TIDMSMIF
TWENTYFOUR SELECT MONTHLY INCOME FUND LIMITED
LEI: 549300P9Q5O2B3RDNF78
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
The following replaces the RNS 'Annual Financial Report' announcement released
on 13 December 2019 at 07:00.
A typographical error has been identified as part of the annual financial
report publication process, which was released on 13 December and to correct
this, the Company is re-releasing the annual financial report below. The only
amendment to the below is as follows:
Text under the headings 'Materiality', 'Audit scope' and 'Key audit matters' in
the Independent Auditor's Report has been added.
Annual Report and Audited Financial Statements
For the year ended 30 September 2019
The Directors of TwentyFour Select Monthly Income Fund Limited (the "Company")
announce the results for the year ended 30 September 2019. The Report will
shortly be available via the Company's Portfolio Manager's website
www.twentyfouram.com and will shortly be available for inspection online at
www.morningstar.co.uk/uk/NSM
SUMMARY INFORMATION
The Company
TwentyFour Select Monthly Income Fund Limited (the "Company") was incorporated
with limited liability in Guernsey, as a closed-ended investment company on 12
February 2014. The Company's Shares were listed with a Premium Listing on the
Official List of the UK Listing Authority and admitted to trading on the Main
Market of the London Stock Exchange ("LSE") on 10 March 2014.
Investment Objective and Investment Policy
The Company's investment objective is to generate attractive risk adjusted
returns, principally through income distributions.
The Company's investment policy is to invest in a diversified portfolio of
credit securities.
The portfolio can be comprised of any category of credit security, including,
without prejudice to the generality of the foregoing, bank capital, corporate
bonds, high yield bonds, leveraged loans, payment-in kind notes and asset
backed securities. The portfolio will include securities of a less liquid
nature. The portfolio will be dynamically managed by TwentyFour Asset
Management LLP (the "Portfolio Manager") and, in particular, will not be
subject to any geographical restrictions.
The Company maintains a portfolio diversified by issuer; the portfolio
comprises at least 50 Credit Securities. No more than 5% of the portfolio value
will be invested in any single Credit Security or issuer of Credit Securities,
tested at the time of making or adding to an investment in the relevant Credit
Security. Uninvested cash, surplus capital or assets may be invested on a
temporary basis in:
· Cash or cash equivalents, money market instruments, bonds, commercial
paper or other debt obligations with banks or other counterparties having a
"single A" or higher credit rating as determined by any internationally
recognised rating agency which, may or may not be registered in the EU; and
· Any "government and public securities" as defined for the purposes of
the Financial Conduct Authority (the "FCA") Rules.
Efficient portfolio management techniques are employed by the Company,
including currency and interest rate hedging and the use of derivatives to
manage key risks such as interest rate sensitivity and to mitigate market
volatility. The Company's currency hedging policy will only be used for
efficient portfolio management and not to attempt to enhance investment
returns.
The Company will not employ gearing or derivatives for investment purposes. The
Company may use borrowing for short-term liquidity purposes, which could be
achieved through arranging a loan facility or other types of collateralised
borrowing instruments including repurchase transactions and stock lending. The
Articles restrict the borrowings of the Company to 10% of the Company's Net
Asset Value ("NAV") at the time of drawdown.
At launch the Company had a target net total return on the original issue price
of between 8% and 10% per annum. This comprised a target dividend payment of 6p
and a target capital return of 2p-4p both based on the original issue amount of
100p. There is no guarantee that this can or will be achieved, particularly
given the current low interest rate environment. As such the total return
generated has been lower than initially anticipated, although the 6p dividend
per annum has consistently been met and the Portfolio Manager is confident,
based on the current outlook, that this dividend target will be maintained in
the current year. Refer to note 19 to the Financial Statements for details of
the Company's dividend policy.
In accordance with the Listing Rules, the Company can only make a material
change to its investment policy with the approval of its Shareholders by
Ordinary Resolution.
Shareholder Information
Maitland Institutional Services Limited ("Maitland") is responsible for
calculating the NAV per share of the Company. Maitland delegated this
responsibility to Northern Trust International Fund Administration Services
(Guernsey) Limited (the "Administrator"). However Maitland still performs an
oversight function. The unaudited NAV per Ordinary Share will be calculated as
at the close of business on every Wednesday that is also a business day and the
last business day of every month and will be announced by a Regulatory
Information Service the following business day.
Financial Highlights
Year ended Year ended
30.09.19 30.09.18
Total Net Assets GBP167,827,286 GBP169,743,090
Net Asset Value per Share 90.63p 93.17p
Share price 93.00p 97.00p
Premium to NAV 2.62% 4.11%
Dividends declared during the year 6.34p 6.55p
Dividends paid during the year 6.55p 6.56p
As at 4 December 2019, the premium had moved to 1.93%. The estimated NAV per
share and share price stood at 91.83p and 93.60p, respectively.
Results are discussed further in the Director's Report.
Ongoing Charges
Ongoing charges for the year ended 30 September 2019 have been calculated in
accordance with the Association of Investment Companies (the "AIC") recommended
methodology. The ongoing charges for the year ended 30 September 2019 were
1.12% (30 September 2018: 1.18%) on an annualised basis.
CHAIRPERSON'S STATEMENT
For the year ended 30 September 2019
The financial year started with challenging conditions for investors with
largely weaker corporate earnings, slower global growth expectations from the
International Monetary Fund ("IMF") and a very hawkish October 2018 commentary
from the Federal Reserve ("Fed"). Sentiment was impacted when Fed Chair, Powell
raised the possibility of Fed Funds being tightened beyond the perceived
neutral rate, creating fears of a policy error. As a result global stock
markets had the worst month in 6 years and the benchmark 10 year US Treasury
yield breached the 3.25% resistance level. Geopolitical fears and comments from
President Trump reiterating his disapproval of Powell and the Fed's tightening
bias added further to volatility.
At the November 2018 Federal Open Market Committee ("FOMC") meeting Powell made
a complete U-turn and his dovish tone resulted in a sharp turnaround for the
interest rates market, sending the 10 year US Treasury Yield below 3%.
Nevertheless the Fed increased the Fed Funds rate to 2.25-2.50% on 19 December
2018, but the market immediately began to sense that the next move would be
lower, despite the Dot-plot charts suggesting the opposite.
Then on the 4 January 2019, at the American Economic Associations ("AEA")
meeting in Atlanta, Powell emphasised that the Fed were adopting a
data-dependant stance and that 'he wouldn't hesitate to adjust the balance
sheet reduction if it was causing problems for the economy'. This supportive
guidance led to a sharp rally in credit markets, reversing the credit spread
widening seen in Q4-2018.
The key event over the summer was the Federal Open Markets Committee ("FOMC")
meeting on 31 July 2019 when the Fed Funds rate was cut for the first time in a
decade; Powell said it was a 'mid-cycle adjustment' but that it didn't mean the
Fed would stop at just one cut. Amid this, and the trade tariff uncertainty,
the key 2-10s yield curve briefly inverted, which many investors consider a
reliable end-of-cycle predictor.
Over the reporting period sentiment was pulled in different directions by trade
talks between USA and China and the emergence of tensions between the EU and
USA over EU state subsidies added to concerns over the economic outlook in
Europe. Narratives relating to these tensions continue to impact sentiment,
volatility and the economic outlook and these remain unresolved.
Volatility in European assets remained relatively high driven by a difficult
political backdrop and poor economic performance. Germany is especially
sensitive to a fall in global trade and to the ongoing trade disputes and
falling factory orders were an area of concern for investors and policy makers.
Reflecting this Mario Draghi struck a dovish note, stating that the European
Central Bank ("ECB") saw risks tilted to the downside and 'they stood ready to
adjust all instruments if necessary'. Draghi delivered on this in September
2019, announcing a further cut in the ECB refinancing rate to -50bps, further
quantitative easing ("QE") from 1 November 2019 and tiering for bank reserve
deposits held at the ECB. It remains to be seen if this policy will succeed in
the 'real economy' but markets responded favourably.
Brexit news continued to dominate the headlines in the UK with paralysis in the
political system adding to uncertainty and negotiating difficulties. Whilst the
UK economy remained relatively resilient UK assets increasingly discounted high
perceived risks from Brexit and potential domestic political fallout. These
accounts will be approved on the 12 December 2019 which is election day in the
UK and therefore the uncertainty remains as I write this. Hopefully by the time
you read it that uncertainty will have been lifted.
The portfolio managers recognised that the weaker sentiment and heightened
volatility in Q4 2018 was an intra-cycle dip, rather than the start of an
end-of-cycle period, and took the opportunity, to selectively add favoured
credits at the shorter end of the credit curve. However, a lack of new issuance
volume impaired secondary market flows limiting the availability of suitable
assets. Despite demand for tap issues the portfolio managers declined a number
of requests for new share issuance and only GBP3m of new shares were issued over
the year.
Portfolio performance and dividends
Despite considerable economic uncertainty, geopolitical volatility and a very
challenging period for markets in Q4 2018, the fund generated a respectable
return over the financial year. The total return based on reinvestment of
dividends for the year was 5.16% (NAV per Share). Reflecting the difficult
backdrop the 3 months to 31 December 2018 produced a negative return of 2.92%
but the last 9 months generated a strong 7.94% return.
Once again the key outperforming sector for the year was Banking, where the
portfolio managers continue to be very selective. The net contribution from the
banking sector was 2.92%, or 57% of the total return for the Fund, despite
representing only 35% of the average allocation during the period. Insurance
was another key performing sector generating a net contribution of 0.99%. The
allocation to asset backed securities ("ABS") averaged 28% through the year but
contributed a net 1.17% of the return, as the bonds were slow to recover from
the sharp sell-off in late 2018. The portfolio managers still consider the
sector to represent relative value and maintain the exposure. The only sectors
where there were negative returns for the year were in European high yield
corporates (net contribution -0.17%) and North American high yield corporates
(net contribution -0.54%). These were primarily due to the underperformance in
the French paper and pulp company, Lecta and US energy producer, EP Energy.
During the period, the Share Price dropped 4p (2018: 2.5p) but dividends
totalling 6.55p (2018: 6.56p) were paid, therefore the Share Price return
including dividends paid (but not reinvested) was 2.63% (2018: 4.08%). To some
extent this reflects the fall in the premium to NAV which fell from 4.11% to
2.62%. Results are discussed further in the Director's Report.
Moving forward
This economic and credit cycle is now extended and whilst defaults and recover
rates remain attractive an expectation that this will not remain so forever is
not unreasonable. Although the manager does not currently anticipate a
significant change to existing conditions, we must be mindful that the quality
of the general credit universe has fallen over the past decade. Favourable
issuance terms have led to relaxed covenants and lower yields enabling weaker
companies to refinance, often with extended maturities.
As a credit fund we are exposed to a deterioration in the credit environment
and the higher yield we generate is a reward of illiquidity and credit risks.
The focus of the Manager is very bottom up and is built on a strong
understanding of each security held and the specific drivers of credit. This
centres on only buying securities that satisfy strict criteria and then closely
monitoring these, thus helping mitigate many risks more top down strategies
incur.
The closed ended structure for this fund was chosen to enable the manager to
exploit the illiquidity premium on certain types of fixed income security. This
dramatically reduces any mismatch between the liquidity of the fund and that of
the underlying assets held, making this the most prudent way to hold such
assets.
However, recent comments by Powell and Carney, Head of the Bank of England,
about potential illiquidity in fixed income markets is a warning that the cost
and availability of liquidity is not constant. High demand for fixed income
products coupled with low yields and spreads has ensured robust issuance
activity reducing the cost to deploy funds but secondary market liquidity can
be problematic due to changes in the market eco-system including regulatory
reforms. Whilst this can generate an illiquidity premium which feeds our
strategy, we are very aware of the wider impact of a shift in liquidity and
monitor this closely, benefiting from detailed liquidity analysis by the
Manager and the AFIM.
The current economic expansion is the longest in modern history and hence
investor sentiment is becoming more fragile. Geopolitical risks remain elevated
and with global growth declining and economic risk growing the portfolio
managers anticipate more frequent periods of volatility as the end of this
cycle approaches. They intend to utilise any heightened volatility to source
suitable new assets and maintain the relatively attractive yield without taking
increased risks. As such the portfolio managers are confident that the
Company's income will continue to be sufficient to maintain the 0.5p dividend
per month for the year ahead.
Claire Whittet
Chair
12 December 2019
PORTFOLIO MANAGER'S REPORT
For the year ended 30 September 2019
The first half of the financial year was defined by two very distinct quarters.
The first quarter began with a number of challenges for investors; with
disappointing earnings from a number of bellwether corporates, such as Amazon
and Caterpillar, and a sobering downgrade of global growth expectations from
the International Monetary Fund ("IMF"). However, market sentiment became
severely impaired following a very hawkish October 2018 commentary from Fed
Chair, Jerome Powell, raising the possibility of Fed Funds being tightened
beyond the perceived neutral rate, resulting in market fears of an impending
policy error. This led to global stocks having their worst month in 6 years,
the benchmark 10y US Treasury yield breaching the 3.25% resistance level and
the key 2-10s curve briefly steepen to 34bps. Geopolitical fears then took hold
again, resulting in Treasury yields retreating back, with volatility being
further stoked by comments from President Trump who reiterated his disapproval
of Powell and the Fed's tightening bias.
Sensing a repeat of the 'Bernanke-tantrum' of 2013 Powell adopted a dovish tone
in his November 2018 statement, which resulted in a sharp change of direction
for the rates market, with the 10y UST yield dipping below 3% and the 2s10s
curve flatten by c.20bps over the month. As expected the Fed hiked Fed Funds to
2.25-2.50% on 19 December 2018 but the market then began to question whether
the Fed would be able to hike at all in 2019; despite the Dot-plot charts
suggesting the opposite. This uncertainty, coupled to some forced selling by
international funds resulted in a weak quarter for sentiment and asset
performance.
At the American Economic Associations ("AEA") meeting in Atlanta on 4 January
2019, Powell, who was joined by Janet Yellen and Ben Bernanke, emphasised that
the Fed were taking a data-dependant stance and that 'he wouldn't hesitate to
adjust the balance sheet reduction if it was causing problems for the economy'.
The market took this as confirmation of a supportive Fed, leading to a sharp
rally in credit markets, rapidly reversing the widening of Q4 2018; while the
dovish stance led to a weaker USD, which in turn helped the EM sector to also
recover.
Fresh round of talks between US and China helped market sentiment over the
early spring period, although President Trump threatened to impose $11bn of
tariffs on European goods, which led the EU to formally open trade talks. There
was a brief reversal in sentiment in May 2019 as the US imposed restrictions on
Huawei Corporation, together with negative rhetoric from the Trump
administration claiming China had back-tracked on previous trade agreements. An
agreement that the US-China talks could re-convene at the G20 meeting helped
sentiment recover and this was supplemented by a very dovish tone from Powell,
increasing expectations of further cuts to Fed Funds. The key event over the
summer was the FOMC meeting on 31 July 2019 when Fed Funds were cut for the
first time in a decade; Powell said it was a 'mid-cycle adjustment' but that it
didn't mean the Fed would stop at just one cut. Amid this, and the trade tariff
uncertainty, the key 2s10s yield curve briefly inverted, which many investors
consider a reliable end-of-cycle predictor.
In the Eurozone, volatility continued in Italian Government Bonds ("BTPs"), as
a disagreement between the EU and coalition government in Rome intensified over
the budget deficit. Moody's added to the volatility by downgrading Italy's
rating to Baa3. Italy continued to underperform their EU peers despite the Bank
of Italy predicting a deficit of over 3% in 2019, although the downside was
softened by the positive tone in the wider market. In Germany the ruling CDU
lost the key Hesse elections, which ultimately resulted in Angela Merkel
announcing her resignation as head of the party, although she intends to stay
on as Chancellor until the end of her term in 2021. In France President
Macron's popularity hit the low point as he caved-in to demands from a populist
uprising against the perceived elitist nature of the French government. German
factory orders began to concern investors in Q2 and Mario Draghi struck a
dovish note, stating that the ECB saw risks tilted to the downside but they
stood ready to adjust all instruments if necessary. This was, correctly,
interpreted by the market that further stimulus was being planned and hence the
market rallied in anticipation. In June, the market was left in no doubt about
a supportive ECB when Draghi delivered a speech at the meeting in Sintra, where
he stated 'additional stimulus if the outlook for Europe doesn't improve'.
Meanwhile in the UK the news was dominated by the ongoing saga of Brexit. Talks
failed around the key Irish border issue resulting in Theresa May being ousted
as Prime Minister and a number of resignations (and sackings) in the
Conservative party, resulting in new leader and Prime Minister Johnson losing a
coalition majority in the House and being forced by Parliament to take
'no-deal' off the negotiating table with the EU. Hopes that a deal would be
struck before the EU elections in May 2019 faded along with the leaving date of
31 October 2019, and the calling of a UK general election on the 12 December
2019 merely fuelled the uncertainty.
Portfolio Commentary
The portfolio managers recognised that the weaker sentiment and heightened
volatility in Q4 2018 was an intra-cycle dip, rather than the start of an
end-of-cycle period, and took the opportunity, where possible, to add favoured
credits at the shorter end of the credit curve. However, a lack of new issuance
volume, which impaired secondary market flow, did limit the availability of
suitable assets and as such the portfolio managers declined a number of
requests for new share issuance. The sharp improvement in market sentiment,
following the Fed 'pivot' in January, added to the challenge of sourcing
suitable assets; although the re-financing of the original AT1 ("Additional
Tier 1") issues in 2013 and 2014 are now occurring in the market and is
gradually creating new opportunity and alleviating any re-investment risk for
the fund.
Overall the fund has performed in line with expectations this year ending 30
September 2019, generating a total return based on reinvestment of dividends of
5.16% for the year (NAV per Share), meeting its main goals of generating
attractive income while protecting capital. As a comparison the Euro High Yield
index generated a total return of 5.22% over the period, the Sterling High
Yield 6.25% and Dollar High Yield indices 6.30%.
Market Outlook and Strategy
With the US economic expansion extending into record territory and geopolitical
risks remaining elevated, in particular fears of a hard Brexit and an all-out
trade war between the US and China, market commentary is invariably drawn to
talk of when the next recession could appear. As a consequence market sentiment
is relative fragile. Nevertheless, the supportive actions of central banks in
2019, including rate cuts from the Federal Reserve and a further rate cut and
further quantitative easing from the ECB, have helped risk assets to perform
strongly, even as risk-off rates products have also generated strong returns to
more cautious investors. Thanks mainly to central bank actions, volatility
remained relatively low during the period, apart from Q4 2018 when the
portfolio managers ("PMs") were able to find very attractive investment
opportunities, and this is likely to continue unless geopolitical risks become
elevated. In this environment, trading will likely remain low, but with bond
maturities also being relatively infrequent the PMs are confident of finding
attractive reinvestment opportunities and maintaining the month income of 0.50p
for the year.
Environmental, Social and Governance
Introduction
TwentyFour believes that Environmental, Social and Governance ("ESG")
considerations can have a material influence on the value of investments. As
such TwentyFour has a formal framework which incorporates ESG factors into its
investment process. TwentyFour has a fourteen strong ESG steering group
representing all areas of its business, including three partners, and is
governed by the firm's Executive Committee.
TwentyFour's ESG Investment Approach
TwentyFour believes that investment returns can be enhanced and protected by
taking ESG considerations into account in the investment process, and has
therefore adopted an Integration approach to ESG. As part of the firm's
integrated investment approach every member of the investment team is required
to 'own' the process. As such, all investment professionals at TwentyFour are
responsible for including ESG factors in their investment decisions, and this
forms part of their appraisal process. Currently, statistical evidence
(Barclays Equity Gilt Study 2017) shows the strongest correlation between
performance and governance, which is an area TwentyFour has focussed on since
the firm's inception. Another of our firm's principles is to regularly meet
companies that we invest in.
Integration
An integrated approach means that we are disciplined in including ESG
parameters in our overall investment relative value analysis. In other words,
ESG considerations are explicitly part of our investment process. As an anchor
to our ESG investment process, we utilise a third party database in order to
help provide measurement and context. This data has been incorporated into our
proprietary 'Observatory' relative value database. The data covers a
comprehensive number of ESG parameters for publically listed companies. This
helps us in a number of ways. It allows our Portfolio Managers to place an
issuer's ESG profile on a relative basis compared to its peers. We are thus
better placed to identify the financial implications of any specific ESG risks
including current controversies. Momentum (whether the company is on an
improving ESG trend) through time is captured and finally our analysis
highlights any areas where we specifically require to think about or engage
with a company.
Just as we utilise company ratings, but never rely on them as we always conduct
our own research, it is the same with ESG in that we do not solely rely on
third party output. Depending on our interaction with a company or our
knowledge of industry trends we are able to adjust scores as appropriate. There
is a structural problem facing fixed income investors in that not all issuers
are publically listed entities so the information set available in some
instances may be sparse, or just very different. In such cases we have to
conduct even more of our own analysis. Our model prompts portfolio managers
with the most relevant standard questions regarding ESG factors which
facilitate a consistent basis for such analysis.
ABS do not fit neatly into the model of corporates that ESG databases cover.
While the sponsor or originator of the deal will likely be covered in the
database, the issuer is typically a Special Purpose Vehicle ("SPV"), set up
solely for the purpose of issuing the bonds. Given the limited operational
scope of the SPV there is little opportunity for the issuer to engage in
activities covering ESG. However, that does not mean that the sponsor's
business, the asset pool, the servicing of the underlying loans and so on are
impossible to analyse through an ESG lens. Fortunately in this strategy we
build our own models for every security considered. We have constructed a
number of data requirements that we feel are appropriate for structured credit
and which are consistent with our ESG database. As mentioned our level of
engagement is proportionately higher for these transactions. Thus we have
integrated ESG factors into our ABS investment decisions.
Our ESG investment process from a top down view, which is implemented by every
member of the portfolio management team, can be described as;
· Numerical ESG scores created
· ESG peer assessment provided
· Trend Analysis assessed (momentum)
· Controversies assessed
· Investment and valuation implications considered
· Engagement process when applicable
In summary, we have produced a framework which integrates ESG into our existing
relative value decision making process. Importantly, we have really focussed on
making our model flexible and easy for portfolio managers to use. Sometimes ESG
factors will be the dominant driver in an investment decision, other times much
less so. Crucially our model has the ability to evolve and is flexible enough
to adapt to future regulatory or investor demands.
Engagement and Voting
We believe in actively engaging on behalf of the Company's investors at a
company, industry and regulatory level. As fixed income investors, our voting
rights are limited, thus engagement as a fixed income manager is somewhat
different to that of managers in the equity space. Our level of engagement is
relatively high when appropriate. There are a number of reasons for this,
though central is the experience level of our partners and portfolio managers
who can easily engage with companies or industry bodies at the highest level
when necessary. With respect to some issuers we will interact with them at
multiple levels, from senior to junior debt, ABS to whole loans.
Our buying power also gives us the opportunity to engage. This is particularly
the case in our ABS business where we are more often than not directly
influencing the structure, asset mix and terms of a transaction.
We also engage on behalf of the Company's investors at the industry and
regulatory level. TwentyFour Asset Management is an advisor to the Bank of
England, the PRA/FCA, the UK Treasury, the European Commission, the European
Banking Authority and a number of other EU Finance Ministries. Our firm is the
only UK asset manager who are founding partners of the Prime Collateralised
Securities ("PCS") initiative. We are in our fifth term as vice-chair of the
Association for Financial Markets in Europe ("AFME") and a member of the Bank
of England Residential Property Forum.
Screening
As mentioned above we can and do run funds which screen out investments or
sectors, which our risk systems and models can easily accommodate.
Conclusion
We believe that our integrated approach across our strategies achieves the main
objectives of responsible investing and is in the interest of our clients. We
have more to do, and while we do not have all the answers we will always seek
to improve our process through time. We will not however engage in the 'arms
race' to have the largest profile with the most badges in an attempt to impress
with our ESG credentials. That particular trend will reduce competition and at
the margin will actually be negative for the advancement of responsible
investing. As the industry evolves we have the platform to incorporate
information and techniques where it makes sense for our investors and as such
we are happy to openly engage with our clients to discuss ideas or
requirements.
TwentyFour Asset Management LLP
12 December 2019
TOP TWENTY HOLDINGS
As at 30 September 2019
Credit Percentage
Nominal/ Security Fair Value * of Net Asset
Shares Sector GBP Value
Nationwide Bldg Society 40,960 Financial- Banks 6,421,229 3.83
10.25 29/06/2049
Coventry Bldg Society 4,560,000 Financial- Banks 4,768,238 2.84
6.875 31/12/2049
Aldermore Group 11.875 31/ 3,350,000 Financial- Banks 3,443,015 2.05
12/2049
Santander Uk 2,000,000 Financial- Banks 3,139,047 1.87
Bracken Midco1 8.875 15/10 2,960,000 High Yield - 2,809,825 1.67
/2023 European
Societe Generale 7.375 31/ 2,960,000 Financial- Banks 2,533,027 1.51
12/2049
Barclays PLC 7.875 31/12/ 2,365,000 Financial- Banks 2,521,207 1.50
2049
Oaknorth Bank 7.75 01/06/ 2,500,000 Financial- Banks 2,512,500 1.50
2028
Phoenix Group 5.75 31/12/ 2,780,000 Financial- 2,501,363 1.49
2049 Insurance
Arbour Clo 2 15/05/2030 3,000,000 ABS 2,489,166 1.48
Banco de Sabadell 6.5 31/ 2,800,000 Financial- Banks 2,482,273 1.48
12/2049
Capital Bridging Finance 1 2,500,000 ABS 2,418,750 1.44
MEZZ 12/11/2018
Rothesay Life 6.875 31/12/ 2,500,000 Financial- 2,397,856 1.43
2049 Insurance
Paragon Group of Companies 2,200,000 Financial- Banks 2,348,636 1.40
7.25 09/09/2026
St Pauls Clo 25/04/2030 2,835,000 ABS 2,257,280 1.35
Intesa Sanpaolo 7.75 31/12 2,150,000 Financial- Banks 2,243,209 1.34
/2019
Onesavings Bank 9.125 31/ 2,200,000 Financial- Banks 2,233,825 1.33
12/2049
Deutsche Pfandbriefbank 2,400,000 Financial- Banks 2,197,733 1.31
5.75 31/12/2049
Banco Bilbao Vizcaya 2,200,000 Financial- Banks 2,156,450 1.28
Argentaria 8.875 29/12/
2049
Hayfin Emerald Clo 5.47 06 2,500,000 ABS 2,140,750 1.28
/09/2031
Total 56,015,379 33.38
* Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.
The full portfolio listing of bonds and asset backed securities ("ABS") as at
30 September 2019 can be obtained from the Administrator on request.
BOARD MEMBERS
Biographical details of the Directors are as follows:
Claire Whittet - (Chair) (age 64)
Ms Whittet is a resident of Guernsey and has 40 years' experience in the
banking industry. She joined Rothschild Bank International Ltd in 2003 as a
Director and was latterly Managing Director and Co-Head before becoming a
Non-Executive Director on her retirement in 2016. She began her career at the
Bank of Scotland where she was for 19 years in a variety of personal and
corporate finance roles. Subsequently, Ms Whittet joined Bank of Bermuda and
was Global Head of Private Client Credit before joining Rothschild. Ms Whittet
holds a number of Non-Executive Directorships.
Ms Whittet has an MA from Edinburgh University, is a member of the Chartered
Institute of Bankers in Scotland, a member of the Chartered Insurance
Institute, a Chartered Banker, a member of the Institute of Directors and holds
the Institute of Directors Diploma in Company Direction. Ms Whittet was
appointed to the Board on 12 February 2014.
Christopher F. L. Legge - (Non-executive Director) (age 64)
Mr Legge is a Guernsey resident and worked for Ernst & Young in Guernsey from
1983 to 2003. Having joined the firm as an audit manager in 1983, he was
appointed a partner in 1986 and managing partner in 1998. From 1990 to 1998, he
was head of Audit and Accountancy and was responsible for the audits of a
number of banking, insurance, investment fund, property fund and other
financial services clients. He also had responsibility for the firm's training,
quality control and compliance functions. He was appointed managing partner for
the Channel Islands region in 2000 and merged the business with Ernst & Young
LLP in the United Kingdom. He retired from Ernst & Young in 2003.
Mr Legge currently holds a number of Non-Executive Directorships in the
financial services sector and also chairs the Audit Committees of several UK
listed companies. He is an FCA and holds a BA (Hons) in Economics from the
University of Manchester. Mr Legge was appointed to the Board on 12 February
2014.
Ian Martin - (Non-executive Director) (age 55)
Mr Martin has over 34 years' experience in finance gathered in a variety of
multi asset investment focused roles in the UK, Asia, Switzerland and South
America. More recently he was the Chief Investment Officer (CIO) and Head of
Asset Management and Research at Lloyds Bank in Geneva and then Head of Bespoke
Portfolio Management and Advisory for key clients in UBP Bank in Geneva.
Previous roles have included senior roles in equity derivatives and multi asset
trading as well as CIO and Managing Director of a Fund of Hedge funds company.
He has an MSc, is a Fellow of the Institute of Directors (IOD) holding the
Chartered Director qualification as well as being a Chartered Member of the
Chartered Institute of Securities and Investment (CISI). Currently he is a
Director of Bedlam Family Office. Mr Martin was appointed to the Board on 15
July 2014.
DISCLOSURE OF DIRECTORSHIPS IN PUBLIC COMPANIES LISTED ON RECOGNISED EXCHANGES
The following summarises the Directors' directorships in other public listed
companies:
Company Name Stock Exchange
Claire Whittet (Chair)
BH Macro Limited London
Eurocastle Investment Limited Amsterdam
International Public Partnerships Limited London
Riverstone Energy Limited London
Third Point Offshore Investors Limited London
Christopher Legge
Ashmore Global Opportunities Limited London
NB Distressed Debt Investment Fund London
Limited
Sherborne Investors (Guernsey) B Limited London
Sherborne Investors (Guernsey) C Limited London
Third Point Offshore Investors Limited London
Ian Martin
None
DIRECTORS' REPORT
The Directors present their Annual Report and Audited Financial Statements for
the year ended 30 September 2019.
Business Review
The Company
TwentyFour Select Monthly Income Fund Limited (the "Company") was incorporated
with limited liability in Guernsey, as a closed-ended investment company on 12
February 2014. The Company's Shares were listed with a Premium Listing on the
Official List of the UK Listing Authority and admitted to trading on the Main
Market of the LSE on 10 March 2014.
Investment Objective and Policy
The investment objective and policy is set out in the Summary Information.
Discount/Premium to Net Asset Value
The Board monitors and manages the level of the share price discount/premium to
NAV. In managing this, the Company can operate a share buyback facility whereby
it may purchase, subject to various terms as set out in its Articles and in
accordance with The Companies (Guernsey) Law, 2008, up to 14.99% of the
Company's Ordinary Redeemable Shares in issue immediately following Admission
for trading in the LSE.
The Company also offers investors a Quarterly Tender, contingent on certain
factors, to provide Shareholders with a quarterly opportunity to submit
Ordinary Shares for placing or repurchase by the Company at a price
representing a discount of no more than 2% to the then prevailing NAV. For
additional information refer to note 16 (ii) to the Financial Statements.
Shareholder Information
Shareholder information is set out in the Summary Information.
The Company has the ability to issue up to 18,517,915 ordinary shares under a
TAP facility as approved at the Annual General Meeting ("AGM") on 4 July 2019.
During the financial year ended 30 September 2019, the Company issued 3,000,000
shares being 2,000,000 shares on 3 October 2018 and 1,000,000 shares on 26
November 2018.
Going Concern
The Directors believe that, having considered the Company's investment
objective (see Summary Information), financial risk management (see note 16 to
the Financial Statements) and in view of the Company's holdings in cash and
cash equivalents, the liquidity of investments and the income deriving from
those investments, the Company has adequate financial resources and suitable
management arrangements in place to continue as a going concern for at least
twelve months from the date of approval of the financial statements.
Viability Statement
Under the UK Corporate Governance Code, the Board is required to make a
"viability statement" which considers the Company's current position and
principal risks and uncertainties combined with an assessment of the prospects
of the Company in order to be able to state that they have a reasonable
expectation that the Company will be able to continue in operation over the
period of their assessment. The Board considers that three years is an
appropriate period to assess the viability of the Company given the uncertainty
of the investment world and the strategy period. In selecting this period the
Board considered the environment within which the Company operates and the
risks associated with the Company.
The Company's prospects are driven by its business model and strategy. The
Company's aim is to provide investors with an attractive level of income and a
focus on capital preservation in uncertain times, by investing in less liquid,
high yielding credit securities.
The Board confirms they have performed a robust assessment of the principal
risks facing the Company and the Board's assessment of the Company over the
three year period has been made with reference to the Company's current
position and prospects, the Company's strategy, and the Board's risk appetite
having considered each of the Company's Principal Risks and Uncertainties
summarised in the Director's Report.
The Board has also considered the Company's cash flows and income flows, its
likely ability to pay dividends and the portfolio analysis, including but not
limited to liquidity analysis, foreign exchange analysis, credit analysis and
valuation analysis. The analysis has taken the form of stress tests on the
Company as well as cash flow modelling based on a range of different market
scenarios. All of the foregoing have been considered against the background of
the Company's dividend target.
Key assumptions considered by the Board in relation to the viability of the
Company are as follows:
Dividend Target
The ongoing viability of the Company and the validity of the going concern
basis depend on the Company meeting its dividend target annually during the
three-year period. In the event that the Company does not meet the dividend
target as disclosed in note 19 to the Financial Statements, the Directors will
convene a general meeting in accordance with the Continuation Vote requirements
set out in note 16 to the Financial Statements. The Board acknowledges the
increase in deficit as mentioned in the results section below and continues to
monitor income closely to ensure the dividend target is met.
Quarterly Tenders
The Company has incorporated into its structure a mechanism for a quarterly
tender to reduce the risk of Ordinary Shares trading at a discount to NAV. It
is anticipated that the Company will tender on a quarterly basis for up to 20%
of the Ordinary Shares in issue as at the relevant Quarter Record Date, subject
to an aggregate limit of 50% of the Ordinary Shares in issue in any twelve
month period ending on the relevant Quarter Record Date. In the event that
quarterly tender applications, on any tender submission deadline, exceed the
50% limit, the Directors will convene a General Meeting in accordance with the
Continuation Vote requirements set out in note 16 to the Financial Statements.
The quarterly tenders will be at the discretion of the Board. Ordinary Shares
trading at a discount to NAV over a long period of time may impact the
viability of the Company.
The Board having considered the analysis above, have a reasonable expectation
that the Company will remain viable over the three year period to 30 September
2022.
During the year 621,675 shares were tendered and repurchased.
Results
The results for the year are set out in the Statement of Comprehensive Income.
The Directors paid income distributions of GBP11,740,789 in respect of the year
ended 30 September 2019, a breakdown of which can be found in note 19 to the
Financial Statements. The 30 September 2019 distribution which was declared on
10 October 2019 was paid on 31 October 2019.
Distributions made with respect to any income period comprise excess income,
defined as (a) the total income of the portfolio for the period, (b) an
additional amount paid out of capital to reflect any additional income in the
course of any share subscriptions that took place during the period (including
additional income in this way ensures that the income yield of the shares is
not diluted as a consequence of the issue of new shares during an income
period) and (c) any income from the foreign exchange contracts caused by the
libor differentials between each foreign exchange currency pair.
The Company has seen a drop in retained earnings during the period. Retained
earnings includes realised and unrealised gains and loss on the Company's
assets such as bonds and foreign exchange derivatives, which are used purely
for hedging, as well as security income. Securities purchased at a premium and
large foreign exchange rate movements, of which both were notable in the period
- for example the EUR versus GBP rate moved in the range 9.1% during the period
- can affect retained earnings. However, the primary objective of the Company
is to generate income and current and future income generation is continuingly
being reviewed by the Company to ensure the dividend target is met, whilst
continuing to improve and maintain the Company's retained earnings when
possible.
Key Performance Indicators ("KPIs")
At each Board meeting, the Directors consider a number of performance measures
to assess the Company's success in achieving its objectives. Below are the main
KPIs which have been identified by the Board for determining the progress of
the Company:
· Monthly Dividends;
· Net Asset Value;
· Share Price;
· Discount/Premium; and
· Ongoing Charges.
A record of these measures is disclosed within Financial Highlights.
Portfolio Manager
The portfolio management fee is payable to the Portfolio Manager, TwentyFour
Asset Management LLP, monthly in arrears at a rate of 0.75% per annum of the
lower of NAV, which is calculated weekly on each valuation day and on the last
business day of each month, or market capitalisation of each class of share.
For additional information refer to note 14 to the Financial Statements.
The Board considers that the interests of Shareholders, as a whole, are best
served by the ongoing appointment of the Portfolio Manager to achieve the
Company's investment objectives.
Alternative Investment Fund Manager ("AIFM")
Alternative investment fund management services are provided by Maitland
Institutional Services Limited ("Maitland") (formerly Phoenix Fund Services
(UK) Limited). The AIFM fee is payable quarterly in arrears at a rate of 0.07%
of the NAV of the Company below GBP50 million, 0.05% on Net Assets between GBP50
million and GBP100 million and 0.03% on Net Assets in excess of GBP100 million. For
additional information refer to note 15 to the Financial Statements.
Custodian and Depositary
Custody and Depositary services are provided by Northern Trust (Guernsey)
Limited. The terms of the Depositary agreement allow Northern Trust (Guernsey)
Limited to receive professional fees for services rendered. The Depositary
agreement includes custodian duties. For additional information refer to note
15 to the Financial Statements.
Directors
The Directors of the Company during the year and at the date of this Report are
set out in Corporate Information.
Directors' and Other Interests
The Directors of the Company held the following Ordinary Shares beneficially:
30.09.19 30.09.18
Shares Shares
Claire Whittet 25,000 25,000
Christopher Legge 50,000 50,000
Ian Martin 35,000 35,000
The Board do not hold any shareholdings in entities where the Company has a
stake in the same entity that amounts to more than 1% of its portfolio.
Corporate Governance
The Board is committed to high standards of corporate governance and has
implemented a framework for corporate governance which it considers to be
appropriate for an investment company in order to comply with the principles of
the UK Corporate Governance Code (the "UK Code"). The Company is also required
to comply with the Code of Corporate Governance (the "GFSC Code") issued by the
Guernsey Financial Services Commission.
The UK Listing Authority requires all UK premium listing companies to disclose
how they have complied with the provisions of the UK Code. This Corporate
Governance Statement, together with the Going Concern Statement, Viability
Statement and the Statement of Directors' Responsibilities, indicates how the
Company has complied with the principles of good governance of the UK Code and
its requirements on Internal Control.
The Company is a member of the AIC and by complying with the AIC Code of
Corporate Governance (the "AIC Code") is deemed to comply with both the UK Code
and the GFSC Code.
The Board has considered the principles and recommendations of the AIC Code, by
reference to the guidance notes provided by the AIC Guide, and consider that
reporting against these will provide better information to shareholders. To
ensure ongoing compliance with these principles the Board reviews a report from
the Corporate Secretary at each quarterly meeting, identifying how the Company
is in compliance and identifying any changes that might be necessary.
The AIC Code and the AIC Guide are available on the AIC's website,
www.theaic.co.uk. The UK Code is available in the Financial Reporting Council's
website, www.frc.org.uk.
Throughout the year ended 30 September 2019, the Company has complied with the
recommendations of the AIC Code and thus the relevant provisions of the UK
Code, except as set out below.
The UK Code includes provisions relating to:
· the role of the Chief Executive;
· Executive Directors' remuneration;
· Annually assessing the need for an internal audit function;
· Senior Independent Director;
For the reasons set out in the AIC Guide, the Board considers that the first
three provisions are not relevant to the position of the Company as it is an
externally managed investment company. The Company has therefore not reported
further in respect of these provisions.
The reason for not appointing a Senior Independent Director is set out below.
There have been no other instances of non-compliance, other than those noted
above.
The AIC updated its Code on 5 February 2019 to reflect revised Principles and
Provisions included in the UK Corporate Governance Code which was revised in
2018. These changes apply to financial years beginning on or after 1 January
2019 and the Directors intend to report on the Company's compliance with the
changes in the Annual Report for the year ended 30 September 2020.
Role, Composition and Independence of the Board
The Board is the Company's governing body and has overall responsibility for
maximising the Company's success by directing and supervising the affairs of
the business and meeting the appropriate interests of shareholders and relevant
stakeholders, while enhancing the value of the Company and also ensuring
protection of investors. A summary of the Board's responsibilities is as
follows:
· statutory obligations and public disclosure;
· strategic matters and financial reporting;
· risk assessment and management including reporting compliance,
governance,
monitoring and control; and
· other matters having a material effect on the Company.
The Board's responsibilities for the Annual Report and Audited Financial
Statements are set out in the Statement of Directors' Responsibilities.
The Board currently consists of three non-executive Directors, all of whom are
considered to be independent of the Portfolio Manager and as prescribed by the
Listing Rules.
The Board does not consider it appropriate to appoint a Senior Independent
Director because all Directors are deemed to be independent by the Company. The
Board considers it has the appropriate balance of diverse skills and
experience, independence and knowledge of the Company and the wider sector, to
enable it to discharge its duties and responsibilities effectively and that no
individual or group of individuals dominates decision making. The Chair is
responsible for leadership of the Board and ensuring its effectiveness.
Chair
The Chair is Claire Whittet. The Chair of the Board must be, and is considered
to be, independent for the purposes of Chapter 15 of the Listing Rules.
Biographies for all the Directors can be found within the Board Members
section. Furthermore, the Board:
· has no current or historical employment with the Portfolio Manager; and
· has no current directorships in any other investment funds managed by
the
Portfolio Manager.
The Board needs to ensure that the Annual Report and Audited Financial
Statements, taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Company's position and
performance, business model and strategy. In seeking to achieve this, the
Directors have set out the Company's investment objective and policy and have
explained how the Board and its delegated Committees operate and how the
Directors review the risk environment within which the Company operates and set
appropriate risk controls. Furthermore, throughout the Annual Report and
Audited Financial Statements the Board has sought to provide further
information to enable shareholders to have a fair, balanced and understandable
view.
The Board has contractually delegated responsibility for the management of its
investment portfolio, the arrangement of custodial and depositary services and
the provision of accounting and company secretarial services.
The Board is responsible for the appointment and monitoring of all service
providers to the Company.
The Directors are kept fully informed of investment and financial controls and
other matters by all services providers that are relevant to the business of
the Company and should be brought to the attention of the Directors.
The Company has adopted a policy that the composition of the Board of
Directors, which is required by the Company's Articles to comprise of at least
two persons, is at all times such that a majority of the Directors are
independent of the Portfolio Manager and any company in the same group as the
Portfolio Manager; the Chair of the Board of Directors is free from any
conflicts of interest and is independent of the Portfolio Manager and of any
company in the same group as the Portfolio Manager; and that no more than one
director, partner, employee or professional adviser to the Portfolio Manager or
any company in the same group as the Portfolio Manager may be a Director of the
Company at any one time.
The Board has a breadth of experience relevant to the Company and the Directors
believe that any changes to the Board's composition can be managed without
undue disruption. With any new director appointment to the Board, consideration
will be given as to what induction process is appropriate.
The Board has also given careful consideration to the recommendations of the
Davies Review. The Board has reviewed its composition and believes that the
current appointments provide an appropriate range of skills, experience and
diversity. In order to maintain its diversity, the Board is committed to
continuing its implementation of the recommendations of the Davies Review as
part of its succession planning over future years and complying with the
disclosure requirements of DTR 7.2.8 in terms of the Company's diversity
policy.
Cross-Directorships
Ms Whittet and Mr Legge both hold positions on the Board of Third Point
Offshore Investors Ltd, a London listed Company, as noted within Disclosure of
Directorships in Public Companies Listed on Recognised Exchanges. The Board
does not consider this to be a threat to their independence.
Directors' Attendance at Meetings
The Board holds quarterly Board meetings, to discuss general management
including: dividend policy, structure, finance, corporate governance,
marketing, risk management, liquidity, compliance, asset allocation and
gearing, contracts and performance. The quarterly Board meetings are the
principal source of regular information for the Board enabling it to determine
policy and to monitor performance, compliance and controls but these meetings
are also supplemented by communication and discussions throughout the year.
A representative from each of the Portfolio Manager, AIFM, Administrator,
Custodian and Depositary and Corporate Broker attends each Board meeting either
in person or by telephone thus enabling the Board to fully discuss and review
the Company's operation and performance. Each Director has direct access to the
Portfolio Manager and Company Secretary and may, at the expense of the Company,
seek independent professional advice on any matter.
Both appointment and removal of these parties is to be agreed by the Board as a
whole.
The Audit and Risk Committee meets at least twice a year, the Management
Engagement Committee ("MEC") and Remuneration and Nomination Committee meet at
least once a year, a dividend meeting is held monthly and there are additional
meetings covering the Quarterly Tender as and when necessary. In addition, ad
hoc meetings of the Board to review specific items between the regular
scheduled quarterly meetings can be arranged. Between formal meetings there is
regular contact with the Portfolio Manager, AIFM, Administrator, Custodian and
Depositary and the Corporate Broker.
Although two of the Directors hold other listed Board positions, none of these
is for a trading company and the Board is satisfied that they have sufficient
time commitment to carry out their duties for the Company as evidenced by their
attendance at the Board, Audit and Management Engagement Committee meetings
during the year which was as follows:
Board Meetings Audit and Risk Committee Management Engagement Remuneration and Ad hoc Committee
Meetings Committee Meetings Nomination Committee Meetings
Meetings
Held Attended Held Attended Held Attended Held Attended Held Attended
Claire Whittet 5 5 2 2 1 1 1 1 16 10
Christopher 5 5 2 2 1 1 1 1 16 12
Legge
Ian 5 5 2 2 1 1 1 1 16 13
Martin
At the Board meetings, the Directors review the management of the Company's
assets and liabilities and all other significant matters so as to ensure that
the Directors maintain overall control and supervision of the Company's
affairs.
Election of Directors
The election of Directors is set out in the Directors' Remuneration Report.
Board Performance and Training
During the year the Board undertook an annual self-evaluation and Chair
evaluation and discussed the results in September 2019. The Board assessed and
discussed their composition and balance of skills, board processes, information
flows, any areas for additional training, board dynamics, accountability and
their effectiveness. There were no material findings from this evaluation.
In 2017, the Board commissioned Optimus Group Limited ("Optimus") to conduct an
independent evaluation of the performance of the Board, its committees and its
individual Directors including mapping its performance to the UK Code, the AIC
Code and the AIC Handbook for Directors of Investment Companies. The conclusion
of the evaluation was positive and Optimus were satisfied that the Board is
compliant with the Code in those areas reviewed. Following the review the Board
created the Remuneration and Nomination Committee. The next external evaluation
will take place during 2020.
On appointment to the Board, Directors will be offered relevant training and
induction. Training is an on-going matter as is discussion on the overall
strategy of the Company and the Board met with the Portfolio Manager early in
the year to discuss these matters.
On appointment to the Board, each Director considered the expected time needed
to discharge their responsibilities effectively. The Directors confirmed that
each had sufficient time to allocate and would inform the Board of any
subsequent changes.
In respect of the Criminal Finances Act 2017 which has introduced a new
corporate criminal offence ("CCO") of 'failing to take reasonable steps to
prevent the facilitation of tax evasion', the Board confirms that they are
committed to zero tolerance towards the criminal facilitation of tax evasion.
Retirement by Rotation
Under the terms of their appointment, each Director is required to retire by
rotation and be subject to re-election at least every three years. The
Directors are also required to seek re-election if they have already served for
more than nine years. The Company may terminate the appointment of a Director
immediately on serving written notice and no compensation is payable upon
termination of office as a director of the Company becoming effective.
Notwithstanding the foregoing, all Directors have agreed to stand for
re-election annually.
Board Committees and their Activities
Terms of Reference
All Terms of Reference of the Board's Committees are available from the
Administrator upon request.
Management Engagement Committee
The Board has established a Management Engagement Committee with formal duties
and responsibilities. The Management Engagement Committee commits to meeting at
least once a year and comprises the entire Board with Ian Martin appointed as
Chair. These duties and responsibilities include the regular review of the
performance, fees and contractual arrangements with the Portfolio Manager and
other service providers and the preparation of the Committee's annual opinion
as to the Portfolio Manager's services.
The Management Engagement Committee carried out its review of the performance
and capabilities of the Portfolio Manager at its meeting during the year and
the Board recommended the continued appointment of TwentyFour Asset Management
LLP as Portfolio Manager to be in the interest of the Company.
The Board conducts an annual strategy day with the PMs at their offices and in
addition to this attended the PMs Annual conference. The Board also conducted a
site visit at Maitland Institutional Services Limited the AFIM for the Company.
The Board considers that the interests of Shareholders, as a whole, are best
served by the ongoing appointment of the AIFM and Custodian and Depositary to
achieve the Company's investment objectives.
Audit and Risk Committee
An Audit and Risk Committee has been established consisting of all Directors
with Christopher Legge appointed as Chair. As there are only 3 Directors of the
Company, the Board considers it appropriate that all Directors should be
members of the Audit and Risk Committee. The terms of reference of the Audit
and Risk Committee provide that the committee shall be responsible, amongst
other things, for reviewing the Interim and Annual Financial Statements,
considering the appointment and independence of external auditors, discussing
with the external auditors the scope of the audit and reviewing the Company's
compliance with the AIC Code.
Further details on the Audit and Risk Committee can be found in the Audit and
Risk Committee Report.
Remuneration and Nomination Committee
The Remuneration and Nomination Committee has been established consisting of
all Directors with Christopher Legge appointed as Chair.
The Committee met on the 6 September 2019.
During the meeting an independent report regarding Non-executive Directors'
fees in 2018 was tabled. After consideration of the report it was suggested
that the directors' fees be increased to the following: Chair: GBP44,000 (4.8%
increase), Audit Committee Chair: GBP38,500 (4.1% increase), MEC Chair GBP33,500
(4.7% increase) and an ordinary Director GBP31,500 (5% increase). It was agreed
to make a recommendation to the Board to increase the fees as suggested with
effect from 1 October 2019.
Diversity of the Board was discussed and it was noted that the split of 33%
remained within the gender diversity guidelines. The Committee also discussed
the skills and experience of the Board and considers them adequate to fulfill
their duties.
International Tax Reporting
For purposes of the US Foreign Account Tax Compliance Act, the Company
registered with the US Internal Revenue Service ("IRS") as a Guernsey reporting
Foreign Financial Institution ("FFI"), received a Global Intermediary
Identification Number (E5XSVA.99999.SL.831), and can be found on the IRS FFI
list.
The Common Reporting Standard ("CRS") is a global standard for the automatic
exchange of financial account information developed by the Organisation for
Economic Co-operation and Development ("OECD"), which has been adopted in
Guernsey.
The Board ensures that the Company is compliant with Guernsey regulations and
guidance in this regard. The activities of the Company do not constitute
relevant activities as defined by the Income Tax (Substance Requirements)
(Implementation) Regulations, 2018 (as amended) and as such the Company was out
of scope.
Strategy
The strategy for the Company is to capture the illiquidity premium that is
associated with 'off the run' bond issues. As part of the general search for
high conviction, relative value securities the Portfolio Manager continually
came across interesting investment opportunities but too often these bonds did
not offer sufficient liquidity to use in the typical daily mark-to-market UCITs
funds, however they are suitable for closed ended vehicles. By remaining highly
selective and without conceding on underlying credit quality, the strategy
targets a monthly distribution of 0.5p per share, with all excess income, as
discussed in the Results section of the Director's Report, being distributed to
investors at the year-end of the Company.
Internal Controls
The Board is ultimately responsible for establishing and maintaining the
Company's system of internal financial and operating control and for
maintaining and reviewing its effectiveness. The Company's risk matrix
continues to be the core element of the Company's risk management process in
establishing the Company's system of internal financial and reporting control.
The risk matrix is prepared and maintained by the Board which initially
identifies the risks facing the Company and then collectively assesses the
likelihood of each risk, the impact of those risks and the strength of the
controls operating over each risk. The system of internal financial and
operating control is designed to manage rather than to eliminate the risk of
failure to achieve business objectives and by their nature can only provide
reasonable and not absolute assurance against misstatement and loss.
These controls aim to ensure that assets of the Company are safeguarded, proper
accounting records are maintained and the financial information for publication
is reliable. The Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks faced by the
Company.
This process has been in place for the year under review and up to the date of
approval of this Annual Report and Audited Financial Statements and is reviewed
by the Board and is in accordance with the AIC Code.
The AIC Code requires Directors to conduct at least annually a review of the
Company's system of internal financial and operating control, covering all
controls, including financial, operational, compliance and risk management. The
Board has evaluated the systems of internal controls of the Company. In
particular, it has prepared a process for identifying and evaluating the
significant risks affecting the Company and the policies by which these risks
are managed. The Board also considers whether the appointment of an internal
auditor is required and has determined that there is no requirement for a
direct internal audit function.
The Board has delegated the day to day responsibilities for the management of
the Company's investment portfolio, the provision of depositary services and
administration, registrar and corporate secretarial functions including the
independent calculation of the Company's NAV and the production of the Annual
Report and Financial Statements which are independently audited.
Formal contractual agreements have been put in place between the Company and
providers of these services. Even though the Board has delegated responsibility
for these functions, it retains accountability for these functions and is
responsible for the systems of internal control. At each quarterly Board
meeting, compliance reports are provided by the Administrator, Company
Secretary, Portfolio Manager, AIFM and Depositary. The Board also receives
confirmation from the Administrator of its accreditation under its Service
Organisation Controls 1 report.
The Company's risk exposure and the effectiveness of its risk management and
internal control systems are reviewed by the Audit and Risk Committee at its
meetings and annually by the Board. The Board believes that the Company has
adequate and effective systems in place to identify, mitigate and manage the
risks to which it is exposed. Principal Risks and Uncertainties are summerised
below.
Principal Risks and Uncertainties
The Board is responsible for the Company's system of internal financial and
reporting controls and for reviewing its effectiveness. The Board is satisfied
that by using the Company's risk matrix as its core element in establishing the
Company's system, internal financial and reporting controls while monitoring
the investment limits and restrictions set out in the Company's investment
objective and policy, that the Board has carried out a robust assessment of the
principal risks and uncertainties facing the Company.
The principal risks which have been identified and the steps which are taken by
the Board to mitigate them are as follows:
Market risk
The underlying investments comprised in the portfolio are subject to market
risk. The Company is therefore at risk that market events may affect
performance and in particular may affect the value of the Company's investments
which are valued on a marked to market basis. Market risk is the risk
associated with changes in market prices, including spreads, economic
uncertainty, changes in laws and political (national and international)
circumstances. While the Company, through its investments in Credit Securities
intends to hold a diversified portfolio of assets, factors such as levels of
sovereign debt or political events may have a material impact which could be
materially detrimental to the performance of the Company's investments.
Under extreme market conditions the portfolio may not benefit from
diversification. For additional information refer to Note 16 to the Financial
Statements.
Liquidity risk
Investments made by the Company may be illiquid and this may limit the ability
of the Company to realise its investments for the purposes of cash management,
such as generating cash for dividend payments to Shareholders or buying back
Ordinary Shares under the Quarterly Tenders or in the market. Substantially all
of the assets of the Company are invested in Credit Securities. There may be no
active market in the Company's interests in Credit Securities and the Company
may be required to provide liquidity to fund Tender Requests or repay any
borrowings. The Company does not have redemption rights in relation to any of
its investments. As a consequence, the value of the Company's investments may
be materially adversely affected. For additional information refer to note 16
to the Financial Statements.
Credit risk
The Company may not achieve the Dividend Target and investors may not get back
the full value of their investment because the Company invests in Credit
Securities issued by other companies, trusts or other investment vehicles
which, compared to bonds issued or guaranteed by governments, are generally
exposed to greater risk of default in the repayment of the capital provided to
the issuer or interest payments due to the Company. The amount of credit risk
is indicated by the issuer's credit rating which is assigned by one or more
internationally recognised rating agencies. This does not amount to a guarantee
of the issuer's creditworthiness but generally provides a good indicator of the
likelihood of default. Securities which have a lower credit rating are
generally considered to have a higher credit risk and a greater possibility of
default than more highly rated securities. There is a risk that an
internationally recognised rating agency may assign incorrect or inappropriate
credit ratings to issuers. Issuers often issue securities which are ranked in
order of seniority which, in the event of default, would be reflected in the
priority in which investors might be paid back.
The level of defaults in the portfolio and the losses suffered on such defaults
may increase in the event of adverse financial or credit market conditions.
In the event of a default of a Credit Security, the Company's right to recover
will depend on the ability of the Company to exercise any rights that it has
against the borrower under the insolvency legislation of the jurisdiction in
which the borrower is incorporated. As a creditor, the Company's level of
protection and rights of enforcement may therefore vary significantly from one
country to another, may change over time and may be subject to rights and
protections which the relevant borrower or its other creditors might be
entitled to exercise. Refer to Investment Objective and Policy within Summary
Information for information regarding investment restrictions currently in
place in order to manage credit risk. For additional information refer to note
16 to the Financial Statements.
Foreign currency risk
The Company is exposed to foreign currency risk through its investments
denominated in currencies other than Sterling. The Company's share capital is
denominated in Sterling and its expenses are incurred in Sterling. The
Company's Financial Statements are maintained and presented in Sterling. At
year end, of the foreign currency investments, approximately 51% are in Euros
and 8% are in US Dollars. Amongst other factors affecting the foreign exchange
markets, events in the Eurozone and U.S. may have an impact upon the value of
the Euro and US dollar which in turn will impact the value of the Company's
Euro and US dollar denominated investments. The Company manages its exposure to
currency movements by using spot and forward foreign exchange contracts, which
are rolled forward periodically. For additional information refer to note 16 to
the Financial Statements.
Reinvestment risk
Quantitative easing resulted in lower yields across all fixed income products
and tightening credit spreads. This could pose a challenge for the Portfolio
Manager when it comes to reinvesting any monies that result from portfolio
asset redemptions and income payments. The Portfolio Manager has recognised
this potential challenge and performed ongoing cash flow analysis on the
current portfolio; encouragingly the redemptions and expected income payments
over the coming 12 months do not pose a significant challenge. Trying to
predict market conditions years ahead is notoriously difficult, however the
Portfolio Manager recognises there may be a requirement to be more
opportunistic in terms of timing for new investments i.e. aim to reinvest when
the market is most volatile and also to remain vigilant to requests for
issuance of new shares. For further information refer to note 16 to the
Financial Statements.
Other Risks and Uncertainties
The Board has identified the following other risks and uncertainties along with
steps taken to mitigate them:
Operational risks
The Company is exposed to the risk arising from any failures of systems and
controls in the operations of the Portfolio Manager, Administrator, AIFM and
the Custodian and Depositary amongst others. The Board and its Audit and Risk
Committee regularly review reports from the Portfolio Manager, the AIFM,
Administrator and Custodian and Depositary on their internal controls. The
Administrator will report to the Portfolio Manager any valuation issues which
will be brought to the Board for final approval as required.
Accounting, legal and regulatory risks
The Company is exposed to the risk that it may fail to maintain accurate
accounting records, fail to comply with requirements of its Admission document
and fail to meet listing obligations. The accounting records prepared by the
Administrator are reviewed by the Portfolio Manager. The Portfolio Manager,
Administrator, AIFM, Custodian and Depositary and Corporate Broker provide
regular updates to the Board on compliance with the Admission document and
changes in regulation. Changes in legal or regulatory environment can have a
major impact on some classes of debt. The Portfolio Manager and Board monitor
this and take appropriate action where needed.
Income recognition risk
The Board considers income recognition as another risk and uncertainty of the
Company. The Portfolio Manager estimates the remaining life of the security and
its likely terminal value, which has an impact on the effective interest rate
of the Credit Securities which in turn impacts the calculation of interest
income. The Board asked the Audit and Risk Committee to consider this risk with
work undertaken by the Audit and Risk Committee as discussed within the Audit
and Risk Committee Report. As a result of this work, the Board is satisfied
that income is appropriately stated in all material aspects in the Financial
Statements.
Cyber security risks
The Company is exposed to risk arising from a successful cyber-attack through
its service providers. The Company requests of its service providers that they
have appropriate safeguards in place to mitigate the risk of cyber-attacks
(including minimizing the adverse consequences arising from any such attack),
that they provide regular updates to the Board on cyber security, and conduct
ongoing monitoring of industry developments in this area. The Board is
satisfied that the Company's service providers have the relevant controls in
place to mitigate this risk.
Shareholder Engagement
The Board welcomes shareholders' views and places great importance on
communication with its shareholders. Shareholders wishing to meet with the
Chair and other Board members should contact the Company's Administrator.
The Portfolio Manager and Listing Sponsor maintain a regular dialogue with
institutional shareholders, the feedback from which is reported to the Board.
The Company's AGM provides a forum for shareholders to meet and discuss issues
of the Company and shareholders with the opportunity to vote on the resolutions
as specified in the Notice of AGM. The Notice of the AGM and the results are
released to the LSE in the form of an announcement.
Members of the Board attend investor days and conferences held by the Portfolio
Manager.
An Extraordinary Resolution was proposed at the AGM on 4 July 2019 to dis-apply
pre-emption rights to equity shares allotted by the Directors of the Company
for cash, as if the pre-emption rights contained in the Articles in respect of
such equity securities did not apply. It was carried by the necessary 75% of
votes in favour.
In addition, the Company maintains a website which contains comprehensive
information, including links to regulatory announcements, share price
information, financial reports, investment objectives and investor contacts.
Environmental, Social and Governance ("ESG") considerations
The Board, together with the Portfolio Manager, take ESG matters seriously and
their approach is covered within the Portfolio Managers Report.
Significant Shareholdings
Shareholders with holdings of more than 3.0% of the Shares of the Company at 9
December 2019 were as follows:
Number of shares Percentage of
issued share
capital
Nortrust Nominees Limited 12,891,836 6.96%
Pershing Nominees Limited 10,558,038 5.70%
HSBC Global Custody Nominee (UK) Limited 9,086,625 4.91%
Huntress (CI) Nominees Limited 6,427,648 3.47%
State Street Nominees Limited 6,148,442 3.32%
W B Nominees Limited 5,923,269 3.20%
Hargreaves Lansdown (Nominees) Limited 5,900,918 3.19%
Roy Nominees Limited 5,635,000 3.04%
Those invested directly or indirectly in 3.0% or more of the issued share
capital of the Company will have the same voting rights as other holders of the
Shares.
Independent Auditor
A resolution for the reappointment of PricewaterhouseCoopers CI LLP was
proposed and approved at the AGM on 4 July 2019.
Signed on behalf of the Board of Directors on 12 December 2019 by:
Claire Whittet
Chair
Christopher Legge
Director
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Audited
Financial Statements in accordance with applicable Guernsey law and
regulations.
Guernsey Company law requires the Directors to prepare Financial Statements for
each financial year. Under that law they have elected to prepare the Financial
Statements in accordance with International Financial Reporting Standards
("IFRS") and applicable law.
The Financial Statements are required by law to give a true and fair view of
the state of affairs of the Company and of the profit or loss of the Company
for that period.
In preparing these Financial Statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the Financial
Statements; and
· prepare the Financial Statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors confirm that they have complied with these requirements in
preparing the Financial Statements.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the Financial Statements have been
properly prepared in accordance with The Companies (Guernsey) Law, 2008. They
have general responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Company and to prevent and detect fraud and
other irregularities.
So far as the Directors are aware, there is no relevant audit information of
which the Company's auditors are unaware, and each Director has taken all the
steps that he or she ought to have taken as a Director in order to make himself
or herself aware of any relevant audit information and to establish that the
Company's auditors are aware of that information.
The Directors are responsible for the oversight of the maintenance and
integrity of the corporate and financial information in relation to the Company
website; the work carried out by the auditors does not involve consideration of
these matters and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the financial statements since they were
initially presented on the website.
Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
The Directors confirm that to the best of their knowledge:
(a) The Financial Statements have been prepared in accordance with IFRS and
give a true and fair view of the assets, liabilities, financial position and
profit or loss of the Company as at and for the year ended 30 September 2019.
(b) The Annual Report includes information detailed in the Chair's Statement,
Portfolio Manager's Report, Directors' Report, Directors' Remuneration Report,
Audit and Risk Committee Report, Alternative Investment Fund Manager's Report
and Depositary Statement provides a fair review of the information required by:
(i) DTR 4.1.8 and DTR 4.1.9 of the Disclosure and Transparency Rules,
being a fair review of the Company business and a description of the principal
risks and uncertainties facing the Company; and
(ii) DTR 4.1.11 of the Disclosure and Transparency Rules, being an
indication of important events that have occurred since the end of the
financial year and the likely future development of the Company.
In the opinion of the Board, the Financial Statements taken as a whole, are
fair, balanced and understandable and provide the information necessary to
assess the Company's position and performance, business model and strategy.
By order of the Board,
Claire Whittet
Chair
Christopher Legge
Director
12 December 2019
DIRECTORS' REMUNERATION REPORT
The Directors' remuneration report has been prepared in accordance with the UK
Code as issued by the UK Listing Authority. An ordinary resolution for the
approval of the annual remuneration report was put to the shareholders at the
AGM held on 4 July 2019.
Remuneration policy
The Company's policy in regard to Directors' remuneration is to ensure that the
Company maintains a competitive fee structure in order to recruit, retain and
motivate non-executive Directors of excellent quality in the overall interests
of shareholders.
It is the responsibility of the Remuneration and Nomination Committee to
determine and approve the Directors' remuneration, who will have given the
matter proper consideration, having regard to the level of fees payable to
non-executive Directors in the industry generally, the role that individual
Directors fulfil in respect of Board and Committee responsibilities and the
time committed to the Company's affairs. The Chair's remuneration is decided
separately and is approved by the Board as a whole.
No element of the Directors' remuneration is performance related, nor does any
Director have any entitlement to pensions, share options or any long term
incentive plans from the Company.
Remuneration
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine, provided that the aggregate amount of such fees
does not exceed GBP150,000 per annum.
Directors are remunerated in the form of fees, payable quarterly in arrears, to
the Director personally. No Directors have been paid additional remuneration by
the Company outside their normal Director's fees and expenses.
In the year ended 30 September 2019 the Directors received the following annual
remuneration in the form of Directors' fees:
Claire Whittet (Chair of the Board) GBP42,000
Christopher Legge (Audit and Risk Committee Chairman) GBP37,000
Ian Martin (MEC Chairman) GBP32,000
Total GBP111,000
As discussed in the Directors' Report, directors fees increased from 1 October
2019.
Appropriate Directors' and Officers' liability insurance cover is maintained by
the Company on behalf of the Directors.
The Directors were appointed as non-executive Directors by letters issued in
February and July 2014. Each Director's appointment letter provides that, upon
the termination of his/her appointment, that he/she must resign in writing and
all records remain the property of the Company. The Directors' appointments can
be terminated in accordance with the Articles and without compensation.
There is no notice period specified in the Articles for the removal of
Directors. The Articles provide that the office of Director shall be terminated
by, among other things: (a) written resignation; (b) unauthorised absences from
board meetings for six months or more; (c) unanimous written request of the
other Directors; and (d) an ordinary resolution of the Company.
Under the terms of their appointment, each Director is required to retire by
rotation and be subject to re-election at least every three years but have
opted for annual re-election. The Directors are required to seek re-election if
they have already served for more than nine years. The Company may terminate
the appointment of a Director immediately on serving written notice and no
compensation is payable upon termination of office as a director of the Company
becoming effective.
The amounts payable to Directors shown in note 14 to the Financial Statements
are for services as non-executive Directors.
No Director has a service contract with the Company, nor are any such contracts
proposed.
Signed on behalf of the Board of Directors on 12 December 2019 by:
Claire Whittet
Chair
Christopher Legge
Director
AUDIT AND RISK COMMITTEE REPORT
We present the Audit and Risk Committee's Report, setting out the
responsibilities of the Audit and Risk Committee and its key activities for the
year ended 30 September 2019.
The Audit and Risk Committee has scrutinised the appropriateness of the
Company's system of risk management and internal financial and operating
controls, the robustness and integrity of the Company's financial reporting,
along with the external audit process. The Audit and Risk Committee has devoted
time to ensuring that controls and processes have been properly established,
documented and implemented.
During the course of the year, the information that the Audit and Risk
Committee has received has been timely and clear and has enabled the Committee
to discharge its duties effectively.
The Audit and Risk Committee is supportive of the latest UK Code
recommendations and other corporate governance organisations such as the AIC,
and believes that the revised AIC Code, when issued, will allow the Audit and
Risk Committee to further strengthen its role as a key independent oversight
Committee.
A new version of the UK Code was issued during 2018 and was effective from 1
January 2019. The Audit and Risk Committee has considered the impact on its
responsibilities with the Company and is well placed to ensure compliance.
Role and responsibilities
The primary function of the Audit and Risk Committee is to assist the Board in
fulfilling its oversight responsibilities. This includes reviewing the
financial reports and other financial information and any significant financial
judgement contained therein, before publication.
In addition, the Audit and Risk Committee reviews the systems of internal
financial and operating controls on a continuing basis that the Administrator,
Portfolio Manager, AIFM, and Custodian and Depositary and the Board have
established with respect to finance, accounting, risk management, compliance,
fraud and audit. The Audit and Risk Committee also reviews the accounting and
financial reporting processes, along with reviewing the roles, independence and
effectiveness of the external auditor.
The ultimate responsibility for reviewing and approving the Annual and Interim
Financial Statements remain with the Board.
The Audit and Risk Committee's full terms of reference can be obtained by
contacting the Company's Administrator.
Risk management and internal control
The Board, as a whole, considers the nature and extent of the Company's risk
management framework and the risk profile that is acceptable in order to
achieve the Company's strategic objectives. As a result, it is considered that
the Board has fulfilled its obligations under the AIC Code.
The Audit and Risk Committee continues to be responsible for reviewing the
adequacy and effectiveness of the Company's on-going risk management systems
and processes. Its system of internal controls, along with its design and
operating effectiveness, is subject to review by the Audit and Risk Committee
through reports received from the Portfolio Manager, AIFM and Custodian and
Depositary, along with those from the Administrator and external auditor.
Fraud, Bribery and Corruption
The Board has relied on the overarching requirement placed on the service
providers under the relevant agreements to comply with applicable law,
including anti-bribery laws. A review of the service provider policies took
place at the Management Engagement Committee Meeting on 4 July 2019. The Board
receives confirmation from all service providers that there has been no fraud,
bribery or corruption.
Financial reporting and significant financial issues
The Audit and Risk Committee assesses whether suitable accounting policies have
been adopted and whether the Portfolio Manager has made appropriate estimates
and judgements. The Audit and Risk Committee reviews accounting papers prepared
by the Portfolio Manager and Administrator which provides details on the main
financial reporting judgements.
The Audit and Risk Committee also reviews reports by the external auditors
which highlight any issues with respect to the work undertaken on the audit.
The significant issues considered during the year by the Audit and Risk
Committee in relation to the Financial Statements and how they were addressed
are detailed below:
(i) Valuation of investments:
The Company's investments had a fair value of GBP158,334,767 as at 30 September
2019 (30 September 2018: GBP162,829,994) and represent a substantial portion of
net assets of the Company. As such this is the largest factor in relation to
the consideration of the Financial Statements. These investments are valued in
accordance with the Accounting Policies set out in note 2 and note 3 to the
Financial Statements. The Audit and Risk Committee considered the valuation of
the investments held by the Company as at 30 September 2019 to be reasonable
based on information provided by the Portfolio Manager, AIFM, Administrator,
Custodian and Depositary on their processes for the valuation of these
investments.
(ii) Income Recognition:
The Audit and Risk Committee considered the calculation of income from
investments recorded in the Financial Statements as at 30 September 2019. As
disclosed in note 3(ii)(b) of the Notes to the Financial Statements, the
estimated life of Credit Securities is determined by the Portfolio Manager,
impacting the effective interest rate of the Credit Securities which in turn
impacts the calculation of income from investments. The Audit and Risk
Committee reviews the Portfolio Manager's processes at least annually for
determining the expected life of the Company's investments and have found them
to be reasonable based on the explanations provided and information obtained
from the Portfolio Manager. The Auditor also reviews the processes and
methodology supporting them. The Audit and Risk Committee was therefore
satisfied that income was appropriately stated in all material aspects in the
Financial Statements.
Following a review of the presentations and reports from the Portfolio Manager
and Administrator and consulting where necessary with the external auditor, the
Audit and Risk Committee is satisfied that the Financial Statements
appropriately address the critical judgements and key estimates (both in
respect to the amounts reported and the disclosures). The Audit and Risk
Committee is also satisfied that the significant assumptions used for
determining the value of assets and liabilities have been appropriately
scrutinised, challenged and are sufficiently robust.
The Company's reporting currency is Sterling while a significant proportion of
the investments owned are denominated in foreign currencies. The Company
operates a hedging strategy designed to mitigate the impact of foreign currency
rate changes on the performance of the Company. The Audit and Risk Committee
has used information from the Administrator and Portfolio Manager to satisfy
itself concerning the effectiveness of the hedging process, as well as to
confirm that realised and unrealised foreign currency gains and losses have
been correctly recorded.
At the Audit and Risk Committee meeting to review the Annual Report and Audited
Financial Statements, the Audit and Risk Committee received and reviewed a
report on the audit from the external auditors. On the basis of its review of
this report, the Audit and Risk Committee is satisfied that the external
auditor has fulfilled its responsibilities with diligence and professional
scepticism. The Audit and Risk Committee advised the Board that these Annual
Financial Statements, taken as a whole, are fair, balanced and understandable.
The Audit and Risk Committee is satisfied that the judgements made by the
Portfolio Manager and Administrator are reasonable, and that appropriate
disclosures have been included in the Financial Statements.
External Auditors
The Audit and Risk Committee has responsibility for making a recommendation on
the appointment, re-appointment and removal of the external auditors.
PricewaterhouseCoopers CI LLP ("PwC") were appointed as the first auditors of
the Company. During the year the Audit and Risk Committee received and reviewed
audit plans and reports from the external auditors. It is standard practice for
the external auditors to meet privately with the Audit and Risk Committee
without the Portfolio Manager and other service providers being present at each
Audit and Risk Committee meeting.
To assess the effectiveness of the external audit process, the auditors were
asked to articulate the steps that they have taken to ensure objectivity and
independence, including where the auditor provides non-audit services. The
Audit and Risk Committee monitors the auditors' performance, behaviour and
effectiveness during the exercise of their duties, which informs the decision
to recommend reappointment on an annual basis.
The Company generally does not utilise external auditors for internal audit
purposes, secondments or valuation advice. Services which are in the nature of
audit, such as tax compliance, private letter rulings, accounting advice and
disclosure advice are normally permitted but all non-audit services are
required to be pre-approved by the Audit and Risk Committee.
The FRC Ethical Standards require that the audit engagement leaders on listed
entities are rotated at least every 5 years. Roland Mills replaced Evelyn Brady
as audit engagement leader following the signing of the Annual Report and
Audited Financial Statements for the year ended 30 September 2018.
The following table summarises the remuneration paid to PwC and to other PwC
member firms for audit and non-audit services in respect of the year ended 30
September 2019 and for the year ended 30 September 2018.
Year ended Year ended
30.09.19 30.09.18
PricewaterhouseCoopers CI LLP - Assurance work GBP GBP
- Annual audit of the Company 54,000 51,500
- Interim review 17,000 16,000
PricewaterhouseCoopers CI LLP - Non assurance work
- Tax consulting and compliance services 15,000 15,000
- Ratio of assurance to non-assurance work 83% / 82% /
17% 18%
The Company does not qualify as an EU Public Interest Entity and is therefore
not subject to the restrictions on non-audit services provided by its auditor
under this regime.
For any questions on the activities of the Audit and Risk Committee not
addressed in the foregoing, a member of the Audit and Risk Committee remains
available to attend each AGM to respond to such questions.
The Audit and Risk Committee and Risk Report was approved by the Audit and Risk
Committee on 12 December 2019 and signed on behalf by:
Christopher Legge
Chairman, Audit and Risk Committee
ALTERNATIVE INVESTMENT MANAGER'S REPORT
Maitland Institutional Services Ltd acts as the Alternative Investment Fund
Manager ("AIFM") of TwentyFour Select Monthly Income Fund Limited ("the
Company") providing portfolio management and risk management services to the
Company.
The AIFM has delegated the following of its alternative investment fund
management functions:
· It has delegated the portfolio management function for listed investments
to TwentyFour Asset Management LLP.
· It has delegated the portfolio management function for unlisted
investments to TwentyFour Asset Management LLP.
The AIFM is required by the Alternative Investment Fund Managers Directive
2011, 61/EU (the "AIFM Directive") and all applicable rules and regulations
implementing the AIFM Directive in the UK (the "AIFM" Rules):
· To make the annual report available to investors and to ensure that the
annual report is prepared in accordance with applicable accounting standards,
the Company's articles of incorporation and the AIFM Rules and that the annual
report is audited in accordance with International Standards on Auditing;
· Be responsible for the proper valuation of the Company's assets, the
calculation of the Company's net asset value and the publication of the
Company's net asset value; and,
· To make available to the Company's shareholders, a description of all fees,
charges and expenses and the amounts thereof, which have been directly or
indirectly borne by them,
· Ensure that the Company's shareholders have the ability to redeem their
share in the capital of the Company in a manner consistent with the principle
of fair treatment of investors under the AIFM Rules and in accordance with the
Company's redemption policy and its obligations.
The AIFM is required to ensure that the annual report contains a report that
shall include a fair and balanced review of the activities and performance of
the Company, containing also a description of the principal risks and
investment or economic uncertainties that the Company might face.
AIFM Remuneration
The AIFM is subject to a remuneration policy which meets the requirements of
the Alternative Investment Fund Managers Directive (AIFMD) as out in SYSC 19B
of the FCA Handbook.
The policy is designed to ensure practices for employee remuneration are
consistent with, and promote, sound and effective risk management. It does not
encourage risk-taking which is inconsistent with the risk profiles, rules or
instrument of incorporation of the funds managed, and does not impair the
AIFM's compliance with its duty to act in the best interests of the funds it
manages.
The AIFM has reviewed the Remuneration Policy and its application in the last
year which has resulted in no material changes to the policy or irregularities
to process.
The remuneration disclosure does not include portfolio management activities as
these are undertaken by various third party investment managers appointed by
the AIFM. The investment manager is required to make separate public
disclosure as part of their obligations under the Capital Requirements
Directive.
The AIFM is required to disclose the total remuneration it pays to its staff
during the financial year of the fund, split into fixed and variable
remuneration, with separate aggregate disclosure for staff whose actions may
have a material impact to the risk profile of a fund or the AIFM itself. This
includes executives, senior risk and compliance staff and certain senior
managers.
Year ending 30th Number of Fixed Variable Total
September 2019 beneficiaries
Total remuneration 75 GBP5,162,113.68 GBP67,544 GBP5,229,657.68
paid by the AIFM
during the year
Remuneration paid to 6 GBP798,329.21 GBP32,694 GBP831,023.21
employees who are
material risk takers
Further information is available in the AIFM's Remuneration Policy Statement
which can be obtained from www.maitlandgroup.com or, on request free of charge,
by writing to the registered office of the AIFM.
In so far as the AIFM is aware:
· There is no relevant audit information of which the Company's auditors or
the Company's Board of directors are unaware; and
· The AIFM has taken all steps that it ought to have taken to make itself
aware of any relevant audit information and to establish that the auditors are
aware of that information.
We hereby certify that this report is made on behalf of the AIFM, Maitland
Institutional Services Ltd.
R Ackermann
P.F. Brickley
Directors
Maitland Institutional Services Ltd
12 December 2019
DEPOSITARY STATEMENT
for the year ended 30 September 2019
Report of the Depositary to the Shareholders
Northern Trust (Guernsey) Limited has been appointed as Depositary to
TwentyFour Select Monthly Income Fund Limited (the "Company") in accordance
with the requirements of Article 36 and Articles 21(7), (8) and (9) of the
Directive 2011/61/EU of the European Parliament and of the Council of 8 June
2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC
and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (the
"AIFM Directive").
We have enquired into the conduct of Maitland Institutional Services Limited
(the "AIFM") and the Company for the year ended 30 September 2019, in our
capacity as Depositary to the Company.
This report including the review provided below has been prepared for and
solely for the Shareholders in the Company. We do not, in giving this report,
accept or assume responsibility for any other purpose or to any other person to
whom this report is shown.
Our obligations as Depositary are stipulated in the relevant provisions of the
AIFM Directive and the relevant sections of Commission Delegated Regulation
(EU) No 231/2013 (collectively the "AIFMD legislation") and The Authorised
Closed Ended Investment Scheme Rules 2008.
Amongst these obligations is the requirement to enquire into the conduct of the
AIFM and the Company and their delegates in each annual accounting period.
Our report shall state whether, in our view, the Company has been managed in
that period in accordance with the AIFMD legislation. It is the overall
responsibility of the AIFM and the Company to comply with these provisions. If
the AIFM, the Company or their delegates have not so complied, we as the
Depositary will state why this is the case and outline the steps which we have
taken to rectify the situation.
The Depositary and its affiliates is or may be involved in other financial and
professional activities which may on occasion cause a conflict of interest with
its roles with respect to the Company. The Depositary will take reasonable care
to ensure that the performance of its duties will not be impaired by any such
involvement and that any conflicts which may arise will be resolved fairly and
any transactions between the Depositary and its affiliates and the Company
shall be carried out as if effected on normal commercial terms negotiated at
arm's length and in the best interests of Shareholders.
Basis of Depositary Review
The Depositary conducts such reviews as it, in its reasonable discretion,
considers necessary in order to comply with its obligations and to ensure that,
in all material respects, the Company has been managed (i) in accordance with
the limitations imposed on its investment and borrowing powers by the
provisions of its constitutional documentation and the appropriate regulations
and (ii) otherwise in accordance with the constitutional documentation and the
appropriate regulations. Such reviews vary based on the type of Fund, the
assets in which a Fund invests and the processes used, or experts required, in
order to value such assets.
Review
In our view, the Company has been managed during the period, in all material
respects:
(i) in accordance with the limitations imposed on the investment and borrowing
powers of the
Company by the constitutional document; and by the AIFMD legislation; and
(ii) otherwise in accordance with the provisions of the constitutional
document; and the AIFMD
legislation.
For and on behalf of
Northern Trust (Guernsey) Limited
12 December 2019
INDEPENT AUDITOR'S REPORT
TO THE MEMBERS OF TWENTYFOUR SELECT MONTHLY INCOME FUND LIMITED
Report on the audit of the financial statements
______________________________________________________________________________________
Our opinion
In our opinion, the financial statements give a true and fair view of the
financial position of TwentyFour Select Monthly Income Fund Limited (the
"Company") as at 30 September 2019, and of its financial performance and its
cash flows for the year then ended in accordance with International Financial
Reporting Standards and have been properly prepared in accordance with the
requirements of The Companies (Guernsey) Law, 2008.
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What we have audited
The Company's financial statements comprise:
* the statement of financial position as at 30 September 2019;
* the statement of comprehensive income for the year then ended;
* the statement of changes in equity for the year then ended;
* the statement of cash flows for the year then ended; and
* the notes to the financial statements, which include a summary of
significant accounting policies.
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Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
("ISAs"). Our responsibilities under those standards are further described in
the Auditor's responsibilities for the audit of the financial statements
section of our report.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
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Independence
We are independent of the Company in accordance with the ethical requirements
that are relevant to our audit of the financial statements of the Company, as
required by the Crown Dependencies' Audit Rules and Guidance. We have fulfilled
our other ethical responsibilities in accordance with these requirements.
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Our audit approach
Overview
Materiality
- Overall materiality was GBP3.4 million which represents 2% of net assets
Audit scope
- The Company is incorporated and based in Guernsey.
- We conducted our audit of the financial statements from information provided
by Northern Trust International Fund Administration Services (Guernsey) Limited
(the "Administrator") to whom the Board of directors has delegated the
administration function. The Company engages TwentyFour Asset Management LLP
(the "Portfolio Manager") to manage the investment portfolio. We had
significant interaction with both the Administrator and the Portfolio Manager
during our audit.
We conducted all of our audit work in Guernsey.
Key audit matters
- Valuation of investments.
Audit scope
As part of designing our audit, we determined materiality and assessed the
risks of material misstatement in the financial statements. In particular, we
considered where the directors made subjective judgements; for example, in
respect of significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain. As in all of our
audits, we also addressed the risk of management override of internal controls,
including among other matters, consideration of whether there was evidence of
bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to
enable us to provide an opinion on the financial statements as a whole, taking
into account the structure of the Company, the accounting processes and
controls, and the industry in which the Company operates.
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Materiality
The scope of our audit was influenced by our application of materiality. An
audit is designed to obtain reasonable assurance whether the financial
statements are free from material misstatement. Misstatements may arise due to
fraud or error. They are considered material if individually or in aggregate,
they could reasonably be expected to influence the economic decisions of users
taken on the basis of the financial statements.
Based on our professional judgement, we determined certain quantitative
thresholds for materiality, including the overall Company materiality for the
financial statements as a whole as set out in the table below. These, together
with qualitative considerations, helped us to determine the scope of our audit
and the nature, timing and extent of our audit procedures and to evaluate the
effect of misstatements, both individually and in aggregate on the financial
statements as a whole.
Overall Company materiality GBP3.4 million (2018: GBP3.4 million)
How we determined it 2% of net assets
Rationale for the materiality benchmark We believe that net assets is the most
appropriate benchmark because this is the
key metric of interest to investors.
We agreed with the Audit Committee that we would report to them misstatements
identified during our audit above GBP168,000, as well as misstatements below that
amount that, in our view, warranted reporting for qualitative reasons.
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Key audit matters
Key audit matters are those matters that, in our professional judgment, were of
most significance in our audit of the financial statements of the current
period. These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.
Key audit matter How our audit addressed the Key audit matter
Valuation of investments - We understood and evaluated the internal
Investments are designated as control environment in place at the Administrator and
financial assets at fair value the Portfolio Manager over the valuation of the
through profit or loss and are investment portfolio.
disclosed separately on the - We assessed the accounting policy for
Statement of Financial Position investment valuation compliance with International
(GBP158.3 million). Investments Financial Reporting Standards.
comprise a diverse portfolio of - We performed testing to check that the
credit securities and are fair investment valuations had been accounted for and
valued in accordance with the applied consistently in accordance with the stated
policies set out in note 2(e), accounting policy.
and the fair value of - We tested the valuation of investments by using
investments and movement therein our asset pricing team in the PwC UK network firm to
are further disclosed in notes 9 reprice the portfolio. Prices were obtained by our
and 17 respectively. pricing team from a range of sources, including
exchange traded and consensus prices.
Investments represent the most
significant balance on the Whilst we sought to reprice the entire portfolio, due
Statement of Financial Position to licensee access restrictions, for 6 of the 110
and, due to the market liquidity investments (representing 6% of the net asset value)
and assumptions underlying each our PwC pricing team were unable to obtain prices. The
security, the valuations are engagement team sought supporting evidence for these
subject to management estimate, prices from the Administrator and/or the Portfolio
as detailed under note 3(ii)(a). Manager and in doing so, we also assessed the
independence, reputation and reliability of the
Owing to the level of sources of the supporting evidence provided in these
subjectivity that could be instances.
applied in fair valuing - In order to determine the ongoing reliability
investments, the risk of of the investment valuations from period to period, we
manipulation or error could be also, for a sample of disposals, compared the sales
material and as a result we have transaction price to the most recently recorded
designated the valuation of valuation prior to the disposal, which allowed us to
investments as a significant assess the reliability of the valuation data at that
audit risk. point.
- During the year the Board adopted a new
investment fair value hierarchy philosophy (the
hierarchy disclosure required by IFRS), which saw more
granularity in the determination of what observable
inputs are used in determining whether a price of an
investment is Level 3 (based on unobservable data) or
Level 2 (unquoted but based on observable data for the
same/similar instruments).
We obtained the Board approved fair value hierarchy
philosophy and we engaged with the Board and the
Portfolio Manager to understand the drivers for
amending the principles therein.We also tested the
Portfolio Manager's year-end process by evaluating a
sample of the fair value hierarchy changes from Level
3 to Level 2.
No matters or material differences were identified in
our testing which required reporting to those charged
with governance or that would lead us to believe that
the portfolio of investments does not materially
reflect fair value.
Other information
The directors are responsible for the other information. The other information
comprises all the information included in the Annual Report and Audited
Financial Statements 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 any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is
to read the other information identified above and, in doing so, consider
whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard.
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Responsibilities of the directors for the financial statements
The directors are responsible for the preparation of financial statements that
give a true and fair view in accordance with International Financial Reporting
Standards, the requirements of Guernsey law and for such internal control as
the directors determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, the directors are responsible for
assessing the Company's ability to continue as a going concern, disclosing, as
applicable, matters relating to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the Company or to
cease operations, or have no realistic alternative but to do so.
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Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of
these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgement
and maintain professional scepticism throughout the audit. We also:
- Identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a
material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control;
- Obtain an understanding of internal control relevant to the audit in
order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control;
- Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by the
directors;
- Conclude on the appropriateness of the directors' use of the going
concern basis of accounting and, based on the audit evidence obtained, whether
a material uncertainty exists related to events or conditions that may cast
significant doubt on the Company's ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw
attention in our auditor's report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our
auditor's report. However, future events or conditions may cause the Company to
cease to continue as a going concern; and
- Evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves fair
presentation.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the financial
statements of the current period and are therefore the key audit matters. We
describe these matters in our auditor's report unless law or regulation
precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our
report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
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Report on other legal and regulatory requirements
Under The Companies (Guernsey) Law, 2008 we are required to report to you if,
in our opinion:
- we have not received all the information and explanations we require for
our audit;
- proper accounting records have not been kept; or
- the financial statements are not in agreement with the accounting
records.
We have no exceptions to report arising from this responsibility.
We have nothing to report in respect of the following matters which we have
reviewed:
- the Director's Report in relation to going concern. As noted in the
Directors' statement, the directors have concluded that it is appropriate to
adopt the going concern basis in preparing the financial statements. The going
concern basis presumes that the Company has adequate resources to remain in
operation, and that the directors intend it to do so, for at least one year
from the date the financial statements were signed. As part of our audit we
have concluded that the directors' use of the going concern basis is
appropriate. However, because not all future events or conditions can be
predicted, these statements are not a guarantee as to the Company's ability to
continue as a going concern;
- the Directors' statement that they have carried out a robust assessment
of the principal risks facing the Company and the directors' statement in
relation to the longer-term viability of the Company. Our review was
substantially less in scope than an audit and only consisted of making
inquiries and considering the directors' process supporting their statements;
checking that the statements are in alignment with the relevant provisions of
the UK Corporate Governance Code; and considering whether the statements are
consistent with the knowledge acquired by us in the course of performing our
audit; and
- the part of the Corporate Governance Statement relating to the Company's
compliance with the ten further provisions of the UK Corporate Governance Code
specified for our review.
This report, including the opinion, has been prepared for and only for the
members as a body in accordance with Section 262 of The Companies (Guernsey)
Law, 2008 and for no other purpose. We do not, in giving this opinion, accept
or assume responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
Roland Mills
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
12 December 2019
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September 2019
Year ended Year ended
30.09.19 30.09.18
Notes GBP GBP
Income (Unaudited) (Unaudited)
Interest income on financial 12,308,151 11,969,011
assets at fair value through
profit and loss
Net foreign currency losses 8 (64,175) (1,289,838)
Net losses on financial assets
at fair value through profit or 9 (2,967,024) (3,831,521)
loss
Total income 9,276,952 6,847,652
Expenses
Portfolio management fees 14 (1,265,691) (1,201,499)
Directors' fees 14 (111,000) (111,000)
Administration fees 15 (119,705) (119,623)
AIFM management fees 15 (80,792) (77,924)
Audit fee (54,000) (49,975)
Custody fees 15 (19,232) (18,150)
Broker fees (50,000) (53,452)
Depositary fees 15 (27,861) (26,523)
Legal fees (68,567) (71,162)
Other expenses (96,972) (168,151)
Total expenses (1,893,820) (1,897,459)
Total comprehensive income for the 7,383,132 4,950,193
year
Earnings per Ordinary Share -
Basic & Diluted 4 0.040 0.029
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these Financial Statements.
STATEMENT OF FINANCIAL POSITION
as at 30 September 2019
30.09.19 30.09.18
Assets Notes GBP GBP
Current assets (Unaudited) (Audited)
Financial assets at fair value through profit and
loss
- Investments 9 158,334,767 162,829,994
- Derivative assets: Forward currency contracts 16 686,397 10,686
Amounts due from broker 629,488 3,019,184
Other receivables 10 2,717,968 2,984,168
Cash and cash equivalents 7,197,759 6,834,535
Total current assets 169,566,379 175,678,567
Liabilities
Current liabilities
Amounts due to broker 444,938 4,810,956
Other payables 11 282,609 395,189
Financial liabilities at fair value through
profit and loss
- Derivative liabilities: Forward currency 16 34,760 729,332
contracts
Interest income received in advance 976,786 -
Total current liabilities 1,739,093 5,935,477
Total net assets 167,827,286 169,743,090
Equity
Share capital account 12 180,201,379 177,393,446
Retained earnings (12,374,093) (7,650,356)
Total equity 167,827,286 169,743,090
Ordinary Shares in issue 12 185,179,151 182,179,151
Net Asset Value per Ordinary Share (pence) 6 90.63 93.17
The Financial Statements were approved by the Board of Directors on 12 December
2019 and signed on its behalf by:
Claire Whittet
Chair
Christopher Legge
Director
The accompanying notes are an integral part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2019
Share capital Retained
account earnings Total
Notes GBP GBP GBP
(Unaudited) (Unaudited) (Unaudited)
Balance at 1 October 2018 177,393,446 (7,650,356) 169,743,090
Issue of shares 2,847,700 - 2,847,700
Share issue costs (33,602) - (33,602)
Income equalisation on new issues 5 (6,165) 6,165 -
Distributions paid - (12,113,034) (12,113,034)
Total comprehensive income for the - 7,383,132 7,383,132
year
Balance at 30 September 2019 180,201,379 (12,374,093) 167,827,286
Share capital Retained
account earnings Total
GBP GBP GBP
(Unaudited) (Unaudited) (Unaudited)
Balance at 1 October 2017 157,001,121 (1,793,164) 155,207,957
Issue of shares 20,817,500 - 20,817,500
Share issue costs (244,606) - (244,606)
Income equalisation on new issues 5 (180,569) 180,569 -
Distributions paid - (10,987,954) (10,987,954)
Total comprehensive income for the - 4,950,193 4,950,193
year
Balance at 30 September 2018 177,393,446 (7,650,356) 169,743,090
The accompanying notes are an integral part of these Financial Statements.
STATEMENT OF CASH FLOWS
for the year ended 30 September 2019
Year ended Year ended
30.09.19 30.09.18
Notes GBP GBP
Cash flows from/(used in) operating activities (Unaudited) (Unaudited)
Total comprehensive income for the year 7,383,132 4,950,193
Adjustments for:
Net losses on financial assets at fair value 9 2,967,024 3,831,521
through
profit or loss
Amortisation adjustment under effective 9 (511,152) (783,913)
interest
rate method
Unrealised (gains)/losses on derivatives 8 (1,370,283) 613,703
Exchange gain on cash and cash equivalents (4,009) (5,502)
Deacrease/(increase) in other receivables 266,200 (221,218)
Increase/(decrease) in other payables 864,206 (47,510)
Purchase of investments (65,710,201) (71,864,425)
Sale of investments 65,773,234 52,601,891
Net cash generated from/(used in) operating activities 9,658,151 (10,925,260)
Cash flows (used in)/from financing activities
Proceeds from issue of ordinary shares 12 2,847,700 20,817,500
Share issue costs 12 (33,602) (244,606)
Dividend distribution (12,113,034) (10,987,956)
Net cash (outflow)/inflow from financing (9,298,936) 9,584,938
activities
Increase/(decrease) in cash and cash 359,215 (1,340,322)
equivalents
Cash and cash equivalents at beginning of year 6,834,535 8,169,355
Exchange gain on cash and cash equivalents 4,009 5,502
Cash and cash equivalents at end of year 7,197,759 6,834,535
The accompanying notes are an integral part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2019
1. General Information
TwentyFour Select Monthly Income Fund Limited (the "Company") was incorporated
with limited liability in Guernsey, as a closed-ended investment company on 12
February 2014. The Company's Shares were listed with a Premium Listing on the
Official List of the UK Listing Authority and admitted to trading on the Main
Market of the London Stock Exchange ("LSE") on 10 March 2014.
The investment objective and policy is set out in the Summary Information.
The Portfolio Manager of the Company is TwentyFour Asset Management LLP (the
"Portfolio Manager").
2. Principal Accounting Policies
a) Basis of preparation and Statement of compliance
The Financial Statements have been prepared in accordance with International
Financial Reporting Standards ("IFRS") as issued by the International
Accounting Standards Board ("IASB") and are in compliance with the Companies
(Guernsey) Law, 2008.
b) Presentation of information
The Financial Statements have been prepared on a going concern basis under the
historical cost convention adjusted to take account of the revaluation of the
Company's financial assets and liabilities at fair value through profit or
loss.
c) Standards, amendments and interpretations effective during the year
The following standards, interpretations and amendments were adopted for the
year ended 30 September 2019:
- IFRS 9 Financial Instruments
- IFRS 15 Revenue from Contracts with Customers
i) IFRS 9 'Financial Instruments'
IFRS 9 'Financial Instruments' ("IFRS 9") replaces IAS 39 'Financial
Instruments: Recognition and Measurement' ("IAS 39"). IFRS 9 specifies how an
entity should classify and measure financial assets`. The standard requires all
financial assets to be classified on the basis of the entity's business model
for managing the financial assets and the contractual cash flow characteristics
of the financial asset. These requirements improve and simplify the approach
for classification and measurement of financial assets compared with the
requirements of IAS 39.
The standard also results in one impairment method, replacing the numerous
impairment methods in IAS 39 that arise from the different classification.
As a result of the adoption of IFRS 9, the Company has adopted consequential
amendments to IAS 1 'Presentation of Financial Statements', which require:
· impairment of financial assets to be presented in a separate line item in
the Statement of Comprehensive Income. Under IAS 39, impairment was recognised
when losses were incurred. The Company did not previously report any incurred
losses; and
· separate presentation in the Statement of Comprehensive Income of interest
revenue calculated using the effective interest method.
The adoption of IFRS 9 had no material impact on the net assets attributable to
holders of Ordinary Redeemable Shares of the Company.
Classification and measurement of financial assets and financial liabilities
IFRS 9 contains three principal classification categories for financial assets:
measured at amortised cost, at fair value through other comprehensive income
and at fair value through profit or loss ("FVTPL"). The classification of
financial assets under IFRS 9 is generally based on the business model in which
a financial asset is managed and its contractual cash flow characteristics.
IFRS 9 eliminates the previous IAS 39 categories of held to maturity, loans and
receivables and available for sale.
IFRS 9 largely retains the existing requirements in IAS 39 for the
classification and measurement of financial liabilities.
The adoption of IFRS 9 has not had a significant effect on the Company's
accounting policies related to financial liabilities and derivative financial
instruments.
The following table and the accompanying notes below explain the original
measurement categories under IAS 39 and the new measurement categories under
IFRS 9 for each class of the Company's financial assets and liabilities as at 1
October 2018.
There was no effect of adopting IFRS 9 on the carrying amounts of the financial
assets as at 1 October 2018 which would relate solely to the new impairment
requirements.
Original New Original New
classification Classification carrying carrying
under IAS 39 under IFRS 9 amount amount
under IAS under IFRS
39 9
Financial Assets
Financial assets at fair value GBP GBP
through profit or loss:
- Investments* Assets at Assets at 162,829,994 162,829,994
FVTPL FVTPL
- Derivative assets: Forward Assets at Assets at 10,686 10,686
currency contracts FVTPL FVTPL
Amounts due from Broker Loans and Amortised cost 3,019,184 3,019,184
receivables
Other receivables (excluding Loans and Amortised cost 2,944,973 2,944,973
prepayments) receivables
Cash and cash Loans and Amortised cost 6,834,535 6,834,535
equivalents receivables
Total Financial Assets 175,639,372 175,639,372
Financial Liabilities
Financial liabilities at fair GBP GBP
value through profit or loss:
- Derivative liabilities: Liabilities at Liabilities at 729,332 729,332
Forward currency contracts FVPTL FVPTL
Amounts due to brokers Other Amortised cost 4,810,956 4,810,956
financial
liabilities
Other payables Other Amortised cost 395,189 395,189
financial
liabilities
Total Financial 5,935,477 5,935,477
Liabilities
* Under IAS 39, these financial assets were designated as at FVTPL because they
were managed on a fair value basis and their performance was monitored on this
basis. The Company has elected to measure these assets at FVTPL under IFRS 9.
There were no changes to the carrying amounts of the financial assets on
transition from IAS 39 to IFRS 9.
Impairment of financial assets
IFRS 9 replaces the 'incurred loss' model in IAS 39 with an expected credit
loss ("ECL") model. Therefore, the carrying amount of other receivables remains
the same under IFRS 9 as the expected credit losses on the financial assets
have been assessed as immaterial as noted below.
The new impairment model applies to financial assets measured at amortised cost
and the standard mandates the use of the simplified approach to calculating the
expected credit losses for trade receivables. The impairment calculation is
based on the Company's historical default rates over the expected life of the
trade receivables and is adjusted for forward-looking estimates. Given the
historical level of defaults and the credit risk of the investment portfolio,
there is a negligible impact because of the lifetime expected credit loss to be
recognised versus the previous impairment model applied by the Company.
Cash and cash equivalents are also subject to the impairment requirements of
IFRS 9 and the identified impairment loss is also assessed as immaterial.
Transition
The Company applied IFRS 9 prospectively, with an initial application date of 1
October 2018. The Company has not restated the comparative information, which
will continue to be reported under IAS 39.
ii) IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 'Revenue from Contracts with Customers' specifies how and when to
recognise revenue as well as requiring entities to provide users of financial
statements with more informative, relevant disclosures. The standard provides a
single, principles based five-step model to be applied to all contracts with
customers. IFRS 15 is effective for annual reporting periods beginning on or
after 1 January 2018. Material revenue streams have been reviewed and there has
not been a material impact on timing of recognition or gross up for principal/
agent considerations.
The Company has undertaken a review of its revenue streams and concluded that
there is no impact on the way in which the Company recognises its revenues as
all revenues are earned on financial instruments. The Company has applied IFRS
15 retrospectively although no restatements were required.
d) Standards, amendments and interpretations issued but not yet effective
At the reporting date of these Financial Statements, the following standards,
interpretations and amendments, which have not been applied in these Financial
Statements, were in issue but not yet effective:
- IFRS 16 Leases (Effective 1 January 2019)
The Company expects that the adoption of IFRS 16 in the future period will not
have an impact on the Company's Financial Statements, as it does not hold any
leases.
e) Financial assets at fair value through profit or loss
Classification
The Company classifies its investments in credit securities and derivatives as
financial assets at fair value through profit or loss.
Financial assets and financial liabilities designated at fair value through
profit or loss at inception are financial instruments that are not classified
as held for trading but are managed and their performance is evaluated on a
fair value basis in accordance with the Company's business model per IFRS 9.
The Company's policy requires the Portfolio Manager and the Board of Directors
to evaluate the information about these financial assets and liabilities on a
fair value basis together with other related financial information.
The Company's policy requires the Portfolio Manager and the Board of Directors
to evaluate the information about these financial assets and liabilities on a
fair value basis together with other related financial information.
Recognition, derecognition and measurement
Regular purchases and sales of investments are recognised on the trade date,
the date on which the Company commits to purchase or sell the investment.
Financial assets and financial liabilities at fair value through profit or loss
are initially recognised at fair value. Transaction costs are expensed as
incurred in the Statement of Comprehensive Income. Financial assets are
derecognised when the rights to receive cash flows from the investments have
expired or the Company has transferred substantially all risks and rewards of
ownership.
The Company may invest in any category of credit security, including, without
prejudice to the generality of the foregoing, bank capital, corporate bonds,
high yield bonds, leveraged loans, payment-in-kind notes and asset backed
securities.
The Company records any principal repayments as they arise and realises a gain
or loss in the net gains on financial assets at fair value through profit or
loss in the Statement of Comprehensive Income in the period in which they
occur.
The interest income arising on these Credit Securities is recognised on a
time-proportionate basis using the effective interest rate method and shown
within income in the Statement of Comprehensive Income.
Fair value estimation
IFRS 13 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (an exit price).
i) Credit Securities traded or dealt on an active market or exchange
Credit Securities that are traded or dealt on an active market or exchange are
valued by reference to their quoted mid-market price as at the close of trading
on the reporting date as the Directors deem the mid-market price to be a
reasonable approximation of an exit price.
ii) Credit Securities not traded or dealt on an active market or exchange
Credit Securities which are not traded or dealt on active markets or exchanges
are valued by reference to their mid-price, as at the close of business on the
reporting date as determined by pricing service providers that use broker
dealer quotations, reported trades or valuation estimates from their internal
pricing models. If a price cannot be obtained from an independent price vendor,
or where the Portfolio Manager determines that the provided price is not an
accurate representation of the fair value of the Credit Security, the Portfolio
Manager will source mid-price quotes at the close of business on the reporting
date from independent third party brokers/dealers for the relevant security. If
no mid-price is available then a bid-price will be used.
In cases where no third party price is available (either from an independent
price vendor or independent third party brokers/dealers), or where the
Portfolio Manager determines that the provided price is not an accurate
representation of the fair value of the Credit Security, the Portfolio Manager
will determine the valuation based on the Portfolio Manager's valuation policy.
This may include the use of a comparable arm's length transaction, reference to
other securities that are substantially the same, discounted cash flow analysis
and other valuation techniques commonly used by market participants making the
maximum use of market inputs and relying as little as possible on
entity-specific inputs.
Forward foreign currency contracts
Forward foreign currency contracts are derivative contracts and as such are
recognised at fair value on the date on which they are entered into and
subsequently measured at their fair value. Fair value is determined from
underlying asset prices indices, reference rates and other observable inputs.
These instruments are normally valued by pricing service providers or by
utilising broker or dealer quotations. All forward foreign currency contracts
are carried as assets when fair value is positive and as liabilities when fair
value is negative. Gains and losses on forward currency contracts are
recognised as part of net foreign currency gains in the Statement of
Comprehensive Income.
Impairment
Financial assets that are stated at cost or amortised cost are reviewed at each
reporting date to determine whether there is objective evidence of impairment.
If any such indication exists, an impairment loss is recognised in the
Statement of Comprehensive Income as the difference between the asset's
carrying amount and the present value of estimated future cash flows discounted
at the financial asset's effective interest rate.
Any impairment losses impacting the amortised cost disclosed for the financial
assets at fair value through profit and loss are recognised in the Statement of
Comprehensive Income as realised losses within the net gain/loss on financial
assets at fair value through profit or loss.
f) Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the
Statement of Financial Position when there is a legally enforceable right to
offset the recognised amounts and there is an intention to settle on a net
basis or realise the asset and settle the liability simultaneously. Derivatives
are not settled on a net basis and therefore derivative assets and liabilities
are shown gross.
g) Amounts due from and due to brokers
Amounts due from and to brokers represent receivables for securities sold and
payables for securities purchased that have been contracted for but not yet
settled or delivered on the statement of financial position date respectively.
These amounts are recognised initially at fair value and subsequently measured
at amortised cost using the effective interest rate method.
h) Income
Interest income is recognised on a time-proportionate basis using the effective
interest rate method. Discounts received or premiums paid in connection with
the acquisition of Credit Securities are amortised into interest income using
the effective interest rate method over the expected life of the related
security.
The effective interest rate method is a method of calculating the amortised
cost of a financial asset or financial liability and of allocating the interest
income or interest expense over the relevant period. The effective interest
rate is the rate that exactly discounts estimated future cash payments or
receipts throughout the expected life of the financial instrument, or, when
appropriate, a shorter period, to the net carrying amount of the financial
asset or financial liability.
When calculating the effective interest rate, the Portfolio Manager estimates
cash flows considering the expected life of the financial instrument, including
future credit losses and deferred interest payments. The calculation includes
all fees and points paid or received between parties to the contract that are
an integral part of the effective interest rate and all other premiums or
discounts.
i) Cash and cash equivalents
Cash and cash equivalents comprises deposits held at call with banks and other
short-term investments in an active market with original maturities of three
months or less and bank overdrafts. Bank overdrafts are included in current
liabilities in the Statement of Financial Position.
j) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of Ordinary Shares are shown in equity as a
deduction, net of tax, from the proceeds and disclosed in the Statement of
Changes in Equity.
Repurchased Tendered Shares are treated as a distribution of capital and
deducted from the Share Capital account.
k) Other reserves
Other reserves consist of equalisation on issues of new shares, distributions
paid and total comprehensive income for the year.
l) Foreign currency translation
Functional and presentation currency
Items included in the financial statements are measured using Sterling, the
currency of the primary economic environment in which the Company operates (the
"functional currency"). The Financial Statements are presented in Sterling,
which is the Company's presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign
currency assets and liabilities are translated into the functional currency
using the exchange rate prevailing at the Statement of Financial Position date.
Foreign exchange gains and losses relating to the financial assets and
liabilities carried at fair value through profit or loss are presented in the
Statement of Comprehensive Income.
m) Transaction costs
Transaction costs on financial assets and liabilities at fair value through
profit or loss include fees and commissions paid to agents, advisers, brokers
and dealers. Transaction costs, when incurred, are immediately recognised in
the Statement of Comprehensive Income.
n) Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Board. The
Directors are of the opinion that the Company is engaged in a single segment of
business, being investments in Credit Securities. The Directors manage the
business in this way. For additional information refer to note 18.
o) Expenses
All expenses are included in the Statement of Comprehensive Income on an
accruals basis and are recognised through profit or loss in the Statement of
Comprehensive Income.
p) Other receivables
Other receivables are amounts due in the ordinary course of business. If
collection is expected in one year or less, they are classified as current
assets. If not, they are presented as non-current assets. Other receivables are
recognised initially at fair value and subsequently measured at amortised cost
using the effective interest rate method, less provision for impairment.
q) Other payables
Other payables are obligations to pay for services that have been acquired in
the ordinary course of business. Other payables are classified as current
liabilities if payment is due within one year or less. If not, they are
presented as non-current liabilities. Other payables are recognised initially
at fair value and subsequently measured at amortised cost using the effective
interest rate method.
r) Dividend distributions
Dividend distributions to the Company's shareholders are recognised as
liabilities in the Company's financial statements and disclosed in the
Statement of Changes in Equity in the period in which the dividends are
approved by the Board.
s) Income equalisation on new issues
In order to ensure there are no dilutive effects on earnings per share for
current shareholders when issuing new shares, a transfer is made between share
capital and other reserves to reflect that amount of income included in the
purchase price of the new shares.
t) Treasury Shares
The Company has the right to issue and purchase up to 14.99% of the total
number of its own shares, as disclosed in note 12.
Shares held in Treasury are excluded from calculations when determining
Earnings per Ordinary Share or Net Asset Value per Ordinary Share as detailed
in notes 4 and 6.
3. Significant accounting judgements, estimates and assumptions
The preparation of the Company's Financial Statements requires
management to make judgements, estimates and assumptions that affect the
reported amounts of revenues, expenses, assets and liabilities and the
accompanying disclosures. Uncertainty about these assumptions and estimates
could result in outcomes that require a material adjustment to the carrying
amount of assets or liabilities affected in future periods.
(i) Judgements
In the process of applying the Company's accounting policies, management has
made the following judgements, which have the most significant effect on the
amounts recognised in the Financial Statements:
Functional currency
As disclosed in note 2(l), the Company's functional currency is Sterling.
Sterling is the currency in which the Company measures its performance and
reports its results, as well as the currency in which it receives subscriptions
from its investors. Dividends are also paid to its investors in Sterling. The
Directors believe that Sterling best represents the functional currency.
(ii) Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation
uncertainty at the reporting date, that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within
the next financial year, are described below. The Company based its assumptions
and estimates on parameters available when the Financial Statements were
prepared. Existing circumstances and assumptions about future developments,
however, may change due to market changes or circumstances arising which are
beyond the control of the Company. Such changes are reflected in the
assumptions when they occur.
(a) Fair value of securities not quoted in active markets
The Company carries its investments in Credit Securities at fair value, with
changes in value being recognised in the Statement of Comprehensive Income. In
cases where prices of Credit Securities are not quoted in an active market, the
Portfolio Manager will obtain prices determined at the close of business on the
reporting date from an independent price vendor. The Portfolio Manager
exercises its judgement on the quality of the independent price vendor and
information provided. If a price cannot be obtained from an independent price
vendor or where the Portfolio Manager determines that the provided price is not
an accurate representation of the fair value of the Credit Security, the
Portfolio Manager will source prices from independent third party brokers or
dealers for the relevant security, which may be indicative rather than
tradable. Where no third party price is available, or where the Portfolio
Manager determines that the third party quote is not an accurate representation
of the fair value, the Portfolio Manager will determine the valuation based on
the Portfolio Manager's valuation policy. This may include the use of a
comparable arm's length transaction, reference to other securities that are
substantially the same, discounted cash flow analysis and other valuation
techniques commonly used by market participants making the maximum use of
market inputs and relying as little as possible on entity-specific inputs. No
Credit Securities were priced by the Portfolio Manager during the year or any
previous year.
(b) Estimated life of Credit Securities
In determining the estimated life of the Credit Securities held by the Company,
the Portfolio Manager estimates the remaining life of the security with respect
to expected prepayment rates, default rates and loss rates together with other
information available in the market underlying the security. The estimated life
of the Credit Securities, as determined by the Portfolio Manager, impacts the
effective interest rate of the Credit Securities which in turn impacts the
calculation of income as discussed in note 2(h).
(c) Determination of observable inputs
As discussed in note 17, when determining the levels of investments
within the fair value hierarchy, the determination of what constitutes
'observable' requires significant judgement by the Company. The Company
considers observable data to be market data that is readily available,
regularly distributed or updated, reliable and verifiable, not proprietary, and
provided by independent sources that are actively involved in the relevant
market.
4. Earnings per Ordinary Share - Basic & Diluted
The earnings per Ordinary Share - Basic and Diluted of 4.0p (30 September 2018:
2.9p) has been calculated based on the weighted average number of Ordinary
Shares of 185,006,548 (30 September 2018: 167,986,686) and a net gain for the
year of GBP7,383,132 (30 September 2018: GBP4,950,193).
5. Income on equalisation of new issues
In order to ensure there were no dilutive effects on earnings per share
for current shareholders when issuing new shares, earnings have been calculated
in respect of the accrued income at the time of purchase and a transfer has
been made from share capital to income to reflect this. The transfer for the
year amounted to GBP6,165 (30 September 2018: GBP180,569).
6. Net Asset Value per Ordinary Share
The net asset value of each Share of 90.63 (30 September 2018: 93.17p) is
determined by dividing the net assets of the Company attributed to the Shares
of GBP167,827,286 (30 September 2018: GBP169,743,090) by the number of Shares in
issue at 30 September 2019 of 185,179,151 (30 September 2018: 182,179,151).
7. Taxation
The Company has been granted Exempt Status under the terms of The Income
Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its
liability for Guernsey taxation is limited to an annual fee of GBP1,200 (30
September 2018: GBP1,200). The activities of the Company do not constitute
relevant activities as defined by the Income Tax (Substance Requirements)
(Implementation) Regulations, 2018 (as amended) and as such the Company was out
of scope.
8. Net foreign currency (losses)/gains
Year ended Year ended
30.09.19 30.09.18
GBP GBP
Movement in net unrealised gains/(losses) on forward 1,370,283 (613,703)
currency contracts
Movement in unrealised gains/(losses) on spot currency 10,387 (10,890)
contracts
Realised losses on forward currency contracts (230,440) (642,348)
Realised currency losses/(gains) on receivables/payables (1,190,963) 51
Unrealised currency losses on receivables/payables (23,442) (22,948)
(64,175) (1,289,838)
9. Investments
As at As at
30.09.19 30.09.18
GBP GBP
Financial assets at fair value through profit and loss:
Unlisted Investments:
Opening amortised cost 158,413,688 137,736,071
Purchases at 61,344,183 72,998,902
cost
Proceeds on sale/principal repayment (63,383,538) (55,621,075)
Amortisation adjustment under effective interest rate method 511,152 783,913
Realised gain on sale/principal repayment 4,595,217 4,609,061
Realised loss on sale/principal repayment (5,408,535) (2,093,184)
Closing amortised cost 156,072,167 158,413,688
Unrealised gain on investments 5,579,321 6,821,995
Unrealised loss on investments (3,316,721) (2,405,689)
Fair value 158,334,767 162,829,994
As at As at
30.09.19 30.09.18
GBP GBP
Realised gain on sale/principal repayment 4,595,217 4,609,061
Realised loss on sale/principal repayment (5,408,535) (2,093,184)
Decrease in unrealised gain (1,242,674) (5,717,151)
Increase in unrealised (911,032) (630,247)
loss
Net loss on financial assets at fair value through profit or (2,967,024) (3,831,521)
loss
10. Other receivables
As at As
30.09.19 at
30.09.18
GBP GBP
Interest income receivable 2,479,801 2,845,755
Prepaid expenses 28,904 39,195
Dividends receivable 209,263 99,190
Foreign currency receivable - 28
2,717,968 2,984,168
11. Other payables
As at As
30.09.19 at
30.09.18
GBP GBP
Portfolio management fees payable 107,716 205,615
Directors' fees payable - 27,750
Administration fees payable 23,322 23,440
AIFM management fees payable 16,138 18,905
Audit fees payable 54,000 51,500
Other expenses payable 76,953 53,960
Depositary fees payable 2,239 2,150
Custody fees payable 2,241 1,454
Foreign currency payable - 10,415
282,609 395,189
12. Share Capital
Authorised Share Capital
The Directors may issue an unlimited number of Ordinary Shares at no par value
and an unlimited number of Ordinary Shares with a par value.
Issued Share Capital
As at As at
30.09.19 30.09.18
GBP GBP
Ordinary Shares
Share Capital at the beginning of the 177,393,446 157,001,121
year
Issue of shares 2,847,700 20,817,500
Share issue costs (33,602) (244,606)
Income equalisation on new issues (6,165) (180,569)
Total Share Capital at the end of the 180,201,379 177,393,446
year
Reconciliation of number of Shares
30.09.19 30.09.18
Shares Shares
Ordinary Shares
Shares at the beginning of the year 182,179,151 160,929,151
Issue of shares 3,000,000 21,250,000
Total Shares in issue at the end of 185,179,151 182,179,151
the year
The Ordinary Shares carry the following rights:
a) the Ordinary Shares carry the right to receive all income of the Company
attributable to the Ordinary Shares.
b) the Shareholders present in person or by proxy or present by a duly
authorised representative at a general meeting has, on a show of hands, one
vote and, on a poll, one vote for each Share held.
The Company has the right to issue and purchase up to 14.99% of the total
number of its own shares at GBP0.01 each, to be classed as Treasury Shares and
may cancel those Shares or hold any such Shares as Treasury Shares, provided
that the number of Shares held as Treasury Shares shall not at any time exceed
10% of the total number of Shares of that class in issue at that time or such
amount as provided in the Companies Law.
The Company held no Treasury as at 30 September 2019 (2018: Nil).
13. Analysis of Financial Assets and Liabilities by Measurement Basis as per
Statement of Financial Position
Financial
assets at fair
value through Amortised
profit and loss Cost Total
GBP GBP GBP
30 September 2019
Financial Assets
Financial assets at fair value through
profit and loss
-Investments
-Bonds 97,230,422 - 97,230,422
-Asset backed 61,104,345 - 61,104,345
securities
-Derivative assets: Forward currency 686,397 - 686,397
contracts
Amounts due from broker - 629,488 629,488
Other receivables (excluding prepaid - 2,689,064 2,689,064
expenses)
Cash and cash equivalents - 7,197,759 7,197,759
159,021,164 10,516,311 169,537,475
Financial
liabilities at Other
fair
value through financial
profit and loss liabilities Total
GBP GBP GBP
30 September 2019
Financial Liabilities
Amounts due to broker - 444,938 444,938
Other payables - 282,609 282,609
Interest income received in advance - 976,786 976,786
Financial liabilities at fair value
through profit and loss
-Derivative liabilities: Forward 34,760 - 34,760
currency
contracts
34,760 1,704,333 1,739,093
Financial
assets at fair
value through Amortised
profit and loss Cost Total
GBP GBP GBP
30 September 2018
Financial Assets
Financial assets at fair value through
profit and loss
-Investments
-Bonds 106,254,172 - 106,254,172
-Asset backed 56,575,822 - 56,575,822
securities
-Derivative assets: Forward currency 10,686 - 10,686
contracts
Amounts due from broker - 3,019,184 3,019,184
Other receivables (excluding prepaid - 2,944,973 2,944,973
expenses)
Cash and cash equivalents - 6,834,535 6,834,535
162,840,680 12,798,692 175,639,372
Financial
liabilities at Other
fair
value through financial
profit and loss liabilities Total
GBP GBP GBP
30 September 2018
Financial Liabilities
Amounts due to broker - 4,810,956 4,810,956
Other payables - 395,189 395,189
Financial liabilities at fair value
through profit and loss
-Derivative liabilities: Forward 729,332 - 729,332
currency
contracts
729,332 5,206,145 5,935,477
14. Related Parties
a) Directors' Remuneration & Expenses
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine. The aggregate fees of the Directors will not exceed
GBP150,000.
The Directors' fees for the year and the outstanding fees at year end are as
follows.
30.09.19 30.09.18
GBP GBP
Claire Whittet (Chair of the 42,000 42,000
Board)
Christopher Legge (Audit Committee Chairman) 37,000 37,000
Ian Martin (MEC Chairman) 32,000 32,000
Total 111,000 111,000
Directors'
fees
As at As at
30.09.19 30.09.18
GBP GBP
Directors' fee payable (note 11) - 27,750
b) Shares held by related parties
The Directors of the Company held the following shares beneficially:
30.09.19 30.08.19
Shares Shares
Claire Whittet 25,000 25,000
Christopher Legge 50,000 50,000
Ian Martin 35,000 35,000
Directors are entitled to receive the dividends on any shares held by them
during the year. Dividends declared by the Company are set out in note 19.
As at 30 September 2019, the Portfolio Manager held no Shares (30 September
2018: no Shares) of the Issued Share Capital. Partners and employees of the
Portfolio Manager decreased their holdings during the year, and held 1,010,642
Shares (30 September 2018: 1,153,258), which is 0.55% (30 September 2018:
0.63%) of the Issued Share Capital.
c) Portfolio Manager
The portfolio management fee is payable to the Portfolio Manager, TwentyFour
Asset Management LLP, monthly in arrears at a rate of 0.75% per annum of the
lower of NAV, which is calculated weekly on each valuation day, or market
capitalisation of each class of shares. Total portfolio management fees for the
year amounted to GBP1,265,691 (30 September 2018: GBP1,201,499) of which GBP107,716
(30 September 2018: GBP205,615) is payable at year end. The Portfolio Management
Agreement dated 17 February 2014 remains in force until determined by the
Company or the Portfolio Manager giving the other party not less than twelve
months' notice in writing. Under certain circumstances, the Company or the
Portfolio Manager is entitled to immediately terminate the agreement in
writing.
The Portfolio Manager is also entitled to a commission of 0.175% of the
aggregate gross offering proceeds plus any applicable VAT in relation to any
issue of new Shares, following admission, in consideration of marketing
services that it provides to the Company. During the year, the Portfolio
Manager received GBP5,145 (30 September 2018: GBP36,431) in commission.
15. Material Agreements
a) Alternative Investment Fund Manager ("AIFM")
The Company's AIFM is Maitland Institutional Services Limited. In consideration
for the services provided by the AIFM under the AIFM Agreement the AIFM is
entitled to receive from the Company a minimum fee of GBP20,000 per annum and
fees payable quarterly in arrears at a rate of 0.07% of the Net Asset Value of
the Company below GBP50 million, 0.05% on Net Assets between GBP50 million and GBP100
million and 0.03% on Net Assets in excess of GBP100 million. During the year,
AIFM fees of GBP80,792 (30 September 2018: GBP77,924) were charged to the Company,
of which GBP16,138 (30 September 2018: GBP18,905) remained payable at the end of
the year.
b) Administrator and Secretary
Administration fees are payable to Northern Trust International Fund
Administration Services (Guernsey) Limited monthly in arrears at a rate of
0.06% of the Net Asset Value of the Company below GBP100 million, 0.05% on Net
Assets between GBP100 million and GBP200 million and 0.04% on Net Assets in excess
of GBP200 million as at the last business day of the month subject to a minimum
of GBP75,000 for each year. In addition, an annual fee of GBP25,000 will be charged
for corporate governance and company secretarial services. During the year,
administration and secretarial fees of GBP119,705 (30 September 2018: GBP119,623)
were charged to the Company, of which GBP23,322 (30 September 2018: GBP23,440)
remained payable at the end of the year.
c) Broker
For its services as the Company's broker, Numis Securities Limited (the
"Broker") is entitled to receive a retainer fee of GBP50,000 per annum and also a
commission of 1% on all tap issues. During the year, the Broker received GBP
28,477 (30 September 2018: GBP208,175) in commission, which is charged as a cost
of issuance.
d) Depositary
Depositary's fees are payable to Northern Trust (Guernsey) Limited monthly in
arrears at a rate of 0.0175% of the NAV of the Company below GBP100 million,
0.0150% on Net Assets between GBP100 million and GBP200 million and 0.0125% on Net
Assets in excess of GBP200 million as at the last business day of the month
subject to a minimum of GBP25,000 for each year. During the year, depositary fees
of GBP27,861 (30 September 2018: GBP26,523) were charged to the Company, of which GBP
2,239 (30 September 2018: GBP2,150) remained payable at the end of the year.
The Depositary is also entitled to a Global Custody fee of a minimum of GBP8,500
per annum plus transaction fees. Total Global Custody fees and charges for the
year amounted to GBP19,232 (30 September 2018: GBP18,150) of which GBP2,241 (30
September 2018: GBP1,454) is due and payable at the end of the year.
16. Financial Risk Management
The Company's activities expose it to a variety of financial risks: Market risk
(including price risk, reinvestment risk, interest rate risk and foreign
currency risk), credit risk, liquidity risk and capital risk.
The Company's financial instruments include financial assets/liabilities at
fair value through profit or loss, cash and cash equivalents, amounts due to/
from broker, other receivables and other payables. The techniques and
instruments utilised for the purposes of efficient portfolio management are
those which are reasonably believed by the Board to be economically appropriate
to the efficient management of the Company.
Market risk
Market risk embodies the potential for both losses and gains and includes
foreign currency risk, interest rate risk, price risk and reinvestment risk.
The Company's strategy on the management of market risk is driven by the
Company's investment objective. The Company's investment objective is to
generate attractive risk adjusted returns principally through investment in
Credit Securities.
(i) Price risk
The underlying investments comprised in the portfolio are subject to price
risk. The Company is therefore at risk that market events may affect
performance and in particular may affect the value of the Company's investments
which are valued on a mark to market and mark to model basis. Price risk is
risk associated with changes in market prices or rates, including interest
rates, availability of credit, inflation rates, economic uncertainty, changes
in laws, national and international political circumstances. The Company's
policy is to manage price risk by holding a diversified portfolio of assets,
through its investments in Credit Securities.
The Company's policy also stipulates that at purchase no more than 5% of the
portfolio value can be exposed to any single Credit Security or issuer of
Credit Securities.
The price of a Credit Security can be affected by a number of factors,
including: (i) changes in the market's perception of the underlying assets
backing the security; (ii) economic and political factors such as interest
rates and levels of unemployment and taxation which can have an impact on the
arrears, foreclosures and losses incurred with respect to the pool of assets
backing the security; (iii) changes in the market's perception of the adequacy
of credit support built into the security's structure to protect against losses
caused by arrears and foreclosures; (iv) changes in the perceived
creditworthiness of the originator of the security or any other third parties
to the transaction; (v) the speed at which mortgages or loans within the pool
are repaid by the underlying borrowers (whether voluntary or due to arrears or
foreclosures).
(ii) Reinvestment risk
Reinvestment risk is the risk that future coupons from a bond will not be
reinvested at the yield prevailing when the bond was initially purchased.
A key determinant of a bond's yield is the price at which it is purchased and,
therefore, when the market price of bonds generally increases, the yield of
bonds purchased generally decreases. As such, the overall yield of the
portfolio, and therefore the level of dividends payable to Shareholders, would
fall to the extent that the market prices of Credit Securities generally rise
and the proceeds of Credit Securities held by the Company that mature or are
sold are not able to be reinvested in Credit Securities with a yield comparable
to that of the portfolio as a whole. The Company assesses reinvestment risk on
at least a monthly basis by calculating the projected amortisation profile of
the Company across the next three years. In addition, changes in the Company's
yield and income are assessed over the same timeframe as bonds redeem or mature
to identify any periods where reinvestment risk may be more significant.
Price sensitivity analysis
The following details the Company's sensitivity to movement in market prices.
The analysis is based on a 10% and 5% (30 September 2017: 10% and 5%) increase
or decrease in market prices. This represents management's best estimate of a
reasonable possible shift in market prices, having regard to historical
volatility.
At 30 September 2019, if the market prices had been 10% and 5% (30 September
2018: 10% and 5%) higher with all other variables held constant, the increase
in the net assets attributable to equity Shareholders would have been GBP
15,833,391 and GBP7,916,695 respectively (30 September 2018: GBP16,282,999 and GBP
8,141,500). The total comprehensive income for the year would have also
increased by GBP15,833,391 and GBP7,916,695 (30 September 2018: GBP16,282,999 and GBP
8,141,500). An equal change in the opposite direction would have decreased the
net assets attributable to equity Shareholders and total comprehensive income
respectively.
Actual trading results may differ from the above sensitivity analysis and those
differences may be material.
(iii) Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect the fair value of financial assets at fair value
through profit or loss.
The tables below summarise the Company's exposure to interest rate risk:
Floating Fixed rate Non-interest Total
rate bearing
As at 30 September 2019 GBP GBP GBP GBP
Investments 31,828,751 126,506,016 - 158,334,767
Derivative assets: Forward - - 686,397 686,397
currency contracts
Amounts due from broker - - 629,488 629,488
Other receivables - - 2,717,968 2,717,968
Cash and cash equivalents 7,197,759 - - 7,197,759
Derivative liabilities: - - (34,760) (34,760)
Forward currency contracts
Amounts due to broker - - (444,938) (444,938)
Other payables - - (282,609) (282,609)
Interest income received in - - (976,786) (976,786)
advance
Net current assets 39,026,510 126,506,016 2,294,760 167,827,286
As at 30 September 2018 GBP GBP GBP GBP
Investments 41,553,484 121,276,510 - 162,829,994
Derivative assets: Forward - - 10,686 10,686
currency contracts
Amounts due from broker - - 3,019,184 3,019,184
Other receivables - - 2,984,168 2,984,168
Cash and cash equivalents 6,834,535 - - 6,834,535
Derivative liabilities: - - (729,332) (729,332)
Forward currency contracts
Amounts due to broker - - (4,810,956) (4,810,956)
Other payables - - (395,189) (395,189)
Net current assets 48,388,019 121,276,510 78,561 169,743,090
The Company holds fixed rate and floating rate financial instruments which,
based on current portfolio duration, have low exposure to fair value interest
rate risk as, when the short-term interest rates increase, the interest rate on
a floating rate note will increase. The maximum time to re-fix interest rates
is six months and therefore the Company has low interest rate risk and, as such
it is not deemed necessary to perform sensitivity analysis over interest rate
risk.
As at 30 September 2019, 75% of the Company's net current asset position was
invested in fixed rate securities, however the overall credit spread duration
of the Company was 3.6 years. A credit spread duration of 3.6 indicates that
the portfolio's value will rise or fall by 3.6bp should the reference credit
spread rise or fall by 1bp. The value of Credit securities may be affected by
interest rate movements. Interest receivable on bank deposits or payable on
bank overdraft positions will be affected by fluctuations in interest rates,
however the underlying cash positions will not be affected.
The Company's continuing position in relation to interest rate risk is
monitored on a weekly basis by the Portfolio Manager as part of its review of
the weekly Net Asset Value calculations prepared by the Company's
Administrator.
(iv) Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates. The Company invests
predominantly in non-Sterling assets while its Shares are denominated in
Sterling, its expenses are incurred in Sterling and its presentational currency
is Sterling. Therefore the Statement of Financial Position may be significantly
affected by movements in the exchange rate between foreign currencies and
Sterling. The Company manages the exposure to currency movements by using spot
and forward foreign exchange contracts, rolling forward on a periodic basis.
At year end, the Company had seven (30 September 2018: six) open forward
currency contracts.
Open forward currency contracts
Outstanding Mark to Unrealised
contracts market gains/
equivalent (losses)
Contract
values
30.09.19 30.09.19 30.09.19 30.09.19
Currency GBP GBP GBP
Seven Sterling forward foreign
currency contracts totalling:
6 EUR forward foreign currency (91,751,565) (81,878,779) (81,204,969) 673,810
contract
1 USD forward foreign currency (16,678,881) (13,506,042) (13,528,215) (22,173)
contract
651,637
Outstanding Mark to Unrealised
contracts market (losses)
equivalent
Contract
values
30.09.18 30.09.18 30.09.18 30.09.18
Currency GBP GBP GBP
Six Sterling forward foreign
currency
contracts
totalling:
1 CHF forward foreign currency (40,495) (31,731) (31,817) (86)
contract
3 EUR forward foreign currency (85,850,355) (76,100,188) (76,512,544) (412,356)
contract
2 USD forward foreign currency (25,230,064) (19,025,947) (19,332,151) (306,204)
contract
(718,646)
At year end, the Company had nil (30 September 2018: three) open spot currency
contracts.
Open spot currency contracts
Outstanding Mark to Unrealised
contracts market losses
equivalent
Contract
values
30.09.18 30.09.18 30.09.18 30.09.18
Currency GBP GBP GBP
Three Sterling spot foreign
currency contract
2 EUR spot currency 901,166 802,804 802,657 (147)
contract
1 GBP spot currency (2,844,503) (2,171,045) (2,181,285) (10,240)
contract
(10,387)
As at 30 September 2019 and 2018 the Company held the following assets and
liabilities denominated in currencies other than Pound Sterling:
30.09.19 30.09.18
GBP GBP
Investments 92,633,805 97,050,699
Cash and cash 835,621 678,883
equivalents
Amounts due from broker and other receivables 1,930,690 4,365,964
Less: Amounts due to - (3,973,710)
broker
Less: Other (976,786) -
payables
Less: Open forward currency (94,733,184) (95,876,512)
contracts
Less: Open spot currency - (1,378,627)
contracts
(309,854) 866,697
The following tables summarise the sensitivity of the Company's assets and
liabilities to changes in foreign exchange movements between Euro, US Dollar
and Swiss Franc, and the Company functional currency of Sterling as at 30
September 2019 and 2018. The analysis is based on the assumption that the
relevant foreign exchange rate increased/decreased by the percentage disclosed
in the table, with all other variables held constant. This represents
management's best estimate of a reasonable possible shift in the foreign
exchange rates, having regard to historical volatility of those rates.
30.09.19 30.09.18
GBP GBP
Impact on Statement of Comprehensive Income
and Equity in response to a:
- 10% (30.09.18: 10%) increase in EUR/GBP 74,838 (31,533)
- 10% (30.09.18: 10%) decrease in EUR/GBP (11,890) 132,789
Impact on Statement of Changes in Equity in response to
a:
- 10% (30.09.18: 10%) increase in EUR/GBP 74,838 (31,533)
- 10% (30.09.18: 10%) decrease in EUR/GBP (11,890) 132,789
30.09.19 30.09.18
GBP GBP
Impact on Statement of Comprehensive Income
and Equity in response to a:
- 10% (30.09.18: 10%) increase in USD/GBP (20,651) (17,975)
- 10% (30.09.18: 10%) decrease in USD/GBP 8,978 (10,682)
Impact on Statement of Changes in Equity in response to
a:
- 10% (30.09.18: 10%) increase in USD/GBP (20,651) (17,975)
- 10% (30.09.18: 10%) decrease in USD/GBP 8,978 (10,682)
30.09.19 30.09.18
GBP GBP
Impact on Statement of Comprehensive Income
and Equity in response to a:
- 10% (30.09.18: 10%) increase in CHF/GBP (1,474) 43
- 10% (30.09.18: 10%) decrease in CHF/GBP 1,615 7
Impact on Statement of Changes in Equity in response to
a:
- 10% (30.09.18: 10%) increase in CHF/GBP (1,474) 43
- 10% (30.09.18: 10%) decrease in CHF/GBP 1,615 7
Credit risk
Credit risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Company. The Company
has a credit policy in place and the exposure to credit risk is monitored on an
on-going basis.
The main concentration of credit risk to which the Company is exposed arises
from the Company's investments in Credit Securities. The Company is also
exposed to counterparty credit risk on forwards, cash and cash equivalents,
amounts due from brokers and other receivable balances.
The Company's policy is to manage this risk by maintaining a portfolio
diversified by issuer. While the prospectus permits no more than 5% of the
portfolio value to be invested in any single Credit Security or issuer of
Credit Securities, the Portfolio Manager operates to stricter exposures
dependent on the credit rating of each single Credit Security or issuer of
Credit Securities.
Portfolio of debt securities by ratings category using the highest rating
assigned by Standard and Poor's ("S&P"), Moody's Analytics ("Moody's") or Fitch
Ratings ("Fitch"):
30.09.19 30.09.18
BBB+ 1.72% 2.66%
BBB 1.12% 0.00%
BBB- 14.46% 6.76%
BB+ 9.38% 9.09%
BB 12.01% 4.94%
BB- 10.31% 7.98%
B+ 4.77% 6.45%
B 21.55% 30.80%
B- 4.46% 8.20%
CCC+ 1.09% 0.22%
CCC 0.00% 0.49%
CC 0.19% 0.00%
Not Rated* 18.94% 22.41%
100.00% 100.00%
*The non-rated exposure within the Company is managed in exactly the same way
as the exposure to any other rated bond in the portfolio. A bond not rated by
any of Moody's, S&P or Fitch does not necessarily translate as poor credit
quality. Often smaller issues/tranches, or private deals which the Company
holds, won't apply for a rating due to the cost of doing so from the relevant
credit agencies. The portfolio managers have no significant credit concerns
with the unrated, or rated, bonds currently held.
To further understand credit risk, the Portfolio Manager undertakes extensive
due diligence procedures on investments in Credit Securities and monitors the
on-going investment in these securities.
The Company manages its counterparty exposure in respect of cash and cash
equivalents and forwards by investing with counterparties with a "single A" or
higher credit rating. The majority of cash is currently placed with The
Northern Trust Company. The Company is subject to credit risk to the extent
that this institution may be unable to return this cash. The Northern Trust
Company is a wholly owned subsidiary of The Northern Trust Corporation. The
Northern Trust Corporation is publicly traded and a constituent of S&P 500. The
Northern Trust Corporation has a credit rating of A+ from Standard & Poor's and
A2 from Moody's.
The Company's maximum credit exposure is limited to the carrying amount of
financial assets recognised as at the statement of financial position date, as
summarised below:
30.09.19 30.09.18
GBP GBP
Investments 158,334,767 162,829,994
Amounts due from 629,488 3,019,184
broker
Cash and cash 7,197,759 6,834,535
equivalents
Derivative assets: Forward currency contracts 686,397 10,686
Other receivables 2,717,968 2,984,168
169,566,379 175,678,567
Investments in Credit Securities that are not backed by mortgages present
certain risks that are
not presented by mortgage-backed securities ("MBS"). Primarily, these
securities may not have the benefit of the same security interest in the
related collateral. Therefore, there is a possibility that recoveries on
defaulted collateral may not, in some cases, be available to support payments
on these securities. The risk of investing in these types of Credit Securities
is ultimately dependent upon payment of the underlying debt by the debtor.
Liquidity risk
Liquidity risk is the risk that the Company may not be able to generate
sufficient cash resources to settle its obligations in full as they fall due or
can only do so on terms that are materially disadvantageous.
Investments made by the Company in Credit Securities may be relatively illiquid
and this may limit the ability of the Company to realise its investments for
the purposes of cash management such as generating cash for dividend payments
to Shareholders or buying back Ordinary Shares under the Quarterly Tenders or
in the market. Investments in Credit Securities may also have no active market
and the Company also has no redemption rights in respect of these investments.
The Company has the ability to borrow to ensure sufficient cash flows.
The Portfolio Manager considers expected cash flows from financial assets in
assessing and managing liquidity risk, in particular its cash resources and
trade receivables. Cash flows from trade and other receivables are all
contractually due within twelve months.
The Portfolio Manager shall maintain a liquidity management policy to monitor
the liquidity risk of the Company.
Shareholders have no right to have their shares redeemed or repurchased by the
Company, except as detailed under the Capital Risk Management (Quarterly
Tenders) section of this note. Shareholders wishing to release their investment
in the Company are therefore required to dispose of their shares on the market.
The following table analyses the Company's liabilities into relevant maturity
groupings based on the maturities at the statement of financial position date.
The amounts in the table are the undiscounted net cash flows on the financial
liabilities:
Up to 1 1-6 6-12 Total
month months months
As at 30 September 2019 GBP GBP GBP GBP
Amounts due to broker (444,938) - - (444,938)
Derivative liabilities: - (34,760) - (34,760)
Forward currency contracts
Other payables (228,609) (54,000) - (282,609)
Total (673,547) (88,760) - (762,307)
Up to 1 1-6 6-12 Total
month months months
As at 30 September 2018 GBP GBP GBP GBP
Amounts due to broker (4,810,956) - - (4,810,956)
Derivative liabilities: - (729,332) - (729,332)
Forward currency contracts
Other payables (343,689) (51,500) - (395,189)
Total (5,154,645) (780,832) - (5,935,477)
Capital risk management
The Company manages its capital to ensure that it is able to continue as a
going concern while following the Company's stated investment policy. The
capital structure of the Company consists of Shareholders' equity, which
comprises share capital and other reserves. To maintain or adjust the capital
structure, the Company may return capital to Shareholders or issue new Shares.
There are no regulatory requirements to return capital to Shareholders.
(i) Quarterly Tenders
With the objective of minimising the risk of the Ordinary Shares trading at a
discount to NAV and to assist in the narrowing of any discount at which the
Ordinary Shares may trade from time to time, the Company has incorporated into
its structure a mechanism (a "Quarterly Tender"), contingent on certain factors
as described below, which can be exercised at the discretion of the Directors,
to provide Shareholders with a quarterly opportunity to submit Ordinary Shares
for placing or repurchase by the Company at a price representing a discount of
no more than 2% to the then prevailing NAV.
Upon confirmation of the number of Tender Requests made in respect of each
Quarter Record Date, the Company intends first, through its corporate broker
acting on a reasonable endeavours basis, to seek to satisfy Tender Requests by
placing the Tendered Shares with investors in the secondary market.
Second, subject to the Tender Restrictions, the Company intends to repurchase
for cancellation any Tendered Shares not placed in the secondary market.
It is anticipated that the Company will tender on a quarterly basis for up to
20% of the Ordinary Shares in issue as at the relevant Quarter Record Date,
subject to an aggregate limit of 50% of the Ordinary Shares in issue in any
twelve month period ending on the relevant Quarter Record Date.
(ii)Share buybacks
The Company has been granted the authority to make market purchases of up to a
maximum of 14.99% of the aggregate number of Ordinary Redeemable Shares in
issue immediately following Admission at a price not exceeding the higher of
(i) 5% above the average of the mid-market values of the Ordinary Redeemable
Shares for the 5 business days before the purchase is made or, (ii) the higher
of the price of the last independent trade and the highest current investment
bid for the Ordinary Redeemable Shares.
In deciding whether to make any such purchases the Directors will have regard
to what they believe to be in the best interests of Shareholders as a whole, to
the applicable legal requirements and any other requirements in its Articles.
The making and timing of any buybacks will be at the absolute discretion of the
Board and not at the option of the Shareholders, and is expressly subject to
the Company having sufficient surplus cash resources available (excluding
borrowed moneys).
The Listing Rules prohibit the Company from conducting any share buybacks
during close periods immediately preceding the publication of annual and
interim results.
(iii) Continuation votes
In the event that:
(i) the Dividend Target, as disclosed in note 19, is not met; or
(ii) on any Tender Submission Deadline, applications for the Company to
repurchase 50% or more of the Company's issued Ordinary Shares, calculated as
at the relevant Quarter Record Date, are received by the Company,
A General Meeting will be convened at which the Directors will propose an
Ordinary Resolution that the Company should continue as an investment company.
If any such Ordinary Resolution is not passed, the Directors shall draw up
proposals for the voluntary liquidation, unitisation, reorganisation or
reconstruction of the Company for submission to the members of the Company at a
General Meeting to be convened by the Directors for a date not more than 6
months after the date of the meeting at which such Ordinary Resolution was not
passed.
17. Fair Value Measurement
All assets and liabilities are carried at fair value or at carrying value which
equates to fair value.
IFRS 13 requires the Company to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy has the following levels:
(i) Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1).
(ii) Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices including interest rates, yield
curves, volatilities, prepayment speeds, credit risks and default rates) or
other market corroborated inputs (level 2).
(iii) Inputs for the asset or liability that are not based on observable market
data (that is, unobservable inputs) (level 3).
The following table analyses within the fair value hierarchy the Company's
financial assets and liabilities (by class) measured at fair value as at 30
September 2019.
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Financial assets at fair value
through profit or loss
-Investments
-Bonds - 89,863,362 7,367,060 97,230,422
-Asset backed - 61,104,345 - 61,104,345
securities
-Derivative assets:
Forward currency - 686,397 - 686,397
contracts
Total assets as at 30 September 2019 - 151,654,104 7,367,060 159,021,164
Liabilities
Financial liabilities at fair value
through profit or loss
-Derivative liabilities:
Forward currency contracts - 34,760 - 34,760
Total liabilities as at 30 September - 34,760 - 34,760
2019
The following table analyses within the fair value hierarchy the Company's
financial assets and liabilities (by class) measured at fair value as 30
September 2018.
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Financial assets at fair value
through profit or loss
-Investments
-Bonds - 40,656,257 65,597,915 106,254,172
-Asset backed - 46,866,424 9,709,398 56,575,822
securities
-Derivative assets:
Forward currency - 10,686 - 10,686
contracts
Total assets as at 30 September 2018 - 87,533,367 75,307,313 162,840,680
Liabilities
Financial liabilities at fair value
through profit or loss
-Derivative liabilities:
Forward currency - 729,332 - 729,332
contracts
Total liabilities as at 30 September - 729,332 729,332
2018
Credit Securities which have a value based on quoted market prices in active
markets are classified in level 1. At the end of the year, no Credit Securities
held by the Company are classified as level 1.
Credit Securities which are not traded or dealt on organised markets or
exchanges are classified in level 2 or level 3. Credit securities priced at
cost are classified as level 3. Credit securities with prices obtained from
independent price vendors, where the Portfolio Manager is able to assess
whether the observable inputs used for their modelling of prices are accurate
and the Portfolio Manager has the ability to challenge these vendors with
further observable inputs, are classified as level 2. Prices obtained from
vendors who are not easily challengeable or transparent in showing their
assumptions for the method of pricing these assets, are classified as level 3.
Credit Securities priced at an average of two vendors' prices are classified as
level 3.
Where the Portfolio Manager determines that the price obtained from an
independent price vendor is not an accurate representation of the fair value of
the Credit Security, the Portfolio Manager may source prices from third party
dealer quotes and if the price represents a reliable and an observable price,
the Credit Security is classified in level 2. Any dealer quote that is over 20
days old is considered stale and is classified as level 3.
There were no transfers between level 1 and 2 during the year, however
transfers from level 3 to level 2 occurred based on the Portfolio Manager's
ability to obtain a more reliable and observable price as detailed above.
Due to the inputs into the valuation of Credit Securities classified as level 3
not being available or visible to the Company, no meaningful sensitivity on
inputs can be performed.
Following the change in the Company's fair value measurement policy, 49 of 110
portfolio positions were priced using an average of Markit and ICE at 30 Sept
2019. The Fair Value methodology used for previous years would have rendered
all of these positions as IFRS 13 Level 3 securities. The updated fair value
methodology acknowledges that an average price of Markit and ICE prices uses
observable market data inputs, and that the price calculated for such positions
is an interpolation of two observable market data inputs, and should therefore
be considered as Level 2 securities under IFRS 13 rather than Level 3.
The following table presents the movement in level 3 instruments for the year
ended 30 September 2019 by class of financial instrument.
Bonds Asset backed Total
securities
30.09.19 GBP GBP GBP
Opening balance 65,597,915 9,709,398 75,307,313
Net purchases (11,225,449) 792,964 (10,432,485)
Net realised loss for the year (1,517,620) (1,091,307) (2,608,927)
Net unrealised gain/(loss) for 289,073 (34,597) 254,476
the year
Transfer into Level 3 - 2,500,000 2,500,000
Transfer out of Level 3 (53,143,919) (4,509,398) (57,653,317)
Closing balance - 7,367,060 7,367,060
The following table presents the movement in level 3 instruments for the year
ended 30 September 2018 by class of financial instrument.
Bonds Asset backed Total
securities
30.09.18 GBP GBP GBP
Opening balance 73,901,893 8,361,751 82,263,644
Net purchases 1,842 5,849,062 5,850,904
Net loss for the year (1,086,461) 652,813 (433,648)
Net unrealised gain for the (1,074,122) (254,682) (1,328,804)
year
Transfer into Level 3 8,972,727 - 8,972,727
Transfer out of Level 3 (15,117,964) (4,899,546) (20,017,510)
Closing balance 65,597,915 9,709,398 75,307,313
The following table analyses within the fair value hierarchy the
Company's assets and liabilities not measured at fair value at 30 September
2019 but for which fair value is disclosed.
Level 1 Level 2 Level 3 Total
30 September 2019 GBP GBP GBP GBP
Assets
Amounts due from broker - 629,488 - 629,488
Other - 2,717,968 - 2,717,968
receivables
Cash and cash 7,197,759 - - 7,197,759
equivalents
Total 7,197,759 3,347,456 - 10,545,215
Liabilities
Amounts due to broker - 444,938 - 444,938
Other payables - 282,609 - 282,609
Interest income received - 976,786 - 976,786
in advance
Total - 1,704,333 - 1,704,333
The following table analyses within the fair value hierarchy the Company's
assets and liabilities not measured at fair value at 30 September 2018 but for
which fair value is disclosed.
Level 1 Level 2 Level 3 Total
30 September 2018 GBP GBP GBP GBP
Assets
Amounts due from broker - 3,019,184 - 3,019,184
Other - 2,984,168 - 2,984,168
receivables
Cash and cash 6,834,535 - - 6,834,535
equivalents
Total 6,834,535 6,003,352 - 12,837,887
Liabilities
Amounts due to broker - 4,810,956 - 4,810,956
Other payables - 395,189 - 395,189
Total - 5,206,145 - 5,206,145
The assets and liabilities included in the above tables are carried at
amortised cost; their carrying values are a reasonable approximation of fair
value.
Cash and cash equivalents include deposits held with banks.
Amounts due to brokers and other payables represent the contractual amounts and
obligations due by the Company for settlement of trades and expenses. Amounts
due from brokers and other receivables represent the contractual amounts and
rights due to the Company for settlement of trades and income.
18. Segmental Reporting
The Board is responsible for reviewing the Company's entire
portfolio and considers the business to have a single operating segment. The
Board's asset allocation decisions are based on a single, integrated investment
strategy, and the Company's performance is evaluated on an overall basis.
The Company invests in a diversified portfolio of Credit
Securities. The fair value of the major financial instruments held by the
Company and the equivalent percentages of the total value of the Company are
reported in the Top Twenty Holdings.
Revenue earned is reported separately on the face of the Statement
of Comprehensive Income as interest income on financial assets at fair value
through profit and loss being interest income received from Credit Securities.
19. Dividend Policy
The Board intends to distribute an amount at least equal to the
value of the Company's excess income, as defined below, arising each financial
year to the holders of Ordinary Shares. However, there is no guarantee that the
dividend target of 6.0 pence per Ordinary Share for each financial year will be
met or that the Company will make any distributions at all.
Excess income is defined as the distributions made with respect to any income
period, which comprise (a) the accrued income of the portfolio for the period
(for these purposes, the Company's income will include the interest payable by
the Credit Securities in the portfolio and amortisation of any discount or
premium to par at which a Credit Security is purchased over its remaining
expected life), and (b) an additional amount to reflect any income purchased in
the course of any share subscriptions that took place during the
period. Including purchased income in this way ensures that the income yield of
the shares is not diluted as a consequence of the issue of new shares during an
income period and (c) any gain / (loss) on the foreign exchange contracts
caused by the libor differentials between each foreign exchange currency pair.
This definition differs from the IFRS "net income" definition which also
recognises gains and losses on financial assets.
The Board expects that dividends will constitute the principal element of the
return to the holders of Ordinary Shares.
The Company declared the following dividends in respect of the profit for the
year ended 30 September 2019:
Period to Dividend Net dividend Ex-dividend Record date Pay date
rate per paid date
Share Income
(pence) (GBP)
31 October 0.50 920,896 15 November 16 November 30 November
2018 2018 2018 2018
30 November 0.50 925,896 13 December 14 December 31 December
2018 2018 2018 2018
31 December 0.50 925,896 17 January 18 January 31 January
2018 2019 2019 2019
31 January 0.50 925,896 14 February 15 February 28 February
2019 2019 2019 2019
28 February 0.50 925,896 14 March 2019 15 March 2019 29 March 2019
2019
31 March 2019 0.50 925,896 18 April 2019 23 April 2019 30 April 2019
30 April 2019 0.50 925,896 16 May 2019 17 May 2019 31 May 2019
31 May 2019 0.50 925,896 20 June 2019 21 June 2019 28 June 2019
30 June 2019 0.50 925,896 18 July 2019 19 July 2019 31 July 2019
31 July 2019 0.50 925,896 15 August 2019 16 August 2019 30 August 2019
31 August 2019 0.50 925,896 19 September 20 September 30 September
2019 2019 2019
30 September 0.84 1,560,933 17 October 18 October 31 October
2019 2019 2019 2019
Under the Companies (Guernsey) Law, 2008, the Company can distribute dividends
from capital and revenue reserves, subject to the net asset and solvency test.
The net asset and solvency test considers whether a company is able to pay its
debts when they fall due, and whether the value of a company's assets is
greater than its liabilities. The Board confirms that the Company passed
the net asset and solvency test for each dividend paid.
20. Ultimate Controlling Party
In the opinion of the Directors on the basis of shareholdings advised to
them, the Company has no ultimate controlling party.
21. Subsequent Events
These Financial Statements were approved for issuance by the Board on 12
December 2019. Subsequent events have been evaluated to this date.
Subsequent to the year end and up to the date of signing of the Annual Report
and Audited Financial Statements, the following events took place:
Dividend declarations
Declaration date
Dividend rate
per Share
(pence)
10 October 2019 0.84
7 November 2019 0.50
12 December 2019 0.50
CORPORATE INFORMATION
Directors Receiving Agent
Claire Whittet (Chair) Computershare Investor Services PLC
Christopher Legge The Pavillions
Ian Martin Bridgewater Road
Bristol, BS13 8AE
Registered Office UK Legal Advisers to the Company
PO Box 255 Eversheds Sutherland
Trafalgar Court One Wood Street
Les Banques London, EC2V 7WS
St Peter Port
Guernsey, GY1 3QL
Portfolio Manager Guernsey Legal Advisers to the
Company
TwentyFour Asset Management LLP Carey Olsen
8th Floor The Monument Building Carey House
11 Monument Street Les Banques
London, EC3R 8AF St Peter Port
Guernsey, GY1 4BZ
Alternative Investment Fund Manager Independent Auditor
Maitland Institutional Services Limited PricewaterhouseCoopers CI LLP
Hamilton Centre PO Box 321
Rodney Way Royal Bank Place
Chelmsford, CM1 3BY Glategny Esplanade
St Peter Port
Guernsey, GY1 4ND
Custodian, Principal Banker and Registrar
Depositary
Northern Trust (Guernsey) Limited Computershare Investor Services
PO Box 71 (Guernsey) Limited
Trafalgar Court 1st Floor
Les Banques Tudor House
St Peter Port Le Bordage
Guernsey, GY1 3DA St Peter Port
Guernsey, GY1 1DB
Administrator and Company Secretary Broker and Financial Adviser
Northern Trust International Fund Numis Securities Limited
Administration The London Stock Exchange Building
Services (Guernsey) Limited
PO Box 255 10 Paternoster Square
Trafalgar Court London, EC4M 7LT
Les Banques
St Peter Port
Guernsey, GY1 3QL
END
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