portfolio management fees for the
year amounted to GBP1,095,655 (30 September 2016: GBP995,849) of which GBP290,302 (30
September 2016: GBP84,266) is payable at year end. The Portfolio Management
Agreement dated 17 February 2014 remains in force until determined by the
Company or the Portfolio Manager giving the other party not less than twelve
months' notice in writing. Under certain circumstances, the Company or the
Portfolio Manager is entitled to immediately terminate the agreement in
writing.
The Portfolio Manager is also entitled to a commission of 0.175% of the
aggregate gross offering proceeds plus any applicable VAT in relation to any
issue of new Shares, following admission, in consideration of marketing
services that it provides to the Company. During the year, the Portfolio
Manager received GBP12,038 (30 September 2016: GBP8,589) in commission.
15. Material Agreements
a) Alternative Investment Fund Manager ("AIFM")
The Company's AIFM is Maitland Institutional Services Limited. In consideration
for the services provided by the AIFM under the AIFM Agreement the AIFM is
entitled to receive from the Company a minimum fee of GBP20,000 per annum and
fees payable quarterly in arrears at a rate of 0.07% of the Net Asset Value of
the Company below GBP50 million, 0.05% on Net Assets between GBP50 million and GBP100
million and 0.03% on Net Assets in excess of GBP100 million. During the year,
AIFM fees of GBP73,744 (30 September 2016: GBP68,036) were charged to the Company,
of which GBP18,528 (30 September 2016: GBP17,706) remained payable at the end of
the year.
b) Administrator and Secretary
Administration fees are payable to Northern Trust International Fund
Administration Services (Guernsey) Limited monthly in arrears at a rate of
0.06% of the Net Asset Value of the Company below GBP100 million, 0.05% on Net
Assets between GBP100 million and GBP200 million and 0.04% on Net Assets in excess
of GBP200 million as at the last business day of the month subject to a minimum
of GBP75,000 for each year. In addition, an annual fee of GBP25,000 will be charged
for corporate governance and company secretarial services. During the year,
administration and secretarial fees of GBP107,946 (30 September 2016: GBP101,667)
were charged to the Company, of which GBP28,004 (30 September 2016: GBP25,705)
remained payable at the end of the year.
c) Broker
For its services as the Company's broker, Numis Securites Limited (the
"Broker") is entitled to receive a retainer fee of GBP50,000 per annum and also a
commission of 1% on all tap issues. During the year, the Broker received GBP
84,593 (30 September 2016: GBP49,081) in commission, which is charged as a cost
of issuance.
d) Depositary
Depositary's fees are payable to Northern Trust (Guernsey) Limited monthly in
arrears at a rate of 0.0175% of the NAV of the Company below GBP100 million,
0.0150% on Net Assets between GBP100 million and GBP200 million and 0.0125% on Net
Assets in excess of GBP200 million as at the last business day of the month
subject to a minimum of GBP25,000 for each year. During the year, depositary fees
of GBP25,157 (30 September 2016: GBP25,000) were charged to the Company, of which GBP
2,054 (30 September 2016: GBP2,049) remained payable at the end of the year.
The Depositary is also entitled to a Global Custody fee of a minimum of GBP8,500
per annum plus transaction fees. Total Global Custody fees and charges for the
year amounted to GBP18,297 (30 September 2016: GBP16,368) of which GBP1,160 (30
September 2016: GBP1,124) is due and payable at the end of the year.
16. Financial Risk Management
The Company's activities expose it to a variety of financial risks: Market risk
(including price risk, reinvestment risk, interest rate risk and foreign
currency risk), credit risk, liquidity risk and capital risk.
The Company's financial instruments include financial assets/liabilities at
fair value through profit or loss, cash and cash equivalents, amounts due to/
from broker, other receivables and other payables. The main risks arising from
the Company's financial instruments are market price risk, interest rate risk,
credit risk, liquidity risk, currency risk and reinvestment risk. The
techniques and instruments utilised for the purposes of efficient portfolio
management are those which are reasonably believed by the Board to be
economically appropriate to the efficient management of the Company.
Market risk
Market risk embodies the potential for both losses and gains and includes
foreign currency risk, interest rate risk, price risk and reinvestment risk.
The Company's strategy on the management of market risk is driven by the
Company's investment objective. The Company's investment objective is to
generate attractive risk adjusted returns principally through investment in
Credit Securities.
(i) Price risk
The underlying investments comprised in the portfolio are subject to price
risk. The Company is therefore at risk that market events may affect
performance and in particular may affect the value of the Company's investments
which are valued on a mark to market and mark to model basis. Price risk is
risk associated with changes in market prices or rates, including interest
rates, availability of credit, inflation rates, economic uncertainty, changes
in laws, national and international political circumstances. The Company's
policy is to manage price risk by holding a diversified portfolio of assets,
through its investments in Credit Securities.
The Company's policy also stipulates that at purchase no more than 5% of the
Portfolio value can be exposed to any single Credit Security or issuer of
Credit Securities.
The price of a Credit Security can be affected by a number of factors,
including: (i) changes in the market's perception of the underlying assets
backing the security; (ii) economic and political factors such as interest
rates and levels of unemployment and taxation which can have an impact on the
arrears, foreclosures and losses incurred with respect to the pool of assets
backing the security; (iii) changes in the market's perception of the adequacy
of credit support built into the security's structure to protect against losses
caused by arrears and foreclosures; (iv) changes in the perceived
creditworthiness of the originator of the security or any other third parties
to the transaction; (v) the speed at which mortgages or loans within the pool
are repaid by the underlying borrowers (whether voluntary or due to arrears or
foreclosures).
(ii) Reinvestment risk
Reinvestment risk is the risk that future coupons from a bond will not be
reinvested at the prevailing interest rate when the bond was initially
purchased.
A key determinant of a bond's yield is the price at which it is purchased and,
therefore, when the market price of bonds generally increases, the yield of
bonds purchased generally decreases. As such, the overall yield of the
portfolio, and therefore the level of dividends payable to Shareholders, would
fall to the extent that the market prices of Credit Securities generally rise
and the proceeds of Credit Securities held by the Company that mature or are
sold are not able to be reinvested in Credit Securities with a yield comparable
to that of the portfolio as a whole. The Company assesses reinvestment risk on
at least a monthly basis by calculating the projected amortisation profile of
the Company across the next three years. In addition, changes in the Company's
yield and income are assessed over the same timeframe as bonds redeem or mature
to identify any periods where reinvestment risk may be more significant.
Price sensitivity analysis
The following details the Company's sensitivity to movement in market prices.
The analysis is based on a 10% and 5% (30 September 2016: 10% and 5%) increase
or decrease in market prices. This represents management's best estimate of a
reasonable possible shift in market prices, having regard to historical
volatility.
At 30 September 2017, if the market prices had been 10% and 5% (30 September
2016: 10% and 5%) higher with all other variables held constant, the increase
in the net assets attributable to equity Shareholders would have been GBP
14,849,978 and GBP7,424,989 respectively (30 September 2016: GBP12,796,837 and GBP
6,398,419). The total comprehensive income for the year would have also
increased by GBP14,849,978 and GBP7,424,989 (30 September 2016: GBP12,796,837 and GBP
6,398,419). An equal change in the opposite direction would have decreased the
net assets attributable to equity Shareholders and total comprehensive income
respectively.
Actual trading results may differ from the above sensitivity analysis and those
differences may be material.
(iii) Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect the fair value of financial assets at fair value
through profit or loss.
The tables below summarise the Company's exposure to interest rate risk:
Floating Non-interest
rate Fixed rate bearing Total
As at 30 September 2017 GBP GBP GBP GBP
Investments 37,579,778 110,919,997 - 148,499,775
Derivative assets: - - 77,788 77,788
Forward currency
contracts
Amounts due from broker - - - -
Other receivables - - 2,762,950 2,762,950
Cash and cash equivalents 8,169,355 - - 8,169,355
Derivative liabilities: - - (182,733) (182,733)
Forward currency
contracts
Amounts due to broker - - (3,676,479) (3,676,479)
Other payables - - (442,699) (442,699)
Net current assets 45,749,133 110,919,997 (1,461,173) 155,207,957
As at 30 September 2016 GBP GBP GBP GBP
Investments 48,625,988 79,342,383 - 127,968,371
Amounts due from broker - - 1,132,190 1,132,190
Other receivables - - 2,477,965 2,477,965
Cash and cash equivalents 8,039,495 - - 8,039,495
Derivative liabilities: - - (279,458) (279,458)
Forward currency
contracts
Amounts due to broker - - (2,297,691) (2,297,691)
Other payables - - (219,031) (219,031)
Net current assets 56,665,483 79,342,383 813,975 136,821,841
The Company holds fixed rate and floating rate financial instruments which,
based on current portfolio duration, have low exposure to fair value interest
rate risk as, when the short-term interest rates increase, the interest rate on
a floating rate note will increase. The maximum time to re-fix interest rates
is six months and therefore the Company has low interest rate risk and, as such
it is not deemed necessary to perform sensitivity analysis over interest rate
risk.
As at 30 September 2017, 71% of the Company's net current asset position was
invested in fixed rate securities, however the overall duration of the Company
was 2.9 years. The value of Credit securities may be affected by interest rate
movements. Interest receivable on bank deposits or payable on bank overdraft
positions will be affected by fluctuations in interest rates, however the
underlying cash positions will not be affected.
The Company's continuing position in relation to interest rate risk is
monitored on a weekly basis by the Portfolio Manager as part of its review of
the weekly Net Asset Value calculations prepared by the Company's
Administrator.
(iv) Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates. The Company invests
predominantly in non-Sterling assets while its Shares are denominated in
Sterling, its expenses are incurred in Sterling and its presentational currency
is Sterling. Therefore the Statement of Financial Position may be significantly
affected by movements in the exchange rate between foreign currencies and
Sterling. The Company manages the exposure to currency movements by using spot
and forward foreign exchange contracts, rolling forward on a periodic basis.
At year end, the Company had four (30 September 2016: two) open forward
currency contracts and one (30 September 2016: nil) open spot currency
contracts.
Open forward currency contracts
Contract Outstanding Mark to Unrealised
market
values contracts equivalent gains/
(losses)
30.09.17 30.09.17 30.09.17 30.09.17
Currency GBP GBP GBP
Four Sterling forward foreign
currency
contracts
totalling:
3 EUR forward foreign currency (72,088,376) (63,616,129) (63,541,781) 74,348
contract
1 USD forward foreign currency (35,210,847) (26,051,426) (26,230,719) (179,293)
contract
(104,945)
Contract Outstanding Mark to Unrealised
market
values contracts equivalent gains/
(losses)
30.09.16 30.09.16 30.09.16 30.09.16
Currency GBP GBP GBP
Two Sterling forward foreign
currency
contracts
totalling:
1 EUR forward foreign currency (79,187,520) (68,278,647) (68,552,759) (274,112)
contract
1 USD forward foreign currency (12,087,442) (9,294,879) (9,300,225) (5,346)
contract
(279,458)
Open spot currency contracts
Contract Outstanding Mark to market Unrealised
values contracts equivalent gains/
(losses)
30.09.17 30.09.17 30.09.17 30.09.17
Currency GBP GBP GBP
One Sterling spot foreign currency
contract
1 EUR spot currency (464,992) 409,226 409,729 503
contract
503
There were no open spot currency contracts held on the 30 September 2016.
As at 30 September 2017 and 2016 the Company held the following assets and
liabilities denominated in currencies other than Pound Sterling:
30.09.17 30.09.16
GBP GBP
Investments 91,162,736 77,113,129
Cash and cash equivalents 350,448 1,646,323
Other receivables 1,320,458 1,271,578
Less: Amounts due to (3,284,699) (1,297,691)
broker
Less: Open forward currency (89,772,500) (77,852,985)
contracts
Add: Open spot currency contracts 409,729 -
186,172 880,354
The following table summarises the sensitivity of the Company's assets and
liabilities to changes in foreign exchange movements between Euro and Sterling
as at 30 September 2017 and 2016. The analysis is based on the assumption that
the relevant foreign exchange rate increased/decreased by the percentage
disclosed in the table, with all other variables held constant. This represents
management's best estimate of a reasonable possible shift in the foreign
exchange rates, having regard to historical volatility of those rates.
30.09.17 30.09.16
GBP GBP
Impact on Statement of Comprehensive Income
and Equity in response to
a:
- 10% (30.09.16: 10%) increase in EUR/GBP (747,117) (25,230)
- 10% (30.09.16: 10%) decrease in EUR/GBP (855,230) 123,352
Impact on Statement of Changes in Equity in response to a:
- 10% (30.09.16: 10%) increase in EUR/GBP (747,117) (25,230)
- 10% (30.09.16: 10%) decrease in EUR/GBP (855,230) 123,352
30.09.17 30.09.16
GBP GBP
Impact on Statement of Comprehensive Income
and Equity in response to
a:
- 10% (30.09.16: 10%) increase in USD/GBP (9,148) (16,582)
- 10% (30.09.16: 10%) decrease in USD/GBP (20,777) 7,814
Impact on Statement of Changes in Equity in response to a:
- 10% (30.09.16: 10%) increase in USD/GBP (9,148) (16,582)
- 10% (30.09.16: 10%) decrease in USD/GBP (20,777) 7,814
Credit risk
Credit risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Company. The Company
has a credit policy in place and the exposure to credit risk is monitored on an
on-going basis.
The main concentration of credit risk to which the Company is exposed arises
from the Company's investments in Credit Securities. The Company is also
exposed to counterparty credit risk on forwards, cash and cash equivalents,
amounts due from brokers and other receivable balances.
The Company's policy is to manage this risk by maintaining a portfolio
diversified by issuer. While the prospectus permits no more than 5% of the
portfolio value to be invested in any single Credit Security or issuer of
Credit Securities, the Portfolio Manager operates to stricter exposures
dependent on the credit rating of each single Credit Security or issuer of
Credit Securities.
Portfolio of debt securities by ratings category using the highest rating
assigned by Standard and Poor's ("S&P"), Moody's Analytics ("Moody's") or Fitch
Ratings ("Fitch"):
Portfolio of debt securities by ratings category assigned by Standard and
Poor's
30.09.17 30.09.16
BBB- 3.95% 4.55%
BB+ 10.69% 10.89%
BB 9.11% 10.58%
BB- 7.18% 4.93%
B+ 6.57% 6.44%
B 28.75% 28.01%
B- 10.23% 10.52%
CCC+ 3.28% 4.86%
CCC- 0.03% 0.13%
CC 0.00% 1.41%
Not Rated 20.21% 17.68%
100.00% 100.00%
To further understand credit risk, the Portfolio Manager undertakes extensive
due diligence procedures on investments in Credit Securities and monitors the
on-going investment in these securities.
The Company manages its counterparty exposure in respect of cash and cash
equivalents and forwards by investing with counterparties with a "single A" or
higher credit rating. The majority of cash is currently placed with The
Northern Trust Company. The Company is subject to credit risk to the extent
that this institution may be unable to return this cash. The Northern Trust
Company is a wholly owned subsidiary of The Northern Trust Corporation. The
Northern Trust Corporation is publicly traded and a constituent of S&P 500. The
Northern Trust Corporation has a credit rating of A+ from Standard & Poor's and
A2 from Moody's.
The Company's maximum credit exposure is limited to the carrying amount of
financial assets recognised as at the statement of financial position date, as
summarised below:
30.09.17 30.09.16
GBP GBP
Investments 148,499,775 127,968,371
Amounts due from - 1,132,190
broker
Cash and cash equivalents 8,169,355 8,039,495
Derivative assets: Forward currency contracts 77,788 -
Other receivables 2,762,950 2,477,965
159,509,868 139,618,021
Investments in Credit Securities that are not backed by mortgages present
certain risks that are
not presented by mortgage-backed securities ("MBS"). Primarily, these
securities may not have the benefit of the same security interest in the
related collateral. Therefore, there is a possibility that recoveries on
defaulted collateral may not, in some cases, be available to support payments
on these securities. The risk of investing in these types of Credit Securities
is ultimately dependent upon payment of the underlying debt by the debtor.
Liquidity risk
Liquidity risk is the risk that the Company may not be able to generate
sufficient cash resources to settle its obligations in full as they fall due or
can only do so on terms that are materially disadvantageous.
Investments made by the Company in Credit Securities may be relatively illiquid
and this may limit the ability of the Company to realise its investments for
the purposes of cash management such as generating cash for dividend payments
to Shareholders or buying back Ordinary Shares under the Quarterly Tenders or
in the market. Investments in Credit Securities may also have no active market
and the Company also has no redemption rights in respect of these investments.
The Company has the ability to borrow to ensure sufficient cash flows.
The Portfolio Manager considers expected cash flows from financial assets in
assessing and managing liquidity risk, in particular its cash resources and
trade receivables. Cash flows from trade and other receivables are all
contractually due within twelve months.
The Portfolio Manager shall maintain a liquidity management policy to monitor
the liquidity risk of the Company.
Shareholders have no right to have their shares redeemed or repurchased by the
Company, except as detailed under the Capital Risk Management (Quarterly
Tenders) section of this note. Shareholders wishing to release their investment
in the Company are therefore required to dispose of their shares on the market.
The following table analyses the Company's liabilities into relevant maturity
groupings based on the maturities at the statement of financial position date.
The amounts in the table are the undiscounted net cash flows on the financial
liabilities:
Up to 1 1-6 6-12 Total
month months months
As at 30 September 2017 GBP GBP GBP GBP
Amounts due to broker (3,676,479) - - (3,676,479)
Derivative liabilities: - (182,733) - (182,733)
Forward currency contracts
Other payables (392,699) (50,000) - (442,699)
Total (4,069,178) (232,733) - (4,301,911)
As at 30 September 2016 GBP GBP GBP GBP
Amounts due to broker (2,297,691) - - (2,297,691)
Derivative liabilities: - (279,458) - (279,458)
Forward currency contracts
Other payables (171,531) (47,500) - (219,031)
Total (2,469,222) (326,958) - (2,796,180)
Capital risk management
The Company manages its capital to ensure that it is able to continue as a
going concern while following the Company's stated investment policy. The
capital structure of the Company consists of Shareholders' equity, which
comprises share capital and other reserves. To maintain or adjust the capital
structure, the Company may return capital to Shareholders or issue new Shares.
There are no regulatory requirements to return capital to Shareholders.
(i) Quarterly Tenders
With the objective of minimising the risk of the Ordinary Shares trading at a
discount to NAV and to assist in the narrowing of any discount at which the
Ordinary Shares may trade from time to time, the Company has incorporated into
its structure a mechanism (a "Quarterly Tender"), contingent on certain factors
as described below, which can be exercised at the discretion of the Directors,
to provide Shareholders with a quarterly opportunity to submit Ordinary Shares
for placing or repurchase by the Company at a price representing a discount of
no more than 2% to the then prevailing NAV.
Upon confirmation of the number of Tender Requests made in respect of each
Quarter Record Date, the Company intends first, through its corporate broker
acting on a reasonable endeavours basis, to seek to satisfy Tender Requests by
placing the Tendered Shares with investors in the secondary market.
Second, subject to the Tender Restrictions, the Company intends to repurchase
for cancellation any Tendered Shares not placed in the secondary market.
It is anticipated that the Company will tender on a quarterly basis for up to
20% of the Ordinary Shares in issue as at the relevant Quarter Record Date,
subject to an aggregate limit of 50% of the Ordinary Shares in issue in any
twelve month period ending on the relevant Quarter Record Date.
(ii)Share buybacks
The Company has been granted the authority to make market purchases of up to a
maximum of 14.99% of the aggregate number of Ordinary Redeemable Shares in
issue immediately following Admission at a price not exceeding the higher of
(i) 5% above the average of the mid-market values of the Ordinary Redeemable
Shares for the 5 business days before the purchase is made or, (ii) the higher
of the price of the last independent trade and the highest current investment
bid for the Ordinary Redeemable Shares.
In deciding whether to make any such purchases the Directors will have regard
to what they believe to be in the best interests of Shareholders as a whole, to
the applicable legal requirements and any other requirements in its Articles.
The making and timing of any buybacks will be at the absolute discretion of the
Board and not at the option of the Shareholders, and is expressly subject to
the Company having sufficient surplus cash resources available (excluding
borrowed moneys).
The Listing Rules prohibit the Company from conducting any share buybacks
during close periods immediately preceding the publication of annual and
interim results.
(iii) Continuation votes
In the event that:
(i) the Dividend Target, as disclosed in note 19, is not met; or
(ii) on any Tender Submission Deadline, applications for the Company to
repurchase 50% or more of the Company's issued Ordinary Shares, calculated as
at the relevant Quarter Record Date, are received by the Company,
A General Meeting will be convened at which the Directors will propose an
Ordinary Resolution that the Company should continue as an investment company.
If any such Ordinary Resolution is not passed, the Directors shall draw up
proposals for the voluntary liquidation, unitisation, reorganisation or
reconstruction of the Company for submission to the members of the Company at a
General Meeting to be convened by the Directors for a date not more than 6
months after the date of the meeting at which such Ordinary Resolution was not
passed.
17. Fair Value Measurement
All assets and liabilities are carried at fair value or at carrying value which
equates to fair value.
IFRS 13 requires the Company to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy has the following levels:
(i) Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1).
(ii) Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices including interest rates, yield
curves, volatilities, prepayment speeds, credit risks and default rates) or
other market corroborated inputs (level 2).
(iii) Inputs for the asset or liability that are not based on observable market
data (that is, unobservable inputs) (level 3).
The following table analyses within the fair value hierarchy the Company's
financial assets and liabilities (by class) measured at fair value as at 30
September 2017.
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Financial assets at fair
value
through profit or loss
-Investments
-Bonds - 27,770,154 73,901,893 101,672,047
-Asset backed - 38,465,977 8,361,751 46,827,728
securities
-Derivative assets:
Forward currency contracts - 77,788 - 77,788
Total assets as at 30 September 2017 - 66,313,919 82,263,644 148,577,563
Liabilities
Financial liabilities at
fair value
through profit or loss
-Derivative liabilities:
Forward currency - 182,733 - 182,733
contracts
Total liabilities as at 30 September - 182,733 - 182,733
2017
The following table analyses within the fair value hierarchy the Company's
financial assets and liabilities (by class) measured at fair value as 30
September 2016.
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Financial assets at fair value
through profit or loss
-Bonds - 38,924,491 44,956,109 83,880,600
-Asset backed securities - 33,298,000 10,789,771 44,087,771
Total assets as at 30 September - 72,222,491 55,745,880 127,968,371
2016
Liabilities
Financial liabilities at fair
value
through profit or loss
-Derivative liabilities:
Forward currency contracts - 279,458 - 279,458
Total liabilities as at 30 - 279,458 - 279,458
September 2016
Credit Securities which have a value based on quoted market prices in active
markets are classified in level 1. At the end of the year, no Credit Securities
held by the Company are classified as level 1.
Credit Securities which are not traded or dealt on organised markets or
exchanges are classified in level 2 or level 3. Credit securities priced at
cost are classified as level 3. Credit securities with prices obtained from
independent price vendors, where the Portfolio Manager is able to assess
whether the observable inputs used for their modelling of prices is accurate
and the Portfolio Manager has the ability to challenge these vendors with
further observable inputs, are classified as level 2. Prices obtained from
vendors who are not easily challengeable or transparent in showing their
assumptions for the method of pricing these assets, are classified as level 3.
Credit Securities priced at an average of two vendors' prices are classified as
level 3.
Where the Portfolio Manager determines that the price obtained from an
independent price vendor is not an accurate representation of the fair value of
the Credit Security, the Portfolio Manager may source prices from third party
broker or dealer quotes and if the price represents a reliable and an
observable price, the Credit Security is classified in level 2. Any broker
quote that is over 20 days old is considered stale and is classified as level
3.
There were no transfers between level 1 and 2 during the year, however
transfers from level 3 to level 2 occurred based on the Portfolio Manager's
ability to obtain a reliable and observable price as detailed above.
Due to the inputs into the valuation of Credit Securities classified as level 3
not being available or visible to the Company, no meaningful sensitivity on
inputs can be performed.
The following table presents the movement in level 3 instruments for the year
ended 30 September 2017 by class of financial instrument.
Interest Asset backed
Bonds Rate Swaps securities Total
GBP GBP GBP GBP
Opening balance 44,956,109 - 10,789,771 55,745,880
Net purchases 24,355,563 - 1,607,339 25,962,902
Net loss for the year (3,997,181) - (412,036) (4,409,217)
Net unrealised gain for the 6,126,981 - 441,842 6,568,823
year
Transfer into Level 3 9,127,401 - - 9,127,401
Transfer out of Level 3 (6,666,980) - (4,065,165) (10,732,145)
Closing balance 73,901,893 - 8,361,751 82,263,644
The following table presents the movement in level 3 instruments for the year
ended 30 September 2016 by class of financial instrument.
Interest Asset backed
Bonds Rate Swaps securities Total
GBP GBP GBP GBP
Opening balance 67,362,346 (839,620) 7,972,641 74,495,367
Net (sales)/purchases (17,159,353) 1,076,632 (779,707) (16,862,428)
Net realised gain/(loss) for 391,035 (1,076,632) (331,193) (1,016,790)
the year
Net unrealised gain for the 165,750 839,620 912,547 1,917,917
year
Transfer into Level 3 11,184,039 - 5,619,998 16,804,037
Transfer out of Level 3 (16,987,708) - (2,604,515) (19,592,223)
Closing balance 44,956,109 - 10,789,771 55,745,880
The following table analyses within the fair value hierarchy the
Company's assets and liabilities not measured at fair value at 30 September
2017 but for which fair value is disclosed.
Level 1 Level 2 Level 3 Total
30 September 2017 GBP GBP GBP GBP
Assets
Other - 2,762,950 - 2,762,950
receivables
Cash and cash 8,169,355 - - 8,169,355
equivalents
Total 8,169,355 2,762,950 - 10,932,305
Liabilities
Amounts due to broker - 3,676,479 - 3,676,479
Other payables - 442,699 - 442,699
Total - 4,119,178 - 4,119,178
The following table analyses within the fair value hierarchy the Company's
assets and liabilities not measured at fair value at 30 September 2016 but for
which fair value is disclosed.
Level 1 Level 2 Level 3 Total
30 September 2016 GBP GBP GBP GBP
Assets
Amounts due from broker - 1,132,190 - 1,132,190
Other - 2,477,965 - 2,477,965
receivables
Cash and cash 8,039,495 - - 8,039,495
equivalents
Total 8,039,495 3,610,155 - 11,649,650
Liabilities
Amounts due to broker - 2,297,691 - 2,297,691
Other payables - 219,031 - 219,031
Total - 2,516,722 - 2,516,722
The assets and liabilities included in the above tables are carried at
amortised cost; their carrying values are a reasonable approximation of fair
value.
Cash and cash equivalents include deposits held with banks.
Amounts due to brokers and other payables represent the contractual amounts and
obligations due by the Company for settlement of trades and expenses. Amounts
due from brokers and other receivables represent the contractual amounts and
rights due to the Company for settlement of trades and income.
18. Segmental Reporting
The Board is responsible for reviewing the Company's entire
portfolio and considers the business to have a single operating segment. The
Board's asset allocation decisions are based on a single, integrated investment
strategy, and the Company's performance is evaluated on an overall basis.
The Company invests in a diversified portfolio of Credit
Securities. The fair value of the major financial instruments held by the
Company and the equivalent percentages of the total value of the Company are
reported in the Top Twenty Holdings.
The internal reporting provided to the Board for the Company's assets,
liabilities and performance is prepared on a consistent basis with the
measurement and recognition principles of IFRS.
There were no changes to reportable segments during the year.
Revenue earned is reported separately on the face of the Statement
of Comprehensive Income as investment income being interest income received
from Credit Securities.
19. Dividend Policy
The Board intends to distribute an amount at least equal to the
value of the Company's net income arising each financial year to the holders of
Ordinary Shares. However, there is no guarantee that the dividend target of 6.0
pence per Ordinary Share for each financial year will be met or that the
Company will make any distributions at all.
Distributions made with respect to any income period comprise (a) the accrued
income of the portfolio for the period (for these purposes, the Company's
income will include the interest payable by the Credit Securities in the
Portfolio and amortisation of any discount or premium to par at which a Credit
Security is purchased over its remaining expected life), and (b) an additional
amount to reflect any income purchased in the course of any share subscriptions
that took place during the period. Including purchased income in this way
ensures that the income yield of the shares is not diluted as a consequence of
the issue of new shares during an income period and (c) any gain / (loss) on
the foreign exchange contracts caused by the libor differentials between each
foreign exchange currency pair.
The Board expects that dividends will constitute the principal element of the
return to the holders of Ordinary Shares.
The Company declared the following dividends in respect of the distributable
profit for the year ended 30 September 2017:
Period to Dividend Net dividend Ex-dividend date Record date Pay date
rate per paid
Share -Income
(pence) (GBP)
31 October 2016 0.50 772,896 17 November 2016 18 November 2016 30 November
2016
30 November 2016 0.50 772,896 15 December 2016 16 December 2016 30 December
2016
31 December 2016 0.50 772,896 19 January 2017 20 January 2017 31 January 2017
31 January 2017 0.50 772,896 16 February 2017 17 February 2017 28 February
2017
28 February 2017 0.50 772,896 16 March 2017 17 March 2017 31 March 2017
31 March 2017 0.50 784,146 20 April 2017 21 April 2017 28 April 2017
30 April 2017 0.50 791,646 18 May 2017 19 May 2017 31 May 2017
31 May 2017 0.50 796,646 15 June 2017 16 June 2017 30 June 2017
30 June 2017 0.50 804,645 20 July 2017 21 July 2017 31 July 2017
31 July 2017 0.50 804,646 17 August 2017 18 August 2017 31 August 2017
31 August 2017 0.50 804,646 21 September 22 September 29 September
2017 2017 2017
30 September 1.06 1,708,101 19 October 2017 20 October 2017 31 October 2017
2017
Under the Companies (Guernsey) Law, 2008, the Company can distribute dividends
from capital and revenue reserves, subject to the net asset and solvency test.
The net asset and solvency test considers whether a company is able to pay its
debts when they fall due, and whether the value of a company's assets is
greater than its liabilities. The Board confirms that the Company passed
the net asset and solvency test for each dividend paid.
20. Ultimate Controlling Party
In the opinion of the Directors on the basis of shareholdings advised to them,
the Company has no ultimate controlling party.
21. Subsequent Events
These Financial Statements were approved for issuance by the Board on 17
January 2018. Subsequent events have been evaluated until this date.
As a listed closed-ended fund, the Company falls under the definition of a
retail investment product for Packaged Retail and Insurance-based Investment
Products ("PRIIPs") Regulation issued by the FCA which came into effect 1
January 2018. As such, the Company is required to produce a Key Information
Document ("KID") which has been made available on the Company's website.
Subsequent to the year end and up to the date of the Annual Report and Audited
Financial Statements, the following events took place:
Dividend declarations
Dividend
rate
Declaration per Share
date (pence)
12 October 2017 1.06
9 November 2017 0.50
7 December 2017 0.50
11 January 2018 0.50
CORPORATE INFORMATION
Directors Receiving Agent
Claire Whittet (Chair) Computershare Investor Services PLC
Christopher Legge The Pavillions
Thomas Emch (retired 30.09.17) Bridgewater Road
Ian Martin Bristol, BS13 8AE
Registered Office UK Legal Advisers to the Company
PO Box 255 Eversheds LLP
Trafalgar Court One Wood Street
Les Banques London, EC2V 7WS
St Peter Port
Guernsey, GY1 3QL
Portfolio Manager Guernsey Legal Advisers to the
Company
TwentyFour Asset Management LLP Carey Olsen
8th Floor The Monument Building Carey House
11 Monument Street Les Banques
London, EC3R 8AF St Peter Port
Guernsey, GY1 4BZ
Alternative Investment Fund Manager Independent Auditor
Maitland Institutional Services Limited PricewaterhouseCoopers CI LLP
Springfield Lodge PO Box 321
Colchester Road Royal Bank Place
Chelmsford, CM2 5PW Glategny Esplanade
St Peter Port
Guernsey, GY1 4ND
Custodian, Principal Banker and Registrar
Depositary
Northern Trust (Guernsey) Limited Computershare Investor Services
(Guernsey)
PO Box 71 Limited
Trafalgar Court 1st Floor
Les Banques Tudor House
St Peter Port Le Bordage
Guernsey, GY1 3DA St Peter Port
Guernsey, GY1 1DB
Administrator and Company Secretary Broker and Financial Adviser
Northern Trust International Fund Numis Securities Limited
Administration
Services (Guernsey) Limited The London Stock Exchange Building
PO Box 255 10 Paternoster Square
Trafalgar Court London, EC4M 7LT
Les Banques
St Peter Port
Guernsey, GY1 3QL
END
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January 17, 2018 12:45 ET (17:45 GMT)
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