Acorn Income Fund - Annual Financial Report
PR Newswire
London, April 28
Acorn Income Fund Limited
LEI 213800UAZN7G46AHQM67
Annual Financial Report (audited)
For the year ended 31 December 2019
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
The Company has today, in accordance with DTR 6.3.5, released its Annual Condensed Financial Report (audited) for the year ended 31 December 2019. The Report will shortly be available via the Investment Manager's website https://www.premierfunds.co.uk/investors/investments/investment-trusts/acorn-income-fund and will also be available for inspection online at www.morningstar.co.uk/uk/NSM website.
Investment Objectives and Policy
Investment Objectives
The investment objective and policy of Acorn Income Fund Limited (the "Company" or "Acorn") is to provide shareholders with high income and also the opportunity for capital growth.
The Company's assets predominantly comprise investments in equities and fixed interest securities in order to achieve its investment objective. The Company's investments are held in two portfolios. Approximately 70% to 80% of the Company's assets are invested in smaller capitalised United Kingdom companies, admitted to the O?cial List of the Financial Conduct Authority (the "FCA") and traded on the main market of the London Stock Exchange (the "LSE") or traded on the Alternative Investment Market ("AIM") at the time of investment. The Company also aims to enhance income for Ordinary Shareholders by investing approximately 20% to 30% of the Company's assets in high yielding instruments which are predominantly ?xed interest securities but may include up to 15% of the Company's overall portfolio (measured at the time of acquisition) in high yielding investment company shares.
The proportion of the overall portfolio held in the Smaller Companies Portfolio and the Income Portfolio varies from day to day as the market prices of investments move. The Directors retain discretion to transfer funds from one portfolio to the other and generally expect between 70% to 80% of the investments to be held in the Smaller Companies Portfolio.
While the Company's investment policy is to spread risk by maintaining diversi?ed portfolios, there are no restrictions on the proportions of either of the portfolios which may be invested in any one geographical area, asset class or industry sector. However, not more than 7.5% of the Company's gross assets may be invested in securities issued by any one company as at the time of investment, save that (i) in respect of the Income Portfolio only, investments may be made in other investment funds subject only to the restriction set out in paragraph (c) of the section headed "Investment Restrictions" below; and (ii) in respect of the Smaller Companies Portfolio only, provided that not more than 10% of the Company's gross assets are invested in securities issued by any one company at any time, the 7.5% limit may be exceeded on a short term basis, with Board approval, where a company whose securities form part of the Smaller Companies Portfolio issues new securities (for example by way of a rights issue).
The Company's capital structure is such that the underlying value of assets attributable to the Ordinary Shares is geared relative to the rising capital entitlements of the Preference Shares ("ZDP Shares"). The Company's gearing policy is not to employ any further gearing through long-term bank borrowing. Save with the prior sanction of ZDP Shareholders, the Company will incur no indebtedness other than short term borrowings in the normal course of business such as to settle share trades or borrowings to ?nance the redemption of the ZDP Shares.
Investment Restrictions
For so long as required by the LSE Listing Rules in relation to closed-ended investment companies, the Company has adopted the following investment and other restrictions:
- the Company will at all times invest and manage its assets in a way which is consistent with its objective of spreading investment risk and in accordance with its published investment policy;
- the Company will not conduct any signi?cant trading activity; and
- not more than 10% in aggregate of the value of the total assets of the Company at the time the investment is made will be invested in other listed closed-ended investment funds. The Listing Rules provide an exception to this restriction to the extent that those investment funds which have stated investment policies to invest no more than 15% of their total assets in other listed closed-ended investment companies.
Derivatives
The Company may invest in derivatives, money market instruments and currency instruments including contracts for difference, futures, forwards and options. These investments may be used for hedging positions against movements in, for example, equity markets, currencies and interest rates, for investment purposes and for efficient portfolio management. The Company's use of such instruments for investment purposes is limited to 5 per cent of the total assets of the Company. The Company will not use such instruments to engage in any significant trading activity. The Company will not maintain derivative positions should the total underlying exposure of these positions (excluding any currency hedges) exceed one times adjusted total capital and reserves.
Dividend Policy
The Company's policy is to provide Ordinary Shareholders with a high income relative to the average dividend yield of the UK Smaller Companies comprised in the Numis Smaller Companies Index ex Investment Companies. The Company aims to pay a regular quarterly dividend in March, June, September and December. It is intended to distribute substantially all of the Company's net income after expenses and taxation; however the Company may retain a proportion of the Company's income in each year as a revenue reserve to assist in providing long term stability in dividend distributions. Dividends may be paid to holders of Ordinary Shares whenever the financial position of the Company, in the opinion of the Directors, justifies such payment, subject to the Company being able to satisfy the solvency test, as defined under The Companies (Guernsey) Law, 2008. The Board is alert to the potential for new share issuance to dilute earnings and accordingly will have regard to the size and timing of new share issues. The ZDP Shares do not carry a right to a dividend.
Performance Summary
for the year ended 31 December 2019
| 31/12/2019 | 31/12/2018 | % change/ return | |
| Total Return Performance* | |||
| Total Return on Gross Assets*## | 19.22% | ||
| Numis Smaller Companies (Ex Investment Companies) Index | 24,153.03 | 19,296.02 | 25.17% |
| FTSE All Share Index | 7,837.96 | 6,577.39 | 19.17% |
| FTSE Small Cap (Ex Investment Companies) Index | 7,977.20 | 6,778.97 | 17.68% |
| Share Price and NAV Returns | |||
| Ordinary Shares | |||
| Share Price | 406.00p | 334.00p | 21.56% |
| NAV** | 466.43p | 384.61p | 21.27% |
| IFRS NAV# | 466.37p | 384.51p | 21.29% |
| Total Return on Net Assets** | +27.38% | ||
| Ordinary Share Price Total Return* | +28.59% | ||
| Discount (-) to NAV on Ordinary Shares** | -12.96% | -13.16% | |
| ZDP Shares | |||
| Share Price | 155.50p | 151.50p | 2.64% |
| NAV** | 154.07p | 148.36p | 3.85% |
| IFRS NAV# | 154.12p | 148.43p | 3.83% |
| Premium (+) to NAV on ZDP Shares** | +0.93% | +2.12% | |
| Other | |||
| Total Assets less Current Liabilities | £106,484,933 | £92,329,389 | 15.33% |
| Package Discount (-) Premium (+) to | |||
| NAV Combined Ordinary and ZDP Shares | -8.69% | -7.95% | |
| ZDP Liability** | £32,710,524 | £31,497,557 | 3.85% |
| Net Assets** | £73,774,408 | £60,831,832 | 21.28% |
| Gearing Level | 44.34% | 51.78% | -14.37% |
| Total Expenses Ratio (calculated on year end Gross Assets) | 1.13% | 1.24% | -8.87% |
| Ongoing Charges (calculated on average Net Assets) | 1.79% | 1.59% | 12.58% |
| Dividends and Earnings | |||
| Revenue Return per Ordinary Share | 22.31p | 21.62p | 3.19% |
| Dividends Declared per Ordinary Share | 20.80p | 19.80p | 5.05% |
* assumes dividends reinvested
** calculated in accordance with the Articles
# calculated in accordance with International Financial Reporting Standards
## adjusted for share buybacks
Sources: Index data: Bloomberg, Total return on gross and net assets, PFM, JP Morgan Cazenove
Company Summary
History
The Company was incorporated on 5 January 1999 and commenced its activities on 11 February 1999. The portfolio is divided into two sub portfolios, a Smaller Companies Portfolio representing approximately 70-80% of the total with the balance invested in an Income Portfolio investing in fixed income securities, investment company shares and structured investments. The Company has always been leveraged, initially through bank debt and now through Zero Dividend Preference ("ZDP") Shares. In December 2016, shareholders approved the extension of the ZDP Shares setting a new redemption date of 28 February 2022.
Capital Structure
Zero Dividend Preference Share (1p each)
21,230,989 (excluding treasury shares)
The ZDP Shares will have a ?nal capital entitlement of 167.2 pence per ZDP Share on 28 February 2022 following the extension of the life of the existing shares from 31 January 2017, subject to there being su?cient capital in the Company. The ZDP Shares are not entitled to any dividends. ZDP Shareholders rank ahead of the Ordinary Shareholders in regards to rights as to capital. The ZDP Shareholders have the right to receive notice of all general meetings of the Company, but do not have the right to attend or vote unless the business of the meeting involves an alteration of the rights attached to the ZDP Shares, in which case the holders of ZDP Shares can attend and vote.
Ordinary Shares (1p each)
15,816,687 (excluding treasury shares)
The Ordinary Shares, excluding treasury shares, are entitled to participate in all dividends and distributions of the Company. On a winding-up holders of Ordinary Shares are entitled to participate in the distribution and the holders of Ordinary Shares are entitled to receive notice of and attend and vote at all general meetings of the Company.
Treasury Shares
As at 31 December 2019, there were 1,325,972 Ordinary and 1,779,873 ZDP Shares held in treasury.
Shareholder Funds
£73.76 million as at 31 December 2019 (calculated in accordance with IFRS)
£73.77 million as at 31 December 2019 (calculated in accordance with the articles)
Market Capitalisation of the Ordinary Shares
£64.22 million as at 31 December 2019
Company Details
The Board
The Board consists of three independent non-executive directors ("the Directors"), John Nigel Ward (Chairman), David Warr and Sharon Ann Parr who was appointed 16 August 2019 replacing Helen Green who stepped down on the same date. Nigel Sidebottom was appointed to the Board on 5 February 2019 and is not considered independent by virtue of his recent employment with the Premier Miton Group PLC (the parent company of the Investment Manager).
Investment Manager
Premier Asset Management (Guernsey) Limited ("PAMG"), is a subsidiary of Premier Miton Group PLC ("PMG"). PMG had approximately £11.6bn of funds under management as at 31 December 2019. PAMG is licensed under the provisions of the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, by the Guernsey Financial Services Commission to carry on controlled investment business.
Investment Advisers
Premier Fund Managers Limited ("PFM") - the Company's Income Portfolio is managed by Chun Lee and Robin Willis.
Unicorn Asset Management Limited ("Unicorn") - the Company's Smaller Companies Portfolio is managed by Simon Moon and Fraser Mackersie.
Secretary/Administrator
Northern Trust International Fund Administration Services (Guernsey) Limited.
Corporate Broker
Numis Securities Limited ("Numis").
Management Fee
0.7% per annum (Total Assets) charged 75% to capital and 25% to revenue. Minimum annual management fee £100,000.
In addition, a performance fee is payable at the year-end if the target set out in note 5 is achieved. This is charged 100% to capital.
Registrar
Anson Registrars Limited
Financial Calendar
Company's year end 31 December
Annual results announced March/April
Company's half year end 30 June
Annual General Meeting 11 August 2020
Half-year results announced August
Dividend payments At the end of March, June, September and December
Company Website
https://www.premierfunds.co.uk /acorn-income-fund-limited
Chairman's Statement
Year to 31 December 2019
Dear Shareholder
On behalf of the Board, I present to you the Annual Financial Report of the Company for the year ended 31 December 2019. Given the significant impact of COVID-19 since the year end my comments which follow are not solely restricted to 2019.
The recovery seen in the UK market in the first half of 2019 was followed by a renewed period of weakness during the summer months for the smaller companies market in particular. This was driven primarily by ongoing uncertainty surrounding the ultimate outcome of the Brexit negotiations, which impacted domestically focused businesses more than larger more international corporations. The decisive election outcome in December provided an immediate fillip to the UK market as a whole, especially to small and mid-cap stocks. Now that the UK has formally left the European Union, the focus will move to the progress being made in negotiating a new trading relationship with Europe.
Events since 31December 2019 have of course resulted in an entirely different focus; that of evaluating the impact of COVID-19 on the Global economy and more specifically the companies in which Acorn has invested. The Board is also acutely aware of the impact of the virus in human terms.
The initial impact of COVID-19 on the global economy has been profound and consequently has significant implications for companies in which the Company is invested and to a large extent is overshadowing the ongoing Brexit negotiations.
Investment Performance
Against a somewhat uncertain market background - both domestic and global - it is pleasing to be able to report a significant improvement to the performance of the Company in 2019 in comparison to the previous year. The total return on Acorn's gross assets, which measures the return on the portfolio including all income and costs, was 19.2%, while the total return on net assets, enhanced by the gearing effect of the Zero Dividend Preference ("ZDP") Shares, increased by 27.4%. This compares to a total return from the Numis Smaller Companies (ex-Investment Companies) Index, of 25.2%, and to the FTSE All Share Index, which recorded a total return of 19.2%.
Rising by 28.6%, the Ordinary Share price total return was broadly in line with that of the net asset total return, reflecting the fact that the discount (the difference between the value of the assets and the share price) was little changed over the year as a whole, averaging 12.5%.
The gearing provided by the ZDPs is a long-standing component of the Company, introduced to enhance returns over the long term. During periods of market weakness gearing will detract from performance, but as the market recovers it will commensurately boost performance, which is why the Ordinary Share Net Asset Value ("NAV") rose ahead of total assets in 2019. The gearing level at the year-end, excluding current period revenue, was 44.3%. The Income Portfolio, which is run by the team at Premier Miton Group Plc ("PMG"), is designed to provide an element of balance to the gearing but does not match it completely.
We cannot ignore the potential impact of COVID-19 and the Investment Adviser Reports cover this subject in more detail. Suffice to say that your Board is actively liaising with the Investment Advisers to understand the short and medium term impact on the companies in which we are invested.
Discount Management
The discount on the Ordinary Shares had widened to 13.0% by the end of the previous year, which, as mentioned in the previous Chairman's Statement, was primarily driven by the market taking a more pessimistic view of UK Smaller Companies as an asset class. It is disappointing to see that the discount remained at or around this level for much of 2019, rather higher than the longer-term average of 7-8%, despite the significant improvement in the performance of the NAV.
The Board closely and regularly monitors the discount and considers whether steps including share buy-backs are an appropriate measure to enhance long term shareholder value. There were no buy-backs during the course of 2019 as the Board was keen to maintain the size of the Company and perhaps more importantly, in line with the views of the Investment Advisers, to ensure that cash remained available to invest. This approach remains relevant following the recent COVID-19 related market shock albeit there is no hurry to invest the Company's increased cash resources until there are clear signs of a return to market stability.
Risk and Return
Acorn's risk-return profile is in line with its peer group when measured against other small and mid-cap funds, whilst in comparison to other UK Equity Income funds, its returns stand out while the volatility of those returns remains below that of the majority of the group.
Asset Allocation
Despite the lack of clarity over the UK's political situation that prevailed for much of the year, the majority of stocks in the Smaller Companies portfolio reported good results, accompanied by attractive levels of dividend growth. Liquidity in these stocks also remained reasonable. By contrast, both liquidity and the general outlook for much of the bond market proved more challenging, so the decision was taken mid-year to increase the weighting to smaller companies as opportunities arose. As a result, in the days following the general election, funds were diverted from the Income Portfolio to be reinvested into the Smaller Companies portfolio, taking advantage of the post-election rally. Such that, by the year-end the weighting was 80% to Smaller Companies with 20% remaining in the Income Portfolio.
In mid-November, following discussions with the Investment Advisers, the Board took the decision to put some downside protection in place, in the event that the general election outcome was less favourable for markets than it subsequently proved to be. This took the form of a listed put option on the FTSE 250 Index, at a small cost to the Company that was more than outweighed by the subsequent rise in the market.
Earnings and Dividends
The first interim dividend for 2019, paid at the end of March, was increased by 5.1%, a level that was maintained for the year as a whole, with the result that the total dividend for the year, 20.80p, represented an increase of 5% on the total dividend for 2018.
The first interim dividend for 2020 was increased by 10.57% to 5.75p. The Company's income will inevitably be impacted by recent market developments. However, the board recognises the importance of dividends to shareholders and it is the board's intention to maintain the second interim dividend whilst keeping matters relating to future dividends under close review but noting the availability of a healthy dividend reserve.
Earnings per share for the year of 22.31p covered the dividend distribution by 107% and resulted in an addition to revenue reserves of £239,024.
Zero Dividend Preference ("ZDP")Shares
The price of the ZDP Shares rose by 2.6%, ending the year at 155.50p, representing a premium of 0.9% to NAV. The asset cover at the year-end stood at 2.8x and the yield to maturity was 3.4%. The number of ZDPs in issue is 21,230,989.
Regulation
The Packaged Retail and Insurance-based Investment Products ("PRIIPs") regulations came into effect on 3 January 2018 and since then the Company has published Key Information Documents ("KIDs") for the Ordinary Shares and ZDPs which can be viewed on the Company's website. Since the introduction of PRIIPS KIDs there has been much debate around the effectiveness of these documents and the European Supervisory Authorities ("ESAs") are currently consulting on proposed amendments to the main regulatory issues; namely, the presentation of illustrative performance scenarios and the methodologies used to present costs. Having made a submission to the Financial Conduct Authority in the past, in response to their call for input on the PRIIPs regulations, the Company continues to follow these developments closely.
Environmental, Social, Governance ("ESG")
ESG matters will have an increasing prominence in future financial and regulatory reporting. In addition, the Manager is working to integrate ESG considerations more closely into investment processes. In September 2019 PMG hired a Head of Responsible Investing within the investment team. This commitment brings significant experience to support us in the enhancement of our responsible investing approach and preparing us for a market which is increasingly focused on sustainability. PMG is a signatory to the United Nations Principles of Responsible Investment ("UN PRI") which has become an industry standard and is a further step in embedding responsible investment in the Company.
Investment Adviser Developments
Shareholders may be aware that in November 2019, Premier Asset Management Group plc ("PAM"), the ultimate parent company of the Company's Investment Manager, Premier Asset Management (Guernsey) Ltd, merged with Miton Group plc to form Premier Miton Group plc. This does not affect the Company's existing management arrangements, but will place further resources at the Advisers' disposal.
Since the departure of Paul Smith, head of the fixed income team at PMG in August 2019, which was announced to the market at the time, the Income Portfolio has been managed by Chun Lee and Robin Willis, who worked closely with Paul in the management of the Income Portfolio for several years prior to his leaving.
Board Structure
Following the decision by Helen Green to step down as Chairman of the Company in August 2019, I took over as Chairman. I would like to thank Helen for her valuable contribution to the Company and in particular for her leadership of the Board over the past seven years. Simultaneously, the Board announced the appointment of Sharon Parr as a non-executive director; Sharon has experience as a non-executive director of London-listed investment companies and was most recently global head of the trust and fund administration division of Barclays Wealth. On behalf of my fellow Directors, I should like to welcome Sharon to the Board and look forward to working with her.
I am pleased to advise that, with effect from 1 May 2020, Sharon Parr will become Chair of the Audit Committee. As part of the Board's on-going restructuring programme, David Warr had intended to step-down from the Board during 2020 but, in view of the extraordinary times we all find ourselves in, the Board were keen to retain his invaluable experience. As a result, he will remain on the Board until the 2021 AGM and in the meantime has accepted the Board's invitation to become the Company's Senior Independent Director.
Outlook
It is now clear that the wide-ranging impact of COVID-19 will dominate 2020 and beyond. This unforeseen event together with the US presidential election in November 2020, continuing tension in the Middle East, the outcome of trade discussions between the US and China and the UK's ongoing Brexit negotiations presents a formidable list of challenges and uncertainty in the near term outlook.
The outlook and the ultimate impact on economies, businesses, individuals and markets are difficult if not impossible to predict at this stage. However, we do not underestimate the gravity of the situation either in human or economic terms and the board and its Investment Advisers are continually monitoring developments in order to manage the impact on the Company.
The Board however remains confident in its Advisers to manage the Company's assets through this period of turbulence and to seek out the investment opportunities which inevitably arise from market dislocation as we are experiencing at present.
Contact with Shareholders
The Board welcomes contact with shareholders, who are always welcome to attend the Annual General Meeting in August, or to contact me directly via the email address acorn_income_fund_limited@ntrs.com. Further information on the Company, including factsheets and a recently updated presentation may be found at www.premierfunds.co.uk/acorn-income-fund-limited
Thank you for your ongoing support as an investor in our Company.
Nigel Ward
Chairman
Investment Advisers' Report
The Smaller Companies Portfolio
Year to 31 December 2019
During the twelve month period to 31 December 2019 the Smaller Companies portfolio generated a total return of 26.5%, after expenses, outperforming a rise of 25.2% by the Numis Smaller Companies Index (Ex Investment Companies).
2019 ended up being a strong year for equity markets globally however there were a number of challenges facing investors throughout the year at both an international and domestic level. In the UK the emergence of some clarity surrounding our exit from the EU provided a more favourable backdrop for Small and Mid-Caps. It is therefore pleasing to report a meaningful rise in the value of the Smaller Companies portfolio, which again outperformed the benchmark.
At an operational level our investee companies have continued to trade well despite the persistent uncertainty surrounding our exit from the EU and we entered 2020 invested in high quality companies trading at attractive valuations. The strong performance over the past twelve months has increased valuations generally across the investee companies however the portfolio continues to represent compelling value for long term investors in our view. We remain mindful of the risks and uncertainty regarding the negotiation of future trade deals however the domestic backdrop has undoubtedly improved. The recently elected majority Conservative government provides much needed political stability and should stimulate economic growth following a number of subdued years.
The number of holdings within the portfolio grew by one to 47 during the period, following the addition of seven new holdings and disposal of six positions. Corporate activity was the primary driver of portfolio turnover in the year with four of the six disposals leaving the portfolio through acquisition. These were: Dairy Crest, Greene King, Manx Telecom, and Mucklow (whose acquisition was partially in shares gave rise to one of the additions, London Metric), which combined contributed over 4% to portfolio performance. This high level of acquisitive behaviour, largely from international buyers, added support to our view that UK equities remain attractively valued relative to international peers - a dynamic enhanced by the depressed level of sterling. The same conditions acted as a deterrent to companies wishing to raise cash through equity fund raising, as such there was a dearth in high quality businesses listing on the market, and accordingly the portfolio did not participate in any IPOs during the period.
Outside of corporate activity the strong performance of the portfolio was driven across the Board with over three quarters of the portfolio delivering positive contributions to returns, and 11 of the 47 holdings contributing over 1% each to portfolio performance with no holdings detracting performance by over 1%.
Notable positive contributions came from: 4imprint, the US focused supplier of corporate promotional material delivered strong organic growth and contributed 208bps to portfolio performance; Alpha FX, the provider of foreign exchange services to smaller companies added 128bps; Marshalls, the leading provider of paving products in the UK added 124bps; DiscoverIE, the electronic components designer and distributor added 122bps; other significant contributions came from Macfarlane, Primary Health Properties, Gateley, and Secure Trust Bank, which all added over 100bps to performance.
The only negative contributions worth noting came from Saga and Hostelworld contributing -62bps and -67bps respectively.
Looking to the prospects for 2020 the focus must unfortunately rest on one severe and ongoing event: the COVID-19 pandemic. The COVID-19 graduated from being a 'Chinese problem' in January that seemed to little bother the rest of the world, to a panic-inducing worldwide phenomenon by March. As the virus rapidly spread from the East to the West, governments and public health services rushed to coordinate their responses to the threat with varying degrees of severity and success. In an effort to contain the spread of the virus the UK Government followed the lead taken by most European countries and imposed a lockdown on its population and, by extension, a large proportion of economic activity. A similar approach is also now being taken in the US in an attempt to contain the outbreak, which will inevitably place further pressure on the global economy.
The speed of the contagion was matched by the rapidity of the sell-off across equity markets as investors sought to reduce risk in the face of uncertainty, as such markets suffered extreme falls and dramatically increased volatility. The UK Government has worked in lock-step with the Bank of England to provide a coordinated response to the threat posed by both the virus and the lockdown that will far exceed the UK's response to the global financial crisis. Although obviously expensive the ultimate aim of this huge economic stimulus is to keep people in jobs and ensure that companies are 'ready to go' when the crisis passes. We believe these measures should position the UK relatively well for the recovery. Regardless of how resilient or otherwise the UK is over this period the key unknown element is the length of time it will take to get the virus under control as that will be the pathway to a recovery in economic activity.
During such an exceptionally volatile and uncertain period for equity investors we have taken a number of steps to de-risk the portfolio - from both a balance sheet and end market perspective. We entered the period under review with low levels of debt across the portfolio. Where we have identified higher levels of risk in the portfolio we have taken decisive action to improve this position further. While a number of our investee companies are currently experiencing disruption to trading we believe our strong starting point and subsequent actions leaves the remaining investee companies well placed to survive a prolonged period of lower activity.
The Company is therefore invested in a portfolio of well-financed companies that address robust end markets; action taken by the Advisers has reduced end market and balance sheet risk even further whilst increasing cash levels at the same time, cumulatively this has improved the ability of the portfolio to weather this storm. Although it is currently and will likely continue to be a testing time, volatility provides opportunities and our cash balances are high so we can quickly deploy capital. We need to be perceptive and mindful of when this crisis starts to turn and as such our attention is focused on any indications that the virus is under control. Evidence of the control of the virus is, in our opinion, a better signal of a nascent economic recovery than any announcement of fiscal stimulus.
In order to assess the risks in the current portfolio our analysis has focused on dividing the holdings into three main groups - Continuity, Resilience and Recovery. This analysis has also framed our income expectations for the current year. Companies in the Continuity group continue to trade reasonably well and we do not currently envisage any significant change to forecasted dividend payments. The Resilience group includes those businesses that are continuing to operate but have suffered disruption in the current environment. Whilst dividend payments should continue from this group more modest payments are likely. The final group is Recovery, where companies are experiencing a more pronounced impact on current trading but have the capacity to participate strongly in any recovery. We view dividend payments as unlikely from this group in the near term but also view them as likely to resume quickly. Roughly half of the portfolio is in the Recovery group, with the balance fairly evenly split between Continuity and Resilience. These groupings and assumptions have formed the basis for our dividend income stress testing in the current year.
Fraser Mackersie and Simon Moon
Unicorn Asset Management Limited
The Income Portfolio
2019 saw unexpectedly strong performance across many asset classes, including corporate bonds, as a number of downside risks appeared to subside. A recession did not materialise in the U.S nor in Europe, while the first phase of a trade deal between the US and China was agreed and a no-deal Brexit avoided. However the most powerful underlying driver of corporate bond markets was arguably the re-expansion of central bank balance sheets. Loose monetary policy had kept investors comfortable that central banks were creating a benign environment for borrowers whilst the low interest rate environment meant that income seekers crowded into the corporate bond space for yield which helped drive the compensation offered by these investments down to historic lows. However the low returns on offer appeared unattractive and at odds with the soft global macroeconomic data which suggested we may be late in the business cycle.
The danger was that any event which upset this complacent mind-set, an unknown unknown, could lead to a repricing of risk and an unprecedented scramble for the exit at the same time. This would create liquidity problems as traditional corporate bond market makers no longer operate in a size that could facilitate smooth support of the market under such conditions. In March 2020, the rapid global spread of COVID-19 proved to be the unexpected catalyst which drove exactly this scenario. As such credit spreads on corporate bonds, the extra yield demanded for taking on credit risk over that of government bonds, rose rapidly whilst liquidity in many parts of the market vanished.
Whilst there has been no sector left unharmed by the sell-off, we are relatively comfortable with the largest sector exposure within our corporate bond holdings, especially national champion banks. Whilst in the last crisis, the banking system was at the heart of the problem, now it is seen as a vital part of the solution as central banks have moved swiftly to ensure lenders have the tools to continue supporting the economy. Whilst it was politically difficult to help the financial sector out of a problem of its own making in the last crisis, the current exogenous shock should ensure that domestic and globally important banks are supported by governments to ensure that the transmission mechanisms of its policies operate smoothly. In addition, the key banks now have a much greater loss absorbing capacity and have been run more conservatively than before, driven by a strict regulatory overhaul.
Outside of financials, exposures are predominantly to less cyclical areas which should prove more defensive and less disrupted in the current environment. Whilst not without their own challenges the likes of domestic supermarkets and telecommunications should prove to have more resilient characteristics, continuing to be essential services during the lockdown. Meanwhile corporate bond exposure to companies within highly disrupted sectors such as commercial transport is relatively limited and to issuers which are a crucial parts of the UK's infrastructure and have decent access to liquidity for now, and should be beneficiaries of the government's announced support packages for affected key industries.
Despite unattractively low real yields, Sovereign bonds have offered multi-asset investors some welcome diversification during these risk-off periods although there have been times where even this traditionally low risk volatility asset class has seen wild swings in price movements.
The portfolio has benefitted from its exposure to Gilts and U.S Treasuries, however as government bond yields get ever lower so do their ability to offer protection, unless highly negative yields across the world become a reality. Another consideration must also be the large prospective sovereign bond issuance and budget deficits needed to fund emergency stimulus. If they prove to be successful, then yields in longer dated bonds may well start rapidly to price in these risks, coupled with the prospect of a renewed rise in inflation, unlikely as both may seem at present.
In order both to diversify risk away from bond markets and to supplement income generated, the portfolio has invested in a number of alternative investments. Positions in investment companies that invest in alternative asset classes, such as music royalties and energy efficiency projects, have provided diversification benefits and although in the current sell-off nothing has proved to be immune, our expectation is that some of these investments will be supported by their unique exposures, discounts to net asset value and income generation characteristics.
As risk assets cheapen, valuations have undoubtedly become more attractive within select opportunities, some of which will prove to be resilient through a downturn whilst others will bounce back strongly should the economic effects not be as severe as feared. Importantly, freshly announced measures by global central banks to support credit markets are showing signs of easing the initial dysfunction. However at this juncture it is perhaps prudent to be patient and assess how the spread and disruption of the pandemic evolves and changes the potential for defaults, when attempting to establish where to hunt for value. In the meantime, we will continue to prioritise preserving capital and having some cash available will provide important optionality when visibility improves.
Chun Lee and Robin Willis
Premier Fund Managers Limited
Schedule of Principal Investments
as at 31 December 2019
| Percentage of Total Assets 2019 | Percentage of Total Assets 2018 | ||||
| Position | Company | Market Value £'000 | Percentage of Portfolio | ||
| Smaller Companies Portfolio | |||||
| 1 | Telecom Plus plc | 3,073,783 | 3.70 | 2.88 | 2.47 |
| 2 | Hollywood Bowl Group plc | 2,565,000 | 3.08 | 2.40 | 1.83 |
| 3 | Severfield plc | 2,536,335 | 3.05 | 2.38 | 1.76 |
| 4 | Secure Trust Bank plc | 2,528,000 | 3.04 | 2.37 | 1.66 |
| 5 | Regional REIT Limited | 2,399,840 | 2.89 | 2.25 | 1.55 |
| 6 | 4imprint Group plc | 2,315,975 | 2.78 | 2.17 | 1.99 |
| 7 | Numis Corporation plc | 2,304,900 | 2.77 | 2.16 | 1.40 |
| 8 | FDM Group Holdings plc | 2,295,480 | 2.76 | 2.15 | 1.36 |
| 9 | Polar Capital Holdings plc | 2,224,800 | 2.68 | 2.08 | 1.90 |
| 10 | Goodwin plc | 2,190,300 | 2.63 | 2.05 | - |
| 11 | Brewin Dolphin Holdings plc | 2,188,900 | 2.63 | 2.05 | 1.12 |
| 12 | Ocean Wilsons Holdings Limited | 2,182,500 | 2.62 | 2.04 | 2.68 |
| 13 | Wincanton plc | 2,126,781 | 2.56 | 1.99 | 1.98 |
| 14 | Macfarlane Group plc | 2,110,000 | 2.54 | 1.98 | 1.74 |
| 15 | James Halstead plc | 2,098,200 | 2.52 | 1.96 | 2.30 |
| 16 | DiscoverIE Group plc | 2,093,442 | 2.52 | 1.96 | 1.74 |
| 17 | Somero Enterprises Inc | 2,025,000 | 2.43 | 1.90 | 2.26 |
| 18 | Clipper Logistics plc | 1,998,500 | 2.40 | 1.87 | 1.26 |
| 19 | Epwin Group plc | 1,984,875 | 2.39 | 1.86 | 1.19 |
| 20 | Primary Health Properties plc | 1,917,600 | 2.31 | 1.80 | 1.91 |
| TOTAL | 45,160,211 | 54.30 | 42.30 | ||
| Income Portfolio | |||||
| 1 | Pershing Square Holdings Limited | 850,651 | 4.13 | 0.80 | 0.65 |
| 2 | Value & Income Trust 11.00% 31/03/2021 | 805,588 | 3.91 | 0.75 | 0.93 |
| 3 | Pershing Square Holdings 5.50% 15/07/2022 | 797,698 | 3.87 | 0.75 | - |
| 4 | APQ Global Limited 3.5% CULS 30/09/2024 | 792,100 | 3.84 | 0.74 | 0.91 |
| 5 | Real Estate Investors plc | 715,000 | 3.47 | 0.67 | - |
| 6 | Credit Suisse Group 2.75% 08/08/2025 | 629,866 | 3.05 | 0.59 | 0.63 |
| 7 | Santander UK 1.875% 17/02/2020 | 600,673 | 2.91 | 0.56 | - |
| 8 | AT&T 2.9% 04/12/2026 | 528,269 | 2.56 | 0.49 | 0.53 |
| 9 | Citigroup 1.75% 23/10/26 | 497,838 | 2.41 | 0.47 | - |
| 10 | British Land White 0.00% | 496,580 | 2.41 | 0.47 | 0.52 |
| 11 | Supermarket Income REIT plc | 490,500 | 2.38 | 0.46 | 0.20 |
| 12 | RM plc ZDP | 465,400 | 2.26 | 0.44 | 0.27 |
| 13 | J Sainsbury 6.5% PERP | 461,886 | 2.24 | 0.43 | 0.51 |
| 14 | Deutsche Bank 0.0025% 29/10/2020 | 446,821 | 2.17 | 0.42 | 0.20 |
| 15 | British American Tobacco plc 4% 04/09/2026 | 439,701 | 2.13 | 0.41 | 0.57 |
| 16 | GS Group 3.125% 25/07/2029 | 431,551 | 2.09 | 0.40 | 0.52 |
| 17 | Barclays 3.125% 17/01/2024 | 419,972 | 2.04 | 0.39 | - |
| 18 | HSBC Holdings 2.256% FRN 13/11/2026 | 405,897 | 1.97 | 0.38 | - |
| 19 | Lloyds Bank 1.75% 11/07/2024 | 403,189 | 1.96 | 0.38 | - |
| 20 | Lloyds Bank plc 9.625% 06/40/2023 | 373,350 | 1.81 | 0.35 | - |
| TOTAL | 11,052,530 | 53.61 | 10.35 | ||
Directors' Biographies
for the year ended 31 December 2019
Directors
As reported within the last Annual Report, planned succession saw Helen Green standing down from the Board on
16 August 2019 having served 12 years as a board member and seven years as your Chairman. We can also report that Nigel Ward was appointed Chairman following Helen Green's resignation and Sharon Parr was appointed to the Board as a non-executive director on 16 August 2019.
The Directors for the whole year ended 2019 were as follows:
Nigel Ward
David Warr
Both Directors of the Board are non-executive Directors and are considered independent of the Investment Manager.
Nigel Sidebottom was appointed to the Board on 5 February 2019 and is not considered independent by virtue of his recent employment with PMG.
Sharon Parr was appointed to the Board effective 16 August 2019 and is considered independent of the Investment Manager.
David Warr and Sharon Parr are chartered accountants. All four Directors have extensive non-executive director experience. Further details of the quali?cations and suitability of each of the Director's appointments are as follows:
John Nigel Ward (Chairman)
Nigel joined the Company in December 2011. He has over 40 years experience of international investment markets, credit and risk analysis, portfolio management, corporate and retail banking, corporate governance, compliance and the managed funds industry gained at Nat West, TSB Bank, Baring Asset Management and Bank Sarasin. Nigel is a full-time non-executive director serving on a number of company boards which have LSE or The International Stock Exchange Listings*. He was a founding Commissioner of the Guernsey Police Complaints Commission, is an Associate of the Institute of Financial Services, a member of the Institute of Directors and holder of the IoD Diploma in Company Direction. Nigel is a resident of Guernsey.
David John Warr
David joined the Company in August 2012. David is a Fellow of the Institute of Chartered Accountants in England and Wales having quali?ed as a chartered accountant in 1976. In 1981 David was appointed a partner in Reads & Co. a Guernsey based ?rm of chartered accountants, which he helped develop into a more broadly based ?nancial services business leading up to its sale at the end of 1998. David's experience at Reads & Co. included audit, trust and company administration. David now acts as a non-executive director on a number of UK listed companies* whilst combining those responsibilities with charitable work. David is a resident of Guernsey.
Nigel Sidebottom
Nigel joined the Company in February 2019. Nigel is a Chartered Fellow of the Chartered Institute of Securities and Investment and a Chartered Wealth Manager. Between 2005 and 2018 he was Deputy Chief Investment Officer and Head of Closed Ended Funds at Premier Asset Management, now Premier Miton Group Plc, the parent company of the Company's investment Manager. He has over 30 years' experience in private client stockbroking and in investment management and has served as a non-executive director on a number of LSE listed companies. Nigel is resident in the UK.
Sharon Parr
Mrs Parr was appointed to the Board in August 2019. In 2003 she completed a private equity backed MBO of the trust and fund administration division of Deloitte and Touche, called Walbrook, selling it to Barclays Wealth in 2007. As a Managing Director of Barclays, she ultimately became global head of their trust and fund administration businesses, comprising over 450 staff in 10 countries. She stepped down from her executive roles in 2011 to focus on other areas and interests but has maintained directorships in several companies. She is a Fellow of the Institute of Chartered Accountants in England and Wales and a member of the Society of Trust and Estate Practitioners, and is a resident of Guernsey.
*Details of the Directors' other directorships for public companies can be found on Directors' Report.
Strategic Report
For the year ended 31 December 2019
The Directors submit to the shareholders their Strategic Report, Directors' Report and the Audited Financial Statements of the Company for the year ended 31 December 2019.
Business Model and Strategy
The Company is a closed-ended investment company, incorporated with limited liability in Guernsey. The Company has been granted exemption from income tax within Guernsey. It is the intention of the Directors to continue to operate the Company so that each year this tax-exempt status is maintained.
Investment Objectives and Policy
The Company's investment objectives are to provide Ordinary Shareholders with a high income with the opportunity for capital growth. The Company seeks to achieve these objectives by investing in a combination of smaller capitalised United Kingdom companies listed on the London Stock Exchange or AIM, and high yielding, predominantly ?xed interest, instruments.
High Income
The Ordinary Shares are designed to offer a high dividend yield. The Board intends to pay quarterly interim dividends with equal amounts paid in March, June, September and December each year.
It is intended that the Company's income will consist wholly or mainly of investment income. The Directors intend to distribute substantially all of the Company's income after expenses and tax to the holders of the Ordinary Shares.
The full year dividend for 2019 totalled 20.8p (2018: 19.8p) representing a yield of 5.12% on the year end share price.
Long Term Growth in Capital Value
The asset value of the Company's portfolios is heavily influenced by external macro-economic factors. The Directors meet with the Investment Manager and Investment Advisers regularly to discuss the portfolio. Additional details are covered in the Chairman's Statement and Investment Advisers' Report.
Business Environment
Principal and Emerging Risks
The Board has an on-going process in place for identifying, evaluating and managing the signi?cant risks faced by the Company. The responsibility for carrying out the risk review is undertaken by the Risk Committee (see Directors' Report for details of the Risk Committee), which meets at least four times per year. The results of the risk evaluations are then reported back to the Board. The last risk assessment took place on 7 November 2019. The current process is in line with the Association of Investment Companies ("AIC") Code of Corporate Governance (the "AIC Code").
Coronavirus Risk
Given recent events, Coronavirus ("COVID-19") changed from being an emerging risk to a significant post balance sheet risk which has impacted global commercial activities.
The Board has been monitoring the development of the pandemic and has considered the impact it has had to date and assessing the impact it may have in the future. Despite the impact on the Company's share performance, there remains continued uncertainty on its development and scale such that predicting the impact with any certainty remains challenging. The Board will continue to assess the position.
From an operational perspective, the Company uses a number of service providers. These providers have established, documented and regularly tested Business Resilience Policies in place, to cover various scenarios whereby staff cannot turn up for work at the designated office and conduct business as usual. Since the COVID-19 pandemic outbreak, service providers have deployed these alternative working policies to good effect, thus ensuring continued business service.
Risks of the Structure of the Company and Gearing
The Company's business could be materially and adversely a?ected by a number of risks. External factors to the Company may either adversely or favourably a?ect the volatility and liquidity of the Smaller Companies Portfolio and Income Portfolio (the "Portfolios"), as well as their values. These can be caused by economic conditions, changes to tax laws, competition and a number of other factors.
Investors holding either Ordinary Shares or ZDP Shares should have carefully considered whether these investments, given the risks attached, are suitable for them.
The market value of ZDP Shares will be a?ected by changes in general interest rates, with upward movements in interest rates likely to lead to reductions in the market value of ZDP Shares although not a?ecting the ultimate redemption value.
Although the holders of ZDP Shares have a priority entitlement to the other assets of the Company (after payment of its liabilities) on a winding-up, if the gross assets of the Company fall to a level that is insu?cient to redeem the ZDP Shares in full, investors in the ZDP Shares would receive a lower payment than the Fixed Capital Entitlement on the ZDP Shares repayment date.
In certain circumstances, such as a major fall in the capital value of the Portfolios such that the Final Capital Entitlement of the ZDP Shares is signi?cantly uncovered but where the Company's Portfolios are still generating revenue, the interests of ZDP Shareholders and the Ordinary Shareholders may con?ict. In such circumstances, the Directors may ?nd it impossible to meet fully, both sets of expectations and so will need to act in a manner which they consider to be fair and equitable to both Ordinary Shareholders and ZDP Shareholders but having regard to the entitlements of each class of shares.
Further risks to the ZDP Shares include the lower level of regulatory protection than applies to premium listed shares.
The Ordinary Shares are geared by the ZDP Shares and should be regarded as carrying above average risk since a positive Net Asset Value ("NAV") for the Ordinary Shareholders will be dependent upon the Company's assets being su?cient to meet those prior entitlements of the holders of ZDP Shares. As a consequence of the gearing, a decline in the value of the Company's investment portfolio will result in a greater percentage decline in the NAV of the Ordinary Shares.
Ordinary Shareholders do not have a right for their shares to be redeemed and those Ordinary Shareholders wishing to realise their investment will be required to dispose of their shares on the stock market.
Market liquidity in the shares of companies such as the Company is less than market liquidity in shares issued by larger companies traded on the LSE. There can be no guarantee that a liquid market will exist for the Ordinary Shares or the ZDP Shares which may prevent any holder of Ordinary Shares or ZDP Shares from disposing of such shares at a price or at such time that they wish.
The Company's future performance depends on the success of its strategy, the skill and judgements of the Investment Manager and of the Investment Advisers. The departure of key personnel of either provider may have an adverse e?ect on the performance of the Company.
The Company may use derivatives to hedge exposure to currency risk and interest rate risk. No assurance can be given that any hedging strategies which may be used by the Company will be successful under all or any market conditions and, if unsuccessful, could have an adverse e?ect on the Company's ?nancial position.
Risk Associated With Investment in Other Investment Companies
The Income Portfolio may contain higher yielding investment company shares (including shares of split capital investment trusts). As a result of the gearing in some investment company shares, any increase or decrease in the value of the investments held by those investment companies might magnify movements in their NAV and consequently a?ect the value of the Income Portfolio. In accordance with the Listing Rules, where appropriate, the Company makes Stock Exchange announcements detailing its holdings in other UK listed investment companies which themselves do not have a stated investment policy to invest no more than 15% of their gross assets in other UK listed investment companies (including investment trusts).
Market Price Risk
Since the Company invests in ?nancial instruments, market price risk is inherent in these investments. In order to minimise this risk, a detailed analysis of the risk/reward relationship of each investee company is undertaken by the Investment Advisers prior to making investments.
Interest Rate Risk
The Company's investment portfolios, particularly the Income Portfolio, include investments bearing interest at fixed rates. Generally when interest rates rise the market prices of fixed interest securities fall and when interest rates fall the prices of fixed interest securities rise. The Company will therefore be exposed to movements in interest rates. The Company has fixed rate leverage through its ZDP Shares. In January 2017, the redemption date of the Company's ZDP Shares was extended to 28 February 2022 at a rate of 3.85% per annum. Replacing this leverage in 2022 might involve the Company paying a higher accrual rate on an issue of new ZDP Shares if interest rates have risen.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter di?culties in meeting its obligations associated with its ?nancial liabilities that are settled by delivery of cash or another ?nancial asset. Some of the Company's investments in smaller company equities and in certain bond issues may have relatively low levels of daily turnover such that it might take several days or even weeks to sell a holding into the market.
Discount Volatility
Being a closed-end fund, the Company's shares may trade at a discount or premium to their NAV. The magnitude of this discount or premium ?uctuates daily and can vary signi?cantly. Thus, for a given period of time, it is possible that the market price could decrease despite an increase in the Company's NAV.
The Directors review the discount levels regularly. The Investment Advisers actively communicate with the Company's major shareholders and potential new investors, with the aim of managing discount levels.
Due to COVID-19 pandemic, 2020 saw significant movements in the share's price.
Brexit
The UK's vote to leave the EU has introduced new uncertainties and instability into the financial markets. As the process of a major country leaving the EU has no precedent, the Board and the Investment Manager expect an ongoing period of market uncertainty as the implications are processed.
Dividend Levels
Dividends paid on the Company's Ordinary Shares principally rely on receipt of dividends and interest payments from the securities in which the Company invests. The Board monitors the income of the Company and reviews an income forecast for the current financial year at its regular quarterly Board meetings.
Currency Risk
The Company invests in overseas securities and its assets are therefore subject to currency exchange rate fluctuations. The Company may hedge against foreign currency movements affecting the value of the investment portfolio where adverse movements are anticipated but otherwise takes account of this risk when making investment decisions.
Operational
Like most other investment companies, the Company has no employees. The Company therefore relies upon the services provided by third parties and is dependent on the control systems of the Investment Manager and the Company's other service providers. The security, for example, of the Company's assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. The Board reviews, at least annually, the performance of all the Company's third party service providers, as well as reviewing service providers' anti-bribery and corruption policies to address the provision of the Bribery Act 2010. The Board and Audit Committee regularly review statements on internal controls and procedures provided by Premier Miton Investors Ltd and other third parties and also subject the books and records of the Company to an annual external audit.
Accounting, Legal and Regulatory
The Board relies on the services of the administrator, Premier Miton Investors Ltd and its other professional advisers to ensure compliance with the Companies Act and the UKLA Listing Rules.
Counterparty/ Service Provider Risk
The Board reviews all aspects of the services provided by the Company's service providers on an annual basis to ensure good standards are maintained. This review also includes consideration of business continuity and procedures in place to mitigate Cyber attack risks. Regular communication is maintained with and between Service Providers. Agreements with service providers include sufficient notice period clauses to allow for alternative arrangements to be made should contracts be terminated.
Discontinuation Vote
In accordance with Article 53.1 of the Articles of incorporation of the Company, shareholders are to be given the opportunity to vote for the discontinuance of the Company. This opportunity was last presented to the shareholders on 26 September 2016, with the next discontinuation resolution to be proposed again at the Annual General Meeting in 2021.
Future Prospects
The Board's main focus is the achievement of a high income from the portfolio together with the generation of long-term capital growth. The future to the Company is dependent upon the success of the investment strategy. The investment outlook and future developments are discussed in both the Chairman's Statement and the Investment Advisers' report.
Board Diversity
When appointing new Directors and reviewing the Board composition, the Nomination Committee considers, amongst other factors, diversity, balance of skills, knowledge, gender, social and ethnic background and experience. The Nomination Committee however does not consider it appropriate to establish targets or quotas in this regard. As at 31 December 2019, the Board comprised of one female and three male Directors. The Company has no employees.
Social, Community and Human Rights
The Company does not have any specific policies on social, community or human rights issues as it is an investment company which does not have any physical assets, property, employees or operations of its own.
Position and Performance
PRIIPs KIDs
The Company has published a Key Information Document ("KID") in compliance with the Packaged Retail and Insurance-based Investment Products ("PRIIPs") Regulation. KIDS for the Ordinary and ZDP Shares can be found on the Company's area on the PMG website at:
https://www.premierfunds.co.uk/acorn-income-fund-limited
The Company is not responsible for the information contained in the KID. The process for calculating the risks, cost and potential returns are prescribed by regulation. The figures in the KID may not reflect the expected returns for the Company and anticipated returns cannot be guaranteed.
Key Performance Indicators
The Company's Directors meet regularly to review the performance of the Company and its shares. The key performance indicators ("KPIs") used to measure the progress and performance of the Company over time are as follows:
1)The performance against a set of reference points. The Investment Manager's performance is not assessed against a formal benchmark but rather against a set of reference points which are more general in nature and intended to be representative of the broad spread of assets in which the portfolio invests. These references include the Numis Smaller Companies (Ex Investment companies) Index, FTSE All share Index and FTSE Small Cap (Ex Investment Companies) Index (see Performance Summary).
2)The performance against the peer group. The assessment of the Investment Manager's performance against companies which invest in similar, but not necessarily the same, securities allows the Board to evaluate the effectiveness of the Company's investment strategy.
3)The performance of the Company at the gross asset level. This shows how the assets attributable to shareholders as a whole have performed (see Performance Summary Total on Gross Assets).
4)The performance of the Ordinary Shares, both in terms of share price total return (i.e accounting for dividends received) and in terms of total return on net asset value. The share price performance is the measure of the return that shareholders have actually received and will reflect the impact of widening or narrowing of discounts to NAV.
5)Ongoing charges. The annualised ongoing charges figure for the year was 1.79% (2018: 1.59%). This figure, which has been prepared in accordance with the recommended methodology of the Association of Investment Companies, represents the annual percentage reduction in shareholder returns as a result of recurring operational expenses excluding performance fee.
All of these areas were examined throughout the year and the table below summarises the key indicators:
| As at or year to: | As at or year to: | ||
| 31 December 2019 | 31 December 2018 | % change | |
| Total Return Performance | |||
| Total Return on Gross Assets | - | - | 19.22% |
| Numis Smaller Companies (Ex Investment Companies) Index | 24,153.03 | 19,296.02 | 25.17% |
| Ordinary Share Performance | |||
| Total return on Net Assets | +27.38% | ||
| Revenue return per Ordinary Share | 22.31p | 21.62p | 3.19% |
| Net dividends declared per Ordinary Share | 20.80p | 19.80p | 5.05% |
| Discount to Net Asset Value | -12.96% | -13.16% | |
| Ongoing Charges | 1.79% | 1.59% | 12.58% |
Return Per Share - Basic
Total return per Ordinary Share is based on the net total gain on ordinary activities after tax of £16,237,744 (31 December 2018: net total loss £13,076,162).
These calculations are based on the weighted average number of Ordinary Shares in issue during the year to 31 December 2019, that is, 15,816,687 (2018: 15,878,637).
| Year ended | Year ended | Year ended | Year ended | |
| 31 December 2019 | 31 December 2019 | 31 December 2018 | 31 December 2018 | |
| Pence per | Pence per | |||
| Ordinary Share | GBP '000 | Ordinary Share | GBP '000 | |
| Revenue return per Ordinary Share | 22.31p | 3,529 | 21.62p | 3,433 |
| Net capital gain/(loss) | 80.35p | 12,709 | (103.97)p | (16,509) |
| Net total gain/(loss) | 102.66p | 16,238 | (82.35)p | (13,076) |
Net Asset Value
The net asset value per Ordinary Share, including revenue reserve, at 31 December 2019 was 466.37p based on net assets as at 31 December 2019 of £73,763,827 divided by number of Ordinary Shares in issue of 15,816,687
(31 December 2018: 384.51p).
The net asset value of a ZDP Share at 31 December 2019 was 154.12p based on the accrued capital entitlement as at 31 December 2019 of £32,721,106 divided by the number of ZDP Shares in issue of 21,230,989 (31 December 2018: 148.43p).
Dividends
During the year the following dividends were paid:
| Dividend pence | ||||
| Payment Date | (net per share) | |||
| First Interim for the year ended 31 December 2019 | 29 March 2019 | 5.20p | ||
| Second Interim for the year ended 31 December 2019 | 28 June 2019 | 5.20p | ||
| Third Interim for the year ended 31 December 2019 | 27 September 2019 | 5.20p | ||
| Forth Interim for the year ended 31 December 2019 | 20 December 2019 | 5.20p |
Subsequent to year end the Directors declared the first interim dividend for the year ending 31 December 2020 of 5.75p, payable on 31 March 2020 to members on the register at the close of business on 13 March 2020. The shares were marked ex-dividend on 12 March 2020. This dividend relates to the year ended 31 December 2019 but in accordance with International Financial Reporting Standards, it is recognised in the period in which it is paid. Further dividend details can be found in note 8.
Viability Statement
In accordance with the UK Corporate Governance Code 2018, published by the Financial Reporting Council in July 2018 (the "Code"), the Directors have assessed the viability of the Company over a three year period, taking into account the Company's position at 31 December 2019.
A period of three years has been chosen for the purposes of the assessment of viability as the Board believes that this reflects a suitable time horizon for reviewing the Company's circumstances and strategy, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and the availability of funding. The Directors had regard to the general advice that equity investment should be made on a medium to longer term view (perhaps 3 to 10 years) but also to evidence that the average holding time for an equity investment is under three years. The Directors consider that three years is a sufficient investment time horizon to be relevant to shareholders and that choosing a longer time period can present difficulties given the lack of longer term economic visibility.
In their assessment of the viability of the Company, the Directors have considered the Company's principal risks and uncertainties detailed in the Business Environment section of this report in particular:
(i) the Company's ability to repay the final capital entitlement of the ZDP Shares on 28 February 2022;
(ii) any potential falls in value of the Company's investment portfolio;
(iii) the potential impact of COVID-19 ;
(iv) the potential impact on the Company and its activities of a disorderly Brexit; and
(v) the impact on the Company should the shareholders vote not to pass the continuation vote scheduled to take place at the 2021 annual general meeting of the Company, which would oblige the Directors to follow the provisions in the Articles of Incorporation and put forward proposals to the effect that the Company would be wound up, liquidated, reorganised, unitised or to find some other suitable solution that would be satisfactory to the shareholders.
The Directors also considered the Company's income and expenditure projections taking into account the fact that the Company's investments principally comprise liquid securities listed on recognised stock exchanges. Consideration has also been given to potential reduction in income due to global economic slowdown from the COVID-19 pandemic.
The Directors have carried out a robust assessment of the risks outlined above and the Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation to serve shareholders appropriately and to meet its liabilities as they fall due over the three year period to December 2022.
Directors' Report
for the year ended 31 December 2019
The Directors have pleasure in presenting their Directors' Report for the year ended 31 December 2019.
Principal Activities and Business Review
The principal activity of the Company is to carry on business as an investment company. The Directors do not envisage any change in these activities for the foreseeable future. A description of the activities of the Company in the period under review is given in the Chairman's Statement.
Business and Tax Status
The Company is a closed-ended investment company, incorporated with limited liability in Guernsey on
5 January 1999, registered number 34778. The Company operates under The Companies (Guernsey) Law, 2008, (the "Law"), the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended and the Authorised Closed Ended Investment Scheme Rules 2008.
The Company's Ordinary Shares and ZDP Shares are traded on the LSE with the Ordinary Shares having a premium listing and the ZDP Shares having a standard listing, as de?ned by the LSE.
The Company's management and administration takes place in Guernsey and the Company has been granted exemption from income tax within Guernsey by the Administrator of Income Tax. It is the intention of the Directors to continue to operate the Company so that each year this tax-exempt status is maintained.
In respect of the Criminal Finances Act 2017 which has introduced a new corporate criminal offence ("CCO") of 'failing to take reasonable steps to prevent the facilitation of tax evasion', the Board confirms that they are committed to zero tolerance towards the criminal facilitation of tax evasion.
Alternative Investment Fund Managers Directive ("AIFMD")
The Company is an 'Alternative Investment Fund' ("AIF"), as de?ned by the Alternative Investment Fund Managers Directive ("AIFMD") and is self managed. The Company was approved as an AIF and submitted an Article 42 Noti?cation to the FCA under the National Private Placement Regime on 3 August 2015.
The Directors have set a maximum gearing level for the purpose of AIFMD of 400% for both the commitment exposure level and gross leverage level. As at 31 December 2019 the commitment exposure level was 150% and the gross leverage level was 155%.
Regulatory disclosures, including the Company's Investor Disclosure Document, are provided on the Company's website www.premierfunds.co.uk /acorn-income-fund-limited.
General Meetings/ Discontinuation Vote
At the Annual General Meeting held on 26 September 2016, shareholders were given the opportunity in accordance with Article 53.1 of the Articles of incorporation of the Company to vote for the discontinuance of the Company. The special resolution was not carried and it was noted that the Company would continue in its present form. The next discontinuation resolution will be proposed at the Annual General Meeting in 2021.
Following the publication of the updated AIC Code in February 2019, when 20% or more of the Shareholder votes have been cast against a Board recommendation for a resolution, the Company should explain, when announcing the voting results, what actions it intends to take to consult Shareholders in order to understand the reasons behind the result. An update on the views received from Shareholders and actions taken should be published no later than six months after the shareholder meeting. The Board should then provide a final summary in the annual report and, if applicable, in the explanatory notes to resolutions at the next Shareholder meeting on what impact the feedback has had on any decision, action or resolution subsequently proposed. At the 2019 Annual General Meeting ("AGM"), a resolution proposing an amendment to the Articles received 33.4% votes against it and as a consequence it was not carried out. The principal shareholder who voted against the resolution was contacted after the meeting and he indicated that it had not been his intention to vote against the proposed amendment. Had the shareholder voted in favour of the resolution the proposed amendment would have been made.
Foreign Account Tax Compliance Act ("FATCA")
FATCA requires certain ?nancial institutions outside the United States ("US") to pass information about their US customers to the US tax authorities, the Internal Revenue Service (the "IRS"). A 30% withholding tax is imposed on the US source income and disposal of assets of any ?nancial institution within the scope of the legislation that fails to comply with this requirement.
The Board of the Company has taken all necessary steps to ensure that the Company is FATCA compliant and con?rms that the Company is registered and has been issued a Global Intermediary Identi?cation Number ("GIIN") by the IRS. The Company will use its GIIN to identify that it is FATCA compliant to all ?nancial counterparties.
Common Reporting Standard
The Common Reporting Standard ("CRS") is a global standard for the automatic exchange of financial account information developed by the Organisation for Economic Co-operation and Development ("OECD"), which has been adopted in Guernsey and which came into effect in January 2016.
The Company is subject to Guernsey regulations and guidance on the automatic exchange of tax information and the Board will therefore take the necessary actions to ensure that the Company is compliant in this regard.
Going Concern
In the opinion of the Directors, the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the ?nancial statements have been prepared on a going concern basis.
The Directors have arrived at this opinion by considering, inter alia, the following factors:
• the Company has su?cient liquidity to meet all ongoing expenses. The Company has net current assets of £2,696,451 at the year end. In January 2017, the ZDP Shares were refinanced and their life was extended to 28 February 2022. In addition, the Board regularly reviews the cash ?ow of the Company and is con?dent that the Company will have su?cient resources to meet all future obligations;
• both the Income and Smaller Companies Portfolios consist substantially of listed investments which are readily realisable and therefore the Company has su?cient resources to meet its liquidity requirements; and
• as at 31 December 2020, the Company had no borrowings other than the ZDP Shares which, as explained in Note 13, have a ?nal capital entitlement on 28 February 2022.
Gearing Policy
The Company's gearing policy is not to employ any gearing through long-term bank borrowing. Save with the prior sanction of the ZDP Shareholders the Company will not incur any indebtedness other than short term borrowings in the normal course of business such as to settle share trades or borrowings to ?nance the redemption of the ZDP Shares.
Results and Dividends
The results attributable to Ordinary Shareholders for the period are shown on the Statement of Comprehensive Income. The Company made a revenue return for the year of 22.31 pence (2018: 21.62 pence) per Ordinary Share and a capital gain of 80.35 pence (2018: capital loss of 103.97 pence) per Ordinary Share. The dividend for the year was increased by 5.05% to 20.8p per Ordinary Share. With earnings of 22.31p per Ordinary Share, revenue reserves were increased to £3,417,227, representing 21.61p per Ordinary Share.
Company Performance
Key Performance Indicators and Analysis of Company's Performance
At each quarterly Board meeting, the Directors consider a number of performance measures in order to assess the Company's success in achieving its objectives. The key areas reviewed are as follows:
• Review of the history of the NAV.
• Receive an update on the market activity of the Ordinary Shares and the ZDP Shares by Numis Securities Limited, the Company's corporate broker.
• Receive updates on the performance of both the Income Portfolio and the Smaller Companies Portfolio from the Investment Advisers.
• Discount to NAV.
• Consideration of the revenue projection.
On-going Charges and Total Expense Ratio (the "TER")
The annual on-going charges ?gure for the year was 1.79% (2018: 1.59%). This ?gure which has been prepared in accordance with the recommended methodology provided by the Association of Investment Companies and represents the annual percentage reduction in shareholder returns as a result of recurring operational expenses. In 2019, a performance fee amounting to £nil (2018: £ nil) was accrued.
The TER of the Company is calculated as a percentage of costs against total assets at the year end and is capped at 1.5%. For 2019 the TER was 1.13% (2018: 1.24%). The calculation of costs excludes performance fees, non-routine administration and professional fees. The net management fee charged in 2019 was £693,387 (2018: £722,795).
Share Price Rating and Discount Management Including Information on Treasury Shares
At the Annual General Meeting on 16 August 2019, the Directors obtained shareholder approval to issue up to 1,591,668 Ordinary Shares and 2,123,098 ZDP Shares, also obtaining the necessary pre-emption waiver from the ZDP Shareholders in respect of any new issue of ZDP Shares.
The shareholders approved renewal of the Company's authority to buy back Ordinary Shares and ZDP Shares up to 14.99%. As at 16 August 2019, 2,372,503 Ordinary Shares and 3,184,648 ZDP Shares were authorised to be purchased.
The Directors also obtained authority to sell from treasury Ordinary Shares at a discount to the prevailing NAV per Ordinary Share, provided that the authority conferred was limited to issues or sales of Ordinary Shares at the same time as ZDP Shares are issued or sold from treasury at a premium, such that, the combined e?ect of the issue or sale of Ordinary Shares and the issue or sale of ZDP Shares at a premium is that; (i) the NAV per Ordinary Share is thereby increased; and (ii) gearing is not thereby increased.
The Company intends to seek annual renewal of these authorities from shareholders at each future general meeting to be held under section 199 of the Law. In accordance with the Law, any share buy backs will be a?ected by the purchase of a package of Ordinary Shares and ZDP Shares (in a speci?ed ratio as set out in the Company's Prospectus) in the market for cash at a package price which in aggregate is at a discount to the prevailing NAVs of each class of Share, where the Directors believe such a purchase will enhance shareholder value. Shares which are purchased may be cancelled or held in treasury.
Investment Management and Administration
Management Agreement and Fees
The Board is responsible for the determination of the Company's investment policy and has overall responsibility for the Company's day-to-day activities. The Company has, however, entered into a Management Agreement with PAMG..
The Manager has discretion to make minor changes to the portfolios and also has discretion to move cash from the Smaller Companies Portfolio to the Income Portfolio. The Manager will refer any proposals to the Board to materially alter the split of assets between the Income Portfolio and the Smaller Companies Portfolio. The Board determines when any potential investment limits can be exceeded, dividend levels and the appropriate issue size for the ZDP Shares and hence the level of gearing.
Under separate Investment Adviser Agreements, PAMG has delegated a number of its duties and responsibilities to PFM and Unicorn. In relation to the Income Portfolio and Smaller Companies Portfolio respectively, both PFM and Unicorn act as Investment Advisers who are responsible for the identi?cation and analysis of investments meeting the investment objectives and strategy of the Company. PFM and Unicorn are authorised and regulated by the FCA.
The Board keeps under review the performance of the Investment Manager and the Investment Advisers. In the opinion of the Directors the continuing appointment of the Investment Manager on the terms agreed is in the interest of shareholders as a whole, due to the experience and proven track record of the fund management team in the chosen markets. The Directors consider the investment performance of the Company is satisfactory relative to the markets in which the Company invests.
A list of the top 20 holdings for each portfolio is shown in the Schedule of Principal Investments of this report and the top 10 holdings for each portfolio is included in the monthly fund factsheet, available on the Company's website.
For the Company's full holdings information please refer to Unaudited Full List of Investment Holdings.
Administration Agreement
The administration of the Company is undertaken by Northern Trust International Fund Administration Services (Guernsey) Limited ("Northern Trust").
Custodian
The custodian of the Company is Northern Trust (Guernsey) Limited.
Segmental Reporting
The Company has two reportable segments, being the Income Portfolio and the Smaller Companies Portfolio. Each of these portfolios is managed separately, entail di?erent investment objectives and contain investments in di?erent products. A more comprehensive disclosure can be found within Note 2 of the Notes to the Financial Statements.
Corporate Governance
On 1 October 2013, the Company became a member of the AIC, and on 19 November 2013 the Company formally resolved to adopt and comply with the AIC Code.
The Financial Reporting Council ("FRC") has con?rmed that an AIC member which reports against the AIC Code and who follows the AIC Corporate Governance Guide for Investment Companies (the "AIC Guide"), will be meeting their Listing Rule obligations in relation to reporting against The UK Code of Corporate Governance (the "UK Code").
Statement of Compliance with the UK Code
The UK Code was recently revised, and became effective for accounting periods commencing 1 January 2019. Following a consultation the 2019 AIC Code has been endorsed by the FRC and the Guernsey Financial Services Commission. The revised UK Code places great emphasis on relationships between companies, shareholders and stakeholders. It also promotes the importance of establishing a corporate culture that is aligned with the company purpose, business strategy, promotes integrity and values diversity.
The Board of the Company has considered the principles and recommendations of the AIC Code by reference to the AIC Guide. The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Code, as well as setting out additional principles and recommendations on issues that are of speci?c relevance to the Company.
The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the UK Code), will provide better information to shareholders.
Due to the Ordinary Shares having a premium listing on the LSE, the Company must comply with Listing Rule 9.8.6(5) which requires the Company to apply the provisions of the UK Code to the extent that they are considered relevant to the Company. By complying with the AIC Code the Company is meeting its obligation under the UK Code and as such is not required to report further on issues contained in the UK Code which are irrelevant to it. The Directors place a high degree of importance on ensuring that high standards of corporate governance are maintained within the Company.
The AIC Code is available for download from the AIC website: www.theaic.co.uk.
With e?ect from 1 January 2012, the Company was also required to comply with the Guernsey Financial Services Commission Financial Sector Code of Corporate Governance (the "Guernsey Code"). As the Company reports under the AIC Code it is deemed to meet the Guernsey Code and the Board has undertaken to evaluate its corporate governance compliance on an on-going basis.
The Company has complied with the recommendations of the AIC Code and the relevant provisions of the UK Code throughout the year, except for a number of provisions where the Board considers as not relevant to the Company due to being an externally managed investment company. In particular, all of the Company's day to day management and administrative functions are outsourced to third parties. As a result, the Company has no executive Directors, employees or internal operations. The Company therefore has not reported further in respect of these provisions.
Other areas of non-compliance with the AIC Code by the Company, and the reasons therefore, are as follows:
The Company did not appoint a Senior Independent Director during the year. This is not in accordance with the recommendations of the AIC Code but was felt appropriate for the size and nature of the Company. Following year end however, David Warr was appointed as Senior Independent Director.
The non-executive Directors of the Company do not meet without the Chairman present to appraise the Chairman's performance. This is not in accordance with the AIC Code. However, the Company has a Chairman's Performance Evaluation Questionnaire which is completed by all Directors (other than the Chairman) and analysed annually to facilitate the review of the Chairman's performance.
Contrary to the AIC Code, but in line with the Company's Articles of Incorporation, the Directors are not subject to re-election by the shareholders except in their ?rst year of appointment, nor are they appointed for speci?c terms as required by these provisions, as this is not felt to be appropriate for the size and nature of the Company. However, to facilitate good corporate governance practice, subsequent to 2016, each directors will offers themselves for re-election every three years until their ninth year of service. Any Director with over nine years service shall be eligible for re-election every year thereafter. As a result, the Directors were elected as follows:
David Warr is next eligible for re- election in 2020.
Nigel Ward is next eligible for re-election in 2020.
In accordance with the AIC Code, the following details are of all other public Company directorships and employment held by each director and shared directorships of any commercial company held by two or more Directors:
David Warr
• Aberdeen Frontier Markets Investment Company Limited**
• Hadrian's Wall Secured Investments Limited*
Nigel Ward
• Fair Oaks Income Fund Limited#
• Hadrian's Wall Secured Investments Limited*
Nigel Sidebottom (appointed 5 February 2019)
• None
Sharon Parr (appointed 16 August 2019)
• JZ Capital Partners Limited#
* Listed on the Main Market of the LSE
** Traded on the AIM of the LSE
# Traded on the Specialist Fund Segment of the LSE
The Company does not comply with the AIC Code as it does not have a formal policy on diversity, however the Company has established a Nomination Committee that adheres to formal terms of reference and which is responsible for identifying any gaps on the Company's Board that need to be ?lled. When considering candidates the Board has due regard to the bene?ts of diversity on the Board and amongst other considerations this includes gender. To aid the selection process that led to the appointment of Sharon Parr to the Board, the Nominations Committee used the services of OSA Recruitment" an external professional search organisation, to help identify a number of potential candidates. None of the Directors have any connections to this organisation.
Conflicts of Interest
None of the Directors nor any persons connected with them had a material interest in any of the Company's transactions, arrangements or agreements at the date of this report and none of the Directors has or had any interest in any transaction which is or was unusual in its nature or conditions or signi?cant to the business of the Company, and which was e?ected by the Company during the reporting period.
David Warr holds 63,000 Ordinary Shares in the capital of the Company, which represented an interest of 0.40% of the Company's Ordinary Shares in issue as at 31 December 2019.
Nigel Sidebottom holds 4,366 Ordinary Shares in the capital of the Company, which represented an interest of 0.03% of the Company's Ordinary Shares in issue as at 31 December 2019, and 5,205 ZDP Shares in the capital of the Company, which represented an interest of 0.02% of the Company's ZDP Shares in issue as at 31 December 2019.
Nigel Ward holds 7,000 Ordinary Shares in the capital of the Company, via a nominee account.
At the date of this report, there are no outstanding loans or guarantees between the Company and any Director.
Board Responsibilities
The Board comprises four non-executive Directors, who meet at least quarterly to consider the a?airs of the Company in a prescribed and structured manner. All Directors are considered independent of the Investment Manager for the purposes of the AIC Code and Listing Rule 15.2.12A, except for Nigel Sidebottom by virtue of his recent employment with PFM . Biographies of the Directors for the period from 1 January 2019 to the date of this report appear on Directors Biographies' demonstrating the wide range of skills and experience they bring to the Board.
As at the beginning of 2016, the Chairman, Helen Green, had served on the Board for over nine years. The Board has taken the view that independence is not necessarily compromised by the length of tenure on the Board and experience can add signi?cantly to the Board's strength. However, the Chairman stood down from the Board at the AGM in August 2019 having served twelve years as a Board member and seven years as Chairman. John Nigel Ward was appointed Chairman effective 17 August 2019.
The Directors, in the furtherance of their duties, may take independent professional advice at the Company's expense, which is in accordance with the AIC Code. The Directors also have access to the advice and services of the Company Secretary through its appointed representatives who are responsible to the Board for ensuring that the Board's procedures are followed and that applicable rules and regulations are complied with. To enable the Board to function e?ectively and allow the Directors to discharge their responsibilities, full and timely access is given to all relevant information.
The Directors are requested to con?rm their continuing professional development is up to date and any necessary training is identi?ed during the annual performance reviews carried out and recorded by the Nomination Committee.
None of the Directors has a contract of service with the Company.
Substantial Shareholdings
As at 23 April 2020, the latest practicable date for disclosure in this report, the Company had no Shareholders with a holding greater than 10%.
Shareholder Communication
In line with the AIC Code, the Investment Advisers communicate with both the Chairman and shareholders and are available to communicate and meet with major shareholders. The Company has also appointed Numis to liaise with all major shareholders together with PFM and Unicorn, all of who report back to the Board at quarterly Board meetings ensuring that the Board is fully aware of shareholder sentiment and expectation.
Director Attendance
During the year ended 31 December 2019, the number of Board meetings attended was as follows:
| Quarterly Board Meetings* | Ad hoc Board Meetings* | Committee Meetings* | |
| Nigel Ward David Warr Nigel Sidebottom Sharon Parr Helen Green | 4 of 4 4 of 4 4 of 4 2 of 2 2 of 2 | 3 of 3 3 of 3 1 of 3 0 of 0 1 of 2 | 11 of 11 10 of 11 4 of 4 3 of 3 8 of 8 |
*Only meetings held during their membership of the Board and relevant committee have been considered.
Committees
The Company has established four committees: the Audit Committee, the Nomination Committee, the Remuneration and Management Engagement Committee and the Risk Committee (together the "Committees"). The Nomination and Risk Committees comprise the whole Board to ensure that these key areas benefit from the review and input from the experience of all Board members. Nigel Ward, David Warr and Sharon Parr sit on the Audit Committee and Remuneration and Management Engagement Committee. The Terms of Reference for each committee are available on request from the Administrator, or on the Company website https://www.premierfunds.co.uk/acorn-income-fund-limited/literature.
The Audit Committee
A full report regarding the Audit Committee can be found in the Audit Committee Report.
Nomination ("NOM") Committee
In accordance with the AIC Code, a Nomination Committee has been established. David Warr has been appointed Chairman. The Nomination Committee meets at least once a year in accordance with the terms of reference and reviews, inter alia, the structure, size and composition of the Board. When the appointment of a non-executive director is being considered the Nomination Committee will make recommendations to the Board after evaluating candidates from a wide range of backgrounds. Whilst considering the composition of the Board, the Nomination Committee will be mindful of diversity, inclusiveness and meritocracy and, in considering a new candidate, the Nomination Committee will apply comparative analysis of candidates' quali?cations and experience, applying pre-established clear, neutrally formulated and unambiguous criteria to determine the most suitable candidate sought for the speci?c position.
Other duties of the Nomination Committee are to give full consideration to succession planning for Directors, to regularly review the leadership needs of the non-executive Directors, ensure non-executive Directors receive a formal letter of appointment and to review the results of the Board's performance evaluation process.
Remuneration and Management Engagement ("RME") Committee
Nigel Ward has been appointed Chairman of the RME Committee. The RME Committee meets at least once a year to determine and agree with the Board the framework for the remuneration of the Company's Chairman, Directors and service providers, taking into account remuneration trends and all other factors which it deems necessary. The RME Committee also reviews contractual terms and performance of all service providers to ensure their satisfactory conduct and performance.
During a meeting held on 16 August 2019 it was noted that the current Director remuneration levels were behind the market level. It was proposed and agreed that fees be increased as follows effective 1 September 2019:
Base fee increased from £25,000 per annum to £30,000 per annum
NOM / RME / Risk committee Chairs fee increased from £30,000 per annum to £35,000 per annum
Audit Chair fee increased from £32,500 per annum to £37,500 per annum
Board Chair fee increased from £35,000 per annum to £40,000 per annum
Details of the Directors' remuneration can be found in Note 6.
Risk Committee
The Risk Committee was established on 19 November 2014. Nigel Ward was Chairman of the Risk Committee until taking over the chair of the Company on 16 August 2019, from which date Nigel Sidebottom was appointed Chairman of the Committee. The Risk Committee meets at least four times a year, reviewing the e?ectiveness of the Company's internal controls and risk management systems and procedures on a quarterly basis, actively seeking to identify, manage and monitor risks such as Market, Credit, Liquidity, Counterparty, Operational and Leverage. In doing so the Risk Committee reviews a quarterly report from the Investment Adviser and reviews arrangements for monitoring investment risk. The Risk Committee also ensures that the risk pro?le of the Company's portfolios are appropriate to the size; structure and investment strategies applied and reports its ?ndings and recommendations to the Board quarterly.
Internal Control and Financial Reporting
The Board is responsible for establishing and maintaining the Company's systems of internal control ensuring that they are designed to meet the particular needs of the Company and the risks to which it is exposed, and by their very nature provide reasonable, but not absolute, assurance against material misstatement or loss. The key procedures which have been established to provide effective internal control are as follows:
Investment advice is provided by PFM and Unicorn under Investment Adviser Agreements. The Board is responsible for setting the overall investment policy and monitors the actions of the Investment Advisers at regular Board meetings. Both PFM and Unicorn provide the Board with updates at each quarterly Board meeting and at any other time that the Board requests.
The administration and company secretarial duties of the Company are performed by Northern Trust International Fund Administration Services (Guernsey) Limited.
Registrar duties are performed by Anson Registrars Limited.
The custody of assets, is undertaken by Northern Trust (Guernsey) Limited.
The duties of investment management, accounting and the custody of assets are segregated. The procedures of the individual parties are designed to complement one another.
The Directors of the Company clearly de?ne the duties and responsibilities of their agents and advisers. The appointment of agents and advisers is conducted by the Board after consideration of the quality of the parties involved; the Board monitors their on-going performance and contractual arrangements. A detailed annual review of the main service providers is undertaken by the RME Committee and their ?ndings are reported to the Board.
Mandates for authorisation of investment transactions and expense payments are set out by the Board.
The Board reviews detailed ?nancial information produced by the Investment Advisers and the Administrator on a regular basis.
The Board is provided, on a quarterly basis, with a Compliance Report produced by a specialist Compliance and Legal department at PMG. The monitoring programme ensures that all activities of PFM, for the year under review, have been in accordance with both internal procedures and with FCA principles for ?rms and individuals. The Compliance team also makes regular external visits to both Unicorn and the Administrator, the latest visit being to Unicorn on 25 April 2019. A visit to Northern Trust took place on 23 May 2018. The Secretary provides a report at each quarterly Board meeting which highlights any areas of non-compliance with any applicable regulations and laws. The Board has access, at all times, to all relevant compliance personnel.
The Company does not have an internal audit department. All the Company's management and administration functions are delegated to independent third parties and it is therefore felt there is no need for the Company to have an internal audit facility.
No signi?cant ?ndings were found during the internal controls review.
Packaged Retail and Insurance-Based Investment Products ("PRIIPs")
As a listed closed-ended fund, the Company falls under the definition of a retail investment product for PRIIPs Regulation issued by the FCA which came into effect 1 January 2018. As such, the Company is required to produce KIDs which are available on the Company's website https://www.premierfunds.co.uk/acorn-income-fund-limited
Relations with Shareholders
All holders of Ordinary Shares in the Company have the right to receive notice of, and attend and vote at the general meetings of the Company. The holders of ZDP Shares have the right to receive notice of all general meetings but only have the right to attend and vote if the business of the meeting proposes a resolution which will vary, modify or abrogate any of the special rights attached to the ZDP Shares.
At each general meeting of the Company, the Board and the Investment Advisers are available to discuss issues affecting the Company. This is in accordance with the AIC Code. Only Ordinary Shares carry full voting rights, holders of ZDP Shares are only entitled to vote on issues affecting their share class. The primary responsibility for shareholder relations lies with PFM. However, the Directors are always available to enter into dialogue with shareholders and the Chairman is always willing to meet major shareholders as the Company believes such communication to be important.
Anti-Bribery and Corruption Policy
The Company has adopted a zero tolerance policy towards bribery and is committed to carrying out business fairly, honestly and openly.
Voting and Stewardship Code
The Investment Manager is committed to the principles of the Financial Reporting Council's UK Stewardship Code (the "Code") and this also constitutes the disclosure of that commitment required under the rules of the FCA (Conduct of Business Rule 2.2.3).
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from the operations of the Company, nor does it have responsibility for other emission producing sources.
Signed on behalf of the Board by:
Nigel Ward
Chairman
28 April 2020
Statement of Directors' Responsibility in Respect of the Annual Financial Report
for the year ended 31 December 2019
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Financial Report and financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards as issued by the IASB and applicable law.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable, relevant and reliable;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the ?nancial statements;
• assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
Disclosure of Information to Auditors
The Directors who held office at the date of approval of this Directors' Report con?rm that, so far as they are aware, there is no relevant audit information of which the Company's Auditor is unaware; and that each Director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company's Auditor is aware of that information.
Responsibility Statement of the Directors in respect of the Annual Financial Report
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
• the Management Report (comprising the Chairman's Statement, the Investment Advisers' Reports, Strategic Report, Directors' Report and Audit Committee Report) includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.
We consider the annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
Reappointment of Auditor
The Auditor, KPMG Channel Islands Limited, has expressed its willingness to continue in office as Auditor. A resolution proposing their reappointment will be submitted at the forthcoming general meeting to be held pursuant to section 199 of the Law.
Signed on behalf of the Board by:
Nigel Ward
Chairman
28 April 2020
Audit Committee Report
for the year ended 31 December 2019
In accordance with the AIC Code an Audit Committee has been established consisting of David Warr, Sharon Parr, and Nigel Ward. David Warr is the Chairman of the Audit Committee, with Sharon Parr to be appointed as the new Audit Committee Chair effective 1 May 2020. It has been deemed appropriate that David Warr retain this position until Sharon Parr transitions into the role in order to facilitate a smoother handover.
The Audit Committee meets at least twice a year and, when requested, provides advice to the Board on whether the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides information necessary for the shareholders to assess the Company's performance, business model and strategy. The Audit Committee also reviews, inter alia, the ?nancial reporting process and the system of internal control and management of ?nancial risks including understanding the current areas of greatest ?nancial risk and how these are managed by the Investment Manager, reviewing the annual report and accounts, assessing the fairness of preliminary and interim statements and disclosures and reviewing the external audit process. The Audit Committee is responsible for overseeing the Company's relationship with the external auditor (the "Auditor"), including making recommendations to the Board on the appointment of the Auditor and their remuneration.
Since the extent of COVID-19 became ever more apparent the Audit Committee has been working very closely with the Investment Advisers to ensure the annual report and accounts remain valid and reflect Company's position as at the date of signing.
The Audit Committee considers the nature, scope and results of the Auditor's work and reviews, and develops and implements a policy on the supply of any non-audit services that are to be provided by the Auditor. The Audit Committee annually reviews the independence and objectivity of the Auditor and also considers the appointment of an appropriate Auditor.
At the Audit Committee meeting on 7 November 2019 the appointment of the Auditor was considered and the Board subsequently decided that the Auditor was su?ciently independent and was appropriately appointed in order to carry out the audit for the year ended 31 December 2019. During the year under review, the Auditor was not engaged to provide any non-audit services to the Company.
The valuation of the Company's investments, given that they represent the majority of net assets of the Company is considered to be a signi?cant area of focus. In discharging its responsibilities the Audit Committee has speci?cally considered the valuation of investments as follows:
• The Board reviews the portfolio valuations on a regular basis throughout the year and meets with the Investment Advisers at least quarterly. It also seeks assurance that the pricing basis is appropriate and in
line with relevant accounting standards as adopted by the Company and that the carrying values are correct.
• The Company's net asset value is calculated twice weekly using a third party pricing source.
• The Audit Committee receives and reviews reports from the Investment Advisers and the Auditor relating to the Company's annual financial report. The Audit Committee focuses particularly on compliance with legal requirements, accounting standards and the Listing Rules and ensures that an e?ective system of internal ?nancial and non-?nancial controls is maintained. The ultimate responsibility for reviewing and approving the annual ?nancial report remains with the Board.
• The Audit Committee holds an annual meeting to approve the Company's annual ?nancial report before its publication. At a meeting held on 7 November 2019 the Audit Committee met with the Auditor to discuss the audit plan and approach. During this meeting it was agreed with the Auditor that the area of signi?cant audit focus related to the valuation of investments given that they represent the majority of net assets of the Company. The scope of the audit work in relation to this asset class was discussed. At the conclusion of the audit, the Audit Committee met with the Auditor and discussed the scope of their annual audit work and also their audit ?ndings.
• The Audit Committee reviews the scope and results of the audit, its cost e?ectiveness together with the independence and objectivity of the Auditor. The Audit Committee has particular regard to any non-audit work that the Auditor may undertake and the terms under which the Auditor may be appointed to perform non-audit services. In order to safeguard the Auditor's independence and objectivity, the Audit Committee ensures that any other advisory and/or consulting services provided by the Auditor does not con?ict with their statutory audit responsibilities.
To ful?l its responsibilities regarding the independence of the Auditor, the Audit Committee considered:
• a report from the Auditor describing their arrangements to identify, report and manage any con?icts of interest; and
• the extent of the non-audit services provided by the Auditor.
To assess the e?ectiveness of the Auditor, the committee reviewed:
• the Auditor's ful?lment of the agreed audit plan and variations from it;
• the audit findings report highlighting any major issues that arose during the course of the audit; and
• the effectiveness and independence of the Auditor having considered the degree of diligence and professional scepticism demonstrated by them.
The Audit Committee is satis?ed with KPMG Channel Islands Limited's ("KPMG") e?ectiveness and independence as Auditor.
As KPMG has been previously engaged to provide the annual audit, the Board was able to rely on both their previous experiences with KPMG and their conduct during the current year audit.
David Warr
Chairman of the Audit Committee
28 April 2020
Independent Auditor's Report to the Members of Acorn Income Fund Limited
Our opinion is unmodified
We have audited the financial statements of Acorn Income Fund Limited (the "Company"), which comprise the statement of financial position as at 31 December 2019, the statements of comprehensive income, cash flows and changes in equity for the year then ended, and notes, comprising significant accounting policies and other explanatory information.
In our opinion, the accompanying financial statements:
- give a true and fair view of the financial position of the Company as at 31 December 2019, and of the Company's financial performance and cash flows for the year then ended;
- are prepared in accordance with International Financial Reporting Standards; and
- comply with the Companies (Guernsey) Law, 2008.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Company in accordance with, UK ethical requirements including FRC Ethical Standards, as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion.
Key audit matters: our assessment of the risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matter was as follows:
| The risk | Our response | |
|---|---|---|
| Valuation of investments (Financial assets designated at fair value through profit or loss) £103,788,482; (2018 £89,329,557) Refer to the Audit Committee Report, accounting policy notes 1(b), 1(l) and disclosure note 10. | Basis: As at 31 December 2019 the Company had invested the equivalent of 140.7% (2018: 146.9%) of its net assets in listed equities, bonds and structured notes (together, the "investments"). The Company's listed investments are valued based on market prices while its structured notes are valued based on price quotes obtained from a third party pricing provider. Risk: The valuation of the Company's investments, given that it represents the majority of the Company's net assets is considered to be a significant area of our audit. | Our audit procedures included, but were not limited to: Use of KPMG Valuation Specialist: We used our KPMG Valuation Specialist to independently price listed investments to a third party pricing source. For structured notes our Valuation Specialist assisted us with the assessment of the quality and integrity of the price quotes, through comparison to available quotes from independent sources or through applying a valuation model based on contractual terms and market data. Assessing disclosures: We also considered the Company's disclosures (see note 1 (b)) in relation to the use of judgments regarding valuation of investments and the Company's valuation policies adopted (see note 1(I)) and fair value disclosures in note 10 for compliance with IFRS. |
Our application of materiality and an overview of the scope of our audit
Materiality for the financial statements as a whole was set at £1,100,000, determined with reference to a benchmark of net assets of £73,763,827, of which it represents approximately 1.5%.
We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding £55,000, in addition to other identified misstatements that warranted reporting on qualitative grounds.
Our audit of the Company was undertaken to the materiality level specified above, which has informed our identification of significant risks of material misstatement and the associated audit procedures performed in those areas as detailed above.
We have nothing to report on going concern
We are required to report to you if we have anything material to add or draw attention to in relation to the directors' statement in note 1(a) to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Company's use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in this respect.
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual financial report but does not include the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information 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.
Disclosures of emerging and principal risks and longer term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:
- the directors' confirmation within the Viability Statement that they have carried out a robust assessment of the emerging and principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity;
- the Principal Risks disclosures describing these risks and explaining how they are being managed or mitigated;
- the directors' explanation in the Viability Statement as to how they have assessed the prospects of the Company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Corporate governance disclosures
We are required to report to you if:
- we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors' statement that they consider that the annual financial report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy; or
- the section of the annual financial report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
- We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report to you in these respects.
We have nothing to report on other matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:
- the Company has not kept proper accounting records; or
- the financial statements are not in agreement with the accounting records; or
- we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit.
Respective responsibilities
Directors' responsibilities
As explained more fully in their statement, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor's report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC's website at www.frc.org.uk/auditorsresponsibilities.
The purpose of this report and restrictions on its use by persons other than the Company's members as a body
This report is made solely to the Company's members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.
Barry Ryan
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors
Guernsey
28 April 2020
Statement of Comprehensive Income
for the year ended 31 December 2019
| Year ended 31 December 2019 | Year ended 31 December 2018 | ||||||
| Revenue | Capital | Total | Total | ||||
| Notes | GBP | GBP | GBP | GBP | |||
| Net gains/(losses) on financial assets designated as at fair value through profit or loss | 10 | - | 14,541,087 | 14,541,087 | (14,395,482) | ||
| Gains/(losses) on derivative financial instruments | 4 | - | 249,850 | 249,850 | (297,159) | ||
| Investment income | 3 | 4,220,187 | - | 4,220,187 | 3,944,774 | ||
| Total income and gains/(losses) | 4,220,187 | 14,790,937 | 19,011,124 | (10,747,867) | |||
| Expenses | 5 | (691,291) | (874,418) | (1,565,709) | (1,154,651) | ||
| Return on ordinary activities before finance costs and taxation | 3,528,896 | 13,916,519 | 17,445,415 | (11,902,518) | |||
| Interest payable and similar charges | 7 | - | (1,207,671) | (1,207,671) | (1,173,644) | ||
| Return/(loss) on ordinary activities before taxation | 3,528,896 | 12,708,848 | 16,237,744 | (13,076,162) | |||
| Taxation on ordinary activities | - | - | - | - | |||
| Other comprehensive income | - | - | - | - | |||
| Total comprehensive income/(loss) for the year attributable to Ordinary Shareholders | 3,528,896 | 12,708,848 | 16,237,744 | (13,076,162) | |||
| Pence | Pence | Pence | Pence | ||||
| Return/(loss) per Ordinary Share | 9 | 22.31 | 80.35 | 102.66 | (82.35) | ||
| Dividend per Ordinary Share | 8 | 20.80 | - | 20.80 | 19.80 | ||
| Return per ZDP Share | 9 | - | 5.69 | 5.69 | 5.51 | ||
The supplementary revenue return and capital return columns have been prepared in accordance with the Statement of Recommended Practice ("SORP") issued by the AIC.
In arriving at the results for the financial year, all amounts above relate to continuing operations. No operations were acquired or discontinued in the year.
The Notes form an integral part of the financial statements.
Statement of Financial Position
as at 31 December 2019
| 31 December 2019 | 31 December 2018 | ||||
| Notes | GBP | GBP | |||
| NON-CURRENT ASSETS | |||||
| Financial assets designated as at fair value through profit or loss | 10 | 103,788,482 | 89,329,557 | ||
| CURRENT ASSETS | |||||
| Receivables | 11 | 491,738 | 525,847 | ||
| Cash and cash equivalents | 2,324,683 | 2,884,610 | |||
| Derivative financial instruments | 186,453 | 14,086 | |||
| 3,002,874 | 3,424,543 | ||||
| TOTAL ASSETS | 106,791,356 | 92,754,100 | |||
| CURRENT LIABILITIES | |||||
| Derivative financial instruments | 6,661 | 199,600 | |||
| Payables - due within one year | 12 | 299,762 | 225,111 | ||
| 306,423 | 424,711 | ||||
| NON-CURRENT LIABILITIES | |||||
| ZDP Shares | 13 | 32,721,106 | 31,513,434 | ||
| TOTAL LIABILITIES | 33,027,529 | 31,938,145 | |||
| NET ASSETS | 73,763,827 | 60,815,955 | |||
| EQUITY | |||||
| Share capital and premium | 14 | 27,420,824 | 27,420,824 | ||
| Revenue reserve | 3,417,227 | 3,178,203 | |||
| Capital reserve | 37,705,938 | 24,997,090 | |||
| Other reserves | 15 | 5,219,838 | 5,219,838 | ||
| TOTAL EQUITY | 73,763,827 | 60,815,955 | |||
| Pence | Pence | ||||
| Net asset value per Ordinary Share (per Articles) | 466.43 | 384.61 | |||
| Net asset value per Ordinary Share (per IFRS) | 466.37 | 384.51 | |||
| Net asset value per ZDP Share (per Articles) | 154.07 | 148.36 | |||
| Net asset value per ZDP Share (per IFRS) | 154.12 | 148.43 |
The financial statements were approved by the Board of Directors and authorised for issue on 28 April 2020 and signed on its behalf by:
Nigel Ward
Chairman
The Notes form an integral part of the financial statements.
Statement of Cash Flows
for the year ended 31 December 2019
| 31 December 2019 | 31 December 2018 | ||
| Notes | GBP | GBP | |
| Operating activities | |||
| Return/(loss) on ordinary activities before taxation | 16,237,744 | (13,076,162) | |
| Net (gains)/losses on financial assets designated as at fair value through profit or loss | 10 | (14,541,087) | 14,395,482 |
| Investment income | 3 | (4,220,187) | (3,944,774) |
| Interest expense | 7 | 1,207,671 | 1,173,644 |
| (Increase)/decrease in derivative financial assets | (172,367) | 15,491 | |
| (Decrease)/increase in derivative financial liabilities | (192,939) | 198,628 | |
| Increase/(decrease) in payables and appropriations excluding amount due to brokers | 12 | 47,537 | (610,091) |
| Decrease/(increase) in receivables excluding accrued investment income and due from brokers | 11 | 13,949 | (10,636) |
| Net cash flow used in operating activities before investment income | (1,619,679) | (1,858,418) | |
| Investment income received | 4,268,828 | 3,964,501 | |
| Net cash flow from operating activities before taxation | 2,649,149 | 2,106,083 | |
| Tax paid | - | - | |
| Net cash flow from operating activities | 2,649,149 | 2,106,083 | |
| Investing activities | |||
| Purchase of financial assets designated at fair value through profit or loss | (34,951,668) | (36,515,135) | |
| Sale of financial assets designated at fair value through profit or loss | 35,032,464 | 36,088,915 | |
| Net cash flow from/(used in) investing activities | 80,796 | (426,220) | |
| Financing activities | |||
| Equity dividends paid | 8 | (3,289,872) | (3,141,604) |
| Buyback of Ordinary Shares | 15 | - | (424,483) |
| Buyback of ZDP Shares | 13 | - | (205,421) |
| Net cash flow used in financing activities | (3,289,872) | (3,771,508) | |
| Decrease in cash and cash equivalents | (559,927) | (2,091,645) | |
| Cash and cash equivalents at beginning of year | 2,884,610 | 4,976,255 | |
| Cash and cash equivalents at end of year | 2,324,683 | 2,884,610 |
The Notes form an integral part of the financial statements.
Statement of Changes in Equity
As at 31 December 2019
| Share Capital and Premium | Revenue Reserve | Capital Reserve | Other Reserves | Total | ||
| 31 December 2019 | 31 December 2019 | 31 December 2019 | 31 December 2019 | 31 December 2019 | ||
| Notes | GBP | GBP | GBP | GBP | GBP | |
| Balances as at 1 January 2019 | 27,420,824 | 3,178,203 | 24,997,090 | 5,219,838 | 60,815,955 | |
| Total comprehensive income for the year attributable to Ordinary Shareholders | ||||||
| - | 3,528,896 | 12,708,848 | - | 16,237,744 | ||
| Dividends | 8 | - | (3,289,872) | - | - | (3,289,872) |
| Balances as at 31 December 2019 | 27,420,824 | 3,417,227 | 37,705,938 | 5,219,838 | 73,763,827 | |
| Share Capital and Premium | Revenue Reserve | Capital Reserve | Other Reserves | Total | ||
| 31 December 2018 | 31 December 2018 | 31 December 2018 | 31 December 2018 | 31 December 2018 | ||
| GBP | GBP | GBP | GBP | GBP | ||
| Balances as at 1 January 2018 | 27,633,383 | 2,886,872 | 41,506,186 | 5,431,762 | 77,458,203 | |
| Total comprehensive loss for the year attributable to Ordinary Shareholders | - | 3,432,935 | (16,509,096) | - | (13,076,161) | |
| Dividends | 8 | - | (3,141,604) | - | - | (3,141,604) |
| Buyback of Ordinary Shares | - | - | - | (424,483) | (424,483) | |
| Cancellation of Ordinary Shares | (212,559) | - | - | 212,559 | - | |
| Balances as at 31 December 2018 | 27,420,824 | 3,178,203 | 24,997,090 | 5,219,838 | 60,815,955 |
The Notes form an integral part of the financial statements.
Notes to the Financial Statements
for the year ended 31 December 2019
1 SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Preparation
The ?nancial statements, which give a true and fair view, have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB"), the Association of Investment Companies ("AIC") Statements of Recommended Practice ("SORP") (as revised in October 2019 and applicable to periods beginning 1 January 2019) where this is consistent with the requirements of IFRS and in compliance with the Companies (Guernsey) Law, 2008. All accounting policies adopted for the period are consistent with IFRS issued by the IASB. The ?nancial statements have been prepared on an historical cost basis except for the measurement at fair value of ?nancial assets designated as at fair value through pro?t or loss and derivative ?nancial instruments.
In the opinion of the Directors, the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the ?nancial statements have been prepared on a going concern basis.
The Directors have arrived at this opinion by considering, inter alia, the following factors:
• the Company has su?cient liquidity to meet all ongoing expenses. The Company has net current assets of £2,696,451 at the year end. In January 2017, the ZDP Shares were refinanced and their life was extended to 28 February 2022. In addition, the Board regularly reviews the cash ?ow of the Company and is con?dent that the Company will have su?cient resources to meet all future obligations;
• both the Income and Smaller Companies Portfolios consist substantially of listed investments which are readily realisable and therefore the Company has su?cient resources to meet its liquidity requirements; and
• as at 31 December 2019, the Company had no borrowings other than the ZDP Shares which, as explained in Note 13, have a ?nal capital entitlement on 28 February 2022.
New Standards, Forthcoming Standards or Amendments and Interpretations Effective During the Reporting Period
There are no forthcoming standards or new standards effective in the current year which will have a significant impact on the Company.
(b) Use of Estimates and Judgements
The preparation of the ?nancial statements in conformity with IFRS requires the Directors to make judgements, estimates and assumptions that a?ect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may di?er from these estimates.
Estimates and underlying assumptions are reviewed on an on going basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods a?ected.
The Directors use judgements in allocating expenses between Revenue and Capital and in ascertaining the risk disclosures contained in Note 18. The Directors use judgements in valuing the market value of the investments contained in Note 10.
No significant estimates have been used.
(c) Dividend Policy
The Company aims to pay a regular quarterly dividend in March, June, September and December. It is intended to distribute substantially all of the Company's net income after expenses and taxation; however the Company may retain a proportion of the Company's income in each year as a revenue reserve to assist in providing long term stability in dividend distributions.
(d) Share Capital
Ordinary Shares are classified as equity. Share capital includes the nominal value of Ordinary Shares that have been issued and any premiums received on the initial issuance of shares. Incremental costs directly attributable to the issue of new Ordinary Shares or options are shown in equity as a deduction, net of tax, from the proceeds.
When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury reserve included in other reserves in the Statement of Financial Position. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity and the resulting surplus or deficit on the transaction is presented within share premium.
(e) Zero Dividend Preference Shares
Under IAS 32 - Financial Instruments: Presentation, the ZDP Shares are classi?ed as ?nancial liabilities and are held at amortised cost. Appropriation for the period in respect of ZDP Shares is included in the Statement of Comprehensive Income as a ?nance cost and is calculated using the e?ective interest rate method ("EIR"). The costs of issue of the ZDP Shares are being amortised over the period until the ZDP Shares are due for redemption.
(f) Taxation
The Company has been granted exemption under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 from Guernsey Income Tax, and has elected to remain exempt following changes to the Guernsey tax regime. The Company paid an annual fee of £1,200 (2018: £1,200).
(g) Capital Reserve
The following are accounted for in this reserve:
- gains and losses on the realisation of financial assets designated at fair value through profit or loss and derivative financial instruments;
- expenses charged to this account in accordance with the expenses policy below;
- increases and decreases in the valuation of the financial assets designated at fair value through profit and loss held at the year end and derivative financial instruments; and
- unrealised exchange di?erences of a capital nature.
(h) Expenses
All expenses are accounted for on an accruals basis and are recognised in profit or loss. Expenses are charged to the capital reserve where a connection with the maintenance or enhancement of the value of the investments can be demonstrated.
75% of the Company's management fee and 100% ?nancing costs are charged to the capital reserve in line with the Board's expected long-term split of returns between income and capital gains from the investment portfolio.
100% of any performance fee, commissions paid, unrealised exchange differences of a capital nature and the appropriation in respect of ZDP Shares is charged to the capital reserve.
All other expenses are charged through the revenue reserve.
(i) Investment Income
Interest income and distributions receivable are accounted for on an accruals basis. Interest income relates only to interest on bank balances. Bond income is accounted for using the EIR basis. Dividends are recognised on the ex-dividend date. Investment income is treated as a revenue item, except for special dividends of a capital nature which are treated as a capital item, in the Statement of Comprehensive Income.
(j) Foreign Currency Translation
The currency of the primary economic environment in which the Company operates (the functional currency) is Great British Pounds ("GBP") which is also the presentational currency.
Transactions denominated in foreign currencies are translated into GBP at the rate of exchange ruling at the date of the transaction.
Monetary assets and liabilities, other than investments, denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at that date. Foreign exchange di?erences arising on translation are recognised in profit or loss in the Statement of Comprehensive Income. Foreign exchange di?erences relating to investments are taken to the capital reserve. Realised and unrealised foreign exchange di?erences on non-capital assets or liabilities are taken to profit or loss in the Statement of Comprehensive Income in the period in which they arise.
(k) Cash and Cash Equivalents
Cash and cash equivalents are de?ned as cash in hand, demand deposits and short term, highly liquid investments readily convertible to known amounts of cash and subject to an insigni?cant risk of change in value. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash, deposits at bank and money market deposits with a maturity of less than three months.
(l) Investments
All investments have been designated as ?nancial assets at "fair value through pro?t or loss". Investments are initially recognised on the date of purchase at fair value, with transaction costs recognised in profit or loss in the Statement of Comprehensive Income. Unrealised gains and losses on movement in fair value of investments are recognised in profit or loss in the Statement of Comprehensive Income. Investments are derecognised on the date of sale. Gains and losses on the sale of investments, which is the difference between its initial cost and sale value, will be taken to the profit or loss in the Statement of Comprehensive Income in the period in which they arise. For investments actively traded in organised ?nancial markets, fair value is determined by reference to Stock Exchange quoted market bid prices as at the close of business on the reporting date.
For investments not actively traded, the Directors will consider where practical, multiples used in recent transactions in comparable stocks. Where there are no comparable listed or unlisted stocks the Directors will take into consideration the performance of the stock, maturity date and ?nance arrangements to determine the fair value.
(m) Derivatives
Derivatives consist of forward exchange contracts which are initially measured at fair value and any directly attributable transaction costs are recognised in profit or loss in the Statement of Comprehensive Income as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are generally recognised in profit or loss in the Statement of Comprehensive Income. Derivatives contracts in a receivable position (positive fair value) are reported as financial assets at fair value through profit or loss. Derivatives contracts in a payable position (negative fair value) are reported as financial liabilities at fair value through profit or loss.
(n) Trade Date Accounting
All "regular way" purchases and sales of ?nancial assets are recognised on the "trade date", i.e. the date that the entity commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of ?nancial assets that require delivery of the asset within the timeframe generally established by regulation or convention in the market place.
(o) Segmental Reporting
The Company retains two Investment Advisers: Unicorn Asset Management Limited and Premier Fund Managers Limited for the Smaller Companies Portfolio and Income Portfolio respectively. As the Board reviews the performance of each portfolio separately and decides on the allocation of resources based on this performance, the Board, as chief operating decision maker, has determined that the Company has two reportable segments (2018: two).
The Board is charged with setting the Company's investment strategy in accordance with the Prospectus. They have delegated the day to day implementation of this strategy to its Investment Advisers but retain responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions. The investment decisions of the Investment Advisers are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board. The Investment Advisers have been given full authority to act on behalf of the Company, including the authority to purchase and sell securities and other investments on behalf of the Company and to carry out other actions as appropriate to give e?ect thereto. Whilst the Investment Advisers may make the investment decisions on a day to day basis regarding the allocation of funds to di?erent investments, any changes to the investment strategy or major allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Advisers. The Board, therefore, retains full responsibility as to the major allocation decisions made on an ongoing basis. The Investment Advisers will always act under the terms of the Prospectus.
The key measure of performance used by the Board to assess the Company's performance and to allocate resources is the total return on the Company's net asset value ("NAV"), as calculated under IFRS, and therefore no reconciliation is required between the measure of pro?t or loss used by the Board and that contained in the ?nancial statements.
The Schedule of Principal Investments held as at the year end is presented above.
(p) Offsetting
Financial assets and liabilities are offset and the net amount is reported in the Statement of Financial Position when there is currently a legally and contractually enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. A current legally and contractually enforceable right to offset must not be contingent on a future event. Furthermore, it must be legally and contractually enforceable in (i) the normal course of business; (ii) the event of default; and (iii) the event of insolvency or bankruptcy of the Company and all of the counterparties.
2 OPERATING SEGMENTS
The Company has two reportable segments, being the Income Portfolio and the Smaller Companies Portfolio. Each of these portfolios is managed separately as they entail di?erent investment objectives and strategies and contain investments in di?erent products.
For each of the portfolios, the Board reviews internal management reports on a quarterly basis. The objectives and principal investment products of the respective reportable segments are as follows:
Segment
Investment Objectives and Principal Investments Products
Income Portfolio
To enhance income and control risk by investing in fixed interest securities, including convertible securities, structured investments across a range of asset classes, shares of other investment companies, including property investment companies, and open-ended fixed interest funds.
Smaller Companies Portfolio
To maximise income and capital growth through investments in smaller capitalised UK companies.
Information regarding the results of each reportable segment follows. Performance is measured based on the increase in value of each portfolio, as included in the internal management reports that are reviewed by the Board.
Segmental information is measured on the same basis as that used in the preparation of the Company's ?nancial statements.
| Smaller | |||||||
| Income | Companies | ||||||
| Portfolio | Portfolio | Unallocated | Total | ||||
| GBP | GBP | GBP | GBP | ||||
| 31 December 2019 | |||||||
| External revenues: | |||||||
| Net gains on financial assets designated as at fair value through profit or loss | 449,802 | 14,091,285 | - | 14,541,087 | |||
| Gains on derivative financial instruments | 249,850 | - | - | 249,850 | |||
| Investment income: | |||||||
| Dividend income | 156,327 | 3,523,388 | - | 3,679,715 | |||
| Bond income | 536,887 | - | - | 536,887 | |||
| Sundry income | 3,585 | - | - | 3,585 | |||
| Total gains | 1,396,451 | 17,614,673 | - | 19,011,124 | |||
| Expenses | - | - | (1,565,709) | (1,565,709) | |||
| Interest payable and similar charges | - | - | (1,207,671) | (1,207,671) | |||
| Total comprehensive income/(loss) for the year attributable to shareholders | 1,396,451 | 17,614,673 | (2,773,380) | 16,237,744 | |||
| Smaller | |||||||
| Income | Companies | ||||||
| Portfolio | Portfolio | Unallocated | Total | ||||
| GBP | GBP | GBP | GBP | ||||
| 31 December 2019 | |||||||
| Financial assets designated as at fair value through profit or loss | 20,619,082 | 83,169,400 | - | 103,788,482 | |||
| Receivables | 458,467 | 31,976 | 1,295 | 491,738 | |||
| Derivative financial instruments | 186,453 | - | - | 186,453 | |||
| Cash and cash equivalents | 1,561,066 | 763,617 | - | 2,324,683 | |||
| Total assets | 22,825,068 | 83,964,993 | 1,295 | 106,791,356 | |||
| Derivative financial instruments | 6,661 | - | - | 6,661 | |||
| Payables | - | - | 299,762 | 299,762 | |||
| Total current liabilities | 6,661 | - | 299,762 | 306,423 | |||
| Smaller | |||||||
| Income | Companies | ||||||
| Portfolio | Portfolio | Unallocated | Total | ||||
| GBP | GBP | GBP | GBP | ||||
| 31 December 2018 | |||||||
| External revenues: | |||||||
| Net losses on financial assets designated as at fair value through profit or loss | (388,217) | (14,007,265) | - | (14,395,482) | |||
| Losses on derivative financial instruments | (297,159) | - | - | (297,159) | |||
| Investment income: | - | ||||||
| Dividend income | 87,410 | 3,345,059 | - | 3,432,469 | |||
| Bond income | 512,305 | - | - | 512,305 | |||
| Total losses | (85,661) | (10,662,206) | - | (10,747,867) | |||
| Expenses | - | - | (1,154,651) | (1,154,651) | |||
| Interest payable and similar charges | - | - | (1,173,644) | (1,173,644) | |||
| Total comprehensive loss for the year attributable to shareholders | (85,661) | (10,662,206) | (2,328,295) | (13,076,162) | |||
| Smaller | |||||||
| Income | Companies | ||||||
| Portfolio | Portfolio | Unallocated | Total | ||||
| GBP | GBP | GBP | GBP | ||||
| 31 December 2018 | |||||||
| Financial assets designated as at fair value through profit or loss | 23,570,636 | 65,758,921 | - | 89,329,557 | |||
| Receivables | 434,116 | 91,731 | - | 525,847 | |||
| Derivative financial instruments | 14,086 | - | - | 14,086 | |||
| Cash and cash equivalents | 1,905,291 | 979,319 | - | 2,884,610 | |||
| Total assets | 25,924,129 | 66,829,971 | - | 92,754,100 | |||
| Derivative financial instruments | 199,600 | - | - | 199,600 | |||
| Payables | - | - | 225,111 | 225,111 | |||
| Total current liabilities | 199,600 | - | 225,111 | 424,711 | |||
Geographical Information
In presenting information on the basis of geographical segments, segment revenue and segment assets are based on the domicile countries of the investees and counterparties to derivative transactions. The table below excludes net gains on financial assets designated as at fair value through profit or loss and gains or losses on derivative instruments.
| Other | Rest of | ||||||||||||
| UK | Guernsey | Jersey | Europe | the world | Total | ||||||||
| GBP | GBP | GBP | GBP | GBP | GBP | ||||||||
| 31 December 2019 | |||||||||||||
| External revenues | |||||||||||||
| Total Revenue | 3,597,917 | 120,371 | - | 171,620 | 330,279 | 4,220,187 | |||||||
| Other | Rest of | ||||||||||||
| UK | Guernsey | Jersey | Europe | the world | Total | ||||||||
| GBP | GBP | GBP | GBP | GBP | GBP | ||||||||
| 31 December 2018 | |||||||||||||
| External revenues | |||||||||||||
| Total Revenue | 3,416,245 | 152,953 | 2,375 | 51,802 | 321,399 | 3,944,774 | |||||||
The Company did not hold any non-current assets during the year other than ?nancial instruments (2018: £nil).
Major Customers
The Company regards its shareholders as customers. The Company had no Shareholders with a holding greater than 10% at the year end (2018: HSBC Issuer Services Common Depositary Nominee (UK) Limited).
3 INVESTMENT INCOME
| Year ended | Year ended | |||||
| 31 December 2019 | 31 December 2018 | |||||
| GBP | GBP | |||||
| Dividend income | 3,679,715 | 3,432,469 | ||||
| Bond income | 536,887 | 512,305 | ||||
| Sundry income | 3,585 | - | ||||
| 4,220,187 | 3,944,774 |
4 GAINS/(LOSSES) ON DERIVATIVE FINANCIAL INSTRUMENTS
| Year ended | Year ended | |||||
| 31 December 2019 | 31 December 2018 | |||||
| GBP | GBP | |||||
| Unrealised gains/(losses) on forward foreign currency contracts | 365,305 | (214,119) | ||||
| Realised loss on forward foreign currency contracts | (115,455) | (83,040) | ||||
| 249,850 | (297,159) | |||||
5 EXPENSES
| Year ended 31 December 2019 | Year ended 31 December 2018 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| GBP | GBP | GBP | GBP | GBP | GBP | |||
| Manager's fee* | 173,347 | 520,040 | 693,387 | 180,699 | 542,096 | 722,795 | ||
| Administrator's fee** | 84,221 | - | 84,221 | 88,605 | - | 88,605 | ||
| Registrar's fee | 45,050 | - | 45,050 | 34,585 | - | 34,585 | ||
| Directors' fees | 128,255 | - | 128,255 | 97,389 | - | 97,389 | ||
| Custody fees | 23,214 | - | 23,214 | 17,863 | - | 17,863 | ||
| Audit fees | 36,422 | - | 36,422 | 31,489 | - | 31,489 | ||
| Directors' and Officers' insurance | 12,653 | - | 12,653 | 350 | - | 350 | ||
| Annual fees | 31,118 | - | 31,118 | 36,916 | - | 36,916 | ||
| Commissions and charges paid | - | 149,932 | 149,932 | - | 100,716 | 100,716 | ||
| Legal and professional fees | 39,949 | - | 39,949 | 31,553 | - | 31,553 | ||
| Broker fees | 56,510 | - | 56,510 | 40,080 | - | 40,080 | ||
| Bank interest | - | - | - | 69 | - | 69 | ||
| Sundry costs | 60,036 | - | 60,036 | 45,237 | - | 45,237 | ||
| Loss/(gain) on foreign exchange | 516 | 204,446 | 204,962 | (92,996) | - | (92,996) | ||
| 691,291 | 874,418 | 1,565,709 | 511,839 | 642,812 | 1,154,651 | |||
Manager's Fee
* The Company has entered into a Management Agreement with Premier Asset Management (Guernsey) Limited, a wholly-owned, Guernsey incorporated subsidiary of Premier Miton Group PLC. The Investment Manager receives a management fee of 0.7% per annum of total assets (subject to a minimum of £100,000) calculated monthly and payable quarterly in arrears, out of which it pays fees to the Investment Advisers. The Investment Manager is also paid a shareholder communication and support fee, currently £3,100 for the twelve months from 1 April 2019 to 31 March 2020. Please refer to Note 1(h) for details on how expenses are charged to the capital reserve and revenue account. The Management Agreement may be terminated, in writing, by either party giving 6 months' notice, provided the initial 12 month period from signing has expired, this date being 17 April 2020. The Company has entered into an agreement with the Investment Manager for the provision of AIFM reporting services for a fee of £19,450 per annum from 1 September 2017.
Administrator's Fee
**The Company entered into an Administration Agreement with Northern Trust International Fund Administration Services (Guernsey) Limited on 1 April 2015. The Company shall pay the Administrator a fee of 12 basis points per annum on the net assets between £0 - £100 million, 10 basis points per annum on the net assets between £100 million - £150 million and 8 basis points per annum on the net assets over £150 million subject to a minimum of £7,000 per month. The Administration Agreement may be terminated by either party on ninety days notice.
Performance Fee
The Investment Manager is also entitled to a performance fee equal to 15% of any excess of the NAV per Ordinary Share (together with any dividends paid) over the higher of the ?rst benchmark or the second benchmark. The ?rst benchmark is the NAV per share immediately following the tender in January 2007 increasing at 10% per annum compound. The second benchmark is the highest NAV per Ordinary Share as of the last calculation day in any preceding ?nancial period commencing after completion of the tender in January 2007 in respect of which a performance fee has been paid compounded at 10% per annum. A performance fee amounting to £nil was accrued for the year ended 31 December 2019 (2018: £nil).
6 DIRECTORS' REMUNERATION
Under their terms of appointment, each Director is paid a basic fee of £30,000 per annum by the Company. In addition to this, the Chairman receives an extra £10,000 per annum, the Audit Committee Chairman receives an extra £7,500 per annum, and the Risk Committee Chairman receives an extra £5,000 per annum.
Directors fees were increased as of 1 September 2019 as detailed in the Directors Report.
A special resolution was passed on 20 December 2016 for the new Articles of Incorporation which included that the ordinary remuneration of the Directors shall not exceed in aggregate of £200,000 per annum.
7 INTEREST PAYABLE AND SIMILAR CHARGES
| Year ended 31 December 2019 | ||||||
| Revenue | Capital | Total | ||||
| GBP | GBP | GBP | ||||
| Appropriation in respect of ZDP Shares | - | 1,207,671 | 1,207,671 | |||
| - | 1,207,671 | 1,207,671 | ||||
| Year ended 31 December 2018 | ||||||
| Revenue | Capital | Total | ||||
| GBP | GBP | GBP | ||||
| Appropriation in respect of ZDP Shares | - | 1,173,644 | 1,173,644 | |||
| - | 1,173,644 | 1,173,644 | ||||
8 DIVIDENDS IN RESPECT OF ORDINARY SHARES
| Year ended | Year ended | |||||||
| 31 December 2019 | 31 December 2018 | |||||||
| Pence | Pence | |||||||
| GBP | per share | GBP | per share | |||||
| First interim payment | 822,468 | 5.20 | 787,876 | 4.95 | ||||
| Second interim payment | 822,468 | 5.20 | 787,876 | 4.95 | ||||
| Third interim payment | 822,468 | 5.20 | 782,926 | 4.95 | ||||
| Fourth interim payment | 822,468 | 5.20 | 782,926 | 4.95 | ||||
| 3,289,872 | 20.80 | 3,141,604 | 19.80 | |||||
Further details on the Company's dividend policy can be found in Investment Objectives and Policy.
9 EARNINGS PER SHARE
Ordinary Shares
The total return per Ordinary Share (per IFRS) is based on the total gain on ordinary activities for the year attributable to Ordinary Shareholders of £16,237,744 (2018: loss of £13,076,162) and on 15,816,687 (2018: 15,878,637) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gains per share are identical.
The revenue return per Ordinary Share (per IFRS) is based on the revenue return on ordinary activities for the year attributable to Ordinary Shareholders of £3,528,896 (2018: £3,432,935) and on 15,816,687 (2018: 15,878,637) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gains per share are identical.
The capital return per Ordinary Share (per IFRS) is based on the capital gain on ordinary activities for the year attributable to Ordinary Shareholders of £12,708,848 (2018: capital loss of £16,509,097) and on 15,816,687 (2018: 15,878,637) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gains per share are identical.
ZDP Shares
The return per ZDP Share is based on the appropriation in respect of ZDP Shares, the amortisation of ZDP Share issue costs and ZDP Share issue costs totalling £1,207,671 (2018: £1,173,644) and on 21,230,989 (2018: 21,314,146) shares, being the weighted average number of ZDP Shares in issue during the year.
10 FINANCIAL ASSETS DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS
| 31 December 2019 | 31 December 2018 | |||||||
| GBP | GBP | |||||||
| INVESTMENTS | ||||||||
| Opening portfolio cost | 85,087,877 | 76,561,591 | ||||||
| Purchases at cost | 34,978,783 | 36,515,135 | ||||||
| Sales | ||||||||
| proceeds | (35,060,945) | (36,088,915) | ||||||
| - realised gains on sales | 6,179,329 | 10,318,189 | ||||||
| - realised losses on sales | (3,193,683) | (2,218,123) | ||||||
| Closing book cost | 87,991,361 | 85,087,877 | ||||||
| Unrealised appreciation on investments | 20,503,186 | 12,483,659 | ||||||
| Unrealised depreciation on investments | (4,706,065) | (8,241,979) | ||||||
| Fair value | 103,788,482 | 89,329,557 | ||||||
| Realised gains on sales | 6,179,329 | 10,318,189 | ||||||
| Realised losses on sales | (3,193,683) | (2,218,123) | ||||||
| Increase/(decrease) in unrealised appreciation on investments | 8,019,527 | (16,607,485) | ||||||
| Decrease/(increase) in unrealised depreciation on investments | 3,535,914 | (5,888,063) | ||||||
| Net gains/(losses) on financial assets designated as at fair value through profit or loss | 14,541,087 | (14,395,482) | ||||||
As at 31 December 2019, the closing fair value of investments comprises £83,169,400 (December 2018: £65,758,921) of Smaller Companies Portfolio, £20,619,082 (December 2018: £23,570,636) of Income Portfolio. The Market value of open Futures included in the Income Portfolio totalled a liability of £43,458 (December 2018: assets of £74,111). Refer to the Unaudited Full List of Holdings for further detail.
IFRS 13 requires the fair value of investments to be disclosed by the source of inputs using a three-level hierarchy as detailed below:
Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and
Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).
Details of the value of each classi?cation are listed in the table below. Values are based on the market value of the investments as at the reporting date:
Financial Assets Designated as at Fair Value Through Profit or Loss
| 31 Dec 2019 | 31 Dec 2019 | 31 Dec 2018 | 31 Dec 2018 | ||||||
| Market value | Market value | Market value | Market value | ||||||
| % | GBP | % | GBP | ||||||
| Level 1 | 81.72 | 84,817,978 | 78.43 | 70,062,801 | |||||
| Level 2 | 18.28 | 18,970,504 | 21.57 | 19,266,756 | |||||
| Level 3 | - | - | - | - | |||||
| Total | 100.00 | 103,788,482 | 100.00 | 89,329,557 |
Bonds and structured investments are priced by reference to market quotations which incorporate assessment of yield, maturity and the instrument's terms and conditions.
The following table is a reconciliation of investments the Company held during the years ended 31 December 2019 and 31 December 2018 at fair value using unobservable inputs (Level 3):
| 31 Dec 2019 | 31 Dec 2018 | ||||||||
| Market value | Market value | ||||||||
| GBP | GBP | ||||||||
| Balance at start of the year | - | 322,434 | |||||||
| Transfer from Level 1 to Level 3 | - | - | |||||||
| Unrealised loss on investments | - | (322,434) | |||||||
| Balance at end of the year | - | - | |||||||
For investments categorised in Level 3 as at 31 December 2019, the below details the valuation methodologies used:
Silverdell plc - The stock is suspended and is valued at zero. JPMorgan Global Convertibles Income - The stock is in liquidation and is valued at zero. The Investment Adviser does not expect any return of capital.
Derivative Financial Assets and Liabilities Designated as at Fair Value Through Profit or Loss
It is the Company's policy to recognise all the transfers into the levels and transfers out of the levels at the end of the reporting year. Transfers into each level shall be disclosed and discussed separately from transfers of each level.
During the year ended 31 December 2019, Castings plc, Braemar Shipping Services plc, Alumasc Group plc and Barclays plc 8% PERP - 2049 were transferred from Level 1 to Level 2 due to an analysis of trading activity. During the year ended 31 December 2018, JPMorgan Structured Programme 0.00% 17/03/2021 and Gli Finance Limited Red Zdp 2019 Npv were transferred from Level 1 to Level 2 due to an analysis of trading activity.
During the year ended 31 December 2019, Credit Suisse Group 2.75% 08/08/2025 and GS Group 5.50% 12/10/2021 were transferred from Level 2 to Level 1 due to an analysis of trading activity. During the year ended 31 December 2018, Barclays plc 8% Perp - 20 was transferred from Level 2 to Level 1 due to an analysis of trading activity.
The derivative ?nancial instruments held by the Company have been classi?ed as Level 1 and 2. This is in accordance with the fair value hierarchy. The Company uses widely recognised valuation models for determining fair value of derivative ?nancial instruments that use only observable market data and require little management judgement and estimation.
11 RECEIVABLES
| 31 Dec 2019 | 31 Dec 2018 | ||||||||
| GBP | GBP | ||||||||
| Due from brokers | 28,481 | - | |||||||
| Prepayments | 4,790 | 18,739 | |||||||
| Accrued investment income | 458,467 | 507,108 | |||||||
| 491,738 | 525,847 | ||||||||
12 PAYABLES
| 31 Dec 2019 | 31 Dec 2018 | ||||||||
| GBP | GBP | ||||||||
| Accrued expenses | 93,235 | 53,931 | |||||||
| Amounts due to brokers | 27,114 | - | |||||||
| Trade creditors | 179,413 | 171,180 | |||||||
| 299,762 | 225,111 | ||||||||
13 ZDP SHARES
| 31 Dec 2019 | 31 Dec 2018 | ||||||||
| GBP | GBP | ||||||||
| ZDP Share entitlement | 32,721,106 | 31,513,434 | |||||||
| The above entitlement comprises the following: | |||||||||
| 21,230,989 ZDP Shares issued to date up to 31 Dec 2019 | 22,831,682 | - | |||||||
| 21,365,221 ZDP Shares issued to date up to 31 Dec 2017 | - | 23,037,103 | |||||||
| 134,232 Buyback of ZDP Shares during the year ended 31 Dec 2018 | - | (205,421) | |||||||
| ZDP Premium | (10,581) | (15,877) | |||||||
| Appropriation in respect of ZDP Shares | 9,889,423 | 8,681,752 | |||||||
| ZDP value (calculated in accordance with the Articles) | 32,710,524 | 31,497,557 | |||||||
| ZDP issue costs | - | - | |||||||
| Issue costs amortised | - | - | |||||||
| Add back ZDP Premium | 10,581 | 15,877 | |||||||
| ZDP value (calculated in accordance with IFRS) | 32,721,106 | 31,513,434 | |||||||
The fair value of the ZDP Shares as at 31 December 2019 was £33,014,188 (31 December 2018: £32,164,948). The ZDP Shares are classified under Level 1 based on unadjusted quoted prices in active markets. Since valuations are based on quoted prices that are readily and regularly available in an active market, the valuation does not entail a significant degree of judgement (2018: Level 1).
A Continuation Offer proposal to ZDP Shareholders was published in November 2016, whereby such holders were given an opportunity to either receive their 2017 Final Capital Entitlement of 138p or to continue their investment in the existing ZDP Shares. Shareholders approved the scheme and 91.4% of ZDP Shareholders elected to remain invested.
Following the proposals, 19,523,014 ZDP Shares were elected for the Continuation Offer with a further 1,842,207 New ZDP Shares being issued through an Initial Placing at 140.0p which represented a premium of 1.4% to the opening NAV per New ZDP Share.
1,834,160 ZDP Shares were elected for Redemption at their 2017 Final Capital Entitlement of 138p.
ZDP Shares carry no entitlement to income distributions to be made by the Company. The ZDP Shares will not pay dividends but have a ?nal capital entitlement at the end of their life on 28 February 2022 of 167.2 pence following the extension of the life of the existing ZDP Shares from 31 January 2017.
It should be noted that the predetermined capital entitlement of a ZDP Share is not guaranteed and is dependent upon the Company's gross assets being su?cient on 28 February 2022 to meet the ?nal capital entitlement of ZDP Shares.
Under the Articles of Incorporation, the Company is obliged to redeem all of the ZDP Shares on 28 February 2022 (if such redemption has not already been e?ected).
The number of authorised ZDP Shares is 50,000,000. The number of issued ZDP Shares is 21,230,989 (31 December 2018: 21,230,989). The non-amortisation of the ZDP Shares in line with the Articles has the e?ect of increasing the NAV per Ordinary Share by 0.10 pence.
14 SHARE CAPITAL AND PREMIUM
| Authorised | GBP | GBP | |||||
| Ordinary Shares of 1p each | unlimited | unlimited | |||||
| 31 Dec 2019 | 31 Dec 2018 | ||||||
| Number of | Number of | ||||||
| Issued | Shares | Shares | |||||
| Number of shares in issue at the start of the year | 15,816,687 | 15,916,687 | |||||
| Buyback of Ordinary Shares during the year | - | (100,000) | |||||
| Number of shares in issue at the end of the year | 15,816,687 | 15,816,687 | |||||
| Issued and fully paid capital at the end of the year | £196,606 | £196,606 | |||||
| Share Capital | Share Premium | Total | Total | ||||
| 31 Dec 2019 | 31 Dec 2019 | 31 Dec 2019 | 31 Dec 2018 | ||||
| GBP | GBP | GBP | GBP | ||||
| Opening share capital and premium | 196,606 | 27,224,218 | 27,420,824 | 27,633,383 | |||
| Buyback of Ordinary Shares during the year | - | - | - | (213,059) | |||
| Cancellation of Ordinary Shares during the year | - | - | - | 500 | |||
| Closing share capital and premium | 196,606 | 27,224,218 | 27,420,824 | 27,420,824 | |||
The Ordinary Shares (excluding treasury shares) are entitled to participate in all dividends and distributions of the Company. On a winding-up holders of Ordinary Shares are entitled to participate in the distribution and the holders of Ordinary Shares are entitled to receive notice of and attend and vote at all general meetings of the Company.
The issued and fully paid capital as at 31 December 2019 was £196,606 (31 December 2018: £196,606).
15 OTHER RESERVES
TREASURY RESERVE
| 31 Dec 2019 | 31 Dec 2018 | |||||
| GBP | GBP | |||||
| Balance as at 1 January | (4,780,162) | (4,568,238) | ||||
| Buyback of Ordinary Shares during the year | - | (424,483) | ||||
| Cancellation of Treasury Shares during the year | - | 212,559 | ||||
| Balance as at 31 December | (4,780,162) | (4,780,162) | ||||
The other reserves presented on the Statement of Financial Position comprise the treasury reserve of (£4,780,162) and special reserve of £10,000,000 totalling £5,219,838.
ORDINARY SHARES HELD IN TREASURY
| 31 Dec 2019 | 31 Dec 2018 | |||||
| No. Shares | No. Shares | |||||
| Balance as at 1 January | 1,325,972 | 1,275,972 | ||||
| Buyback of Ordinary Shares during the year | - | 100,000 | ||||
| Cancellation of Ordinary Shares during the year | - | (50,000) | ||||
| Balance as at 31 December | 1,325,972 | 1,325,972 | ||||
A Special reserve of £10,000,000 was created on the cancellation of part of the Company's Share premium account.
16 RELATED PARTIES
Premier Asset Management (Guernsey) Limited is the Company's Investment Manager and operates under the terms of the Management Agreement in force which delegates its authority over the Company's investment portfolios.
£693,387 (2018: £722,795) of costs were incurred by the Company with this related party in the year, of which £179,413 (2018: £171,180) was due to this related party as at 31 December 2019.
During the year ended 31 December 2019, £nil (31 December 2018: £nil) was charged as performance fees of which, £nil (31 December 2018: £nil) remained payable at year end.
The Directors' remuneration is disclosed in Notes 5 and 6.
David Warr holds 63,000 (31 December 2018: 63,000) Ordinary Shares in the capital of the Company, which represented an interest of 0.40% (31 December 2018: 0.40%) of the Company's Ordinary Shares in issue as at 31 December 2019.
Nigel Sidebottom holds 4,366 (31 December 2018: 4,366) Ordinary Shares in the capital of the Company, which represented an interest of 0.03% (31 December 2018: 0.03%) of the Company's Ordinary Shares in issue as at 31 December 2019, and 5,205 (31 December 2018: 5,205) ZDP Shares in the capital of the Company, which represented an interest of 0.02% (31 December 2018: 0.02%) of the Company's ZDP Shares in issue as at 31 December 2019.
Nigel Ward holds 7,000 Ordinary Shares in the capital of the Company, via a nominee account. This represents an interest of 0.04% (31 December 2018: nil).
17 FINANCIAL INSTRUMENTS
The Company's main ?nancial instruments comprise:
(a) Cash and cash equivalents that arise directly from the Company's operations;
(b) Investments in listed entities, receivables and payables;
(c) ZDP Shares; and
(d) Derivative ?nancial instruments.
18 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The following table details the categories of ?nancial assets and liabilities held by the Company at the reporting date:
| 31 Dec 2019 | 31 Dec 2018 | ||||||||
| GBP | GBP | ||||||||
| Financial Assets | |||||||||
| Financial assets designated as at fair value through profit or loss | 103,788,482 | 89,329,557 | |||||||
| Derivative financial assets | 186,453 | 14,086 | |||||||
| Total financial assets at fair value through profit or loss | 103,974,935 | 89,343,643 | |||||||
| Loans and receivables | |||||||||
| Cash and receivables | 2,324,683 | 2,884,610 | |||||||
| Receivables (excluding prepayments) | 486,948 | 507,108 | |||||||
| Total assets (excluding prepayments) | 106,786,566 | 92,735,361 | |||||||
| 31 Dec 2019 | 31 Dec 2018 | ||||||||
| GBP | GBP | ||||||||
| Financial liabilities | |||||||||
| Financial liabilities at fair value through profit or loss: | |||||||||
| Derivative financial liabilities | 6,661 | 199,600 | |||||||
| Total financial liabilities at fair value through profit or loss | 6,661 | 199,600 | |||||||
| Financial liabilities measured at amortised cost | |||||||||
| ZDP Shares | 32,721,106 | 31,513,434 | |||||||
| Payables | 299,762 | 225,111 | |||||||
| Total Financial liabilities measured at amortised cost | 33,020,868 | 31,738,545 | |||||||
| Total liabilities excluding net assets attributable to holders of Ordinary Shares | 33,027,529 | 31,938,145 | |||||||
Loans and receivables presented above represents cash and cash equivalents, balances due from brokers and other receivables (excluding prepayments) as detailed in the Statement of Financial Position.
Financial liabilities measured at amortised cost presented above represents accrued expenses and ZDP Shares as detailed in the Statement of Financial Position.
Derivative ?nancial assets and liabilities presented above represent forward foreign exchange contracts. Unrealised gains and losses on movement in fair value are recognised in the Statement of Comprehensive Income.
The main risks arising from the Company's ?nancial instruments are market price risk, credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Board regularly reviews and agrees policies for managing each of these risks and these are summarised in Notes 18(a) to 18(e).
(a) Market Price Risk
Market price risk arises mainly from uncertainty about future prices of ?nancial instruments held. It represents the potential loss the Company might su?er through holding market positions in the face of price movements. The Investment Advisers actively monitor market prices and report to the Board as to the appropriateness of the prices used for valuation purposes. The Investment Advisers also attempt to minimise market price risk by undertaking a detailed analysis of the risk/reward relationship of each investee company prior to any investment being made.
Unicorn monitors the industry concentration exposure for the Smaller Companies Portfolio.
Details of the Company's Investment Objective and Policy are given inside the front cover of this Report.
Price Sensitivity
The following details the Company's sensitivity to a 25% (2018: 25%) increase and decrease in the market prices, with 25% being the sensitivity rate used when reporting price risk internally to key management personnel and representing management's assessment of the possible change in market prices.
At 31 December 2019, if market prices had been 25% (2018: 25%) higher with all the other variables held constant, the return attributable to shareholders for the year would have been £25,947,121 (2018: £22,332,389) greater, due to the increase in the fair value of ?nancial assets at fair value through pro?t or loss. This would represent an increase in Net Assets of 35% (2018: 37%).
If market prices had been 25% (2018: 25%) lower with all the other variables held constant, the return attributable to shareholders for the year would have been £25,947,121 (2018: £22,332,389) lower, due to the decrease in the fair value of ?nancial assets at fair value through pro?t or loss. This would represent a decrease in Net Assets of 35% (2018: 37%).
At 31 December 2019, the Company's largest exposure to a single investment was £3,073,783 (2018: £2,485,707), 2.88% (2018: 2.68%) of total assets.
(b) Credit Risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Company. The Directors receive ?nancial information on a regular basis which is used to identify and monitor risk. It is the Company's policy not to invest, at the time of investment, more than 7.5% in any one ?xed interest security.
The Company has no signi?cant concentration of credit risk, with exposure spread over a large number of counterparties. At 31 December 2019, the Company's largest exposure to a single counterparty was £3,073,783 (2018: £2,485,707), 2.88% (2018: 2.68%) of total assets.
Investors should be aware that the prospective returns to shareholders mirror the returns under the quoted securities held or entered into by the Company and that any default by an issuer of any such quoted security held by the Company would have a consequential adverse e?ect on the ability of the Company to pay some or all of the entitlement to its shareholders. Such a default might, for example, arise on the insolvency of an issuer of a quoted security.
The Company's ?nancial assets exposed to credit risk are as follows:
| 31 Dec 2019 | 31 Dec 2018 | ||||||||
| GBP | GBP | ||||||||
| Financial assets designated as at fair value through profit or loss | |||||||||
| (fixed income securities and structured investments only) | 15,588,001 | 20,392,264 | |||||||
| Cash and cash equivalents | 2,324,683 | 2,884,610 | |||||||
| Interest, dividends and other receivables | 486,948 | 507,108 | |||||||
| Derivatives financial instruments | 186,453 | 14,086 | |||||||
| 18,586,085 | 23,798,068 | ||||||||
The credit ratings of the bonds, as rated by Moody's Investor Services Inc ("Moodys") were:
| Rating | 31 Dec 2019 | 31 Dec 2018 | |||||||
| Aaa | 8.97% | 4.47% | |||||||
| Aa | 4.62% | 5.99% | |||||||
| A | 11.97% | 7.84% | |||||||
| Baa | 36.99% | 24.31% | |||||||
| Ba | 2.04% | 4.30% | |||||||
| No ratings available | 35.41% | 53.09% | |||||||
The cash and cash equivalents were held with Northern Trust (Guernsey) Limited, a fully owned subsidiary of The Northern Trust Company, which at the year ended 31 December 2019 held a credit rating, as rated by Moody's, of Aa2 (31 December 2018: Aa2) . The long gilt future is held with J.P. Morgan who at the year ended 31 December 2019 held a credit rating, as rated by Moody's, of A2 (31 December 2018: A2). The Investment Adviser for the Income Portfolio selects investments having regard to their potential return and the credit risk associated with them. The Investment Adviser carries out its own assessment of credit risk and the rating provided by a credit rating agency is just one of the factors taken into account. The absence of a rating is not necessarily a re?ection on credit risk. The Board reviews the whole portfolio at quarterly Board meetings.
(c) Liquidity Risk
Liquidity risk is the risk that the Company will encounter di?culty in meeting its obligations associated with its ?nancial liabilities that are settled by delivering cash or another ?nancial asset. The Company's main ?nancial commitments are its ongoing operating expenses.
The ZDP Shares will not pay dividends but will have a ?nal capital entitlement at the end of their life on 28 February 2022 of 167.2 pence. It should be noted that the predetermined capital entitlement of the 2022 ZDP Shares is not guaranteed and is dependent upon the Company's gross assets being su?cient on 28 February 2022 to meet the ?nal capital entitlement of the ZDP Shares.
The Investment Advisers ensure that the Company has su?cient liquid resources available to ful?l its operational plans and to meet its ?nancial obligations as they fall due. This is monitored by carrying out a solvency calculation on a quarterly basis by reference to management accounts and revenue projections. The Board will approve a Solvency Certi?cate resolution prior to declaring any interim distributions.
The Board intends to monitor the ?nancial position of the Company to ensure that it has su?cient liquid resources available to ful?l its obligation upon maturity of the ZDP Shares.
The table below details the residual contractual undiscounted maturities of ?nancial liabilities:
| As at 31 December 2019 | As at 31 December 2018 | |||||||||||
| 0-3 months | Over 1 year | 0-3 months | Over 1 year | |||||||||
| GBP | GBP | GBP | GBP | |||||||||
| Financial liabilities including derivatives | ||||||||||||
| Payables - due within one year | 299,762 | - | 225,111 | - | ||||||||
| Derivative financial instruments | 6,661 | - | 199,600 | - | ||||||||
| ZDP Share entitlement | - | 35,498,214 | - | 35,498,214 | ||||||||
| 306,423 | 35,498,214 | 424,711 | 35,498,214 | |||||||||
(d) Interest Rate Risk
The Company could hedge interest rate risk using various different methods.
The following table details the Company's exposure to interest rate risks. It includes the Company's assets and liabilities at fair values, categorised by the earlier of contractual re-pricing or maturity date measured by the carrying value of the assets and liabilities:
As at 31 December 2019:
| Less than | Non-interest | ||||||
| 1 month | Fixed interest | Bearing | Total | ||||
| GBP | GBP | GBP | GBP | ||||
| Financial Assets | |||||||
| Financial assets at fair value through profit or loss on | |||||||
| initial recognition | - | 15,588,001 | 88,200,481 | 103,788,482 | |||
| Cash and cash equivalents | 2,324,683 | - | - | 2,324,683 | |||
| Interest, dividends and other receivables | - | - | 486,948 | 486,948 | |||
| Derivative financial instruments | - | - | 186,453 | 186,453 | |||
| Total Financial Assets | 2,324,683 | 15,588,001 | 88,873,882 | 106,786,566 | |||
| Financial Liabilities | |||||||
| Derivative financial instruments | - | - | 6,661 | 6,661 | |||
| Payables | - | - | 299,762 | 299,762 | |||
| ZDP Share entitlement | - | 32,721,106 | - | 32,721,106 | |||
| Total Financial Liabilities | - | 32,721,106 | 306,423 | 33,027,529 | |||
| Total Interest Sensitivity Gap | 2,324,683 | (17,133,105) | |||||
As at 31 December 2018:
| Less than | Non-interest | ||||||
| 1 month | Fixed interest | Bearing | Total | ||||
| GBP | GBP | GBP | GBP | ||||
| Financial Assets | |||||||
| Financial assets at fair value through profit or loss on | |||||||
| initial recognition | - | 20,471,675 | 68,857,882 | 89,329,557 | |||
| Cash and cash equivalents | 2,884,610 | - | - | 2,884,610 | |||
| Interest, dividends and other receivables | - | - | 507,108 | 507,108 | |||
| Derivative Financial instruments | - | - | 14,086 | 14,086 | |||
| Total Financial Assets | 2,884,610 | 20,471,675 | 69,379,076 | 92,735,361 | |||
| Financial Liabilities | |||||||
| Derivative Financial instruments | - | - | 199,600 | 199,600 | |||
| Payables | - | - | 225,111 | 225,111 | |||
| ZDP Share entitlement | - | 31,513,434 | - | 31,513,434 | |||
| Total Financial Liabilities | - | 31,513,434 | 424,711 | 31,938,145 | |||
| Total Interest Sensitivity Gap | 2,884,610 | (11,041,759) | |||||
Interest rate sensitivity takes account of the e?ect of interest rate movements on cash balances. Interest rate risk does not a?ect the cash ?ows of the ?xed interest securities but does a?ect the fair value and as such this sensitivity has been re?ected in the market price risk disclosures at Note 18(a).
Interest Rate Sensitivity
If interest rates had been 25 basis points higher and all other variables were held constant, the Company's return attributable to Ordinary Shareholders for the year ended 31 December 2019 would have increased by approximately
£5,812 (2018: £7,212) or 0.005% (2018: 0.008%) of Total Assets, due to an increase in the amount of interest receivable on the bank balances.
If interest rates had been 25 basis points lower and all other variables were held constant, the Company's return attributable to Ordinary Shareholders for the year ended 31 December 2019 would have decreased by approximately £5,812 (2018: £7,212) or 0.005% (2018: 0.008%) of Total Assets, due to a decrease in the amount of interest receivable on the bank balances.
(e) Foreign Exchange Risk
Forward currency transactions are used to hedge the foreign currency exposure in bonds, other investments and cash balances held within the Income Portfolio. The purpose of the hedge is to protect the Company's assets from a decline in value that might arise from the depreciation of a foreign currency against Sterling.
At 31 December 2019, the Company's holdings in derivatives translated into GBP were as speci?ed below:
| Notional | |||||||||
| amount of | Fair value | ||||||||
| contracts | liabilities | ||||||||
| Type of contract | Expiration | Underlying | outstanding | GBP | |||||
| Forward | January 2020 | Purchased EUR | 71,855 | (907) | |||||
| Forward | January 2020 | Sold EUR | (885,000) | (23,973) | |||||
| Forward | January 2020 | Sold RON | (1,121,440) | (4,481) | |||||
| Forward | January 2020 | Sold USD | (4,841,366) | (156,576) | |||||
| Forward | January 2020 | Purchased USD | 260,000 | 6,661 | |||||
| Forward | January 2020 | Purchased USD | 53,690 | (516) | |||||
| (179,792) |
At 31 December 2018, the Company's holdings in derivatives translated into GBP were as speci?ed below:
| Notional | |||||||||
| amount of | Fair value | ||||||||
| contracts | liabilities | ||||||||
| Expiration | Underlying | outstanding | GBP | ||||||
| Forward | January 2019 | Purchased EUR | 1,000,000 | (19,069) | |||||
| Forward | January 2019 | Purchased EUR | 200,000 | (1,556) | |||||
| Forward | January 2019 | Purchased RON | 1,824,051 | (11,158) | |||||
| Forward | January 2019 | Purchased USD | 5,300,000 | (167,817) | |||||
| Forward | January 2019 | Sold USD | (451,555) | 14,086 | |||||
| (185,514) |
Exchange rate exposures are managed by minimising the amount of foreign currency held at any one time and entering into forward exchange contracts.
The following table sets out the Company's total exposure to foreign currency risk and the net exposure to foreign currencies of the monetary assets and liabilities:
| At 31 December 2019: | |||||||||
| Monetary | Monetary | Forward | |||||||
| Assets | Liabilities | FX Contracts | Net exposure | ||||||
| GBP | GBP | GBP | GBP | ||||||
| Euro | 634,495 | - | (689,249) | (54,754) | |||||
| US Dollar | 3,423,652 | (19,670) | (3,416,705) | (12,723) | |||||
| Romanian Leu | 66 | - | (198,383) | (198,317) | |||||
| At 31 December 2018: | |||||||||
| Monetary | Monetary | Forward | |||||||
| Assets | Liabilities | FX Contracts | Net exposure | ||||||
| GBP | GBP | GBP | GBP | ||||||
| Euro | 961,551 | - | (1,077,515) | (115,964) | |||||
| US Dollar | 4,028,177 | - | (3,804,700) | 223,477 | |||||
| Romanian Leu | - | - | (351,419) | (351,419) | |||||
Amounts in the above table are based on the carrying value of monetary assets and liabilities and the underlying principal amount of forward currency contracts.
(f) Capital Management
The principal investment objectives of the Company are to provide shareholders with a high income and also the opportunity for capital growth.
The Company's investments are held in two portfolios. The Company's assets comprise investments in equities and ?xed interest and other income-bearing securities in order to achieve its investment objectives. Approximately 70%-80% of the portfolio are invested in smaller capitalised United Kingdom companies, admitted to the O?cial List of the Financial Conduct Authority (the "FCA") and traded on the London Stock Exchange (the "LSE") or traded on the Alternative Investment Market ("AIM") at the time of investment. The Company also aims to further enhance income for shareholders by investing approximately 20%-30% of its assets in high yielding securities which will be predominantly ?xed income securities (including corporate bonds, preference and permanent interest bearing shares, convertible and reverse convertible bonds and debentures) but may include up to 15% of the portfolio (measured at time of acquisition) in high yielding investment company shares.
As the Company's Ordinary Shares are traded on the LSE, the Ordinary Shares may trade at a discount or premium to their Net Asset Value per Share on occasion. However, the Directors and the Investment Manager monitor the discount on a regular basis and can use share buy backs to manage the discount.
The Company monitors capital on the basis of the carrying amount of equity as presented on the face of the Statement of Financial Position. Capital for the reporting periods under review is summarised as follows:
| GBP | ||||||
| Distributable reserves | 8,637,065 | |||||
| Share capital and share premium | 27,420,824 | |||||
| Non distributable reserves | 37,705,938 | |||||
| Total | 73,763,827 | |||||
The distributable reserves comprise the revenue reserve and other reserves. The other reserves presented on the Statement of Financial Position comprise the treasury reserve and special reserve as detailed in Note 15. The special reserve of £10,000,000 was created on the cancellation of part of the Company's share premium account. The non distributable reserves comprise the capital reserve.
(g) Dividend Levels
Dividends paid on the Company's Ordinary Shares rely on receipt of interest payments and dividends from the securities in which the Company invests. The Company's revenue levels are monitored on a regular basis by the Board and the Investment Advisers.
19 SUBSEQUENT EVENTS
These Financial Statements were approved for issue by the Board on 28 April 2020. Subsequent events have been evaluated until this date.
A dividend of 5.75p was declared on 12 February 2020 and was paid to Ordinary Shareholders on 31 March 2020.
As at 22 April 2020 the published NAV per Ordinary Share for the Company was 290.01p. This represents a drop of 37.82% from 31 December 2019 NAV (466.44p), which movement was mostly attributable to the impact of COVID-19 on the global markets. In the early months of 2020, the COVID-19 outbreak has adversely impacted global commercial activities. The fluidity of the situation precludes any prediction, however it is foreseen that the pandemic will continue to have an adverse impact on the global economic and market conditions. The Directors continue to monitor the situation and it's impact on the Company.
Unaudited Full List of Investment Holdings
| Percentage of Total Assets 2019 | ||||||||
| Company | Nominal Holdings | Valuation GBP | ||||||
| Smaller Companies Portfolio | ||||||||
| Telecom Plus plc | 204,646 | 3,073,783 | 2.88 | |||||
| Hollywood Bowl Group plc | 900,000 | 2,565,000 | 2.40 | |||||
| Severfield plc | 3,033,894 | 2,536,335 | 2.38 | |||||
| Secure Trust Bank plc | 160,000 | 2,528,000 | 2.37 | |||||
| Regional REIT Limited | 2,120,000 | 2,399,840 | 2.25 | |||||
| 4imprint Group plc | 66,551 | 2,315,975 | 2.17 | |||||
| Numis Corporation plc | 780,000 | 2,304,900 | 2.16 | |||||
| FDM Group Holdings plc | 222,000 | 2,295,480 | 2.15 | |||||
| Polar Capital Holdings plc | 412,000 | 2,224,800 | 2.08 | |||||
| Goodwin plc | 73,500 | 2,190,300 | 2.05 | |||||
| Brewin Dolphin Holdings plc | 590,000 | 2,188,900 | 2.05 | |||||
| Ocean Wilsons Holdings Limited | 225,000 | 2,182,500 | 2.04 | |||||
| Wincanton plc | 708,927 | 2,126,781 | 1.99 | |||||
| Macfarlane Group plc | 2,000,000 | 2,110,000 | 1.98 | |||||
| James Halstead plc | 390,000 | 2,098,200 | 1.96 | |||||
| DiscoverIE Group plc | 373,829 | 2,093,442 | 1.96 | |||||
| Somero Enterprises inc | 750,000 | 2,025,000 | 1.90 | |||||
| Clipper Logistics plc | 700,000 | 1,998,500 | 1.87 | |||||
| Epwin Group plc | 1,975,000 | 1,984,875 | 1.86 | |||||
| Primary Health Properties plc | 1,200,000 | 1,917,600 | 1.80 | |||||
| Gateley Holdings plc | 970,000 | 1,910,900 | 1.79 | |||||
| Sabre Insurance Group plc | 620,000 | 1,909,600 | 1.79 | |||||
| Palace Capital plc | 600,000 | 1,902,000 | 1.78 | |||||
| Hill & Smith Holdings plc | 121,500 | 1,789,695 | 1.68 | |||||
| Tyman plc | 650,000 | 1,742,000 | 1.63 | |||||
| STV Group plc | 426,000 | 1,738,080 | 1.63 | |||||
| XPS Pensions Group plc | 1,350,000 | 1,714,500 | 1.61 | |||||
| Castings plc | 415,000 | 1,701,500 | 1.59 | |||||
| River & Mercantile Group plc | 665,000 | 1,662,500 | 1.56 | |||||
| Braemar Shipping Services plc | 750,000 | 1,582,500 | 1.48 | |||||
| Chesnara plc | 500,000 | 1,560,000 | 1.46 | |||||
| Iomart Group plc | 410,000 | 1,525,200 | 1.43 | |||||
| Flowtech Fluidpower plc | 1,195,767 | 1,464,815 | 1.37 | |||||
| Hostelworld Group plc | 1,141,118 | 1,424,115 | 1.33 | |||||
| Park Group plc | 2,600,000 | 1,404,000 | 1.31 | |||||
| Vesuvius plc | 265,052 | 1,325,260 | 1.24 | |||||
| Boot (Henry) plc | 414,823 | 1,323,285 | 1.24 | |||||
| RPS Group plc | 750,000 | 1,278,000 | 1.20 | |||||
| Card Factory plc | 846,170 | 1,248,947 | 1.17 | |||||
| Alpha FX Group plc | 97,654 | 1,201,144 | 1.12 | |||||
| Cineworld Group plc | 545,641 | 1,195,499 | 1.12 | |||||
| NCC Group plc | 500,000 | 1,127,500 | 1.06 | |||||
| Signature Aviation plc | 300,000 | 948,000 | 0.89 | |||||
| Londonmetric Property plc | 400,000 | 945,600 | 0.89 | |||||
| Warpaint London plc | 1,330,000 | 917,700 | 0.86 | |||||
| Alumasc Group plc | 794,444 | 738,833 | 0.69 | |||||
| Marshalls plc | 84,653 | 728,016 | 0.68 | |||||
| Silverdell plc | 3,090,546 | - | 0.00 | |||||
| TOTAL | 83,169,400 | 77.91 | ||||||
| Income Portfolio | ||||||||
| Pershing Square Holdings Limited | 59,000 | 850,651 | 0.80 | |||||
| Value & Income Trust 11.00% 31/03/2021 | 719,191 | 805,588 | 0.75 | |||||
| Pershing Square Holdings 5.50% 15/07/2022 | 1,000,000 | 797,698 | 0.75 | |||||
| APQ Global Limited 3.5% CULS 30/09/2024 | 178 | 792,100 | 0.74 | |||||
| Real Estate Investors plc | 1,375,000 | 715,000 | 0.67 | |||||
| Credit Suisse Group 2.75% 08/08/2025 | 600,000 | 629,866 | 0.59 | |||||
| Santander UK 1.875% 17/02/2020 | 600,000 | 600,673 | 0.56 | |||||
| AT&T 2.9% 04/12/2026 | 500,000 | 528,269 | 0.49 | |||||
| Citigroup 1.75% 23/10/26 | 500,000 | 497,838 | 0.47 | |||||
| British Land White 0.00% | 500,000 | 496,580 | 0.47 | |||||
| Supermarket Income REIT plc | 450,000 | 490,500 | 0.46 | |||||
| RM plc ZDP | 447,500 | 465,400 | 0.44 | |||||
| J Sainsbury 6.5% PERP | 450,000 | 461,886 | 0.43 | |||||
| Deutsche Bank Credit European 0.0025% 29/10/2020 | 6,000 | 446,821 | 0.42 | |||||
| British American Tobacco plc 4% 04/09/2026 | 400,000 | 439,701 | 0.41 | |||||
| GS Group 3.125% 25/07/2029 | 400,000 | 431,551 | 0.40 | |||||
| Barclays 3.125% 17/01/2024 | 400,000 | 419,972 | 0.39 | |||||
| HSBC Holdings 2.256% FRN 13/11/2026 | 400,000 | 405,897 | 0.38 | |||||
| Lloyds Bank 1.75% 11/07/2024 | 400,000 | 403,189 | 0.38 | |||||
| Lloyds Bank plc 9.625% 06/40/2023 | 300,000 | 373,350 | 0.35 | |||||
| Burford Capital 6.5% 2022 | 365,000 | 371,450 | 0.35 | |||||
| US 0.875% IL Treasury 2047 | 400,000 | 344,921 | 0.32 | |||||
| UK Mortgages Limited | 479,622 | 326,141 | 0.31 | |||||
| GS Group 5.50% 12/10/2021 | 300,000 | 322,315 | 0.30 | |||||
| US 2.375% Treasury Note 2029 | 400,000 | 314,057 | 0.29 | |||||
| Phoenix Group Holdings 4.125% 20/07/2022 | 300,000 | 313,972 | 0.29 | |||||
| Tesco Corporate Treasury 2.5% 02/05/2025 | 300,000 | 308,995 | 0.29 | |||||
| Theam Quant Dispersion US | 3,942 | 306,883 | 0.29 | |||||
| Aberdeen Asian Sma 2.25% | 308,982 | 305,892 | 0.29 | |||||
| Polar Capital Global Financials Trust plc | 203,845 | 297,614 | 0.28 | |||||
| BAA Funding 7.075% 04/08/2028 | 200,000 | 280,149 | 0.26 | |||||
| JPMorgan Chase & Co 1.875% 10/02/2020 | 276,000 | 276,279 | 0.26 | |||||
| Orange 5.75% PERP | 250,000 | 276,208 | 0.26 | |||||
| UIL Finance Ltd | 200,000 | 260,000 | 0.24 | |||||
| United Kingdom 1.25% IL Treasury 2032 | 125,000 | 255,844 | 0.24 | |||||
| Fidelity International 7.125% 2024 | 200,000 | 242,285 | 0.23 | |||||
| Phoenix Group Holdings 6.625% 18/12/2025 | 200,000 | 232,707 | 0.22 | |||||
| Tetragon Financial Group Ltd | 25,000 | 230,232 | 0.22 | |||||
| EJF Investments Ltd | 200,000 | 226,000 | 0.21 | |||||
| France Telecom 8.125% 2028 | 150,000 | 225,874 | 0.21 | |||||
| Wells Fargo 5.25% 01/08/2023 | 200,000 | 225,523 | 0.21 | |||||
| Thames Water Utilities 4.00% 2025 | 200,000 | 222,106 | 0.21 | |||||
| Firstgroup plc 8.75% 2021 | 200,000 | 216,921 | 0.20 | |||||
| A2D Funding Plc 4.75% 18/10/2022 | 200,000 | 214,378 | 0.20 | |||||
| SDCL Energy Efficiency Income Trust plc | 200,000 | 214,000 | 0.20 | |||||
| Sainsbury 2.875% FRN PERP | 200,000 | 211,044 | 0.20 | |||||
| Aviva Plc 5.9021% FRN PERP | 200,000 | 204,549 | 0.19 | |||||
| Barclays Plc 2.375% FRN 06/10/2023 | 200,000 | 203,548 | 0.19 | |||||
| Fondul Proprietatea | 19,358 | 200,192 | 0.19 | |||||
| Anglian Water 3.666% 30/07/2024 | 100,000 | 199,996 | 0.19 | |||||
| HipGnosis Songs Fund Limited | 175,000 | 189,000 | 0.18 | |||||
| South Eastern Power Networks 3.053% 2023 | 100,000 | 182,907 | 0.17 | |||||
| Barclays plc 8% PERP - 2049 | 200,000 | 180,693 | 0.17 | |||||
| Hadrian's Wall Secured Investments Limited | 300,000 | 177,000 | 0.17 | |||||
| RL Finance Bonds plc 6.125% 2043 | 150,000 | 169,649 | 0.16 | |||||
| Wells Fargo 1.375% 6/2022 | 150,000 | 150,536 | 0.14 | |||||
| Kelda Finance (No 3) plc 5.75% 2020 | 150,000 | 150,519 | 0.14 | |||||
| JPMorgan Structured Programme 0.00% 17/03/2021 | 200,000 | 149,140 | 0.14 | |||||
| Wm Morrison Superm 3.50% | 100,000 | 109,994 | 0.10 | |||||
| Whitbread Group 3.375% 2025 | 100,000 | 103,532 | 0.10 | |||||
| Tesco Property Finance 6.125% 2022 | 83,000 | 91,039 | 0.09 | |||||
| Gli Finance Limited Red ZDP 2019 Npv | 64,006 | 78,087 | 0.07 | |||||
| Societe Generale CDX IG Bear Warrant Dec 2022 | 50 | 24,797 | 0.02 | |||||
| Citigroup Global Markets 31/7/2023 | 10 | 23,042 | 0.02 | |||||
| JPMorgan Global Convertibles Income | 515,000 | - | 0.00 | |||||
| Futures | ||||||||
| Fut. MSCI World Finance Icf Mar20 | -15 | 846 | 0.00 | |||||
| Fut. Berkshire Hath-B D Oc Jun20 | -6 | (809) | 0.00 | |||||
| Fut. Starbucks Div Oc Jun20 | -14 | (821) | 0.00 | |||||
| Fut. Lowe's Cos Div Oc Jun20 | -16 | (1,222) | 0.00 | |||||
| Fut. S&P500 Emini Cme Mar20 | -1 | (1,359) | 0.00 | |||||
| Fut. Mar 20 Ice Msciwrlmw | -2 | (1,536) | 0.00 | |||||
| Fut. Chipotle Mexican D Oc Jun20 | -3 | (2,391) | 0.00 | |||||
| Fut. Hilton Worldwide Oc Jun20 | -16 | (3,259) | 0.00 | |||||
| Fut. Agilent Tech D Oc Jun20 | -18 | (4,422) | 0.00 | |||||
| Fut. Howard Oc Jun20 | -10 | (4,965) | 0.00 | |||||
| Fut. Long Gilt Future Icf Mar20 | 12 | (23,520) | -0.02 | |||||
| 20,619,082 | 19.34 | |||||||
| TOTAL | 103,788,482 | 97.25 | ||||||
Glossary of Terms and Alternative Performance Measures
ALTERNATIVE PERFORMANCE MEASURES ("APMS")
In accordance with ESMA Guidelines on Alternative Performance Measures ("APMs") the Board has considered what APMs are included in the annual report and accounts which require further clarification. APMs are defined as a financial measure of historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework.
COVER
The Cover on the ZDP Shares measures the amount by which the ?nal redemption value of the ZDP Shares is covered by the total assets of the Company allowing for all prior ranking liabilities and the accrual of expenses to capital over the remaining period to the redemption of the ZDP Shares. The calculation used in this report is for non-cumulative cover and represents a fraction where the numerator is equal to the gross assets of the Company less current liabilities (other than debt and liabilities to ZDP Shareholders) less the Company's revenue reserves and the denominator is the aggregate amount payable to ZDP Shareholders on the repayment date plus any other borrowing plus the cumulative management fee charged to capital over the remaining period to the repayment date. The full de?nition of the calculation is set out in the Company's Prospectus that can be found on the Company's website.
COVER TEST
The Cover Test is required to be met if the Company, with appropriate Shareholder approval, issues new ZDP Shares in a manner that would result in a reduction in Cover for existing ZDP Shareholders. For the Cover Test to be met the ZDP Cover immediately after the issue of new ZDP Shares must be at least 2.0 times.
DISCOUNT/PREMIUM
If the share price of an investment company is lower than the NAV per share, the shares are said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, the shares are said to be trading at a premium.
GEARING
Also known as leverage. Gearing is introduced when a company borrows money or issues prior ranking share classes such as ZDP Shares, to buy additional investments. The objective is to enhance returns to Ordinary Shareholders but there is the risk of the opposite effect if the additional investments fall in value.
HURDLE RATE
The compound rate of growth or decline of the total assets required each year until the redemption date for shareholders to receive the predetermined redemption price on a ZDP Share or the current share price on an Ordinary Share.
NET ASSETS RECONCILIATION PER ORDINARY SHARES AND ZDP SHARES
| Ordinary Shares | NAV per Share (pence) | ZDP Shares | NAV per Share (pence) | ||||
| Net Assets (per Articles) | 73,774,408 | 466.43 | ZDP value (per Articles) | 32,710,524 | 154.07 | ||
| ZDP Premium | (10,581) | (0.07) | ZDP premium | 10,581 | 0.05 | ||
| Net Assets (per IFRS) | 73,763,827 | 466.37 | ZDP value (per IFRS) | 32,721,106 | 154.12 |
NET ASSET VALUE ("NAV")
NAV is the assets attributable to Ordinary Shareholders expressed as an amount per individual share. Within this report two different methods are used for calculating NAV. One using the accounting standards speci?ed by International Financial Reporting Standards ("IFRS") and one which has been calculated in accordance with the Company's Articles of Association. The latter is the method which would be used to calculate the amount due to Ordinary Shareholders on the winding up of the Company. However, the Financial Statements are prepared in accordance with IFRS. Where the IFRS method has been used it will be indicated.
ONGOING CHARGES
The ongoing charges represent the Company's management fee and all other operating expenses, excluding finance costs, expressed as a percentage of the average of the daily net assets during the year. The Board continues to be conscious of expenses and works hard to maintain a sensible balance between good quality service and cost.
| for the year ended 31 December 2019 | 2019 | 2018 | ||||
| GBP | GBP | GBP | GBP | |||
| Average NAV | 66,267,314 | 72,356,592 | ||||
| Investment management fee | 693,386 | 722,795 | ||||
| Other operating expenses | 495,508 | 424,067 | ||||
| Total expenses excluding finance costs | 1,188,894 | 1,146,862 | ||||
| Ongoing Charges | 1.79% | 1.59% | ||||
PACKAGE DISCOUNT TO NAV
The difference between NAV of Ordinary and ZDP Shares and Share price of Ordinary and ZDP Shares as a percentage of the ZDP Shares to Ordinary Shares ratio.
Calculated as:
(A+(B*(C/D))) - (E+(F*(C/D)))
E+(F*(C/ D))
Where:
A is Share price of Ordinary Shares
B is Share price of ZDP Shares
C is Number of ZDP Shares in issue
D is Number of Ordinary Shares in issue
E is NAV of Ordinary Shares
F is NAV of ZDP Shares
REVENUE RETURN PER ORDINARY SHARE
Revenue per share is calculated using the net return on ordinary activities after finance costs and taxation, 2019, net total gain of £16,237,744, (2018: net total loss of £13,076,162) divided by the weighted average number of shares in issue for the financial year, 2019, 21,230,989 shares (2018: 21,314,146 shares). The Directors also regard returns per share to be a key indicator of performance. The revenue return per share is shown in the Statement of Comprehensive Income.
TOTAL RETURN ON TOTAL ASSETS, NAV AND SHARE PRICE
The combined effect of any dividends paid, together with the rise or fall in the Total Assets, NAV or share price. Total return statistics enable the investor to make performance comparisons between companies with different dividend policies. Any dividends received by a shareholder are assumed to have been invested in the month that the shares go ex-dividend at a value representing an average of the start and end values for that month of the Total Assets, NAV or share price as appropriate. The Total Assets Total Return, the NAV Total Return and the share price Total Return figures are shown on the Performance Summary.
TOTAL ASSETS
Total assets less current liabilities, before deduction of all borrowings.
TOTAL EXPENSE RATIO
This represents the total expenses, excluding Performance Fee, commissions and exchange gain/ losses as a percentage of total assets.
YIELD
The annual interest payments on a ?xed-interest security, or the annual dividends on an equity (less any withholding tax) expressed as a percentage of the current market value of the security.
The Company's yield was arrived at considering total dividends paid in 2019 of 20.8p as a percentage of year end share price of 406.00p.
Directors, Advisers and Contacts
| Directors | Custodian | |
| John Nigel Ward (Chairman) | Northern Trust (Guernsey) Limited | |
| David John Warr | PO Box 71 | |
| Nigel Sidebottom (appointed 5 February 2019) Sharon Parr (appointed 16 August 2019) | Trafalgar Court Les Banques | |
| Helen Foster Green (resigned 16 August 2019) | St Peter Port | |
| Guernsey | ||
| Shareholders are welcome to contact the Chairman directly by emailing: Acorn_Income_Fund_Limited@ntrs.com | GY1 3DA Corporate Broker | |
| Numis Securities Limited | ||
| Investment Manager | 10 Paternoster Square | |
| Premier Asset Management (Guernsey) Limited PO Box 255 | London EC4M 7LT Tel: 0207 2601000 | |
| Trafalgar Court | ||
| Les Banques | Independent Auditor | |
| St Peter Port | KPMG Channel Islands Limited | |
| Guernsey | Glategny Court | |
| GY1 3QL | Glategny Esplanade | |
| Tel: 01483 400430 | St Peter Port | |
| Contact: Claire Long | Guernsey | |
| GY1 1WR | ||
| Investment Adviser - Smaller Companies Portfolio | Registrar Anson Registrars Limited | |
| Unicorn Asset Management Limited | PO Box 426 | |
| Preacher's Court | Anson House | |
| The Charterhouse | Havilland Street | |
| Charterhouse Square | St Peter Port | |
| London EC1M 6AU | Guernsey GY1 3WX | |
| Tel: 0207 2530889 | Tel: 01481 722260 | |
| Contact: Simon Moon | Email: registrars@anson-group.com | |
| Investment Adviser - Income Portfolio | Company's Registered O?ce | |
| Premier Fund Managers Limited | PO Box 255 | |
| Eastgate Court | Trafalgar Court | |
| High Street | Les Banques | |
| Guildford GU1 3DE | St Peter Port | |
| Tel: 01483 400430 | Guernsey GY1 3QL | |
| Contact: Claire Long | ||
| Administrator and Secretary | Company Details | |
| Northern Trust International Fund Administration Services (Guernsey) Limited | Company Number: 34778 GIIN Number: CY0IXM.99999.SL.831 | |
| PO Box 255 | ||
| Trafalgar Court | ||
| Les Banques | Ordinary Shares | |
| St Peter Port Guernsey | ISIN: GB0004829437 Ticker: AIF | |
| Guernsey | ZDP Shares | |
| GY1 3DA | ISIN: GGOOBYMJ7X48 | |
| Email: Team_Acorn@ntrs.com | Ticker: AIFZ | |
Notice of Class Meeting
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt about the contents of this document or the action you should take, you should consult immediately your stockbroker, bank manager, solicitor, accountant or other financial adviser, authorised under the Financial Services and Markets Act 2000 (as amended).
If you have sold or otherwise transferred all of your ZDP Shares in Acorn Income Fund Limited, please send this document and Form of Proxy, as soon as possible, to the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.
Acorn Income Fund Limited
(Company No. 34778)
NOTICE OF CLASS MEETING
Notice is hereby given that a Class Meeting of holders of ZDP Shares of Acorn Income Fund Limited (the "Company") will be held at the offices of Northern Trust International Fund Administration Services (Guernsey) Limited, Trafalgar Court, Les Banques, St Peter Port, Guernsey, Channel Islands on 11 August 2020 at 11am.
In light of the impact of COVID-19, at the time of writing, shareholders are recommended to avoid attending the Annual General Meeting in person and are therefore encouraged to vote by proxy and direct any questions to the Company Secretary by emailing NTIFASGL_Corporate_Secretarial@ntrs.com.
| Resolution on Form of Proxy | Agenda |
| Business to be proposed as an Ordinary Resolution: | |
| 1. | THAT the holders of the ZDP Shares hereby sanction and consent to the passing and carrying into effect, as an Ordinary Resolution of the Company, of Resolution 11 contained in the notice of annual general meeting of the Company dated 16 April 2020 and any variation or abrogation and/or deemed variation or abrogation of the rights attached to the ZDP Shares which will, or may, result from the passing and carrying into effect of such resolution. |
Any Other Business |
By Order of the Board
For and on behalf of
Northern Trust International Fund Administration
Services (Guernsey) Limited
Secretary
16 April 2020
Notes
A member of a company is entitled to appoint another person as their proxy to exercise all or any of their rights to attend and to speak and vote at a meeting of the company. A member may appoint more than one proxy in relation to a meeting, provided that each proxy is appointed to exercise the rights attached to a different share or shares held by them. A proxy need not also be a member of the company.Details of how to appoint the Chairman of the Meeting or another person as proxy using the Proxy Form are set out in the notes to the Proxy Form.The requisite form is attached hereto and must be lodged with the Company's Registrars at: JTC Registrar Limited, PO Box 156, Ground Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 4EU at least 48 hours before the time of the Meeting.
Notice of Annual General Meeting
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt about the contents of this document or the action you should take, you should consult immediately your stockbroker, bank manager, solicitor, accountant or other financial adviser, authorised under the Financial Services and Markets Act 2000 (as amended).
If you have sold or otherwise transferred all of your Shares in Acorn Income Fund Limited, please send this document and Form of Proxy, as soon as possible, to the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.
Acorn Income Fund Limited
(Company No. 34778)
NOTICE OF ANNUAL GENERAL MEETING
Notice is hereby given that the 2020 Annual General Meeting of the Acorn Income Fund Limited (the "Company") will be held at the offices of Northern Trust International Fund Administration Services (Guernsey) Limited, Trafalgar Court, Les Banques, St Peter Port, Guernsey, Channel Islands on 11 August 2020 at 11.15am. (The "Meeting").
In light of the impact of COVID-19, at the time of writing, shareholders are recommended to avoid attending the Annual General Meeting in person and are therefore encouraged to vote by proxy and direct any questions to the Company Secretary by emailing NTIFASGL_Corporate_Secretarial@ntrs.com.
| Resolution on Form of Proxy | Agenda |
| Business to be proposed as Ordinary Resolutions: | |
| 1. | To receive the Annual Financial Report of the Company for the year ended 31 December 2019. |
| 2. | To re-appoint KPMG Channel Islands Limited as Auditor of the Company until the conclusion of the next Annual General Meeting. |
| 3. | To authorise the Directors to determine the Auditor's remuneration. |
| 4. | To re-elect John Nigel Ward as a Director of the Company. |
| 5. | To elect Sharon Parr as a Director of the Company. |
| 6. | To re-elect Nigel Sidebottom as a Director of the Company. |
| 7. | To re-elect David John Warr as a Director of the Company. |
| 8. | To receive and approve the Company's Dividend Policy as contained within the Annual Financial Report of the Company for the year ended 31 December 2019. |
| 9. | THAT the decision of the Board of Directors of the Company to allow Nigel Sidebottom to participate in the board meeting held on 21 April 2020, by telephone from the UK, due to travel restrictions, imposed by both the UK Government and the States of Guernsey, in response to the COVID-19 pandemic, and irrespective of the restrictions in relation to Directors attendance at meetings within the Articles of Incorporation of the Company, be hereby ratified |
| Special Business to be proposed as Ordinary Resolutions: | |
| 10. | THAT, the Directors of the Company be and are hereby generally and unconditionally authorised in accordance with the Articles to issue new Ordinary Shares in the Company PROVIDED THAT: (i) such powers shall be limited to issue up to 1,581,668 new Ordinary Shares (approximately 10% of the issued Ordinary Shares, excluding treasury shares, as at the date of this Notice); and (ii) the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2021 unless such authority is renewed, varied or revoked by the Company in general meeting (save that the Company may, at any time before such expiry, make an o?er or agreement which would or might require Ordinary Shares to be issued after such expiry and the Directors may issue Ordinary Shares after such expiry in pursuance of such o?er or agreement as if the authority conferred hereby had not expired). |
| 11. | THAT, subject to and conditional upon the passing of the proposed resolution of the Class Meeting of ZDP Members convened for 11 August 2020 at 11.00 am, the Directors of the Company be and are hereby generally and unconditionally authorised in accordance with the Articles to issue new ZDP Shares in the Company PROVIDED THAT: (i) such powers shall be limited to issue up to 2,123,098 new ZDP Shares (approximately 10% of the issued ZDP Shares, excluding treasury shares, as at the date of this Notice) in circumstances where the Cover Test is met or Cover is maintained or is otherwise increased, in each case, immediately following such issue; and (ii) the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2021 unless such authority is renewed, varied or revoked by the Company in general meeting (save that the Company may, at any time before such expiry, make an offer or agreement which would or might require ZDP Shares to be issued after such expiry and the Directors may issue ZDP Shares after such expiry in pursuance of such o?er or agreement as if the authority conferred hereby had not expired). |
| Special Business to be proposed as Special Resolutions: | |
| 12. | THAT the Directors be and are hereby empowered (pursuant to Resolution 9 or otherwise) to issue and sell from treasury up to 1,325,972 Ordinary Shares for cash otherwise than pro rata to existing Ordinary Members at: (i) a price equal to or greater than the prevailing Net Asset Value per Ordinary Share; or (ii) discount to the prevailing Net Asset Value per Ordinary Share in circumstances where ZDP Shares are issued at the same time at a premium to Net Asset Value such that the combined effect of the issue or sale of Ordinary Shares at a discount to the prevailing Net Asset Value per Ordinary Share and the issue of ZDP Shares at a premium to Net Asset Value is that (i) Net Asset Value per Ordinary Share is thereby increased; and (ii) gearing is not thereby increased, PROVIDED THAT the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2021 unless such authority is renewed, varied or revoked by the Company in general meeting (save that the Company may at any time before such expiry make an offer or agreement which might require Ordinary Shares to be issued or sold after such expiry and the Directors may issue or sell Ordinary Shares after such expiry in pursuance of such o?er or agreement as if the authority conferred hereby had not expired). |
| 13. | THAT, the Company be generally and, subject as hereinafter appears, unconditionally authorised in accordance with section 315 of the Companies Law to make market acquisitions (within the meaning of section 316 of the Companies Law) of its issued Ordinary Shares, PROVIDED THAT: (i) the maximum aggregate number of Ordinary Shares hereby authorised to be purchased shall be 2,370,921 Ordinary Shares; (ii) the minimum price (exclusive of expenses) payable by the Company for each Ordinary Share shall be £0.01; (iii) the maximum price (exclusive of expenses) payable by the Company for each Ordinary Share shall be the higher of (a) an amount equal to 105% of the average value of an Ordinary Share for the ?ve business days prior to the day the purchase is made and (b) the higher of the price of the last independent trade and the highest independent bid at the time of the purchase for any number of Ordinary Shares on the trading venue where the trade is carried out; (iv) the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2021 unless such authority is varied, revoked or renewed prior to such time; and (v) the Company may make a contract to purchase Ordinary Shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiration of such authority and may make an acquisition of Ordinary Shares pursuant to any such contract. |
| 14. | THAT, the Company be generally and, subject as hereinafter appears, unconditionally authorised in accordance with section 315 of the Companies Law to make market acquisitions (within the meaning of section 316 of the Companies Law) of its issued ZDP Shares, PROVIDED THAT: (i) the maximum aggregate number of ZDP Shares hereby authorised to be purchased shall be 3,182,525 ZDP Shares; (ii) the minimum price (exclusive of expenses) payable by the Company for each ZDP Share shall be £0.01; (iii) the maximum price (exclusive of expenses) payable by the Company for each ZDP Share shall be the higher of (a) an amount equal to 105% of the average value of a ZDP Share for the ?ve business days prior to the day the purchase is made and (b) the higher of the price of the last independent trade and the highest independent bid at the time of the purchase for any number of ZDP Shares on the trading venue where the trade is carried out; (iv) the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2021 unless such authority is varied, revoked or renewed prior to such time; and (v) the Company may make a contract to purchase ZDP Shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiration of such authority and may make an acquisition of ZDP Shares pursuant to any such contract. |
| 15. | THAT, Article 37.2 of the Articles of Incorporation of the Company be deleted in its entirety and replaced with the following: "A Director in communication with one or more other Directors so that each Director participating in the communication can hear or read what is said or communicated by each of the others, is deemed to be present at a meeting with the other Directors so participating and, where a quorum is present, such meeting shall be treated as a validly held meeting of the Board and shall be deemed to have been held in the place where the chairman is present. Directors may participate in a meeting by means of video link, telephone conference call or other electronic or telephonic means of communication, provided the majority are not participating in a meeting from the United Kingdom." |
| Any Other Business |
By Order of the Board
For and on behalf of
Northern Trust International Fund Administration
Services (Guernsey) Limited
As Secretary
16 April 2020
Notes
A member of a company is entitled to appoint another person as their proxy to exercise all or any of their rights to attend and to speak and vote at a meeting of the company. A member may appoint more than one proxy in relation to a meeting, provided that each proxy is appointed to exercise the rights attached to a different share or shares held by them. A proxy need not also be a member of the company.Details of how to appoint the Chairman of the Meeting or another person as proxy using the Proxy Form are set out in the notes to the Proxy Form.The requisite form is attached hereto and must be lodged with the Company's Registrars at: JTC Registrar Limited, PO Box 156, Ground Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 4EU at least 48 hours before the time of the Meeting.
