THREADNEEDLE
Contents
Introductory Information
2
Financial Highlights
2
Dividends
2
Directors and Advisors
3
Chairman’s Statement
4
Investment Manager’s Report
5
The Portfolio
6
Sector Distribution
7
Directors’ Report
8
Directors’ Responsibilities Statement
13
Report of the Audit Committee
14
Independent Auditor’s Report
16
Statement of Comprehensive Income
19
Statement of Financial Position
20
Statement of Changes in Net Assets
Attributable to Shareholders
21
Statement of Cash Flows
22
Notes to the Financial Statements
23
31 December 2013
31 December 2012
Net asset value per share 181.33p 147.36p
Equity shareholders’ interest(1) £39.69m £30.44m
Revenue return on ordinary activities for the financial year after taxation £0.70m £0.35m
Capital return/(deficit) on ordinary activities for the financial year after taxation £7.49m £1.57m
Revenue return per ordinary share 3.30p 1.72p
Capital return/(deficit) per ordinary share 35.07p 7.59p
Dividend per ordinary share(2) 4.25p 4.15p
Share Price(3) 178.00p 146.25p
Net asset value total return(4) 28.1% 8.01%
FTSE All-Share total return 20.8% 12.30%
(1) During the year the Company purchased 140,000 ordinary shares of 10p from the market to be held in Treasury. 286,710 ordinary shares of 10p each from the shares held in Treasury were sold during the year. 24,322 shares remain in Treasury at 31 December 2013. These are held for resale and the Company does not intend to cancel these. During the period 1,083,569 ordinary shares of 10p each were issued to shareholders.
(2) The dividend figures include the declared second interim dividend for the relevant financial period. (3) Source: Daily official list mid market closing price.
(4) Source: Datastream/Threadneedle. Basis: Gross income reinvested. Dividends
In the Company’s annual report for the year ended 31 December 2012 the Chairman advised that the Board was intending to increase the proportion of income paid out in the first interim dividend in November each year. Earnings per share for the half year amounted to 2.06p (2012: 0.57p) and in line with the Board’s intention the Board declared an interim dividend of 1.80p per share (Six months ended 30 June 2012:0.95p), which was paid on 5 November 2013 to shareholders on the register at 6 September 2013. The Company intends to continue with the policy of paying a second interim dividend each year to shareholders in May of the following year in place of a final dividend. The objective is to rebalance the proportion of the dividends paid by the Company between two interim dividends, so that shareholders will receive an increased portion of the Company’s dividend distribution earlier. A second interim dividend of 2.45p per share has been declared for 2013 payable on 9 May 2014 to shareholders registered as at close of business on 14 March 2014 (2012: second interim dividend 3.15p). This brings the total dividend paid for the year to 4.25p (2012: 4.15p).
Financial Highlights
Introductory information
Threadneedle UK Select Trust Limited’s (the “Company”) ordinary shares are traded on the Main Market of the London Stock Exchange.
The Company’s share price is published daily under Investment Companies in the Share Information Section in the Financial Times. In addition it is published every Monday on the business pages of The Guernsey Press and Star and Jersey Evening Post.
Directors and Advisors
J M Le Pelley (Chairman), (Born 1949) resident in Guernsey, Non-executive Chairman. He has retired from private practice as an Advocate of the Royal Court of Guernsey and joined the board in 1983. Other directorships include AcenciA Debt Strategies Limited.
J G West FCA, (Born 1947) resident in the UK, Non-executive Director. He joined the board in 1997. He is a chartered accountant, who has spent his career in asset management. He is currently the Chairman of New City High Yield Fund Limited and a Director of a number of public and private companies, including British Assets Trust Plc and JP Morgan Income and Capital Trust Plc, Aberdeen Smaller Companies High Income Trust. He is also Chairman of Associated British Foods Pension Fund Limited and former chief executive of Lazard Asset Management Limited.
D Warr, (Born 1953) resident in Guernsey, Senior independent, non-executive Director and Audit Committee Chairman. He is a fellow of the Institute of Chartered Accountants in England and Wales and joined the Board in 2006. He is also a Non-executive Director of Breedon Aggregates Limited, Schroder Real Estate Investment Trust Limited, Acorn Income Fund Limited and Unigestion (Guernsey) Limited.
S Farnon, (Born 1960) resident in Guernsey, Non-Executive Director (appointed 12 December 2013). She is a chartered accountant and was a banking and finance Partner with KPMG Channel Islands from 1990 until 2001, Head of Audit KPMG Channel Islands and a former member of The States of Guernsey Public Accounts Committee. She is currently Vice-Chairman of The Guernsey Financial Services Commission and a non executive director of Ravenscroft Limited, HICL Infrastructure Fund Limited, Breedon Aggregates Limited, Standard Life Investments Property Income Trust Limited and Dexion Absolute Limited.
D R Maltwood, (Born 1938) resident in Jersey, Non-executive Director (resigned 31 December 2013).
G Ross Russell, (Born 1933) resident in the UK, Non-executive Director (resigned 31 December 2013).
Advisors
Secretary, Administrator and Registered Office
Kleinwort Benson (Channel Islands) Fund Services Limited Dorey Court Admiral Park St Peter Port Guernsey GY1 2HT 01481 727111 Investment Manager
Threadneedle Asset Management Limited 60 St Mary Axe London EC3A 8JQ United Kingdom 0207 464 5000 Auditor Deloitte LLP Regency Court Glategny Esplanade St Peter Port Guernsey GY1 3HW 01481 724011 Registrars
Capita Registrars (Guernsey) Limited Mont Crevelt House
Bulwer Avenue St Sampson Guernsey GY2 4LH 0870 162 3100
Brokers and advisors
Canaccord Genuity Limited 88 Wood Street
London EC2V 7QR 0207 523 8000
Bankers and Custodian
HSBC Bank plc 8 Canada Square London E14 5HQ
Review of Performance
I am pleased to report on a very successful year for your Company. Over the twelve months to 31 December 2013 the Company’s net asset value rose by 28.1% on a total return basis compared with the 20.8% total return from the FTSE All-Share Index.
This is the first full year with Threadneedle Asset Management Limited as the Investment Manager and I am sure shareholders will be pleased with the performance of the portfolio. I would encourage shareholders to read the Investment Manager’s report, as this provides a very comprehensive commentary. Since the date of Threadneedle’s appointment on 27 July 2012 to this year’s financial year end, the increase in the net asset value per share has exceeded the benchmark.
Share Price and discount
Over the year, the share price increased by 21.71% from 146.25p to 178.0p. The average premium at which the Company’s shares have traded over the year has been 0.35%. This is a very pleasing result for shareholders.
Gearing
The Company did not have any borrowing facility in place during 2013. On 26 March 2014 the Company entered into a one year £5 million loan facility with Lloyds Bank Plc. The facility will be used to gear the Company’s investment portfolio with the aim of enhancing returns to shareholders and the Board will be looking to target a level of approximately 10% to 20% of the Company’s net asset value. Interest will accrue on the loan at 1% over LIBOR and it is repayable at the option of the Company. A non-utilisation fee of 0.35% per annum is payable on any portion of the facility not drawn down
Earnings and Dividend per share
2013 was a stronger year than 2012 in terms of dividends received from underlying portfolio holdings. The revenue return per share has increased to 3.30p (2012: 1.72p). In keeping with the Company’s policy to pay a progressive dividend, the Board declared a second interim dividend of 2.45p per share on 6 March 2014 in respect of the 2013 financial year (2012: 3.20p). This brings the total dividend payable in respect of the 2013 financial year to 4.25p (2012: 4.15p). This is the first year that the Board has increased the proportion of income paid out in the first interim dividend to lessen the disparity between the dividend payments throughout the year. Shareholders should be aware that whilst the Investment Manager’s strategy generates a degree of income, the focus remains on total return rather than a specific level of income from the Company’s portfolio. The Company might need to make use of its revenue reserves to pay the second interim dividend. In addition it should be noted that scrip dividends are paid from capital reserves and thus do not impinge on revenue reserves, nor do they need to be funded from cash. The Board recognises that the dividend policy, and the ability of shareholders to elect to take a scrip alternative, remain key attractions of the Company.
Directors
In December we were pleased that Susie Farnon joined the Board. Susie is an excellent addition to the Board and brings a wealth of experience and we look forward to her input. At the year-end Derek Maltwood and Graham Ross Russell retired from the Board. I would like to thank both Derek and Graham for their years of service to your Company. They have both given invaluable service over many years and we will miss their wise counsel.
Outlook
Although emerging market led volatility has weighed on equity markets in the early part of 2014, the Investment Manager remains positive on the longer-term prospects for UK equities, as the market benefits from global economic recovery, with more than 75% of investee companies’ earnings coming from overseas. The Company’s portfolio continues to focus on well-managed, fundamentally strong businesses that the Investment Manager believes have realistic potential to deliver positive earnings surprises, helped by selected exposure to growing global markets.
Annual general meeting
In addition to the business regularly proposed by the Board to shareholders at each annual general meeting, the Board is also seeking shareholder authority to issue additional shares to Canaccord Genuity Limited (“Canaccord”), the Company’s corporate broker, at their prevailing net asset value on the basis that Canaccord will on admission sell all these shares back to the Company on market at the same price, free of commission, to be held in treasury.
The shares to be held in treasury will be used by the Company to satisfy demand under the scrip dividend scheme and to be issued into the market for general corporate purposes. Unless the proposal is approved, the Company may need to issue new shares for such purposes; the use of treasury shares will be more efficient and cost effective. In particular, the Company can be more responsive in taking advantage of market demand for its shares and save on the significant fixed costs incurred on each occasion that a further issue of shares is made.
The sale of treasury shares into the market for cash cannot be made at a discount to NAV and will be subject to pre-emption rights unless the Company has capacity under shareholder authority resolution 8 to sell such shares without regard to pre-emption. For the avoidance of doubt, pre-emption rights do not apply in respect of the shares issued out of treasury to satisfy scrip. The pricing of treasury shares used for scrip dividends will be at the average of the closing mid market price over the five business days commencing on the ex-dividend date for the relevant dividend, which is on the same basis that new shares are issued to satisfy scrip dividends. Under the Companies Law and the Articles, the Company may only hold a maximum of up to 10 per cent. of the total number of shares in issue at any time in treasury.
These proposals require the approval of shareholders and are therefore conditional on the passing of the resolutions which will be proposed at the annual general meeting.
JM Le Pelley
Chairman 10 April 2014
Inve stment Manager’s Report
Simon Brazier(Portfolio Manager) Market Background
Like most other developed equity markets, the UK stock market performed robustly in 2013, with the FTSE All-Share index up more than 20% in sterling total return terms. The main drivers of this strong performance were improvement in global economic indicators and more importantly the sustained provision of liquidity in the form of quantitative easing. M&A also provided some support with significant deals including Vodafone’s sale of its stake in Verizon Wireless. Shareholder-friendly activity, such as share buybacks, provided a further boost for the FTSE.
The UK’s economic data showed a steady improvement over the year, with GDP growth reaching 1.9% in 2013, the strongest rate of expansion since 2007. There was also a marked revival in the housing market, which was invigorated by government lending incentives such as ‘Help to Buy’, although muted levels of business investment and sluggish growth in the eurozone raised some questions over the sustainability of the recovery. On the policy front, the Bank of England kept interest rates on hold at 0.5%, while new Bank of England Governor Mark Carney introduced the concept of ‘forward guidance’, a commitment to keep interest rates low as long as certain economic preconditions are met. However, the rapid recovery in the UK economy led to speculation that the Bank would have to recast forward guidance. (This was subsequently confirmed in February 2014 when the Bank abandoned the link between the unemployment rate and monetary policy.)
The best-performing sectors over the year were telecommunications, consumer discretionary and industrials. The materials sector was by far the weakest area of the market and the only sector to produce a negative total return for the year. Energy, consumer staples and utilities also underperformed.
Performance Review
The Net Asset Value significantly outperformed the FTSE All-Share index in 2013. This outperformance stemmed from favourable sector allocation and positive stock selection, with the latter adding the most value.
At the sector level, the portfolio benefited from overweight positions in industrials and consumer discretionary, both of which outperformed in 2013. The underweight in materials was also a positive as the sector was affected by Chinese GDP growth concerns and fears that some mining companies have been too slow to cut capacity and capital expenditure. The underweight position in telecoms was detrimental, however. Stock selection was positive in all sectors except energy, healthcare and utilities. It was particularly strong in the materials and financial sectors, and also worked well in industrials and both of the consumer sectors.
At the security level, significant positive contributors over the year included the holding in BT Group. The fixed-line telecom operator delivered strong results, with positive updates on its fibre service and demand for BT Sport. Our overweight position in the stock helped to offset the effect of not holding Vodafone, which performed strongly on the sale of its stake in Verizon Wireless. The recovery in the housing market helped the portfolio’s position in Breedon Aggregates, which produces construction materials, as well as the holdings in house builders Persimmon and Bellway. Other strong performers included auto and aero parts maker GKN and support services firm Berendsen; both posted good results.
Elsewhere, the overweight position in Daily Mail & General Trust added value, as the media group announced strong results, while the holding in budget airline easyJet was boosted by growing passenger numbers. Booker, the food wholesaler, benefited from optimism over its growth prospects after its acquisition of the Makro chain of cash-and-carry stores. The portfolio participated in IPOs such as Royal Mail, which performed strongly. The biggest stock-level negatives came from not holding some of the better-performing FTSE 100 stocks such as Vodafone, Lloyds Banking Group and Prudential. Within the portfolio, First Quantum Minerals detracted from returns as the copper price weakened. Other notable detractors included Tullow Oil, which was affected by disappointing drilling results.
Outlook
Fresh signs are emerging that the trading environment is improving in the UK, with many of the company executives we meet now also noticing ‘green shoots’ in the eurozone.
We believe that the outlook remains encouraging at the UK company level and continue to focus on well-managed, fundamentally strong businesses that we believe have realistic potential to deliver positive earnings surprises, helped by selected exposure to growing global markets. Many of our highest-conviction holdings also offer scope to support total returns to shareholders through attractive and sustainable levels of dividend payouts. Nevertheless, although corporate profits are growing and companies are increasingly putting balance-sheet cash to use, we remain vigilant to the risk that rising investor expectations have also created more scope for profit warnings.
Simon Brazier Portfolio Manager
Threadneedle Asset Management Limited (“Threadneedle”) 31 March 2014
Company Market Value £’000 1 BP 1,693 2 BT Group 1,441 3 GlaxoSmithKline 1,405 4 AstraZeneca 1,065 5 Unilever 1,002 6 Imperial Tobacco 956
7 Royal Dutch Shell 908
8 First Quantum Minerals 902
9 Breedon Aggregates 868 10 Booker Group 846 11 BG Group 842 12 Rio Tinto 829 13 Johnson Matthey 793 14 Sage Group 788 15 Merlin Entertainment 761
16 Legal and General 747
17 Reckitt Benckiser Group 737
18 HSBC Holdings 709
19 DCC 703
20 Smith (DS) 699
21 Smith & Nephew 686
22 Smiths Group 648
23 Daily Mail & General 630
24 Reed Elsevier 630
25 London Stock Exchange Group 630
26 GKN 620 27 Melrose Industries 619 28 Compass Group 601 29 Signet Jewelers 590 30 Wolseley 588 31 AZ Electronic Materials 573 32 Berendson 555
33 Rolls Royce Holdings 555
34 British American Tobacco 541
35 Barclays 534
36 Wood Group (John) 493
37 Carnival 463
38 SVG Capital 425
Company Market Value
£’000 39 Royal Mail 406 40 Essentra 397 41 Glencore Xstrata 396 42 Derwent London 394 43 Aviva 392 44 Rentokil 384 45 Bellway 383 46 Diageo 379 47 Tullow Oil 374 48 Crest Nicholson 374 49 St James’s Place 364 50 AMEC 352 51 Experian Group 349 52 Old Mutual 348 53 SABMiller 347 54 Pearson 338 55 Electrocomponents 333 56 Stagecoach Group 325 57 easyJet 307 58 CRH 307 59 Schroders 307 60 IMI 303 61 ITE Group 297 62 De La Rue 295 63 Wetherspoon (J.D) 285
64 RSA Insurance Group 283
65 PZ Cussons 270 66 Standard Chartered 262 67 Headlam Group 232 68 Ultra Electronics 229 69 Grainger 205 70 G4S 185 71 Persimmon 185 72 Berkeley Group 47 73 Acquisition 1234 3 Total Valuation 39,712
Total Total
2013 2012
Sector Classification % %
Oil and Gas
Oil and gas producers 9.6 10.7
Oil Equipment, Services and Distribution 2.2 3.0
11.8 13.7
Industrials
Construction and materials 3.0 1.6
Aerospace and defence 2.0 2.2
General industrials 3.4 2.5 Industrial engineering 2.3 3.3 Support services 9.5 9.9 Industrial transportation 1.0 – 21.2 19.5 Basic Materials Chemicals 3.4 2.6 Mining 5.4 5.1 8.8 7.7 Consumer goods
Automobiles and parts 1.5 1.5
Beverages 1.8 2.0
Food Producers 2.5 2.7
Household goods and home construction 5.0 5.2
Tobacco 3.8 3.7
Personal goods 0.7 –
15.3 15.1
Consumer Services
General retailers 1.5 0.8
Travel and leisure 6.9 7.2
Food and drug retailers 2.1 3.2
Media 4.8 6.2
15.3 17.4
Health Care
Pharmaceuticals and biotechnology 6.2 5.8
Health care equipment and Services 1.8 1.3
8.0 7.1
Telecommunications
Fixed line telecommunications 3.6 3.1
3.6 3.1
Utilities
Gas, Water and Multi utilities – 2.1
– 2.1
Technology
Software and computer services 2.0 1.9
2.0 1.9
Financials
Banks 3.8 4.5
Financial services 3.4 1.5
Real estate investments & services 0.5 1.5
Real estate investment trusts 1.0 –
Non-life insurance 0.7 0.6
Life assurance 4.7 3.6
14.1 11.7
Net current (liability)/assets (0.1) 0.7
Net assets 100.00 100.00
Note: The distribution of investments is based on the valuations at 31 December 2013 and at 31 December 2012. All of the investments are listed or quoted on the London Stock Exchange except for Acquisition 1234.
Directors’ Report
The Directors present their report and the annual financial statements for the year ended 31 December 2013 with comparatives for the year ended 31 December 2012. The Directors confirm that the Annual Financial Report taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
Principal activities
The principal activity of the Company during the year was that of an investment company. The Company is an authorised closed-ended investment scheme regulated by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended. The Company’s ordinary shares have been admitted to the Official List of the UK Listing Authority with a premium listing and to trading on the London Stock Exchange’s Main Market for listed securities.
Name change
At the Annual General Meeting held on 15 August 2013 the Directors were authorised to apply to the Registrar of Companies to change the registered name of the Company to Threadneedle UK Select Trust Limited. The Registrar of Companies confirmed the name change with effect from 27 August 2013.
Revenue and dividend
The statement of comprehensive income set out on page 19 shows a profit for the year amounting to £8,195,000 (2012: £1,919,000). The Directors have declared a second interim dividend of 2.45p which, together with the first interim dividend of 1.80p, makes a total of 4.25p for the year (2012: 4.15p). The second interim dividend will be paid on 9 May 2014 to ordinary shareholders on the register on 14 March 2014 and a scrip dividend alternative will be offered.
Assets
At the year end the net assets attributable to the ordinary shares were £39,691,000 (2012: £30,443,000). Based on this figure the net asset value of an ordinary share was 181.33p (2012: 147.36p).
Share capital
During the year 140,000 issued ordinary shares of 10p each were purchased by the Company at a total cost of £232,225 and held in Treasury. The authority allowing the Company to purchase its own shares expires at the end of the 2014 annual general meeting and allows the purchase of a maximum of 3,282,505 shares, representing 14.99% of the number of shares in issue on 15 August 2013, being the date of the 2013 annual general meeting. The Board will seek this authority again at the 2014 annual general meeting. During the year 286,710 ordinary shares of 10p each were issued from the Treasury reserve arising from elections by ordinary shareholders to receive shares in lieu of cash dividends (2012: 316,846) thereby resulting in a total of £475,108 (2012: £384,933) being capitalised. In addition, 1,083,569 new ordinary shares were issued to investors on 4 June 2013 at 1.72p per share, being a premium of 1.4% to the prevailing net asset value, resulting in an additional £1,863,739 being capitalised.
Directors
Substantial shareholdings
At 31 March 2014, the following held a notifiable interest in the Company’s voting rights:
31 March 31 December
2014 2013
Ameriprise Financial Inc 22.21% 22.21%
JM & Mrs AE Le Pelley 10.06% 10.06%
Mr G Green 6.63% 6.63%
At 31 March 2014, there has been no other notifiable interest in the Company’s voting rights reported to the Company.
The Directors are responsible for the determination of the Company’s investment objectives and policies and have overall responsibility for the Company’s activities. The Directors have put procedures in place to ensure that the Company meets current corporate governance requirements. Details of the current Board composition, including their roles and other significant commitments, are provided on page 3.
None of the Directors has a contract of service with the Company and, no contract or arrangement subsisted during or at the end of the year in which any directors was materially interested and which was significant in relation to the Company’s business.
Furthermore, they are not entitled to any minimum period of notice or to compensation in the event of their removal as a Director.
The Directors who served on the Board during the year, together with their beneficial interests and those of their spouses and dependent children at 31 December 2013, were as follows:
2013 2012
Shares Shares
J M Le Pelley (Chairman) 2,203,579 2,138,544
J G West 34,263 33,900
D Warr (Audit Committee Chairman) 115,572 112,162
S Farnon * 48,000 N/A
D R Maltwood** 3,880 3,766
G Ross Russell** 368,469 357,596
* Appointed as a Director of the Company with effect from 12 December 2013. ** Resigned as Directors of the Company with effect from 31 December 2013.
There have been no changes in the Directors’ interests in the shares of the Company between 31 December 2013 and 31 March 2014.
Share buy back policy
The Board intends to use its share buyback powers with the objective of minimising any discount at which the Company’s shares trade to their underlying net asset value in normal market conditions. However, shareholders should note that the Board is not bound to undertake share buybacks and will do so entirely at its own discretion, bearing in mind, inter alia, available cash, the remaining shareholder authority the Company has to conduct share buybacks and the ability of the Company to satisfy the applicable statutory solvency tests or any other company law requirements. There is no guarantee that the Board will decide to exercise its buyback powers in any particular case or that it will be successful in achieving its objective.
Any shares repurchased by the Company will normally be held in treasury to be used, inter alia, to satisfy elections under the Company’s popular scrip dividend scheme.
Gearing
On 26 March 2014 the Company entered into a one year £5 million loan facility with Lloyds Bank Plc. The facility will be used to gear the Company’s investment portfolio with the aim of enhancing returns to shareholders and the Board will be looking to target a level of approximately 10% to 20% of the Company’s net asset value. Interest will accrue on the loan at 1% over LIBOR and it is repayable at the option of the Company. A non-utilisation fee of 0.35% per annum is payable on any portion of the facility not drawn down.
Corporate governance a) Statements of compliance
The UK Listing Authority’s Listing and Disclosure and Transparency Rules require all overseas companies with a premium listing (which includes the Company) to include a corporate governance statement in its directors’ report, which must contain a reference to the corporate governance code to which the Company is subject and / or the corporate governance code which the Company may have voluntarily decided to apply and / or all relevant information about the corporate governance practices applied beyond the requirements under national law.
The Association of Investment Companies (formerly Association of Investment Trust Companies), of which the Company is a member, has published its Code of Corporate Governance for Investment Companies (the “AIC Code”) and the Corporate Governance Guide for Investment Companies dated February 2013 (the “AIC Guide”), which incorporates the FRC’s UK Corporate Governance Code, the AIC Code and certain requirements of the UKLA Listing Rules. The UK’s Financial Reporting Council (the “FRC”) has confirmed that “it remains the FRC’s view that by following the AIC Corporate Governance Guide investment company boards should fully meet their obligations in relation to the UK Corporate Governance Code and Paragraph LR 9.8.6 of the Listing Rules.”
The Board has considered the principles and recommendations of the AIC Guide. The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Corporate Governance Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to the Company. The Board considers that reporting against the principles and recommendations of the AIC Code will provide better information to shareholders.
The Directors believe that the Company has complied with the provisions of the AIC Code where appropriate, and that it has complied throughout the year with the provisions where the requirements are of a continuing nature. On 30 September 2011, the Guernsey Financial Services Commission published its Finance Sector Code of Corporate Governance (the “GFSC Code”), which came into effect on 1 January 2012. The GFSC Code provides a framework which applies to all companies in the regulated finance sector in Guernsey. The GFSC Code deals with governance issues under several topics including the Board, accountability, risk management, disclosure and reporting, remuneration and shareholder relations. Companies which report against the AIC Code are deemed to meet the requirements of the GFSC Code.
b) The Board
The Company is led and controlled by a Board comprising non-executive Directors, all of whom have wide experience and are considered to be independent. The Board believes that it is in the shareholders’ best interests for the Chairman to be the point of contact for all matters relating to the governance of the Company.
Mr D Warr has been appointed as the senior independent non-executive Director for the purpose of the AIC Code. The appointment of Directors is considered by the Board who sit on the Nomination Committee. The Board has reviewed its performance and composition, as well as that of its committees and individual Directors, and is content that, following the changes made in December 2013, no further changes to the composition of the Board are necessary or desirable, as it is considered that the performance of all Directors is satisfactory and that they have demonstrated commitment to their roles. Biographical information on each Director is included on page 3. The Chairman and Mr West have served on the Board for more than nine years. Mr Warr joined the Board in 2006 and Ms Farnon joined the Board in 2013. Whilst the AIC Code recommends that non-executive directors serving more than nine years should be subject to annual re-election, the Articles of Incorporation stipulate that one third, or the number nearest to but not exceeding one third, of the Directors shall retire and offer themselves up for reappointment at each annual general meeting. The Board does not consider it to be in the best interests of the Company to require the majority of Directors to stand for re-election annually and has chosen therefore to adopt best practice in relation to retirement by rotation of two Directors. Therefore two Directors will stand for re-appointment at each annual general meeting, so that the shareholders will have the opportunity to consider each Director’s continuing involvement with the Company every second year.
Following the evaluation of the performance of the Board, its committees and individual Directors, it is considered that the performance of all Directors who are to retire and offer themselves for re-appointment continues to be effective and that they have demonstrated commitment to their roles. In accordance with this policy Mr Le Pelley will at the Company’s forthcoming annual general meeting retire and, being eligible, offer himself for re-election in accordance with Article 21 of the Articles of Association of the Company. In addition, as Ms Farnon was appointed during the year by the Directors, she also will retire and, being eligible, offer herself for re-election.
The Board meets regularly, normally quarterly, with additional meetings should it be considered appropriate to discuss specific issues. The table below lists the number of Board and Committee meetings attended by each Director during the year ended 31 December 2013.
Scheduled Board Other Board Audit Committee Nomination Committee Number of Meetings 4 7 2 1 JM Le Pelley (Chairman) 4 7 2 1 J G West 4 – 2 1 D Warr (Audit Committee Chairman) 4 6 2 1 S Farnon* 1 – – – DR Maltwood** 3 2 2 – G Ross Russell** 4 – 1 1
* Appointed as a Director of the Company with effect from 12 December 2013. ** Resigned as Directors of the Company with effect from 31 December 2013.
In 2012 and 2013 the Company did not employ any personnel.
Directors’ Report
c) Committees, Board Composition and Succession Planning
The Board has established an Audit Committee, a separate report being provided on page 14, and the Board has also established for itself a Nomination Committee. On 12 December 2013 the Board created a Management Engagement and Remuneration Committee, which will meet when necessary, usually at least annually. The Terms of Reference for all Committees are available for inspection at the Company’s registered office during normal business hours.
In addition to conducting an evaluation on the composition of the Board, in terms of size, skills and expertise, a formal and rigorous evaluation of the Board’s own performance, as well as its Committees, is undertaken annually by the Nomination Committee. The Nomination Committee consists of all non-executive Directors.
The objectives of Board planning in terms of its composition and succession are to ensure that the Board is comprised collectively, of fit and proper individuals with the capability to direct the Company in the best interest of its shareholders.
The Nomination Committee and the Board have reviewed the Board’s performance and composition, as well as that of its Committees and individual Directors. Messrs Maltwood and Ross Russell resigned from the Board, with the effect from 31 December 2013. Ms S Farnon was appointed as an independent non-executive Director on 12 December 2013. Ms Farnon has also been appointed to serve as a member on the Audit Committee, Nomination Committee and the Management, Engagement and Remuneration Committee. Directors’ fees are recommended by the full Board. The emoluments of the Directors for the year were as follows:
2013 2012 Fees Fees £ £ JM Le Pelley (Chairman) 25,000 25,000 DR Maltwood 20,000 20,000 G Ross Russell 20,000 20,000 JG West 20,000 20,000
D Warr (Audit Committee Chairman) 22,500 22,500
S Farnon 1,095 –
108,595 107,500
The figures above represent emoluments earned as Directors during the relevant financial year which are paid quarterly in arrears. The Directors receive no other remuneration or benefits from the Company other than the fees stated above. The directors are paid out of pocket expenses for attendance at Board meetings.
With effect from 1 January 2014, the Directors fees were increased to £30,000 for the Chairman and £24,000 for other Directors. In addition the Chairman of the Audit Committee and the Risk Committee will each receive an additional £3,000.
d) Management Engagement and Remuneration Committee
The Management Engagement and Remuneration Committee consists of all non-executive Directors. The Committee has been delegated the responsibility for monitoring and reviewing and making recommendations to the Board on all aspects of the management and administration of the
Company’s assets and corporate records and other ancillary services provided by each of Threadneedle Asset Management Limited, Kleinwort Benson (Channel Islands) Fund Services Limited, Canaccord Genuity Limited, Capita Registrars (Guernsey) Limited and HSBC Bank Plc, as well as any other service providers. The Management Engagement and Remuneration Committee also makes recommendations to the Board on any variations to the terms of the Investment Management Agreement and any agreement with any other service provider which the Committee considers necessary or desirable.
The Committee is authorised to seek any information it requires from any employee or agent of the Company in order to perform its duties. All agents of the Company are directed to co-operate with any reasonable request made by the Committee.
The Committee is authorised by the Board to obtain, at the Company’s expense, outside legal or other professional advice on any matters within its terms of reference if it considers necessary.
e) Risk Committee
The Board has decided to establish a Risk Committee as part of its preparation for complying with the Alternative Investment Fund Managers Directive (“AIFMD”).
As mentioned in the Audit Committee section of the Annual Financial Report, the Board’s intention is to register as a self-managed AIFM with the Financial Conduct Authority (“FCA”) to enable it to continue marketing its shares within the United Kingdom beyond 22 July 2014.
The Risk Committee will assume responsibility for certain of the duties currently undertaken by the Audit Committee.
f) Relations with shareholders
In conjunction with the Board, the broker keeps under review the register of members of the Company. Potential investors are also contacted by the Investment Manager.
All shareholders are encouraged to participate in the Company’s annual general meeting. All Directors normally attend the annual general meeting, at which shareholders have the opportunity to ask questions and discuss matters with the Directors and the Investment Manager.
It is recognised that the AIC Code requires notice of annual general meetings to be dispatched at least 21 clear days before the meeting. The Company will continue to comply with this Code provision in 2014.
Accountability and audit a) Statement of going concern
In the opinion of the Directors the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the financial statements have been prepared using the going concern basis. The Directors have arrived at this opinion by considering, inter alia, the following factors:
the Company has sufficient liquidity to meet all on-going expenses Although the Company is in a net current liability position of £20,900 (excluding investments) at the year end the Board regularly reviews the cash flow of the Company and is confident that the Company will have sufficient resources to meet all future obligations.
Directors’ Report
Directors’ Report
(continued)
the portfolio of investments held by the Company materially consists of listed investments which are readily realisable and therefore the Company will have sufficient resources to meet its liquidity requirements; and as at 31 December 2013, the Company had no external borrowings and
therefore was under no obligation to repay any borrowing facilities. As at the date of signing the Annual Financial Report the Company had in place a one year £5 million loan facility with Loyds Bank Plc, which has not yet been utilised.
b) Internal control
The Directors acknowledge that they are responsible for establishing and maintaining the Company’s system of internal control and reviewing its effectiveness. Internal control systems are designed to manage rather than eliminate the failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. They have therefore established an ongoing process designed to meet the particular needs of the Company in managing the risks to which it is exposed, consistent with the guidance provided by the AIC. Such review procedures have been in place throughout the full financial year and up to the date of the approval of the financial statements.
The Board has contractually delegated to Threadneedle the management of the Company’s investments. The management agreement between the Company and its Investment Manager sets out the matters over which the Investment Manager has authority and the limits above which Board approval must be sought. Other matters reserved for the approval of the Board include the report and accounts, communications with shareholders and decisions on strategy.
The safe custody of the Company’s investments is managed by HSBC Plc and Kleinwort Benson (Channel Islands) Fund Services Limited is contracted to provide the Company’s administration, secretarial and accounting functions and Capita Registrars (Guernsey) Limited, its registration function. The Management Engagement and Remuneration Committee will regularly review the performances of the services provided by these companies. Threadneedle and Kleinwort Benson (Channel Islands) Fund Services Limited maintain their own systems of internal controls, on which they have reported to the Board. The Company, in common with other investment companies, does not have an internal audit function.
The systems are designed to ensure effectiveness and efficient operations, internal control, and compliance with laws and regulations. In establishing the systems of internal control regard is paid to the materiality of relevant risks, the likelihood of costs being incurred and costs of control. It follows therefore that the systems of internal control can only provide reasonable but not absolute assurance against the risk of material misstatement or loss. There are well established budgeting and forecasting procedures in place and reports are presented to the Board detailing variance against budget and prior year and other performance data. The effectiveness of the internal control systems is reviewed annually by the Board and the Audit Committee. The Audit Committee has a discussion annually with the auditor to ensure that there are no issues of concern in relation to the audit opinion on the accounts and, if necessary, representatives of the Investment Manager would be excluded from that discussion.
The Board regularly takes steps to embed internal control and risk management further into the operations of the Company and to deal with areas of improvement which come to the Investment Manager’s and the Board’s attention.
Investment objective and policy
The Company’s investment objective is to provide shareholders with a total return in excess of the total return on the FTSE All-Share Index, together with a progressive dividend policy.
The Company is permitted to invest in any security listed or quoted on any UK stock exchange provided that no less than 80 per cent of its gross assets at the time an investment is made are invested in constituents of the FTSE All-Share index.
There are no minimum or maximum limits on the number of investments in the portfolio but it is expected that the portfolio will generally comprise shares and securities in 50 to 90 companies. The Company seeks to manage risk in part through heeding the following investment restrictions:
The top five holdings in the Company’s portfolio may not exceed 40 per cent of the total value of the portfolio.
The top three sectors represented in the portfolio may not exceed 50 per cent of the total value of the portfolio.
The securities of no one company may represent more than 10 per cent of the value of the Company’s portfolio measured at the time of acquisition and subsequently, when additions are made to the holding.
The Company will not hold more than 5 per cent of the issued share capital (or voting shares) in any one company.
While the Company may hold shares in other investment companies (including investment trusts), the Company will not invest more than 10 per cent., in aggregate, of the value of its total assets in other listed closed-ended investment funds (save to the extent that such closed-ended investment funds have published investment policies to invest no more than 15 per cent. of their total assets in such other listed closed-ended investment funds).
Cash
The Company intends to be fully invested in normal market conditions but may hold up to 20 per cent of net asset value in cash on deposit (or in short-term money market instruments) during periods in which the Investment Manager believes markets are overvalued or expects them to fall.
Gearing
Gearing may be used selectively in order to leverage the Company’s portfolio to enhance returns where the Board in conjunction with the Investment Manager considers it appropriate to do so.
Derivatives
Subject to the Board giving its prior approval, the Investment Manager is permitted to invest in options and other derivatives for the purposes of efficient portfolio management only.
Investment Process and implementation of investment policy
The Investment Manager’s investment approach is driven by stock selection, with a focus on risk and reward. Reward is derived from valuation and profit opportunity. In terms of risk, it is the level of business risk rather than index weight that determines position size in the portfolio, with portfolio
risk minimised through diversification. Considerable emphasis is placed on identifying companies which are well managed, have sustainable franchises, strong balance sheets and cash flow generation, and which trade on attractive valuations relative to peers and history.
During the year under review, the assets of the Company were invested in accordance with the Company’s investment policy. Further details of the performance of the Company and the extent to which the Company’s objectives were achieved can be found in the Chairman’s Statement and Investment Manager’s Report.
The Company’s portfolio consisted of 73 investments as at 31 December 2013. As at 31 December 2013, the portfolio consists primarily of investments issued in the United Kingdom. The top 10 holdings comprise 27.93% of total net assets (2012: 27.08%).
The Company’s gearing stood at nil% as at 31 December 2013 (2012: nil%).
Financial risk profile
The Company’s financial instruments comprise investments, cash and various items such as debtors, creditors etc that arise directly from the Company’s operations. The main purpose of these instruments is the investment of shareholders’ funds.
Market price risk
The main risk arising from the Company’s financial instruments is market price risk.
In accordance with the Company’s investment objectives, the Company does not normally hedge against its exposure to market price risk.
The investment strategy of the Company has been delegated to the Company’s Investment Manager, Threadneedle under an agreement dated 27 July 2012. The Investment Manager operates under agreed parameters and the Board monitors its performance on a regular basis.
Liquidity risk
As set out above and subsequent to the year end, the Company has entered into a one year £5 million loan facility with Lloyds Bank Plc. The Company’s assets comprise securities that can be readily realised to meet its obligations. As a result the Company is able to realise its investments in these instruments at an amount close to their fair value in order to meet its liquidity requirements.
Interest rate risk
The Company’s interest rate sensitive assets and liabilities mainly comprise cash at bank and any bank loan. The cash at bank and bank loan facility are subject to floating rates and any loan facility is considered to be part of the investment strategy of the Company. No other hedging is undertaken in respect of this interest rate risk.
Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign exchange rates.
The Company’s foreign currency risk in 2013 arose from the investment portfolio including cash and was minimal as it was principally Sterling denominated. No hedging was undertaken in respect of this foreign currency exposure. The Company had no significant exposure to foreign currencies as at 31 December 2013 (see note 18).
The Alternative Investments Fund Managers Directive (‘AIFMD’)
The AIFMD, which was required to be transposed by EU Member States into national law by 22nd July 2013 seeks to regulate alternative investment fund managers (‘AIFM’) established in the EU and prohibits such managers from managing any alternative investment fund (‘AIF’) or marketing shares in such funds to investors in the EU unless an AIFMD authorisation is granted to the AIFM.
The UK has implemented the AIFMD in a way that allows the continuation of certain activities after the date of transposition, provided that the authorisation conditions are met within a year after that date (the ‘Transitional Period’). The Company has the benefit of the Transitional Period and has decided that it will be a self-managed AIF and register accordingly with both the Financial Conduct Authority in the UK and the Guernsey Financial Services Commission prior to the 22 July 2014. In deciding on the self-managed option the Board is mindful that the reporting requirements of so doing are less than would be the case if the Investment Manager was appointed the AIFM and therefore considers this approach to be both practical and cost effective.
Subject to registration with the FCA the Company will be able to continue marketing its shares into the UK beyond 22 July 2014.
The Board is implementing the necessary measures to facilitate compliance with AIFMD which includes the establishement of the Risk Committee. It is intended that the Risk Committee will specifically monitor the risks pertaining to the investment portfolio and strategy. This Committee will assume certain of the responsibilities previously undertaken by the Audit Committee.
Auditor
Deloitte LLP has expressed its willingness to continue in office as auditor and a resolution to re-appoint it will be proposed at the forthcoming annual general meeting.
Disclosure of information to the auditor
At the date of approval of the financial statements, the Directors confirm that:
so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware; and
they have taken all steps they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of section 249 of The Companies (Guernsey) Law, 2008. By order of the Board
JM Le Pelley D Warr
10 April 2014
Directors’ Report
Directors’ Responsibilities Statement
The Directors are responsible for preparing the Annual Financial Report in accordance with applicable law and regulations.
The Companies (Guernsey) Law, 2008 (the “Companies Law”) requires the Directors to prepare Financial Statements for each financial year. Under the Companies Law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (“IFRSs”).
Under the Companies Law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors:
properly select and apply accounting policies;
present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the 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 are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Law. 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.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in Guernsey and the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
To the best of the knowledge of the Directors:
The financial statements, which have been prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and The Chairman’s Statement, Investment Manager’s Report and Notes to the Financial Statements are incorporated herein by reference and include a true and fair review of the development and performance of the Company and a description of the principal risks and uncertainties that it faces, as required by DTR 4.1.8 of the Disclosure and Transparency Rules. By order of the Board
JM Le Pelley D Warr
Role and responsibility
This is the report of the Audit Committee which has been prepared with reference to the AIC Code and describes the work of the Committee in discharging its responsibilities.
The Company has established an Audit Committee in compliance with the Financial Conduct Authority’s (FCA’s) Disclosure and Transparency Rule 7.1 and the AIC Code, which reports formally twice each year to the main Board. It has formally delegated duties and responsibilities within written terms of reference which are reviewed and reapproved annually.
The Audit Committee is mandated by the Board to investigate any activity within its terms of reference and to consult externally with legal or other independent professional advisors, as required, to ensure that the Committee adequately discharges its duties and responsibilities, which include: a) considering the appointment of the external auditor, its letter of
engagement, the audit fee, and any questions of resignation or dismissal of the external auditor;
b) reviewing from time to time the cost effectiveness of the audit and the independence and objectivity of the external auditor;
c) developing and implementing policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and report to the Board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken;
d) reviewing the Company’s half-yearly and annual financial reports, not excepting the full Board’s responsibility over the accounts, focusing particularly on:
Any changes in accounting policies and practice; Major judgmental areas;
Significant adjustments arising from the audit; The going concern assumption;
Compliance with accounting standards (and in particular accounting standards adopted in the financial year for the first time);
Compliance with applicable legal and regulatory requirements (including inter alia, those of the Financial Conduct Authority, the London Stock Exchange, the Guernsey Financial Services Commission and The Companies (Guernsey) Law, 2008, as amended);
A risk management review; and
Assessing the effectiveness of internal controls
e) discussing any problems and reservations arising from the final audit, and any other matters which the auditor may wish to discuss (in the absence of the Company’s agents where necessary);
f) reviewing the external auditor’s Report to the Audit Committee and determining whether any changes have to be implemented as a result; g) reviewing, on behalf of the Board, the Company’s system of internal control
(including financial, operational, compliance and risk management) and make recommendations to the Board;
h) reviewing from time to time the appropriateness of internal audit reporting by the Company’s agents;
i) considering the major findings of internal investigations and management’s response;
j) reviewing the Company’s operating, financial and accounting policies and practices;
k) considering any other matters specifically delegated to the Committee by the Board from time to time; and
l) confirming to the Board as to whether the annual financial report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
The committee may review any matter that it considers appropriate not withstanding that it is not specifically mentioned in the above list of duties. Where non-audit services are provided by the auditor, these engagements are pre-approved by the Audit Committee to ensure that the auditor’s independence and objectivity is not breached. No non-audit services were provided in the year ended 31 December 2013 (2012: £nil).
Composition
Mr Warr is the Chairman of the Audit Committee and Mr West and Ms Farnon are additional members serving on the Committee. In line with what has been considered best practice Mr Le Pelley stepped down from the Audit Committee on 12 December 2013. Only independent non-executive Directors serve on the Audit Committee and the members do not have any links with the Company’s external auditor. They are also independent of the management teams of the Investment Manager, administrator and all other service providers. The Audit Committee meets formally no less than twice a year in Guernsey and on an ad hoc basis if required. In addition, it meets the external auditor at least twice a year. The membership of the Audit Committee and its terms of reference are kept under review.
Significant issues considered regarding the Annual Financial Report
In discharging its responsibilities, the Audit Committee has specifically considered the following significant issues relating to the financial statements:
Significant issue How the issue was addressed
Valuation of the Company’s Investments
The Board reviews the portfolio valuations on a regular basis throughout the year. The Board meets with the Investment Manager at least quarterly and seeks assurance that the pricing basis is appropriate and in line with relevant accounting standards as adopted by the Company and that the carrying values are materially correct.
The Company’s net asset value is calculated on a daily basis by the Administrator, Kleinwort Benson (Channel Islands) Fund Services Limited and published in the Financial Times.
Report of the Audit Committee
(continued)
Significant issue How the issue was addressed
Ownership of the Company’s Investments
The Company’s investments are held in safe custody by HSBC Bank Plc. The Board monitors the performance of the Custodian and also considers the security of the investments held by the Custodian.
The Investment Manager has procedures to ensure that investments can only be made to the extent that the appropriate contractual and legal arrangements are in place to protect the Company’s assets. The Administrator reconciles the investments held according to their records with the Custodian’s records. The Board satisfies itself with these procedures by reviewing the internal control documents of the Administrator. The Board also has regular meetings with the Investment Manager where they discuss the Company’s investments amongst other issues. Accuracy of
calculation of investment management and performance fees
The management fee and any performance fee is calculated in accordance with the contractual terms in the investment management Agreement by the Administrator, Kleinwort Benson (Channel Islands) Fund Services Limited. These calculations are prepared on a daily basis as part of the daily net asset value calculation. The Board monitors the investment management fee and any performance fee on an ongoing basis. The standard schedule used to calculate the performance fee has been created by the Administrator and reviewed and approved by the Board before being used.
Auditor and audit tenure
The Company’s auditor Deloitte LLP, has acted in this role since 1974 under its current trading name of Deloitte LLP as well as predecessor trading names. The Committee, in conjunction with the Board, is committed to reviewing this appointment on a regular basis to ensure that the Company is receiving an optimal level of service. The appointment of the auditor is reviewed annually and we are satisfied that sufficient safeguards are put in place by the auditor to mitigate risks associated with long association such as regular partner rotation. There are no contractual obligations which restrict the Company’s choice of auditor.
Assessment of the external audit process
The Audit Committee considers the nature, scope and results of the auditor’s work and monitors the independence of the external auditor. Formal reports are received from the auditors on an annual basis relating to the extent of their work, the accuracy of accounting and the correctness of valuation of assets. The work of the auditors in respect of any significant audit issues and consideration of the adequacy of that work is discussed.
The Chairman of the Audit Committee liaises with the Investment Manager and Administrator to discuss the extent of audit work completed to ensure all matters of risk are covered while the Committee assesses the quality of the draft financial statements prepared by the administrator.
The Audit Committee has an active involvement and oversight of the preparation of both half yearly and annual financial statements. Ultimate responsibility for reviewing and approving the Annual Financial Report remains with the Board.
Conclusion in respect of the Annual Financial Report
The production of the Company’s Annual Financial Report is a comprehensive process requiring input from a number of different parties. One of the key governance requirements of the Company’s Annual Financial Report is that it is fair, balanced and understandable. The Board has requested that the Committee advise on whether it considers that the Annual Financial Report fulfil these requirements.
As a result of the work performed, the Committee has concluded that the Annual Financial Report for the year ended 31 December 2013, taken as a whole,is fair,balanced and understandable and provides the information necessary for shareholder’s to assess the Company’s performance,business model and strategy and has reported on these findings to the Board. The Board’s conclusions in this respect are set out in the Directors’ Report on page 8.
D Warr
Chairman of Audit Committee 10 April 2014
Independent Auditor’s Report to the members of Threadneedle UK Select Trust Limited
Opinion on financial statements of Threadneedle UK Select Trust Limited
In our opinion the financial statements:
give a true and fair view of the state of the Company’s affairs as at 31 December 2013 and of its profit for the year then ended;
have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB); and
have been prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008.
The financial statements comprise the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Cash Flows, the Statement of Changes in Net Assets and the related notes 1 to 20. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as issued by the IASB.
Going concern We have reviewed the directors’ statement on page 10 that the Company is a going concern. We confirm that:
we have not identified material uncertainties related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern which we believe would need to be disclosed in accordance with IFRSs as issued by the IASB; and
we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Company’s ability to continue as a going concern.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team:
Risk How the scope of our audit responded to the risk
Valuation of the Company’s investments There is a risk that the Company’s pricing methodology does not accurately reflect the potential exit price at the year-end date. This risk is heightened when current market conditions may impair the liquidity of the investment portfolio as an element of judgment may need to be incorporated into the valuation.
We tested 100% of the year end prices to prices obtained independently from reliable third party sources. In addition, the liquidity of the portfolio was considered as at the year-end date to assess whether any adjustments to establish the fair value of illiquid or otherwise suspended for trading equities from stale pricing were required.
Ownership of the Company’s investments There is a risk that the Company has not retained the rights and obligations of its investment portfolio, or that the investments portfolio is not recognised on a trade date basis which may result in gains and losses on investments being recognised in an incorrect period.
We received direct confirmation of all positions from the Custodian on both a trade date and settlement date basis and reconciled the trade date basis to the Company’s records in order to test for the recognition of gains and losses in the correct period.
Accuracy of calculation of performance fees The performance fee is payable to the Investment Manager, based on the excess total return of the Company’s net assets compared to the total return of the FTSE All-Share Index, over a 2 year period. The calculation requires reference to a third party index and adjustment to the Company’s NAV to reflect the Company’s total return over the specified performance period. Further detail on the performance fee is included in note 4. As this calculation is complex and considered to be a related party transaction it has been identified as a significant risk.
We determined an expectation of the fees by following the calculation methodology detailed in the agreements entered into by the Company and compared our expectation to the Company’s records with reference to a statistical threshold. For our expectation of the fees, we utilised third party market data in respect of the performance fee benchmark and checked the calculation of the Company’s NAV on a total return basis. We also reviewed the Company’s own calculation of the performance fees and sample tested the fees to invoice, also checking settlement of those samples to bank statements.
The Audit Committee’s consideration of these risks is set out on page 14.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.
