TIDMIPE
Invesco Enhanced Income Limited
Annual Financial Report for the Year to 30 September 2020
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
Total Return(1)
Change for the year 2020 2019
Net asset value ('NAV')(2)(3) +4.6% +8.9%
Share price(2) -6.0% +6.7%
3 month LIBOR rate +0.5% +0.8%
Capital
As at 30 September 2020 2019 % Change
Shareholders' funds (GBP'000)(4) 125,990 126,157 -0.1
Net asset value(2) per ordinary share 72.21p 74.18p -2.7
Share price(1)(2) 65.70p 75.20p -12.6
(Discount)/premium per ordinary share(2) (9.0)% 1.3%
Gross borrowing(2) 23% 19%
Net borrowing(2) 22% 15%
Revenue
Year Ended 30 September 2020 2019
Gross income (GBP'000) 8,876 8,688
Net revenue return (GBP'000) 7,868 7,808
Revenue return per ordinary share 4.54p 4.69p
Dividends per ordinary share:
- first interim 1.25p 1.25p
- second interim 1.25p 1.25p
- third interim 1.25p 1.25p
- fourth interim 1.25p 1.25p
Total 5.00p 5.00p
Ongoing Charges(2) 1.05% 1.04%
(1) Source: Refinitiv.
(2) Alternative Performance Measure (APM). See Glossary of Terms and
Alternative Performance Measures on pages 64 to 66 of the financial report for
details of the explanation and reconciliations of APMs.
(3) The increase in total return NAV includes a 0.08% enhancement to NAV
generated by the issue of ordinary shares at a premium to NAV during the year.
(4) Reflects the proceeds from 4,400,000 (2019: 5,075,000) ordinary shares
issued in the year.
CHAIRMAN'S STATEMENT
I hope that during these rather turbulent and unprecedented times that this
statement finds you well.
On 21 September 2020, the Company announced that Michael Lombardi had resigned
from the Board with immediate effect. It is with great sadness that I report
that Michael passed away on 21 October 2020. My fellow Directors and I would
like to take this opportunity to record our thanks to him for his valuable
contribution over his tenure as a Director. Our thoughts are with his family.
Results for the Year
The Portfolio Manager's Report which follows explains the market background and
portfolio strategy during the year which provides context for the Company's
results.
For the year to 30 September 2020, the Company's share price with dividends
reinvested on a total return basis fell by 6.0%. The dividend was maintained at
5.00p per share, whilst the share price fell from 75.20p at the start of the
year to 65.70p at the year end, a decrease of 12.6%. The NAV total return was
+4.6% for the year and the NAV per share after distributions fell by 2.7% to
72.21p.
This has been an unprecedented period for the world's economies and markets.
Bond markets have benefited from governments' monetary and fiscal response to
the pandemic which took markets from their lows in March through a dramatic
rally to the end of August. During that time, issuance was extensive as
investors continued to seek out yield and, in response, companies took the
opportunity to begin to repair the damage to their balance sheets. Towards the
end of the period under review that exuberance was tempered by the rise in
Covid-19 cases.
In the current economic and market environment, your Board continues to believe
that shareholders place great value on the Company's consistent dividend stream
and has prioritised revenue generation through investment in relatively
high-yielding and considered debt positions. Market yields remain at
historically low levels but, despite this, your portfolio managers have
generated a net revenue return of 4.54p per share. During a period when many
companies have been forced to suspend dividends, the Board has maintained the
5.00p annual dividend for the year and a fourth interim dividend of 1.25p per
share was declared on 22 September 2020.
The shortfall of net revenue earned versus dividend paid was 0.46p which is the
equivalent of GBP793,000 (2019: GBP525,000). This has been funded from revenue
reserves which the Company has accumulated over a number of years. Our dividend
policy has served investors well, but the medium term effects of Covid-19 will
likely bring a prolonged period of very low interest rates. With that in mind
the Board will be reviewing whether the policy is sustainable, balancing the
need for current income against the requirement to preserve investors' capital
to earn that income in coming years.
Borrowings
The Portfolio Manager uses borrowings to gear the portfolio during most market
conditions. The Company's upper limit for net gearing is 50% of shareholders'
funds and the portfolio manager, working with the Board, will vary the level
from time to time according to their view of prevailing market conditions.
During the year to 30 September 2020 the level of gearing has averaged 18.4%,
well below the permitted level. It should be noted that preservation of the
Company's NAV remains a key consideration. As a result, the portfolio managers
are focussing the Company's holdings towards generally lower risk bonds as a
way to mitigate capital risk.
The Company uses repo financing, which the Board believes remains a flexible
and relatively low-cost method of providing additional capital when
appropriate. The level of gearing is carefully monitored by the Board which is
fully cognisant of the need to carefully match risk and reward.
The repricing of high yield bonds to reflect the severe economic shock of
Covid-19 led to attractive investment opportunities for the portfolio manager.
The Company started the year with gross borrowings of 19% and that level was
increased so that at the year end gross borrowings were 23%. Taking the
Company's cash position into account, net borrowings were 22%, and average net
borrowings for the year were 18.4% (2019: 17.5%). As at 24 November 2020, the
latest practical date before publication, the level of borrowing is 25% (gross)
and 22% (net).
Share Discount/Premium and Share Issuance
The Board monitors the price of the Company's shares in relation to their NAV
and the premium/discount at which they trade. During the year the shares traded
within the range of -28.4% (discount) at the peak of the Covid-19 pandemic on
19 March 2020 to +5.1% (premium). Over the period, the discount averaged 2.2%.
In order to satisfy market demand the Company issued 4,400,000 new shares at an
average price of 74.84p (excluding costs) during the year to 30 September 2020.
This enhanced the NAV by 0.08%.
At the Company's Annual General Meeting (AGM) your Directors will be seeking to
renew the authority granted by shareholders at the last AGM to authorise the
issue of up to 10% of the Company's issued share capital in order to provide
additional flexibility to increase the size of the Company when the Board
considers the circumstances to be appropriate. I would like to stress that when
considering any issue of new shares, your Board is mindful that existing
shareholders' interests are paramount and will always ensure that issues of new
shares take place at an appropriate premium to the cum dividend NAV. In
determining the appropriate premium, the Board will aim for a minimum premium
of 3.0% before expenses.
Board Composition and Corporate Governance
Given the combination of Michael's departure from the Board, the impacts of
Covid-19 and subsequent travel restrictions, the Board have deferred the hiring
of a new Director until 2021. The Board has therefore requested that Clive
Spears remain on the Board for a further year. He will retire at the Company's
AGM in 2022. Following Michael's departure, Clive Spears has been appointed
Chairman of the Nomination and Remuneration Committee.
Third Party Service Providers
The Covid-19 global pandemic has made 2020 an unprecedented year. During this
time when many organisations were required to alter staff working arrangements
and close offices, the Board has frequently reviewed the efficiency and quality
of work by its third party service providers and would like to record their
appreciation for the seamless transitions that took place and the continued
delivery of service to a high standard. In particular, the Board would like to
thank the Portfolio Manager, Rhys Davies, for the excellent work that he has
done during market turbulence to keep shareholders and the Board up to date
with his investment approach.
AGM
This year, with many travel and meeting restrictions in place in a response to
Covid-19, the Board has taken the decision to postpone the date of the AGM
until later in 2021, as permitted by Jersey law. Shareholders will be notified
as soon as possible and Invesco will provide details via the Company's website
at www.invesco.co.uk/enhancedincome once the date is decided. A separate
announcement will also be made to the market and Notice of Meeting sent to
shareholders.
Outlook
In the weeks since the end of September the market's appetite for risk has
continued to fluctuate, remaining sensitive both to news on the virus and on
monetary and fiscal measures. While the Portfolio Manager has continued to add
positions, the portfolio is cautiously positioned for a slow recovery that will
leave many companies with weakened credit profiles. As additional lockdowns and
social restrictions are announced this winter such an approach feels warranted.
Looking ahead, the prolonged period of contraction and the permanent changes
that the crisis has brought will make business models unsustainable and debt
restructuring will be necessary. The twin obligations of avoiding these
casualties and sustainable income generation will play a part in guiding future
strategy. We remain confident in Invesco's ability to address these
uncertainties with their normal rigour.
Kate Bolsover
Chairman
26 November 2020
PORTFOLIO MANAGERS' REPORT
Market background
The twelve months to the 30 September 2020 have been an extraordinary period
both for society and financial markets. Both have been dominated by Covid-19.
High yield bond markets ended 2019 with their highest annual return since 2012.
They then sold-off significantly during February and March 2020, as economies
were shuttered in response to Covid-19. However, from late March financial
markets have rebounded with European high yield delivering a sterling hedged
total return in Q2 2020 of 11.35% - its best quarterly return since 2012. The
catalyst for the change in sentiment was the extraordinary monetary and fiscal
policy response to the virus from central banks and governments.
These measures included the US Federal Reserve directly purchasing corporate
bonds. Unlike other central bank asset purchase schemes, the eligible
securities for the US programme included bonds downgraded to high yield since
the onset of the pandemic. The European Central Bank also extended its
quantitative easing programme. For the first time European governments also
agreed to a mutualisation of debt through a EUR750bn joint recovery fund. The
fund includes EUR390bn of loans and EUR350bn of debt.
The rally continued until the end of August 2020. Then as autumn began, a
resurgence of Covid-19 cases in Europe, as well as rising US political
uncertainty, led to some consolidation in the high yield bond market.
Nonetheless, demand for high yield has remained very strong in the six months
since March 2020. In response to this demand for yield, corporate bond issuance
levels have soared as issuers have sought to build up cash surpluses and repair
their balance sheets.
To put the move in credit spreads into some context, in March, at the height of
concerns over Covid-19, European currency high yield credit spreads had widened
to 854bps. This was their widest level since the sovereign debt crisis in 2012.
By 30 September 2020, credit spreads had fallen back to a level of 485bps. It
was a similar story in the US high yield market. There, spreads widened from
360bps at the start of 2020 to 1087bps in late March. They then fell back to
541bps by 30 September 2020.
Portfolio strategy
The Company entered the Covid-19 crisis on a relatively strong footing. The
portfolio was cautiously positioned by the end of 2019, with increased levels
of cash and reduced levels of leverage. This was a natural response to yields
having fallen so much and our sober view on valuations.
The NAV of the Company ended September 2020 at 72.21p from 74.18p at
30 September 2019. In a period in which many companies have been forced to
suspend dividend payments, the Company paid a total dividend of 5p over the
period.
In March, high yield bonds repriced to reflect the severe economic shock that
Covid-19 is inflicting. A lack of market liquidity exacerbated price moves and
created some very attractive opportunities that we sought to exploit across
both financial and non-financial issuers. To further capitalise on the
investment opportunities available leverage was increased to 29% by the end of
April 2020.
We were able to purchase bonds from good quality companies that had
dramatically fallen in price, in some cases by over 20 or even 30 points. For
example, the Company purchased bonds from Dutch cable operator, Ziggo, that had
fallen 25 points below their February issue price.
As well as opportunities within the high yield market, we were able to add some
higher yielding investment grade names to the portfolio as issuance re-started
in that market. For example, BMW came to the market in April with a 5-year bond
offering a coupon of 3.9%. This is more than some high yield issuers were
paying to raise capital at the start of the year. Another investment grade name
we added was Dell Technologies, which was offering 10-year and 7-year bonds
with coupons of 6.2% and 6.1% respectively.
In the high yield market itself, bonds were added across many sectors and
included new issues such as Ford. The US car manufacturer was downgraded by the
rating agencies as a result of the disruption to production and sales due to
Covid-19. It subsequently came to the market to shore up its balance sheet
offering bonds with coupons of 8.5% and 9.625%, which we viewed as compelling.
Following purchases made during this period of market weakness, at a sector
level the portfolio's largest exposure remains financials (both subordinated
bank and subordinated insurance bonds). As at 30 September 2020, 29% of the
portfolio is invested in this area of the market. Elsewhere, the portfolio's
largest allocations are to telecoms, autos and food companies. We hope that
shareholders are pleased with the Company's NAV performance through such
turbulent markets.
Outlook
Markets have rallied significantly from the lows of March 2020. Whilst this
year's volatility provided a fantastic opportunity to add future income to the
portfolio, yields in the high yield market are once again heading lower, driven
by the prospect of a prolonged period of low interest rates. Although we will
continue to seek out attractive income opportunities, such an environment does
create challenges for future income. Furthermore, there are undoubtedly
difficult times ahead for many high yield companies and default rates are
likely to increase. As we seek out appropriately priced income opportunities,
we will continue to apply a thorough and comprehensive analysis of each issuer
and we will maintain a diversified portfolio. We believe this approach has
served shareholders well during 2020.
Rhys Davies Edward Craven
26 November 2020
Portfolio Managers
Rhys Davies
Rhys Davies was named as the lead portfolio manager for the Company on 22 July
2020. He joined Invesco in 2002 and has 18 years' experience in fixed income
markets.
He has been associated with the Company's portfolio for many years and was
appointed portfolio co-manager in May 2016.
Edward Craven
Edward Craven is a senior credit analyst having been part of the Fixed Interest
team for more than nine years. He has more than 17 years' financial services
experience.
Investment Team update
On 31 August 2020 Senior Credit Analyst Edward Craven expanded his
responsibilities to become Deputy Fund Manager of the Company. Although Paul
Read and Paul Causer are no longer named managers of the Company, they remain
Co-Heads of the Henley fixed interest team and continue to play an important
part of the wider strategies adopted by the team, they also continue to manage
a number of other funds directly.
Top Ten Investments
2020 2019
At At
Fair Fair
Value % of Value % of
Issuer Issue GBP'000 Portfolio GBP'000 Portfolio
Telecom Italia 5.25% 17 Mar 2055 2,112 2.2 1,999 2.3
5.303% 30 May 2024 1,255 1,313
Volkswagen 4.25% 09 Oct 2025 (SNR) 1,244 -
Financial Services
3.875% FRN Perpetual 1,093 2.1 - -
3.5% FRN Perpetual 826 -
Barclays 7.875% FRN Perpetual 1,734 1,806
6.375% FRN Perpetual 795 573
8% FRN Perpetual 408 2.0 555 2.5
2.75% FRN Perpetual 135 122
7.125% FRN Perpetual - 487
Vodafone Group 6.25% 03 Oct 2078 1,167 1,228
4.875% 03 Oct 2078 1,056 2.0 1,059 2.2
7% FRN 04 Apr 2079 667 681
1.5% Cnv 12 Mar 2022 167 251
Teva 6.75% 01 Mar 2028 (SNR) 1,584 1,306
Pharmaceutical
Finance
7.125% 31 Jan 2025 (SNR) 1,028 2.0 - 0.9
6% 31 Jan 2025 (SNR) 427 -
Altice SFR 7.375% 01 May 2026 2,511 2,702
7.5% 15 May 2026 515 2.0 543 2.9
6.625% 15 Feb 2023 - 1,000
Lloyds Banking 7.5% FRN Perpetual 1,907 902
Group
7.875% FRN Perpetual 458 1.9 - 0.7
7.625% FRN Perpetual 414 -
6.375% FRN Perpetual 144 147
NatWest 2.62788% FRN Perpetual 1,472 -
8.625% FRN Perpetual 823 383
8% Cnv FRN Perpetual 427 1.8 448 1.8
7.64% FRN Perpetual - 1,533
7.5% Cnv FRN Perpetual - 174
AT&T 4.65% 01 Jun 2044 (SNR) 2,645 1.7 2,626 1.8
Dell Technologies 6.1% 15 Jul 2027 (SNR) 1,829 1.7 - -
6.2% 15 Jul 2030 (SNR) 811 -
29,654 19.4 21,838 15.1
Business Review
Purpose, Business Model and Strategy
?The Company is a Jersey based, London listed investment company which at the
year end had a portfolio of investments with a fair value in excess of GBP151
million. The Company's investment objective is shown alongside. The strategy
the Board follows to achieve that objective is to set investment policy and
risk guidelines, together with investment limits, and to monitor how they are
applied. These are set out below and have been approved by shareholders.
The Company's purpose is to provide shareholders with a high level of income
whilst seeking to maximise total return by investing in a diversified portfolio
of high yielding corporate and government bonds. The business model the Company
has adopted to achieve its objective has been to contract the services of:
- Invesco Fund Managers Limited (the 'Manager') to manage the
portfolio in accordance with the Board's strategy; and
- JTC Fund Solutions (Jersey) Limited ('JTC') to provide company
secretarial and general administration services.
All administrative support is provided by third parties. In addition to the
management and administrative functions of the Manager and JTC, the Company has
contractual arrangements with Link Market Services (Jersey) Limited to act as
Registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as
Depositary and Custodian.
The Board maintains oversight of the Company's service providers, and monitors
them on a formal and regular basis. On 22 July 2020, Rhys Davies was named as
lead portfolio manager and Edward Craven appointed as deputy portfolio manager.
Paul Read and Paul Causer have stepped back as co-fund managers but continue to
provide support along with the wider fixed interest team.
For the purposes of the Alternative Investment Fund Managers Directive, the
Company is an alternative investment fund.
Investment Policy
The Company's Investment Policy comprises its investment objective, investment
policy and risk and investment limits and is designed so as to provide
shareholders with information on the policies that the Company will follow
relating to asset allocation, risk diversification and gearing, including
maximum exposures.
The Manager monitors the investment portfolio on an ongoing basis to ensure
adherence to the Company's Investment Policy.
Investment Objective
The Company's principal objective is to provide shareholders with a high level
of income whilst seeking to maximise total return through investing in a
diversified portfolio of high yielding corporate and government bonds. The
Company may also invest in equities and other instruments that the Manager
considers appropriate.
The Company seeks to balance the attraction of high yield securities with the
need for protection of capital and to manage volatility. The Company generally
employs gearing in its Investment Policy.
Investment Policy and Risk
The investment portfolio is constructed in order to gain exposure to attractive
ideas within the investment parameters of the investment portfolio and to
express the Company's views on fixed interest markets. The investment process
comprises three key elements which drive portfolio construction - macroeconomic
analysis, credit analysis and value assessment. The Manager aims to control
stock-specific risk by ensuring that the investment portfolio is appropriately
diversified. In-depth, continual analysis of the fundamentals of all holdings
gives the Manager an understanding of the financial risks associated with any
particular stock.
The Company may enter into derivative transactions (including, but not limited
to, options, futures, and contracts for difference, credit derivatives and
interest rate swaps) periodically for the purposes of efficient portfolio
management. Derivative transactions may only be entered into if they are
compatible with the Company's Investment Policy and fall within the limits
determined by the Board from time to time. The Company will not enter into
derivative transactions for speculative purposes.
Efficient portfolio management may include the reduction of risk, reduction of
cost and the enhancement of capital or income, including transactions designed
to hedge all or part of the investment portfolio, to replicate or gain
synthetic exposure to a particular investment position where this can be done
more effectively or efficiently through the use of derivatives than through
investment in physical securities, or to transfer risk or obtain protection
from a particular type of risk which might attach to portfolio investments.
The Company may enter into a derivative transaction provided the maximum
exposure (including any initial outlay in respect of the transaction) to which
the Company is committed by virtue of the transaction, when aggregated with all
other outstanding derivative positions, is covered by the Company's net assets.
The Manager may invest in money market instruments and currencies.
The Company may borrow for investment purposes and principally does so using
repo agreements. Under the repo financing, the Company sells fixed interest
securities held by it to a counterparty for consideration that is less than
such assets' market value and agrees to repurchase on a fixed date the same
assets for a fixed price above the consideration received by it on the sale.
The difference in these two amounts equates to the cost (effectively interest)
of the repo financing.
Investment Limits
The Board has prescribed limits on the Investment Policy, among which are the
following:
- investments in equities are restricted to no more than 20% of the
Company's investment portfolio;
- no single investment (bond or equity) may exceed 10% of gross assets;
- no more than 5% of gross assets may be exposed to unquoted investments;
- no more than 15% of the Company's gross assets will be invested in other
investment companies (including investment trusts); and
- repo financing and other borrowings may be used to raise the exposure to
bonds and equities. Net borrowings (comprising aggregate borrowings less cash)
may not, at the time of drawdown, exceed 50% of shareholders' funds (as
determined under the Company's normal accounting policies).
For the purpose of the investment limits, excluding the borrowing limit, gross
assets is defined as the investment portfolio plus cash and the limits are
measured at the time of investment.
Gearing Policy
Under the Company's Investment Policy, borrowings may be used to raise exposure
to bonds and equities and net borrowings may not exceed 50% of shareholders'
funds. Gearing levels will change from time-to-time in accordance with the
Board and the Manager's assessment of risk and reward.
From time-to-time, the Company arranges facilities for repo financing with
counterparties. The Company manages counterparty exposure to ensure that under
normal circumstances its exposure to the creditworthiness or solvency of any
one counterparty does not exceed 20% of its gross assets. The Company's
exposure to any one counterparty is calculated for these purposes as the
difference between the aggregate amount owed by that counterparty to the
Company less the aggregate amount owed by the Company to that counterparty.
The effective cost of the repo financing is allocated over the period to
repurchase at a constant rate and is charged 50% to revenue and 50% to capital.
Each repo financing arrangement typically has a fixed life of between one and
six months. The short-term nature of the repo financing means that the
effective cost of the Company's borrowings will fluctuate from time to time in
accordance with the market rates of repo financing (which are closely related
to interest rates).
Performance and Key Performance Indicators
The Board reviews performance by reference to a number of Key Performance
Indicators which include the following:
* portfolio performance;
* net asset value (NAV);
* share price;
* premium/discount;
* dividends; and
* ongoing charges.
The Company's focus has been on absolute returns. The portfolio performance of
the Company is commented on in both the Chairman's Statement on pages 7 and 8
and, in more detail, in the Portfolio Managers' Report on page 9. These also
set out the NAV per share and share price total return performance for the
year, with the NAV per share increasing 4.6% (2019: 8.9%) and the share price
decreasing 6.0% (2019: increasing 6.7%). For a longer term view, the graph on
the bottom of page 5 shows the movements in these for the ten years ended 30
September 2020.
The Board monitors the price of the Company's shares in relation to their NAV
and the share price premium/discount to NAV at which they trade. Over the year
the shares have traded at a discount/premium within the range, discount 28.4%
to premium 5.1%, and ended the year at a discount of 9.0%. The graph below
shows the premium/discount throughout the year.
The Board and Manager closely monitor movements in the Company's ordinary share
price and dealings in the Company's ordinary shares. The Board seeks approvals
from shareholders every year to allow for the issue of new ordinary shares and
the buy back of ordinary shares (for cancellation or to be held as treasury
shares). This may assist in the management of any premium or discount at which
the Company's shares may trade, although the primary reason for buying back
ordinary shares is to enhance investor value.
Any issues of new ordinary shares will be at a price above NAV per share so the
interests of existing shareholders are not diluted and where the Board
considers it is in shareholders' interests to do so.
Any buy back of shares will be made within guidelines established from time to
time by the Board and the making and timing of any buy backs will be at the
absolute discretion of the Board. Buy backs will only be made where the
Directors consider it to be in the interests of shareholders as a whole, taking
into consideration the working capital and cashflow requirements of the
Company.
Dividends are a key component of the total return to shareholders, and the
level of potential dividend payable and income from the portfolio is reviewed
at every board meeting. The Company has paid 5p each year in respect of the ten
financial years to 30 September 2020. The Company will only pay dividends in
respect of a year to the extent that it has accumulated revenue reserves
available for that purpose.
The expenses of managing the Company are carefully monitored by the Board at
every meeting. It is the intention of the Board to minimise the ongoing charges
which provide a guide to the effect on performance of all annual operating
costs of the Company. The ongoing charges figure for the past year was 1.05%
which compares with 1.04% for the previous year, excluding borrowing costs.
Financial Position
As at 30 September 2020, the Company's net assets were GBP126 million (2019: GBP126
million). These comprised a portfolio of predominantly corporate bonds. Due to
the realisable nature of the majority of the Company's assets, cash flow does
not have the same significance as for an industrial or commercial company. The
Company's principal cash flows arise from the purchases and sales of
investments, repo financing, proceeds from the issue of shares and the income
from investments against which must be set the costs of borrowing and
management expenses.
As explained previously, the ordinary shares are geared by borrowings,
principally in the form of repo financing. As at 30 September 2020, net
borrowing was 22% (2019: 15%).
Future Trends
Details of the main trends and factors likely to affect the future development,
performance and position of the Company's business can be found in the
Portfolio Managers' Report on page 9. Further details as to the risks affecting
the Company are set out in the next section.
Principal Risks and Uncertainties
The Audit Committee regularly undertakes a robust assessment of the principal
risks facing the Company, on the Board's behalf. As part of this process, new
and emerging risks are considered. These are not currently principal risks for
the Company, but may have the potential to be in the future.
Investment Policy (incorporating the Investment Objective) Risk: There is no
guarantee that the Company's investment objective will be achieved or provide
the returns sought by shareholders.
Mitigation: The Board monitors the performance of the Company and has
established guidelines to ensure that the investment policy that has been
approved is pursued by the Manager.
Market Risk: The majority of the Company's investments are traded on the major
securities markets. The principal risk for investors in the Company is of a
significant fall in the markets and/or a prolonged period of decline in the
markets relative to other forms of investment. The value of investments held
within the investment portfolio is influenced by many factors including the
general health of the world economy, interest rates, inflation, government
policies, industry conditions, political and diplomatic events, tax laws,
competition, environmental laws and by changing investor demand. The extreme
volatility experienced in March 2020 from the market reaction to the Covid-19
global pandemic has had an effect on the Company's portfolio and the discount
to net asset value at which the shares trade.
Mitigation: The Portfolio Managers' Report summarises particular macro economic
factors affecting performance during the year and the portfolio managers' views
on those most relevant to the outlook for the portfolio. The Manager strives to
maximise the total return within certain risk parameters from the investments
held, but these investments are influenced by market conditions and the Board
acknowledges the external influences on investment portfolio performance.
Investment Risk: The investment process employed by the Manager is set out in
the first paragraph under Investment Policy and Risk on page 11. Investment
portfolio performance is dependent on the performance of high yield corporate
bonds. These stocks are particularly influenced by prevailing interest rates,
government monetary policy and by demand for income.
The Company is likely, from time-to-time, to maintain a more concentrated
investment portfolio (both in terms of individual holdings and in terms of its
exposure to particular industries) than those of many other investment funds.
Accordingly, shareholders should be aware that the investment portfolio
potentially carries a higher level of risk than a more diversified investment
portfolio.
The Company is permitted from time-to-time to invest in other listed investment
companies (including investment trusts) subject to a limit on such investment
of 15% of its gross assets. As a consequence of these investments, the Company
may itself be indirectly exposed to gearing through the borrowings of these
other investment companies. The Company is not currently invested in any listed
investment companies (including investment trusts).
Mitigation: The Manager strives to maximise within its mandate both capital
growth and high income from the investment portfolio. The inherent risk of
investment is that the stocks selected for the portfolio do not perform.
The Board also considers reports from the Manager which includes VaR, portfolio
contribution and performance attribution reports, at each Board meeting.
The Portfolio Manager's Report sets out the portfolio's strategy and results
for the year, as well as their outlook. The performance of the Manager is
carefully monitored both during the year and post year end by the Board. The
continuation of the Manager's mandate is reviewed each year and investment
performance is a principal consideration in this review.
The Manager is expected to operate within the investment limits as set out on
page 12.
Past performance of the Company is not necessarily indicative of future
performance.
Foreign Exchange Risk: The movement of exchange rates may have an unfavourable
or favourable impact on returns as the Company holds non-sterling denominated
investments and cash.
Mitigation: This risk is partially mitigated by the use of non-sterling
denominated repo financing and the use of forward currency contracts. The
foreign currency exposure of the Company is monitored by the Manager on a daily
basis and formally at Board meetings.
Shares Price and Dividends Risk: The market value of the ordinary shares of the
Company will be affected by a number of factors, including the dividend yield
from time-to-time of the ordinary shares, prevailing interest rates and supply
and demand for those ordinary shares, along with wider economic factors. The
market value of, and the income derived from, the Company's ordinary shares can
fluctuate and may go down as well as up.
While it is the intention of Directors to pay dividends to shareholders on a
quarterly basis, the ability to do so will largely depend on the amount of
income the Company receives on its investments, the timing of such receipts and
its costs including the repo financing. Any reduction in income receivable by
the Company, or increase in the costs, will lead to a reduction in earnings per
share and therefore in the Company's ability to pay dividends. Accordingly, the
amount of dividends payable by the Company may fluctuate.
The market value of the ordinary shares may not always reflect the NAV per
ordinary share.
Mitigation: The Directors seek powers to issue and buy back the Company's
shares each year, which can be used to help manage the level of discount or
premium. Both the Board and the Manager monitor the share price and level of
discount/premium on a regular basis, as well as formally at Board meetings.
The Board monitors the level of net revenue available for distribution at each
Board meeting and prior to the declaration of each dividend. The Company will
only pay dividends in respect of a year to the extent that it has accumulated
revenue reserves available for that purpose.
Gearing Returns Using Borrowings Risk: Borrowing levels may change from time to
time in accordance with the Manager's assessment of risk and reward. As a
consequence, any reduction in the value of the Company's investments may lead
to a correspondingly greater percentage reduction in its NAV (which is likely
to adversely affect the Company's share price). Any reduction in the number of
ordinary shares in issue (for example, as a result of buy backs) will, in the
absence of a corresponding reduction in borrowings, result in an increase in
the Company's gearing.
There is no guarantee that it will be possible to re-finance the repo financing
arrangements or any other borrowings on their maturity either at all or on
terms that are acceptable to the Company. If it were not possible to roll over
any repo financing, the amounts then owing by the Company under the repo
financing arrangement would become payable to the counterparty. Also, although
the repo financing requires the counterparties to sell the assets to the
Company on the repurchase date at a fixed price, if a counterparty failed to do
so the Company would be left with a contractual claim against the defaulting
counterparty and there is no guarantee the Company would be able to recover all
or any of the value of the assets from that counterparty. In adverse market
conditions, the risks of counterparty default may be greater than at other
times.
If one or more of the counterparties with which the Company enters into repo
financing decided to stop accepting non-investment grade bonds as collateral
for repo financing or decided otherwise to restrict the repo financing
currently provided to the Company then the Company may be unable, or it may be
impracticable, to continue utilising repo financing and/or to replace its
current repo financing as it expires. In certain circumstances, such as a
material increase in the margins payable on repo financing, it may be
uneconomical for the Company to continue utilising repo financing. The
counterparties may force closure of the repo financing positions in which case
the Company may be forced to repay the repo financing at short notice and the
Company may be forced to sell assets at short notice to repay that debt and may
not be able to realise the expected market value of those assets.
A lack of liquidity in corporate bonds may make it difficult for the Company to
sell those bonds at or near their purported value. This may particularly be the
case if the Company is forced to sell assets quickly, for example, to repay any
repo financing that becomes unexpectedly repayable or which it is not possible
to rollover or in the event of a liquidation of the Company. A lack of
liquidity in corporate bonds may also make it difficult or impossible to
rebalance the Company's investment portfolio as and when it believes it would
be advantageous to do so.
Mitigation: Net borrowing may not exceed 50% of shareholders' funds and this is
monitored on a daily basis by the Manager. The Company currently has arranged
facilities for repo financing with four counterparties. All borrowings,
including repo financing, are actively managed by the Manager and monitored by
the Board.
The portfolio managers monitor daily both the ratings and liquidity of the bond
portfolio in relation to the Company's known repo financing requirements, and
the Board receives regular reports which it reviews throughout the year.
High Yield Corporate Bonds Risk: Corporate bonds are subject to credit,
liquidity, duration and interest rate risks. Adverse changes in the financial
position of an issuer of corporate bonds or in general economic conditions may
impair the ability of the issuer to make payments of principal and interest or
may cause the liquidation or insolvency of an issuer.
The majority of the Company's investment portfolio at the year end consists of
non-investment grade securities. To the extent that the Company invests in
non-investment grade securities, the Company may realise a higher current yield
than the yield offered by investment grade securities, but investment in such
securities involves a greater volatility of price and a greater risk of default
by the issuers of such securities with consequent loss of interest payment and
principal. Non-investment grade securities are likely to have greater
uncertainties of risk exposure to adverse conditions and will be speculative
with respect to an issuer's capacity to meet interest payments and repay
principal in accordance with its obligations.
A lack of liquidity in corporate bonds may make it difficult for the Company to
sell those bonds at or near their purported value. This may particularly be the
case if the Company is forced to sell assets quickly, for example, to repay any
repo financing that becomes unexpectedly repayable or which it is not possible
to rollover or in the event of a liquidation of the Company. A lack of
liquidity in corporate bonds may also make it difficult or impossible to
rebalance the Company's investment portfolio as and when it believes it would
be advantageous to do so.
Mitigation: To mitigate these risks, the portfolio managers monitor daily both
the ratings and liquidity of the bond portfolio in relation to the Company's
known repo financing requirements, and the Board regularly receives reports
which it reviews throughout the year.
Derivatives Risk: The Company may enter into derivative transactions for the
purposes of efficient portfolio management ('EPM'), as set out in the
investment policy. The Company may also hedge against exposure to changes in
currency rates to the extent that repo financing has not offset such exposure.
Derivative instruments can be highly volatile and expose investors to a higher
risk of loss. Derivatives enable a higher degree of leverage than might be
acquired in respect of a direct investment in the underlying asset. As a
result, relatively small fluctuations in the value of the underlying asset or
the subject of the derivative may result in a substantial fluctuation in the
value of the derivative, either up or down. Daily limits on price fluctuations
and position limits on exchanges may prevent prompt liquidation of positions
resulting in potentially greater losses.
Where derivatives are used for hedging, there is a risk that the returns on the
derivative do not exactly correlate to the returns on the underlying
investment, obligation or market sector being hedged against. If there is an
imperfect correlation, the Company may be exposed to greater loss than if the
derivative had not been entered into.
Trading in derivatives markets may be unregulated or subject to less regulation
than other markets.
Mitigation: The Manager has systems in place to monitor derivative levels on a
daily basis. These also ensure exposure levels are in accordance with EPM and
investment limits.
Reliance on External Service Providers Risk: The Company has no employees and
the Directors have all been appointed on a non-executive basis. The Company is
reliant upon the performance of third party service providers (TPPs) for its
executive function. Operational capability relies upon the ability of its TPPs
to continue working throughout the disruption caused by a major event such as
the Covid-19 global pandemic.
The Company's most significant contract is with the Manager, to whom the
responsibility for the Company's portfolio is delegated. The Company has other
contractual arrangements with third parties to act as Company Secretary,
Registrar, Depositary and Broker.
Failure by any service provider to carry out its obligations to the Company in
accordance with the terms of its appointment could have a materially
detrimental impact on the operation of the Company and could affect the ability
of the Company to pursue successfully its investment policy and expose the
Company to reputational risk.
The Manager may be exposed to the risk that litigation, misconduct, operational
failures, negative publicity and press speculation, whether or not it is valid,
will harm its reputation. Any damage to the reputation of the Manager could
result in counterparties and third parties being unwilling to deal with the
Manager and by extension the Company. This could have an adverse impact on the
ability of the Company to pursue its investment policy.
Mitigation: The Manager's business continuity plans are reviewed on an ongoing
basis and the Directors are satisfied that the Manager has in place robust
plans and infrastructure to minimise the impact on its operations.
As the Covid-19 global pandemic continues, the Manager has mandated work from
home arrangements and implemented split team working for those whose work is
deemed necessary to be carried out on business premises. Any meetings are held
virtually or via conference calls. Other similar working arrangements are in
place for the Company's TPPs.
The Board receives regular updates from the Board and TPPs on business
continuity processes. The Company has limited exposure to cyber risk. However,
the Company's operations or reputation could be affected if any of its service
providers suffered a major cyber security breach. The Board monitors the
preparedness of its service providers in this regard and is satisfied that the
risk is given due priority.
The Board seeks to manage these risks, and others, in a number of ways:
* The Manager monitors the performance of all third party providers in
relation to agreed service standards on a regular basis, and any issues and
concerns would be dealt with promptly and reported to the Board. The Manager
formally reviews the performance of all third party providers and reports to
the Board on an annual basis.
* The Board monitors the performance of the Manager at every board meeting
and otherwise as appropriate. The Board has the power to replace the Manager
and reviews the management contract formally once a year
* The day-to-day management of the portfolio is the responsibility of Rhys
Davies. On 22 July 2020, Rhys Davies was named as lead portfolio manager and
Edward Craven appointed as deputy portfolio manager. Mr Davies joined Invesco
in 2002 and has 18? years' experience in fixed income markets. He has been
associated with the Company's portfolio for many years. Edward Craven is a
senior credit analyst having been part of the Fixed Interest team for more than
nine years. He has more than 17 years' financial services experience. Paul Read
and Paul Causer have stepped back as co-fund managers but continue to provide
support along with the wider fixed interest team. The Board has adopted
guidelines within which the portfolio managers are permitted wide discretion.
Any proposed variation outside these guidelines is referred to the Board and
the guidelines themselves are reviewed at every board meeting.
* The risk that any one of the portfolio managers might be incapacitated or
otherwise unavailable is mitigated by the fact that they work closely with each
other and they also work within the wider Invesco Fixed Interest team.
Regulatory Risk: The Company is subject to various laws and regulations by
virtue of its status as a Company registered under the Companies (Jersey) Law
1991, under Alternative Investment Fund Regulations and Collective Investment
Funds (Jersey) Law 1998, and as an investment company and its listing on the
London Stock Exchange.
A serious breach of regulatory rules may lead to suspension from the London
Stock Exchange or a qualified Audit Report. Other control failures, either by
the Manager or any other of the Company's service providers, may result in
operational or reputational problems, erroneous disclosures or loss of assets
through fraud, as well as breaches of regulations.
Any changes in the Company's tax status or in taxation legislation or
accounting practice could affect the value of investments held by the Company,
affect the Company's ability to provide returns to shareholders or alter the
post-tax returns to shareholders.
Mitigation: The Manager reviews compliance with regulatory requirements on a
regular basis. All transactions, income and expenditure are reported to the
Board. The Board regularly considers all risks, the measures in place to
control them and the possibility of any other risks that could arise. The Board
ensures that satisfactory assurances are received from service providers. The
Manager's compliance and internal audit officers produce regular reports for
review by the Company's Audit Committee.
Additionally, the Depositary monitors stock, cash, borrowings and investment
restrictions throughout the year. The Depositary reports formally once a year
and also has access to the Company Chairman and the Audit Committee Chairman if
needed during the year.
Viability Statement
An investment company, such as this Company, is a collective investment vehicle
rather than a commercial business venture and is designed and managed for long
term investment. Long term for this purpose is considered to be at least three
years and so the Directors have assessed the Company's viability over that
period. However, the life of the Company is not intended to be limited to that
or any other period.
The main risk to the Company's continuation is shareholder dissatisfaction
through failure to meet the Company's investment objective, through poor
investment performance or the investment policy not being appropriate in
prevailing market conditions. The Board actively reviews the Company's
performance against its investment objective and policy as well as reviewing
the Company's objective to ensure that this continues to meet shareholder
requirements especially during the Covid-19 global pandemic this year.
Performance has been strong for many years and through different, and
difficult, market cycles as shown by the ten year total return performance
graph on page 5, and the stable level of dividend paid by the Company over the
last ten years, also as set out on page 5. Throughout these times there has
been no change in Manager and the five-yearly continuation vote in 2019 was
passed with 99.9% of voting shareholders in favour. The next continuation vote
is due in 2024.
Other principal risks arise from the make-up of the portfolio, especially as it
contains a high level of non-investment grade (or so-called 'junk') bonds which
may have a higher risk of default, and the use of gearing to enhance returns.
The Portfolio Managers constantly monitor the portfolio and its ratings, a bond
rating analysis of which is shown on pages 6 and 22. Even though a majority of
the portfolio is formally ranked as non-investment grade, the portfolio remains
defensively positioned. The Portfolio Manager's Report on page 9 sets out the
current portfolio strategy, with exposure positioned towards higher quality
issuers where risk of default is considered low, and who have high levels of
liquidity. The Company's investment limits permit borrowings of up to 50% of
shareholders' funds. At this level, borrowings are twice covered. At the year
end, net gearing as a result of borrowings was 22% and thus four and half times
covered.
Based on the above analysis of the Company's current position and prospects,
the Directors confirm that they have a reasonable expectation that the Company
will be able to continue in operation and meet its liabilities as they fall due
over the three-year period of their assessment.
Board's Duty to Promote the Success of the Company
The Directors have a duty to promote the success of the Company. The AIC Code
of Corporate Governance, codifies this duty and also widens the responsibility
to incorporate the consideration of wider relationships that are necessary for
the Company's sustainability. As a UK listed Company it is necessary for the
Company to report against this UK statutory duty (Section 172). This is not an
obligation under Jersey Law.
In fulfilling these duties, and in accordance with the Company's nature as an
investment company with no employees and no customers in the traditional sense,
the Board's principal concern has been, and continues to be, the interests of
the Company's shareholders taken as a whole. Notwithstanding this, the Board
has a responsible governance culture and also has due regard for broader
matters so far as they apply. In particular, the Board engages with the Manager
at every Board meeting, reviews the Company's relationships with the other
service providers, such as the Registrar, Depositary and Custodian, at least
annually. At every Board meeting the Directors receive an investor relations
update from the Manager, which details any significant changes in the Company's
shareholder register, shareholder feedback, as well as notifications of any
publications or press articles.
Environment, Social and Governance considerations are dealt with in a separate
section below.
Shareholder relations are given a high priority by the Board. The prime medium
by which the Company communicates with shareholders is through the annual and
half-yearly financial reports, which aim to provide shareholders with a full
understanding of the Company's activities and its results. This information is
supplemented by the publication of monthly factsheets and the NAV of the
Company's ordinary shares, which is published daily via the London Stock
Exchange and on the Company's section of the current Manager's website at
www.invesco.co.uk/enhancedincome.
Shareholders normally have the opportunity to communicate directly with the
Directors at the AGM. The forthcoming AGM has been postponed and will be held
at a later date in 2021. The details will be communicated to shareholders.
Shareholders wishing to lodge questions in advance of the AGM are invited to do
so, either on the reverse of the proxy card, via the current Manager's website
(www.invesco.co.uk/enhancedincome) or in writing to the Company Secretary at
the address given on page 63, stating name and postal address. At other times
the Company responds to queries from shareholders on a range of issues.
There is a clear channel of communication between the Board and the Company's
shareholders via the Company Secretary. The Company Secretary has no express
authority to respond to enquiries addressed to the Board and all such
communication, other than junk mail, is redirected to the Chairman as
appropriate.
There is a regular dialogue with individual major shareholders to discuss
aspects of investment performance, governance and strategy and to listen to
shareholder views in order to develop a balanced understanding of their issues
and concerns.
Shareholders can visit the Company's section of the current Manager's website
(www.invesco.co.uk/enhancedincome) in order to access copies of annual and
half-yearly financial reports, pre-investment information, key information
document (KID), shareholder circulars, factsheets, Stock Exchange
announcements, schedule of matters reserved for the Board, terms of reference
of Board Committees, Directors' letters of appointment, the Company's share
price and proxy voting results.
Environment, Social and Governance (ESG) Matters
As an investment company with no employees, property or activities outside
investment, environmental policy has limited direct application. A greenhouse
gas emissions statement is included in the Directors' Report on page 30. In
relation to the portfolio, the Company has, for the time being, delegated the
management of the Company's investments to the current Manager, who has an
ESG Guiding Framework which sets out a number of principles that are intended
to be considered in the context of its responsibility to manage investments in
the financial interests of shareholders.
The Manager is committed to being a responsible investor and applies, and is a
signatory to, the United Nations Principles for Responsible Investment, which
demonstrates its extensive efforts in terms of ESG integration, active
ownership, investor collaboration and transparency. The Manager is also a
signatory to the FRC Stewardship Code 2020, which seeks to improve the quality
of engagement between institutional investors and companies to help improve
long-term returns to shareholders and the efficient exercise of governance
responsibilities.
The Manager's investment team incorporates ESG considerations in its investment
process as part of the evaluation of new opportunities, with identified ESG
concerns feeding into the final investment decision and assessment of relative
value. The Portfolio Managers make their own conclusions about the ESG
characteristics of each investment held and about the overall ESG
characteristics of the portfolio, although third party ESG ratings may inform
their view. Additionally, the Manager's ESG team provides ESG monitoring.
Regarding stewardship, the Board considers that the Company has a
responsibility as an investor towards ensuring that high standards of corporate
governance are maintained in the companies in which it invests. To achieve
this, the Board does not seek to intervene in daily management decisions, but
aims to support high standards of governance and, where necessary, will take
the initiative to ensure those standards are met.
The Company's stewardship functions have been delegated to the Manager. The
current Manager has adopted a clear and considered policy towards its
responsibility as an investor on behalf of the Company. As part of this policy,
the Manager takes steps to satisfy itself about the extent to which the
companies in which it invests look after shareholders' value and comply with
local recommendations and practices, such as the UK Corporate Governance Code.
A copy of the current Manager's Stewardship Policy, which is updated annually,
can be found at www.invesco.co.uk.
Board Diversity
The Board takes into account many factors, including the balance of skills,
knowledge, diversity (including gender) and experience, amongst other factors
when reviewing its composition and appointing new directors. The Board has
considered the recommendations of the Davies and Hampton-Alexander review as
well as the Parker review, but does not consider it appropriate to establish
targets or quotas in this regard. The Board comprises four non-executive
directors, two male and two female, thereby constituting 50% female
representation. There are no set targets in respect of diversity, including
gender. However, diversity forms part of both the Nominations and Remuneration
Committee and main Board's deliberations when considering new appointments. The
Company's success depends on suitably qualified candidates who are willing, and
have the time, to be a director of the Company. Summary biographical details of
the Directors are set out on page 25. The Company has no employees.
Modern Slavery Act 2015
The Company is an investment vehicle and does not provide goods or services in
the normal course of business, or have customers. Accordingly, the Directors
consider that the Company is not required to make any slavery or human
trafficking statement under the Modern Slavery Act 2015.
Approved by the Board of Directors on 26 November 2020.
JTC Fund Solutions (Jersey) Limited
Company Secretary
INVESTMENT PORTFOLIO
AT 30 SEPTEMBER 2020
All investments are fixed interest bonds unless otherwise stated; floating
rates notes are depicted by FRN.
The definitions of the Moody/Standard & Poor's ratings below are set out on
page 66.
Bonds and Equity Investments
Fair Value % of
Issuer Issue Rating(1) GBP'000 Portfolio
Euro
Banco BPM 5% FRN 14 Sep 2030 B1/NR/B 1,368 1.5
8.75% FRN Perpetual B3/NR/B 875
Telecom Italia 5.25% 17 Mar 2055 Ba1/BB+/BB 2,112 1.4
Achmea 6% 04 Apr 2043 NR/BBB-/BBB 2,010 1.3
Banco Santander 6.25% FRN Perpetual Ba1/NR/BB 1,809 1.3
4.375% FRN Perpetual Ba1/NR/BB 164
Volkswagen Financial 3.875% FRN Perpetual Baa2/BBB-/BBB 1,093 1.2
Services
3.5% FRN Perpetual Baa2/BBB-/BBB 826
Codere Finance 6.75% 01 Nov 2021 (SNR) Caa3/CC/CCC 786 0.9
12.75% 30 Sep 2023 (SNR) B3/CCC-/CCC 670
Burger King France 8% 15 Dec 2022 (SNR) NR/CCC/CCC 722
FRN 01 May 2023 B3/B-/B 459 0.9
6% 01 May 2024 (SNR) B3/B-/B 213
Banco BVA 6% FRN Perpetual Ba2/NR/BB 1,280 0.8
Permanent TSB 8.625% FRN Perpetual NR/NR/NR 1,197 0.8
La Financière ATALIAN 4% 15 May 2024 (SNR) Caa2/B/CCC 1,147 0.8
Commerzbank 6.125% FRN Perpetual Ba2/BB-/BB 884 0.7
4% FRN 05 Dec 2030 Baa3/BB+/BB 186
IM Group 6.625% 01 Mar 2025 B3/B-/B 1,030 0.7
Frigoglass Finance 6.875% 12 Feb 2025 B3/B-/B 1,026 0.7
Loxam SAS 5.75% 15 Jul 2027 NR/CCC+/CCC 523 0.6
3.75% 15 Jul 2026 (SNR) NR/B/B 484
Picard FRN 30 Nov 2023 B3/B/B 880 0.6
Tereos Finance 4.125% 16 Jun 2023 (SNR) NR/B+/B 837 0.6
Intesa Sanpaolo 7% Perpetual Ba3/BB-/BB 825 0.5
Banca Monte Dei Paschi - 8% FRN 22 Jan 2030 Caa1/NR/CCC 455 0.5
Siena
10.5% 23 Jul 2029 (SUB) Caa1/NR/CCC 368
Banco Sabadell 6.5% FRN Perpetual B2/NR/B 810 0.5
HEMA 6.25% FRN 15 Jul 2022 Caa3/CC/CC 805 0.5
(SNR)
Banco Comercial Portugues 9.25% 30 Apr 2067 B2/CCC+/B 797 0.5
Deutsche Bank 5.625% FRN 19 May 2031 Ba2/BB+/BB 777 0.5
DKT Finance 7% 17 Jun 2023 (SNR) Caa1/CCC+/CCC 766 0.5
Ziggo Bond Finance 3.375% 28 Feb 2030 (SNR) B3/B-/B 733 0.5
IQVIA 3.25% 15 Mar 2025 (SNR) Ba3/BB/BB 730 0.5
Bank Of Ireland 7.5% FRN Perpetual Ba2/B/B 729 0.5
El Corte Inglés 3.625% 15 Mar 2024 (SNR) NR/NR/NR 689 0.5
INEOS Group 5.375% 01 Aug 2024 (SNR) B2/B+/B 497 0.4
2.875% 01 May 2026 (SNR) Ba2/BB+/BB 174
CNP Assurances FRN Perpetual NR/NR/NR 644 0.4
Virgin Money 2.875% FRN Perpetual Baa3/BBB-/BBB 629 0.4
Gamma 6.25 % 15 Jul 2025 B1/B/B 603 0.4
Aegon 5.625% FRN Perpetual Baa3/BBB-/BBB 590 0.4
PrestigeBidCo 6.25% 15 Dec 2023 (SNR) B2/B/B 552 0.4
National Bank Of Greece 8.25% FRN 18 Jul 2029 Caa2/CCC/CCC 549 0.4
Crystal Almond 4.25% 15 Oct 2024 (SNR) NR/B/B 543 0.4
Yew Grove REIT Common stock NR/NR/NR 534 0.4
Platin 5.375% 15 Jun 2023 (SNR) B3/B/B 512 0.3
Crown European Holdings 2.875% 01 Feb 2026 (SNR) Ba2/BB+/BB 488 0.3
VMED O2 3.25% 31 Jan 2031 (SNR) Ba3/BB-/BB 484 0.3
Motion Finco 7% 15 May 2025 (SNR) B1/CCC+/CCC 434 0.3
UniCredit International Bank 3.875% FRN Perpetual Ba3/NR/B 430 0.3
Faurecia 3.75% 15 Jun 2028 (SNR) Ba2/BB/BB 429 0.3
Teva Pharmaceutical Finance 6% 31 Jan 2025 (SNR) NR/BB-/BB 427 0.3
EDP - Energias de Portugal 4.496% 30 Apr 2079 Ba2/BB/BB 392 0.3
Plantronics 4.625% 05 Jan 2026 (SNR) B2/B/B 377 0.3
IHO Verwaltungs 3.625% 15 May 2025 (SNR) Ba2/BB-/BB 363 0.2
Trafigura 7.5% FRN Perpetual (SUB) NR/NR/NR 362 0.2
Ford Motor Credit FRN 14 May 2021 Ba2/BB+/BB 355 0.2
BNP Paribas Cnv FRN Perpetual Baa3/BB+/BBB 324 0.2
Motion Bondco 4.5% 15 Nov 2027 (SNR) Caa1/CCC-/CCC 308 0.2
Volvo 2.5% 07 Oct 2027 (SNR) NR/NR/NR 275 0.2
Bayer AG 3.125% FRN 12 Nov 2079 Baa3/BB+/BBB 274 0.2
(SUB)
Parts Europe 6.5% 16 Jul 2025 Caa1/B-/CCC 271 0.2
Aviva 6.125% FRN 05 Jul 2043 A3/BBB+/BBB 246 0.2
Odyssey Europe 8% 15 May 2023 (SNR) Caa1/CCC+/CCC 241 0.2
Synthomer 3.875% 01 Jul 2025 (SNR) Ba2/BB/BB 233 0.2
ASR Nederland 4.625% Cnv FRN Perpetual NR/BB+/BB 186 0.1
Lloyds Banking Group 6.375% FRN Perpetual Baa3/BB-/BBB 144 0.0
43,935 28.9
Sterling
Barclays 7.875% FRN Perpetual Ba2/B+/BB 1,734 1.6
6.375% FRN Perpetual Ba2/B+/BB 795
NGG Finance 5.625% FRN 18 Jun 2073 Baa3/BBB/BBB 2,478 1.6
NWEN Finance 5.875% 21 Jun 2021 (SNR) NR/BB+/BB 2,400 1.6
Arqiva Broadcast Finance 6.75% 30 Sep 2023 B1/NR/B 2,163 1.4
Premier Foods Finance 6.25% 15 Oct 2023 B1/B/B 1,750 1.4
FRN 15 Jul 2022 (SNR) B1/B/B 365
Eléctricité De France 6% Perpetual Baa3/BB-/BBB 1,399 1.4
5.875% Perpetual Baa3/BB-/BBB 643
Virgin Money 8.75% FRN Perpetual Ba2/B/BB 1,881 1.2
Co-Operative Bank 9.5% FRN 25 Apr 2029 NR/NR/NR 1,373 1.2
5.125% 17 May 2024 (SNR) NR/BB/BB 481
Aviva 6.125% Perpetual A3/BBB+/BBB 1,612 1.1
Pension Insurance 7.375% FRN Perpetual NR/NR/BBB 1,584 1.0
VMED O2 4% 31 Jan 2029 (SNR) Ba3/BB-/BB 1,507 1.0
Wagamama Finance 4.125% 01 Jul 2022 (SNR) B2/B-/B 1,382 0.9
Matalan Finance 6.75% 31 Jan 2023 (SNR) B3/CCC-/CCC 800
9.5% 31 Jan 2024 (SNR) Caa3/CC/CC 313 0.9
16.5% 25 Jul 2022 (SNR) NR/CCC+/CCC 229
SSE 3.74% FRN Perpetual (SUB) Baa3/BBB-/BBB 1,290 0.9
Time Warner Cable 5.25% 15 Jul 2042 Ba1/BBB-/BBB 1,282 0.9
Volkswagen Financial 4.25% 09 Oct 2025 (SNR) A3/BBB+/BBB 1,244 0.9
Services
Vodafone Group 4.875% 03 Oct 2078 Ba1/BB+/BB 1,056 0.8
1.5% Cnv 12 Mar 2022 NR/NR/NR 167
Orange 5.875% Perpetual Baa3/BBB-/BBB 1,175 0.8
Nationwide 5.75% FRN Perpetual Ba1/BB+/BB 796 0.7
5.875% FRN Perpetual Ba1/BB+/BB 369
William Hill 4.75% 01 May 2026 Ba3/BB-/BB 1,085 0.7
BP Capital 4.25% FRN Perpetual A3/BBB/BBB 1,024 0.7
Drax Finco 4.25% 01 May 2022 (SNR) NR/BB+/BB 934 0.6
Legal & General 5.625% FRN Perpetual Baa3/BBB/BBB 349
4.5% FRN Perpetual A3/BBB+/BBB 308 0.6
5.5% 27 Jun 2064 FRN (SUB) A3/BBB+/BBB 235
Scottish Widows 5.5% 16 Jun 2023 Baa1/BBB+/BBB 880 0.6
Lloyds Banking Group 7.875% FRN Perpetual Baa3/BB-/BBB 458 0.6
7.625% FRN Perpetual Baa3/BB-/BBB 414
CPUK FINANCE 4.25% 28 Feb 2047 (SNR) NR/B-/B 514 0.5
6.5% 28 Aug 2050 (SNR) NR/B-/B 330
Miller Homes 5.5% 15 Oct 2023 (SNR) NR/BB-/BB 644 0.5
FRN 15 Oct 2023 (SNR) NR/BB-/BB 170
Sainsbury's 6% FRN 23 Nov 2027 NR/NR/NR 809 0.5
Bupa Finance 5% 08 Dec 2026 Baa1/NR/BBB 808 0.5
Enel 6.625% FRN 15 Sep 2076 Ba1/BBB-/BBB 795 0.5
OneSavings Bank 9.125% FRN Perpetual NR/NR/NR 652 0.4
Deutsche Bank 7.125% Perpetual B1/B+/B 640 0.4
Iron Mountain 3.875% 15 Nov 2025 Ba3/BB-/BB 605 0.4
Pinewood 3.25% 30 Sep 2025 (SNR) NR/BB/BB 597 0.4
AXA 5.453% FRN Perpetual Baa1/BBB+/BBB 567 0.4
Petroleos Mexicanos 8.25% 02 Jun 2022 (SNR) Ba2/BBB/BB 551 0.4
Jaguar Land Rover 2.75% 24 Jan 2021 (SNR) B1/B/B 490 0.3
La Financière ATALIAN 6.625% 15 May 2025 (SNR) Caa2/B/CCC 423 0.3
Hurricane Finance 8% 15 Oct 2025 (SNR) B3/NR/B 416 0.3
B&M 3.625% 15 Jul 2025 (SNR) Ba3/BB-/BB 400 0.3
Intesa 5.148% 10 Jun 30 Ba1/BB+/BB 330 0.2
Rothesay Life 8% 30 Oct 2025 NR/NR/BBB 310 0.2
Jupiter Fund Management 8.875% 27 Jul 2030 NR/NR/BBB 302 0.2
CYBG 9.25% Perpetual Ba2u/B/BB 279 0.2
Direct Line Insurance 4% 05 Jun 2032 Baa1/NR/BBB 220 0.2
John Lewis 4.25% 18 Dec 2034 (SNR) NR/NR/NR 176 0.1
Aroundtown 4.75% FRN Perpetual (SUB) NR/BBB-/BBB 170 0.1
49,153 32.4
US Dollar
Altice SFR 7.375% 01 May 2026 B2/B/B 2,511 2.0
7.5% 15 May 2026 B2/B/B 515
NatWest 2.62788% FRN Perpetual Ba2/BB-/BB 1,472
8.625% FRN Perpetual Ba2u/B+/BB 823 1.8
8% Cnv FRN Perpetual Ba2u/B+/BB 427
AT&T 4.65% 01 Jun 2044 (SNR) Baa2/BBB/BBB 2,645 1.7
Dell Technologies 6.1% 15 Jul 2027 (SNR) Baa3/BBB-/BBB 1,829 1.7
6.2% 15 Jul 2030 (SNR) Baa3/BBB-/BBB 811
Teva Pharmaceutical Finance 6.75% 01 Mar 2028 (SNR) Ba2/BB-/BB 1,584 1.7
7.125% 31 Jan 2025 (SNR) Ba2/BB-/BB 1,028
Stora Enso 7.25% 15 Apr 2036 Baa3/NR/BBB 1,910 1.3
Lloyds Banking Group 7.5% FRN Perpetual Baa3/BB-/BBB 1,907 1.3
Ziggo Bond Finance 6% 15 Jan 2027 (SNR) B3/B-/B 1,590 1.2
4.875% 15 Jan 2030 (SNR) B1/B+/B 263
Vodafone Group 6.25% 03 Oct 2078 Ba1/BB+/BB 1,167 1.2
7% FRN 04 Apr 2079 Ba1/BB+/BB 667
Aker BP 5.875% 31 Mar 2025 (SNR) Ba1/BBB-/BB 1,610 1.1
Panther BF Aggregator 8.5% 15 May 2027 (SNR) Caa1/CCC+/CCC 1,527 1.0
Adient 7% 15 May 2026 (SNR) Ba3/B+/B 1,321 0.9
9% 15 Apr 2025 (SNR) Ba3/B+/B 46
DKT Finance 9.375% 17 Jun 2023 (SNR) Caa1/CCC+/CCC 1,348 0.9
Neptune Energy 6.625% 15 May 2025 (SNR) B1/BB-/BB 1,313 0.9
BMW US Capital 3.9% 09 Apr 2025 (SNR) A2/A/A 1,298 0.9
Telecom Italia 5.303% 30 May 2024 Ba1/BB+/BB 1,255 0.8
Beazley 5.875% 04 Nov 2026 NR/NR/BBB 1,186 0.8
XPO Logistics 6.5% 15 Jun 2022 (SNR) Ba3/BB-/BB 621 0.8
6.25% 01 May 2025 (SNR) Ba3/BB-/BB 564
Algeco Scotsman 8% 15 Feb 2023 (SNR) B2/B-/B 1,019 0.7
Marfrig Global Foods 7% 15 Mar 2024 NR/BB-/BB 976 0.6
Petra Diamonds 7.25% 01 May 2022 (SNR) Ca/D/D 647 0.6
7.25% 01 May 2022 (SNR) Ca/D/D 272
Trinseo 5.375% 01 Sep 2025 (SNR) B2/B/B 904 0.6
Ford 8.5% 21 Apr 2023 (SNR) Ba2/BB+/BB 488 0.6
9% 22 Apr 2025 (SNR) Ba2/BB+/BB 382
Goodyear Tire & Rubber 9.5% 31 May 2025 (SNR) B2/B+/B 840 0.6
IHO Verwaltungs 6% 15 May 2027 (SNR) Ba2/BB-/BB 807 0.5
Lamb Weston 4.625% 01 Nov 2024 Ba2/BB+/BB 801 0.5
Verizon Communications 4.272% 15 Jan 2036 Baa1/BBB+/BBB 800 0.5
Société Genérale 7.375% 31 Dec 2065 Ba2/BB/BB 792 0.5
Sigma Holdco 7.875% 15 May 2026 (SNR) B3/B-/B 789 0.5
VIVAT 6.25% Perpetual NR/NR/BB 779 0.5
Brink's 4.625% 15 Oct 2027 Ba3/BB-/BB 495 0.5
5.5% 15 Jul 2025 (SNR) Ba3/BB-/BB 249
FAGE International 5.625% 15 Aug 2026 (SNR) B2/B+/B 741 0.5
General Motors 6.8% 01 Oct 2027 (SNR) Baa3/BBB/BBB 342
5.2% 20 Mar 2023 (SNR) Baa3/BBB/BBB 219 0.5
5.4% 02 Oct 2023 (SNR) Baa3/BBB/BBB 171
DNO ASA 8.375% 29 May 2024 NR/NR/NR 427 0.5
8.75% 31 May 2023 NR/NR/NR 291
UBS 7% FRN Perpetual NR/BB+/BB 386 0.4
5% Perpetual Ba1u/BB/BB 295
Ithaca Energy 9.375% 15 Jul 2024 (SNR) B3/CCC/B 655 0.4
Codere Finance 7.625% 01 Nov 2021 (SNR) Caa3/CC/CCC 649 0.4
Walnut Bidco 9.125% 01 AUG 2024 (SNR) B1/B/B 617 0.4
MHP 6.95% 03 Apr 2026 (SNR) NR/B/B 584 0.4
Barclays 8% FRN Perpetual Ba2/B+/BB 408 0.4
2.75% FRN Perpetual Ba1/BB+/BB 135
Rothschilds Continuation FRN Perpetual NR/NR/NR 540 0.4
Finance
Avis Budget Car Rental 10.5% 15 May 2025 (SNR) Ba2/BB-/BB 533 0.4
Stena 7% 01 Feb 2024 (SNR) Caa1/B+/CCC 526 0.3
Marb Bondco 6.875% 19 Jan 2025 (SNR) NR/BB-/BB 520 0.3
Motion Bondco 6.625% 15 Nov 2027 (SNR) Caa1/CCC-/CCC 482 0.3
CIRSA Finance 7.875% 20 Dec 2023 B3/B-/B 442 0.3
Diamond 1 5.45% 15 Jun 2023 Baa3/BBB-/BBB 424 0.3
Petroleos Mexicanos 6.95% 28 Jan 2060 (SNR) Ba2/BBB/BB 212 0.2
6.75% 21 Sep 2047 (SNR) Ba2/BBB/BB 206
Puma International 5% 24 Jan 2026 B1/NR/B 377 0.2
VTR Finance 5.125% 15 Jan 2028 (SNR) Ba3/B+/BB 178 0.2
6.375% 15 Jul 2028 (SNR) B1/B/B 162
UniCredit International Bank 8% FRN Perpetual NR/NR/B 328 0.2
Owens-Brockway 6.625% 13 May 2027 (SNR) B1/B/B 308 0.2
Hertz 7.625% 01 Jun 2022 NR/NR/NR 307 0.2
Avantor Funding 4.625% 15 Jul 2028 (SNR) B3/B/B 306 0.2
Metinvest 7.65% 01 Oct 2027 (SNR) NR/B/B 302 0.2
Expedia 6.25% 01 May 2025 (SNR) Baa3/BBB-/BBB 177 0.2
7% 01 May 2025 (SNR) Baa3/BBB-/BBB 93
CEMEX 7.375% 05 Jun 2027 (SNR) NR/BB/BB 235 0.2
PGH Capital 5.375% 06 Jul 2027 NR/NR/BBB 234 0.2
Millicom International 5.125% 15 Jan 2028 Ba2/NR/BB 233 0.2
Cellular
Tesco 6.15% 15 Nov 2037 (SNR) Baa3/BBB-/BBB 233 0.2
Nyrstar 0% 31 Jul 2026 (SNR) NR/NR/NR 195 0.1
EG Global Finance 8.5% 30 Oct 2025 (SNR) B2/B-/B 161 0.1
Hanesbrands 5.375% 15 May 2025 (SNR) Ba3/BB/BB 161 0.1
Credit Suisse 7.125% FRN Perpetual Ba2u/BB-/BB 161 0.1
Turk Telekomunikas 6.875% 28 Feb 2025 (SNR) NR/BB-/BB 158 0.1
Marriott International 5.75% 01 May 2025 (SNR) Baa3/BBB-/BBB 126 0.1
Trafigura 5.25% 19 Mar 2023 (SNR) NR/NR/NR 105 0.1
Clarios 6.75% 15 May 2025 (SNR) B1/B/B 63 0.0
Yum Brands 7.75% 01 Apr 2025 (SNR) B1/B+/B 33 0.0
58,719 38.7
Total investments 151,807 100.0
(1) Moody/Standard & Poor's (S&P)/Equivalent average rating.
BOND RATING ANALYSIS
AT 30 SEPTEMBER
Standard & Poor's (S&P) ratings. Where a S&P rating is not available, an
equivalent average rating has been used. Investment grade is BBB- and above.
For the definitions of these ratings see the Glossary of Terms and Alternative
Performance Measures on page 66.
2020 2019
% of Cumulative % of Cumulative
RATING Portfolio Total % Portfolio Total %
Investment Grade:
A 0.9 0.9 - -
A- - 0.9 1.8 1.8
BBB+ 4.1 5.0 3.0 4.8
BBB 9.7 14.7 9.8 14.6
BBB- 10.1 24.8 6.5 21.1
Non-investment Grade:
BB+ 10.3 35.1 13.8 34.9
BB 5.8 40.9 6.2 41.1
BB- 15.0 55.9 13.0 54.1
B+ 6.6 62.5 8.5 62.6
B 15.9 78.4 16.9 79.5
B- 6.5 84.9 8.5 88.0
CCC+ 3.9 88.8 1.8 89.8
CCC 1.8 90.6 1.4 91.2
CCC- 1.4 92.0 0.5 91.7
CC 1.6 93.6 - 91.7
D 0.6 94.2 0.1 91.8
NR (including equities) 5.8 100.0 8.2 100.0
100.0 100.0
Summary of Analysis
Investment Grade 24.8 21.1
Non-investment Grade 69.4 70.7
NR (including equities) 5.8 8.2
100.0 100.0
DIRECTORS' RESPONSIBILITIES STATEMENT
in respect of the preparation of the annual financial report
The Directors are responsible for ensuring that the annual financial report is
prepared in accordance with applicable laws and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with International Financial Reporting
Standards as adopted by the European Union ('IFRSs'). The financial statements
are required by law to give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period.
International Accounting Standard 1 requires that financial statements present
fairly for each financial year the Company's financial position, financial
performance and cash flows. This requires the faithful representation of the
effects of transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities, income and
expenses set out in the International Accounting Standards Board's 'Framework
for the preparation and presentation of financial statements'. In virtually all
circumstances, a fair presentation will be achieved by compliance with all
applicable IFRSs.
In preparing these financial statements, the Directors are required to:
* properly select and apply accounting policies and then apply them
consistently;
* present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
* provide additional disclosures when compliance with specific requirements
in IFRSs are insufficient to enable users to understand the impact of
particular transactions, other events and conditions on the entity's financial
position and financial performance; and
* make an assessment of the Company's ability to continue as a going
concern.
The Directors confirm that they have complied with the above requirements in
preparing these financial statements.
The Directors are responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and which enable them to ensure that the financial statements comply
with the Companies (Jersey) Law 1991. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, a Corporate Governance Statement and a Directors'
Report that comply with that law and those regulations.
The Directors of the Company, each confirm to the best of their knowledge that:
* the financial statements, which have been prepared in accordance with
applicable accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company;
* this annual financial 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 it faces; and
* the annual report and accounts, taken as a whole, are fair, balanced and
understandable and provide the information necessary for shareholders to assess
the Company's position and performance, business model and strategy.
Peter Yates
Director
Signed on behalf of the Board of Directors
26 November 2020
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 30 SEPTEMBER
2020 2019
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
(Loss)/profit on
investments held at
fair value 11 - (3,894) (3,894) - 5,548 5,548
Profit/(loss) on
derivative
instruments - currency - 2,136 2,136 - (2,416) (2,416)
hedges
Exchange differences - (684) (684) - (391) (391)
Income 4 8,876 - 8,876 8,688 - 8,688
Investment management and
performance fees 5 (466) (160) (626) (463) (463) (926)
Other expenses 6 (445) (5) (450) (320) (1) (321)
Profit before finance 7,965 (2,607) 5,358 7,905 2,277 10,182
costs and taxation
Finance costs 7 (81) (81) (162) (97) (97) (194)
Profit before taxation 7,884 (2,688) 5,196 7,808 2,180 9,988
Tax on ordinary 8 (16) - (16) - - -
activities
Profit after taxation 7,868 (2,688) 5,180 7,808 2,180 9,988
Return per ordinary share 9 4.54p (1.55)p 2.99p 4.69p 1.31p 6.00p
The total column of this statement represents the Company's statement of
comprehensive income, prepared in accordance with International Financial
Reporting Standards as adopted by the European Union. The profit after taxation
is the total comprehensive income. The supplementary revenue and capital
columns are both prepared in accordance with the Statement of Recommended
Practice issued by the Association of Investment Companies. All items in the
above statement derive from continuing operations of the Company. No operations
were acquired or discontinued in the year.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 30 SEPTEMBER
Share Share Capital Revenue
Capital Premium Reserve Reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 30 September 2018 8,250 151,560 (50,484) 11,351 120,677
Total comprehensive income - - 2,180 7,808 9,988
for the year
Dividends paid 10 - (30) - (8,269) (8,299)
Net proceeds from issue of 253 3,538 - - 3,791
new shares
At 30 September 2019 8,503 155,068 (48,304) 10,890 126,157
Total comprehensive income - - (2,688) 7,868 5,180
for the year
Dividends paid 10 - (21) - (8,606) (8,627)
Net proceeds from issue of 220 3,060 - - 3,280
new shares
At 30 September 2020 8,723 158,107 (50,992) 10,152 125,990
BALANCE SHEET
AS AT 30 SEPTEMBER
2020 2019
Notes GBP'000 GBP'000
Non-current assets
Investments held at fair value through profit or loss 11 151,807 144,528
Current assets
Other receivables 12 3,349 2,718
Derivative financial instruments - unrealised net profit 13 74 -
Cash and cash equivalents 1,546 4,623
4,969 7,341
Total assets 156,776 151,869
Current liabilities
Other payables 14 (1,616) (305)
Derivative financial instruments - unrealised net loss 13 - (940)
Securities sold under agreements to repurchase (29,170) (24,161)
(30,786) (25,406)
Total assets less current liabilities 125,990 126,463
Provision 15 - (306)
Net assets 125,990 126,157
Capital and reserves
Share capital 16 8,723 8,503
Share premium 17 158,107 155,068
Capital reserve 17 (50,992) (48,304)
Revenue reserve 17 10,152 10,890
Total shareholders' funds 125,990 126,157
Net asset value per ordinary share 18 72.21p 74.18p
The financial statements were approved and authorised for issue by the Board of
Directors on 26 November 2020.
Signed on behalf of the Board of Directors
Peter Yates
Director
CASH FLOW STATEMENT
FOR THE YEARED 30 SEPTEMBER
2020 2019
Notes GBP'000 GBP'000
Cash flow from operating activities
Profit before finance costs and taxation 5,358 10,182
Tax on overseas income (16) -
Adjustments for:
Purchase of investments (72,572) (44,749)
Sale of investments 62,662 43,721
(9,910) (1,028)
Increase from securities sold under agreements to repurchase 5,009 2,052
Loss/(profit) on investments held at fair value 3,894 (5,548)
Net movement from derivative instruments - currency hedges (1,014) 1,233
Increase in receivables (631) (328)
Decrease in payables (268) (13)
Net cash inflow from operating activities 2,422 6,550
Cash flow from financing activities
Finance cost paid (152) (194)
Net proceeds from issue of new shares 3,280 3,791
Dividends paid 10 (8,627) (8,299)
Net cash outflow from financing activities (5,499) (4,702)
Net (decrease)/increase in cash and cash equivalents (3,077) 1,848
Cash and cash equivalents at start of the year 4,623 2,775
Cash and cash equivalents at the end of the year 1,546 4,623
Reconciliation of cash and cash equivalents to the Balance
Sheet is as follows:
Cash held at Custodian 1,476 1,473
Invesco Liquidity Funds plc - Sterling (formerly Short Term
Investment Companies
(Global Series) plc) 70 3,150
Cash and cash equivalents 1,546 4,623
Cash flow from operating activities includes:
Dividends received 199 185
Interest received 8,643 8,290
At At
1 October 2019 Cash Flows 30 September
2020
GBP'000 GBP'000 GBP'000
Analysis of changes in net debt:
Cash and cash equivalents 4,623 (3,077) 1,546
Securities sold under agreements to repurchase (24,161) (5,009) (29,170)
Total (19,538) (8,086) (27,624)
NOTES TO THE FINANCIAL STATEMENTS
1. Principal Activity
The Company is a closed-end investment company incorporated in Jersey and it
operates under the Companies (Jersey) Law 1991.
The Company was incorporated on 10 September 1999. The principal activity of
the Company is investment in a diversified portfolio of high yielding corporate
and government bonds and, to a lesser extent, equities and other instruments as
appropriate to its Investment Policy.
2. Principal Accounting Policies
The principal accounting policies describe the Company's approach to
recognising and measuring transactions during the year and the position of the
Company at the year end.
The principal accounting policies adopted in the preparation of these financial
statements are set out below. These policies have been consistently applied
during the current year and the preceding year, unless otherwise stated. The
financial statements have been prepared on a going concern basis as noted
below.
(a) Basis of Preparation
(i) Accounting Standards Applied
The financial statements have been prepared on an historical cost basis, except
for the measurement at fair value of investments and derivatives, and in
accordance with the applicable International Financial Reporting Standards
(IFRS) as adopted by the European Union and interpretations issued by the
International Financial Reporting Interpretations Committee. The standards are
those endorsed by the European Union and effective at the date the financial
statements were approved by the Board.
Where presentational guidance set out in the Statement of Recommended Practice
(SORP) 'Financial Statements of Investment Trust Companies and Venture Capital
Trusts', issued by the Association of Investment Companies in October 2019, is
consistent with the requirements of IFRS, the Directors have prepared the
financial statements on a basis compliant with the recommendations of the SORP.
The supplementary information which analyses the statement of comprehensive
income between items of a revenue and a capital nature is presented in
accordance with the SORP.
(ii) Going Concern
The Directors have determined that the financial statements should be prepared
on a going concern basis as reported on page 29. In reaching this conclusion,
the Directors considered the level of borrowings; cash balances; portfolio risk
and liquidity; and income forecasts. Accordingly, the financial statements have
been prepared on a going concern basis and the Directors are satisfied that the
Company has adequate resources to continue in operational existence for at
least twelve months after signing the balance sheet.
(iii) Adoption of New and Revised Standards
New and revised standards and interpretations that became effective during the
year had no significant impact on the amounts reported in these financial
statements but may impact accounting for future transactions and arrangements.
At the date of authorising these financial statements, the following standards
and interpretations which have not been applied in these financial statements
were in issue but not yet effective (and in some cases had not yet been adopted
by the EU).
The following standards and amendments to existing standards became effective
during the year:
* IAS 1 and IAS 8 Amendments (effective 1 January 2020) - definition of
Material. The amendments to IAS 1, 'Presentation of Financial Statements', and
IAS 8, 'Accounting Policies, Changes in Accounting Estimates and Errors', and
consequential amendments to other IFRSs require companies to:
(i) use a consistent definition of materiality throughout IFRSs and the
Conceptual Framework for Financial Reporting;
(ii) clarify the explanation of the definition of material; and
(iii) incorporate some of the guidance of IAS 1 about immaterial
information.
* IFRS 3 Amendment (effective 1 January 2020) - definition of a Business.
This amendment revises the definition of a business. To be considered a
business, an acquisition would have to include an input and a substantive
process that together significantly contribute to the ability to create
outputs.
* IFRS 9 and IFRS 7 Amendments (effective 1 January 2020) - Interest Rate
Benchmark Reform. These amendments provide certain reliefs in connection with
the interest rate benchmark reform.
* IAS 1, 8, 34, 37, 38 and IFRS 2, 3, 6, 14, IFRIC 12, 19, 20, 22 and SIC 32
(effective 1 January 2020) - amendment to References to the Conceptual
Framework.
The Directors do not expect the adoption of above standards and interpretations
(or any other standards and interpretations which are in issue but not
effective) will have a material impact on the financial statements of the
Company in future periods.
(iv) Critical Accounting Estimates and Judgements
The preparation of the financial statements may require the Directors to make
estimations where uncertainty exists. It also requires the Directors to make
judgements, estimates and assumptions, in the process of applying the
accounting policies. There have been no significant judgements, estimates or
assumptions for the current or preceding year, except for the allocation of
management fee and finance costs (see note 2(h)).
(b) Foreign Currency
(i) Functional and Presentation Currency
The financial statements are presented in sterling, which is the Company's
functional and presentation currency and is the currency in which the Company's
share capital and the predominant currency in which the Company's shares are
traded.
(ii) Transactions and Balances
Transactions in foreign currency, whether of a revenue or capital nature, are
translated to sterling at the rate of exchange ruling on the date of such
transactions. Foreign currency assets and liabilities are translated to
sterling at the rates of exchange ruling at the balance sheet date. Any profits
or losses, whether realised or unrealised, are taken to the capital reserve or
to the revenue reserve, depending on whether the gain or loss is of a capital
or revenue nature. All profits and losses are recognised in the statement of
comprehensive income.
(c) Financial Instruments
(i) Recognition of Financial Assets and Financial Liabilities
The Company recognises financial assets and financial liabilities when the
Company becomes a party to the contractual provisions of the instrument. The
Company will offset financial assets and financial liabilities if the Company
has a legally enforceable right to set off the recognised amounts and interests
and intends to settle on a net basis.
(ii) Derecognition of Financial Assets
The Company derecognises a financial asset when the contractual rights to the
cash flows from the asset expire, or it transfers the right to receive the
contractual cash flows on the financial asset in a transaction in which
substantially all the risks and rewards of ownership of the financial asset are
transferred. Any interest in the transferred financial asset that is created or
retained by the Company is recognised as an asset.
(iii) Derecognition of Financial Liabilities
The Company derecognises financial liabilities when its obligations are
discharged, cancelled or expired.
(iv) Trade Date Accounting
Purchases and sales of financial assets are recognised on trade date, being the
date on which the Company commits to purchase or sell the assets.
(v) Classification of financial assets and financial liabilities
Financial assets
The Company's investments are classified as held at fair value through profit
or loss.
Financial assets held at fair value through profit or loss are initially
recognised at fair value, which is taken to be their cost, with transaction
costs expensed in the statement of comprehensive income, and are subsequently
valued at fair value.
Fair value for investments that are actively traded in organised financial
markets is determined by reference to stock exchange quoted bid prices at the
balance sheet date. For investments that are not actively traded or where
active stock exchange quoted bid prices are not available, fair value is
determined by reference to a variety of valuation techniques including broker
quotes and price modelling.
Other receivables that have fixed or determinable payments that are not quoted
in an active market are classified as 'loans and receivables'. Loans and
receivables are measured at amortised cost using effective interest method less
any impairment/expected credit losses.
Financial liabilities
Financial liabilities, including borrowings, are initially measured at fair
value, net of transaction costs and are subsequently measured at amortised cost
using the effective interest method.
The effective interest method is a method of calculating the amortised cost of
a financial asset or financial liability and of allocating interest income or
expense over the relevant period.
(d) Derivatives
Changes in the fair value of derivative financial instruments are recognised in
the Statement of Comprehensive Income as they arise. If capital in nature, the
associated change in value is presented as a capital item in the Statement of
Comprehensive Income.
Derivative instruments are valued at fair value in the balance sheet.
Forward currency contracts are valued at the appropriate forward exchange rate
ruling at the balance sheet date. Profits or losses on the closure or
revaluation of positions are recognised as capital in the statement of
comprehensive income.
(e) Cash and Cash Equivalents
Cash and cash equivalents comprise cash at bank, short-term deposits and
investment in Invesco Liquidity Funds plc - Sterling (formerly Short-Term
Investments Company (Global Series) plc), all with an original maturity date of
three months or less.
(f) Securities Sold Under Agreements to Repurchase ('repo financing')
The Company participates in repo financing arrangements in connection with its
investment portfolio. Under these arrangements, the Company sells fixed
interest securities but is contractually obliged to repurchase them at a fixed
price on a fixed date. Securities which are the subject of repo financing
arrangements are included in investments in the balance sheet at their fair
value and the associated liability is recognised at amortised cost, being the
capital amounts owing under the repo financing arrangements. The difference
between sale and repurchase prices for such transactions is reflected in the
statement of comprehensive income over the lives of the transactions, within
finance costs which is allocated equally between capital and revenue. This
accounting has been adopted because the repurchase price results in a lender's
return for the transferee as the Company has retained substantially all the
risks and rewards of ownership of the asset.
(g) Revenue Recognition
Interest income arises from cash and cash equivalents and fixed income
securities and is recognised in the statement of comprehensive income using the
effective interest method. Dividend income arises from equity investments held
and is recognised on the date investments are marked 'ex-dividend'. Where the
Company elects to receive dividends in the form of additional shares rather
than cash, the equivalent to the cash dividend is recognised as income in
revenue and any excess in value of the shares received over this is recognised
in capital.
(h) Expenses and Finance Costs
All expenses and finance costs are accounted for on an accruals basis and are
recognised in the statement of comprehensive income. The base investment
management fee and finance costs are allocated equally to capital and revenue.
This is in accordance with the Board's expected long-term split of returns, in
the form of capital gains and income respectively, from the investment
portfolio. All other expenses, except for Custodian dealing costs, are charged
through revenue in the statement of comprehensive income.
(i) Taxation
Overseas interest and dividends are shown gross of withholding tax and the
corresponding irrecoverable tax is shown as a charge in the statement of
comprehensive income.
3. Segmental Reporting
No segmental reporting is provided as the Directors are of the opinion that the
Company is engaged in a single segment of business of investing in debt, and,
to a significantly lesser extent equity securities.
4. Income
This note shows the income generated from the portfolio (investment assets) of
the Company and income received from any other source.
2020 2019
GBP'000 GBP'000
Income from investments:
UK bond interest 3,402 3,540
UK dividends 170 170
Overseas bond interest 5,263 4,954
Overseas dividends 35 15
8,870 8,679
Other income:
Deposit interest 6 8
Other - 1
6 9
Total income 8,876 8,688
5. Investment Management Fee
This note shows the fees paid to the Manager. This is made up of the base
management fee payable per annum.
2020 2019
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management fee 466 466 932 463 463 926
Performance fee - (306) (306) - - -
466 160 626 463 463 926
Details of the investment management agreement are given on page 31 in the
Directors' Report.
At 30 September 2020, GBP240,000 (2019: GBP241,000) was accrued in respect of the
investment management fee.
The deferred performance fee of GBP306,000 earned for the year to 30 September
2017, was written-back in the current year, details are given in note 15.
6. Other Expenses
The other expenses of the Company are presented below; those paid to the
Directors and the Auditor are separately identified.
2020 2019
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Directors' remuneration(i) 137 - 137 119 - 119
Auditors' fees(ii):
- for audit of the Company's annual
financial statements 34 - 34 30 - 30
General expenses(iii) 274 5 279 171 1 172
445 5 450 320 1 321
(i) The Director's Remuneration Report provides further information on
Directors' fees.
(ii) Auditor's fees include out of pocket expenses.
(iii) General expenses include:
* Custodian transaction charges of GBP5,400 (2019: GBP1,000). These are charged
to capital.
* amounts due to JTC Fund Solutions (Jersey) Limited (previously: R&H Fund
Services (Jersey) Limited) who acted as Administrator and Company Secretary to
the Company under an agreement starting from 10 December 2019. The fee is
calculated at the rate of GBP70,000 per annum for company secretarial and
Administration Services.
* GBP73,000 (2019: GBPnil) premium payable on Credit Default Swaps.
7. Finance Costs
Finance costs arise on any borrowing that the Company has, with the main
borrowing being in the form of repo financing (see note 2(f)).
2020 2019
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Interest due under repo financing 75 75 150 96 96 192
Overdraft interest 6 6 12 1 1 2
81 81 162 97 97 194
8. Taxation
As a Jersey investment company no tax is payable on capital gains and, as the
Company principally invests in assets which do not result in a revenue tax, the
only overseas tax arises on assets domiciled in countries with which Jersey has
no double-taxation treaty.
2020 2019
GBP'000 GBP'000
Overseas taxation 16 -
The Company is subject to Jersey income tax at the rate of 0% (2019: 0%). The
overseas tax charge consists of irrecoverable withholding tax suffered.
9. Return per Ordinary Share
Return per share is the amount of profit (or loss) generated for the financial
year divided by the weighted average number of ordinary shares in issue.
The basic revenue, capital and total return per ordinary share is based on each
of the returns on ordinary activities after taxation and on 173,132,358 (2019:
166,398,417) ordinary shares, being the weighted average number of ordinary
shares in issue throughout the year.
10. Dividends on Ordinary Shares
Dividends represent the return of income less expenses to shareholders.
Dividends are paid as an amount per ordinary share held.
2020 2019
Pence GBP'000 Pence GBP'000
Dividends paid and recognised in the year:
Fourth interim from prior year 1.25 2,126 1.25 2,062
First interim 1.25 2,147 1.25 2,062
Second interim 1.25 2,173 1.25 2,062
Third interim 1.25 2,181 1.25 2,113
5.00 8,627 5.00 8,299
Set out below are the dividends that have been declared in respect of the
financial years ended 30 September:
2020 2019
Pence GBP'000 Pence GBP'000
Dividends in respect of the year:
First interim 1.25 2,147 1.25 2,062
Second interim 1.25 2,173 1.25 2,062
Third interim 1.25 2,181 1.25 2,113
Fourth interim 1.25 2,181 1.25 2,126
5.00 8,682 5.00 8,363
Dividends paid in respect of the year have been charged to revenue except for GBP
21,000 (2019: GBP30,000) which was charged to share premium. This amount is
equivalent to the income accrued on the new shares issued in the year. This
income accrued represented the income element of the net asset value at the
time of each individual new share issue.
The fourth interim dividend for 2020 was paid on 30 October 2020 to
shareholders on the register on 2 October 2020.
11. Investments Held at Fair Value Through Profit and Loss
The portfolio is made up of investments which are traded on regulated
exchanges. Gains and losses are either:
* realised, usually arising when investments are sold; or
* unrealised, being the difference from cost on the investments held at
the year end.
(a) Analysis of investments:
2020 2019
GBP'000 GBP'000
Investments listed on a recognised investment exchange 151,807 144,528
(b) Analysis of investment (loss)/profit in the year
2020 2019
UK Overseas UK Overseas
listed listed Total listed listed Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Opening valuation 61,292 83,236 144,528 63,787 76,125 139,912
Movements in year:
Purchases at cost 19,267 54,568 73,835 17,270 25,519 42,789
Sales - proceeds (30,382) (32,280) (62,662) (20,409) (23,312) (43,721)
(Loss)/profit on investments in the (1,024) (2,870) (3,894) 644 4,904 5,548
year
Closing valuation 49,153 102,654 151,807 61,292 83,236 144,528
Closing book cost 46,999 96,560 143,559 59,297 74,913 134,210
Closing investment holding profit 2,154 6,094 8,248 1,995 8,323 10,318
Closing valuation 49,153 102,654 151,807 61,292 83,236 144,528
The Company received GBP62,662,000 (2019: GBP43,721,000) from investments sold in
the year. The book cost of these investments when they were purchased was GBP
64,486,000 (2019: GBP41,077,000) realising a loss of GBP1,824,000 (2019: profit GBP
2,644,000). These investments have been revalued over time and until they were
sold any unrealised profits/losses were included in the fair value of the
investments.
(c) Registration of investments
The investments of the Company are registered in the name of the Company or in
the name of nominees and held to the account of the Company. Securities
transferred under repo financing arrangements are registered in the name of the
counterparty until these are repurchased by the Company, when these are
re-registered in the name of the Company.
(d) Securities under agreements to repurchase had a market value of GBP
37,341,000 (2019: GBP29,850,000).
(e) The transaction costs on investments amount to GBPnil for both purchases
and sales (2019: GBPnil for both purchases and sales).
12. Other Receivables
Other receivables are amounts which are due to the Company, such as income
which has been earned (accrued) but not yet received and monies due from
brokers for investments sold.
2020 2019
GBP'000 GBP'000
Amounts due from brokers 582 -
Margin held at brokers 224 189
Prepayments and accrued income 2,543 2,529
3,349 2,718
13. Derivative Financial Instruments
Derivative financial instruments are financial instruments that derive their
value from the performance of another item, such as an asset or exchange rates.
They are used to manage the risk associated with fluctuations in the value of
certain assets and liabilities. In accordance with Board approved policies, the
Company can use derivatives to manage its exposure to fluctuations in foreign
exchange rates.
Derivative financial instruments comprise forward currency contracts.
2020 2019
GBP'000 GBP'000
Forward currency contracts - net unrealised profit/(loss) 74 (940)
14. Other Payables
Other payables are amounts which must be paid by the Company, and include any
amounts due to brokers for the purchase of investments or amounts owed to
suppliers, such as the Manager and Auditor.
2020 2019
GBP'000 GBP'000
Amounts due to brokers 1,263 -
Accruals 353 305
1,616 305
15. Provision
The Company makes a provision when a potential obligation exists, relating to
events in the future that will probably result in payment of the amount.
2020 2019
GBP'000 GBP'000
Provision for performance fee brought forward 306 306
Performance fee provision written-back in the year (306) -
Provision for performance fee carried forward - 306
Performance fee arrangements have been removed with effect from 1 October 2017.
The deferred performance fee, earned for the year to 30 September 2017, was
written back in the current year as the conditions required for the payment to
occur, were not met in in each of the three years since 30 September 2017.
16. Share Capital
Dividends represent the return of income less expenses to shareholders.
Dividends are paid as an amount per ordinary share held.
2020 2019
Number GBP'000 Number GBP'000
Authorised:
Ordinary shares of 5p each 200,000,000 10,000 200,000,000 10,000
Allotted, called-up and fully paid
ordinary shares of 5p each:
Brought forward 170,069,855 8,503 164,994,855 8,250
Issued in the year 4,400,000 220 5,075,000 253
Carried forward 174,469,855 8,723 170,069,855 8,503
During the year 4,400,000 (2019: 5,075,000) ordinary shares were issued at an
average share price excluding costs of 74.84p per share (2019: 75.02p).
Subsequent to the year end no ordinary shares were issued.
17. Reserves
This note explains the different reserves that have arisen over the years. The
aggregate of the reserves and share capital (see previous note) make up total
shareholders' funds.
The share premium arises from the excess of consideration received on the issue
of shares over the nominal 5p value. The capital reserve includes investment
holding profits and losses (being the difference between cost and market value
at the balance sheet date), realised profits and losses on disposals of
investments, profits and losses on derivatives and expenses allocated to
capital. The revenue reserve is formed from the aggregate of income received
less expenses and any dividends paid from revenue. All reserves, including the
share premium, are distributable.
18. Net Asset Value per Share
The Company's total net assets (total assets less total liabilities) are often
termed shareholders' funds and are converted into net asset value per ordinary
share by dividing by the number of shares in issue.
The net asset value per share and the net asset values attributable at the year
end were as follows:
Net asset value Net assets
per ordinary share attributable
2020 2019 2020 2019
Pence Pence GBP'000 GBP'000
Ordinary shares 72.21 74.18 125,990 126,157
Net asset value per ordinary share is based on net assets at the year end and
on 174,469,855 (2019: 170,069,855) ordinary shares, being the number of
ordinary shares in issue (excluding treasury) at the year end.
19. Financial Instruments
Financial instruments comprise the Company's investment portfolio and
derivative financial instruments (for the latter see note 13) as well as its
cash, borrowings (i.e. securities sold under agreements to repurchase otherwise
known as 'repo financing', and overdraft), other receivables and other
payables.
The Company's financial instruments comprise its investment portfolio (as shown
on pages 17 to 21), cash, securities sold under agreements to repurchase (repo
financing), derivative financial instruments, other receivables and other
payables that arise directly from its operations such as sales and purchases
awaiting settlement and accrued income. The accounting policies in note 2
include criteria for the recognition and the basis of measurement applied for
financial instruments. Note 2 also includes the basis on which income and
expenses arising from financial assets and liabilities are recognised and
measured.
The principal risks that an investment company faces in its portfolio
management activities are set out below:
Market risk - arising from fluctuations in the fair value or future cash flows
of a financial instrument because of changes in market prices. Market risk
comprises three types of risk: currency risk, interest rate risk and other
price risk:
Currency risk - arising from fluctuations in the fair value or future cash
flows of a financial instrument because of changes in foreign exchange rates;
Interest rate risk - arising from fluctuations in the fair value or future cash
flows of a financial instrument because of changes in market interest rates;
and
Other price risk - arising from fluctuations in the fair value or future cash
flows of a financial instrument for reasons other than changes in foreign
exchange rates or market interest rates.
Liquidity risk - arising from any difficulty in meeting obligations associated
with financial liabilities.
Credit risk - arising from financial loss for a company where the other party
to a financial instrument fails to discharge an obligation.
Risk Management Policies and Procedures
The Directors have delegated to the Manager the responsibility for the
day-to-day investment activities, management of borrowings and hedging
undertaken by the Company as more fully described in the Directors' Report.
Investments include, but are not restricted to, corporate bonds, government
bonds, preference shares, loan stocks and equities for the long-term so as to
comply with its Investment Policy (incorporating the Company's investment
objective). In pursuing its investment objective, the Company is exposed to a
variety of risks that could result in either a reduction in the Company's net
assets or a reduction of the profits available for dividends. The risks
applicable to the Company and the policies the Company uses to manage these
risks for the two years under review are detailed overleaf.
Market Risk
The Manager assesses the exposure to market risk when making each investment
decision, and monitors the overall level of market risk on the whole of the
portfolio on an ongoing basis. Risk management is an integral part of the
investment management process. The Manager controls risk by ensuring that the
Company's investment portfolio is appropriately diversified. In-depth and
continual analysis of market and stock fundamentals give the Manager the best
possible understanding of the risks associated with a particular stock.
As more fully described in the Business Review on page 14, high-yield corporate
bonds are subject to a variety of risks. A majority of the Company's
investments are in non-investment grade securities and so adverse changes in
the financial position of an issuer of corporate bonds or in the general
economy may affect both the principal and the interest.
(a) Currency Risk
The sterling value of the Company's assets, liabilities and income which are
denominated in currencies other than sterling will be affected by movements in
exchange rates.
Management of the currency risk
The Manager monitors the Company's exposure to foreign currencies on a daily
basis and reports to the Board on a regular basis. The Company uses both
forward currency contracts and repo financing to mitigate currency movements
that would affect the investment portfolio and cash.
Repo financing is matched to the currency of the underlying assets, which
minimises currency risk on the movement of exchange rates affecting the
underlying investments. Non-sterling investments that are not pledged under
repo financing can be hedged using forward currency contracts.
Income denominated in foreign currencies is converted to sterling on receipt.
The Company does not use financial instruments to mitigate the currency
exposure in the period between the time that income is included in the
financial statements and its receipt.
Currency exposure
The fair values of the Company's monetary items that have foreign currency
exposure at 30 September are shown in the table below. Where the Company's
investments (which are not monetary items) are priced in a foreign currency,
they have been included separately in the analysis so as to show the overall
level of exposure.
2020 2019
US US
Euro Dollar Euro Dollar
GBP'000 GBP'000 GBP'000 GBP'000
Investments at fair value through
profit or loss that are monetary items
(fixed and floating interest) 43,401 58,719 29,655 53,419
Forward currency contracts (25,885) (51,860) (10,159) (46,297)
Other receivables (due from brokers
and dividends) 812 1,160 797 885
Cash and cash equivalents 466 849 176 496
Other payables (due to brokers and
accruals) (956) (315) - -
Securities sold under agreement
to repurchase (10,786) (6,090) (13,343) -
Foreign currency exposure on net
monetary items 7,052 2,463 7,126 8,503
Investments at fair value through profit
or loss 534 - 162 -
Total net foreign currency 7,586 2,463 7,288 8,503
Cash and cash equivalent figures include amounts at Custodian that have a right
of offset. Sterling cash at the year end was GBP231,000 (2019: GBP3,951,000).
Currency sensitivity
The following tables illustrate the sensitivity of the profit after taxation
for the year with respect to the Company's monetary financial assets and
liabilities and each of the exchange rates for GBP to Euro and GBP to US dollar
based on the following:
2020 2019
% %
GBP/Euro ±2.9% ±2.0%
GBP/US dollar ±2.7% ±2.5%
The above percentages have been determined based on the market volatility in
exchange rates in the year. The sensitivity analysis is based on the Company's
monetary foreign currency financial instruments held at each balance sheet date
and takes account of any forward foreign exchange contracts that offset the
effects of changes in currency exchange rates. The effect of the strengthening
or weakening of sterling against currencies to which the Company is exposed is
calculated by reference to the volatility of exchange rates during the year
using the standard deviation of currency fluctuations against the mean.
If sterling had strengthened by the changes in exchange rates shown in the
table above, this would have had the following effect:
2020 2019
US US
Euro Dollar Euro Dollar
GBP'000 GBP'000 GBP'000 GBP'000
Income statement - loss after taxation
Revenue return (60) (92) (34) (80)
Capital return (196) (35) (129) (190)
Total loss after taxation for the year (256) (127) (163) (270)
If sterling had weakened against the euro or dollar to this extent, the effect
would have been the converse.
In the opinion of the Directors, this sensitivity analysis is not
representative of the year as a whole, since the level of exposure changes
frequently as part of the currency risk management process of the Company.
(b) Interest Rate Risk
Interest rate movements may affect:
* the fair value of the investments in fixed interest rate securities;
* the level of income receivable on cash deposits; and
* the interest payable on variable rate borrowings.
Management of interest rate risk
The possible effects on fair value and cash flows that could arise as a result
of changes in interest rates are taken into account when making investment
decisions and borrowings. The Board reviews on a regular basis the investment
portfolio and borrowings. This encompasses the valuation of fixed interest,
floating rate securities and gearing levels. When the Company has Custodian
cash or overdraft balances, they are held on variable rate bank accounts
yielding rates of interest dependent on the base rate of the Custodian, The
Bank of New York Mellon (International) Limited. Holdings in the Invesco
Liquidity Funds plc - Sterling ("STIC") (formerly Short Term Investment
Companies (Global Series) plc) are subject to interest rate changes.
Interest rate exposure
At 30 September the exposure of financial assets and financial liabilities to
interest rate risk is shown by reference to:
* floating interest rates (giving cash flow interest rate risk) - when the
interest rate is due to be reset; and
* fixed interest rates (giving fair value interest rate risk) - when the
financial instrument is due for repayment.
2020 2019
Within More Within More
one than one than
year one year Total year one year Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Exposure to floating
interest rates:
Investments held at fair value
through profit or loss 355 44,844 45,199 - 38,740 38,740
Cash and cash equivalents* 1,546 - 1,546 4,623 - 4,623
1,901 44,844 46,745 4,623 38,740 43,363
Exposure to fixed interest
rates:
Investments held at fair
value through profit or loss 2,890 103,184 106,074 1,643 102,339 103,982
Securities sold under
agreements to repurchase (29,170) - (29,170) (24,161) - (24,161)
(26,280) 103,184 76,904 (22,518) 102,339 79,821
Net exposure to interest rates (24,379) 148,028 123,649 (17,895) 141,079 123,184
*Includes GBP70,000 (2019: GBP3,150,000) held on STIC.
The nominal interest rates on investments at fair value through profit or loss
are shown in the portfolio statement on pages 17 to 21. The weighted average
effective interest rate on these investments is 6.0% (2019: 6.3%).
Interest rate sensitivity
The following table illustrates the sensitivity of the profit after taxation
for the year to a 1.0% increase in interest rates in regard to the Company's
financial assets and financial liabilities. This level of change is considered
to be reasonably possible based on the observation of current market
conditions. The sensitivity analysis is based on the Company's financial
instruments held at the balance sheet date, with all other variables held
constant.
2020 2019
Increase Increase
in rate in rate
GBP'000 GBP'000
Income statement - profit/(loss) after taxation
Revenue return 15 46
Capital return (6,353) (5,609)
Total loss after taxation for the year (6,338) (5,563)
Effect on NAV (3.6)p (3.3)p
The effect would have been the exact opposite if interest rates had decreased
by the same amount.
The above exposure and sensitivity analysis are not representative of the year
as a whole, since the level of exposure changes frequently as borrowings are
drawn down and repaid throughout the year.
(c) Other Price Risk
Other price risk (i.e. changes in market prices other than those arising from
interest rate risk or currency risk) may affect the value of the portfolio. It
is the business of the Manager to manage the portfolio and borrowings to
achieve the best returns.
Management of other price risk
The Directors manage the market price risks inherent in the portfolio by
meeting regularly to monitor, on a formal basis, the Manager's compliance with
the Company's stated Investment Policy and to review investment performance.
The Company's portfolio is the result of the Manager's investment process and
the result is not correlated with the market in which the Company invests, with
the value of the portfolio moving as a result of the performance of the company
shares held in the portfolio. The Company can hedge part of its portfolio
denominated in foreign currency by using repo financing arrangements in the
same foreign currency. It can also hold derivative positions in options and
futures to hedge movements in the stocks in which the Company's portfolio has
an exposure.
The Company's exposure to other changes in market prices at 30 September on its
quoted equity investments and fixed interest investments was as follows:
2020 2019
GBP'000 GBP'000
Bonds 151,273 142,722
Equity* - convertible preference share and common stock 534 1,806
Investments 151,807 144,528
Cash and cash equivalents 1,546 4,623
153,353 149,151
*Equity comprised of Yew Grove REIT ordinary shares of GBP534,000. For the
previous year, Balfour Beatty 10.75p Convertible Preference of GBP1,644,000 and
CGG ordinary shares of GBP162,000.
Concentration of exposure to other price risks
The Company's investment portfolio on pages 17 to 21 is not concentrated to any
single country of domicile, however, it is recognised that an investment's
country of domicile or listing does not necessarily equate to its exposure to
the economic conditions in that country.
Other price risk sensitivity
At the year end, the Company held equity investments of GBP534,000 (2019: GBP
1,806,000). The effect of a 10% increase or decrease in the fair values
(including equity exposure through derivatives) on the profit after taxation
for the year is GBP53,000 (2019: GBP181,000). This level of change is considered to
be reasonably possible based on the observation of current market conditions.
The sensitivity analysis is based on the Company's equities and equity exposure
through derivatives at the balance sheet date with all other variables held
constant.
Liquidity Risk
This is the risk that the Company may encounter in realising assets or raising/
replacing repo financing to meet financial commitments. A lack of liquidity in
corporate bonds may make it difficult for the Company to sell its bonds at or
near their purported value compounding the liquidity pressure caused by the
requirement to roll repo financing at repo maturity dates.
Management of Liquidity Risk
The Manager, as part of the ongoing management of the Company, ascertains the
Company's cash requirements taking account of the asset purchases and sales,
income receivable from investments, running expenses and dividend payments as
well as the ongoing borrowing requirements of the Company arising from repo
financing. The Manager reviews the repo financing of the Company on a daily
basis, with a view to new repo agreements ending at a quarter end, and rolling
of existing repo agreements on a quarterly time basis. If any shortfalls could
not be met by repo financing, the Manager could potentially realise the more
liquid corporate bonds in the portfolio, taking into account the effect of this
on performance as well as the objectives of the Company.
Further details can be found in the 'Gearing Policy' section on page 12 in the
Business Review, which also discusses the risks arising from repo financing and
gearing of the investment portfolio.
Liquidity Risk Exposure
The contractual maturities of the financial liabilities at 30 September, based
on the earliest date on which payment can be required, was as follows:
2020 2019
Less More Less More
than than than than
three one three one
months year total months year total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Other payables (note 14) 1,616 - 1,616 305 - 305
Unrealised loss on forward currency
contracts (note 13) - - - 940 - 940
Performance fee provision (note 15) - - - - 306 306
Securities sold under agreements to
repurchase 29,170 - 29,170 24,161 - 24,161
30,786 - 30,786 25,406 306 25,712
Credit Risk
The Company's principal credit risk is the risk of default on the
non-investment grade debt. The Company's other main credit risk arises from the
repo financing arrangements whereby, if a counterparty failed to sell the
required assets to the Company on the repurchase date, the Company would be
left with the claim against the defaulting counterparty for the stock and, if
applicable, any margin held by the counterparty and not returned.
Credit risk also encompasses the failure by counterparties to deliver
securities which the Company has paid for, or to pay for securities which the
Company has delivered. This risk also includes transactions involving
derivatives.
The portfolio may be adversely affected if the Custodian of the Company's
assets suffers insolvency or other financial difficulties. The portfolio in
this instance covers both investments and any cash held at the Custodian.
Exposure to and Management of Credit Risk
The Company's portfolio of investments on pages 17 to 21 shows the Moody's and
Standard & Poor's ratings and an analysis of this is also shown by the graph on
page 6. Where the Manager makes an investment in a bond, corporate or
otherwise, the credit rating of the issuer is taken into account to manage the
Company's exposure to risk of default. Investments in bonds are across a
variety of industrial sectors and geographical markets, to avoid concentration
of credit risk.
The Company manages the credit risk inherent in repo financing by only dealing
with good quality counterparties whose credit-standing is reviewed periodically
by the Manager. There is a maximum limit allowed with any one counterparty, and
have a maturity tenor of three months or less. The Company has exposure to
credit risk on securities pledged under repo financing held, with four
counterparties, as follows:
2020 2019
Market Market
value of value of
Amounts Securities Net credit Amounts Securities Net credit
borrowed Pledged exposure borrowed pledged exposure to
to
Under repo under repo counter- under repo under repo counter-
financing financing party financing financing party
Counterparty Rating Location GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Barclays A1/A+ UK 5,100 5,816 716 4,339 5,218 879
CitiBank Aa3/A+ UK 6,524 8,373 1,849 3,785 4,550 765
Credit Suisse A1/A+ UK 14,352 19,080 4,728 7,286 9,305 2,019
HSBC Aa3/AA- UK 3,194 4,072 878 8,751 10,777 2,026
29,170 37,341 8,171 24,161 29,850 5,689
Net credit exposure as % of net 6.5% 4.5%
assets
Transactions in derivatives, including forward currency contracts (the exposure
to which is shown in this note, under currency risk) are entered into only with
investment banks, the credit rating of which is taken into account to manage
default risk. Failure by counterparties is mitigated by using only approved
counterparties.
As part of the Board's risk management and control monitoring, the Board
reviews the Custodian's annual control report and the Manager's management of
the relationship with the Custodian.
The risk associated with failure of the Custodian is mitigated by the
Depositary, which is ultimately responsible for safekeeping of the Company's
assets and is strictly liable for the recovery of financial instruments in the
event of loss. Additionally, the Depositary reconciles both stock and cash held
at the Custodian to Custodian records throughout the year and reports to the
audit committee at the year end.
Cash balances are limited to a maximum of GBP10 million with any one deposit
taker, with only approved deposit takers being used, and a maximum of GBP10
million for holdings in the Invesco Liquidity Funds plc - Sterling (formerly
Short Term Investment Companies (Global Series) plc) a triple A rated money
market fund.
Fair Values of Financial Assets and Financial Liabilities
The financial assets are either carried at their fair value (investments and
derivatives), or the balance sheet amount is a reasonable approximation of fair
value (due from brokers, dividends receivable, accrued income and cash and cash
equivalents). Total gains and losses on investments, represents the total
carrying amount of gains and losses on financial assets designated by the
Company as financial assets at fair value through profit and loss.
The financial liabilities are carried at amortised cost except for derivatives
which are carried at fair value.
20. Classification Under Fair Value Hierarchy
Nearly all of the Company's portfolio of investments are in the Level 2
category as defined in IFRS 7 'Financial Instruments: Disclosures'. The three
levels set out in IFRS 7 follow:
Level 1 - The unadjusted quoted price in an active market for identical assets
or liabilities that the entity can access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are
observable (i.e. developed using market data) for the asset or liability,
either directly or indirectly.
Level 3 - Inputs are unobservable (i.e. for which market data is unavailable)
for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest
level input that is significant to the fair value measurement of each relevant
asset/liability.
The valuation techniques used by the Company are explained in the accounting
policies note. There were no transfers in the year between any of the levels.
Normally, investment company investments would be valued using stock market
active prices with investments disclosed as Level 1, and this is the case for
the quoted equity investments that the Company holds. However, a majority, if
not all, of the investments are non-equity investments. These securities are
priced using evaluated prices from a third party vendor, together with a price
comparison made to secondary and tertiary evaluated third party sources.
Evaluated prices are in turn based on a variety of sources, including broker
quotes and benchmarks. As a result these investments are disclosed as Level 2 -
recognising that the fair values of these investments are not as visible as
quoted equity investments and their higher inherent pricing risk. However, this
does not mean that the fair values shown in the portfolio valuation are not
achievable at point of sale. No Level 3 investments were held in the year, or
the previous year and there have been no transfers between levels during the
year.
2020
Level 1 Level 2 Total
GBP'000 GBP'000 GBP'000
Financial assets designated at fair value through profit or
loss
Debt securities - 151,273 151,273
Equities 534 - 534
Derivative financial instruments: Currency hedges - 74 74
Total for financial assets 534 151,347 151,881
2019
Level 1 Level 2 Total
GBP'000 GBP'000 GBP'000
Financial assets designated at fair value through profit or loss
Debt securities - 142,722 142,722
Equities - convertible preference shares and common stock 162 1,644 1,806
Total for financial assets 162 144,366 144,528
Financial liabilities designated at fair value through profit or
loss
Derivative financial instruments: Currency hedges - 940 940
Total for financial liabilities - 940 940
21. Maturity Analysis of Contractual Liability Cash Flows
The financial liabilities of the Company comprise securities sold under
agreement to repurchase which are all repayable within three months of the
balance sheet date totalling GBP29,170,000 (2019: GBP24,161,000), together with
interest thereon of GBP18,000 (2019: GBP9,000). Other liabilities may include
forward currency contracts, amounts due to brokers and accruals. All are paid
under contractual terms. Forward currency contracts in place at the balance
sheet date were all due within three months. Any amounts due to brokers, are
usually payable on the purchase date of the investment plus three business
days.
22. Capital Management
The Company's total capital employed at 30 September 2020 was GBP155,160,000
(2019: GBP150,318,000) comprising repo financing of GBP29,170,000 (2019: GBP
24,161,000) and equity share capital and other reserves of GBP125,990,000 (2019:
GBP126,157,000).
The Company's total capital employed is managed to achieve the Company's
objective and investment policy as set out on pages 11 and 12.
The main risks to the Company's investments are shown in the Business Review
under the 'Principal Risks and Uncertainties' section on pages 13 to 15. These
also explain that the Company is able to gear its portfolio by borrowing in the
form of repo financing and that gearing will amplify the effect on equity of
changes in the value of the portfolio. At the balance sheet date, net borrowing
was 22% (2019: 15%). Net borrowings cannot exceed 50% of shareholders' funds.
The Company's policies and processes for managing capital were unchanged
throughout the year and the preceding year.
The Board can also manage the capital structure directly since it has taken the
powers, which it is seeking to renew, to issue and buy back shares and it also
determines dividend payments.
The Company is subject to counterparty imposed requirements with respect to the
repo financing and the terms imposed by the lenders with respect to the short
term overdraft facility. The Board regularly monitors, and has complied with,
these requirements and are unchanged from the prior year.
23. Contingent Liabilities
Contingent liabilities that the Company will or has given would be disclosed in
this note if any existed.
There were no contingencies, guarantees or other financial commitments of the
Company as at 30 September 2020 (2019: nil).
24. Related Party Transactions and Transactions with the Manager
A related party is a company or individual who has direct or indirect control
or who has significant influence over the Company. The Manager is not
considered a related party.
Under International Financial Reporting Standards, the Company has identified
the Directors as related parties. The Directors' interests and remuneration
have been disclosed on pages 29 and 30 with additional disclosure in note 6. No
other related parties have been identified.
Details of the Manager's services and fees are disclosed in the Directors'
Report on page 31, and in note 5.
25. Post Balance Sheet Events
Any significant events that occurred after the end of the reporting period but
before the signing of the statement of financial position will be shown here.
There are no significant events after the end of the reporting period requiring
disclosure.
This annual financial report announcement is not the Company's statutory
accounts. The statutory accounts for the year ended 30 September 2019 and for
the year ended 30 September 2020 received an audit report which was unqualified
and did not include a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying the report. The statutory
accounts for the financial year ended 30 September 2020 have been approved and
audited but not yet filed.
The audited annual financial report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
Registered Office, 28 Esplanade, Jersey, JE2 3QA or the Manager's website at:
www.invesco.co.uk/enhancedincome
By order of the Board
JTC Fund Solutions (Jersey) Limited
Company Secretary
Contacts:
Invesco Fund Managers Limited
Will Ellis
Kelly Nice
Tel - 020 3753 1000
END
(END) Dow Jones Newswires
November 27, 2020 02:00 ET (07:00 GMT)
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