TWENTYFOUR SELECT MONTHLY INCOME FUND LIMITED
TWENTYFOUR SELECT MONTHLY INCOME FUND LIMITED
REPORT AND AUDITED FINANCIAL STATEMENTS
For the year ended 30 September 2016
The Directors of TwentyFour Select Monthly Income Fund Limited announce the
results for the year ended 30 September 2016. The Report will shortly be
available via the Company's Portfolio Manager's website www.twentyfouram.com
and will shortly be available for inspection online at www.hemscott.com/nsm.do.
SUMMARY INFORMATION
The Company
TwentyFour Select Monthly Income Fund Limited (the "Company") was incorporated
with limited liability in Guernsey, as a closed-ended investment company on 12
February 2014. The Company's shares were listed with a Premium Listing on the
Official List of the UK Listing Authority and admitted to trading on the Main
Market of the London Stock Exchange ("LSE") on 10 March 2014.
Investment Objective and Investment Policy
The Company's investment objective is to generate attractive risk adjusted
returns, principally through income distributions.
The Company's investment policy is to invest in a diversified portfolio of
credit securities.
The portfolio can be comprised of any category of credit security, including,
without prejudice to the generality of the foregoing, bank capital, corporate
bonds, high yield bonds, leveraged loans, payment-in kind notes and asset
backed securities. The portfolio will include securities of a less liquid
nature. The portfolio will be dynamically managed by TwentyFour Asset
Management LLP (the "Portfolio Manager") and, in particular, will not be
subject to any geographical restrictions.
The Company maintains a portfolio diversified by issuer; the portfolio
comprises at least 50 Credit Securities. No more than 5% of the portfolio value
will be invested in any single Credit Security or issuer of Credit Securities,
tested at the time of making or adding to an investment in the relevant Credit
Security. Uninvested cash, surplus capital or assets may be invested on a
temporary basis in:
* Cash or cash equivalents, money market instruments, bonds, commercial paper
or other debt obligations with banks or other counterparties having a
"single A" or higher credit rating as determined by any internationally
recognised rating agency which, may or may not be registered in the EU; and
* Any "government and public securities" as defined for the purposes of the
Financial Conduct Authority (the "FCA") Rules.
Efficient portfolio management techniques are employed by the Company, such as
currency hedging, interest rate hedging and the use of derivatives to manage
key risks such as interest rate sensitivity and to mitigate market volatility.
The Company's currency hedging policy will only be used for efficient portfolio
management and not to attempt to enhance investment returns.
The Company will not employ gearing or derivatives for investment purposes. The
Company may use borrowing for short-term liquidity purposes, which could be
achieved through its loan facility or other types of collateralised borrowing
instruments including repurchase transactions and stock lending. The Articles
restrict the borrowings of the Company to 10% of the Company's Net Asset Value
("NAV") at the time of drawdown.
At launch the Company had a target net total return on the original issue price
of between 8% and 10% per annum. This comprised a target dividend payment of 6p
and a target capital return of 2p-4p both based on the original issue amount of
100p. There is no guarantee that this can or will be achieved, particularly
given the recent low interest rate environment. As such the total return
generated has been lower than initially anticipated, although the 6p dividend
per annum has consistently been met and the Portfolio Manager is confident that
this dividend target will be maintained in the coming year. Refer to note 19 to
the Financial Statements for details of the Company's dividend policy.
Shareholder Information
Maitland Institutional Services Limited ("Maitland") (formerly Phoenix Fund
Services (UK) Limited) is responsible for calculating the NAV per share of the
Company. Maitland delegated this responsibility to Northern Trust International
Fund Administration Services (Guernsey) Limited (the "Administrator") however
Maitland still performs an oversight function. The unaudited NAV per Ordinary
Share will be calculated as at the close of business on every Wednesday that is
also a business day and the last business day of every month and will be
announced by a Regulatory Information Service the following business day.
Financial Highlights
30.09.16 30.09.15
Total Net Assets £136,821,841 £134,560,344
Net Asset Value per Share 89.97p 92.59p
Share price 92.00p 96.63p
Premium to NAV 2.27% 4.36%
Dividends declared during the year 6.85p 6.53p
Dividends paid during the year 6.53p 7.07p
As at 16 January 2017, the premium had moved to 3.13%. The estimated NAV per
share and share price stood at 91.15p and 94.00p, respectively.
Ongoing Charges
Ongoing charges for the year ended 30 September 2016 of 1.21% (30 September
2015: 1.19%) have been calculated in accordance with the Association of
Investment Companies (the "AIC") recommended methodology.
CHAIR'S STATEMENT
for the year ended 30 September 2016
The twelve month period to 30 September 2016 was a dramatic period for
investors with surprising political events, contradictory economic data and
idiosyncratic corporate events which led to some highly diverse periods of
market sentiment. As a result some investors retreated to cash and asset price
volatility was heightened.
In the final quarterly tender of the year, circa. 26m shares were tendered. The
majority of the tendered shares came from a large shareholder for whom the
investment was sub-scale. The Portfolio Manager undertook a roadshow to visit
existing shareholders (and other potential investors), with the Company's
broker, to explain the opportunity currently offered by the Company. The
response was very positive, with demand exceeding the number of shares that
were tendered, resulting in applicants being scaled back to approximately 54%
of demand. This was a very encouraging result for the Company and its mandate.
By the close of the year the number of shares in issue had increased from
149,335,881 at the start of the 12 months to 152,079,151. The Company's NAV
decreased by 2.62p and paid dividends totalled 6.53p, creating a NAV total
return of 3.91p.
The challenging market conditions, particularly in the first half of the year,
resulted in a period of high mark-to-market volatility for the Company during
the early months of 2016 but prices saw a sharp recovery over the summer as
central bank support created a strong technical backdrop for asset prices. The
investment composition of the Company continues to meet an acceptable level of
diversity and target yield, and the Company has achieved the target gross
monthly dividend of 0.5p per share. The Company's policy is to pay a fixed 0.5p
per share dividend on a monthly basis, with any excess income paid out in the
month following the Company's year-end, which for this year is 1.35p per share.
The Portfolio Manager and the Company's Board continue to adhere to a strict
discipline of only accepting new share issuance to meet investor demand and
only when there are suitable investment opportunities. For the year in question
the opportunities were scarcer than previous periods as credit spreads were
slowly squeezed in Europe. Yield is becoming a scarce commodity and this is
likely to become more of an issue as the central bank activity continues into
2017.
Mark-to-market performance is expected to continue to be relatively volatile
over the coming months, as the market is faced with a number of significant
political uncertainties, which could weigh on market sentiment. However, the
strong technical back-drop is expected to remain and the demand for yield is
expected to continue. The Portfolio Manager is confident that the assets in the
portfolio will perform and that there remain sufficient opportunities to offset
the re-investment risk over the medium term. The Portfolio Manager continually
stress tests the portfolio and remains confident that the dividend policy is
maintainable over the medium term.
Claire Whittet
Chair
18 January 2017
PORTFOLIO MANAGER'S REPORT
for the year ended 30 September 2016
Economic Background
The twelve month period to 30 September 2016 was dominated by central bank
activity as market sentiment threatened to be overwhelmed by a mixture of weak
economic fundamentals and political uncertainty.
The market started the period with a reasonably upbeat tone as the market
interpreted weak US payrolls being too low to allow the Federal Open Market
Committee ("FOMC") to hike rates at the October meeting, but this was short
lived as the minutes inferred that the Federal Reserve ("Fed") members saw
enough domestic consumer demand to potentially warrant its first rate rise,
setting a negative tone as we approached the year end. The European Central
Bank ("ECB") became more dovish, leading to strong market speculation of
further support at the Governing Council meeting in December. The mood wasn't
helped as the recently appointed Portuguese government were ousted by a
left-wing coalition led by Antonio Costa, leading to initial fears of
anti-Eurozone policies and a reversal of austerity measures.
In the USA the high yield ("HY") sector took the brunt of the negative
sentiment as a combination of lower oil prices and the prospect of higher Fed
Funds Rate increased the expectation of a spike in the default rate. The
negative tone continued with the cancellation of a large $2.45bn + €760m dual
tranche deal for Veritas (a large telecom operator) followed by the
announcement that Abengoa (a leading Spanish engineering/infrastructure group)
had filed for creditor protection while it looked to secure additional capital.
Although the end of the year is usually quiet, December 2015 proved to be a
dramatic and challenging month for investors. As expected the ECB cut the
depo-rate to minus 30bp and extended the asset purchase programme out to May
2017 but this was seen as insufficient by market participants. The FOMC hiked
Fed Funds Rate to 0.25-0.50% although the following rhetoric from Janet Yellen
was relatively dovish, and the large outflows from US high yield bond funds
gathered pace with some managers unable to meet the outflow requests (due to
poor market liquidity). The downward spiral continued with Brent crude oil down
17% in the month, taking 2015 losses to an eye-watering 44% which had the
obvious knock-on effect in the energy sector of US HY bonds. In Europe the
political turmoil continued with Spanish elections providing an inconclusive
result and the Bank of Portugal astonishingly deciding that one of its leading
banks, Novo Banco, should have a bail-in of senior debt and to resolve this it
would transfer 5 out of 52 bonds to the "bad bank", against the concept of pari
passu. Legal action was lodged by investors and the reputation of Portugal's
Central Bank was severely impaired. The Company had exposure to one of the 5
bonds and legal action has been pursued (see details in Performance Review).
January 2016 was the most sombre start to a year that we can recall; the
weakness in oil prices continued with West Texas Intermediate ("WTI") crude
testing new lows of $28.50 p/barrel. China released Q4 2015 GDP numbers of 6.8%
which, even though this was only 0.1% below consensus, sent the markets into
decline with concerns of a hard-landing for the world's second largest
economy. At the first 2016 meeting of the FOMC, Janet Yellen mentioned the Fed
had concerns about the global economic outlook and kept rates on hold. The Bank
of Japan ("BoJ") then shocked the market by moving domestic interest rates into
negative territory while the ECB kept interest rates on hold but said they
would 'possibly reconsider' their policy stance in March. In the UK, Mark
Carney added to the dovish central bank rhetoric by ruling out any imminent
rise in UK rates saying "the world is weaker and UK growth has slowed" during a
speech at Queen Mary University in January 2016.
In February, the 'rolling bear' sentiment switched its attention to the banking
sector as Deutsche Bank and then Credit Suisse announced sobering results,
leading some commentators to question the solvency of the banking system.
Speculation that Deutsche Bank ("DB") would be the first bank not to pay AT1
coupons (denied by DB management) was enough to result in heavy contagion
spreading throughout the whole bank hybrid sector, regardless of the credit
quality of the borrower. Asset Backed Securities ("ABS"), particularly
collateralised loan obligations ("CLOs"), also endured sharp price declines in
the month as comments from a couple of investment banks announced their
departure from the sector, leading to a strong technical headwind for the ABS
sector.
Slowly but surely a combination of relative value buyers and professional
short-covering reversed the generic selling pressure, helped by a reasonable
2015 results season for corporates where revenue growth was benign but bottom
line profit generally beat expectations and there were no signs of any
impending solvency crisis in European banking.
The political influence continued with the announcement that the UK referendum
was to take place on 23 June 2016, which had an immediate negative impact on
Sterling and Sterling assets. In March the market received a welcome boost with
the ECB announcing a raft of stimuli that exceeded all expectations with 10bp
cut in the deposit facility to -40bp, a €20bn per month increase in the asset
purchase program (including Investment Grade ("IG") non-bank corporates), and a
new series of four targeted longer-term refinancing operations ("TLTRO") each
with a 4-yr maturity. Unsurprisingly this new facility, ensuring banks
unlimited liquidity support through to March 2021, with borrowing rates
potentially as low as the deposit facility rate, resulted in a significant
relief rally in subordinated bank paper across the whole Euro-region.
In the build up to the UK referendum the polls were all pointing to the UK
staying in the EU; as such the result to leave was a major surprise to many,
including market participants. Understandably Sterling took the brunt of the
early selling pressure, falling over 10% against its major trading partners.
Credit followed suit with the iTraxx crossover index widening over 150bps in
early trading on 24 June 2016. However, strong words from Mark Carney that the
Bank of England ("BoE") would intervene to stabilise markets helped to stem the
panic and with the assumption that the exit vote would delay any Fed hikes
together with the ongoing ECB stimulus, credit spreads soon began to reverse
their widening.
The July meeting of the Monetary Policy Committee ("MPC") was considered too
soon after the referendum for any significant changes but Mark Carney made
amends by delivering a round of stimuli that surprised even the most expectant
of investors. A cut in the base rate to 0.25%, a £60bn increase in Gilt
purchases to £435bn, a £10bn corporate bond purchase programme and a bank
'term-funding scheme' (which provides funding for banks at levels close to base
rates) added considerable weight to the already strong technical supporting
markets. In addition Carney announced the likelihood of rates being cut further
in the year to just 0.10% which did little for Sterling but resulted in a
strong fixed income rally (particularly Gilts and Investment Grade ("IG")
corps). The aftermath of the UK referendum remains the major political
distraction for the UK (and EU) with even the UK government warning of two
years of potential turmoil, following the signing of Article 50 in Q1 2017.
The ECB did little over the summer but the bank stress tests were released
which, with the exception of just two smaller lenders, the results were viewed
as a positive signal for the European banking sector and put to bed any lasting
predictions of a potential solvency crisis looming. Short covering followed and
spreads tightened as a result. However, the market bears were given a lifeline
following an announcement that the US Department of Justice claimed $14bn
against Deutsche Bank in settlement of misdemeanours in the German lender's US
mortgage unit, which some commentators saw as a threat to the solvency of
Europe's largest investment bank. While it seems obvious that the final
settlement figure will be substantially below the initial $14bn being claimed,
the headline number led to significant falls in the value of Deutsche Bank
shares with the contagion being felt across the whole financial sector.
In the US Janet Yellen continued a dovish stance highlighting that 'global
economic and financial developments continue to pose risks'. More latterly the
US economic data has been mixed with poor ISM Manufacturing data for August
(49.4 vs. expected 52.0) and weaker than expected Non-Farm-Payrolls of 151,000
(180k was expected) pushing back expectations of the next Fed Fund hike to
December at the earliest, and the so called "Dot Plot" rate estimates lowered,
with the Fed only expecting two hikes in 2017 (down from three).
Performance Review
The Company's aim is to produce an attractive level of income, with an aim of
generating a minimum monthly income of 0.5p, with any excess income annually
distributed to investors. This is a high conviction strategy based on relative
value bonds in the credit markets, with an emphasis on the securities that
exhibit a degree of liquidity premium assets that are primarily buy-to-hold.
The 12-months in question have been particularly challenging for higher beta
credit, particularly the period of mid-Dec to mid-February. As mentioned in the
commentary above, significant macro-economic events and political changes have
created wild swings in market sentiment. The considerable support shown by the
ECB and more latterly the BoE have had a dramatic effect on government bonds
and IG-credit but this should begin to have a similar effect on higher beta
product as the contagion effect trickles along the credit curve. The main drag
on the annual performance came from the first 4-months of the year, with the
initial 6-weeks of January being the key period, with the general 'rolling
bear' market sentiment that gripped the market. Fears of an impending bank
solvency crisis was never in the Portfolio Manager's base case scenario but a
sharp decline in Additional Tier 1 ("AT1") prices during this period had a
significant impact on the NAV. As an illustration one of the largest portfolio
positions was in COVBS 6.375% 19-49 (3% portfolio allocation) which declined
from a price of 97.375 at the end of December-15 to 84.50 in mid-February
(representing a 13% price decline) - this bond steadily recovered throughout
the rest of the year to close at 95.00. There were similar price actions across
the whole of the AT1 sector (which was circa. 18% of the total portfolio) but
the Portfolio Manager refused to capitulate these positions, recognising their
relative value. Similarly there were some significant volatile swings in the
prices for the European CLO sector around the same period, as a number of large
banks announced their withdrawal from the sector. Despite no change in the
fundamental credit quality these holdings impacted the NAV during the first
half of the year and have taken a considerable period to fully recover 2015
levels. Also during that period, the Novo Banco bonds that were transferred to
Banco Espírito Santo ("BES") saw a price decline from 93.50 to 22.00 following
the news of the transfer. The portfolio held circa. 1.5% thereby impacting the
total NAV by just over 1%; the Company has joined a syndicate of asset
management companies pursuing a legal action to restore the bonds' standing or
receive full compensation from the Portuguese Central Bank - the action is
ongoing.
The period has been challenging for higher beta credit, particularly for the
period from mid-December to mid-February.
Due to the challenging market conditions the NAV decreased by 2.62p during the
period, however, declared dividends during the period of 6.85p exceeded the
6.00p target.
Foreign Exchange Accounting
The Company's policy is to hedge foreign currency risk. The currency markets
experienced significant volatility during the year, with the EUR/GBP rate
finishing higher by over 17%, in part due to the referendum outcome in June
which saw almost a 9% move on the day. Large currency moves were also felt in
the USD/GBP rate, which similarly saw a movement during the period of 17%.
Exposure to Euro denominated assets represented 54% of the Portfolio at the end
of the period. The Company also had exposure to US Dollar, Swedish Krona and
Swiss Franc denominated assets during the year. All currency exposures are
hedged back to Sterling to minimise any currency risk.
The net foreign currency gain on the portfolio (recorded within net gain/(loss)
on financial assets at fair value through profit or loss) and the net foreign
currency losses on the forward currency contracts (included within net foreign
currency (loss)/gain) are recognised in accordance with the hedging policy and
IFRS, within the Statement of Comprehensive Income.
Investment Outlook
The Company was established to take advantage of the liquidity premium that
exists in the non-government sectors of the fixed income universe, whilst only
hedging excessive duration risk. However, with the ongoing central bank support
the Portfolio Manager currently considers that interest rate hedging is an
unnecessary drag on performance and hence there are no interest rate positions
held by the Company in the current year.
Since the launch of the Company in early 2014 credit spreads in the key sectors
of CLOs, subordinated financials and high yield corporates continue to trade
wider. However, with the ongoing central bank stimulus from the ECB and BoE the
Portfolio Manager is convinced that spreads will eventually tighten in line
with 2014 levels, although they appreciate that there are likely to be some
periods of volatility along the way. There are a number of uncertainties that
face markets, suggesting that the coming 12 months will have its challenges but
central bank activity will continue to create strong technical support. The
Portfolio Manager sees this as an ongoing opportunity to add credit exposure
during the periods of market stress, which alleviates the concerns of
re-investment risk during this low interest rate environment. The turnover of
the Company during the period was relatively unchanged and in line with
previous periods, with any issuance of shares able to be invested in a
reasonable timeframe and in line with the Company's objectives. The Portfolio
Manager has no concerns on the overall liquidity of the Company, while
acknowledging there are still opportunities to be found in more relatively
illiquid securities, and that there are no significant changes to default rate
expectations.
The Portfolio Manager considers the medium outlook with a degree of caution as
there are a number of uncertain macro and political events that could create
periods of market uncertainty. The US election, Italian Constitutional
Referendum and the UK signing of Article 50 all have the potential to
destabilise markets, and there are elections this year in Germany, France,
Netherlands and Hungary which will also be closely watched. This could result
in some mark-to-market volatility but the PM is confident that the underlying
credits will, over the longer-term, generate attractive returns in an
environment where yield is becoming an ever more scarce resource.
TwentyFour Asset Management LLP
18 January 2017
TOP TWENTY HOLDINGS
As at 30 September 2016
Credit Percentage
of
Nominal/ Security Fair Value * Net Asset
Shares Sector £ Value
Nationwide Bldg Society 10.25 29/06 30,000 Banks 3,919,821 2.86
/2049
Coventry Bldg Society 6.375 29/12/ 3,540,000 Banks 3,364,887 2.46
2049
Santander UK Group 10.375 31/12/ 2,000,000 Banks 3,274,973 2.39
2049
Avoca CLO 11X F 15/07/2027 4,000,000 ABS 2,958,734 2.16
Shawbrook Group 8.5 28/10/2025 2,800,000 Banks 2,856,000 2.09
Bank of Ireland 7.375 29/12/2049 3,400,000 Banks 2,823,775 2.06
Jubilee CDO BV 2014-12X F 15/07/ 3,950,000 ABS 2,723,905 1.99
2027
Capital Bridging Finance 1 MEZZ 05/ 2,500,000 ABS 2,512,500 1.84
07/2018
Intralot Capital Luxembourg SA 6 15 2,800,000 High 2,402,328 1.76
/05/2021 Yield
SC Germany Consumer 2015-1 E 13/12/ 2,500,000 ABS 2,260,435 1.65
2028
Aquilae CLO 1X E 22/12/2016 2,800,000 ABS 2,211,938 1.62
Credit Suisse Group AG 7.5 29/12/49 2,800,000 Financial 2,201,309 1.61
Keystone Financing 9.5 15/10/2019 2,100,000 High 2,186,730 1.60
Yield
Herbert Park BV Series 1X E 20/10/ 3,000,000 ABS 2,142,082 1.57
2026
Ethias SA 5 14/01/2026 2,900,000 Insurance 2,063,458 1.51
Barclays PLC 7.875 29/12/2049 2,065,000 Banks 2,025,972 1.48
GHD Bondco PLC 7 15/04/2020 2,000,000 High 2,003,200 1.46
Yield
Aldermore Group 11.875 29/12/2049 1,900,000 Banks 1,998,563 1.46
Synlab Unsecured Bondco PLC 8.25 01 2,000,000 High 1,849,209 1.35
/07/2023 Yield
Avoca CLO 13A F 16/12/2027 2,500,000 ABS 1,838,395 1.34
Total 49,618,214 36.26
* Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.
The full portfolio listing as at 30 September 2016 can be obtained from the
Administrator on request.
BOARD MEMBERS
Biographical details of the Directors are as follows:
Claire Whittet - (Chair) (age 61)
Ms Whittet is a resident of Guernsey and has nearly 40 years' experience in the
banking industry. Until May 2016, she was Managing Director and Co-Head of
Rothschild Bank International Ltd and a Director of Rothschild Bank (CI) Ltd
and is now a Non-Executive Director of Rothschild Bank International Ltd. She
joined Rothschild as a Director in 2003 having begun her career at the Bank of
Scotland where she was for 19 years in a variety of personal and corporate
finance roles. Subsequently, Ms Whittet joined Bank of Bermuda and was Global
Head of Private Client Credit before joining Rothschild.
Ms Whittet is a Non-Executive Director of 4 other listed, Guernsey registered
funds.
Ms Whittet holds an MA from Edinburgh University, is a member of the Chartered
Institute of Bankers in Scotland, a member of the Chartered Insurance
Institute, a Chartered Banker, a member of the Institute of Directors and holds
the Institute of Directors Diploma in Company Direction. Ms Whittet was
appointed to the Board on 12 February 2014.
Christopher F. L. Legge - (Non-executive Director) (age 61)
Mr Legge is a Guernsey resident and worked for Ernst & Young in Guernsey from
1983 to 2003. Having joined the firm as an audit manager in 1983, he was
appointed a partner in 1986 and managing partner in 1998. From 1990 to 1998, he
was head of Audit and Accountancy and was responsible for the audits of a
number of banking, insurance, investment fund, property fund and other
financial services clients. He also had responsibility for the firm's training,
quality control and compliance functions. He was appointed managing partner for
the Channel Islands region in 2000 and merged the business with Ernst & Young
LLP in the United Kingdom. He retired from Ernst & Young in 2003.
Mr Legge currently holds a number of non-executive directorships in the
financial services sector and also chairs the Audit Committees of several UK
listed companies. He is an FCA and holds a BA (Hons) in Economics from the
University of Manchester. Mr Legge was appointed to the Board on 12 February
2014.
Thomas H. Emch - (Non-executive Director) (age 73)
Mr Emch is an independent Board member and consultant. He graduated from the
University of Zurich (lic.oec.publ.) and IMD (PED) in Lausanne. During his
professional career he successively was European Treasurer of Litton
International, SVP of Banque Paribas Suisse, EVP of Lombard Odier & Co. and CEO
of Royal Bank of Canada (Suisse), a position he held for 11 years until his
retirement in 1999. Throughout his banking career, he served on the Boards of
numerous companies and professional associations in Switzerland and abroad. Mr
Emch was appointed to the Board on 12 February 2014.
Ian Martin - (Non-executive Director) (age 53)
Ian Martin has over 30 years' experience in finance gathered in a variety of
multi asset investment focused roles in the UK, Hong Kong, Switzerland and
Uruguay. More recently he was the CIO and Head of Asset Management and Research
at Lloyds Bank in Geneva and then Head of Bespoke Portfolio Management and
Advisory for key clients in UBP Bank in Geneva. Previous roles have included
senior roles in equity derivatives and trading as well as CIO and Managing
Director of a Fund of Hedge fund company in the UK. Currently he is a Director
of Bedlam Family Office. Mr Martin was appointed to the Board on 15 July 2014.
DISCLOSURE OF DIRECTORSHIPS IN PUBLIC COMPANIES LISTED ON RECOGNISED EXCHANGES
The following summarises the Directors' directorships in other public listed
companies:
Company Name Stock Exchange
Claire Whittet (Chair)
BH Macro Limited London, Bermuda and
Dubai
Eurocastle Investment Amsterdam
Limited
International Public Partnerships London
Limited
Riverstone Energy Limited London
Christopher
Legge
Ashmore Global Opportunities Limited London
John Laing Environmental Assets Group Limited London
Sherborne Investors (Guernsey) B London
Limited
Third Point Offshore Investors London
Limited
DIRECTORS' REPORT
The Directors present their Annual Report and Audited Financial Statements for
the year ended 30 September 2016.
Business Review
The Company
TwentyFour Select Monthly Income Fund Limited (the "Company") was incorporated
with limited liability in Guernsey, as a closed-ended investment company on 12
February 2014. The Company's Shares were listed with a Premium Listing on the
Official List of the UK Listing Authority and admitted to trading on the Main
Market of the LSE on 10 March 2014.
Investment Objective and Policy
The investment objective and policy is set out in the Summary Information.
Discount/Premium to Net Asset Value
The Board monitors and manages the level of the share price discount/premium to
NAV. In managing this, the Company can operate a share buyback facility whereby
it may purchase, subject to various terms as set out in its Articles and in
accordance with The Companies (Guernsey) Law, 2008, up to 14.99% of the
Company's Ordinary Redeemable Shares in issue immediately following Admission
for trading in the LSE.
The Company also offers investors a Quarterly Tender, contingent on certain
factors, to provide Shareholders with a quarterly opportunity to submit
Ordinary Shares for placing or repurchase by the Company at a price
representing a discount of no more than 2% to the then prevailing NAV. For
additional information refer to note 16 to the Financial Statements.
Shareholder Information
Shareholder information is set out in the Summary Information.
Going Concern
The Directors believe that, having considered the Company's investment
objective (see Summary Information), financial risk management (see note 16 to
the Financial Statements) and in view of the Company's holding in cash and cash
equivalents, the liquidity of investments and the income deriving from those
investments, the Company has adequate financial resources and suitable
management arrangements in place to continue as a going concern for at least
twelve months from the date of approval of the financial statements.
Viability Statement
Under the UK Corporate Governance Code, the Board is required to make a
"viability statement" which considers the Company's current position and
principal risks and uncertainties combined with an assessment of the prospects
of the Company in order to be able to state that they have a reasonable
expectation that the Company will be able to continue in operation over the
period of their assessment. The Board considers that three years is an
appropriate period to assess the viability of the Company given the uncertainty
of the investment world and the strategy period. In selecting this period the
Board considered the environment within which the Company operates and the
risks associated with the Company.
The Company's prospects are driven by its business model and strategy. The
Company's aim is to provide investors with an attractive level of income and a
focus on capital preservation in uncertain times, by investing in less liquid,
high yielding credit securities.
The Board confirms they have performed a robust assessment of the principal
risks facing the Company and the Board's assessment of the Company over the
three year period has been made with reference to the Company's current
position and prospects, the Company's strategy, and the Board's risk appetite
having considered each of the Company's principal risks and uncertainties
summarised in the Directors' Report.
The Board has also considered the Company's cash flows and income flows, its
likely ability to pay dividends and the portfolio analysis, including but not
limited to liquidity analysis, foreign exchange analysis, credit analysis and
valuation analysis. The analysis has taken the form of stress tests on the
Company as well as cash flow modelling based on a range of different market
scenarios. All of the foregoing have been considered against the background of
the Company's dividend target.
Key assumptions considered by the Board in relation to the viability of the
Company are as follows:
Dividend Target
The ongoing viability of the Company and the validity of the going concern
basis depend on the Company meeting its dividend target annually during the
three-year period. In the event that the Company does not meet the dividend
target as disclosed in note 19 to the Financial Statements, the Directors will
convene a general meeting in accordance with the Continuation Vote requirements
set out in note 16 to the Financial Statements.
Quarterly Tenders
The Company has incorporated into its structure a mechanism for a quarterly
tender to reduce the risk of Ordinary Shares trading at a discount to NAV. It
is anticipated that the Company will tender on a quarterly basis for up to 20%
of the Ordinary Shares in issue as at the relevant Quarter Record Date, subject
to an aggregate limit of 50% of the Ordinary Shares in issue in any twelve
month period ending on the relevant Quarter Record Date. In the event that
quarterly tender applications, on any tender submission deadline, exceed the
50% limit, the Directors will convene a General Meeting in accordance with the
Continuation Vote requirements set out in note 16 to the Financial Statements.
The quarterly tenders will be at the discretion of the Board. Ordinary Shares
trading at a discount to NAV over a long period of time may impact the
viability of the Company.
The Board having considered the analysis above, have a reasonable expectation
that the Company will be able to continue in operation and meet its liabilities
as they fall due over the three year period to 30 September 2019.
Results
The results for the year are set out in the Statement of Comprehensive Income.
The Directors paid income distributions of £10,314,251 for the year ended 30
September 2016, a breakdown of which can be found in note 19 to the Financial
Statements. The 30 September 2016 distribution which was declared on 12 October
2016 was paid on 31 October 2016.
Distributions made with respect to any income period comprise (a) the total
income of the portfolio for the period, and (b) an additional amount paid out
of capital to reflect any additional income in the course of any share
subscriptions that took place during the period. Including additional income in
this way ensures that the income yield of the shares is not diluted as a
consequence of the issue of new shares during an income period and (c) any
income on the foreign exchange contracts caused by the libor differentials
between each foreign exchange currency pair.
Key Performance Indicators ("KPIs")
At each Board meeting, the Directors consider a number of performance measures
to assess the Company's success in achieving its objectives. Below are the main
KPIs which have been identified by the Board for determining the progress of
the Company:
* Net Asset Value;
* Share Price;
* Discount/Premium;
* Ongoing Charges; and
* Monthly Dividends.
A record of these measures is disclosed in the Summary Information.
Portfolio Manager
The portfolio management fee is payable to the Portfolio Manager, TwentyFour
Asset Management LLP, monthly in arrears at a rate of 0.75% per annum of the
lower of NAV, which is calculated weekly on each valuation day and on the last
business day of each month, or market capitalisation of each class of share.
For additional information refer to note 14 to the Financial Statements.
The Board considers that the interests of Shareholders, as a whole, are best
served by the ongoing appointment of the Portfolio Manager to achieve the
Company's investment objectives.
Alternative Investment Fund Manager ("AIFM")
Alternative investment fund management services are provided by Maitland
Institutional Services Limited ("Maitland") (formerly Phoenix Fund Services
(UK) Limited). The AIFM fee is payable quarterly in arrears at a rate of 0.07%
of the NAV of the Company below £50 million, 0.05% on Net Assets between £50
million and £100 million and 0.03% on Net Assets in excess of £100 million. For
additional information refer to note 15 to the Financial Statements.
Custodian and Depositary
Custody and Depositary services are provided by Northern Trust (Guernsey)
Limited. The terms of the Depositary agreement allow Northern Trust (Guernsey)
Limited to receive professional fees for services rendered. The Depositary
agreement includes custodian duties. For additional information refer to note
15 to the Financial Statements.
Directors
The Directors of the Company during the year and at the date of this Report are
set out in the Corporate Information.
Directors' and Other Interests
The Directors of the Company held the following Ordinary Shares beneficially:
30.09.16 30.09.15
Shares Shares
Claire 25,000 25,000
Whittet
Christopher 50,000 50,000
Legge
Thomas Emch 25,000 25,000
Ian Martin 35,000 25,000
Corporate Governance
The Board is committed to high standards of corporate governance and has
implemented a framework for corporate governance which it considers to be
appropriate for an investment company in order to comply with the principles of
the UK Corporate Governance Code (the "UK Code"). The Company is also required
to comply with the Code of Corporate Governance (the "GFSC Code") issued by the
Guernsey Financial Services Commission.
The UK Listing Authority requires all UK premium listing companies to disclose
how they have complied with the provisions of the UK Code. This Corporate
Governance Statement, together with the Going Concern Statement, Viability
Statement and the Statement of Directors' Responsibilities set out in the
Statement of Directors' Responsibilities, indicates how the Company has
complied with the principles of good governance of the UK Code and its
requirements on Internal Control.
The Company is a member of the AIC and by complying with the AIC Code of
Corporate Governance (the "AIC Code") is deemed to comply with both the UK Code
and the GFSC Code.
The Board has considered the principles and recommendations of the AIC Code, by
reference to the guidance notes provided by the AIC Guide, and consider that
reporting against these will provide better information to shareholders. To
ensure ongoing compliance with these principles the Board reviews a report from
the Corporate Secretary at each quarterly meeting, identifying how the Company
is in compliance and identifying any changes that might be necessary.
The AIC Code and the AIC Guide are available on the AIC's website,
www.theaic.co.uk. The UK Code is available in the Financial Reporting Council's
website, www.frc.org.uk.
Throughout the year ended 30 September 2016, the Company has complied with the
recommendations of the AIC Code and thus the relevant provisions of the UK
Code, except as set out below.
The UK Code includes provisions relating to:
* the role of the Chief Executive;
* Executive Directors' remuneration;
* Annually assessing the need for an internal audit function;
* the whistle blowing policy;
* Senior Independent Director;
* Remuneration Committee; and
* Nomination Committee.
For the reasons set out in the AIC Guide, and as explained in the UK Code, the
Board considers these provisions are not relevant to the position of the
Company as it is an externally managed investment company. The Company has
therefore not reported further in respect of these provisions. The Directors
are all non-executive and the Company does not have employees, hence no Chief
Executive or whistle-blowing policy is required for the Company. The key
service-providers all have whistleblowing policies in place. The Board is
satisfied that any relevant issues can be properly considered by the Board. The
Board as a whole fulfills the function of a Nomination and Remuneration
Committee.
Details of compliance with the AIC Code are noted below and in the succeeding
sections. There have been no other instances of non-compliance, other than
those noted above.
Role, Composition and Independence of the Board
The Board is the Company's governing body and has overall responsibility for
maximising the Company's success by directing and supervising the affairs of
the business and meeting the appropriate interests of shareholders and relevant
stakeholders, while enhancing the value of the Company and also ensuring
protection of investors. A summary of the Board's responsibilities is as
follows:
* statutory obligations and public disclosure;
* strategic matters and financial reporting;
* risk assessment and management including reporting compliance, governance,
monitoring and control; and
* other matters having a material effect on the Company.
The Board's responsibilities for the Annual Report and Audited Financial
Statements are set out in the Statement of Directors' Responsibilities.
The Board currently consists of four non-executive Directors, all of whom are
considered to be independent of the Portfolio Manager and as prescribed by the
Listing Rules.
The Board does not consider it appropriate to appoint a Senior Independent
Director because they are all deemed to be independent by the Company. The
Board considers it has the appropriate balance of diverse skills and
experience, independence and knowledge of the Company and the wider sector, to
enable it to discharge its duties and responsibilities effectively and that no
individual or group of individuals dominates decision making. The Chair is
responsible for leadership of the Board and ensuring its effectiveness.
Chair
The Chair is Claire Whittet. The Chair of the Board must be independent for the
purposes of Chapter 15 of the Listing Rules. Claire Whittet is considered
independent because she:
* has no current or historical employment with the Portfolio Manager; and
* has no current directorships in any other investment funds managed by the
Portfolio Manager.
Biographies for all the Directors can be found in the Board Members section.
The Board needs to ensure that the Annual Report and Audited Financial
Statements, taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Company's position and
performance, business model and strategy. In seeking to achieve this, the
Directors have set out the Company's investment objective and policy and have
explained how the Board and its delegated Committees operate and how the
Directors review the risk environment within which the Company operates and set
appropriate risk controls. Furthermore, throughout the Annual Report and
Audited Financial Statements the Board has sought to provide further
information to enable shareholders to have a fair, balanced and understandable
view.
The Board has contractually delegated responsibility for the management of its
investment portfolio, the arrangement of custodial and depositary services and
the provision of accounting and company secretarial services.
The Board is responsible for the appointment and monitoring of all service
providers to the Company.
The Directors are kept fully informed of investment and financial controls and
other matters by all services providers that are relevant to the business of
the Company and should be brought to the attention of the Directors.
The Company has adopted a policy that the composition of the Board of
Directors, which is required by the Company's Articles to comprise of at least
two persons, is at all times such that a majority of the Directors are
independent of the Portfolio Manager and any company in the same group as the
Portfolio Manager; the Chair of the Board of Directors is free from any
conflicts of interest and is independent of the Portfolio Manager and of any
company in the same group as the Portfolio Manager; and that no more than one
director, partner, employee or professional adviser to the Portfolio Manager or
any company in the same group as the Portfolio Manager may be a Director of the
Company at any one time.
The Board has a breadth of experience relevant to the Company and the Directors
believe that any changes to the Board's composition can be managed without
undue disruption. With any new director appointment to the Board, consideration
will be given as to whether an induction process is appropriate.
The Board has also given careful consideration to the recommendations of the
Davies Review. The Board has reviewed its composition and believes that the
current appointments provide an appropriate range of skills, experience and
diversity. In order to maintain its diversity, the Board is committed to
continuing its implementation of the recommendations of the Davies Review as
part of its succession planning over future years.
Directors' Attendance at Meetings
The Board holds quarterly Board meetings, to discuss general management,
structure, finance, corporate governance, marketing, risk management,
compliance, asset allocation and gearing, contracts and performance. The
quarterly Board meetings are the principal source of regular information for
the Board enabling it to determine policy and to monitor performance,
compliance and controls but these meetings are also supplemented by
communication and discussions throughout the year.
A representative from each of the Portfolio Manager, AIFM, Administrator,
Custodian and Depositary and Corporate Broker attends each Board meeting either
in person or by telephone thus enabling the Board to fully discuss and review
the Company's operation and performance. Each Director has direct access to the
Portfolio Manager and Company Secretary and may, at the expense of the Company,
seek independent professional advice on any matter.
Both appointment and removal of these parties is to be agreed by the Board as a
whole.
The Audit Committee meets at least twice a year, Management Engagement
Committee meets at least once a year, a dividend meeting is held monthly and
there are additional meetings covering the Quarterly Tender as and when
necessary. In addition, ad hoc meetings of the Board to review specific items
between the regular scheduled quarterly meetings can be arranged. Between
formal meetings there is regular contact with the Portfolio Manager, AIFM,
Administrator, Custodian and Depositary and the Corporate Broker.
Attendance at the Board, Audit and Management Engagement Committee meetings
during the year was as follows:
Board Meetings Audit Committee Management Ad hoc Committee
Meetings Engagement Meetings
Committee
Meetings
Held Attended Held Attended Held Attended Held Attended
Claire Whittet 4 4 3 3 1 1 15 11
Christopher Legge 4 4 3 3 1 1 15 15
Thomas Emch 4 4 3 3 1 1 15 11
Ian Martin 4 4 3 3 1 1 15 12
At the Board meetings the Directors review the management of the Company's
assets and liabilities and all other significant matters so as to ensure that
the Directors maintain overall control and supervision of the Company's
affairs.
Election of Directors
The election of Directors is set out in the Directors' Remuneration Report.
Board Performance and Training
The Board undertook an annual self-evaluation and Chair evaluation and
discussed the results in September 2016. The Board assessed and discussed their
composition and balance of skills, board processes, information flows, any
areas for additional training, board dynamics, accountability and their
effectiveness. There were no material findings from this evaluation. The Board
will commission an external evaluation in the first half of 2017.
On appointment to the Board, the Directors were offered relevant training and
induction. Training is an on-going matter as is discussion on the overall
strategy of the Company and the Board has met with the Portfolio Manager during
the year to discuss these matters. Such meetings will be an on-going
occurrence.
Retirement by Rotation
Under the terms of their appointment, each Director is required to retire by
rotation and be subject to re-election at least every three years. The
Directors are also required to seek re-election if they have already served for
more than nine years. The Company may terminate the appointment of a Director
immediately on serving written notice and no compensation is payable upon
termination of office as a director of the Company becoming effective. All
Directors have agreed to stand for re-election annually.
Board Committees and their Activities
Terms of Reference
All Terms of Reference of the Board's Committees are available from the
Administrator upon request.
Management Engagement Committee
The Board has established a Management Engagement Committee with formal duties
and responsibilities. The Management Engagement Committee commits to meeting at
least once a year and comprises the entire Board with Thomas Emch appointed as
Chair. These duties and responsibilities include the regular review of the
performance of and contractual arrangements with the Portfolio Manager and
other service providers and the preparation of the Committee's annual opinion
as to the Portfolio Manager's services.
The Management Engagement Committee carried out its review of the performance
and capabilities of the Portfolio Manager at its meeting during the year and
the Board recommended the continued appointment of TwentyFour Asset Management
LLP as Portfolio Manager as it is in the interest of shareholders.
Audit Committee
An Audit Committee has been established consisting of all Directors with
Christopher Legge appointed as Chair. The terms of reference of the Audit
Committee provide that the committee shall be responsible, amongst other
things, for reviewing the Interim and Annual Financial Statements, considering
the appointment and independence of external auditors, discussing with the
external auditors the scope of the audit and reviewing the Company's compliance
with the AIC Code.
Further details on the Audit Committee can be found in the Audit Committee
Report.
Nomination Committee
There is no separate Nomination Committee. The Board as a whole fulfils the
function of a Nomination Committee. Any proposal for a new Director will be
discussed and approved by all members of the Board.
Remuneration Committee
In view of its non-executive and independent nature, the Board considers that
it is not appropriate for there to be a separate Remuneration Committee as
anticipated or recommended by the AIC Code. The Board as a whole fulfils the
functions of the Remuneration Committee, although the Board has included a
separate Remuneration Report of these Financial Statements.
International Tax Reporting
For purposes of the US Foreign Account Tax Compliance Act, the Company
registered with the US Internal Revenue Service ("IRS") as a Guernsey reporting
Foreign Financial Institution ("FFI"), received a Global Intermediary
Identification Number (E5XSVA.99999.SL.831), and can be found on the IRS FFI
list.
The Common Reporting Standard ("CRS") is a global standard for the automatic
exchange of financial account information developed by the Organisation for
Economic Co-operation and Development ("OECD"), which has been adopted in
Guernsey and which came into effect on 1 January 2016. The CRS has replaced the
inter-governmental agreement between the UK and Guernsey to improve
international tax compliance that had previously applied in respect of 2014 and
2015.
The Board ensures that the Company is compliant with Guernsey regulations and
guidance in this regard.
Strategy
The strategy for the Company is to capture the illiquidity premium that is
associated with 'off the run' bond issues in the secondary markets. As part of
the general search for high conviction, relative value securities the Portfolio
Manager continually came across interesting investment opportunities but too
often these bonds did not offer sufficient liquidity to use in the typical
daily mark-to-market UCITs funds, however they are suitable for closed ended
vehicles. By remaining highly selective and without conceding on underlying
credit quality, the strategy expects to generate a minimum monthly distribution
of 0.5p per share, with all excess income being distributed to investors at the
year-end of the Company.
Internal Controls
The Board is ultimately responsible for establishing and maintaining the
Company's system of internal financial and operating control and for
maintaining and reviewing its effectiveness. The Company's risk matrix
continues to be the core element of the Company's risk management process in
establishing the Company's system of internal financial and reporting control.
The risk matrix is prepared and maintained by the Board which initially
identifies the risks facing the Company and then collectively assesses the
likelihood of each risk, the impact of those risks and the strength of the
controls operating over each risk. The system of internal financial and
operating control is designed to manage rather than to eliminate the risk of
failure to achieve business objectives and by their nature can only provide
reasonable and not absolute assurance against misstatement and loss.
These controls aim to ensure that assets of the Company are safeguarded, proper
accounting records are maintained and the financial information for publication
is reliable. The Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks faced by the
Company.
This process has been in place for the year under review and up to the date of
approval of this Annual Report and Audited Financial Statements and is reviewed
by the Board and is in accordance with the AIC Code.
The AIC Code requires Directors to conduct at least annually a review of the
Company's system of internal financial and operating control, covering all
controls, including financial, operational, compliance and risk management. The
Board has evaluated the systems of internal controls of the Company. In
particular, it has prepared a process for identifying and evaluating the
significant risks affecting the Company and the policies by which these risks
are managed. The Board also considers whether the appointment of an internal
auditor is required and has determined that there is no requirement for a
direct internal audit function.
The Board has delegated the day to day responsibilities for the management of
the Company's investment portfolio, the provision of depositary services and
administration, registrar and corporate secretarial functions including the
independent calculation of the Company's NAV and the production of the Annual
Report and Financial Statements which are independently audited.
Formal contractual agreements have been put in place between the Company and
providers of these services. Even though the Board has delegated responsibility
for these functions, it retains accountability for these functions and is
responsible for the systems of internal control. At each quarterly Board
meeting, compliance reports are provided by the Administrator, Company
Secretary, Portfolio Manager, AIFM and Depositary. The Board also receives
confirmation from the Administrator of its accreditation under its Service
Organisation Controls 1 report.
The Company's risk exposure and the effectiveness of its risk management and
internal control systems are reviewed by the Audit Committee at its quarterly
meetings and annually by the Board. The Board believes that the Company has
adequate and effective systems in place to identify, mitigate and manage the
risks to which it is exposed. Principal Risks and Uncertainties are set out
below.
Principal Risks and Uncertainties
The Board is responsible for the Company's system of internal financial and
reporting controls and for reviewing its effectiveness. The Board is satisfied
that by using the Company's risk matrix as its core element in establishing the
Company's system, internal financial and reporting controls while monitoring
the investment limits and restrictions set out in the Company's investment
objective and policy, that the Board has carried out a robust assessment of the
principal risks and uncertainties facing the Company.
The principal risks which have been identified and the steps which are taken by
the Board to mitigate them are as follows:
Market risk
The underlying investments comprised in the Portfolio are subject to market
risk. The Company is therefore at risk that market events may affect
performance and in particular may affect the value of the Company's investments
which are valued on a marked to market basis. Market risk is the risk
associated with changes in market prices, including spreads, economic
uncertainty, changes in laws and political (national and international)
circumstances such as the recent UK vote to leave the EU. While the Company,
through its investments in Credit Securities, intends to hold a diversified
Portfolio of assets, any of these factors including specific market events,
such as the global financial crisis, levels of sovereign debt and UK's vote to
leave the EU, may have a material impact which could be materially detrimental
to the performance of the Company's investments. The UK's vote to leave the EU
has introduced new uncertainties and instability into the financial markets. As
the process of a major country leaving the EU has no precedent, the Board and
the Portfolio Manager expect an ongoing period of market uncertainty as the
implications are processed.
Under extreme market conditions the portfolio may not benefit from
diversification. For additional information refer to Note 16 to the Financial
Statements.
Liquidity risk
Investments made by the Company may be illiquid and this may limit the ability
of the Company to realise its investments and in turn pay dividends to
Shareholders or buy back Ordinary Shares under the Quarterly Tenders or in the
market. Substantially all of the assets of the Company are invested in Credit
Securities. There may be no active market in the Company's interests in Credit
Securities and the Company may be required to provide liquidity to fund Tender
Requests or repay borrowings. The Company does not have redemption rights in
relation to any of its investments. As a consequence, the value of the
Company's investments may be materially adversely affected. For additional
information refer to note 16 to the Financial Statements.
Credit risk
The Company may not achieve the Dividend Target and investors may not get back
the full value of their investment because the Company invests in Credit
Securities issued by other companies, trusts or other investment vehicles
which, compared to bonds issued or guaranteed by governments, are generally
exposed to greater risk of default in the repayment of the capital provided to
the issuer or interest payments due to the Company. The amount of credit risk
is indicated by the issuer's credit rating which is assigned by one or more
internationally recognised rating agencies. This does not amount to a guarantee
of the issuer's creditworthiness but generally provides a good indicator of the
likelihood of default. Securities which have a lower credit rating are
generally considered to have a higher credit risk and a greater possibility of
default than more highly rated securities. There is a risk that an
internationally recognised rating agency may assign incorrect or inappropriate
credit ratings to issuers. Issuers often issue securities which are ranked in
order of seniority which, in the event of default, would be reflected in the
priority in which investors might be paid back.
The level of defaults in the Portfolio and the losses suffered on such defaults
may increase in the event of adverse financial or credit market conditions.
In the event of a default of a Credit Security, the Company's right to recover
will depend on the ability of the Company to exercise any rights that it has
against the borrower under the insolvency legislation of the jurisdiction in
which the borrower is incorporated. As a creditor, the Company's level of
protection and rights of enforcement may therefore vary significantly from one
country to another, may change over time and may be subject to rights and
protections which the relevant borrower or its other creditors might be
entitled to exercise. Refer to Investment Objective and Policy in the Summary
Information for information regarding investment restrictions currently in
place in order to manage credit risk. For additional information refer to note
16 to the Financial Statements.
Foreign currency risk
The Company is exposed to foreign currency risk through its investments
denominated in currencies other than Sterling. The Company's share capital is
denominated in Sterling and its expenses are incurred in Sterling. The
Company's Financial Statements are maintained and presented in Sterling. At
year end, of the foreign currency investments, approximately 54% are in Euros
and 7% are in US dollars. Amongst other factors affecting the foreign exchange
markets, events in the Eurozone may have an impact upon the value of the Euro
which in turn will impact the value of the Company's Euro denominated
investments. The Company manages its exposure to currency movements by using
spot and forward foreign exchange contracts, which are rolled forward
periodically. For additional information refer to note 16 to the Financial
Statements.
Reinvestment risk
Quantitative easing resulted in lower yields across all fixed income products
and tightening credit spreads. This could pose a challenge for the Portfolio
Manager when it comes to reinvesting any monies that result from portfolio
asset redemptions and income payments. The Portfolio Manager has recognised
this potential challenge and performed ongoing cashflow analysis on the current
portfolio; encouragingly the redemptions and expected income payments over the
coming 12 months do not pose a significant challenge. Trying to predict market
conditions years ahead is notoriously difficult, however the Portfolio Manager
recognises there may be a requirement to be more opportunistic in terms of
timing for new investments i.e. aim to reinvest when the market is most
volatile and also to remain vigilant to requests for issuance of new shares.
For further information refer to note 16 to the Financial Statements.
Other Risks and Uncertainties
The Board has identified the following other risks and uncertainties along with
steps taken to mitigate them:
Operational risks
The Company is exposed to the risk arising from any failures of systems and
controls in the operations of the Portfolio Manager, Administrator, AIFM and
the Custodian and Depositary amongst others. The Board and its Audit Committee
regularly review reports from the Portfolio Manager, the AIFM, Administrator
and Custodian and Depositary on their internal controls. The Administrator will
report to the Portfolio Manager any valuation issues which will be brought to
the Board for final approval as required.
Accounting, legal and regulatory risks
The Company is exposed to the risk that it may fail to maintain accurate
accounting records, fail to comply with requirements of its Admission document
and fail to meet listing obligations. The accounting records prepared by the
Administrator are reviewed by the Portfolio Manager. The Portfolio Manager,
Administrator, AIFM, Custodian and Depositary and Corporate Broker provide
regular updates to the Board on compliance with the Admission document and
changes in regulation. Changes in legal or regulatory environment can have a
major impact on some classes of debt. The Portfolio Manager monitors this and
takes appropriate action.
Income recognition risk
The Board considers income recognition as another risk and uncertainty of the
Company. The Portfolio Manager estimates the remaining life of the security and
its likely terminal value, which has an impact on the effective interest rate
of the Credit Securities which in turn impacts the calculation of interest
income. The Board asked the Audit Committee to consider this risk with work
undertaken by the Audit Committee as discussed in the Audit Committee Report.
As a result of this work, the Board is satisfied that income is appropriately
stated in all material aspects in the Financial Statements.
Cyber security risks
The Company is exposed to the risk arising from a successful cyber-attack
through its service providers. The Company's service providers provide regular
updates to the Board on any cyber security issues and how they are mitigating
this risk. The Board is satisfied that the Company's service providers have the
relevant controls in place to mitigate this risk.
Shareholder Engagement
The Board welcomes shareholders' views and places great importance on
communication with its shareholders. Shareholders wishing to meet with the
Chair and other Board members should contact the Company's Administrator.
The Portfolio Manager and Listing Sponsor maintain a regular dialogue with
institutional shareholders, the feedback from which is reported to the Board.
The Company's Annual General Meeting ("AGM") provides a forum for shareholders
to meet and discuss issues of the Company and shareholders with the opportunity
to vote on the resolutions as specified in the Notice of AGM. The Notice of the
AGM and the results are released to the LSE in the form of an announcement.
In addition, the Company maintains a website which contains comprehensive
information, including links to regulatory announcements, share price
information, financial reports, investment objective and investor contacts.
Significant Shareholdings
Shareholders with holdings of more than 3.0% of the Shares of the Company at 16
January 2017 were as follows:
Percentage of
issued share
Number of capital
Shares
Nortrust Nominees Limited 23,999,733 15.53%
The Bank of New York (Nominees) Limited 20,546,332 13.29%
Platform Securities Nominees Limited 13,559,533 8.77%
Pershing Nominees Limited 13,059,501 8.45%
State Street Nominees Limited 11,096,881 7.18%
Ferlim Nominees Limited 8,088,556 5.23%
W B Nominees Limited 7,132,160 4.61%
Rock (Nominees) Limited 6,788,268 4.39%
Vidacos Nominees Limited 5,515,242 3.57%
HSBC Global Custody Nominee (UK) Limited 4,941,184 3.20%
Smith & Williamson Nominees Limited 4,657,300 3.01%
Those invested directly or indirectly in 3.0% or more of the issued share
capital of the Company will have the same voting rights as other holders of the
Shares.
Independent Auditors
A resolution for the reappointment of PricewaterhouseCoopers CI LLP will be
proposed at the forthcoming AGM.
Signed on behalf of the Board of Directors on 18 January 2017 by:
Claire Whittet Christopher
Legge
Chair Director
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Audited
Financial Statements in accordance with applicable Guernsey law and
regulations.
Guernsey Company law requires the Directors to prepare Financial Statements for
each financial year. Under that law they have elected to prepare the Financial
Statements in accordance with International Financial Reporting Standards
("IFRS") and applicable law.
The Financial Statements are required by law to give a true and fair view of
the state of affairs of the Company and of the profit or loss of the Company
for that period.
In preparing these Financial Statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable and prudent;
* state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the Financial
Statements; and
* prepare the Financial Statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors confirm that they have complied with these requirements in
preparing the Financial Statements.
The Directors are responsible for keeping proper accounting records which
disclose wit7h reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the Financial Statements have been
properly prepared in accordance with The Companies (Guernsey) Law, 2008. They
have general responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Company and to prevent and detect fraud and
other irregularities.
So far as the Directors are aware, there is no relevant audit information of
which the Company's auditors are unaware, and each Director has taken all the
steps that he or she ought to have taken as a Director in order to make himself
or herself aware of any relevant audit information and to establish that the
Company's auditors are aware of that information.
The Directors are responsible for the oversight of the maintenance and
integrity of the corporate and financial information in relation to the Company
website; the work carried out by the auditors does not involve consideration of
these matters and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the financial statements since they were
initially presented on the website.
Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
The Directors confirm that to the best of their knowledge
a. The Financial Statements have been prepared in accordance with IFRS and
give a true and fair view of the assets, liabilities, financial position
and profit or loss of the Company as at and for the year ended 30 September
2016.
b. The Annual Report includes information detailed in the Chair's Statement,
Portfolio Manager's Report, Directors' Report, Directors' Remuneration
Report, Audit Committee Report, Alternative Investment Fund Manager's
Report and Depositary Statement provides a fair review of the information
required by:
(i) DTR 4.1.8 and DTR 4.1.9 of the Disclosure and Transparency Rules,
being a fair review of the Company business and a description of the principal
risks and uncertainties facing the Company; and
(ii) DTR 4.1.11 of the Disclosure and Transparency Rules, being an
indication of important events that have occurred since the end of the
financial year and the likely future development of the Company.
In the opinion of the Board, the Financial Statements taken as a whole, are
fair, balanced and understandable and provide the information necessary to
assess the Company's position and performance, business model and strategy.
By order of the Board,
Claire Whittet Christopher
Legge
Chair Director
18 January 2017
DIRECTORS' REMUNERATION REPORT
The Directors' remuneration report has been prepared in accordance with the UK
Code as issued by the UK Listing Authority. An ordinary resolution for the
approval of the annual remuneration report was put to the shareholders at the
AGM held on 7 July 2016.
Remuneration policy
The Company's policy in regard to Directors' remuneration is to ensure that the
Company maintains a competitive fee structure in order to recruit, retain and
motivate non-executive Directors of excellent quality in the overall interests
of shareholders.
The Directors do not consider it necessary for the Company to establish a
separate Remuneration Committee. All of the matters recommended by the UK Code
that would be delegated to such a committee are considered by the Board as a
whole.
It is the responsibility of the Board as a whole to determine and approve the
Directors' remuneration, following a recommendation from the Chair who will
have given the matter proper consideration, having regard to the level of fees
payable to non-executive Directors in the industry generally, the role that
individual Directors fulfil in respect of Board and Committee responsibilities
and the time committed to the Company's affairs. The Chair's remuneration is
decided separately and is approved by the Board as a whole.
No element of the Directors' remuneration is performance related, nor does any
Director have any entitlement to pensions, share options or any long term
incentive plans from the Company.
Remuneration
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine, provided that the aggregate amount of such fees
does not exceed £150,000 per annum.
Directors are remunerated in the form of fees, payable quarterly in arrears, to
the Director personally. No Directors have been paid additional remuneration by
the Company outside their normal Director's fees and expenses.
In the year ended 30 September 2016 the Directors received the following annual
remuneration in the form of Directors' fees:
Claire Whittet (Chair of the Board) £35,000
Christopher Legge (Audit Committee Chairman) £32,500
Thomas Emch £30,000
Ian Martin £30,000
Total £127,500
With effect from 1 October 2015, the Directors' fees increased by £5,000 each.
The remuneration policy set out above is the one applied for the year ended 30
September 2016 and is not expected to change in the foreseeable future.
Appropriate Directors' and Officers' liability insurance cover is maintained by
the Company on behalf of the Directors.
The Directors were appointed as non-executive Directors by letters issued in
February and July 2014. Each Director's appointment letter provides that, upon
the termination of his/her appointment, that he/she must resign in writing and
all records remain the property of the Company. The Directors' appointments can
be terminated in accordance with the Articles and without compensation.
There is no notice period specified in the Articles for the removal of
Directors. The Articles provide that the office of Director shall be terminated
by, among other things: (a) written resignation; (b) unauthorised absences from
board meetings for six months or more; (c) unanimous written request of the
other Directors; and (d) an ordinary resolution of the Company.
Under the terms of their appointment, each Director is required to retire by
rotation and be subject to re-election at least every three years but have
opted for annual re-election. The Directors are required to seek re-election if
they have already served for more than nine years. The Company may terminate
the appointment of a Director immediately on serving written notice and no
compensation is payable upon termination of office as a director of the Company
becoming effective.
The amounts payable to Directors shown in note 14 to the Financial Statements
are for services as non-executive Directors.
No Director has a service contract with the Company, nor are any such contracts
proposed.
Signed on behalf of the Board of Directors on 18 January 2017 by:
Claire Whittet Christopher
Legge
Chair Director
AUDIT COMMITTEE REPORT
On the following sections, we present the Audit Committee's Report, setting out
the responsibilities of the Audit Committee and its key activities for the year
ended 30 September 2016.
The Audit Committee has scrutinised the appropriateness of the Company's system
of risk management and internal financial and operating controls, the
robustness and integrity of the Company's financial reporting, along with the
external audit process. The Audit Committee has devoted time to ensuring that
controls and processes have been properly established, documented and
implemented.
During the course of the year, the information that the Audit Committee has
received has been timely and clear and has enabled the Committee to discharge
its duties effectively.
The Audit Committee is supportive of the latest UK Code recommendations and
other corporate governance organisations such as the AIC, and believes that the
revised AIC Code allows the Audit Committee to further strengthen its role as a
key independent oversight Committee.
Role and responsibilities
The primary function of the Audit Committee is to assist the Board in
fulfilling its oversight responsibilities. This includes reviewing the
financial reports and other financial information and any significant financial
judgement contained therein, before publication.
In addition, the Audit Committee reviews the systems of internal financial and
operating controls on a continuing basis that the Administrator, Portfolio
Manager, AIFM, and Custodian and Depositary and the Board have established with
respect to finance, accounting, risk management, compliance, fraud and audit.
The Audit Committee also reviews the accounting and financial reporting
processes, along with reviewing the roles, independence and effectiveness of
the external auditor.
The ultimate responsibility for reviewing and approving the Annual and Interim
Financial Statements remain with the Board.
The Audit Committee's full terms of reference can be obtained by contacting the
Company's Administrator.
Risk management and internal control
The Board, as a whole, consider the nature and extent of the Company's risk
management framework and the risk profile that is acceptable in order to
achieve the Company's strategic objectives. As a result, it is considered that
the Board has fulfilled its obligations under the AIC Code.
The Audit Committee continues to be responsible for reviewing the adequacy and
effectiveness of the Company's on-going risk management systems and processes.
Its system of internal controls, along with its design and operating
effectiveness, is subject to review by the Audit Committee through reports
received from the Portfolio Manager, AIFM and Custodian and Depositary, along
with those from the Administrator and external auditor.
Fraud, Bribery and Corruption
The Board has relied on the overarching requirement placed on the service
providers under the relevant agreements to comply with applicable law,
including anti-bribery laws. A review of the service provider policies took
place at the Management Engagement Committee Meeting on 1 July 2016. The Board
receives confirmation from all service providers that there has been no fraud,
bribery or corruption.
Financial reporting and significant financial issues
The Audit Committee assesses whether suitable accounting policies have been
adopted and whether the Portfolio Manager has made appropriate estimates and
judgements. The Audit Committee reviews accounting papers prepared by the
Portfolio Manager and Administrator which provides details on the main
financial reporting judgements.
The Audit Committee also reviews reports by the external auditors which
highlight any issues with respect to the work undertaken on the audit.
The significant issues considered during the year by the Audit Committee in
relation to the Financial Statements and how they were addressed are detailed
below:
(i) Valuation of investments:
The Company's investments had a fair value of £127,968,371 as at 30 September
2016 (30 September 2015: £128,802,069) and represent a substantial portion of
net assets of the Company. As such this is the largest factor in relation to
the consideration of the Financial Statements. These investments are valued in
accordance with the Accounting Policies set out in note 2 and note 3 to the
Financial Statements. The Audit Committee considered the valuation of the
investments held by the Company as at 30 September 2016 to be reasonable based
on information provided by the Portfolio Manager, AIFM, Administrator,
Custodian and Depositary on their processes for the valuation of these
investments.
(ii) Income Recognition:
The Audit Committee considered the calculation of income from investments
recorded in the Financial Statements as at 30 September 2016. As disclosed in
note 3(ii)(b) of the Notes to the Financial Statements, the estimated life of
Credit Securities is determined by the Portfolio Manager, impacting the
effective interest rate of the Credit Securities which in turn impacts the
calculation of income from investments. The Audit Committee has reviewed the
Portfolio Manager's process for determining the expected life of the Company's
investments and found it to be reasonable based on the explanations provided
and information obtained from the Portfolio Manager. The Audit Committee was
therefore satisfied that income was appropriately stated in all material
aspects in the Financial Statements.
Following a review of the presentations and reports from the Portfolio Manager
and Administrator and consulting where necessary with the external auditor, the
Audit Committee is satisfied that the Financial Statements appropriately
address the critical judgements and key estimates (both in respect to the
amounts reported and the disclosures). The Audit Committee is also satisfied
that the significant assumptions used for determining the value of assets and
liabilities have been appropriately scrutinised, challenged and are
sufficiently robust.
The Company's reporting currency is Sterling while a significant proportion of
the investments owned are denominated in foreign currencies. The Company
operates a hedging strategy designed to mitigate the impact of foreign currency
rate changes on the performance of the Company. The Audit Committee has used
information from the Administrator and Portfolio Manager to satisfy itself
concerning the effectiveness of the hedging process, as well as to confirm that
realised and unrealised foreign currency gains and losses have been correctly
recorded.
At the request of the Audit Committee, the Administrator confirmed that it was
not aware of any material misstatements including matters relating to Financial
Statement presentation. At the Audit Committee meeting to review the Annual
Report and Audited Financial Statements, the Audit Committee received and
reviewed a report on the audit from the external auditors. On the basis of its
review of this report, the Audit Committee is satisfied that the external
auditor has fulfilled its responsibilities with diligence and professional
scepticism. The Audit Committee advised the Board that these Annual Financial
Statements, taken as a whole, are fair, balanced and understandable.
The Audit Committee is satisfied that the judgements made by the Portfolio
Manager and Administrator are reasonable, and that appropriate disclosures have
been included in the Financial Statements.
External auditors
The Audit Committee has responsibility for making a recommendation on the
appointment, re-appointment and removal of the external auditors.
PricewaterhouseCoopers CI LLP ("PwC") were appointed as the first auditors of
the Company. During the year the Audit Committee received and reviewed audit
plans and reports from the external auditors. It is standard practice for the
external auditors to meet privately with the Audit Committee without the
Portfolio Manager and other service providers being present at each Audit
Committee meeting.
To assess the effectiveness of the external audit process, the auditors were
asked to articulate the steps that they have taken to ensure objectivity and
independence, including where the auditor provides non-audit services. The
Audit Committee monitors the auditors' performance, behaviour and effectiveness
during the exercise of their duties, which informs the decision to recommend
reappointment on an annual basis.
The Company generally does not utilise external auditors for internal audit
purposes, secondments or valuation advice. Services which are in the nature of
audit, such as tax compliance, private letter rulings, accounting advice and
disclosure advice are normally permitted but will be pre-approved by the Audit
Committee.
The following table summarises the remuneration paid to PwC and to other PwC
member firms for audit and non-audit services during the year ended 30
September 2016 and for the period ended 30 September 2015.
Year Year
ended ended
30.09.16 30.09.15
PricewaterhouseCoopers CI LLP - Assurance £ £
work
- Annual audit of the 47,500 45,700
Company
- Annual audit of the Company - - 11,000
additional scope
- Interim 16,000 22,500
review
PricewaterhouseCoopers CI LLP - Non assurance work
- Tax consulting and compliance 15,000 3,000
services
For any questions on the activities of the Audit Committee not addressed in the
foregoing, a member of the Audit Committee remains available to attend each AGM
to respond to such questions.
The Audit Committee Report was approved by the Audit Committee on 18 January
2017 and signed on behalf by:
Christopher Legge
Chairman, Audit Committee
ALTERNATIVE INVESTMENT MANAGER'S REPORT
Maitland Institutional Services Limited (formerly Phoenix Fund Services (UK)
Limited) acts as the Alternative Investment Fund Manager ("AIFM") of TwentyFour
Select Monthly Income Fund Limited (the "Company" or the "AIF") providing
portfolio management and risk management services to the Company.
The AIFM has delegated the following of its alternative investment fund
management functions:
* It has delegated the portfolio management function for listed investments
to TwentyFour Asset Management LLP.
* It has delegated the portfolio management function for unlisted investments
to TwentyFour Asset Management LLP.
The AIFM is required by the Alternative Investment Fund Managers Directive
2011, 61/EU (the "AIFM Directive") and all applicable rules and regulations
implementing the AIFM Directive in the UK (the "AIFM" Rules):
* to make the annual report available to investors and to ensure that the
annual report is prepared in accordance with applicable accounting
standards, the Company's articles of incorporation and the AIFM Rules and
that the annual report is audited in accordance with International
Standards on Auditing;
* be responsible for the proper valuation of the Company's assets, the
calculation of the Company's net asset value and the publication of the
Company's net asset value;
* to make available to the Company's shareholders, a description of all fees,
charges and expenses and the amounts thereof, which have been directly or
indirectly borne by them; and
* ensure that the Company's shareholders have the ability to tender their
share in the capital of the Company in a manner consistent with the
principle of fair treatment of investors under the AIFM Rules and in
accordance with the Company's redemption policy and its obligations.
The AIFM is required to ensure that the annual report contains a report that
includes a fair and balanced review of the activities and performance of the
Company, containing also a description of the principal risks and investment or
economic uncertainties that the Company might face.
AIFM Remuneration
Under the AIFM Directive, acting as the AIFM, Maitland Institutional Services
Limited is required to disclose how those whose actions have a material impact
on the Company are remunerated.
Due to the nature of the activities conducted by Maitland Institutional
Services Limited, it has deemed itself as a lower risk firm in accordance with
SYSC 19B and the Remuneration Code. The only employees at Maitland
Institutional Services Limited permitted to have a material impact on the risk
profile of the AIF are the Board and the Head of Risk and Compliance.
The delegated Investment Manager, TwentyFour Asset Management LLP, is subject
to regulatory requirements that are broadly equivalent to those detailed in the
AIFM Directive, which include the Capital Requirements Directive or Markets in
Financial Instruments Directive. While a portion of the remuneration paid by
the Investment Manager is variable and based, in part, on the performance of
the investment portfolio, the investment discretion of the Investment Manager
is strictly controlled within certain pre-defined parameters as detailed in the
prospectus of the Company.
Under the AIFM Directive, the AIFM is required to stipulate how much it pays to
its staff, in relation to fixed and variable remuneration and how much, in
relation to the Company, is firstly attributed to all staff and those that are
deemed, under the directive, to have an impact on the risk profile of the
Company. Maitland Institutional Services Ltd does not pay any form of variable
remuneration.
September 16 Number of Total Fixed remuneration
Beneficiaries remuneration paid
Total remuneration paid by 60 £69,204 £69,204
the AIFM during the year
for work performed on the
AIF
Remuneration paid to 5 £12,457 £12,457
employees of the AIFM who
have a material impact on
the risk profile of the
AIF
In so far as the AIFM is aware:
* there is no relevant audit information of which the Company's auditors or
the Company's board of directors are unaware; and
* the AIFM has taken all steps that it ought to have taken to make itself
aware of any relevant audit information and to establish that the auditors
are aware of that information.
We hereby certify that this report is made on behalf of the AIFM, Maitland
Institutional Services Limited.
R.W. Leedham
D.Jones
Directors
Maitland Institutional Services Limited
18 January 2017
DEPOSITARY STATEMENT
for the year ended 30 September 2016
Report of the Depositary to the Shareholders
Northern Trust (Guernsey) Limited has been appointed as Depositary to
TwentyFour Select Monthly Income Fund Limited (the "Company") in accordance
with the requirements of Article 36 and Articles 21(7), (8) and (9) of the
Directive 2011/61/EU of the European Parliament and of the Council of 8 June
2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC
and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (the
"AIFM Directive").
We have enquired into the conduct of Maitland Institutional Services Limited
(the "AIFM") and the Company for the year ended 30 September 2016, in our
capacity as Depositary to the Company.
This report including the review provided below has been prepared for and
solely for the Shareholders in the Company. We do not, in giving this report,
accept or assume responsibility for any other purpose or to any other person to
whom this report is shown.
Our obligations as Depositary are stipulated in the relevant provisions of the
AIFM Directive and the relevant sections of Commission Delegated Regulation
(EU) No 231/2013 (collectively the "AIFMD legislation") and The Authorised
Closed Ended Investment Scheme Rules 2008.
Amongst these obligations is the requirement to enquire into the conduct of the
AIFM and the Company and their delegates in each annual accounting period.
Our report shall state whether, in our view, the Company has been managed in
that period in accordance with the AIFMD legislation. It is the overall
responsibility of the AIFM and the Company to comply with these provisions. If
the AIFM, the Company or their delegates have not so complied, we as the
Depositary will state why this is the case and outline the steps which we have
taken to rectify the situation.
The Depositary and its affiliates is or may be involved in other financial and
professional activities which may on occasion cause a conflict of interest with
its roles with respect to the Company. The Depositary will take reasonable care
to ensure that the performance of its duties will not be impaired by any such
involvement and that any conflicts which may arise will be resolved fairly and
any transactions between the Depositary and its affiliates and the Company
shall be carried out as if effected on normal commercial terms negotiated at
arm's length and in the best interests of Shareholders.
Basis of Depositary Review
The Depositary conducts such reviews as it, in its reasonable discretion,
considers necessary in order to comply with its obligations and to ensure that,
in all material respects, the Company has been managed (i) in accordance with
the limitations imposed on its investment and borrowing powers by the
provisions of its constitutional documentation and the appropriate regulations
and (ii) otherwise in accordance with the constitutional documentation and the
appropriate regulations. Such reviews vary based on the type of Fund, the
assets in which a Fund invests and the processes used, or experts required, in
order to value such assets.
Review
In our view, the Company has been managed during the period, in all material
respects:
(i) in accordance with the limitations imposed on the investment and borrowing
powers of the Company by the constitutional document; and by the AIFMD
legislation; and
(ii) otherwise in accordance with the provisions of the constitutional
document; and the AIFMD legislation.
For and on behalf of
Northern Trust (Guernsey) Limited
18 January 2017
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF TWENTYFOUR SELECT MONTHLY INCOME FUND LIMITED
Report on the Financial Statements
We have audited the accompanying financial statements of TwentyFour Select
Monthly Income Fund Limited (the "Company") which comprise the Statement of
Financial Position as of 30 September 2016 and the Statement of Comprehensive
Income, the Statement of Changes in Equity and the Statement of Cash Flows for
the year then ended and a summary of significant accounting policies and other
explanatory information.
Directors' Responsibility for the Financial Statements
The Directors are responsible for the preparation of financial statements that
give a true and fair view in accordance with International Financial Reporting
Standards and with the requirements of Guernsey law. The Directors are also
responsible for such internal control as they determine is necessary to enable
the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit in accordance with International Standards
on Auditing. Those Standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditors' judgement, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by the Directors, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the
financial position of the Company as of 30 September 2016, and of its financial
performance and its cash flows for the year then ended in accordance with
International Financial Reporting Standards and have been properly prepared in
accordance with the requirements of The Companies (Guernsey) Law, 2008.
Report on other Legal and Regulatory Requirements
We read the other information contained in the Annual Report and consider the
implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. The other information
is as per the table of contents.
In our opinion the information given in the Directors' Report is consistent
with the financial statements.
This report, including the opinion, has been prepared for, and only for, the
Company's members as a body in accordance with Section 262 of The Companies
(Guernsey) Law, 2008 and for no other purpose. We do not, in giving this
opinion, accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters which we are
required to review under the Listing Rules:
* the Directors' statement set out in the Directors' Report in relation to
going concern. As noted in the Directors' statement, the Directors have
concluded that it is appropriate to adopt the going concern basis in
preparing the financial statements. The going concern basis presumes that
the Company has adequate resources to remain in operation, and that the
Directors intend it to do so, for at least one year from the date the
financial statements were signed. As part of our audit we have concluded
that the Directors' use of the going concern basis is appropriate. However,
because not all future events or conditions can be predicted, these
statements are not a guarantee as to the Company's ability to continue as a
going concern;
* the Directors' statement that they have carried out a robust assessment of
the principal risks facing the Company and the Directors' statement in
relation to the longer-term viability of the Company. Our review was
substantially less in scope than an audit and only consisted of making
inquiries and considering the Directors' process supporting their
statements; checking that the statements are in alignment with the relevant
provisions of the UK Corporate Governance Code; and considering whether the
statements are consistent with the knowledge acquired by us in the course
of performing our audit;
* the part of the Corporate Governance Statement relating to the Company's
compliance with the ten further provisions of the UK Corporate Governance
Code specified for our review; and
* certain elements of the report to shareholders by the Board on Directors'
remuneration.
Evelyn Brady
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
18 January 2017
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September 2016
Year ended Year ended
30.09.16 30.09.15
Notes £ £
Income
Interest income 10,810,286 9,711,733
Net foreign currency (loss)/ 8 (11,251,978) 3,544,710
gain
Net gain/(loss) on financial
assets
at fair value through profit 9 7,938,726 (9,914,061)
or loss
Total income 7,497,034 3,342,382
Expenses
Portfolio management fees 14 (995,849) (998,154)
Directors' fees 14 (127,500) (112,842)
Administration fees 15 (101,667) (101,544)
AIFM management fees 15 (68,036) (76,175)
Audit fee (58,500) (45,700)
Custody fees 15 (16,368) (15,953)
Broker fees 15 (50,000) (50,000)
Depositary fees 15 (25,000) (23,183)
Other expenses (163,206) (164,751)
Total expenses (1,606,126) (1,588,302)
Total comprehensive income for the 5,890,908 1,754,080
year
Earnings per Ordinary Share -
Basic & Diluted 4 0.039 0.013
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these Financial Statements.
STATEMENT OF FINANCIAL POSITION
as at 30 September 2016
30.09.16 30.09.15
Assets Notes £ £
Current assets
Financial assets at fair value through profit
and loss
- Investments 9 127,968,371 128,802,069
- Derivative assets: Forward currency 17 - 480,209
contracts
Amounts due from broker 1,132,190 1,233,420
Other receivables 10 2,477,965 2,794,811
Cash and cash equivalents 8,039,495 4,532,345
Total current assets 139,618,021 137,842,854
Liabilities
Current liabilities
Amounts due to broker 2,297,691 1,889,571
Other payables 11 219,031 245,140
Financial liabilities at fair value through
profit and loss
- Derivative liabilities: Forward currency 17 279,458 1,147,799
contracts
Total current liabilities 2,796,180 3,282,510
Total net assets 136,821,841 134,560,344
Equity
Share capital account 12 148,691,163 142,609,447
Other reserves (11,869,322) (8,049,103)
Total equity 136,821,841 134,560,344
Ordinary Shares in issue 12 152,079,151 145,335,881
Net Asset Value per Ordinary Share (pence) 6 89.97 92.59
The Financial Statements were approved by the Board of Directors on
18 January 2017 and signed on its behalf by:
Claire Whittet Christopher Legge
Chair Director
The accompanying notes are an integral part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2016
Share Other
Capital
Account Reserves Total
£ £ £
Balance at 01 October 2015 142,609,447 (8,049,103) 134,560,344
Reissue of treasury shares 6,193,760 - 6,193,760
Share issue costs (62,197) - (62,197)
Income equalisation on new issues (49,847) 49,847 -
Distributions paid - (9,760,974) (9,760,974)
Total comprehensive income for the year - 5,890,908 5,890,908
Balance at 30 September 2016 148,691,163 (11,869,322) 136,821,841
Share Capital Other
Account Reserves Total
£ £ £
Balance at 01 October 2014 123,434,794 (240,328) 123,194,466
Issue of shares 16,075,985 - 16,075,985
Shares issued for repurchase 13,451,019 - 13,451,019
Purchase of own shares to hold in (13,451,019) - (13,451,019)
treasury
Reissue of treasury shares 3,551,432 - 3,551,432
Share issue costs (339,085) - (339,085)
Income equalisation on new issues (113,679) 113,679 -
Distributions paid - (9,676,534) (9,676,534)
Total comprehensive income for the year - 1,754,080 1,754,080
Balance at 30 September 2015 142,609,447 (8,049,103) 134,560,344
The accompanying notes are an integral part of these Financial Statements.
STATEMENT OF CASH FLOWS
for the year ended 30 September 2016
Year ended Year ended
30.09.16 30.09.15
Notes £ £
Cash flows used in operating activities
Total comprehensive income for the year 5,890,908 1,754,080
Adjustments for:
Net (gain)/loss on investments (7,938,726) 9,914,061
Amortisation adjustment under effective 9 (1,087,382) (639,168)
interest rate method
Unrealised (gain)/loss on derivatives 8 (388,127) 2,172,266
Decrease/(increase) in other receivables 10 316,846 (529,278)
Decrease in other payables 11 (26,109) (7,903)
Purchase of investments (75,295,581) (89,423,264)
Sale of investments 85,664,732 66,767,578
Net cash generated from/(used in) operating 7,136,561 (9,991,628)
activities
Cash flows from financing activities
Proceeds from issue of ordinary shares 12 - 16,075,985
Payment for shares redeemed to hold in 12 - 3,551,432
treasury
Proceeds from re-issuance of treasury 12 6,193,760 -
shares
Share issue costs 12 (62,197) (339,085)
Dividend distribution 19 (9,760,974) (9,676,534)
Net cash (outflow)/inflow from financing (3,629,411) 9,611,798
activities
Increase/(decrease) in cash and cash 3,507,150 (379,830)
equivalents
Cash and cash equivalents at beginning of 4,532,345 4,912,175
year
Cash and cash equivalents at end of year 8,039,495 4,532,345
The accompanying notes are an integral part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2016
1. General Information
TwentyFour Select Monthly Income Fund Limited (the "Company") was incorporated
with limited liability in Guernsey, as a closed-ended investment company on 12
February 2014. The Company's Shares were listed with a Premium Listing on the
Official List of the UK Listing Authority and admitted to trading on the Main
Market of the London Stock Exchange ("LSE") on
10 March 2014.
The investment objective and policy is set out in the Summary Information.
The Portfolio Manager of the Company is TwentyFour Asset Management LLP (the
"Portfolio Manager").
2. Principal Accounting Policies
a) Basis of preparation and Statement of compliance
The Financial Statements have been prepared in accordance with International
Reporting Financial Standards ("IFRS") as issued by the International
Accounting Standards Board ("IASB") and are in compliance with the Companies
(Guernsey) Law, 2008.
b) Presentation of information
The Financial Statements have been prepared on a going concern basis under the
historical cost convention adjusted to take account of the revaluation of the
Company's financial assets and liabilities at fair value through profit or
loss.
c) Standards, amendments and interpretations issued but not yet effective
At the reporting date of these Financial Statements, the following standards,
interpretations and amendments, which have not been applied in these Financial
Statements, were in issue but not yet effective:
- IFRS 9 Financial Instruments (Effective 1 January 2018)
- IFRS 15 Revenue from Contracts with Customers (Effective 1 January 2018)
- IFRS 7 Financial Instruments: Disclosures (Effective 1 January 2016)
- IAS 1 Disclosure Initiative (Effective 1 January 2016)
The Directors anticipate that the adoption of these standards effective in a
future period will not have a material impact on the financial statements of
the Company, other than IFRS 9. The Company is currently evaluating the
potential effect of IFRS 9.
IFRS 9 'Financial Instruments' amends IAS 39. IFRS 9 specifies how an entity
should classify and measure financial assets, including some hybrid contracts.
The standard requires all financial assets to be classified on the basis of the
entity's business model for managing the financial assets and the contractual
cash flow characteristics of the financial asset. This classification includes
financial assets initially measured at fair value plus, in the case of a
financial asset not at fair value through profit or loss, particular
transaction costs; subsequently measured at amortised costs or fair value.
These requirements improve and simplify the approach for classification and
measurement of financial assets compared with the requirements of IAS 39. The
standard applies a consistent approach to classifying financial assets and
replaces the numerous categories of financial assets in IAS 39, each of which
had its own classification criteria.
The standard also results in one impairment method, replacing the numerous
impairment methods in IAS 39 that arise from the different classification.
No new accounting standards were effected or adopted during the year having an
effect on the financial statements.
d) Financial assets at fair value through profit or loss
Classification
The Company classifies its investments in credit securities and derivatives as
financial assets at fair value through profit or loss.
This category has two sub-categories: financial assets or financial liabilities
held for trading; and those designated at fair value through profit or loss at
inception.
(i) Financial assets and liabilities held for trading
A financial asset or financial liability is classified as held for trading if
it is acquired or incurred principally for the purpose of selling or
repurchasing in the near term or if on initial recognition is part of a
portfolio of identifiable financial investments that are managed together and
for which there is evidence of a recent actual pattern of short-term profit
taking. Derivatives are categorised as held for trading. The Company does not
classify any derivatives as hedges in a designated hedging relationship and
therefore does not apply hedge accounting.
(ii) Financial assets and financial liabilities designated at fair value
through profit or loss
Financial assets and financial liabilities designated at fair value through
profit or loss at inception are financial instruments that are not classified
as held for trading but are managed, and their performance is evaluated on a
fair value basis in accordance with the Company's documented investment
strategy.
The Company's policy requires the Portfolio Manager and the Board of Directors
to evaluate the information about these financial assets and liabilities on a
fair value basis together with other related financial information.
Recognition, derecognition and measurement
Regular purchases and sales of investments are recognised on the trade date,
the date on which the Company commits to purchase or sell the investment.
Financial assets and financial liabilities at fair value through profit or loss
are initially recognised at fair value. Transaction costs are expensed as
incurred in the Statement of Comprehensive Income. Financial assets are
derecognised when the rights to receive cash flows from the investments have
expired or the Company has transferred substantially all risks and rewards of
ownership.
The Company may invest in any category of credit security, including, without
prejudice to the generality of the foregoing, bank capital, corporate bonds,
high yield bonds, leveraged loans, payment-in-kind notes and asset backed
securities.
The Company records any principal repayments as they arise and realises a gain
or loss in the net gains on financial assets at fair value through profit or
loss in the Statement of Comprehensive Income in the period in which they
occur.
The interest income arising on these Credit Securities is recognised on a
time-proportionate basis using the effective interest rate method and shown
within income in the Statement of Comprehensive Income.
Fair value estimation
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. Investments in Credit Securities are fair valued in
accordance with either i) or ii) below and the change in fair value, if any, is
recorded as net gains/(losses) on financial assets/(liabilities) at fair value
through profit or loss in the Statement of Comprehensive Income.
(i) Credit Securities traded or dealt on an active market or exchange
Credit Securities that are traded or dealt on an active market or exchange are
valued by reference to their quoted mid-market price as at the close of trading
on the reporting date as the Directors deem the mid-market price to be a
reasonable approximation of an exit price.
(ii) Credit Securities not traded or dealt on an active market or exchange
Credit Securities which are not traded or dealt on active markets or exchanges
are valued by reference to their mid-price, as at the close of business on the
reporting date as determined by an independent price vendor. If a price cannot
be obtained from an independent price vendor, or where the Portfolio Manager
determines that the provided price is not an accurate representation of the
fair value of the Credit Security, the Portfolio Manager will source mid-price
quotes at the close of business on the reporting date from independent third
party brokers/dealers for the relevant security. If no mid-price is available
then a bid-price will be used.
In cases where no third party price is available (either from an independent
price vendor or independent third party brokers/dealers), or where the
Portfolio Manager determines that the provided price is not an accurate
representation of the fair value of the Credit Security, the Portfolio Manager
will determine the valuation based on the Portfolio Manager's valuation policy.
This may include the use of a comparable arm's length transaction, reference to
other securities that are substantially the same, discounted cash flow analysis
and other valuation techniques commonly used by market participants making the
maximum use of market inputs and relying as little as possible on
entity-specific inputs.
Over-the-counter derivative contracts such as Interest Rate Swaps are valued on
a weekly basis. This may be done using reference to data supplied from an
independent data source or an alternative vendor as deemed suitable by the
Directors. Where data from an independent data source is not available, the
valuation may be done by using the counterparty's valuation provided that the
valuation is approved or verified by a party who is approved for the purpose by
the Directors and who is independent of the counterparty.
Forward foreign currency contracts
Forward foreign currency contracts are derivative contracts and as such are
recognised at fair value on the date on which they are entered into and
subsequently measured at their fair value. Fair value is determined by rates in
active currency markets. All forward foreign currency contracts are carried as
assets when fair value is positive and as liabilities when fair value is
negative. Gains and losses on forward currency contracts are recognised as part
of net foreign currency gains in the Statement of Comprehensive Income.
Interest rate swaps
Interest rate swaps are derivative contracts and as such are recognised at fair
value on the date on which they are entered into and subsequently measured at
their fair value. Fair value is determined by rates provided by brokers. All
interest rate swaps are carried as assets when fair value is positive and as
liabilities when fair value is negative. Gains and losses on interest rate
swaps are recognised as part of net gains and losses on financial assets at
fair value through profit or loss in the Statement of Comprehensive Income.
Impairment
Financial assets that are stated at cost or amortised cost are reviewed at each
reporting date to determine whether there is objective evidence of impairment.
If any such indication exists, an impairment loss is recognised in the
Statement of Comprehensive Income as the difference between the asset's
carrying amount and the present value of estimated future cash flows discounted
at the financial asset's effective interest rate.
e) Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the
Statement of Financial Position when there is a legally enforceable right to
offset the recognised amounts and there is an intention to settle on a net
basis or realise the asset and settle the liability simultaneously. Derivatives
are not settled on a net basis and therefore derivative assets and liabilities
are shown gross.
f) Amounts due from and due to brokers
Amounts due from and to brokers represent receivables for securities sold and
payables for securities purchased that have been contracted for but not yet
settled or delivered on the statement of financial position date respectively.
These amounts are recognised initially at fair value and subsequently measured
at amortised cost using the effective interest rate method.
g) Income
Interest income is recognised on a time-proportionate basis using the effective
interest rate method. Discounts received or premiums paid in connection with
the acquisition of Credit Securities are amortised into interest income using
the effective interest rate method over the expected life of the related
security.
The effective interest rate method is a method of calculating the amortised
cost of a financial asset or financial liability and of allocating the interest
income or interest expense over the relevant period. The effective interest
rate is the rate that exactly discounts estimated future cash payments or
receipts throughout the expected life of the financial instrument, or, when
appropriate, a shorter period, to the net carrying amount of the financial
asset or financial liability.
When calculating the effective interest rate, the Portfolio Manager estimates
cash flows considering the expected life of the financial instrument, including
future credit losses and deferred interest payments. The calculation includes
all fees and points paid or received between parties to the contract that are
an integral part of the effective interest rate and all other premiums or
discounts.
h) Cash and cash equivalents
Cash and cash equivalents comprises deposits held at call with banks and other
short-term investments in an active market with original maturities of three
months or less and bank overdrafts. Bank overdrafts are included in current
liabilities in the Statement of Financial Position.
i) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of Ordinary Shares are shown in equity as a
deduction, net of tax, from the proceeds and disclosed in the Statement of
Changes in Equity.
Repurchased Tendered Shares are treated as a distribution of capital and
deducted from the Share Capital account.
j) Foreign currency translation
Functional and presentation currency
Items included in the financial statements are measured using Sterling, the
currency of the primary economic environment in which the Company operates (the
"functional currency"). The Financial Statements are presented in Sterling,
which is the Company's presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign
currency assets and liabilities are translated into the functional currency
using the exchange rate prevailing at the Statement of Financial Position date.
Foreign exchange gains and losses relating to the financial assets and
liabilities carried at fair value through profit or loss are presented in the
Statement of Comprehensive Income.
k) Transaction costs
Transaction costs on financial assets at fair value through profit or loss
include fees and commissions paid to agents, advisers, brokers and dealers.
Transaction costs, when incurred, are immediately recognised in the Statement
of Comprehensive Income.
l) Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Board. The
Directors are of the opinion that the Company is engaged in a single segment of
business, being investments in Credit Securities. The Directors manage the
business in this way. For additional information refer to note 18.
m) Expenses
All expenses are included in the Statement of Comprehensive Income on an
accruals basis and are recognised through profit or loss in the Statement of
Comprehensive Income.
n) Other receivables
Other receivables are amounts due in the ordinary course of business. If
collection is expected in one year or less, they are classified as current
assets. If not, they are presented as non-current assets. Other receivables are
recognised initially at fair value and subsequently measured at amortised cost
using the effective interest rate method, less provision for impairment.
o) Other payables
Other payables are obligations to pay for services that have been acquired in
the ordinary course of business. Other payables are classified as current
liabilities if payment is due within one year or less. If not, they are
presented as non-current liabilities. Other payables are recognised initially
at fair value and subsequently measured at amortised cost using the effective
interest rate method.
p) Dividend distributions
Dividend distributions to the Company's shareholders are recognised as
liabilities in the Company's financial statements and disclosed in the
Statement of Changes in Equity in the period in which the dividends are
approved by the Board.
q) Income equalisation on new issues
In order to ensure there are no dilutive effects on earnings per share for
current shareholders when issuing new shares, a transfer is made between share
capital and income to reflect that amount of income included in the purchase
price of the new shares.
r) Treasury Shares
The Company has the right to issue and purchase up to 14.99% of the total
number of its own shares, as disclosed in note 12.
Shares held in Treasury are excluded from calculations when determining
Earnings per Ordinary Share or Net Asset Value per Ordinary Share as detailed
in notes 4 and 6.
3. Significant accounting judgements, estimates and assumptions
The preparation of the Company's Financial Statements requires
management to make judgements, estimates and assumptions that affect the
reported amounts of revenues, expenses, assets and liabilities and the
accompanying disclosures. Uncertainty about these assumptions and estimates
could result in outcomes that require a material adjustment to the carrying
amount of assets or liabilities affected in future periods.
(i) Judgements
In the process of applying the Company's accounting policies, management has
made the following judgements, which have the most significant effect on the
amounts recognised in the Financial Statements:
Functional currency
As disclosed in note 2(j), the Company's functional currency is Sterling.
Sterling is the currency in which the Company measures its performance and
reports its results, as well as the currency in which it receives subscriptions
from its investors. Dividends are also paid to its investors in Sterling. The
Directors believe that Sterling best represents the functional currency.
(ii) Estimates and assumptions
The key assumptions concerning the future and other key sources of
estimation uncertainty at the reporting date, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year, are described below. The Company based its
assumptions and estimates on parameters available when the Financial Statements
were prepared. Existing circumstances and assumptions about future
developments, however, may change due to market changes or circumstances
arising which are beyond the control of the Company. Such changes are reflected
in the assumptions when they occur.
(a) Fair value of securities not quoted in active markets
The Company carries its investments in Credit Securities at fair value,
with changes in value being recognised in the Statement of Comprehensive
Income. In cases where prices of Credit Securities are not quoted in an active
market, the Portfolio Manager will obtain prices determined at the close of
business on the reporting date from an independent price vendor. The Portfolio
Manager exercises its judgement on the quality of the independent price vendor
and information provided. If a price cannot be obtained from an independent
price vendor or where the Portfolio Manager determines that the provided price
is not an accurate representation of the fair value of the Credit Security, the
Portfolio Manager will source prices from independent third party brokers or
dealers for the relevant security, which may be indicative rather than
tradable.
Where no third party price is available, or where the Portfolio Manager
determines that the third party quote is not an accurate representation of the
fair value, the Portfolio Manager will determine the valuation based on the
Portfolio Manager's valuation policy. This may include the use of a comparable
arm's length transaction, reference to other securities that are substantially
the same, discounted cash flow analysis and other valuation techniques commonly
used by market participants making the maximum use of market inputs and relying
as little as possible on entity-specific inputs. No Credit Securities were
priced by the Portfolio Manager during the year or any previous year.
(b) Estimated life of Credit Securities
In determining the estimated life of the Credit Securities held by the Company,
the Portfolio Manager estimates the remaining life of the security with respect
to expected prepayment rates, default rates and loss rates together with other
information available in the market underlying the security. The estimated life
of the Credit Securities, as determined by the Portfolio Manager, impacts the
effective interest rate of the Credit Securities which in turn impacts the
calculation of income as discussed in note 2(g).
(c) Determination of observable inputs
As discussed in note 17, when determining the levels of investments
within the fair value hierarchy, the determination of what constitutes
'observable' requires significant judgement by the Company. The Company
considers observable data to be market data that is readily available,
regularly distributed or updated, reliable and verifiable, not proprietary, and
provided by independent sources that are actively involved in the relevant
market.
4. Earnings per Ordinary Share - Basic & Diluted
The earnings per Ordinary Share - Basic and Diluted of 3.9p (30 September 2015:
1.3p) has been calculated based on the weighted average number of Ordinary
Shares of 149,767,982 (30 September 2015: 138,712,320) and a net gain for the
year of £5,890,908 (30 September 2015: £1,754,080).
5. Income on equalisation of new issues
In order to ensure there were no dilutive effects on earnings per share
for current shareholders when issuing new shares, earnings have been calculated
in respect of the accrued income at the time of purchase and a transfer has
been made from share capital to income to reflect this. The transfer for the
year amounted to £49,847 (30 September 2015: £113,679).
6. Net Asset Value per Ordinary Share
The net asset value of each Share of 89.97p (30 September 2015: £92.59p) is
determined by dividing the net assets of the Company attributed to the Shares
of £136,821,841 (30 September 2015: £134,560,344) by the number of Shares in
issue at 30 September 2015 of 152,079,151 (30 September 2015: 145,335,881).
7. Taxation
The Company has been granted Exempt Status under the terms of The Income
Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its
liability for Guernsey taxation is limited to an annual fee of £1,200 (30
September 2015: £1,200).
8. Net foreign currency (losses)/gains
Year ended Year ended
30.09.16 30.09.15
£ £
Movement in net unrealised gain/(loss) on forward currency 388,127 (2,172,266)
contracts
Realised (loss)/gain on forward currency contracts (11,954,408) 5,657,181
Realised currency gain/(loss) on receivables/payables 304,581 (17,758)
Unrealised income exchange gain on receivables/payables 9,722 77,553
(11,251,978) 3,544,710
9. Investments
Year ended Year ended
30.09.16 30.09.15
£ £
Financial assets at fair value through profit and loss:
Unlisted Investments:
Opening amortised 139,639,982 122,539,767
cost
Purchases at cost 75,703,701 88,769,362
Proceeds on sale/principal repayment (85,563,502) (68,000,998)
Amortisation adjustment under effective interest rate 1,087,382 639,168
method
Realised gain on sale/principal 3,162,474 1,461,103
repayment
Realised loss on sale/principal (5,926,052) (5,768,420)
repayment
Closing amortised 128,103,985 139,639,982
cost
Unrealised gain on investments 8,171,289 1,659,469
Unrealised loss on investments (8,306,903) (12,497,382)
Fair value 127,968,371 128,802,069
Realised gain on sale/principal 3,162,474 1,461,103
repayment
Realised loss on sale/principal (5,926,052) (5,768,420)
repayment
Increase in unrealised gain 6,511,825 759,440
Decrease/(increase) in unrealised loss 4,190,479 (6,366,184)
Net gain/(loss) on financial assets at fair value 7,938,726 (9,914,061)
through profit or loss
10. Other receivables
As at As at
30.09.16 30.09.15
£ £
Interest income receivable 2,348,525 2,672,409
Prepaid expenses 14,413 15,175
Dividends receivable 115,027 107,227
2,477,965 2,794,811
11. Other payables
As at As at
30.09.16 30.09.15
£ £
Portfolio management fees payable 84,266 92,094
Directors' fees 31,875 26,875
payable
Administration fees payable 25,705 26,050
AIFM management fees payable 17,706 18,369
Audit fees 47,500 45,700
payable
General expenses payable 8,806 32,838
Depositary fees 2,049 2,260
payable
Custody fees payable 1,124 954
219,031 245,140
12. Share Capital
Authorised Share Capital
The Directors may issue an unlimited number of Ordinary Shares at no par value
and an unlimited number of Ordinary Shares with a par value.
Issued Share Capital
As at As at
30.09.16 30.09.15
£ £
Ordinary Shares
Share Capital at the beginning of the 142,609,447 123,434,794
year
Issue of shares - 29,527,004
Share issue costs (62,197) (339,085)
Purchase of own shares into treasury - (13,451,019)
Re-issuance of treasury 6,193,760 3,551,432
shares
Income equalisation on new issues (49,847) (113,679)
Total Share Capital at the end of the 148,691,163 142,609,447
year
30.09.16 30.09.15
£ £
Treasury Shares
Share Capital at the beginning of the year 9,899,587 -
Purchased shares - 13,451,019
Re-issued shares (6,193,760) (3,551,432)
Total Treasury Shares at the end of the year 3,705,827 9,899,587
Reconciliation of number of Shares
30.09.16 30.09.15
Shares Shares
Ordinary Shares
Shares at the beginning of the year 145,335,881 125,185,881
Issue of shares - 30,723,887
Purchase of own shares into - (14,173,887)
treasury
Re-issuance of treasury shares 6,743,270 3,600,000
Total Shares in issue at the end of 152,079,151 145,335,881
the year
The Ordinary Shares carry the following rights:
a. the Ordinary Shares carry the right to receive all income of the Company
attributable to the Ordinary Shares.
b. the Shareholders present in person or by proxy or present by a duly
authorised representative at a general meeting has, on a show of hands, one
vote and, on a poll, one vote for each Share held.
Reconciliation of number of Treasury Shares
30.09.16 30.09.15
Shares Shares
Treasury Shares
Shares at the beginning of the year 10,573,887 -
Purchase of own shares to hold in - 14,173,887
treasury
Reissue of treasury shares (6,743,270) (3,600,000)
Total Shares held in treasury at the end of the 3,830,617 10,573,887
year
The Company has the right to issue and purchase up to 14.99% of the total
number of its own shares at £0.01 each, to be classed as Treasury Shares and
may cancel those Shares or hold any such Shares as Treasury Shares, provided
that the number of Shares held as Treasury Shares shall not at any time exceed
10% of the total number of Shares of that class in issue at that time or such
amount as provided in the Companies Law.
On 13 February 2015 the Company purchased 14,173,887 Ordinary Shares of £0.01
at a price of 94.90p to be held in treasury. The total amount paid to purchase
these shares was £13,451,019 and has been deducted from the shareholders'
equity. The Company has the right to re-issue these shares at a later date. All
shares issued were fully paid. During the year 6,743,270 (30 September 2015:
3,600,000) treasury shares were re-issued for a total consideration of £
6,193,760 (30 September 2015: £3,551,432).
Shares held in Treasury are excluded from calculations when determining
Earnings per Ordinary Share or Net Asset Value per Ordinary Share as detailed
in notes 4 and 6.
13. Analysis of Financial Assets and Liabilities by Measurement Basis as per
Statement of Financial Position
Financial
assets at fair
value through Loans and
profit and receivables Total
loss
£ £ £
30 September 2016
Financial Assets
Financial assets at fair value through profit
and loss
-Investments
-Bonds 83,880,600 - 83,880,600
-Asset backed securities 44,087,771 - 44,087,771
Amounts due from broker - 1,132,190 1,132,190
Other receivables (excluding prepaid expenses) - 2,463,552 2,463,552
Cash and cash equivalents - 8,039,495 8,039,495
127,968,371 11,635,237 139,603,608
Financial
liabilities at Other
fair
value through financial
profit and liabilities Total
loss
£ £ £
30 September 2016
Financial Liabilities
Amounts due to - 2,297,691 2,297,691
broker
Other payables - 219,031 219,031
Financial liabilities at fair value through
profit and loss
-Derivative liabilities: Forward currency 279,458 - 279,458
contracts
279,458 2,516,722 2,796,180
Financial
assets at fair
value through Loans and
profit and receivables Total
loss
£ £ £
30 September 2015
Financial Assets
Financial assets at fair value through profit
and loss
-Investments
-Bonds 94,262,743 - 94,262,743
-Asset backed securities 35,378,946 - 35,378,946
-Interest rate (839,620) - (839,620)
swaps
-Derivative assets: Forward currency 480,209 - 480,209
contracts
Amounts due from broker - 1,233,420 1,233,420
Other receivables (excluding prepaid expenses) - 2,779,636 2,779,636
Cash and cash equivalents - 4,532,345 4,532,345
129,282,278 8,545,401 137,827,679
Financial
liabilities at Other
fair
value through financial
profit and liabilities Total
loss
£ £ £
30 September 2015
Financial Liabilities
Amounts due to - 1,889,571 1,889,571
broker
Other payables - 245,140 245,140
Financial liabilities at fair value through
profit and loss
-Derivative liabilities: Forward currency 1,147,799 - 1,147,799
contracts
1,147,799 2,134,711 3,282,510
14. Related Parties
a) Directors' Remuneration & Expenses
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine. The aggregate fees of the Directors will not exceed
£150,000.
The Directors' fees for the year and the outstanding fees at year end are as
follows.
Year ended Year ended
30.09.16 30.09.15
£ £
Claire Whittet (Chair of the Board) 35,000 30,000
Christopher Legge (Audit Committee Chairman) 32,500 27,500
Thomas Emch 30,000 25,000
Ian Martin 30,000 30,342
Total Directors' fees 127,500 112,842
As at As at
30.09.16 30.09.15
£ £
Directors' fee payable (note 11) 31,875 26,875
The fees paid to Mr Martin for the year ended 30 September 2015 included
unrecorded 2014 fees of £5,342 that was expensed in 2015.
With effect from 1 October 2015, the Directors' fees increased by £5,000
each.
b) Shares held by related parties
The Directors of the Company held the following shares beneficially:
30.09.16 30.09.15
Shares Shares
Claire Whittet 25,000 25,000
Christopher Legge 50,000 50,000
Thomas Emch 25,000 25,000
Ian Martin 35,000 25,000
Directors are entitled to receive the dividends on any shares held by them
during the period. Dividends declared by the Company are set out in note 19.
As at 30 September 2016, the Portfolio Manager held no Shares (30 September
2016: no Shares) of the Issued Share Capital. Partners and employees of the
Portfolio Manager increased their holdings during the year, and held 1,535,826
(30 September 2015: 883,227), which is 1.01% (30 September 2015: 0.61%) of
the Issued Share Capital.
c) Portfolio Manager
The portfolio management fee is payable to the Portfolio Manager, TwentyFour
Asset Management LLP, monthly in arrears at a rate of 0.75% per annum of the
lower of NAV, which is calculated weekly on each valuation day, or market
capitalisation of each class of shares. Total investment management fees for
the year amounted to £995,849 (30 September 2015: £998,154) of which £84,266
(30 September 2015: £92,094) is payable at year end. The Portfolio Management
Agreement dated 17 February 2014 remains in force until determined by the
Company or the Portfolio Manager giving the other party not less than twelve
months' notice in writing. Under certain circumstances, the Company or the
Portfolio Manager is entitled to immediately terminate the agreement in
writing.
The Portfolio Manager is also entitled to a commission of 0.175% of the
aggregate gross offering proceeds plus any applicable VAT in relation to any
issue of new Shares, following admission, in consideration of marketing
services that it provides to the Company. During the year, the Portfolio
Manager received £8,589 (30 September 2015: £34,348) in commission.
On 30 April 2015, the Portfolio Manager entered into a strategic partnership
with Vontobel Asset Management, however the strategic partnership has had no
impact on the Portfolio Manager's management activities or fees.
15. Material Agreements
a) Alternative Investment Fund Manager ("AIFM")
The Company's AIFM is Maitland Institutional Services Limited (formerly Phoenix
Fund Services (UK) Limited). In consideration for the services provided by the
AIFM under the AIFM Agreement the AIFM is entitled to receive from the Company
a minimum fee of £20,000 per annum and fees payable quarterly in arrears at a
rate of 0.07% of the Net Asset Value of the Company below £50 million, 0.05% on
Net Assets between £50 million and £100 million and 0.03% on Net Assets in
excess of £100 million. During the year, AIFM fees of £68,036 (30 September
2015: £76,175) were charged to the Company, of which £17,706 (30 September
2015: £18,369) remained payable at the end of the year.
b) Administrator and Secretary
Administration fees are payable to Northern Trust International Fund
Administration Services (Guernsey) Limited monthly in arrears at a rate of
0.06% of the Net Asset Value of the Company below £100 million, 0.05% on Net
Assets between £100 million and £200 million and 0.04% on Net Assets in excess
of £200 million as at the last business day of the month subject to a minimum
of £75,000 for each year. In addition, an annual fee of £25,000 will be charged
for corporate governance and company secretarial services. During the year,
administration and secretarial fees of £101,667 (30 September 2015: £101,544)
were charged to the Company, of which £25,705 (30 September 2015: £26,050)
remained payable at the end of the year.
c) Broker
For its services as the Company's broker, Numis Securites Limited (the
"Broker") is entitled to receive a retainer fee of £50,000 per annum and also a
commission of 1% on all tap issues. During the year, the Broker received £
49,081 (30 September 2015: £196,274) in commission, which is charged as a cost
of issuance.
d) Depositary
Depositary's fees are payable to Northern Trust (Guernsey) Limited monthly in
arrears at a rate of 0.0175% of the NAV of the Company below £100 million,
0.0150% on Net Assets between £100 million and £200 million and 0.0125% on Net
Assets in excess of £200 million as at the last business day of the month
subject to a minimum of £25,000 for each year. During the year, depositary fees
of £25,000 (30 September 2015: £23,183) were charged to the Company, of which £
2,049 (30 September 2015: £2,260) remained payable at the end of the year.
The Depositary is also entitled to a Global Custody fee of a minimum of £8,500
per annum plus transaction fees. Total Global Custody fees and charges for the
year amounted to £16,368 (30 September 2015: £15,953) of which £1,124 (30
September 2015: £954) is due and payable at the end of the year.
16. Financial Risk Management
The Company's activities expose it to a variety of financial risks: Market risk
(including price risk and reinvestment risk), interest rate risk, credit risk,
liquidity risk, foreign currency risk and capital risk.
The Company's financial instruments include financial assets/liabilities at
fair value through profit or loss, cash and cash equivalents, amounts due to/
from broker, other receivables and other payables. The main risks arising from
the Company's financial instruments are market price risk, interest rate risk,
credit risk, liquidity risk and currency risk. The techniques and instruments
utilised for the purposes of efficient portfolio management are those which are
reasonably believed by the Board to be economically appropriate to the
efficient management of the Company.
Market risk
Market risk embodies the potential for both losses and gains and includes
currency risk, interest rate risk and price risk. The Company's strategy on the
management of market risk is driven by the Company's investment objective. The
Company's investment objective is to generate attractive risk adjusted returns
principally through investment in Credit Securities.
(i) Price risk
The underlying investments comprised in the portfolio are subject to price
risk. The Company is therefore at risk that market events may affect
performance and in particular may affect the value of the Company's investments
which are valued on a mark to market and mark to model basis. Price risk is
risk associated with changes in market prices or rates, including interest
rates, availability of credit, inflation rates, economic uncertainty, changes
in laws, national and international political circumstances. The Company's
policy is to manage price risk by holding a diversified portfolio of assets,
through its investments in Credit Securities.
The Company's policy also stipulates that at purchase no more than 5% of the
Portfolio value can be exposed to any single Credit Security or issuer of
Credit Securities.
The price of a Credit Security can be affected by a number of factors,
including: (i) changes in the market's perception of the underlying assets
backing the security; (ii) economic and political factors such as interest
rates and levels of unemployment and taxation which can have an impact on the
arrears, foreclosures and losses incurred with respect to the pool of assets
backing the security; (iii) changes in the market's perception of the adequacy
of credit support built into the security's structure to protect against losses
caused by arrears and foreclosures; (iv) changes in the perceived
creditworthiness of the originator of the security or any other third parties
to the transaction; (v) the speed at which mortgages or loans within the pool
are repaid by the underlying borrowers (whether voluntary or due to arrears or
foreclosures).
(ii) Reinvestment risk
Reinvestment risk is the risk that future coupons from a bond will not be
reinvested at the prevailing interest rate when the bond was initially
purchased.
A key determinant of a bond's yield is the price at which it is purchased and,
therefore, when the market price of bonds generally increases, the yield of
bonds purchased generally decreases. As such, the overall yield of the
portfolio, and therefore the level of dividends payable to Shareholders, would
fall to the extent that the market prices of Credit Securities generally rise
and the proceeds of Credit Securities held by the Company that mature or are
sold are not able to be reinvested in Credit Securities with a yield comparable
to that of the portfolio as a whole.
Price sensitivity analysis
The following details the Company's sensitivity to movement in market prices.
The analysis is based on a 10% and 5% (30 September 2015: 5%) increase or
decrease in market prices. This represents management's best estimate of a
reasonable possible shift in market prices, having regard to historical
volatility.
At 30 September 2016, if the market prices had been 10% and 5% (30 September
2015: 5%) higher with all other variables held constant, the increase in the
net assets attributable to equity Shareholders would have been £12,796,837 and
£6,398,419 respectively (30 September 2015: £6,440,103). The total
comprehensive income for the year would have also increased by £12,796,837 and
£6,398,419 (30 September 2015: £6,440,103). An equal change in the opposite
direction would have decreased the net assets attributable to equity
Shareholders and total comprehensive income respectively.
Actual trading results may differ from the above sensitivity analysis and those
differences may be material.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect the fair value of financial assets at fair value through profit or
loss.
The tables below summarise the Company's exposure to interest rate risk:
Floating Fixed rate Non-interest Total
rate bearing
As at 30 September 2016 £ £ £ £
Investments 48,625,988 79,342,383 - 127,968,371
Amounts due from broker - - 1,132,190 1,132,190
Other receivables - - 2,477,965 2,477,965
Cash and cash equivalents 8,039,495 - - 8,039,495
Derivative liabilities: - - (279,458) (279,458)
Forward currency contracts
Amounts due to broker - - (2,297,691)
(2,297,691)
Other payables - - (219,031) (219,031)
Net current assets 56,665,483 79,342,383 813,975 136,821,841
As at 30 September 2015 £ £ £ £
Investments 45,203,982 83,598,087 - 128,802,069
Amounts due from broker - - 1,233,420 1,233,420
Other receivables - - 2,794,811 2,794,811
Cash and cash equivalents 4,532,345 - - 4,532,345
Derivative assets: Forward - - 480,209 480,209
currency contracts
Derivative liabilities: - - (1,147,799)
Forward currency contracts (1,147,799)
Amounts due to broker - - (1,889,571)
(1,889,571)
Other payables - - (245,140) (245,140)
Net current assets 49,736,327 83,598,087 1,225,930 134,560,344
The Company holds fixed rate and floating rate financial instruments which,
based on current portfolio duration, have low exposure to fair value interest
rate risk as, when the short-term interest rates increase, the interest rate on
a floating rate note will increase. The maximum time to re-fix interest rates
is six months and therefore the Company has low interest rate risk and, as such
it is not deemed necessary to perform sensitivity analysis over interest rate
risk. As at 30 September 2016, 65% of the Company was invested in fixed rate
securities, however overall duration of the Company was 2.9 years. The value of
Credit securities may be affected by interest rate movements. Interest
receivable on bank deposits or payable on bank overdraft positions will be
affected by fluctuations in interest rates, however the underlying cash
positions will not be affected.
The Company's continuing position in relation to interest rate risk is
monitored on a weekly basis by the Portfolio Manager as part of its review of
the weekly Net Asset Value calculations prepared by the Company's
Administrator.
Credit risk
Credit risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Company. The Company
has a credit policy in place and the exposure to credit risk is monitored on an
on-going basis.
The main concentration of credit risk to which the Company is exposed arises
from the Company's investments in Credit Securities. The Company is also
exposed to counterparty credit risk on forwards, cash and cash equivalents,
amounts due from brokers and other receivable balances.
The Company's policy is to manage this risk by maintaining a portfolio
diversified by issuer. While the prospectus permits no more than 5% of the
portfolio value to be invested in any single Credit Security or issuer of
Credit Securities, the Portfolio Manager operates to stricter exposures
dependent on the credit rating of each single Credit Security or issuer of
Credit Securities.
Portfolio of debt securities by ratings category using the highest rating
assigned by Standard and Poor's ("S&P"), Moody's Analytics ("Moody's") or Fitch
Ratings ("Fitch"):
30.09.16 30.09.15
BBB 0.00% 0.78%
BBB- 4.55% 4.81%
BB+ 10.89% 15.99%
BB 10.58% 4.27%
BB- 4.93% 7.21%
B+ 6.44% 6.31%
B 28.01% 27.87%
B- 10.52% 9.50%
CCC+ 4.86% 12.26%
CCC 0.00% 0.74%
CCC- 0.13% 0.00%
CC 1.41% 0.96%
Not Rated 17.68% 9.30%
100.00% 100.00%
To further understand credit risk, the Portfolio Manager undertakes extensive
due diligence procedures on investments in Credit Securities and monitors the
on-going investment in these securities.
The Company manages its counterparty exposure in respect of cash and cash
equivalents and forwards by investing with counterparties with a "single A" or
higher credit rating. The majority of cash is currently placed with The
Northern Trust Company. The Company is subject to credit risk to the extent
that this institution may be unable to return this cash. The Northern Trust
Company is a wholly owned subsidiary of The Northern Trust Corporation. The
Northern Trust Corporation is publicly traded and a constituent of S&P 500. The
Northern Trust Corporation has a credit rating of A+ from Standard & Poor's and
A2 from Moody's.
The Company's maximum credit exposure is limited to the carrying amount of
financial assets recognised as at the statement of financial position date, as
summarised below:
30.09.16 30.09.15
£ £
Investments 127,968,371 128,802,069
Amounts due from 1,132,190 1,233,420
broker
Cash and cash equivalents 8,039,495 4,532,345
Derivative assets: Forward currency contracts - 480,209
Other receivables 2,477,965 2,794,811
139,618,021 137,842,854
Investments in Credit Securities that are not backed by mortgages present
certain risks that are not presented by mortgage-backed securities ("MBS").
Primarily, these securities may not have the benefit of the same security
interest in the related collateral. Therefore, there is a possibility that
recoveries on defaulted collateral may not, in some cases, be available to
support payments on these securities. The risk of investing in these types of
Credit Securities is ultimately dependent upon payment of the underlying debt
by the debtor.
Liquidity risk
Liquidity risk is the risk that the Company may not be able to generate
sufficient cash resources to settle its obligations in full as they fall due or
can only do so on terms that are materially disadvantageous.
Investments made by the Company in Credit Securities may be relatively illiquid
and this may limit the ability of the Company to realise its investments.
Investments in Credit Securities may also have no active market and the Company
also has no redemption rights in respect of these investments. The Company has
the ability to borrow to ensure sufficient cash flows.
The Portfolio Manager considers expected cash flows from financial assets in
assessing and managing liquidity risk, in particular its cash resources and
trade receivables. Cash flows from trade and other receivables are all
contractually due within twelve months.
The Portfolio Manager shall maintain a liquidity management policy to monitor
the liquidity risk of the Company.
Shareholders have no right to have their shares redeemed or repurchased by the
Company, except as detailed under the Capital Risk Management (Quarterly
Tenders) section of this note. Shareholders wishing to release their investment
in the Company are therefore required to dispose of their shares on the market.
The table below analyses the Company's liabilities into relevant maturity
groupings based on the maturities at the statement of financial position date.
The amounts in the table are the undiscounted net cash flows on the financial
liabilities:
Up to 1 1-6 months 6-12 Total
month months
As at 30 September 2016 £ £ £ £
Amounts due to broker (2,297,691) - - (2,297,691)
Derivative liabilities: - (279,458) - (279,458)
Forward currency
contracts
Other payables (171,531) (47,500) - (219,031)
Total (2,469,222) (326,958) -
(2,796,180)
As at 30 September 2015 £ £ £ £
Amounts due to broker (1,889,571) - - (1,889,571)
Derivative liabilities: (1,147,799) - - (1,147,799)
Forward currency
contracts
Other payables (199,440) (45,700) - (245,140)
Total (3,236,810) (45,700) -
(3,282,510)
Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates. The Company invests
predominantly in non-Sterling assets while its Shares are denominated in
Sterling, its expenses are incurred in Sterling and its presentational currency
is Sterling. Therefore the Statement of Financial Position may be significantly
affected by movements in the exchange rate between foreign currencies and
Sterling. The Company manages the exposure to currency movements by using spot
and forward foreign exchange contracts, rolling forward on a periodic basis.
At year end, the Company had two (30 September 2015: sixteen) open forward
currency contracts and nil (30 September 2015: five) open spot currency
contracts.
Open forward currency contracts
Outstanding Mark to Unrealised
contracts market gains/
equivalent (losses)
Contract
values
30.09.16 30.09.16 30.09.16 30.09.16
Currency £ £ £
Two Sterling forward foreign
currency
contracts
totalling:
1 EUR forward foreign currency (79,187,520) (68,278,647) (68,552,759) (274,112)
contract
1 USD forward foreign currency (12,087,442) (9,294,879) (9,300,225) (5,346)
contract
(279,458)
Outstanding Mark to Unrealised
contracts market gains/
equivalent (losses)
Contract
values
30.09.15 30.09.15 30.09.15 30.09.15
Currency £ £ £
Sixteen Sterling forward foreign currency
contracts
totalling:
2 CHF forward foreign currency (8,550,000) (5,790,367) (5,779,563) 10,804
contract
3 EUR forward foreign currency (89,400,000) (66,323,609) (65,914,740) 408,869
contract
2 USD forward foreign currency 4,400,000 2,876,274 2,904,770 28,496
contract
448,169
4 EUR forward foreign currency (96,400,000) (70,494,957) (71,038,466) (543,509)
contract
2 SEK forward foreign currency (17,750,000) (1,376,568) (1,397,625) (21,057)
contract
2 USD forward foreign currency (31,000,000) (20,265,914) (20,466,453) (200,539)
contract
1 CHF forward foreign currency (200,000) (132,901) (135,128) (2,227)
contract
(767,332)
Open spot currency contracts
Outstanding Mark to Unrealised
contracts market gains/
equivalent (losses)
Contract
values
30.09.15 30.09.15 30.09.15 30.09.15
Currency £ £ £
Five Sterling spot
currency
contracts
totalling:
1 EUR spot currency (1,800,000) (1,328,850) (1,326,457) 2,393
contract
1 SEK spot currency 8,800,000 687,022 692,679 5,657
contract
1 USD spot currency 13,300,000 8,756,337 8,780,327 23,990
contract
32,040
1 EUR spot currency 93,800,000 69,496,420 69,123,125 (373,295)
contract
1 CHF spot currency 4,400,000 2,980,020 2,972,848 (7,172)
contract
(380,467)
As at 30 September 2016 and 2015 the Company held the following assets and
liabilities denominated in currencies other than Pound Sterling:
30.09.16 30.09.15
£ £
Investments 77,113,129 77,667,796
Cash and cash equivalents 1,646,323 2,253,255
Other receivables 1,271,578 2,852,506
Less: Amounts due to (1,297,691) -
broker
Less: Open forward currency (77,852,985) (161,827,206)
contracts
Add: Open spot currency - 80,242,525
contracts
880,354 1,188,876
The table below summarises the sensitivity of the Company's assets and
liabilities to changes in foreign exchange movements between Euro and Sterling
as at 30 September 2016 and 2015. The analysis is based on the assumption that
the relevant foreign exchange rate increased/decreased by the percentage
disclosed in the table, with all other variables held constant. This represents
management's best estimate of a reasonable possible shift in the foreign
exchange rates, having regard to historical volatility of those rates.
30.09.16 30.09.15
£ £
Impact on Statement of Comprehensive Income
and Equity in response to
a:
- 10% (30.09.15: 5%) increase in EUR/GBP (25,230) (41,367)
- 10% (30.09.15: 5%) decrease in EUR/GBP 123,352 115,958
Impact on Statement of Changes in Equity in
response to a:
- 10% (30.09.15: 5%) increase in EUR/GBP (25,230) (41,367)
- 10% (30.09.15: 5%) decrease in EUR/GBP 123,352 115,958
Capital risk management
The Company manages its capital to ensure that it is able to continue as a
going concern while following the Company's stated investment policy. The
capital structure of the Company consists of Shareholders' equity, which
comprises share capital and other reserves. To maintain or adjust the capital
structure, the Company may return capital to Shareholders or issue new Shares.
There are no regulatory requirements to return capital to Shareholders.
(i) Quarterly Tenders
With the objective of minimising the risk of the Ordinary Shares trading at a
discount to NAV and to assist in the narrowing of any discount at which the
Ordinary Shares may trade from time to time, the Company has incorporated into
its structure a mechanism (a "Quarterly Tender"), contingent on certain factors
as described below, which can be exercised at the discretion of the Directors,
to provide Shareholders with a quarterly opportunity to submit Ordinary Shares
for placing or repurchase by the Company at a price representing a discount of
no more than 2% to the then prevailing NAV.
Upon confirmation of the number of Tender Requests made in respect of each
Quarter Record Date, the Company intends first, through its corporate broker
acting on a reasonable endeavours basis, to seek to satisfy Tender Requests by
placing the Tendered Shares with investors in the secondary market.
Second, subject to the Tender Restrictions, the Company intends to repurchase
for cancellation any Tendered Shares not placed in the secondary market.
It is anticipated that the Company will tender on a quarterly basis for up to
20% of the Ordinary Shares in issue as at the relevant Quarter Record Date,
subject to an aggregate limit of 50% of the Ordinary Shares in issue in any
twelve month period ending on the relevant Quarter Record Date.
(ii)Share buybacks
The Company has been granted the authority to make market purchases of up to a
maximum of 14.99% of the aggregate number of Ordinary Redeemable Shares in
issue immediately following Admission at a price not exceeding the higher of
(i) 5% above the average of the mid-market values of the Ordinary Redeemable
Shares for the 5 business days before the purchase is made or, (ii) the higher
of the price of the last independent trade and the highest current investment
bid for the Ordinary Redeemable Shares.
In deciding whether to make any such purchases the Directors will have regard
to what they believe to be in the best interests of Shareholders as a whole, to
the applicable legal requirements and any other requirements in its Articles.
The making and timing of any buybacks will be at the absolute discretion of the
Board and not at the option of the Shareholders, and is expressly subject to
the Company having sufficient surplus cash resources available (excluding
borrowed moneys).
The Listing Rules prohibit the Company from conducting any share buybacks
during close periods immediately preceding the publication of annual and
interim results.
(iii) Continuation votes
In the event that:
(i) the Dividend Target, as disclosed in note 19, is not met; or
(ii) on any Tender Submission Deadline, applications for the Company to
repurchase 50% or more of the Company's issued Ordinary Shares, calculated as
at the relevant Quarter Record Date, are received by the Company,
A General Meeting will be convened at which the Directors will propose an
Ordinary Resolution that the Company should continue as an investment company.
If any such Ordinary Resolution is not passed, the Directors shall draw up
proposals for the voluntary liquidation, unitisation, reorganisation or
reconstruction of the Company for submission to the members of the Company at a
General Meeting to be convened by the Directors for a date not more than 6
months after the date of the meeting at which such Ordinary Resolution was not
passed.
17. Fair Value Measurement
All assets and liabilities are carried at fair value or at carrying value which
equates to fair value.
IFRS 13 requires the Company to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy has the following levels:
(i) Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1).
(ii) Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices including interest rates, yield
curves, volatilities, prepayment speeds, credit risks and default rates) or
other market corroborated inputs (level 2).
(iii) Inputs for the asset or liability that are not based on observable market
data (that is, unobservable inputs) (level 3).
The following table analyses within the fair value hierarchy the Company's
financial assets and liabilities (by class) measured at fair value as at 30
September 2016.
Level 1 Level 2 Level 3 Total
£ £ £ £
Assets
Financial assets at fair value
through profit or loss
-Investments
-Bonds - 38,924,491 44,956,109 83,880,600
-Asset backed securities - 33,298,000 10,789,771 44,087,771
Total assets as at 30 September - 72,222,491 55,745,880 127,968,371
2016
Liabilities
Financial liabilities at fair value
through profit or loss
-Derivative liabilities: Forward
currency
contracts - 279,458 - 279,458
Total liabilities as at 30 - 279,458 - 279,458
September 2016
The following table analyses within the fair value hierarchy the Company's
financial assets and liabilities (by class) measured at fair value as 30
September 2015.
Level 1 Level 2 Level 3 Total
£ £ £ £
Assets
Financial assets at fair value
through profit or loss
-Investments
-Bonds - 26,900,396 67,362,346 94,262,743
-Interest rate swaps - - (839,620) (839,620)
-Asset backed securities - 27,406,306 7,972,641 35,378,946
-Derivative assets: Forward
currency
contracts - 480,209 - 480,209
Total assets as at 30 September - 54,786,911 74,495,367 129,282,278
2015
Liabilities
Financial liabilities at fair value
through profit or loss
-Derivative liabilities: Forward
currency
contracts - 1,147,799 - 1,147,799
Total liabilities as at 30 - 1,147,799 - 1,147,799
September 2015
Credit Securities which have a value based on quoted market prices in active
markets are classified in level 1. At the end of the year, no Credit Securities
held by the Company are classified as level 1.
Credit Securities which are not traded or dealt on organised markets or
exchanges are classified in level 2 or level 3. Credit securities priced at
cost are classified as level 3. Credit securities with prices obtained from
independent price vendors, where the Portfolio Manager is able to assess
whether the observable inputs used for their modelling of prices is accurate
and the Portfolio Manager has the ability to challenge these vendors with
further observable inputs, are classified as level 2. Prices obtained from
vendors who are not easily challengeable or transparent in showing their
assumptions for the method of pricing these assets, are classified as level 3.
Credit Securities priced at an average of two vendors' prices are classified as
level 3.
Where the Portfolio Manager determines that the price obtained from an
independent price vendor is not an accurate representation of the fair value of
the Credit Security, the Portfolio Manager may source prices from third party
broker or dealer quotes and if the price represents a reliable and an
observable price, the Credit Security is classified in level 2. Any broker
quote that is over 20 days old is considered stale and is classified as level
3.
There were no transfers between level 1 and 2 during the year, however
transfers from level 3 to level 2 occurred based on the Portfolio Manager's
ability to obtain a reliable and observable price as detailed above.
During the year the level classification policy employed by the Portfolio
Manager was updated following an exercise undertaken to assess the transparency
offered by third party price vendors, which has enabled the Portfolio Manager
to determine the appropriate classification between level 2 and level 3 with
greater precision.
As such the comparative period level three information has been restated to
account for a reclassification from level 3 to level 2 amounting to £
47,829,924, such that the comparative levelling table is comparable and in line
with the Company's enhanced levelling assessment.
Due to the inputs into the valuation of Credit Securities classified as level 3
not being available or visible to the Company, no meaningful sensitivity on
inputs can be performed.
The following table presents the movement in level 3 instruments for the year
ended 30 September 2016 by class of financial instrument.
Preferred Bonds Interest Asset Total
Stock Rate Swaps backed
securities
£ £ £ £ £
Opening balance - 67,362,346 (839,620) 7,972,641 74,495,367
Net (sales)/ - (17,159,353) 1,076,632 (779,707) (16,862,428)
purchases
Net realised gain/ - 391,035 (1,076,632) (331,193) (1,016,790)
(loss) for the year
Net unrealised gain - 165,750 839,620 912,547 1,917,917
for the year
Transfer into Level - 11,184,039 - 5,619,998 16,804,037
3
Transfer out of - (16,987,708) - (2,604,515) (19,592,223)
Level 3
Closing balance - 44,956,109 - 10,789,771 55,745,880
The following table presents the movement in level 3 instruments for the year
ended 30 September 2015 by class of financial instrument.
Preferred Bonds Interest Asset backed Total
Stock Rate Swaps securities
£ £ £ £ £
Opening balance 2,895,000 49,692,194 (252,574) 10,988,865 63,323,485
Net purchases - 20,131,811 - 5,096,290 25,228,101
Investment (2,895,000) 2,895,000 - - -
reclassification
Net realised (loss)/ - (326,034) - 12,357 (313,677)
gain for the year
Net unrealised - (1,510,989) (587,046) 24,123 (2,073,912)
(loss)/gain for the
year
Transfer into Level - 6,660,081 - 1,653,589 8,313,670
3
Transfer out of - (10,179,717) - (9,802,583) (19,982,300)
Level 3
Closing balance - 67,362,346 (839,620) 7,972,641 74,495,367
The following table analyses within the fair value hierarchy the
Company's assets and liabilities not measured at fair value at 30 September
2016 but for which fair value is disclosed.
Level 1 Level 2 Level 3 Total
30 September 2016 £ £ £ £
Assets
Amounts due from broker - 1,132,190 - 1,132,190
Other receivables - 2,477,965 - 2,477,965
Cash and cash equivalents 8,039,495 - - 8,039,495
Total 8,039,495 3,610,155 - 11,649,650
Liabilities
Amounts due to broker - 2,297,691 - 2,297,691
Other payables - 219,031 - 219,031
Total - 2,516,722 - 2,516,722
The following table analyses within the fair value hierarchy the Company's
assets and liabilities not measured at fair value at 30 September 2015 but for
which fair value is disclosed.
Level 1 Level 2 Level 3 Total
30 September 2015 £ £ £ £
Assets
Amounts due from broker - 1,233,420 - 1,233,420
Other receivables - 2,794,811 - 2,794,811
Cash and cash 4,532,345 - - 4,532,345
equivalents
Total 4,532,345 4,028,231 - 8,560,576
Liabilities
Amounts due to broker - 1,889,571 - 1,889,571
Other payables - 245,140 - 245,140
Total - 2,134,711 - 2,134,711
The assets and liabilities included in the above tables are carried at
amortised cost; their carrying values are a reasonable approximation of fair
value.
Cash and cash equivalents include deposits held with banks.
Amounts due to brokers and other payables represent the contractual amounts and
obligations due by the Company for settlement of trades and expenses. Amounts
due from brokers and other receivables represent the contractual amounts and
rights due to the Company for settlement of trades and income.
18. Segmental Reporting
The Board is responsible for reviewing the Company's entire
portfolio and considers the business to have a single operating segment. The
Board's asset allocation decisions are based on a single, integrated investment
strategy, and the Company's performance is evaluated on an overall basis.
The Company invests in a diversified portfolio of Credit
Securities. The fair value of the major financial instruments held by the
Company and the equivalent percentages of the total value of the Company are
reported in the Top Twenty Holdings.
Revenue earned is reported separately on the face of the Statement
of Comprehensive Income as investment income being interest income received
from Credit Securities.
19. Dividend Policy
The Board intends to distribute an amount at least equal to the
value of the Company's net income arising each financial year to the holders of
Ordinary Shares. However, there is no guarantee that the dividend target of 6.0
pence per Ordinary Share for each financial year will be met or that the
Company will make any distributions at all.
Distributions made with respect to any income period comprise (a) the accrued
income of the portfolio for the period (for these purposes, the Company's
income will include the interest payable by the Credit Securities in the
Portfolio and amortisation of any discount or premium to par at which a Credit
Security is purchased over its remaining expected life), and (b) an additional
amount to reflect any income purchased in the course of any share subscriptions
that took place during the period. Including purchased income in this way
ensures that the income yield of the shares is not diluted as a consequence of
the issue of new shares during an income period and (c) any gain / (loss) on
the foreign exchange contracts caused by the libor differentials between each
foreign exchange currency pair.
The Board expects that dividends will constitute the principal element of the
return to the holders of Ordinary Shares.
The Company declared the following dividends in respect of the distributable
profit for the year ended 30 September 2016:
Period to Dividend Net dividend Ex-dividend date Record date Pay date
rate per paid
Share -Income
(pence) (£)
31 October 2015 0.50 744,179 19 November 2015 20 November 30 November 2015
2015
30 November 2015 0.50 744,179 17 December 2015 18 December 31 December 2015
2015
31 December 2015 0.50 744,179 21 January 2016 22 January 2016 29 January 2016
31 January 2016 0.50 744,179 18 February 2016 19 February 29 February 2016
2016
29 February 2016 0.50 746,679 17 March 2016 18 March 2016 31 March 2016
31 March 2016 0.50 754,146 16 April 2016 17 April 2016 30 April 2016
30 April 2016 0.50 754,146 19 May 2016 20 May 2015 31 May 2016
31 May 2016 0.50 754,146 16 June 2016 17 June 2016 30 June 2016
30 June 2016 0.50 754,146 21 July 2016 22 July 2016 29 July 2016
31 July 2016 0.50 754,146 18 August 2016 19 August 2016 28 August 2016
31 August 2016 0.50 764,146 15 September 16 September 30 September
2016 2016 2016
30 September 1.35 2,055,980 20 October 2016 21 October 2016 31 October 2016
2016
Under the Companies (Guernsey) Law, 2008, the Company can distribute dividends
from capital and revenue reserves, subject to the net asset and solvency test.
The net asset and solvency test considers whether a company is able to pay its
debts when they fall due, and whether the value of a company's assets is
greater than its liabilities. The Board confirms that the Company passed
the net asset and solvency test for each dividend paid.
20. Ultimate Controlling Party
In the opinion of the Directors on the basis of shareholdings advised to
them, the Company has no ultimate controlling party.
21. Subsequent Events
These Financial Statements were approved for issuance by the Board on 18
January 2017. Subsequent events have been evaluated until this date.
Subsequent to the year end and up to the date of the Annual Report and Audited
Financial Statements, the following events took place:
Dividend declarations
Declaration date Dividend
rate per
Share
(pence)
12 October 2016 1.35
10 November 2016 0.50
8 December 2016 0.50
11 January 2017 0.50
Re-issuance of Treasury Shares
Date of Shares £
Re-issue
6 October 2016 2,500,000 2,294,500
As at the date of approval for issuance of the Annual Report and Audited
Financial Statements, the Company had 154,579,151 Ordinary shares in issue and
1,330,617 held in treasury.
CORPORATE INFORMATION
Directors Receiving Agent
Claire Whittet (Chair) Computershare Investor Services PLC
Christopher Legge The Pavillions
Thomas Emch Bridgewater Road
Ian Martin Bristol, BS13 8AE
Registered Office UK Legal Advisers to the Company
PO Box 255 Eversheds LLP
Trafalgar Court One Wood Street
Les Banques London, EC2V 7WS
St Peter Port
Guernsey, GY1 3QL
Portfolio Manager Guernsey Legal Advisers to the
Company
TwentyFour Asset Management LLP Carey Olsen
8th Floor The Monument Building Carey House
11 Monument Street Les Banques
London, EC3R 8AF St Peter Port
Guernsey, GY1 4BZ
Alternative Investment Fund Manager Independent Auditor
Maitland Institutional Services Limited PricewaterhouseCoopers CI LLP
(formerly Phoenix Fund Services (UK) PO Box 321
Limited)
Springfield Lodge Royal Bank Place
Colchester Road 1 Glategny Esplanade
Chelmsford, CM2 5PW St Peter Port
Guernsey, GY1 4ND
Custodian, Principal Banker and Registrar
Depositary
Northern Trust (Guernsey) Limited Computershare Investor Services
PO Box 71 (Guernsey) Limited
Trafalgar Court 3rd Floor
Les Banques NatWest House
St Peter Port Le Truchot
Guernsey, GY1 3DA St Peter Port
Guernsey, GY1 1WD
Administrator and Company Secretary Broker and Financial Adviser
Northern Trust International Fund Numis Securities Limited
Administration The London Stock Exchange Building
Services (Guernsey) Limited
PO Box 255 10 Paternoster Square
Trafalgar Court London, EC4M 7LT
Les Banques
St Peter Port
Guernsey, GY1 3QL
TWENTYFOUR SEL : Select Monthly Income Fund - Annual Financial Report
January 19, 2017 at 02:01 am EST
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