ACON INCOP
Acorn Income Fund Limited
Annual Financial Report
For the year ended 31 December 2016
The Company has today, in accordance with DTR 6.3.5, released its Annual
Financial Report for the year ended
31 December 2016. The Report will shortly be available via the Investment
Manager's website https://www.premierfunds.co.uk/media/941577/
acorn-income-fund-annual-report-2016.pdf and will also be available for
inspection online at www.morningstar.co.uk/uk/NSM website.
Investment Objectives and Policy
Investment Objectives
The investment objective and policy of Acorn Income Fund Limited (the "Company"
or "Acorn") is to provide Shareholders with high income and also the
opportunity for capital growth.
The Company's assets comprise investments in equities and fixed interest
securities in order to achieve its investment objective. The Company's
investments are held in two portfolios. Approximately 70% to 80% of the
Company's assets are invested in smaller capitalised United Kingdom companies,
admitted to the Official List of the Financial Conduct Authority (the "FCA")
and traded on the main market of the London Stock Exchange (the "LSE") or
traded on the Alternative Investment Market ("AIM") at the time of investment.
The Company also aims to enhance income for Ordinary Shareholders by investing
approximately 20% to 30% of the Company's assets in high yielding instruments
which are predominantly fixed interest securities but may include up to 15% of
the Company's overall portfolio (measured at the time of acquisition) in high
yielding investment company shares.
The proportion of the overall portfolio held in the Smaller Companies Portfolio
and the Income Portfolio varies from day to day as the market prices of
investments move. The Directors retain discretion to transfer funds from one
portfolio to the other and generally expect between 70% to 80% of the
investments to be held in the Smaller Companies Portfolio.
While the Company's investment policy is to spread risk by maintaining
diversified portfolios, there are no restrictions on the proportions of either
of the portfolios which may be invested in any one geographical area, asset
class or industry sector. However, not more than 7.5% of the Company's gross
assets may be invested in securities issued by any one company as at the time
of investment, save that (i) in respect of the Income Portfolio only,
investments may be made in other investment funds subject only to the
restriction set out in paragraph (c) of the section headed "Investment
Restrictions" below; and (ii) in respect of the Smaller Companies Portfolio
only, provided that not more than 10% of the Company's gross assets are
invested in securities issued by any one company at any time, the 7.5% limit
may be exceeded on a short term basis, with Board approval, where a company
whose securities form part of the Smaller Companies Portfolio issues new
securities (for example by way of a rights issue).
The Company's capital structure is such that the underlying value of assets
attributable to the Ordinary Shares is geared relative to the rising capital
entitlements of the Preference Shares ("ZDP Shares"). The Company's gearing
policy is not to employ any further gearing through long-term bank borrowing.
Save with the prior sanction of ZDP Shareholders, the Company will incur no
indebtedness other than short term borrowings in the normal course of business
such as to settle share trades or borrowings to finance the redemption of the
ZDP Shares.
Investment Restrictions
For so long as required by the LSE Listing Rules in relation to closed-ended
investment companies, the Company has adopted the following investment and
other restrictions:
(a) the Company will at all times invest and manage its assets in a way
which is consistent with its objective of spreading investment risk and in
accordance with its published investment policy;
(b) the Company will not conduct any significant trading activity; and
(c) not more than 10% in aggregate of the value of the total assets of the
Company at the time the investment is made will be invested in other listed
closed-ended investment funds. The Listing Rules provide an exception to this
restriction to the extent that those investment funds which have stated
investment policies to invest no more than 15% of their total assets in other
listed closed-ended investment companies.
Derivatives
The Company may invest in derivatives, money market instruments and currency
instruments including contracts for differences, futures, forwards and options.
These investments may be used for hedging positions against movements in, for
example, equity markets, currencies and interest rates, for investment purposes
and for efficient portfolio management. The Company's use of such instruments
for investment purposes is limited to 5 per cent. of the total assets of the
Company. The Company will not use such instruments to engage in any significant
trading activity. The Company will not maintain derivative positions should the
total underlying exposure of these positions (excluding any currency hedges)
exceed one times adjusted total capital and reserves.
Performance Summary
for the year ended 31 December 2016
31/12/2016 31/12/2015 % change/return
Total Return Performance*
Total Return on Gross Assets*## 6.73%
Numis Smaller Companies (Ex Investment 19,074.80 17,171.76 11.08%
Companies) Index
FTSE All Share Index 6,424.25 5,502.42 16.75%
FTSE Small Cap (Ex Investment Companies) 6,802.34 6,044.52 12.54%
Index
Share Price and NAV Returns
Ordinary Shares
Share Price 359.00p 400.00p -10.25%
NAV** 407.23p 395.94p 2.85%
IFRS NAV# 407.20p 395.50p 2.96%
Total return on Net Assets* 6.91%
Ordinary Share Price Total Return -6.32%
Discount (-) Premium (+) to NAV on Ordinary -11.84% +1.02%
Shares
ZDP Shares
Share Price 139.38p 131.75p 5.79%
NAV** 137.26p 128.89p 6.49%
IFRS NAV 137.28p 129.22p 6.24%
Discount (-) Premium (+) to NAV on ZDP Shares +1.54% +2.21%
Other
Total Assets less Current Liabilities~ 64,787,950 89,812,543 -27.86%
Package Discount (-) Premium (+) to
NAV Combined Ordinary and ZDP Shares -7.67% +1.39%
ZDP Liability** 29,314,857 27,310,997 7.34%
Net Assets** 64,793,038 62,501,546 3.67%
Gearing Level 45.24% 43.70% 3.52%
Total Expenses Ratio (calculated on year end 1.04% 1.09% -4.59%
Gross Assets)
Ongoing Charges (calculated on average Net 1.63% 1.69% -3.55%
Assets)
Dividends and Earnings
Revenue return per ordinary share 20.38p 18.49p 10.22%
Dividends declared per ordinary share 15.50p 13.75p 12.73%
~ During the year ended 31 December 2016 the ZDP Shares were reclassified on
the Statement of Financial Position as a current liability as the maturity date
is within one year. In January 2017 the ZDP Shares were refinanced and the life
of the ZDP Shares was extended to 28 February 2022.
* assumes dividends reinvested
** calculated in accordance with the Articles
# calculated in accordance with International Financial Reporting Standards
# # adjusted for debt repayment and the issue of new Ordinary Shares and ZDP
Shares
Sources: Index data: Bloomberg, total return on gross and net assets, PFM, JP
Morgan Cazenove
Company Summary
History
The Company was incorporated on 5 January 1999 and commenced its activities on
11 February 1999. The portfolio was divided into two sub portfolios, a Smaller
Companies Portfolio representing approximately 70-80% of the total with the
balance invested in an Income Portfolio investing in fixed income securities,
investment company shares and more recently in structured investments. The
Company has always been leveraged, initially through bank debt and now through
Zero Dividend Preference Shares. In December 2016 shareholders approved the
extension of the Zero Dividend Preference Shares setting a new redemption date
of
28 February 2022.
Capital Structure
Zero Dividend Preference Shares (1p each) 21,357,174 (excluding treasury shares)
The ZDP Shares in issue at the year end had
a final capital entitlement of 138 pence per
ZDP on 31 January 2017. Following
shareholder approval of a scheme to extend
the life of the ZDPs and to give
shareholders the opportunity to elect to
remain invested, the redemption date of the
ZDP shares was extended to 28 February 2022
with a redemption price of 167.2 pence per
share, subject to there being sufficient
capital in the Company. The ZDP Shares are
not entitled to any dividends. ZDP
Shareholders rank ahead of the Ordinary
Shareholders in regards to rights as to
capital. The ZDP Shareholders have the right
to receive notice of all general meetings of
the Company, but do not have the right to
attend or vote unless the business of the
meeting involves an alteration of the rights
attached to the ZDP Shares, in which case
the holders of ZDP Shares can attend and
vote.
Ordinary Shares (1p each) 15,910,692 (excluding treasury shares)
The Ordinary Shares are entitled to
participate in all dividends and
distributions of the Company. On a
winding-up holders of Ordinary Shares are
entitled to participate in the distribution
and the holders of Ordinary Shares are
entitled to receive notice of and attend and
vote at all general meetings of the Company.
Treasury Shares As at 31 December 2016 there were 1,275,972
Ordinary and 1,712,757 ZDP Shares held in
treasury.
Shareholder Funds £64.79 million as at 31 December 2016
(calculated in accordance with IFRS)
Market Capitalisation of the Ordinary Shares £57.12 million as at 31 December 2016
Company Details
The Board The Board consists of three independent
non-executive directors ("the Directors"),
Helen Green (Chairman), Nigel Ward and David
Warr.
Investment Manager Premier Asset Management (Guernsey) Limited
("PAMG"), is a subsidiary of Premier Asset
Management Limited ("PAM"). PAM had
approximately £5.2bn of funds under
management as at 31 December 2016. PAMG is
licensed under the provisions of the
Protection of Investors (Bailiwick of
Guernsey) Law, 1987, as amended, by the
Guernsey Financial Services Commission to
carry on controlled investment business.
Investment Advisers Premier Fund Managers Limited ("PFM") - the
Company's Income Portfolio is managed by
Paul Smith.
Unicorn Asset Management Limited ("Unicorn")
- the Company's Smaller Companies Portfolio
is managed by Simon Moon and Fraser
Mackersie.
Secretary/Administrator Northern Trust International Fund
Administration (Guernsey) Limited.
Corporate Broker Numis Securities Limited ("Numis") provide
all corporate broking services.
Management Fee 0.7% per annum (Total Assets) charged 75% to
capital and 25% to revenue, plus performance
fee. Minimum annual management fee £100,000.
Registrar Anson Registrars Limited
Financial Calendar
Company's year end 31 December
Annual results announced March/April
Company's half year end 30 June
Annual General Meeting 15 August 2017
Half year results announced August
Dividend payments At the end of March, June, September and
December
Company Website
https://www.premierfunds.co.uk/investors/investments/investment-trusts/
acorn-income-fund
Chairman's Statement
Year to 31 December 2016
Dear Shareholder
2016 has been a year that has brought many unexpected twists and turns some of
which have been beneficial to the Company and some not. The return to
shareholders was challenging due to small companies having a difficult first
half of the year compounded by Acorn's Ordinary Shares moving to a wider
discount to net asset value (NAV). However the portfolio continued to deliver
strong revenue returns enabling the directors to increase the quarterly
dividend by 14.3% in June and then nine months later, post the year end, by a
further 12.5%. A strong recovery in the NAV towards the end of the year has
carried over into 2017. Following shareholder approval on 20 December 2016, the
life of the Zero Dividend Preference shares was extended for a further five
years at an accrual rate of 3.85%, enabling Ordinary shareholders to benefit
from a considerably lower cost of gearing than had applied for the previous
five years.
Investment Performance
The broad UK market as measured by the FTSE All-Share Total Return Index rose
16.75% over the 12 months to
31 December 2016. The Numis Smaller Companies (ex investment companies) Total
Return Index lagged the broader market with an increase of 11.08%. Acorn
suffered from the relative weakness of the small company sector, some
underperformance of the Numis Index and a widening of the discount to NAV at
which its Ordinary Shares traded. The total return on Acorn's gross assets over
the year was 6.73% and on net assets 6.91%. With a widening of the discount
the total return to Acorn Ordinary shareholders was -6.32% (share price plus
dividends).
There were two principal factors responsible for this outcome for Acorn. First
was the poor sentiment towards smaller companies that persisted for most of the
year. At the start of the year smaller companies were tending to lag the
broader market and then, following the unexpected EU Referendum result,
sentiment towards smaller companies moved sharply negative. The small company
indices fell further than the FTSE 100 and FTSE All-Share indices and recovered
more slowly. Larger companies recovered quickly from the initial shock as
investors focused on the increased value of overseas earnings which would
result from weak sterling. Smaller companies were perceived to have more of a
domestic focus and hence to be more exposed to the slowing of the UK economy
that many economists and commentators expected to arise as a consequence of
leaving the EU. The last two months of the year saw improvement in the
sentiment towards smaller companies as the downbeat forecasts for the UK
economy retreated and, as investors differentiated between those small company
stocks that would benefit from weaker sterling and those that might be under
pressure from a slowing domestic economy, the small company indices and Acorn's
net asset value began to move ahead to levels that exceeded the pre-Referendum
level.
The second factor giving rise to the disappointing return for shareholders was
the fact that the rating of the Ordinary Shares deteriorated significantly over
the year. Indeed at the start of the year the Ordinary Shares had been trading
at a premium to NAV of 1.02% and by the year-end were trading at an 11.84%
discount. The discount arose when sentiment towards smaller companies
deteriorated following the Referendum.
The Zero Dividend Preference Shares appreciated in value by 5.79% over the
year. The ZDP Shares closed the year at a price of 139.38 pence, trading at a
premium to their net asset value.
As in previous years the Company's broker Numis has carried out an analysis of
Acorn's performance and volatility against funds in the small and mid cap
sectors and in the equity income sector over the last 5 years. Acorn remains in
the top left quadrant on both charts indicating that, measured on NAV total
return, Acorn achieved above average returns with below average volatility
relative to other funds in those sectors.
Asset Allocation
The split between the Smaller Companies Portfolio and the Income Portfolio
started the year at approximately 77.5% to the Smaller Companies Portfolio and
22.5% to the Income Portfolio. Following the Referendum result the exposure to
smaller companies was agreed to be increased, with the portfolio split moving
to 80% to the Smaller Companies Portfolio and 20% to the Income Portfolio. This
change was made as the Investment Advisers considered that the outlook for bond
markets had deteriorated following the Referendum whilst the setback in equity
markets and the disruption to valuations in the smaller company sector was
creating investment opportunities.
Discontinuance vote
As required by the Company's Articles of Association, Shareholders were given
the opportunity to vote at the AGM held in September for the discontinuance of
the Company in its present form. An overwhelming majority of shareholders voted
against this resolution thereby securing the future of the Company for the next
five years.
The Zero dividends preference Shares (ZDPs)
With the ZDPs due to redeem on 31 January 2017 and with the future of the
Company secured until the AGM in 2021 your Company published proposals in
November 2016 to extend the life of the ZDPs for a further 5 years and one
month to 28 February 2022. The accrual rate on the ZDPs was reset at 3.85% per
annum from their 138 pence NAV on 31 January 2017 to 167.2 pence per ZDP Share
on redemption. Existing shareholders were given the opportunity to elect to
remain invested or to receive 138 pence per ZDP Share shortly after 31 January
2017. Shareholders approved the scheme and 91.4% of ZDP shareholders elected to
remain invested. As your board wished to maintain the same structure and level
of gearing, the Company's brokers replaced the ZDPs that had been redeemed
through a placing of new ZDPs. The price for this placing was determined
through a book build by the Company's broker and the level of demand enabled
the shares to be placed on 31 January 2017 at 140 pence per share, a premium of
1.4% to their NAV.
Discount Management
The Company's articles provide shareholders with an opportunity to vote every 5
years on whether they wish the Company to continue in its present form. The
Directors consider this to be an important component of a long term discount
management policy. In the intervening periods the Company will seek the
necessary authorities to buy back shares and in determining a discount level at
which to exercise these powers the Directors will have regard to the general
level of discount prevailing in comparable investment company sectors, the
degree to which the buyback would be NAV enhancing for ongoing shareholders and
the benefits of improved short term liquidity against the disadvantages of a
declining market capitalisation. The Directors consider that, in addition to
long term delivery of strong income and capital return, effective marketing and
promotion of the Company to existing and potential shareholders is an important
factor in maintaining a healthy secondary market and relatively narrow
discount. When buying back shares the Directors will generally seek to buy back
both classes of shares in ratio to their existing issue sizes so as to maintain
the capital structure of the Company. Ordinary Shares would only be bought back
on their own if the Directors considered it appropriate to increase gearing and
after consideration of the impact of such a buyback on the interests of the ZDP
shareholders.
No Ordinary Shares were bought back during the period.
Share issuance
In early January 2016 the Company issued two tranches of new shares totalling
125,000 Ordinary Shares and 167,790 ZDP Shares raising approximately £716,000.
The issue was priced at a premium to the package net asset value (the NAV of
Ordinary Shares and ZDPs combined).
In conjunction with the ZDP proposals outlined above, the Company issued a
Prospectus for the issue of new Ordinary Shares through a placing and offer for
subscription that was to close in January 2017. The price at which the new
Ordinary Shares would be issued was set at a premium of 1% to the NAV as struck
on 25 January 2017. The proposals also provided for new ZDPs to be issued
through a placing in such number as would preserve the ratio of ZDPs to
Ordinary Shares. These proposals were approved by shareholders and on 30
January 2017 the Company announced that 5,995 new Ordinary Shares had been
issued. The Company had received applications for a greater number of Ordinary
Shares however as the Ordinary Shares had been trading at a significant
discount to NAV and therefore to the Initial Issue Price, all applicants were
given the opportunity to withdraw and the vast majority did so. New ZDPs in
appropriate ratio to the new Ordinary Shares were issued at 140 pence per share
through the placing along with the ZDPs that were replacing the redeeming ZDP
shareholders.
Earnings and Dividends
The quarterly dividend was increased by 14.3% from 3.5 pence to 4.0 pence per
Ordinary Share in the second quarter. Over the year the total dividend
distribution was 15.5 pence per Ordinary Share. Earnings per share for the
year of 20.38 pence covered the dividend distribution by 131.5% and resulted in
an addition to revenue reserves. At the year-end, revenue reserves were the
equivalent of 15.79 pence per Ordinary Share, representing 102% of the 2016
dividend. The Board are encouraged not only by the significant growth in
earnings during 2016 but also by the dividend growth prospects that our
Investment Adviser is seeing in investee companies held in the Smaller
Companies Portfolio. Following the year-end the Company has brought forward the
June 2017 dividend increase and announced a 12.5% uplift to the first interim
for 2017 from 4.0 pence to 4.5 pence per Ordinary Share.
Outlook
Your Board remains positive on the prospects for the Smaller Companies
Portfolio. The Investment Adviser is continuing to find attractive and
overlooked investment opportunities among smaller companies and a weak sterling
is not only boosting earnings for portfolio companies with a high proportion of
overseas business but is proving a stimulus for merger and acquisition activity
from foreign buyers. The allocation of 80% of Acorn to the Smaller Companies
Portfolio reflects our conviction that there is both value and opportunity
within our investment universe. However there remain many economic and policy
unknowns both in the UK, Europe and the US and this suggests a degree of
caution is required. Within the Income Portfolio our Investment Adviser is
prepared both for increasing inflation, rising interest rates and a potential
widening of credit spreads by holding structured investments that will benefit
from these market outcomes and which will act as a hedge against weakness in
bond markets. Furthermore as well as holding conventional fixed interest
investments the portfolio has index linked exposure, convertibles and
alternative asset exposure through investment companies.
Contact with Shareholders
Shareholders are always welcome to attend the General Meeting in August however
I recognise that for most shareholders a trip to Guernsey may not be
practicable. To provide you with an alternative way of communicating with the
Board I have set up an email address through which you are welcome to contact
me with any questions you may have. Just email me on
Acorn_Income_Fund_Limited@ntrs.com.
Helen Green
Chairman
Investment Advisers' Report
The Smaller Companies Portfolio
During the twelve month period to 31st December 2016 the Smaller Companies
Portfolio generated a total return 8.6% (860 basis points) before allowing for
costs and management fees - underperforming a rise of 11.1% by the Numis
Smaller Companies (Ex Investment Companies) Index (NSCI).
The period under review was a challenging year defined by tumultuous events and
political surprises. In the UK the EU Referendum was clearly a pivotal moment
for the performance of the portfolio during the period under review. The
portfolio was not positioned to benefit from any specific outcome of the
referendum and as such carried its usual exposure to domestic earners. Smaller,
domestically focused companies were especially hard hit in the immediate
aftermath of the vote as Sterling devalued dramatically with investors taking a
more cautious view of the UK economy.
As the post-referendum period saw an outperformance in larger companies
compared to smaller, the year as a whole saw a stark effect of a significant
rebound in resource stocks. As the Smaller Companies Portfolio invests at the
lower end of the market scale and filters out resource-focused stocks, it found
itself facing two major headwinds in terms of relative performance over the
year. The contribution of the mining sectors to the total return of the NSCI
was around 6% of the 11% total, in light of this we feel the portfolio's return
of 8.6% was respectable.
Towards the end of the year the result of the US presidential election provided
another political shock with Donald Trump being chosen as the new US President.
His selection was taken as broadly positive by equity markets which now expect
increased inflation and interest rates fuelled by anticipated high levels of
infrastructure spending; an environment that should be relatively favourable
for equities. As such, companies that generate a high proportion of earnings in
the US have generally performed better than those that are more domestically
focused.
The number of holdings within the portfolio increased to 50 during the period
following the addition of twelve new holdings and disposal of seven positions.
Overall 2016 proved to be a fairly busy year in terms of corporate activity
with the portfolio participating in four Initial Public Offerings (IPOs) and
receiving bid approaches for three investee companies.
Outside of the IPO market the eight new additions to the portfolio were BBA
Aviation, the global provider of aviation support services; Wincanton, the
logistics company; RPS Group, the global consultancy business; Chesnara, the
closed life consolidator; Dairy Crest, the producer of consumer dairy products;
New River Retail, the retail property REIT; Greene King, the UK pub operator
and Card Factory, the greetings card retailer.
The portfolio also participated in four IPOs during the period, all of which
ended the year in positive territory, generating a combined contribution to
performance of 109 bps. These additions to the portfolio were Warpaint, a
manufacturer and distributor of cosmetic products; Van Elle, a specialist
provider of piling equipment and services; Midwich Group, a distributor of
audio visual equipment and Morses Club, a consumer lending business.
In total seven positions were exited in full during the period. British
Polythene Industries was acquired during the period by RPC Group in a cash and
shares deal, and the residual holding in RPC was also exited prior to the
period end. Long term holdings in both VP and Diploma were also exited on
yield compression grounds, following strong multi-year periods of share price
performance. A small holding in DX Group was also sold, drawing a line under
this disappointing investment. The position in pub group Marstons was also
exited towards the end of the year, in favour of our new position in Greene
King.
Unusually for the portfolio, the position in New River Retail was bought and
sold during the period as we looked to reduce retail property exposure
following the EU referendum result.
The strongest contribution to performance came from Somero, the manufacturer of
laser guided concrete spreading and levelling equipment, which added 170 bps to
performance. The Company continued to enjoy strong demand for its products
around the world and also benefited from the strength of the US dollar.
In addition to the bid approach for British Polythene Industries further
approaches were made for UK Mail and Lavendon during the period, as overseas
buyers looked to take advantage of the weakness in sterling. In August Deutsche
Post announced a cash offer for UK Mail, moving the shares sharply higher and
generating a contribution to performance of 117 bps. UK Mail endured a tough
year in 2015 however we remained convinced in the underlying value of the
business and it was pleasing to see our patience pay off following the bid
approach. An approach for the equipment rental business Lavendon in November
by Belgian firm TVH Group sparked further interest from French rival Loxam SAS
- with both companies bidding for the firm during the period. By the end of
the year Lavendon had generated a contribution to performance of 148 bps -
marking a significant return on the investment we made at the end of 2015.
The Company's largest holding, Clipper Logistics, also enjoyed another strong
period of operational and share price performance, generating a return of 112
bps during the year. Further strong returns were also provided by BBA Aviation
(88 bps), Amino Technologies (78 bps) and Hill & Smith Holdings (73 bps).
The largest detractor from performance was Secure Trust Bank, which cost the
portfolio 107 bps of performance. The shares were sold off sharply in line
with all the challenger banks following the EU referendum, and only partially
recovered this lost ground by the end of the year. Secure Trust remains a core
long term holding within the portfolio and the position was increased by over
20% during the period as we looked to take advantage of the short term share
price weakness.
Sprue Aegis, the manufacturer of smoke and carbon monoxide alarms also
struggled during the year as a non-safety critical technical issue with one of
their products resulted in an expensive increase in the warranty provision.
Our position was increased by 25% during the period on share price weakness
however it did have a negative impact of 99 bps on performance.
In a period which is becoming increasingly defined by moves away from the
political status quo we feel that our focus on profitable, cash generative,
well financed, dividend paying stocks at the lower end of the market
capitalisation scale leaves us well positioned to generate strong returns over
our mid to long term investment horizon.
Fraser Mackersie and Simon Moon
Unicorn Asset Management Limited
The Income Portfolio
The Income Portfolio delivered a fairly smooth and stable return path
throughout what proved to be an extremely volatile year for fixed income
markets. Whilst it did not fully participate in the large post-UK referendum
rally due to lower duration exposure, it has been much more defensive and
protected capital as bond markets have sold off since late summer. Investment
discipline and not chasing unjustified valuations has been key to this.
The China and US driven risk-off environment seen in the first quarter was soon
exacerbated by the shock UK referendum result, which drove gilt yields down to
all-time lows. Since August however, global yields have rebounded
spectacularly, inflicting material losses on instruments which had been held as
safe haven assets. The sharp reversal in yields has principally developed from
a change in mind-set which has seen global deflationary fears transformed into
inflation concerns for a number of reasons. The stabilisation of oil prices at
much higher levels from their lows saw the deflationary drag from energy
reverse across observed global inflation baskets as can be seen from the chart
below which shows the Consumer Price Indices for the US, UK and Germany all
moving higher over the last 9 months.
Inflation (CPI) in US, UK and Germany
Inflation expectations have also shifted markedly higher as Donald Trump's
presidential victory in the US has brought great expectations of a policy mix
change in the US, moving away from exclusive reliance on ultra-loose monetary
policy towards a more balanced dependence on deregulation and economic activity
supported by expansionary fiscal policy. With expectation comes the possibility
of disappointment and we wait to see what policies the new President
prioritises and what support he has in executing them. Certainly the endeavour
for expansionary policy is there and with the economy already around full
employment the concern is that the Federal Reserve Bank may be forced to raise
rates faster than they had anticipated.
Meanwhile in the UK, gilt yields ended the year around double the level of
their post-referendum lows, inflicting large losses on those investors which
assumed the Bank of England's policy of monetary loosening would be a backstop
for the bond market. For now at least, the economy appears to be holding up
well and could put the Bank of England in a more neutral mind-set following the
pre-emptive rate cut in response to the referendum. Indeed the service and
manufacturing sector Purchasing Managers' Index surveys bounced back strongly
in December with low unemployment supporting the consumer and sterling's
weakness providing a boost to export competitiveness. However the collapse in
sterling has also introduced imported inflation risks which will erode the real
return of gilts. Inflation is also likely to present a challenge to consumer
real incomes whilst the lack of visibility to firms regarding Brexit
negotiations is likely to curtail corporate spending.
Despite the recent rise in yields, valuations of investment grade corporate
bonds continue to look rich with the scope for credit spreads to tighten
further being limited and almost certainly less than the potential for them to
widen if growth or default expectations worsen. The credit market has been
highly manipulated with central bank quantitative easing programmes further
driving down yields and spreads through direct repurchases of corporate bonds,
which have already experienced a tailwind from buybacks of sovereign issues.
The European Central Bank and Bank of England's intervention in corporate bond
markets where the search for yield has already created crowded activity has
arguably added to liquidity problems and make them vulnerable to a withdrawal
of technical supports such as tapering.
We remain cautious on duration and the tight levels of investment grade credit
and endeavour to seek opportunities where risk and reward profiles are most
attractive. Overall, the current uncertainty requires cautious positioning
within both duration and spreads with both still at historically low levels and
either vulnerable to rising in a variety of positive or negative economic
scenarios, especially given liquidity constraints in the bond markets. For
these reasons we are investing in alternative strategies to provide some
diversification from traditional fixed income investments. These strategies
include exposures to convertible bonds, index linked bonds, investment
companies and structured investments.
Paul Smith
Premier Fund Managers Limited
Schedule of Principal Investments
as at 31 December 2016
Percentage Percentage
of Total of Total
Assets Assets
2016 2015
Position Company Market Percentage
Value £ of
'000 Portfolio
Smaller Companies Portfolio
1 Clipper Logistics plc 2,850,000 3.96 3.01 2.91
2 Conviviality Retail plc 2,481,125 3.45 2.62 3.44
3 Safestyle UK plc 2,322,000 3.22 2.46 2.63
4 Macfarlane Group 2,280,000 3.17 2.41 3.21
5 Secure Trust Bank plc 2,258,550 3.14 2.39 3.10
6 Acal plc 2,205,000 3.06 2.33 3.00
7 Somero Enterprises inc 2,200,000 3.06 2.33 1.82
8 Lavendon Group plc 2,190,358 3.04 2.32 0.82
9 Castings plc 1,845,850 2.56 1.95 2.32
10 Park Group plc 1,825,000 2.53 1.93 2.48
11 Numis Corporation plc 1,824,375 2.53 1.93 2.01
12 Primary Health Properties plc 1,768,000 2.46 1.87 2.65
13 Wincanton plc 1,722,000 2.39 1.82 -
14 James Halstead plc 1,695,750 2.36 1.79 2.24
15 FDM Group Holdings plc 1,695,000 2.35 1.79 1.71
16 Gateley Holdings plc 1,677,000 2.33 1.77 1.40
17 Alumasc Group plc 1,672,000 2.32 1.77 2.44
18 Mucklow A&J Group plc 1,624,845 2.26 1.72 1.80
19 Epwin Group plc 1,604,000 2.23 1.70 2.27
20 Quarto Group inc 1,535,046 2.13 1.62 1.12
39,275,899 54.55 41.53
Income Portfolio
1 Real Estate Credit Pref Shs NPV 943,500 6.22 1.00 0.80
2 DW Catalyst Fund Limited 632,838 4.17 0.67 0.12
3 United Kingdom 2.50% IL Treasury 2020 519,624 3.43 0.55 -
4 British Telecoms 5.75% 2028 401,005 2.64 0.42 0.27
5 HSBC 6% 29/03/2040 360,312 2.37 0.38 0.39
6 JPMorgan Global Convertibles Income Fund 360,000 2.37 0.38 -
Limited
7 Glencore Finance Dubai 2.625% 2018 354,556 2.34 0.37 0.28
8 Itv 2.125% 2022 352,043 2.32 0.37 0.16
9 F&C Global Smaller Companies CULS 3.5% 343,700 2.27 0.36 0.35
10 Natixis Structured 0.00% 08/09/2017 340,831 2.25 0.36 -
11 Tesco Personal Finance 1.00% 2019 339,135 2.24 0.36 0.22
12 EDF 6.125% 02/06/2034 334,180 2.20 0.35 0.34
13 UBS 7.25% 22/02/2022 325,632 2.15 0.34 0.47
14 Investec Bank 0.00% 08/09/2020 302,094 1.99 0.32 -
15 Heathrow 7.075% 04/08/2028 286,202 1.89 0.31 0.30
16 St Modwen Properties 2.875% 06/03/19 283,170 1.87 0.31 0.34
17 Credit Agricole SA 8.125% 2033 - 18 261,178 1.72 0.28 0.25
18 Northumbrian Water Finance plc 6.875% 2023 259,306 1.71 0.27 0.28
19 Spirit Issuer 5.472% 28/12/2034 258,911 1.71 0.27 0.28
20 Aviva 5.9021% Perp - 2020 255,313 1.67 0.27 0.28
TOTAL 7,513,530 49.53 7.94
Directors' Biographies
for the year ended 31 December 2016
Directors
The Directors for the whole year ended 2016 were as follows:
Helen Green
Nigel Ward
David Warr
All three Directors of the Board are non-executive Directors and are considered
independent of the Investment Manager.
Both Helen Green and David Warr are chartered accountants and all three have
extensive non-executive director experience. Further details of the
qualifications and suitability of each of the Director's appointments are as
follows:
Helen Foster Green (Chair)
Helen joined the Company in January 2007 and has been Chairman of the Company
since 22 August 2012. She was re-elected as Chairman of the Company in August
2013. Helen is a chartered accountant. She has been employed by Saffery
Champness, a top 20 firm of chartered accountants, since 1984. She qualified as
a chartered accountant in 1987 and became a partner in the London office in
1997. Since 2000 she has been based in the Guernsey office where she is client
liaison director responsible for trust and company administration. Helen serves
on the boards of both LSE listed companies and AIM listed companies*. Helen is
a resident of Guernsey.
John Nigel Ward
Nigel joined the Company in December 2011. Nigel has over 40 years experience
of international investment markets, credit and risk analysis, portfolio
management, corporate and retail banking, corporate governance, compliance and
the managed funds industry gained at Nat West, TSB Bank, Baring Asset
Management and Bank Sarasin. Nigel is a full- time non-executive director
serving on a number of company boards which have LSE or Channel Island
Securities Exchange listings.* He is a founding Commissioner of the Guernsey
Police Complaints Commission, an Associate of the Institute of Financial
Services, a member of the Institute of Directors and holder of the IoD Diploma
in Company Direction. Nigel is a resident of Guernsey.
David John Warr
David joined the Company in August 2012. David is a Fellow of the Institute of
Chartered Accountants in England and Wales having qualified as a chartered
accountant in 1976. In 1981 David was appointed a partner in Reads & Co. a
Guernsey based firm of chartered accountants, which he helped develop into a
more broadly based financial services business leading up to its sale at the
end of 1998. David's experience at Reads & Co. included audit, trust and
company administration. David now acts as a non-executive director on a number
of UK listed companies* whilst combining those responsibilities with charitable
work most noticeably as Vice-Chairman of the Guernsey Community Foundation LBG.
David is a resident of Guernsey.
*Details of the Directors' other directorships for public companies can be
found in the Directors' Report.
Directors' Report
for the year ended 31 December 2016
The Directors have pleasure in presenting their business review, report and
financial statements of the Company for the year ended 31 December 2016.
Principal Activities and Business Review
The principal activity of the Company is to carry on business as an investment
company. The Directors do not envisage any change in these activities for the
foreseeable future. A description of the activities of the Company in the
period under review is given in the Chairman's Statement.
Business and Tax Status
The Company is a closed-ended investment company, incorporated with limited
liability in Guernsey on 5 January 1999, registered number 34778. The Company
operates under The Companies (Guernsey) Law, 2008, (the "Law"), the Protection
of Investors (Bailiwick of Guernsey) Law, 1987 as amended and the Authorised
Closed Ended Investment Scheme Rules 2008.
The Company's Ordinary Shares and ZDP Shares are traded on the LSE with the
Ordinary Shares having a premium listing and the ZDP Shares having a standard
listing, as defined by the LSE.
The Company's management and administration takes place in Guernsey and the
Company has been granted exemption from income tax within Guernsey by the
Administrator of Income Tax. It is the intention of the Directors to continue
to operate the Company so that each year this tax-exempt status is maintained.
Alternative Investment Fund Managers Directive ("AIFMD")
The Company is an 'Alternative Investment Fund' ("AIF"), as defined by the
Alternative Investment Fund Managers Directive ("AIFMD") and is self managed.
The Company was approved as an AIF and submitted an Article 42 Notification to
the FCA under the National Private Placement Regime on 3 August 2015.
The Directors have set a maximum gearing level for the purpose of AIFMD of 400%
for both the commitment exposure level and gross leverage level. As at 31
December 2016 the commitment exposure level was 56% and the gross leverage
level was 53%.
Regulatory disclosures, including the Company's Investor Disclosure Document,
are provided on the Company's website www.premierfunds.co.uk/investors/
investments/ investment-trusts/acorn-income-fund.
Foreign Account Tax Compliance Act ("FATCA")
FATCA requires certain financial institutions outside the United States ("US")
to pass information about their US customers to the US tax authorities, the
Internal Revenue Service (the "IRS"). A 30% withholding tax is imposed on the
US source income and disposal of assets of any financial institution within the
scope of the legislation that fails to comply with this requirement. On 13
December 2013, the Intergovernmental Agreement between the United States and
the States of Guernsey implementing FATCA was signed.
On 22 October 2013 an Intergovernmental Agreement between the United Kingdom
("UK") Government and the States of Guernsey to implement a similar provision
between the States of Guernsey and the UK was signed. The Board of the Company
has taken all necessary steps to ensure that the Company is FATCA compliant and
confirms that the Company is registered and has been issued a Global
Intermediary Identification Number ("GIIN") by the IRS. The Company will use
its GIIN to identify that it is FATCA compliant to all financial
counterparties.
Common Reporting Standard
The Common Reporting Standard ("CRS") is a global standard for the automatic
exchange of financial account information developed by the Organisation for
Economic Co-operation and development ("OECD"), which has been adopted in
Guernsey and which came into effect in January 2016. The CRS has replaced the
inter-governmental agreement between the UK and Guernsey to improve
international tax compliance that had previously applied in respect of 2014 and
2015. However, it was still necessary to submit the 2014 and 2015 reports for
the UK IGA by 30 June 2016. The first report for CRS will be made to the
Director of Income Tax by 30 June 2017.
The Company is subject to Guernsey regulations and guidance on the automatic
exchange of tax information and the Board will therefore take the necessary
actions to ensure that the Company is compliant in this regard.
Discontinuation Vote
At the Annual General Meeting held on 26 September 2016, shareholders were
given the opportunity in accordance with Article 53.1 of the Articles of
incorporation of the Company to vote for the discontinuance of the Company. The
Directors recommended that shareholders vote against the special resolution
thereby supporting the continuance of the Company in its present form. The
special resolution was not carried and it was noted that the Company would
continue in its present form.
Going Concern
In the opinion of the Directors the Company has adequate resources to continue
in operational existence for the foreseeable future. For this reason the
financial statements have been prepared on a going concern basis.
The Directors have arrived at this opinion by considering, inter alia, the
following factors:
• the Company has sufficient liquidity to meet all ongoing expenses. The
Company has net liabilities of £22,384,312 (includes the ZDP Shares which have
been reclassified on the Statement of Financial Position as a current liability
as the maturity date is within one year) at the year end. In January 2017 the
ZDP Shares were refinanced and the life of the ZDP Shares was extended to 28
February 2022. In addition the Board regularly reviews the cash flow of the
Company and is confident that the Company will have sufficient resources to
meet all future obligations;
• both the Income and Smaller Companies Portfolios consist substantially
of listed investments which are readily realisable and therefore the Company
has sufficient resources to meet its liquidity requirements; and
• as at 31 December 2016, the Company had no borrowings other than the
ZDP Shares which, as explained in Note 13, had a final capital entitlement on
the 31 January 2017. A proposal by the Company to extend the life of the ZDPs
for a further 5 years and one month to 28 February 2022 with the ZDPs accruing
at a rate of 3.85% from the 138p NAV on 31 January 2017 to 167.2p on redemption
was approved by 91.4% of ZDP Shareholders.
The Company's brokers replaced the ZDPs that had been redeemed through a
placing of new ZDPs. The price for this placing was determined through a book
build by the Company's broker and the level of demand enabled the shares to be
placed at 140p, a premium of 1.4% to their NAV.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate Governance Code,
published by the Financial Reporting Council in September 2014 (the "Code"),
the Directors have assessed the prospects of the Company over the three year
period to 31 December 2019. The Directors consider that three years is an
appropriate period to assess the viability of an investment company for the
purpose of giving assurance to Shareholders.
In determining the appropriate period of assessment the Directors had regard to
the general advice that equity investment should be made on a medium to longer
term view (perhaps 3 to 10 years) but also to evidence that the average holding
time for an equity investment is under 3 years. The Directors consider that 3
years is a sufficient investment time horizon to be relevant to shareholders
and that choosing a longer time period can present difficulties given the lack
of longer term economic visibility.
In its assessment of the viability of the Company, the Directors have
considered each of the Company's principal risks and uncertainties detailed in
the principal risks section below (and in Note 18) and, in particular, the
impact of a significant fall in regional equity markets on the value of the
Company's investment portfolio. The Directors have also considered the
Company's income and expenditure projections and the fact that the Company's
investments comprise readily realisable securities which can be expected to be
sold to meet funding requirements if necessary. The Directors also noted that
the next Discontinuation Resolution will be proposed at the annual general
meeting in 2021.
Based on the Company's processes for monitoring operating costs, share price
discount, the Manager's compliance with the investment objective, asset
allocation, the portfolio risk profile, gearing, counterparty exposure,
liquidity risk and financial controls, the Directors have concluded that there
is a reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the three year period
to 31 December 2019.
Gearing Policy
The Company's gearing policy is not to employ any gearing through long-term
bank borrowing. Save with the prior sanction of the ZDP Shareholders the
Company will not incur any indebtedness other than short term borrowings in the
normal course of business such as to settle share trades or borrowings to
finance the redemption of the ZDP Shares.
Results and Dividends
The results attributable to Ordinary Shareholders for the period are shown in
the Statement of Comprehensive Income. The Company made a revenue return for
the year of 20.38 pence (2015: 18.49 pence) per Ordinary Share and a capital
return of 6.81 pence (2015: 55.60 pence) per Ordinary Share.
Principal Risks
The Board has an on-going process in place for identifying, evaluating and
managing the significant risks faced by the Company. The responsibility for
carrying out the risk review is now undertaken by the Risk Committee (see
Directors' Report for details of the Risk Committee), which meets at least four
times per year. The results of the risk evaluations are then reported back to
the Board. The last risk assessment took place on 6 February 2017. Prior to the
establishment of the Risk Committee, the Audit Committee undertook the role of
reviewing the Company's risk and that process of review had been in place since
the Company's incorporation. The current process is in line with the
Association of Investment Companies ("AIC") Code of Corporate Governance (the
"AIC Code").
Company Risks
Risks of the Structure of the Company and gearing
The Company's business could be materially and adversely affected by a number
of risks. External factors to the Company may either adversely or favourably
affect the volatility and liquidity of the Smaller Companies Portfolio and
Income Portfolio (the"Portfolios"), as well as their values. These can be
caused by economic conditions, changes to tax laws, competition and a number of
other factors.
Investors holding either Ordinary Shares or ZDP Shares should have carefully
considered whether these investments, given the risks attached, are suitable
for them.
The market value of ZDP Shares will be affected by changes in general interest
rates, with upward movements in interest rates likely to lead to reductions in
the market value of ZDP Shares although not affecting the ultimate redemption
value.
Although the holders of ZDP Shares have a priority entitlement to the other
assets of the Company (after payment of its liabilities) on a winding-up, if
the gross assets of the Company fall to a level that is insufficient to redeem
the ZDP Shares in full, investors in the ZDP Shares would receive a lower
payment than the Fixed Capital Entitlement on the ZDP Shares repayment date.
In certain circumstances, such as a major fall in the capital value of the
Portfolios such that the Final Capital Entitlement of the ZDP Shares is
significantly uncovered but where the Company's Portfolios are still generating
revenue, the interests of ZDP Shareholders and the Ordinary Shareholders may
conflict. In such circumstances, the Directors may find it impossible to meet
fully, both sets of expectations and so will need to act in a manner which they
consider to be fair and equitable to both Ordinary Shareholders and ZDP
Shareholders but having regard to the entitlements of each class of shares.
Further risks to the ZDP Shares include the lower level of regulatory
protection than applies to premium listed shares.
The Ordinary Shares are geared by the ZDP Shares and should be regarded as
carrying above average risk since a positive Net Asset Value ("NAV") for the
Ordinary Shareholders will be dependent upon the Company's assets being
sufficient to meet those prior entitlements of the holders of ZDP Shares. As a
consequence of the gearing, a decline in the value of the Company's investment
portfolio will result in a greater percentage decline in the NAV of the
Ordinary Shares.
Ordinary Shareholders do not have a right for their shares to be redeemed and
those Ordinary Shareholders wishing to realise their investment will be
required to dispose of their shares on the stock market.
Market liquidity in the shares of companies such as the Company is less than
market liquidity in shares issued by larger companies traded on the LSE. There
can be no guarantee that a liquid market will exist for the Ordinary Shares or
the ZDP Shares which may prevent any holder of Ordinary Shares or ZDP Shares
from disposing of such shares at a price or at such time that they wish.
The Company's future performance depends on the success of its strategy, the
skill and judgement of the Investment Manager and of the Investment Advisers.
The departure of key personnel of either provider may have an adverse effect on
the performance of the Company.
The Company may use derivatives to hedge exposure to currency risk and interest
rate risk. No assurance can be given that any hedging strategies which may be
used by the Company will be successful under all or any market conditions and,
if unsuccessful, could have an adverse effect on the Company's financial
position.
Risk associated with investment in other investment companies
The Income Portfolio may contain higher yielding investment company shares
(including shares of split capital investment trusts). As a result of the
gearing in some investment company shares, any increase or decrease in the
value of the investments held by those investment companies might magnify
movements in their NAV and consequently affect the value of the Income
Portfolio. In accordance with the Listing Rules, where appropriate, the Company
makes Stock Exchange announcements detailing its holdings in other UK listed
investment companies which themselves do not have a stated investment policy to
invest no more than 15% of their gross assets in other UK listed investment
companies (including investment trusts).
Currency risk
The majority of the Company's assets and all of its liabilities are denominated
in sterling however some of the investments in the Income Portfolio may be
denominated in foreign currencies. Generally, these exposures are hedged back
to sterling and there is unlikely to be any significant direct currency risk.
Market price risk
Since the Company invests in financial instruments, market price risk is
inherent in these investments. In order to minimise this risk, a detailed
analysis of the risk/reward relationship of each investee company is undertaken
by the Investment Advisers prior to making investments.
Interest rate risk
The Company's investment portfolios, particularly the Income Portfolio, include
investments bearing interest at fixed rates. Generally when interest rates rise
the market prices of fixed interest securities fall and when interest rates
fall the prices of fixed interest securities rise. The Company will therefore
be exposed to movements in interest rates. The Company has fixed rate leverage
through its ZDP Shares. Post the year end, the redemption date of the Company's
ZDP shares was extended to 28 February 2022 at a rate of 3.85% per annum.
Replacing this leverage in 2022 might involve the Company paying a higher
accrual rate on an issue of new ZDP Shares if interest rates have risen.
Liquidity risk
Liquidity risk is the risk that the Company will encounter dfficulties in
meeting its obligations associated with its financial liabilities that are
settled by delivery of cash or another financial asset. Some of the Company's
investments in smaller company equities and in certain bond issues may have
relatively low levels of daily turnover such that it might take several days or
even weeks to sell a holding into the market.
Discount volatility
Being a closed-end fund, the Company's shares may trade at a discount or
premium to their NAV. The magnitude of this discount or premium fluctuates
daily and can vary significantly. Thus, for a given period of time, it is
possible that the market price could decrease despite an increase in the
Company's NAV.
The Directors review the discount levels regularly. The Investment Advisers
actively communicate with the Company's major shareholders and potential new
investors, with the aim of managing discount levels.
Brexit
The UK's vote to leave the EU has introduced new uncertainties and instability
into the financial markets. As the process of a major country leaving the EU
has no precedent, the Board and the Investment Manager expect an ongoing period
of market uncertainty as the implications are processed.
Company Performance
Key Performance Indicators and Analysis of Company's Performance
At each quarterly board meeting the Directors consider a number of performance
measures in order to assess the Company's success in achieving its objectives.
The key areas reviewed are as follows:
• Review of the history of the NAV.
• Receive an update on the market activity of the Ordinary Shares and
the ZDP Shares by Numis Securities Limited, the Company's corporate broker.
• Receive updates on the performance of both the Income Portfolio and
the Smaller Companies Portfolio from the Investment Advisers.
• Consideration of the revenue projection.
On-going Charges and Total Expense Ratio (the "TER")
The annual on-going charges figure for the year was 1.65% (2015: 1.69%). This
figure which has been prepared in accordance with the recommended methodology
provided by the Association of Investment Companies and represents the annual
percentage reduction in shareholder returns as a result of recurring
operational expenses. In 2016 and 2015 a performance fee was not payable.
The TER of the Company is calculated as a percentage of costs against total
assets at the year end and is capped at 1.5%. For 2016 the TER was 1.04% (2015:
1.09%). The calculation of costs excludes performance fees, non-routine
administration and professional fees. The net management fee charged in 2016
was £623,080 (2015: £596,754).
Share Price Rating and Discount Management including information on treasury
shares
At the Annual General Meeting on 26 September 2016 the Directors obtained
shareholder approval to issue up to an aggregate nominal amount of £31,821.38
Ordinary Shares and an aggregate nominal amount of £42,714.34 ZDP Shares, also
obtaining the necessary pre-emption waiver from the ZDP Shareholders in respect
of any new issue of ZDP Shares.
The shareholders approved renewal of the Company's authority to buy back
Ordinary Shares and ZDP Shares up to 25% of the issued Ordinary and ZDP Shares
as at 26 September 2016 specifically 5,569,151 Ordinary Shares and 7,472,875
ZDP Shares and authority to buyback a further 5% (of the shares in issue as at
26 September 2016) to manage any discount.
The Directors also obtained authority to sell from treasury Ordinary Shares at
a discount to the prevailing NAV per Ordinary Share, provided that the
authority conferred was limited to issues or sales of Ordinary Shares at the
same time as ZDP Shares are issued or sold from treasury at a premium, such
that, the combined effect of the issue or sale of Ordinary Shares and the issue
or sale of ZDP Shares at a premium is that; (i) the NAV per Ordinary Share is
thereby increased; and (ii) gearing is not thereby increased.
The Company intends to seek annual renewal of these authorities from
shareholders at each future general meeting to be held under section 199 of the
Law. In accordance with the Law, any share buy backs will be affected by the
purchase of a package of Ordinary Shares and ZDP Shares (in a specified ratio
as set out in the Company's Prospectus) in the market for cash at a package
price which in aggregate is at a discount to the prevailing NAVs of each class
of Share, where the Directors believe such a purchase will enhance shareholder
value. Shares which are purchased may be cancelled or held in Treasury.
Investment Management and Administration
Management Agreement and Fees
The Board is responsible for the determination of the Company's investment
policy and has overall responsibility for the Company's day-to-day activities.
The Company has, however, entered into a Management Agreement with PAMG, a
wholly-owned, Guernsey incorporated subsidiary of Premier Asset Management
Limited.
The Manager has discretion to make minor changes to the portfolios and also has
discretion to move cash from the Smaller Companies Portfolio to the Income
Portfolio. The Manager will refer any proposals to the Board to materially
alter the split of assets between the Income Portfolio and the Smaller
Companies Portfolio. The Board determines when any potential investment limits
can be exceeded, dividend levels and the appropriate issue size for the ZDP
Shares and hence the level of gearing.
Under separate Investment Adviser Agreements, PAMG has delegated a number of
its duties and responsibilities to PFM and Unicorn. In relation to the Income
Portfolio and Smaller Companies Portfolio respectively, both PFM and Unicorn
act as Investment Advisers who are responsible for the identification and
analysis of investments meeting the investment objectives and strategy of the
Company. PFM and Unicorn are authorised and regulated by the FCA.
The Board keeps under review the performance of the Investment Manager and the
Investment Advisers. In the opinion of the Directors the continuing appointment
of the Investment Manager on the terms agreed is in the interest of
shareholders as a whole, due to the experience and proven track record of the
fund management team in the chosen markets. The Directors consider the
investment performance of the Company is satisfactory relative to the markets
in which the Company invests.
A list of the top 20 holdings for each portfolio is shown in the Schedule of
Principal Investments of this report and the top 10 holdings for each portfolio
is included in the monthly fund factsheet, available on the Company's website.
For the Company's full holdings information please refer to the Unaudited Full
List of Investment Holdings Listing.
Administration Agreement
The administration of the Company is undertaken by Northern Trust International
Fund Administration Services (Guernsey) Limited ("Northern Trust").
Custodian
The custodian of the Company is Northern Trust (Guernsey) Ltd.
Segmental Reporting
The Company has two reportable segments, being the Income Portfolio and the
Smaller Companies Portfolio. Each of these portfolios is managed separately,
entail different investment objectives and contain investments in different
products. A more comprehensive disclosure can be found within Note 2 of the
Notes to the Financial Statements.
Corporate Governance
On 1 October 2013, the Company became a member of the AIC, and on 19 November
2013 the Company formally resolved to adopt and comply with the AIC Code.
The Financial Reporting Council has confirmed that an AIC member which reports
against the AIC Code and who follows the AIC Corporate Governance Guide for
Investment Companies (the "AIC Guide"), will be meeting their Listing Rule
obligations in relation to reporting against The UK Code of Corporate
Governance (the "UK Code").
Statement of Compliance with the UK Code
The Board of the Company has considered the principles and recommendations of
the AIC Code by reference to the AIC Guide. The AIC Code, as explained by the
AIC Guide, addresses all the principles set out in the UK Code, as well as
setting out additional principles and recommendations on issues that are of
specific relevance to the Company.
The Board considers that reporting against the principles and recommendations
of the AIC Code, and by reference to the AIC Guide (which incorporates the UK
Code), will provide better information to shareholders.
Due to the Ordinary Shares having a premium listing on the LSE, the Company
must comply with Listing Rule 9.8.6(5) which requires the Company to apply the
provisions of the UK Code to the extent that they are considered relevant to
the Company. By complying with the AIC Code the Company is meeting its
obligation under the UK Code and as such is not required to report further on
issues contained in the UK Code which are irrelevant to it. The Directors place
a high degree of importance on ensuring that high standards of corporate
governance are maintained within the Company.
The AIC Code is available for download from the AIC website: www.theaic.co.uk.
With effect from 1 January 2012, the Company was also required to comply with
the Guernsey Financial Services Commission Financial Sector Code of Corporate
Governance (the "Guernsey Code"). As the Company reports under the AIC Code it
is deemed to meet the Guernsey Code and the Board has undertaken to evaluate
its corporate governance compliance on an on-going basis.
The Company has complied with the recommendations of the AIC Code and the
relevant provisions of the UK Code throughout the year, except as set out
below.
The UK Code includes provisions relating to:
• the role of the chief executive;
• executive directors' remuneration; and
• the need for an internal audit function.
For the reasons set out in the AIC Guide, and as explained in the UK Code, the
Board considers these provisions are not relevant to the Company, being an
externally managed investment company. In particular, all of the Company's day
to day management and administrative functions are outsourced to third parties.
As a result, the Company has no executive directors, employees or internal
operations. The Company therefore has not reported further in respect of these
provisions.
Other areas of non-compliance with the AIC Code by the Company, and the reasons
therefore, are as follows:
The Company has not appointed a Senior Independent Director. This is not in
accordance with the recommendations in principle 1 of the AIC Code but is felt
to be appropriate for the size and nature of the Company.
The non-executive Directors of the Company do not meet without the Chairman
present to appraise the Chairman's performance. This is not in accordance with
principle 1 of the AIC Code. However, the Company has a Chairman's Performance
Evaluation Questionnaire which is completed by all Directors (other than the
Chairman) and analysed annually to facilitate the review of the Chairman's
performance.
The Company does not comply with principle 3 of the AIC code; as per the
Company's Articles of Incorporation, the Directors are not subject to
re-election by the Shareholders except in their first year of appointment, nor
are they appointed for specific terms as required by these provisions, as this
is not felt to be appropriate for the size and nature of the Company. However,
the Board has determined in order to facilitate good corporate governance
practice in line with principle 2 of the AIC Code, each director, subsequent to
2016, will offer themselves for re-election every 3 years until their ninth
year of service. Any Director with over nine years shall be eligible for
re-election every year thereafter. As a result of this principle the Directors
were elected as follows:
Helen Green was re-elected in 2013, and is next eligible for re- election in
2017.
David Warr was elected in 2013, and is eligible for re- election in 2019.
Nigel Ward will be eligible for re-election in 2018.
In accordance with principle 5 of the AIC Code the following details are of all
other public Company directorships and employment held by each director and
shared directorships of any commercial company held by two or more Directors:
Helen Green
• John Laing Infrastructure Fund Limited*
• City Natural Resources High Yield Trust Plc*
• Landore Resources Limited**
• Aberdeen Emerging Markets Investment Company Limited*
• UK Mortgages Limited#
David Warr
• Aberdeen Frontier Markets Investment Company Limited**
• Threadneedle UK Select Trust Limited*
• Breedon Group Plc**
• Hadrian's Wall Secured Investments Limited*
Nigel Ward
• Crystal Amber Fund Limited**
• Fair Oaks Income Fund Limited#
• Hadrian's Wall Secured Investments Limited*
* Listed on the Main Market of the LSE
** Traded on the AIM of the LSE
# Traded on the Specialist Fund Segment of the LSE
The Company does not comply with principle 9 of the AIC Code as it does not
have a formal policy on diversity, however the Company has established a
Nomination Committee that adheres to formal terms of reference and which is
responsible for identifying any gaps on the Company's board that need to be
filled. When considering candidates the Board has due regard to the benefits of
diversity on the board and amongst other considerations this includes gender.
Conflicts of Interest
None of the Directors nor any persons connected with them had a material
interest in any of the Company's transactions, arrangements or agreements at
the date of this report and none of the Directors has or had any interest in
any transaction which is or was unusual in its nature or conditions or
significant to the business of the Company, and which was effected by the
Company during the reporting period.
David Warr holds 63,000 Ordinary Shares in the capital of the Company, which
represented an interest of 0.40% of the Company's Ordinary Shares in issue as
at 31 December 2016.
At the date of this report, there are no outstanding loans or guarantees
between the Company and any director.
Board Responsibilities
The Board comprises three non-executive Directors, who meet at least quarterly
to consider the affairs of the Company in a prescribed and structured manner.
All Directors are considered independent of the Investment Manager for the
purposes of the AIC Code and Listing Rule 15.2.12A. Biographies of the
Directors appear in the Directors' Biographies section demonstrating the wide
range of skills and experience they bring to the Board.
As at the beginning of 2016 the Chairman had served on the Board for over nine
years. The Board has taken the view that independence is not necessarily
compromised by the length of tenure on the Board and experience can add
significantly to the Board's strength. It has therefore determined that in
performing her role as Director, the Chairman remains wholly independent.
The Directors, in the furtherance of their duties, may take independent
professional advice at the Company's expense, which is in accordance with
principle 13 of the AIC Code. The Directors also have access to the advice and
services of the Company Secretary through its appointed representatives who are
responsible to the Board for ensuring that the Board's procedures are followed
and that applicable rules and regulations are complied with. To enable the
Board to function effectively and allow the Directors to discharge their
responsibilities, full and timely access is given to all relevant information.
The Directors are requested to confirm their continuing professional
development is up to date and any necessary training is identified during the
annual performance reviews carried out and recorded by the Nomination
Committee.
Substantial Shareholdings
There were no substantial interests to be disclosed as at 18 April 2017 the
latest practicable date for disclosure in this report.
None of the Directors has a contract of service with the Company.
Shareholder Communication
In line with principle 19 of the AIC Code the Investment Advisers communicate
with both the Chairman and Shareholders and are available to communicate and
meet with major shareholders. The Company has also appointed Numis to liaise
with all major shareholders together with PFM and Unicorn, all of who report
back to the Board at quarterly board meetings ensuring that the Board is fully
aware of shareholder sentiment and expectation.
Director Attendance
During the year ended 31 December 2016 the number of Board meetings attended
were as follows:
Quarterly Adhoc
Board Board Committee
Meetings Meetings Meetings
Helen Green 4 of 4 3 of 3 7 of 7
Nigel Ward 4 of 4 2 of 3 7 of 7
David Warr 4 of 4 2 of 3 7 of 7
Committees
The Company has established four committees; the Audit Committee, the
Nomination Committee, The Remuneration and Management Engagement Committee and
the Risk Committee (together the "Committees"). Each Committee consists of the
whole Board. Due to the size of the Company the Board consider it would be
overly burdensome to establish separate committees that do not comprise all of
the non-executive directors of the Company. The Terms of Reference for each
committee is available on request to the Administrator.
The Audit Committee
A full report regarding the Audit Committee can be found in the Audit Committee
Report.
Nomination Committee
In accordance with the AIC Code, a Nomination Committee has been established.
David Warr has been appointed Chairman. The Nomination Committee meets at least
once a year in accordance with the terms of reference and reviews, inter alia,
the structure, size and composition of the Board. When the appointment of a
non-executive director is being considered the Nomination Committee will make
recommendations to the Board after evaluating candidates from a wide range of
backgrounds. Whilst considering the composition of the Board, the Nomination
Committee will be mindful of diversity, inclusiveness and meritocracy and, in
considering a new candidate, the Nomination Committee will apply comparative
analysis of candidates' qualifications and experience, applying pre-established
clear, neutrally formulated and unambiguous criteria to determine the most
suitable candidate sought for the specific position.
Other duties of the Nomination Committee are to give full consideration to
succession planning for Directors, to regularly review the leadership needs of
the non-executive Directors, ensure non-executive Directors receive a formal
letter of appointment and to review the results of the Board's performance
evaluation process.
Remuneration and Management Engagement (RME) Committee
Nigel Ward has been appointed Chairman of the RME Committee. The RME Committee
meets at least once a year to determine and agree with the Board the framework
for the remuneration of the Company's Chairman, Directors and service
providers, taking into account remuneration trends and all other factors which
it deems necessary. The RME Committee also reviews contractual terms and
performance of all service providers to ensure their satisfactory conduct and
performance.
Details of the Directors' remuneration can be found in Note 6.
Risk Committee
The Risk Committee was established on 19 November 2014. Nigel Ward has been
appointed the chairman of the Risk Committee which will meet at least four
times per year. The Risk Committee reviews the effectiveness of the Company's
internal controls and risk management systems and procedures on a quarterly
basis, actively seeking to identify, manage and monitor risks such as Market,
Credit, Liquidity, Counterparty, Operational and Leverage. In doing so the Risk
Committee reviews a quarterly report from the Investment Adviser and reviews
arrangements for monitoring investment risk. The Risk Committee also ensures
that the risk profile of the Company's portfolios are appropriate to the size;
structure and investment strategies applied and reports its findings and
recommendations to the Board quarterly.
Internal Control and Financial Reporting
The Board is responsible for establishing and maintaining the Company's systems
of internal control ensuring that they are designed to meet the particular
needs of the Company and the risks to which it is exposed, and by their very
nature provide reasonable, but not absolute, assurance against material
misstatement or loss. The key procedures which have been established to provide
effective internal control are as follows:
Investment advice is provided by PFM and Unicorn under Investment Adviser
Agreements. The Board is responsible for setting the overall investment policy
and monitors the actions of the Investment Advisers at regular board meetings.
Both PFM and Unicorn provide the Board with updates at each quarterly board
meeting and at any other time that the Board requests.
The administration and company secretarial duties of the Company are performed
by Northern Trust International Fund Administration Services (Guernsey) Ltd.
Registrar duties are performed by Anson Registrars Limited.
The Custody of assets, is undertaken by Northern Trust (Guernsey) Limited.
The duties of investment management, accounting and the custody of assets are
segregated. The procedures of the individual parties are designed to complement
one another.
The Directors of the Company clearly define the duties and responsibilities of
their agents and advisers. The appointment of agents and advisers is conducted
by the Board after consideration of the quality of the parties involved; the
Board monitors their on-going performance and contractual arrangements. A
detailed annual review of the main service providers is undertaken by the RME
Committee and their findings are reported to the Board.
Mandates for authorisation of investment transactions and expense payments are
set out by the Board.
The Board reviews detailed financial information produced by the Investment
Advisers and the Administrator on a regular basis.
The Board is provided, on a quarterly basis, with a Compliance Report produced
by a specialist Compliance and Legal department at PAM. The monitoring
programme ensures that all activities of PFM, for the year under review, have
been in accordance with both internal procedures and with FCA principles for
firms and individuals. The Compliance team also makes regular external visits
to both Unicorn and the Administrator, the latest visit being to Unicorn on 15
February 2016. A visit to Northern Trust took place in April 2016. The
Secretary provides a report at each quarterly Board meeting which highlights
any areas of non compliance with any applicable regulations and laws. The Board
has access, at all times, to all relevant compliance personnel.
The Company does not have an internal audit department. All the Company's
management and administration functions are delegated to independent third
parties and it is therefore felt there is no need for the Company to have an
internal audit facility.
No significant findings were found during the internal controls review.
Relations with Shareholders
All holders of Ordinary Shares in the Company have the right to receive notice
of, and attend and vote at the general meetings of the Company. The holders of
ZDP Shares have the right to receive notice of all general meetings but only
have the right to attend and vote if the business of the meeting proposes a
resolution which will vary, modify or abrogate any of the special rights
attached to the ZDP Shares.
At each general meeting of the Company the Board and the Investment Advisers
are available to discuss issues affecting the Company. This is in accordance
with principle 19 of the AIC Code. Only Ordinary Shares carry full voting
rights, holders of ZDP Shares are only entitled to vote on issues affecting
their share class. The primary responsibility for shareholder relations lies
with PFM. However, the Directors are always available to enter into dialogue
with shareholders and the Chairman is always willing to meet major shareholders
as the Company believes such communication to be important.
Anti-Bribery and Corruption Policy
The Company has adopted a zero tolerance policy towards bribery and is
committed to carrying out business fairly, honestly and openly.
Voting and Stewardship code
The Investment Manager is committed to the principles of the Financial
Reporting Council's UK Stewardship Code (the 'Code') and this also constitutes
the disclosure of that commitment required under the rules of the FCA (Conduct
of Business Rule 2.2.3).
Signed on behalf of the Board by:
Helen Green
Chairman
18 April 2017
Statement of Directors' Responsibility in Respect of the Annual Financial
Report
for the year ended 31 December 2016
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Directors' Report and the
financial statements in accordance with applicable law and regulations.
The Law requires the Directors to prepare financial statements for each
financial year. In accordance with section 243 (3) (a) of the Law they have
elected to prepare the financial statements in accordance with International
Financial Reporting Standards as issued by the IASB and applicable law.
The financial statements are required by the Law to give a true and fair view
of the state of affairs of the Company and of the profit or loss of the Company
for that period. The accounts of the Company comply with the Law as enacted as
at 31 December 2016.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the financial
statements; and
• prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the financial statements comply with
the Law. They have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and to prevent
and detect fraud and other irregularities.
The Directors who held office at the date of approval of the Directors' Report
confirm that they consider the annual report and accounts, taken as a whole, is
fair, balanced and understandable and provides the information necessary for
shareholders to assess the Company's performance, business model and strategy.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website, and for
the preparation and dissemination of financial statements. Legislation in
Guernsey governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
The Directors confirm that they have carried out a robust assessment of the
principal risks facing the Company, including those that would threaten its
business model, future performance, solvency or liquidity.
Disclosure of information to auditors
The Directors who held office at the date of approval of this Directors' Report
confirm that, so far as they are each aware, there is no relevant audit
information of which the Company's Auditor is unaware; and each Director has
taken all the steps that he ought to have taken as a director to make himself
aware of any relevant audit information and to establish that the Company's
Auditor is aware of that information.
Reappointment of auditor
The Auditor, KPMG Channel Islands Limited, has expressed its willingness to
continue in office as Auditor. A resolution proposing their reappointment will
be submitted at the forthcoming general meeting to be held pursuant to section
199 of the Law.
Directors' Responsibility Statement
The Directors confirm to the best of their knowledge that:
(a) The Management Report (comprising the Chairman's Statement, the
Investment Advisers' Report, Directors' Report and Audit Committee Report)
includes a fair review of the development and performance of the business and
the position of the Company together with a description of the principal risks
and uncertainties that the Company faces; and
(b) The financial statements, prepared in accordance with International
Financial Reporting Standards as issued by the International Accounting
Standards Board (IASB), give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company.
Signed on behalf of the Board by:
Helen Green
Chairman
18 April 2017
Audit Committee Report
for the year ended 31 December 2016
In accordance with the AIC Code an Audit Committee has been established
consisting of David Warr, Helen Green, and Nigel Ward. David Warr is the
Chairman of the Audit Committee.
The Audit Committee meets at least twice a year and, where requested, provides
advice to the Board on whether the annual report and accounts, taken as a
whole, is fair, balanced and understandable and provides information necessary
for the shareholders to assess the Company's performance, business model and
strategy. The Audit Committee also reviews, inter alia, the financial reporting
process and the system of internal control and management of financial risks
including understanding the current areas of greatest financial risk and how
these are managed by the Investment Manager, reviewing the annual report and
accounts, assessing the fairness of preliminary and interim statements and
disclosures and reviewing the external audit process. The Audit Committee is
responsible for overseeing the Company's relationship with the external auditor
(the 'Auditor'), including making recommendations to the Board on the
appointment of the Auditor and their remuneration.
The Audit Committee considers the nature, scope and results of the Auditor's
work and reviews, and develops and implements a policy on the supply of any
non-audit services that are to be provided by the Auditor. The Audit Committee
annually reviews the independence and objectivity of the Auditor and also
considers the appointment of an appropriate Auditor.
At the Audit Committee meeting on 28 November 2016 the appointment of the
Auditor was considered and the Board subsequently decided that the Auditor was
sufficiently independent and was appropriately appointed in order to carry out
the audit for year ended 31 December 2016. During the year under review, the
Auditor was not engaged to provide any non-audit services to the Company.
The valuation of the Company's investments, given that they represent the
majority of net assets of the Company is considered to be a significant area of
focus. In discharging its responsibilities the Audit Committee has specifically
considered the valuation of investments as follows:
• The Board reviews the portfolio valuations on a regular basis
throughout the year and meets with the Investment Adviser at least quarterly.
It also seeks assurance that the pricing basis is appropriate and in line with
relevant accounting standards as adopted by the Company and that the carrying
values are correct.
• The Company's net asset value is calculated twice weekly using a third
party pricing source.
• The Audit Committee receives and reviews reports from the Investment
Advisers and the Auditor relating to the Company's annual report and accounts.
The Audit Committee focuses particularly on compliance with legal requirements,
accounting standards and the Listing Rules and ensures that an effective system
of internal financial and non-financial controls is maintained. The ultimate
responsibility for reviewing and approving the annual financial report and
accounts remains with the Board.
• The Audit Committee holds an annual meeting to approve the Company's
annual financial report and accounts before its publication. At a meeting held
on 28 November 2016 the Audit Committee met with the Auditor to discuss the
audit plan and approach. During this meeting it was agreed with the Auditor
that the area of significant audit focus related to the valuation of
investments given that they represent the majority of net assets of the
Company. The scope of the audit work in relation to this balance was discussed.
At the conclusion of the audit, the Audit Committee met with the Auditor and
discussed the scope of their annual audit work and also their audit findings.
• The Audit Committee reviews the scope and results of the audit, its
cost effectiveness together with the independence and objectivity of the
Auditor. The Audit Committee has particular regard to any non-audit work that
the Auditor may undertake and the terms under which the Auditor may be
appointed to perform non-audit services. In order to safeguard the Auditor's
independence and objectivity, the Audit Committee ensures that any other
advisory and/or consulting services provided by the Auditor does not conflict
with their statutory audit responsibilities.
To fulfil its responsibilities regarding the independence of the Auditor, the
Audit Committee considered:
• a report from the Auditor describing their arrangements to identify,
report and manage any conflicts of interest; and
• the extent of the non-audit services provided by the Auditor.
To assess the effectiveness of the Auditor, the committee reviewed:
• the Auditor's fulfilment of the agreed audit plan and variations from
it;
• the audit findings report highlighting any major issues that arose
during the course of the audit; and
• the effectiveness and independence of the Auditor having considered
the degree of diligence and professional scepticism demonstrated by them.
The Audit Committee is satisfied with KPMG Channel Islands Limited's ("KPMG")
effectiveness and independence as Auditor.
As KPMG has been previously engaged to provide the annual audit the Board was
able to rely on both; their previous experiences with KPMG and their conduct
during the current year audit.
KPMG have been engaged as Auditor to the Company for 18 years, during which
time their appointment has not been put out to tender. As the Company is not a
FTSE 350 company it is not necessary to put the appointment of the Auditor out
to tender. Further, having satisfied itself that the Auditor remains
independent and effective, the Audit Committee has recommended to the Board
that KPMG be reappointed as Auditor for the year ending 31 December
2017 but has also recommended that the audit be put out to tender thereafter.
The terms of reference of the Audit Committee are available from the
Administrator on request.
During the year the Audit Committee met three times and of those meetings all
Audit Committee members were in attendance.
David Warr
Chairman of the Audit Committee
18 April 2017
Independent Auditor's Report To The Members Of Acorn Income Fund Limited
Opinions and conclusions arising from our audit
Opinion on financial statements
We have audited the financial statements of Acorn Income Fund Limited (the
"Company") for the year ended 31 December 2016 which comprise the statement of
comprehensive income, the statement of financial position, the statement of
cash flows, the statement of changes in equity and the related notes. The
financial reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards ("IFRS"). In
our opinion, the financial statements:
· give a true and fair view of the state of the Company's affairs as at 31
December 2016 and of its total comprehensive income for the year ended 31
December 2016;
· have been properly prepared in accordance with IFRS; and
· comply with the Companies (Guernsey) Law, 2008.
Our assessment of risks of material misstatement
The risks of material misstatement detailed in this section of this report are
those risks that we have deemed, in our professional judgment, to have had the
greatest effect on: the overall audit strategy; the allocation of resources in
our audit; and directing the efforts of the engagement team. Our audit
procedures relating to these risks were designed in the context of our audit of
the financial statements as a whole. Our opinion on the financial statements is
not modified with respect to any of these risks, and we do not express an
opinion on these individual risks.
In arriving at our audit opinion above on the financial statements, the risk of
material misstatement that had the greatest effect on our audit was as follows:
Valuation of investments (£87,172,262)
Refer to page 28 of the Audit Committee Report, Note 1 Accounting Policies and
Note 10 Financial Assets Designated as at Fair Value through Profit or Loss
disclosures
· The risk - The Company has invested 135% of its net assets as at 31
December 2016 into listed equities and bonds and structured investments. The
Company's listed investments (99% of investments) are valued based on market
prices while its structured investments (1% of investments) are valued based on
price quotes obtained from a third party pricing provider. The valuation of the
Company's investments, given that they represent the majority of net assets of
the Company is considered to be a significant area of our audit.
· Our response - Our audit procedures with respect to the valuation of
listed investments included, but were not limited to, use of our own valuation
specialist to independently price the investments to a third party source and
assess the trading volume behind such prices. For structured investments, our
audit procedures included, but were not limited to, use of our own valuation
specialist to assist us with the assessment of the quality and integrity of the
price quotes, through comparison to available quotes from independent sources
or through applying a valuation model based on contractual terms and market
data.
We also considered the Company's disclosures (see Note 1) in relation to the
use of estimates and judgments regarding valuation of investments and the
Company's valuation policies adopted and fair value disclosures in Note 10 for
compliance with IFRS.
Our application of materiality and an overview of the scope of our audit
Materiality is a term used to describe the acceptable level of precision in
financial statements. Auditing standards describe a misstatement or an omission
as "material" if it could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements. The auditor
has to apply judgment in identifying whether a misstatement or omission is
material and to do so the auditor identifies a monetary amount as "materiality
for the financial statements as a whole".
The materiality for the financial statements as a whole was set at £1,943,000.
This has been calculated using a benchmark of the Company's net asset value (of
which it represents approximately 3%) which we believe is the most appropriate
benchmark as net asset value is considered to be one of the principal
considerations for members of the Company in assessing the financial
performance of the Company.
We agreed with the audit committee to report to it all corrected and
uncorrected misstatements we identified through our audit with a value in
excess of £97,000, in addition to other audit misstatements below that
threshold that we believe warranted reporting on qualitative grounds.
Our audit of the Company was undertaken to the materiality level specified
above, which has informed our identification of significant risks of material
misstatement and the associated audit procedures performed in those areas as
detailed above. The audit was performed at the offices of the administrator.
Whilst the audit process is designed to provide reasonable assurance of
identifying material misstatements or omissions it is not guaranteed to do so.
Rather we plan the audit to determine the extent of testing needed to reduce to
an appropriately low level the probability that the aggregate of uncorrected
and undetected misstatements does not exceed materiality for the financial
statements as a whole. This testing requires us to conduct significant depth of
work on a broad range of assets, liabilities, income and expense as well as
devoting significant time of the most experienced members of the audit team, in
particular the Responsible Individual, to subjective areas of the accounting
and reporting process.
An audit involves obtaining evidence about the amounts and disclosures in the
financial statements sufficient to give reasonable assurance that the financial
statements are free from material misstatement, whether caused by fraud or
error. This includes an assessment of: whether the accounting policies are
appropriate to the Company's circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant accounting
estimates made by the Board of Directors; and the overall presentation of the
financial statements. In addition, we read all the financial and non-financial
information in the Annual Financial Report to identify material inconsistencies
with the audited financial statements and to identify any information that is
apparently materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If we become
aware of any apparent material misstatements or inconsistencies we consider the
implications for our report.
Disclosures of principal risks
Based on the knowledge we acquired during our audit, we have nothing material
to add or draw attention to in relation to:
· the Directors' Viability Statement on page 18, concerning the principal
risks, their management, and, based on that, the Directors' assessment and
expectations of the Company continuing in operation over the 3 years to 31
December 2019; or
· the disclosures in note 1 of the financial statements concerning the use
of the going concern basis of accounting.
Matters on which we are required to report by exception
Under International Standards on Auditing ("ISAs") (UK and Ireland) we are
required to report to you if, based on the knowledge we acquired during our
audit, we have identified other information in the Annual Financial Report that
contains a material inconsistency with either that knowledge or the financial
statements, a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
· we have identified material inconsistencies between the knowledge we
acquired during our audit and the Directors' statement that they consider that
the Annual Financial Report and financial statements taken as a whole is fair,
balanced and understandable and provides the information necessary for members
to assess the Company's performance, business model and strategy; or
· the Audit Committee Report does not appropriately address matters
communicated by us to the audit committee.
Under the Companies (Guernsey) Law, 2008, we are required to report to you if,
in our opinion:
· the Company has not kept proper accounting records; or
· the financial statements are not in agreement with the accounting
records; or
· we have not received all the information and explanations, which to the
best of our knowledge and belief are necessary for the purpose of our audit.
Under the Listing Rules we are required to review the part of the Corporate
Governance Statement on Pages 22 and 23 relating to the Company's compliance
with the eleven provisions of the UK Corporate Governance Code specified for
our review.
We have nothing to report in respect of the above responsibilities.
Scope of report and responsibilities
The purpose of this report and restrictions on its use by persons other than
the Company's members as a body
This report is made solely to the Company's members, as a body, in accordance
with section 262 of the Companies (Guernsey) Law, 2008 and, in respect of any
further matters on which we have agreed to report, on terms we have agreed with
the Company. Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in an
auditor's report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than the Company
and the Company's members, as a body, for our audit work, for this report, or
for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors' Responsibilities set out
on Page 27, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view. Our
responsibility is to audit, and express an opinion on, the financial statements
in accordance with applicable law and ISAs (UK and Ireland). Those standards
require us to comply with the UK Ethical Standards for Auditors.
Barry T. Ryan
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors
Guernsey
18 April 2017
Statement of Comprehensive Income
for the year ended 31 December 2016
Year ended
Year ended 31 Dec 2015
31 Dec 2016
Revenue Capital Total Total
Notes GBP GBP GBP GBP
Net gains on financial assets
designated as at
fair value through profit or loss 10 - 3,901,649 3,901,649 10,835,045
(Losses)/gains on derivative 4 - (465,564) (465,564) 4,019
financial instruments
Investment income 3 3,704,675 165,000 3,869,675 3,412,408
Total income and gains 3,704,675 3,601,085 7,305,760 14,251,472
Expenses 5 (462,599) (587,724) (1,050,323) (1,133,014)
Return on ordinary activities before
finance costs
and taxation 3,242,076 3,013,361 6,255,437 13,118,458
Interest payable and similar charges 7 - (1,929,208) (1,929,208) (1,593,477)
Return on ordinary activities before 3,242,076 1,084,153 4,326,229 11,524,981
taxation
Taxation on ordinary activities - - - -
Other comprehensive income - - - -
Total comprehensive income for the
year
attributable to ordinary shareholders 3,242,076 1,084,153 4,326,229 11,524,981
Pence Pence Pence Pence
Return per Ordinary share 9 20.38 6.81 27.19 74.09
Dividend per Ordinary Share 8 15.50 0.00 15.50 13.75
Return per ZDP Share 9 - 9.03 9.03 7.63
The supplementary revenue return and capital return columns have been prepared
in accordance with the Statement of Recommended Practice ("SORP") issued by the
Association of Investment Companies ("AIC").
In arriving at the results for the financial year, all amounts above relate to
continuing operations. No operations were acquired or discontinued in the year.
The notes form an integral part of these financial statements.
Statement of Financial Position
as at 31 December 2016
31 Dec 2016 31 Dec 2015
Notes GBP GBP
NON-CURRENT ASSETS
Financial assets designated as at fair value 10 87,172,262 86,634,633
through profit or loss
CURRENT ASSETS
Receivables 11 2,242,217 617,154
Cash and cash equivalents 5,071,818 2,933,049
Derivative financial instruments 18 91,470 8,746
7,405,505 3,558,949
TOTAL ASSETS 94,577,767 90,193,582
CURRENT LIABILITIES
Derivative financial instruments 18 - 141,151
Payables - due within one year 12 469,872 239,888
ZDP Shares 13 29,319,945 -
29,789,817 381,039
NON-CURRENT LIABILITIES
ZDP Shares 13 - 27,380,779
TOTAL LIABILITIES 29,789,817 27,761,818
NET ASSETS 64,787,950 62,431,764
EQUITY
Share capital 14 171,867 171,867
Share premium 27,436,022 27,436,022
Treasury reserve 15 (4,568,238) (5,064,352)
Revenue reserve 2,511,830 1,735,911
Special reserve 18 10,000,000 10,000,000
Capital reserve 18 29,236,469 28,152,316
TOTAL EQUITY 64,787,950 62,431,764
Pence Pence
Net asset value per Ordinary Share (per Articles) 407.23 395.94
Net asset value per Ordinary Share (per IFRS) 407.20 395.50
Net asset value per ZDP Share (per Articles) 137.26 128.89
Net asset value per ZDP Share (per IFRS) 137.28 129.22
The financial statements were approved by the Board of Directors and authorised
for issue on 18 April 2017 and signed on its behalf by:
Helen Green
Chairman
The notes form an integral part of these financial statements.
Statement of Cash Flows
for the year ended 31 December 2016
31 Dec 2016 31 Dec 2015
Notes GBP GBP
Operating activities
Return on ordinary activities before taxation 4,326,229 11,524,981
Net gains on financial assets designated as at fair value 10 (3,901,649) (10,835,045)
through profit or loss
Investment income 3 (3,869,675) (3,412,408)
Interest expense 7 1,929,208 1,593,477
(Increase)/decrease in derivative financial assets 18 (82,724) 27,994
(Decrease)/increase in derivative financial liabilities 18 (141,151) 97,491
Increase in payables and appropriations 12 19,984 25,777
(Increase)/decrease in receivables excluding accrued
investment income and due from brokers 11 (9,400) 223,360
Net cash flow used in operating activities before investment (1,729,178) (754,373)
income
Investment income received 4,090,590 3,420,617
Net cash flow from operating activities before taxation 2,361,412 2,666,244
Tax paid - -
Net cash flow from operating activities 2,361,412 2,666,244
Investing activities
Purchase of financial assets 10 (22,830,886) (36,586,284)
Sale of financial assets 24,358,328 36,937,572
Net cash flow from investing activities 1,527,442 351,288
Financing activities
Equity dividends paid 8 (2,466,157) (2,136,253)
Treasury shares sold 496,114 1,232,793
Buyback of Ordinary Shares - (435,875)
Buyback of ZDP Shares - (263,514)
ZDP shares sold out of treasury 221,063 560,062
Cost of issue of ZDP Shares (1,105) (2,801)
Net cash flow used in financing activities (1,750,085) (1,045,588)
Increase in cash and cash equivalents 2,138,769 1,971,944
Cash and cash equivalents at beginning of year 2,933,049 961,105
Cash and cash equivalents at end of year 5,071,818 2,933,049
The notes form an integral part of these financial statements.
Statement of Changes in Equity
as at 31 December 2016
Share Share Treasury Revenue Special Capital
Capital Premium Reserve Reserve Reserve Reserve Total
31 Dec 2016 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
2016 2016 2016 2016 2016 2016
GBP GBP GBP GBP GBP GBP GBP
Balances as at 171,867 27,436,022 (5,064,352) 1,735,911 10,000,000 28,152,316 62,431,764
1 January 2016
Total
comprehensive
income for the
year
attributable - - - 3,242,076 - 1,084,153 4,326,229
to
shareholders
Dividends - - - (2,466,157) - - (2,466,157)
Treasury - - 496,114 - - - 496,114
shares sold
Balances as at
31 December 171,867 27,436,022 (4,568,238) 2,511,830 10,000,000 29,236,469 64,787,950
2016
The notes form an integral part of these financial statements
Statement of Changes in Equity
as at 31 December 2015
Share Share Treasury Revenue Special Capital
Capital Premium Reserve Reserve Reserve Reserve Total
31 Dec 2015 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
2015 2015 2015 2015 2015 2015
GBP GBP GBP GBP GBP GBP GBP
Balances as at 173,533 27,870,231 (6,297,145) 996,144 10,000,000 19,503,355 52,246,118
1 January 2015
Total - - - 2,876,020 - 8,648,961 11,524,981
comprehensive
income for the
year
attributable
to
shareholders
Dividends - - - (2,136,253) - - (2,136,253)
Treasury - - 1,232,793 - - - 1,232,793
shares sold
Buyback of - - (435,875) - - - (435,875)
Ordinary
Shares
Cancellation (1,666) (434,209) 435,875 - - - -
of Ordinary
Shares
Balances as at
31 December 171,867 27,436,022 (5,064,352) 1,735,911 10,000,000 28,152,316 62,431,764
2015
The notes form an integral part of these financial statements
Notes to the Financial Statements
for the year ended 31 December 2016
1 ACCOUNTING POLICIES
(a) Basis of preparation
The financial statements, which give a true and fair view, have been prepared
in accordance with International Financial Reporting Standards ("IFRS") issued
by the International Accounting Standards Board ("IASB"), the Association of
Investment Companies ("AIC") Statements of Recommended Practice ("SORP") (as
revised in November 2014) where this is consistent with the requirements of
IFRS and in compliance with the Companies (Guernsey) Law, 2008. All accounting
policies adopted for the period are consistent with IFRS issued by the IASB.
The financial statements have been prepared on an historical cost basis except
for the measurement at fair value of financial assets designated as at fair
value through profit or loss and derivative financial instruments.
The accounts have been prepared on a going concern basis. The disclosure on
going concern in the Report of the Directors forms part of the financial
statements.
The following Standards or Interpretations have been adopted in the current
year.
IFRS 7 Financial instruments: Amendments resulting from September 2014 Annual
improvements to IFRSs, effective for annual periods beginning on or after 1
January 2016.
IAS 1 Presentation of Financial Statement: Disclosure initiative effective 1
January 2016.
The following Standards or Interpretations have been issued by the IASB but not
yet adopted by the Company:
IFRS 7 Financial Instruments: Disclosures - Deferral of mandatory effective
date of IFRS 9 and amendments relating to additional hedge accounting
disclosure (and consequential amendments). Applied only when IFRS 9 is adopted,
which is effective for annual periods beginning on or after 1 January 2018.
IFRS 9 Financial Instruments - classification and measurement of financial
assets effective for annual periods beginning on or after 1 January 2018. The
standard contains revised guidance including new general hedge accounting
requirements that align hedge accounting more closely with an entities risk
management approach and a new expected credit loss model for calculating
impairment on financial assets.
Other requirements of IFRS 9 relating to accounting for liabilities and
derecognition of financial instruments are effective for annual periods
beginning on or after 1 January 2018.
The Directors have considered the above and are of the opinion that these
Standards and Interpretations are not expected to have an impact on the
Company's financial statements except for the presentation of additional
disclosures and changes to the presentation of components of the financial
statements. These items will be applied in the first financial period for which
they are required.
(b) Use of estimates and judgements
The preparation of the financial statements in conformity with IFRS requires
the Directors to make judgements, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets,
liabilities, income and expenses. Actual results may differ from these
estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
The Directors use judgements in allocating expenses between Revenue and Capital
and in ascertaining the risk disclosures contained in Note 18. The Directors
use judgements in valuing the market value of the investments contained in Note
10.
No significant estimates have been used.
(c) Share Capital
Ordinary shares are classified as equity. Share capital includes the nominal
value of ordinary shares that have been issued and any premiums received on the
initial issuance of shares. Incremental costs directly attributable to the
issue of new ordinary shares or options are shown in equity as a deduction, net
of tax, from the proceeds.
When shares recognised as equity are repurchased, the amount of the
consideration paid, which includes directly attributable costs, is recognised
as a deduction from equity. Repurchased shares are classified as treasury
shares and are presented in the treasury reserve. When treasury shares are sold
or reissued subsequently, the amount received is recognised as an increase in
equity and the resulting surplus or deficit on the transaction is presented
within share premium.
(d) Zero Dividend Preference Shares
Under IAS 32, the ZDP Shares are classified as financial liabilities and are
held at amortised cost. Appropriation for the period in respect of ZDP Shares
is included in the Statement of Comprehensive Income as a finance cost and is
calculated using the effective interest rate method ("EIR"). The costs of issue
of the ZDP shares are being amortised over the period until the ZDP shares will
be redeemed.
(e) Taxation
The Company has been granted exemption under the Income Tax (Exempt Bodies)
(Guernsey) Ordinance, 1989 from Guernsey Income Tax, and has elected to remain
exempt following changes to in the Guernsey tax regime. The Company paid an
annual fee of £1,200 (2015: £1,200).
(f) Capital Reserve
The following are accounted for in this reserve:
- gains and losses on the realisation of investments;
- expenses charged to this account in accordance with the expenses policy
below;
- increases and decreases in the valuation of the investments held at the
year end; and
- unrealised exchange differences of a capital nature.
(g) Expenses
All expenses are accounted for on an accruals basis and are recognised in
profit or loss. Expenses are charged to the capital reserve where a connection
with the maintenance or enhancement of the value of the investments can be
demonstrated.
75% of the Company's management fee and financing costs are charged to the
capital reserve in line with the Board's expected long-term split of returns
between income and capital gains from the investment portfolio.
100% of any performance fee, commissions paid and the appropriation in respect
of ZDP Shares is charged to the capital reserve.
All other expenses are charged through the revenue reserve.
(h) Investment income
Interest income and distributions receivable are accounted for on an accruals
basis. Interest income relates only to interest on bank balances. Bond income
is accounted for using the EIR basis. Dividends are recognised on the
ex-dividend date. Investment income is treated as a revenue item, except for
special dividends of a capital nature which are treated as a capital item, in
the Statement of Comprehensive Income.
(i) Foreign currency translation
The currency of the primary economic environment in which the Company operates
(the functional currency) is Great British Pounds (GBP) which is also the
presentational currency.
Transactions denominated in foreign currencies are translated into GBP at the
rate of exchange ruling at the date of the transaction.
Monetary assets and liabilities, other than investments, denominated in foreign
currencies at the reporting date are translated to the functional currency at
the foreign exchange rate ruling at that date. Foreign exchange differences
arising on translation are recognised in profit or loss in the Statement of
Comprehensive Income. Foreign exchange differences relating to investments are
taken to the capital reserve. Realised and unrealised foreign exchange
differences on non-capital assets or liabilities are taken to profit or loss in
the Statement of Comprehensive Income in the period in which they arise.
(j) Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits and
short term, highly liquid investments readily convertible to known amounts of
cash and subject to an insignificant risk of changes in value. For the purposes
of the Statement of Cash Flows, cash and cash equivalents consist of cash,
deposits at bank and money market deposits with a maturity of less than 3
months.
(k) Investments
All investments have been designated as financial assets at "fair value through
profit or loss". Investments are initially recognised on the date of purchase
at fair value, with transaction costs recognised in profit or loss of the
Statement of Comprehensive Income. Unrealised gains and losses on movement in
fair value of investments are recognised in profit or loss in the Statement of
Comprehensive Income. Investments are derecognised on the date of sale. Gains
and losses on the sale of investments, which is the difference between its
initial cost and sale value, will be taken to profit or loss in the Statement
of Comprehensive Income in the period in which they arise. For investments
actively traded in organised financial markets, fair value is determined by
reference to Stock Exchange quoted market bid prices as at the close of
business on the reporting date.
For investments not actively traded, the Directors will consider where
practical, multiples used in recent transactions in comparable stocks. Where
there are no comparable listed or unlisted stocks the Directors will take into
consideration the performance of the stock, maturity date and finance
arrangements to determine the fair value.
(l) Derivatives
Derivatives consist of forward exchange contracts which are initially measured
at fair value and any directly attributable transaction costs are recognised in
profit or loss in the Statement of Comprehensive Income as incurred. Subsequent
to initial recognition, derivatives are measured at fair value, and changes
therein are generally recognised in profit or loss in the Statement of
Comprehensive Income. Derivatives contracts in a receivable position (positive
fair value) are reported as financial assets at fair value through profit or
loss. Derivatives contracts in a payable position (negative fair value) are
reported as financial liabilities at fair value through profit or loss.
(m) Trade date accounting
All "regular way" purchases and sales of financial assets are recognised on the
"trade date", i.e. the date that the entity commits to purchase or sell the
asset. Regular way purchases or sales are purchases or sales of financial
assets that require delivery of the asset within the timeframe generally
established by regulation or convention in the market place.
(n) Segmental reporting
The Company retains two Investment Advisers, Unicorn Asset Management Limited
and Premier Fund Managers Limited for the Smaller Companies Portfolio and
Income Portfolio respectively. As the Board reviews the performance of each
portfolio separately and decides on the allocation of resources based on this
performance, the Board, as chief operating decision maker, has determined that
the Company has two reportable segments (2015: two).
The Board is charged with setting the Company's investment strategy in
accordance with the Prospectus. They have delegated the day to day
implementation of this strategy to its Investment Advisers but retain
responsibility to ensure that adequate resources of the Company are directed in
accordance with their decisions. The investment decisions of the Investment
Advisers are reviewed on a regular basis to ensure compliance with the policies
and legal responsibilities of the Board. The Investment Advisers have been
given full authority to act on behalf of the Company, including the authority
to purchase and sell securities and other investments on behalf of the Company
and to carry out other actions as appropriate to give effect thereto. Whilst
the Investment Advisers may make the investment decisions on a day to day basis
regarding the allocation of funds to different investments, any changes to the
investment strategy or major allocation decisions have to be approved by the
Board, even though they may be proposed by the Investment Advisers. The Board,
therefore, retains full responsibility as to the major allocation decisions
made on an ongoing basis. The Investment Advisers will always act under the
terms of the Prospectus.
The key measure of performance used by the Board to assess the Company's
performance and to allocate resources is the total return on the Company's net
asset value ("NAV"), as calculated under IFRS, and therefore no reconciliation
is required between the measure of profit or loss used by the Board and that
contained in the financial statements.
The schedule of principal investments held as at the year end are presented in
the Schedule of Principal Investments section.
(o) Offsetting
Financial assets and liabilities are offset and the net amount is reported in
the Statement of Financial Position when there is currently a legally and
contractually enforceable right to offset the recognised amounts and there is
an intention to settle on a net basis, or realise the asset and settle the
liability simultaneously. A current legally and contractually enforceable right
to offset must not be contingent on a future event. Furthermore, it must be
legally and contractually enforceable in (i) the normal course of business;
(ii) the event of default; and (iii) the event of insolvency or bankruptcy of
the Company and all of the counterparties.
2 OPERATING SEGMENTS
The Company has two reportable segments, being the Income Portfolio and the
Smaller Companies Portfolio. Each of these portfolios is managed separately as
they entail different investment objectives and strategies and contain
investments in different products.
For each of the portfolios, the Board reviews investment management reports on
a quarterly basis. The objectives and principal investment products of the
respective reportable segments are as follows:
Segment Investment objectives and principal investments products
Income Portfolio To maximise income through investments in sterling
denominated fixed interest securities including corporate
bonds, preference and permanent interest bearing shares,
convertibles, reverse convertibles, debentures and other
similar securities.
Smaller Companies Portfolio To maximise income and capital growth through investments in
smaller capitalised UK companies.
Information regarding the results of each reportable segment follows.
Performance is measured based on the increase in value of each portfolio, as
included in the investment management reports that are reviewed by the Board.
Segmental information is measured on the same basis as those used in the
preparation of the Company's financial statements.
Smaller
Income Companies
Portfolio Portfolio Unallocated Total
GBP GBP GBP GBP
2016
External revenues:
Net gains on financial assets designated
as at fair value
through profit or 954,587 2,947,062 - 3,901,649
loss
Losses on derivative financial instruments (465,564) - - (465,564)
Bank interest - - 2,365 2,365
Dividend income 146,359 3,071,816 - 3,218,175
Bond income 649,135 - - 649,135
Total income and 1,284,517 6,018,878 2,365 7,305,760
gains
Expenses - - (1,050,323) (1,050,323)
Interest payable and similar - - (1,929,208) (1,929,208)
charges
Total comprehensive income for the year
attributable
to shareholders 1,284,517 6,018,878 (2,977,166) 4,326,229
Smaller
Income Companies
Portfolio Portfolio Unallocated Total
GBP GBP GBP GBP
2016
Financial assets designated as at fair value
through
profit or loss 15,171,128 72,001,134 - 87,172,262
Receivables 219,640 2,022,577 - 2,242,217
Derivative financial 91,470 - - 91,470
instruments
Cash and cash equivalents 2,406,640 2,665,178 - 5,071,818
Total 17,888,878 76,688,889 - 94,577,767
assets
Payables - - 469,872 469,872
Total current - - 469,872 469,872
liabilities
Smaller
Income Companies
Portfolio Portfolio Unallocated Total
GBP GBP GBP GBP
2015
External revenues:
Net gains on financial assets designated
as at fair value
through profit or 587,228 10,247,817 - 10,835,045
loss
Gains on derivative financial instruments 4,019 - - 4,019
Bank interest - - 609 609
Dividend income 53,253 2,505,468 - 2,558,721
Bond income 853,078 - - 853,078
Total income and 1,497,578 12,753,285 609 14,251,472
gains
Expenses - - (1,133,014) (1,133,014)
Interest payable and similar - - (1,593,477) (1,593,477)
charges
Total comprehensive income for the year
attributable
to shareholders 1,497,578 12,753,285 (2,725,882) 11,524,981
Smaller
Income Companies
Portfolio Portfolio Unallocated Total
GBP GBP GBP GBP
2015
Financial assets designated as at fair value
through
profit or loss 18,103,395 68,531,238 - 86,634,633
Receivables 316,275 297,639 3,240 617,154
Derivative financial 8,746 - - 8,746
instruments
Cash and cash equivalents 796,660 2,136,389 - 2,933,049
Total 19,225,076 70,965,266 3,240 90,193,582
assets
Derivative financial 141,151 - - 141,151
instruments
Payables - - 239,888 239,888
Total current 141,151 - 239,888 381,039
liabilities
Geographical information
In presenting information on the basis of geographical segments, segment
revenue is based on the domicile countries of the investees and counterparties
to derivative transactions. The table below excludes net gains on financial
assets designated at fair value through profit or loss and gains or losses on
derivative instruments.
Other Rest of
UK Guernsey Jersey Europe the world Total
GBP GBP GBP GBP GBP GBP
31 December 2016
External revenues
Total Revenue 3,307,930 177,633 - 224,460 159,652 3,869,675
Other Rest of
UK Guernsey Jersey Europe the world Total
GBP GBP GBP GBP GBP GBP
31 December 2015
External revenues
Total Revenue 3,075,400 135,133 702 89,093 112,080 3,412,408
The Company did not hold any non-current assets during the year other than
financial instruments (2015: £nil).
Major customers
The Company regards its shareholders as customers. The Company's only
shareholder with a holding greater than 10% at the year end was HSBC Issuer
Services Common Depositary Nominee (UK) Limited (2015: The Company's only
shareholder with a holding greater than 10% at the year end was HSBC Issuer
Services Common Depositary Nominee (UK) Limited).
3 INVESTMENT INCOME
Year ended Year ended
31 Dec 2016 31 Dec 2015
GBP GBP
Bank interest 2,365 609
Dividend 3,218,175 2,558,721
income
Bond income 649,135 853,078
3,869,675 3,412,408
4 (LOSSES)/GAINS ON DERIVATIVE FINANCIAL INSTRUMENT
Year ended Year ended
31 Dec 2016 31 Dec 2015
GBP GBP
Unrealised gain/(loss) on forward foreign currency contracts 223,875 (125,485)
Realised (loss)/gain on forward foreign currency contracts (689,439) 129,504
(465,564) 4,019
5 EXPENSES
Year ended 31 Dec 2016 Year ended 31 Dec 2015
Revenue Capital Total Revenue Capital Total
GBP GBP GBP GBP GBP GBP
Manager's fee* 155,770 467,310 623,080 149,292 447,462 596,754
Administrator's fee 91,911 - 91,911 94,859 - 94,859
**
Registrar's fee 16,340 - 16,340 20,332 - 20,332
Directors' fees 78,307 - 78,307 77,430 - 77,430
Custody fees 23,452 - 23,452 29,482 - 29,482
Audit 32,782 - 32,782 29,000 - 29,000
fees
Directors' and Officers' 3,428 - 3,428 7,522 - 7,522
insurance
Annual fees 29,756 - 29,756 22,330 - 22,330
Bank charges - - - 329 - 329
Commission paid - 120,414 120,414 - 149,164 149,164
Legal and professional fees 5,267 - 5,267 6,861 - 6,861
Broker fees 40,412 - 40,412 35,860 - 35,860
Sundry costs 35,284 - 35,284 65,571 - 65,571
Gain on foreign exchange (50,110) - (50,110) (2,480) - (2,480)
462,599 587,724 1,050,323 536,388 596,626 1,133,014
Manager's fee
* The Company has entered into a Management Agreement with Premier Asset
Management (Guernsey) Limited, a wholly-owned, Guernsey incorporated subsidiary
of Premier Asset Management Limited. The Investment Manager receives a
management fee of 0.7% per annum of total assets (subject to a minimum of £
100,000) calculated monthly and payable quarterly in arrears, out of which it
pays fees to the Investment Advisers. The Investment Manager is also paid a
shareholder communication and support fee, currently £3,100 for the twelve
months from 1 April 2016 to 31 March 2017. Please refer to Note 1(h) for
details on how expenses are charged to the capital reserve and revenue account.
The Management Agreement may be terminated by either party on 12 months'
written notice.
Performance fee
The Investment Manager is also potentially entitled to a performance fee equal
to 15% of any excess of the NAV per Ordinary Share (together with any dividends
paid) over the higher of the first benchmark or the second benchmark. The first
benchmark is the NAV per share immediately following the tender in January 2007
increasing at 10% per annum compound. The second benchmark is the highest NAV
per Ordinary Share as of the last calculation day in any preceding financial
period commencing after completion of the tender in January 2007 in respect of
which a performance fee has been paid compounded at 10% per annum. A
performance fee was not payable to the Investment Manager for the year ended
2016 (2015: Nil).
Administrator's fee
** The Company entered into an Administration Agreement with Northern Trust
International Fund Administration Services (Guernsey) Limited on 1 April 2015.
The Company shall pay the Administrator a fee of 12 basis points per annum on
the net assets between £0 - £100 million, 10 basis points per annum on the net
assets between £100 million - £150 million and 8 basis points per annum on the
net assets over £150 million subject to a minimum of £7,000 per month. The
Administration Agreement may be terminated by either party on ninety days
notice.
6 DIRECTORS' REMUNERATION
Under their terms of appointment, each Director is paid a fee of £25,000 per
annum by the Company, except for the Chairman, who receives £27,500 per annum.
During the year ended 31 December 2016 each Director received an ad hoc
transaction fee of £4,000 in relation to the extra work undertaken in relation
to the refinancing of the ZDP Shares.
A special resolution was passed on 20 December 2016 for the new Articles of
Incorporation which included that the ordinary remuneration of the Directors
shall not exceed in aggregate of £200,000 per annum. Effective from 1 February
2017, each Director is paid a base fee of £25,000 with an additional £10,000
per annum to the Chairman, £7,500 to the Audit Committee Chairman and an
additional £5,000 per annum to Mr Ward to reflect marketing and Risk Committee
duties.
7 INTEREST PAYABLE AND SIMILAR CHARGES
Year ended 31 Dec 2016
Revenue Capital Total
GBP GBP GBP
Appropriation in respect of ZDP shares - 1,622,138 1,622,138
Amortisation of ZDP issue - 97,070 97,070
costs
ZDP issue costs - 210,000 210,000
(2022)
- 1,929,208 1,929,208
Year ended 31 Dec 2015
Revenue Capital Total
GBP GBP GBP
Appropriation in respect of ZDP shares - 1,495,289 1,495,289
Amortisation of ZDP issue - 98,188 98,188
costs
- 1,593,477 1,593,477
8 DIVIDENDS IN RESPECT OF ORDINARY SHARES
Year ended Year ended
31 Dec 2016 31 Dec 2015
Pence Pence
GBP per share GBP per share
First interim 556,873 3.50 502,721 3.25
payment
Second interim payment 636,428 4.00 541,391 3.50
Third interim 636,428 4.00 545,767 3.50
payment
Fourth interim 636,428 4.00 546,374 3.50
payment
2,466,157 15.50 2,136,253 13.75
9 EARNINGS PER SHARE
Ordinary Shares
The total return per Ordinary Share (per IFRS) is based on the total gain on
ordinary activities for the year attributable to Ordinary Shareholders of £
4,326,229 (2015: gain of £11,524,981) and on 15,908,774 (2015: 15,556,337)
shares, being the weighted average number of shares in issue during the year.
There are no dilutive instruments and therefore basic and diluted gains per
share are identical.
The revenue return per Ordinary Share (per IFRS) is based on the revenue return
on ordinary activities for the year attributable to Ordinary Shareholders of £
3,242,076 (2015: £2,876,020) and on 15,908,774 (2015: 15,556,337) shares, being
the weighted average number of shares in issue during the year. There are no
dilutive instruments and therefore basic and diluted gains per share are
identical.
The capital return per Ordinary Share (per IFRS) is based on the capital return
on ordinary activities for the year attributable to Ordinary Shareholders of £
1,084,153 (2015: capital return of £8,648,961) and on 15,908,774(2015:
15,556,337) shares, being the weighted average number of shares in issue during
the year. There are no dilutive instruments and therefore basic and diluted
gains per share are identical.
ZDP shares
The return per ZDP Share is based on the appropriation in respect of ZDP
Shares, the amortisation of ZDP Share issue costs and ZDP Share issue costs
(2022) accruals totalling £1,929,208 (2015: £1,593,477) and on 21,355,157
(2015: 20,881,947) shares, being the weighted average number of ZDP Shares in
issue during the year.
10 FINANCIAL ASSETS DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS
31 Dec 31 Dec 2015
2016
GBP GBP
INVESTMENTS
Opening portfolio 67,722,601 62,431,660
cost
Purchases at cost 22,830,886 36,586,284
Sales
- (26,194,906) (36,937,572)
proceeds
- realised gains on 7,745,792 8,055,355
sales
- realised losses (2,699,306) (2,413,126)
on sales
Closing book cost 69,405,067 67,722,601
Unrealised appreciation on investments 20,697,555 22,195,364
Unrealised depreciation on investments (2,930,360) (3,283,332)
Fair 87,172,262 86,634,633
value
Realised gains on 7,745,792 8,055,355
sales
Realised losses on (2,699,306) (2,413,126)
sales
(Decrease)/increase in unrealised appreciation on (1,497,809) 8,476,148
investments
Decrease/(increase) in unrealised depreciation on 352,972 (3,283,332)
investments
Net gains on financial assets designated as at fair value through 3,901,649 10,835,045
profit or loss
As at 31 December 2016, the closing fair value of investments comprises £
72,001,134 (Dec 2015: £68,531,238) of Smaller Companies Portfolio, £15,171,128
(Dec 2015: £18,064,090) of Income Portfolio and an asset of £132,661 (Dec 2015:
asset of £39,305) in respect of long gilts held.
IFRS 13 requires the fair value of investments to be disclosed by the source of
inputs using a three-level hierarchy as detailed below:
Quoted prices (unadjusted) in active markets for identical assets or
liabilities (Level 1);
Inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly (as prices) or indirectly (derived from
prices) (Level 2);
Inputs for the asset or liability that are not based on observable market data
(unobservable inputs) (Level 3).
Details of the value of each classification are listed in the table below.
Values are based on the market value of the investment as at the reporting
date:
Financial assets designated as at fair value through profit or loss
31 Dec 2016 31 Dec 31 Dec 2015 31 Dec
2016 2015
Market Market Market value Market
value value value
% GBP % GBP
Level 1 84.53 73,688,748 79.15 68,570,543
Level 2 15.47 13,483,142 20.79 18,012,917
Level 3 0.00 372 0.06 51,173
Total 100.00 87,172,262 100.00 86,634,633
Bonds and structured investments are priced by reference to market quotations
which incorporate assessment of yield, maturity and the instrument's terms and
conditions.
During the current year, equity securities held within the Income Portfolio
have been reclassified from Level 2 to Level 1 in order to better reflect the
source of inputs for these securities.
The following table is a reconciliation of investments the Company held during
the years ended 31 Dec 2016 and 31 Dec 2015 at fair value using unobservable
inputs (Level 3):
31 Dec 2016 31 Dec 2015
Market Market
value value
GBP GBP
Balance at 1 51,173 48,829
January
Unrealised (loss)/gain on investments (50,801) 2,344
Balance at 31 372 51,173
December
For investments categorised in Level 3 as at 31 December 2016, the below
details the valuation methodologies used:
Lehman Brother Holdings Capital Trust V 6.9% - These bonds were subordinated
and are in default and the Investment Adviser does not expect any return of
capital or interest and the bonds are valued at zero.
Petromena AS 10.85% 2014 - The bonds are in default and are priced from a
Bloomberg bond valuation model.
Silverdell plc - The stock is suspended and is valued at zero. The Investment
Adviser does not expect any return of capital.
Derivative financial assets and liabilities designated as at fair value through
profit or loss
31 Dec 2016 31 Dec 31 Dec 31 Dec
2016 2015 2015
Market Market value Market value Market value
value
% GBP % GBP
Level 2 derivative financial assets 100.00 91,470 100.00 8,746
Level 2 derivative financial - - 100.00 141,151
liabilities
It is the Company's policy to recognise all the transfers into the levels and
transfers out of the levels at the end of the reporting year. Transfers into
each level shall be disclosed and discussed separately from transfer out of
each level.
The derivative financial instruments held by the Company have been classified
as Level 2. This is in accordance with the fair value hierarchy. The Company
uses widely recognised valuation models for determining fair value of
derivative financial instruments that use only observable market data and
require little management judgement and estimation.
11 RECEIVABLES
31 Dec 31 Dec
2016 2015
GBP GBP
Due from 1,836,578 -
brokers
Prepayments 17,687 5,047
Accrued income 387,952 608,867
Sundry receivables - 3,240
2,242,217 617,154
12 PAYABLES
31 Dec 2016 31 Dec
2015
GBP GBP
Accrued 99,992 82,911
expenses
Trade 159,880 156,977
creditors
ZDP issue costs (2022) 210,000 -
469,872 239,888
13 ZDP SHARES
31 Dec 31 Dec
2016 2015
GBP GBP
ZDP Share entitlement 29,319,945 27,380,779
The above entitlement comprises the following:
21,189,384 ZDP Shares issued to date up to 31 Dec 2015 22,768,091 -
201,348 Buyback of ZDP Shares during the year to 31 Dec 2015 - (263,514)
167,790 ZDP shares sold out of treasury during the year to 31 Dec 221,063 -
2016
425,998 ZDP shares sold out of treasury during the year to 31 Dec - 560,062
2015
27,032,008 ZDP Shares issued to date up to 31 Dec 2014 - 22,471,543
ZDP Premium (13,501) (174,160)
Appropriation in respect of ZDP Shares 6,339,204 4,717,066
ZDP value (calculated in accordance with the Articles) 29,314,857 27,310,997
ZDP issue (105,483) (202,566)
costs
Issue costs amortised 97,070 98,188
Add back ZDP Premium 13,501 174,160
ZDP value (calculated in accordance 29,319,945 27,380,779
with IFRS)
The fair value of the ZDP Shares as at 31 December 2016 was £29,767,629 (31
December 2015: £27,917,997).
ZDP Shares carry no entitlement to income distributions made by the Company.
The ZDP Shareholders will not receive dividends but will have a final capital
entitlement at the end of their life on 31 January 2017 of 138 pence. It should
be noted that the predetermined capital entitlement of a ZDP Share is not
guaranteed and is dependent upon the Company's gross assets being sufficient on
31 January 2017 to meet the final capital entitlement of the ZDP Shares. If the
Company had been wound up on
31 December 2016, the ZDP Shares would have had an entitlement of 137.26 pence
each. The ZDP Shareholders have the right to receive notice of and attend, but
shall not have the right to vote at, any general meeting.
Under the Articles of Association, the Company is obliged to redeem all of the
ZDP Shares on 31 January 2017 (if such redemption has not already been
effected).
The number of authorised ZDP Shares is 50,000,000. The number of issued ZDP
Shares is 21,357,174 (2015: 21,189,384). The number of ZDP Shares held in
treasury as at 31 December 2016 was 1,712,757 (2015: 1,880,547). The
non-amortisation of the ZDP Shares in line with the Articles has the effect of
increasing NAV per Ordinary Shares by 0.03 pence.
The ZDP Shares have been reclassified on the Statement of Financial Position as
a current liability as the maturity date is within one year.
14 SHARE CAPITAL
Authorised GBP
Ordinary Shares of 1p each unlimited
Issued Number of
Shares
The issue of Ordinary Shares took place as follows:
Ordinary Shares 11 Feb 1999 29,600,002
Tender offer 17 Jan 2007 (20,660,212)
Purchase of treasury shares - Year ended 31 December 2011 (215,000)
Placing - Year ended 31 December 2013 6,438,339
Purchase of treasury shares - Year ended 31 December 2013 (1,756,000)
Shares sold out of Treasury - Year ended 31 December 2013 1,971,000
Issue of shares - Year ended 31 December 2,500,205
2014
Buyback of Ordinary Shares - Year ended 31 December 2014 (2,650,000)
Shares sold out of Treasury - Year ended 31 December 2014 390,000
Buyback of Ordinary Shares - Year ended 31 December 2015 (150,002)
Shares sold out of Treasury - Year ended 31 December 2015 317,360
Number of shares in issue at 31 December 15,785,692
2015
Shares sold out of Treasury during the 125,000
year
Number of shares in issue at 31 December 15,910,692
2016
Issued and fully paid capital as at 31 December 2016 £171,867
The Ordinary Shares (excluding treasury shares) are entitled to participate in
all dividends and distributions of the Company. On a winding-up holders of
Ordinary Shares are entitled to participate in the distribution and the holders
of Ordinary Shares are entitled to receive notice of and attend and vote at all
general meetings of the Company.
The issued and fully paid capital as at 31 December 2016 was £171,867 (31
December 2015: £171,867).
15 TREASURY RESERVE
31 Dec 2016 31 Dec 2015
GBP GBP
Balance as at 1 (5,064,352) (6,297,145)
January
Treasury shares sold during 496,114 1,232,793
the year
Buyback of Ordinary Shares during the year - (435,875)
Cancellation of Treasury Shares during the year - 435,875
Balance as at 31 December (4,568,238) (5,064,352)
31 Dec 2016 31 Dec 2015
No. Shares No. Shares
Balance as at 1 1,400,972 1,735,000
January
Buyback of shares during the - 150,000
year
Treasury shares sold during (125,000) (317,360)
the year
Cancellation of Treasury Shares during the year - (166,668)
Balance as at 31 December 1,275,972 1,400,972
There were no Treasury Shares purchased during the year ended 31 December 2016.
In the prior year the Treasury Shares were purchased in the market at various
prices ranging from £2.83 to £3.06 and held by the Company in treasury.
16 RELATED PARTIES
Premier Asset Management (Guernsey) Limited is the Company's Investment Manager
and operates under the terms of the Management Agreement in force which
delegates its authority over the Company's investment portfolios.
£623,080 (2015: £596,754) of costs were incurred by the Company with this
related party in the year, of which £159,880 (2015: £156,977) was due to this
related party as at 31 December 2016.
Directors' remuneration is disclosed in Note 6.
David Warr holds 63,000 Ordinary Shares in the capital of the Company, which
represented an interest of 0.40% of the Company's Ordinary Shares in issue as
at 31 December 2016.
17 FINANCIAL INSTRUMENTS
The Company's main financial instruments comprise:
(a) Cash and cash equivalents that arise directly from the Company's
operations;
(b) Investments in listed entities, receivables and payables;
(c) ZDP Shares; and
(d) Derivative financial instruments.
18 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The following table details the categories of financial assets and liabilities
held by the Company at the reporting date:
31 Dec 2016 31 Dec
2015
GBP GBP
Financial Assets
Financial assets designated as at fair value through profit 87,172,262 86,634,633
or loss
Derivative financial assets 91,470 8,746
Total financial assets at fair value through profit 87,263,732 86,643,379
or loss
Loans and receivables
Cash and receivables 5,071,818 2,933,049
Receivables 2,224,530 612,107
Total assets 94,560,080 90,188,535
31 Dec 2016 31 Dec
2015
GBP GBP
Financial liabilities
Financial liabilities at fair value through profit
or loss:
Derivative financial - 141,151
liabilities
Total financial liabilities at fair value through - 141,151
profit or loss
Financial liabilities measured at
amortised cost
ZDP Shares 29,319,945 27,380,779
Payables 469,872 239,888
Total Financial liabilities measured at amortised 29,789,817 27,620,667
cost
Total liabilities excluding net assets attributable to holders of 29,789,817 27,761,818
Ordinary Shares
Loans and receivables presented above represents cash and cash equivalents,
balances due from brokers and other receivables (excluding prepayments) as
detailed in the Statement of Financial Position.
Financial liabilities measured at amortised cost presented above represents
accrued expenses and ZDP Shares as detailed in the Statement of Financial
Position.
Derivative financial assets and liabilities presented above represent forward
foreign exchange contracts. Unrealised gains and losses on movement in fair
value are recognised in the Statement of Comprehensive Income.
The main risks arising from the Company's financial instruments are market
price risk, credit risk, liquidity risk, interest rate risk and foreign
exchange risk. The Board regularly reviews and agrees policies for managing
each of these risks and these are summarised in notes 18(a) to 18(e).
(a) Market Price Risk
Market price risk arises mainly from uncertainty about future prices of
financial instruments held. It represents the potential loss the Company might
suffer through holding market positions in the face of price movements. The
Investment Advisers actively monitor market prices and report to the Board as
to the appropriateness of the prices used for valuation purposes. The
Investment Advisers also attempt to minimise market price risk by undertaking a
detailed analysis of the risk/reward relationship of each investee company
prior to any investment being made.
Unicorn monitors the industry concentration exposure for the Smaller Companies
Portfolio. The concentration exposure is presented in a graph on page 12 of the
published Financial Statements which will shortly be available via the
Investment Manager's website https://www.premierfunds.co.uk/media/941577/
acorn-income-fund-annual-report-2016.pdf.
Details of the Company's Investment Objective and Policy are given at the
beginning of this Report.
Price sensitivity
The following details the Company's sensitivity to a 15% increase and decrease
in the market prices, with 15% being the sensitivity rate used when reporting
price risk internally to key management personnel and representing management's
assessment of the possible change in market prices.
At 31 December 2016, if market prices had been 15% higher with all the other
variables held constant, the return attributable to shareholders for the year
would have been £13,075,839 (2015: £12,995,195) greater, due to the increase in
the fair value of financial assets at fair value through profit or loss. This
would represent an increase in Net Assets of 20.18% (2015: 20.82%).
If market prices had been 15% lower with all the other variables held constant,
the return attributable to shareholders for the year would have been £
13,075,839 (2015: £12,995,195) lower, due to the decrease in the fair value of
financial assets at fair value through profit or loss. This would represent a
decrease in Net Assets of 20.18% (2015: 20.82%).
(b) Credit Risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Company. The
Directors receive financial information on a regular basis which is used to
identify and monitor risk. It is the Company's policy not to invest, at the
time of investment, more than 10% of the Company's gross assets in any one
smaller company equity, more than 7.5% in any one fixed interest security and
more than 20% in any one investment company or fund.
The Company has no significant concentration of credit risk, with exposure
spread over a large number of counterparties. At 31 December 2016 the Company's
largest exposure to a single investment was £2,850,000 (2015: £3,101,000),
3.01% (2015: 3.44%) of total assets.
Investors should be aware that the prospective returns to Shareholders mirror
the returns under the quoted securities held or entered into by the Company and
that any default by an issuer of any such quoted security held by the Company
would have a consequential adverse effect on the ability of the Company to pay
some or all of the entitlement to its Shareholders. Such a default might, for
example, arise on the insolvency of an issuer of a quoted security.
The Company's financial assets exposed to credit risk are as follows:
31 Dec 31 Dec
2016 2015
GBP GBP
Financial assets designated as at fair value through profit
or loss
(fixed income securities 13,350,853 18,103,395
only)
Cash and cash equivalents 5,071,818 2,933,049
Interest, dividends and other 2,224,530 617,154
receivables
Derivatives financial 91,470 (132,405)
instruments
20,738,671 21,521,193
The credit ratings of the bonds, as rated by Moody's Investor Services Inc
("Moodys") were:
Rating 31 Dec 2016 31 Dec
2015
Aaa 0.00% 4.88%
Aa 3.43% 3.53%
A 12.54% 11.12%
Baa 26.66% 20.20%
Ba 5.30% 7.39%
B 2.59% 3.96%
Other Sourced 10.47% 18.61%
Ratings
No ratings 39.01% 30.31%
available
The cash and cash equivalents were held with Northern Trust (Guernsey) Limited,
a fully owned subsidiary of The Northern Trust Company, which at the year ended
31 December 2016 held a credit rating, as rated by Moody's, of Aa2. The long
gilt future is held with J.P. Morgan who at the year ended 31 December 2016
held a credit rating, as rated by Moody's, of Aa2. The Investment Adviser for
the Income Portfolio selects investments having regard to their potential
return and the credit risk associated with them. The Investment Adviser carries
out its own assessment of credit risk and the rating provided by a credit
rating agency is just one of the factors taken into account. The absence of a
rating is not necessarily a reflection on credit risk. The board review the
whole portfolio at quarterly board meetings.
(c) Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in
meeting its obligations associated with its financial liabilities that are
settled by delivering cash or another financial asset. The Company's main
financial commitments are its ongoing operating expenses and the settlement of
the obligation upon maturity of the ZDP Shares on 31 January 2017.
The ZDP Shares will not pay dividends but will have a final capital entitlement
at the end of their life on 31 January 2017 of 138 pence. Following approval of
shareholders on 20 December 2016, the life of the ZDP Shares was extended to 28
February 2022 with over 91% of ZDP Shareholders electing to remain invested.
The cash payment to ZDP shareholders who redeemed their shares on 31 January
2017 was financed by a placing of 2022 ZDP Shares with new investors. It should
be noted that the predetermined capital entitlement of the 2022 ZDP Shares is
not guaranteed and is dependent upon the Company's gross assets being
sufficient on 28 February 2022 to meet the final capital entitlement of the ZDP
Shares.
The Investment Advisers ensure that the Company has sufficient liquid resources
available to fulfil its operational plans and to meet its financial obligations
as they fall due. This is monitored by carrying out a solvency calculation on a
quarterly basis by reference to management accounts and revenue projections.
The Board will approve a Solvency Certificate resolution prior to declaring any
interim distributions.
The Board intends to monitor the financial position of the Company to ensure
that it has sufficient liquid resources available to fulfil its obligation upon
maturity of the ZDP Shares.
The table below details the residual contractual undiscounted maturities of
financial liabilities:
As at 31 December 2016 As at 31 December 2015
1-3 months Over 1-3 months Over
1 year 1 year
GBP GBP GBP GBP
Financial liabilities including
derivatives
Payables - due within one 469,872 - 239,888 -
year
Derivative financial - - 141,151 -
instruments
ZDP Share 29,472,900 - - 29,241,350
entitlement
29,942,772 - 381,039 29,241,350
(d) Interest Rate Risk
The Company could hedge interest rate risk using various different methods.
The following table details the Company's exposure to interest rate risks. It
includes the Company's assets and liabilities at fair values, categorised by
the earlier of contractual re-pricing or maturity date measured by the carrying
value of the assets and liabilities:
As at 31 December 2016:
Less than Fixed Non-interest
1 month interest Bearing Total
GBP GBP GBP GBP
Financial Assets
Financial assets at fair value through
profit or loss on
initial recognition - 13,350,853 73,821,409 87,172,262
Cash and cash equivalents 5,071,818 - - 5,071,818
Interest, dividends and other receivables - - 2,224,530 2,224,530
Derivative Financial - - 91,470 91,470
instruments
Total Financial 5,071,818 13,350,853 76,005,120 94,560,080
Assets
Financial
Liabilities
Payables - - 469,872 469,872
ZDP Share - 29,319,945 - 29,319,945
entitlement
Total Financial Liabilities - 29,319,945 469,872 29,789,817
Total Interest sensitivity 5,071,818 (15,969,092)
gap
As at 31 December 2015:
Less than Fixed Non-interest
1 month interest Bearing Total
GBP GBP GBP GBP
Financial Assets
Financial assets at fair value through
profit or loss on
initial recognition - 18,103,395 68,531,238 86,634,633
Cash and cash equivalents 2,933,049 - - 2,933,049
Interest, dividends and other receivables - - 617,154 617,154
Derivative Financial - - 8,746 8,746
instruments
Total Financial 2,933,049 18,103,395 69,157,138 90,193,582
Assets
Financial
Liabilities
Derivative Financial - - 141,151 141,151
instruments
Payables - - 239,888 239,888
ZDP Share - 27,380,779 - 27,380,779
entitlement
Total Financial Liabilities - 27,380,779 381,039 27,761,818
Total Interest sensitivity 2,933,049 (9,277,384)
gap
Interest rate sensitivity takes account of the effect of interest rate
movements on cash balances, loan amounts and fixed interest securities.
Interest rate risk does not affect the cash flows of the fixed interest
securities but does affect the fair value and as such this sensitivity has been
reflected in the market price risk disclosures at Note 18(a).
Interest rate sensitivity
If interest rates had been 25 basis points higher and all other variables were
held constant, the Company's return attributable to Ordinary Shareholders for
the year ended 31 December 2016 would have increased by approximately
£12,680 (2015: £7,333) or 0.013% (2015: 0.008%) of Total Assets, due to an
increase in the amount of interest receivable on the bank balances.
If interest rates had been 25 basis points lower and all other variables were
held constant, the Company's return attributable to Ordinary Shareholders for
the year ended 31 December 2016 would have decreased by approximately
£12,680 (2015: £7,333) or 0.013% (2015: 0.008%) of Total Assets, due to a
decrease in the amount of interest receivable on the bank balances.
(e) Foreign Exchange Risk
Forward currency transactions are used to hedge the foreign currency exposure
in bonds, other investments and cash balances held within the Income Portfolio.
The purpose of the hedge is to protect the Company's assets from a decline in
value that might arise from the depreciation of a foreign currency against
Sterling.
At 31 December 2016, the Company's holdings in derivatives translated into GBP
were as specified below:
Notional
amount of Fair
contracts value
Expiration Underlying outstanding assets
GBP
Type of contract
Forward January 2017 Purchased EUR 1,670,000 79,144
Forward January 2017 Purchased USD 2,150,000 12,326
91,470
At 31 December 2015, the Company's holdings in derivatives translated into GBP
were as specified below:
Notional
amount of Fair
contracts value
Expiration Underlying outstanding assets
GBP
Forward February Purchased EUR 1,900,000 (41,095)
2016
Forward February Sold EUR (250,000) 8,006
2016
Forward February Purchased EUR 3,300,000 (100,056)
2016
Forward February Sold EUR (89,531) 740
2016
(132,405)
Exchange rate exposures are managed by minimising the amount of foreign
currency held at any one time and entering into forward exchange contracts.
The following table sets out the Company's total exposure to foreign currency
risk and the net exposure to foreign currencies of the monetary assets and
liabilities:
31 December 2016
Monetary Monetary Forward Net
Assets Liabilities FX Contracts exposure
GBP GBP GBP GBP
Euro 1,476,958 - (1,425,944) 51,014
US Dollar 1,926,026 - (1,739,387) 186,639
Australian Dollar 15 - - 15
31 December 2015
Monetary Monetary Forward Net
Assets Liabilities FX Contracts exposure
GBP GBP GBP GBP
Euro 1,213,516 - (1,216,753) (3,237)
US Dollar 2,208,820 - (2,178,059) 30,761
Australian Dollar 13 - - 13
Amounts in the above table are based on the carrying value of monetary assets
and liabilities and the underlying principal amount of forward currency
contracts.
(f) Capital Management
The principal investment objectives of the Company are to provide shareholders
with a high income and also the opportunity for capital growth.
The Company's investments are held in two portfolios. The Company's assets
comprise investments in equities and fixed interest and other income-bearing
securities in order to achieve its investment objectives. Approximately 70%-80%
of the portfolio are invested in smaller capitalised United Kingdom companies,
admitted to the Official List of the Financial Conduct Authority (the "FCA")
and traded on the London Stock Exchange (the "LSE") or traded on the AIM at the
time of investment. The Company also aims to further enhance income for
Shareholders by investing approximately 20%-30% of its assets in high yielding
securities which will be predominantly fixed income securities (including
corporate bonds, preference and permanent interest bearing shares, convertible
and reverse convertible bonds and debentures) but may include up to 15% of the
portfolio (measured at time of acquisition) in high yielding investment company
shares.
As the Company's Ordinary Shares are traded on the LSE, the Ordinary Shares may
trade at a discount or premium to their Net Asset Value per Share on occasion.
However, the Directors and the Manager monitor the discount on a regular basis
and can use share buy backs to manage the discount.
The Company monitors capital on the basis of the carrying amount of equity as
presented on the face of the Statement of Financial Position. Capital for the
reporting periods under review is summarised as follows:
GBP
Distributable 12,511,830
reserves
Share capital and share 27,607,889
premium
Non distributable reserves 29,236,469
Treasury reserve (4,568,238)
Total 64,787,950
The distributable reserves comprises the revenue reserve and the special
reserve. The non distributable reserves comprise the capital reserve and the
treasury reserve. The special reserve was created on the cancellation of part
of the Company's share premium account.
(g) Dividend levels
Dividends paid on the Company's Ordinary Shares rely on receipt of interest
payments and dividends from the securities in which the Company invests. The
Company's revenue levels are monitored on a regular basis by the Board and the
Investment Advisers.
19 SUBSEQUENT EVENTS
These Financial Statements were approved for issue by the Board on 18 April
2017. Subsequent events have been evaluated until this date.
A dividend of 4.5p was declared on 15 February 2017 and was paid to Ordinary
Shareholders on 31 March 2017.
ZDP Shares - On 30 January 2017 the Company announced that existing
Shareholders were given the opportunity to elect to remain invested for a
further five years and one month to 28 February 2022 with the ZDPs accruing at
a rate of 3.85% from the 138p NAV in 31 January 2017 to 167.2p on redemption or
to receive 138p shortly after 31 January 2017. Shareholders approved the scheme
and 91.4% of ZDP Shareholders elected to remain invested.
Ordinary Shares - On 30 January 2017 the Company announced that 5,995 new
Ordinary Shares had been issued through the Initial Placing and Offer for
Subscription.
Unaudited Full List of Investment Holdings Listing
Company Nominal Valuation Percentage
Holdings GBP of Total
Assets 2016
Smaller Companies Portfolio
Clipper Logistics plc 750,000 2,850,000 3.01
Conviviality Retail plc 1,150,000 2,481,125 2.62
Safestyle UK plc 800,000 2,322,000 2.46
Macfarlane Group 3,800,000 2,280,000 2.41
Secure Trust Bank plc 105,000 2,258,550 2.39
Acal plc 980,000 2,205,000 2.33
Somero Enterprises inc 1,000,000 2,200,000 2.33
Lavendon Group plc 829,681 2,190,358 2.32
Castings plc 449,112 1,845,850 1.95
Park Group plc 2,500,000 1,825,000 1.93
Numis Corporation plc 750,000 1,824,375 1.93
Primary Health Properties plc 1,600,000 1,768,000 1.87
Wincanton plc 700,000 1,722,000 1.82
James Halstead plc 350,000 1,695,750 1.79
FDM Group Holdings plc 300,000 1,695,000 1.79
Gateley Holdings plc 1,300,000 1,677,000 1.77
Alumasc Group plc 1,100,000 1,672,000 1.77
Mucklow A&J Group plc 349,429 1,624,845 1.72
Epwin Group plc 1,600,000 1,604,000 1.70
Quarto Group inc 515,116 1,535,046 1.62
BBA Aviation plc 533,299 1,510,303 1.60
Manx Telecom plc 750,000 1,492,500 1.58
Telecom Plus plc 125,000 1,466,250 1.55
Flowtech Fluidpower plc 1,100,000 1,397,000 1.48
Jarvis Securities plc 415,000 1,390,250 1.47
Amino Technologies plc 800,000 1,376,000 1.45
Tyman plc 500,000 1,370,000 1.45
Warpaint London plc 1,000,000 1,350,000 1.43
River & Mercantile Group plc 650,000 1,339,000 1.42
Photo-Me International plc 800,000 1,312,000 1.39
Card Factory plc 500,000 1,264,500 1.34
Van Elle Holdings plc 1,000,000 1,260,000 1.33
Ocean Wilson Holdings Limited 120,610 1,224,192 1.29
Lower & Bonar plc 1,908,250 1,221,280 1.29
Brewin Dolphin Holdings plc 400,000 1,216,400 1.29
Greene King plc 173,000 1,204,945 1.27
Hill & Smith Holdings plc 100,000 1,198,000 1.27
Headlam Group plc 245,000 1,192,538 1.26
Midwich Group plc 500,000 1,125,000 1.19
Palace Capital plc 296,802 1,068,487 1.13
Morses Club plc 950,000 1,030,750 1.09
Hostelworld Group plc 438,514 925,265 0.98
Pendragon plc 2,863,824 887,785 0.94
Dairy Crest Group plc 142,630 880,740 0.93
Sprue Aegis plc 500,000 875,000 0.93
Harvey Nash Group plc 1,132,728 679,637 0.72
RPS Group plc 302,500 673,063 0.71
Braemar Shipping Services plc 200,000 552,000 0.58
Chesnara plc 67,601 242,350 0.26
Silverdell plc 3,090,546 - -
TOTAL 72,001,134 76.15
Percentage
Company Nominal Valuation of Total
Holdings GBP Assets 2016
Income Portfolio
Real Estate Credit Pref Shs NPV 925,000 943,500 1.00
DW Catalyst Fund Limited 53,359 632,838 0.67
United Kingdom 2.50% IL Treasury 2020 140,000 519,624 0.55
British Telecoms 5.75% 2028 300,000 401,005 0.42
HSBC 6% 29/03/2040 300,000 360,312 0.38
JPMorgan Global Convertibles Income Fund Limited 400,000 360,000 0.38
Glencore Finance Dubai 2.625% 2018 400,000 354,556 0.37
Itv 2.125% 2022 400,000 352,043 0.37
F&C Global Smaller Companies CULS 3.5% 280,000 343,700 0.36
Natixis Structured 0.00% 08/09/2017 400,000 340,831 0.36
Tesco Personal Finance 1.00% 2019 300,000 339,135 0.36
EDF 6.125% 02/06/2034 250,000 334,180 0.35
UBS 7.25% 22/02/2022 400,000 325,632 0.34
Investec Bank 0.00% 08/09/2020 300,000 302,094 0.32
Heathrow 7.075% 04/08/2028 200,000 286,202 0.30
St Modwen Properties 2.875% 06/03/19 300,000 283,170 0.30
Credit Agricole SA 8.125% 2033 - 18 300,000 261,178 0.28
Northumbrian Water Finance plc 6.875% 2023 200,000 259,306 0.27
Spirit Issuer 5.472% 28/12/2034 250,000 258,911 0.27
Aviva 5.9021% Perp - 2020 250,000 255,313 0.27
Firstgroup plc 8.75% 2021 200,000 253,552 0.27
Fidelity International 7.125% 2024 200,000 250,656 0.27
Investec Bank 9.625% 2022 200,000 241,757 0.26
Thames Water Utili 4.00% 2025 200,000 232,692 0.25
France Telecom 8.125% 2028 150,000 232,090 0.25
Anheuser-Busch Inbev 9.75% 2024 150,000 231,263 0.24
Sse plc 6.25% 2038 150,000 229,198 0.24
Marks & Spencer 4.75% 2025 200,000 224,680 0.24
Unite Group plc 6.125% 2020 200,000 219,281 0.23
Everything Everywhere 4.375% 2019 200,000 215,253 0.23
AT&T 4.25% 2043 200,000 214,802 0.23
Bakkavor Finance plc 8.75% 2020 200,000 213,616 0.23
Pepsi 2.5% 2022 200,000 213,315 0.23
Royal Bank Of Canada 0.00% 2018 200,000 212,980 0.23
Morrison (WM) Supermarkets 3.50% 2026 200,000 207,555 0.22
Hadrian's Wall Secured Investment Limited 192,805 203,409 0.22
Gli Finance Limited Red Zdp 2019 Npv 205,806 201,175 0.21
Investec Bank 0.00% 11/01/2021 200,000 200,014 0.21
Enterprise Funding Limited 3.50% 2020 200,000 192,500 0.20
Finmeccanica Spa 4.50% 2021 200,000 192,250 0.20
Helical Bar Jersey 4.00% 2019 convertible 200,000 192,100 0.20
JPMorgan Structured Programme 0.00% 17/03/2021 200,000 190,265 0.20
HSBC Holdings 6.25% 2018 200,000 183,190 0.19
Tesco Property Finance 5.4111% 2044 197,065 182,785 0.19
South Eastern Power Networks 3.053% 2023 100,000 181,640 0.19
Barclays plc 8% Perp - 20 200,000 180,048 0.19
House Of Fraser Funding 2020 200,000 179,000 0.19
BPCE SA 2.75% 2026 -21 200,000 176,846 0.19
Old Mutual 8.00% 2021 150,000 169,820 0.18
Kelda Finance (No 3) plc 5.75% 2020 150,000 164,548 0.17
Punch Taverns Finance 7.32% 2026 135,900 162,179 0.17
RL Finance Bonds plc 6.125% 2043 150,000 158,962 0.17
Aberforth Geared Income Trust plc 100,000 156,500 0.17
3i Group 6.875% 2023 100,000 125,362 0.13
Mitchells & Butlers Finance 5.574% 2030 103,637 119,324 0.13
Verizon Communications 2.45% 2022 150,000 117,255 0.12
BAE Systems 4.125% 2022 100,000 112,611 0.12
Whitbread Group 3.375% 2025 100,000 106,600 0.11
SQN Asset Finance Income Fund Limited 100,000 102,750 0.11
UK Mortgages Limited 100,000 94,250 0.10
Edinburgh Dragon Trust 3.50% 2018 87,574 90,201 0.10
Natwest Bank plc 9% Non Cumulative Preference 50,000 66,750 0.07
Nationwide Building Society 10.25% 500 65,540 0.07
Punch Taverns Finance 7.274% 2026 50,000 59,971 0.06
P2P Global Investments plc 4,550 36,354 0.04
Juridica Ordinary Shares 200,000 32,999 0.03
Petromena AS 10.85% 2014 82,990 371 -
Lehman Brthers Holdings Capital Trust V 6.9% 100,000 - -
Bond futures
Fut. Long Gilt Icf Mar17 - (134,068) (0.14)
Fut. Msci Asia Eux Mar 17 - 1,407 -
15,171,128 16.03
TOTAL 87,172,262 92.18
Glossary
Cover
The Cover on the ZDP Shares measures the amount by which the final redemption
value of the ZDP Shares is covered by the total assets of the Company allowing
for all prior ranking liabilities and the accrual of expenses to capital over
the remaining period to the redemption of the ZDP Shares. The calculation used
in this report is for non-cumulative cover and represents a fraction where the
numerator is equal to the gross assets of the Company less current liabilities
(other than debt and liabilities to ZDP Shareholders) less the Company's
revenue reserves and the denominator is the aggregate amount payable to ZDP
Shareholders on the repayment date plus any other borrowing plus the cumulative
management fee charged to capital over the remaining period to the repayment
date. The full definition of the calculation is set out in the Company's
prospectus that can be found on the Company's website.
Cover Test
A required Cover of not less than 2.0 times.
Discount/Premium
If the share price of an investment company is lower than the NAV per share,
the shares are said to be trading at a discount. The size of the discount is
calculated by subtracting the share price from the NAV per share and is usually
expressed as a percentage of the NAV per share. If the share price is higher
than the NAV per share, the shares are said to be trading at a premium.
Gearing
Also known as leverage. Gearing is introduced when a company borrows money or
issues prior ranking share classes such as ZDP Shares, to buy additional
investments. The objective is to enhance returns to ordinary shareholders but
there is the risk of the opposite effect if the additional investments fall in
value.
Yield
The annual interest payments on a fixed-interest security, or the annual
dividends on an equity (less any withholding tax) expressed as a percentage of
the current market value of the security.
Net Asset Value ("NAV")
NAV is the assets attributable to Ordinary Shareholders expressed as an amount
per individual share. Within this report two different methods are used for
calculating NAV. One using the accounting standards specified by International
Financial Reporting Standards (IFRS) and one which has been calculated in
accordance with the Company's Articles of Association. The latter is the method
which would be used to calculate the amount due to Ordinary Shareholders on a
winding up of the Company. However, the Financial Statements are prepared in
accordance with IFRS. Where the IFRS method has been used it will be indicated.
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance Measures ("APMS")
the Board has considered what APMs are included in the annual report and
accounts which require further clarification. An APM is defined as a financial
measure of historical or future financial performance, financial position or
cash flows, other than a financial measure defined or specified in the
applicable financial reporting framework. The APM included in the annual report
and accounts, which is unaudited and outside the scope of IFRS is deemed to be
Net Assets calculated in accordance with the Articles.
Ordinary Shares NAV per ZDP Shares NAV per
Share Share
(pence) (pence)
Net Assets (per 64,793,038 407.23 ZDP value (per 29,314,857 137.26
Articles) Articles)
ZDP issue costs 105,483 0.66 ZDP issue costs (105,483) (0.49)
Issue costs (97,070) (0.61) Issue costs 97,070 0.45
amortised amortised
ZDP Premium (13,501) (0.08) ZDP premium 13,501 0.06
Net Assets (per 64,787,950 407.20 ZDP value (per 29,319,945 137.28
IFRS) IFRS)
Total Return
The combined effect of any dividends paid, together with the rise or fall in
the share price or NAV. Total return statistics enable the investor to make
performance comparisons between companies with different dividend policies. Any
dividends (after tax) received by a shareholder are assumed to have been
reinvested in either additional shares of the Company at the time the shares go
ex-dividend (the share price total return) or in the assets of the Company at
its NAV per share (the NAV total return).
Directors, Advisers and Contacts
Directors
Helen Foster Green (Chairman)
John Nigel Ward
David John Warr
Investment Manager
Premier Asset Management (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 01483 306090
Contact: Nigel Sidebottom
Investment Adviser - Smaller Companies Portfolio
Unicorn Asset Management Limited
Preacher's Court
The Charterhouse
Charterhouse Square
London EC1M 6AU
Tel: 0207 2530889
Contact: Simon Moon
Investment Adviser - Income Portfolio
Premier Fund Managers Limited
Eastgate Court
High Street
Guildford GU1 3DE
Tel: 01483 306090
Contact: Nigel Sidebottom
Administrator and Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Custodian
Northern Trust (Guernsey) Limited
PO Box 71
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3DA
Corporate Broker
Numis Securities Limited
10 Paternoster Square
London EC4M 7LT
Tel: 0207 2601000
Independent Auditors
KPMG Channel Islands Limited
Glategny Court
Glategny Esplanade
St Peter Port
Guernsey GY1 1WR
Registrar
Anson Registrars Limited
PO Box 426
Anson House
Havilland Street
St Peter Port
Guernsey GY1 3WX
Tel: 01481 722260
Email: registrars@anson-group.com
Company's Registered Office
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
Company Details
Company Number: 34778
GIIN Number: CY0IXM.99999.SL.831
Ordinary Shares
ISIN: GB0004829437
Ticker: AIF
ZDP Shares
ISIN: GG00B4W1FT21
Ticker: AIFZ
Notice of Class Meeting
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are
in any doubt about the contents of this document or the action you should take,
you should consult immediately your stockbroker, bank manager, solicitor,
accountant or other financial adviser, authorised under the Financial Services
and Markets Act 2000 (as amended).
If you have sold or otherwise transferred all of your ZDP Shares in Acorn
Income Fund Limited, please send this document and Form of Proxy, as soon as
possible, to the purchaser or transferee or to the stockbroker, bank or other
agent through whom the sale or transfer was effected for transmission to the
purchaser or transferee.
Acorn Income Fund Limited
(Company No. 34778)
NOTICE OF CLASS MEETING
Notice is hereby given that a Class Meeting of holders of ZDP Shares of Acorn
Income Fund Limited (the "Company") will be held at the offices of Northern
Trust International Fund Administration Services (Guernsey) Limited, Trafalgar
Court, Les Banques, St Peter Port, Guernsey, Channel Islands on 15 August 2017
at 11am.
Resolution on Agenda
Form of Proxy
Business to be proposed as an Ordinary Resolution:
1. THAT the holders of the ZDP Shares hereby sanction and consent
to the passing and carrying into effect, as an ordinary
resolution of the Company, of Resolution 6 contained in the
notice of annual general meeting of the Company dated 18 April
2017 and any variation or abrogation and/or deemed variation
or abrogation of the rights attached to the ZDP Shares which
will, or may, result from the passing and carrying into effect
of such resolution.
Any Other Business.
By Order of the Board
For and on behalf of
Northern Trust International Fund Administration
Services (Guernsey) Limited
Secretary
18 April 2017
Notes:
1 A member entitled to attend and to speak and vote at the meeting is
entitled to appoint one or more proxies to speak and vote instead of them. A
proxy need not be a member of the Company. Completion and return of the Class
Meeting Form of Proxy will not preclude members from attending or voting at the
meeting, if they so wish.
2 More than one proxy may be appointed provided each proxy is appointed
to exercise the rights attached to different shares.
3 To be valid the Class Meeting Form of Proxy, together with the power
of attorney or other authority, if any, under which it is executed (or a
notarially certified copy of such power of authority) must be deposited with
the Registrar: Anson Registrars, Limited, PO Box 426, Anson House, Havilland
Street, St Peter Port, Guernsey GY1 3WX no later than 11am on 10 August 2017 or
not less than forty-eight (48) hours before the time for holding any adjourned
meeting. A Class Meeting Form of Proxy is enclosed with this notice.
4 All persons recorded on the register of members as holding ZDP Shares
in the Company as at 11a.m. on 10 August 2017 or, if the meeting is adjourned,
as at 48 hours before the time of any adjourned meeting, shall be entitled to
attend and vote (either in person or by proxy) at the meeting and shall be
entitled to one vote per share held.
5 The quorum for the Class Meeting is two persons present in person or
by proxy and holding at least one third of the issued ZDP Shares at the date of
the Meeting. If the meeting is not quorate, it will be adjourned to the same
time and place fourteen clear days later, whereupon one person holding ZDP
Shares and present in person or by proxy shall form the quorum.
6 Where there are joint registered holders of any ZDP Shares, such
persons shall not have the right of voting individually in respect of such
shares but shall elect one of their number to represent them and to vote
whether in person or by proxy in their name. In default of such election, the
person whose name stands first on the register of ZDP Members shall alone be
entitled to vote.
7 On a poll, votes may be given either personally or by proxy and a
holder of ZDP Shares entitled to more than one vote need not use all their
votes or cast all the votes he uses in the same way.
8 Any corporation which is a member may by resolution of its directors
or other governing body, authorise such person as it thinks fit to act as its
representative at this meeting. Any person so authorised shall be entitled to
exercise on behalf of the corporation which he represents the same powers
(other than to appoint a proxy) as the corporation could exercise if it were an
individual member of the Company.
9 Pursuant to the Articles, every member (being an individual) present
in person or by proxy or (being a corporation) present by a duly authorised
representative shall have one vote on a show of hands, subject to any special
voting powers or restrictions, and one vote per ZDP Share on a poll (other than
the Company itself where it holds its own shares as treasury shares), subject
to any special voting powers or restrictions.
10 As at 18 April 2017 (being the last practicable date prior to the
publication of this Notice) the total number of votes exercisable by holders of
ZDP Shares is 21,365,221.
11 Capitalised terms used in this Notice of Class Meeting but not defined
shall bear the same meanings as set out in the Company's Articles of
Incorporation.
Notice of Annual General Meeting
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are
in any doubt about the contents of this document or the action you should take,
you should consult immediately your stockbroker, bank manager, solicitor,
accountant or other financial adviser, authorised under the Financial Services
and Markets Act 2000 (as amended).
If you have sold or otherwise transferred all of your Shares in Acorn Income
Fund Limited please send this document and Form of Proxy, as soon as possible,
to the purchaser or transferee or to the stockbroker, bank or other agent
through whom the sale or transfer was effected for transmission to the
purchaser or transferee.
Acorn Income Fund Limited
(Company No. 34778)
NOTICE OF ANNUAL GENERAL MEETING
Notice is hereby given that the 2017 Annual General Meeting of Acorn Income
Fund Limited (the "Company") will be held at the offices of Northern Trust
International Fund Administration Services (Guernsey) Limited, Trafalgar Court,
Les Banques, St Peter Port, Guernsey, Channel Islands on 15 August 2017 at
11.15am.
Resolution on Agenda
Form of Proxy
Business to be proposed as Ordinary Resolutions:
1. To receive and adopt the Annual Financial Report for the year
ended 31 December 2016.
2. To re-appoint KPMG Channel Islands Limited as Auditor to the
Company until the conclusion of the next Annual General
Meeting.
3. To authorise the Directors to determine the Auditor's
remuneration.
4. To re-elect Helen Foster Green as a Director of the Company.
Special Business to be proposed as Ordinary Resolutions:
5. THAT, the Directors of the Company be and are hereby generally
and unconditionally authorised in accordance with the Articles
to issue new Ordinary Shares in the Company PROVIDED THAT:
(i) such powers shall be limited to issue up to 3,183,337
new Ordinary Shares (approximately 20% of the issued Ordinary
Shares, excluding treasury shares, as at the date of this
Notice); and
(ii) the authority hereby conferred shall expire at the
conclusion of the annual general meeting of the Company to be
held in 2018 unless such authority is renewed, varied or
revoked by the Company in general meeting (save that the
Company may, at any time before such expiry, make an offer or
agreement which would or might require Ordinary Shares to be
issued after such expiry and the Directors may issue Ordinary
Shares after such expiry in pursuance of such offer or
agreement as if the authority conferred hereby had not
expired).
6. THAT, subject to and conditional upon the passing of the
proposed resolution of the Class Meeting of ZDP Members
convened for 15 August 2017 at 11.00 am, the Directors of the
Company be and are hereby generally and unconditionally
authorised in accordance with the Articles to issue new ZDP
Shares in the Company PROVIDED THAT:
(i) such powers shall be limited to issue up to 4,273,044
new ZDP Shares (approximately 20% of the issued ZDP Shares,
excluding treasury shares, as at the date of this Notice) in
circumstances where the Cover Test is met or Cover is
maintained or is otherwise increased, in each case, immediately
following such issue; and
(ii) the authority hereby conferred shall expire at the
conclusion of the annual general meeting of the Company to be
held in 2018 unless such authority is renewed, varied or
revoked by the Company in general meeting (save that the
Company may, at any time before such expiry, make an offer or
agreement which would or might require ZDP Shares to be issued
after such expiry and the Directors may issue ZDP Shares after
such expiry in pursuance of such offer or agreement as if the
authority conferred hereby had not expired).
Special Business to be proposed as Special Resolutions:
7. THAT the Directors be and are hereby empowered (pursuant to
Resolution 5 or otherwise) to issue and sell from treasury up
to 4,775,006 Ordinary Shares for cash otherwise than pro rata
to existing Ordinary Members at:
(i) a price equal to or greater than the prevailing Net
Asset Value per Ordinary Share; or
(ii) a discount to the prevailing Net Asset Value per
Ordinary Share in circumstances where ZDP Shares are issued at
the same time at a premium to Net Asset Value such that the
combined effect of the issue or sale of Ordinary Shares at a
discount to the prevailing Net Asset Value per Ordinary Share
and the issue of ZDP Shares at a premium to Net Asset Value is
that (i) Net Asset Value per Ordinary Share is thereby
increased; and (ii) gearing is not thereby increased,
PROVIDED THAT the authority hereby conferred shall expire at
the conclusion of the annual general meeting of the Company to
be held in 2018 unless such authority is renewed, varied or
revoked by the Company in general meeting (save that the
Company may at any time before such expiry make an offer or
agreement which might require Ordinary Shares to be issued or
sold after such expiry and the Directors may issue or sell
Ordinary Shares after such expiry in pursuance of such offer or
agreement as if the authority conferred hereby had not
expired).
8. THAT, the Company be generally and, subject as hereinafter
appears, unconditionally authorised in accordance with section
315 of the Companies Law to make market acquisitions (within
the meaning of section 316 of the Companies Law) of its issued
Ordinary Shares, PROVIDED THAT:
(i) the maximum aggregate number of Ordinary Shares
hereby authorised to be purchased shall be 5,569,248 Ordinary
Shares;
(ii) the minimum price (exclusive of expenses) payable by
the Company for each Ordinary Share shall be £0.01;
(iii) the maximum price (exclusive of expenses) payable by
the Company for each Ordinary Share shall be the higher of (a)
an amount equal to 105% of the average value of an Ordinary
Share for the five business days prior to the day the purchase
is made and (b) the higher of the price of the last
independent trade and the highest independent bid at the time
of the purchase for any number of Ordinary Shares on the
trading venue where the trade is carried out;
(iv) the authority hereby conferred shall expire at the
conclusion of the annual general meeting of the Company to be
held in 2018 unless such authority is varied, revoked or
renewed prior to such time; and
(v) the Company may make a contract to purchase Ordinary
Shares under the authority hereby conferred prior to the
expiry of such authority which will or may be executed wholly
or partly after the expiration of such authority and may make
an acquisition of Ordinary Shares pursuant to any such
contract.
9. THAT, the Company be generally and, subject as hereinafter
appears, unconditionally authorised in accordance with section
315 of the Companies Law to make market acquisitions (within
the meaning of section 316 of the Companies Law) of its issued
ZDP Shares, PROVIDED THAT:
(i) the maximum aggregate number of ZDP Shares hereby
authorised to be purchased shall be 7,475,690 ZDP Shares;
(ii) the minimum price (exclusive of expenses) payable by
the Company for each ZDP Share shall be £0.01;
(iii) the maximum price (exclusive of expenses) payable by
the Company for each ZDP Share shall be the higher of (a) an
amount equal to 105% of the average value of a ZDP Share for
the five business days prior to the day the purchase is made
and (b) the higher of the price of the last independent trade
and the highest independent bid at the time of the purchase
for any number of ZDP Shares on the trading venue where the
trade is carried out;
(iv) the authority hereby conferred shall expire at the
conclusion of the annual general meeting of the Company to be
held in 2018 unless such authority is varied, revoked or
renewed prior to such time; and
(v) the Company may make a contract to purchase ZDP Shares
under the authority hereby conferred prior to the expiry of
such authority which will or may be executed wholly or partly
after the expiration of such authority and may make an
acquisition of ZDP Shares pursuant to any such contract.
Any Other Business.
By Order of the Board
For and on behalf of
Northern Trust International Fund Administration Services (Guernsey) Limited
Secretary
18 April 2017
Notes:
1 A member entitled to attend and to speak and vote at the meeting
is entitled to appoint one or more proxies to speak and vote instead of them.
A proxy need not be a member of the Company. Completion and return of the Form
of Proxy will not preclude members from attending or voting at the meeting, if
they so wish.
2 More than one proxy may be appointed provided each proxy is
appointed to exercise the rights attached to different shares.
3 To be valid the Form of Proxy, together with the power of
attorney or other authority, if any, under which it is executed (or a
notarially certified copy of such power of authority) must be deposited with
the Registrar: Anson Registrars, Limited, PO Box 426, Anson House, Havilland
Street, St Peter Port, Guernsey GY1 3WX no later than 11.15am on 10 August 2017
or not less than forty-eight (48) hours before the time for holding any
adjourned meeting. A Form of Proxy is enclosed with this Notice.
4 All persons recorded on the register of members as holding
Ordinary Shares in the Company as at 11.15 a.m. on 10 August 2017 or, if the
meeting is adjourned, as at 48 hours before the time of any adjourned meeting,
shall be entitled to attend and vote (either in person or by proxy) at the
meeting and shall be entitled to one vote per share held.
5 The quorum for the Annual General Meeting is one or more members
present in person or by proxy and holding 5% or more of the voting rights
available at such meeting. If the meeting is not quorate, it will be adjourned
to the same time and place fourteen clear days later, whereupon such member or
members who shall attend in person or by proxy at any such adjourned meeting
shall form the quorum.
6 Where there are joint registered holders of any Ordinary Shares
such persons shall not have the right of voting individually in respect of such
shares but shall elect one of their number to represent them and to vote
whether in person or by proxy in their name. In default of such elections, the
person whose name stands first on the register of Ordinary Members shall alone
be entitled to vote.
7 On a poll, votes may be given either personally or by proxy and
a member entitled to more than one vote need not use all his votes or cast all
the votes he uses in the same way.
8 Any corporation which is a member may by resolution of its
directors or other governing body, authorise such person as it thinks fit to
act as its representative at this meeting. Any person so authorised shall be
entitled to exercise on behalf of the corporation which he represents the same
powers (other than to appoint a proxy) as the corporation could exercise if it
were an individual member of the Company.
9 Pursuant to the Articles, every member (being an individual)
present in person or by proxy or (being a corporation) present by a duly
authorised representative shall have one vote on a show of hands, subject to
any special voting powers or restrictions, and one vote per Ordinary Share on a
poll (other than the Company itself where it holds its own shares as treasury
shares), subject to any special voting powers or restrictions.
10 As at 18 April 2017 (being the last practicable date prior to the
publication of this Notice) the total number of votes exercisable by holders of
Ordinary Shares is 15,916,687.
11 Capitalised terms used in this Notice of Annual General Meeting
but not defined shall bear the same meanings as set out in the Company's
Articles of Incorporation.
Explanatory Notes to the Resolutions
Ordinary Business:
Resolution 1 - To receive and adopt the Annual Report and Financial Statements
The Annual Report and Financial Statements for the year ended 31 December 2016
will be presented to the Annual General Meeting (the "AGM"). These Financial
Statements accompanied this Notice of Meeting and members will be given an
opportunity to ask questions at the AGM.
Resolutions 2 - Re-appointment of auditors
Resolution 2 relates to the re-appointment of KPMG Channel Islands Limited as
the Company's independent auditors to hold office until the next AGM of the
Company.
Resolution 3 - To authorise the Directors to determine the Auditor's
remuneration.
Resolution 4 - To re-elect Helen Green as a Director of the Company.
To re-elect Helen Green as a Director of the Company in accordance with the
Company's policy on Directors' tenure, which is that in order to facilitate
good corporate governance practice in line with principle 2 of the AIC Code,
each Director will offer themselves for re-election every 3 years until their
ninth year of service and any Director with over nine years' service shall be
eligible for re-election every year thereafter.
The Board believes it is in the Company's best interest that Helen Green be
re-elected due to her extensive experience as a chartered accountant and also
as a non-executive director, having served on the boards of a number of other
investment companies admitted to the Official List of the FCA (see further
details contained within the Annual Accounts).
Special Business to be proposed as Ordinary Resolutions:
The Company's existing authorities to issue new shares, sell shares from
treasury and make market purchases of shares expire at the forthcoming AGM.
Resolution 5 - Authority to issue Ordinary shares
Resolution 5 will authorise the directors to issue up to 3,183,337 new Ordinary
Shares (being approximately 20% of the issued Ordinary Shares at the date of
this document, excluding treasury shares).
Resolution 6 - Authority to issue ZDPs
Resolution 6 will authorise the directors to issue up to 4,273,044 new ZDP
Shares (being approximately 20% of the issued ZDP Shares at the date of this
document, excluding treasury shares), such authority being conditional on the
prior approval of such issuance at the Class Meeting of holders of Zero
Dividend Preference shares to be held immediately prior to the AGM. The
resolution provides that new ZDPs will only be issued if the Cover Test is met
(see the Glossary on page 65 for explanation of Cover Test) or if the cover
immediately following the issue is either maintained or increased.
Special Business to be proposed as Special Resolutions:
Resolution 7 - Authority to dis-apply pre-emption rights in certain
circumstances on the issue or sale from treasury of new Ordinary Shares and to
issue or sell new Ordinary Shares at less than Net Asset Value.
When Ordinary Shares are to be allotted for cash, the Articles provide that
existing Ordinary Members have pre-emption rights such that the new Ordinary
Shares must be offered first to such members in proportion to their existing
holding of Ordinary Shares. However, members can, by special resolution,
authorise the Directors to allot Ordinary Shares otherwise than by a pro rata
issue to existing members.
In addition, under the Listing Rules, the issue of new Ordinary Shares
(including sales of treasury shares) at prices representing a discount to NAV
per Ordinary Share, other than on a pre-emptive basis, is only permitted if
Members have authorised such issues.
Accordingly, resolution 5 will give the Company authority to dis-apply
pre-emption rights when issuing new Ordinary Shares provided the new Ordinary
Shares are issued or sold at a premium to NAV per Ordinary Share or, if sold at
a discount to NAV per Ordinary Share, only in those circumstances where ZDP
Shares are issued at the same time at a premium to Net Asset Value so that:
(i) Net Asset Value per Ordinary Share is thereby increased; and
(ii) gearing is not thereby increased.
The power to dis-apply pre-emption rights and to issue Ordinary Shares at less
than Net Asset Value will be limited to 4,775,006 new Ordinary Shares in
aggregate (being 30% of the issued Ordinary Shares at the date of this
document, excluding treasury shares). This power will expire (unless renewed)
at the annual general meeting in 2018.
This should give the Company greater flexibility in managing its share capital,
and improve liquidity in its shares.
Resolutions 8 and 9 - Authority to buy back Ordinary Shares and ZDP Shares
Under the Listing Rules, purchases of 15% or more of any class of shares may
only be made without the making of a tender offer if the full terms of the
buyback have been specifically approved by members.
The Company is seeking authority under resolution 8 to make market acquisitions
of up to 34.99% of the issued ordinary shares, at the date of this document, to
(a) facilitate its discount management policy in respect of 14.99% of the
issued shares, and (b) facilitate repurchases of newly issued shares into
treasury for future sale to meet market demand in respect of 20% of the issued
shares.
The Company is also seeking a similar authority under resolution 9 to make
market acquisitions of up to 34.99% of the issued ZDP shares, at the date of
this document to (a) facilitate its discount management policy in respect of
14.99% of the issued shares, and (b) facilitate repurchases of newly issued
shares into treasury for future sale to meet market demand in respect of 20% of
the issued shares.
RECOMMENDATION
The Board considers the resolutions to be proposed at the forthcoming Annual
General Meeting to be in the best interest of the Company and the members as a
whole and recommends that members vote in favour of the resolutions to be
proposed at the forthcoming Annual General Meeting.
ACON INCOP : Acorn Income Fund - Annual Financial Report
April 19, 2017 at 02:02 am
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