TIDMFCAP
RNS Number : 2488R
FRM Credit Alpha Limited
01 November 2011
FRM Credit Alpha Limited
Annual Report and Financial Statements for the year ended 30
June 2011
Copies of the annual report and financial statements have been
submitted to the National Storage Mechanism and will shortly be
available for inspection at www.hemscott.com/nsm.do
A copy of the annual report and financial statements will also
be available to download from the Company's website,
www.frmcredit.com
For further information please contact:
Chris Brierley
Financial Risk Management Limited
020 7968 6136
DIRECTORS' REPORT FOR THE YEAR ENDED 30 JUNE 2011
Managed Wind-Down
On 4 February 2011 a circular recommending proposals for a
managed wind-down of the Company and giving notice of an
Extraordinary General Meeting to be held on 17 March 2011 was sent
to Shareholders. At the Extraordinary General Meeting held on 17
March 2011 the special resolution that the Company modify its
investment policy in order to effect a managed wind-down was
approved by 100% of voting members. Subsequent to that date the
necessary steps have been put in place to begin the managed
wind-down of the Company. On 11 May 2011 the Company resolved to
return GBP31,000,000 by way of a compulsory partial redemption of
shares at a price of 88.6 pence per share, the Company's NAV per
share as at 31 March 2011. On 14 July 2011 the Company resolved to
return GBP8,003,806 by way of a further compulsory partial
redemption of shares at a price of 88.9 pence per share, the
Company's NAV per share as at 30 June 2011.The remainder of the net
assets attributable to holders of shares will be returned in line
with the Company's modified investment policy of realising the
Company's existing investments in an orderly and timely manner,
with a view to distributing cash to Shareholders (in accordance
with their rights to distributions on a winding-up as set out in
the Articles) at appropriate times as sufficient investments are
realised. The Company will not make any new investments other than
in cash or cash equivalents pending distribution of cash to
Shareholders.
Independent Auditors
The Company's Independent Auditors, PricewaterhouseCoopers CI
LLP, have indicated their willingness to continue in office, and a
resolution reappointing them and authorising the Directors to agree
their remuneration will be proposed at the Annual General
Meeting.
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors are responsible for preparing the financial report
for each financial period which gives a true and fair view, in
accordance with applicable Guernsey law and International Financial
Reporting Standards, of the state of affairs of the Company and of
the profit or loss of the Company for that period. In preparing
this year-end financial report, 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 annual financial report; and
-- prepare the financial report on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business. Given the proposal for winding down the
Company, this financial report was prepared on a break up basis of
accounting.
The Directors confirm that they have complied with the above
requirements in preparing the year-end financial report.
The Directors are responsible for keeping proper accounting
records that disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the year-end financial report complies with The Companies
(Guernsey) Law, 2008 and the Prospectus. They are also responsible
for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
Legislation in Guernsey governing the preparation and
dissemination of financial statement may differ from legislation in
other jurisdictions.
As required under the Disclosure and Transparency Rules of the
United Kingdom's Financial Services Authority, the Directors
confirm, to the best of their knowledge:
-- The financial report has been prepared in accordance with
International Financial Reporting Standards (IFRS) and gives a true
and fair view of the assets, liabilities, financial position and
profit of the Company;
-- The Management Report which follows includes;
- A fair view of the development, performance and position of
the Company during the period; and
- A statement of the principal risks and uncertainties the Company faces.
CHAIRMAN'S STATEMENT
Proposals for the managed wind down of the Company were
considered and approved at the Extraordinary General Meeting held
on 17 March 2011.
Since that date the Investment Manager has been liquidating
positions in order to enable the Company to return funds to its
Shareholders.
In May 2011, the Company returned the sum of GBP31,000,000 by
way of a compulsory partial redemption of Sterling Shares being
52.92% of the issued share capital as at the date of
redemption.
On 22 July 2011, a further GBP8,003,806 was returned to
Shareholders representing 28.92% of the Company's then issued share
capital.
The Investment Manager is continuing to liquidate the portfolio
and it is anticipated that a further distribution will be made
towards the end of 2011. This will as always be dependent upon the
liquidity of the underlying investee funds. It is not possible at
the time of this Statement to give any indication of the date of
any possible distribution in 2012.
As the liquidation of the portfolio proceeds and capital is
distributed to Shareholders, the portfolio becomes progressively
more concentrated in a small number of illiquid investments.
Substantially all of the assets now remaining have a liquidity
profile of more than six months. Whilst the Directors have not had
cause to adjust the valuations attributed to the value of these
assets as detailed in the annual financial report, the Board draws
attention to the fact that the reduction in the number and
liquidity of the remaining assets increases the risk of variation
in or changes to the valuations as redemptions take place.
Dr Damian Johnson has indicated that he will not be standing for
re-election at the forthcoming AGM and the Board of Directors
wishes to express its thanks to him for his services to the Company
since incorporation.
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2011
Notes 30 June 2011 30 June 2010
US$ US$
Assets
Non-current assets
Financial assets at fair value 2(c),
through profit or loss 4 19,697,200 38,178,816
Sales awaiting settlement 3,649,862 -
Current assets
Financial assets at fair value 2(c),
through profit or loss 4 5,586,432 41,386,510
Sales awaiting settlement 2(h) 9,965,856 6,016,570
Interest receivable 60 -
Prepaid expenses 10,088 13,478
Cash and cash equivalents 2(d) 5,622,127 6,357,459
Total assets 44,531,625 91,952,833
------------ ------------
Liabilities
Current liabilities
Management fees payable 3(a) 52,322 151,560
Administration & custodian fees
payable 3(c) 10,257 14,620
Audit fees payable 40,653 30,665
Other payables 14,805 42,951
Total liabilities 118,037 239,796
------------ ------------
Total net assets 44,413,588 91,713,037
============ ============
Represented by:
Shareholders' premium and accumulated
deficit
Share premium 8 100,196,180 149,934,699
Accumulated deficit 9 (55,782,592) (58,221,662)
------------ ------------
Total Shareholders' funds 44,413,588 91,713,037
============ ============
Number of Shares 8 31,135,739 66,133,577
Net Asset Value per Sterling Share GBP0.889 GBP0.926
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE
2011
Year ended Year ended
Notes 30 June 2011 30 June 2010
US$ US$
Income
Interest income 2(g) 1,381 978
Other income 63 -
Net foreign currency gains 1,995,332 674,560
Other net changes in fair value on
financial assets and financial liabilities
at fair value through profit or loss 5 1,861,620 (6,404,782)
Total net income/(loss) 3,858,396 (5,729,244)
------------- -------------
Expenses
Management fees 3(a) (802,636) (971,645)
Administration & custodian fees 3(c) (77,907) (84,322)
Legal fees (221,372) (66,819)
Audit fees (47,471) (41,708)
Directors fees 3(d) (135,276) (134,601)
Printing and postage - 41,531
Other operating expenses (134,664) (198,184)
------------- -------------
Total operating expenses (1,419,326) (1,455,748)
------------- -------------
Operating profit/(loss) 2,439,070 (7,184,992)
Profit/(loss) for the year from operations 2(j) 2,439,070 (7,184,992)
============= =============
Basic and diluted earnings per Sterling
Share GBP0.027 GBP(0.069)
Items in the above statement are derived from continuing
operations.
There were no other elements of comprehensive income in the year
(30 June 2010: Nil).
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE
2011
Year ended Year ended
30 June 2011 30 June 2010
US$ US$
Net assets at start of the year 91,713,037 123,633,764
Redemptions of Shares (49,738,519) (24,735,735)
------------- -------------
Net decrease from Share transactions (49,738,519) (24,735,735)
------------- -------------
Profit/(loss) for the year from operations 2,439,070 (7,184,992)
Net assets at end of the year 44,413,588 91,713,037
============= =============
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2011
Note Year ended Year ended
30 June 2011 30 June 2010
US$ US$
Cash flows from operating activities
Profit/(loss) for the year from operations 2,439,070 (7,184,992)
Adjusted for:
Interest income (1,381) (978)
2,437,689 (7,185,970)
Operating activities:
Net decrease in prepaid expenses 3,390 177,283
Net (increase)/decrease in sales awaiting
settlement (7,599,148) 10,866,678
Net decrease in liabilities and accrued
expenses (121,759) (186,014)
Net decrease/(increase) in financial assets
at fair value through
profit or loss 54,281,694 (8,565,133)
Net decrease in financial liabilities
at fair value through profit or loss - (127,506)
------------- -------------
Cash provided by/(used in) operating activities 49,001,866 (5,020,662)
Interest received 1,321 978
------------- -------------
Net cash provided by/(used in) operating
activities 49,003,187 (5,019,684)
------------- -------------
Cash flows used in financing activities
Redemption of Shares (49,738,519) (24,735,735)
Net cash used in financing activities (49,738,519) (24,735,735)
------------- -------------
Net decrease in cash and cash equivalents (735,332) (29,755,419)
Cash and cash equivalents at the start
of the year 6,357,459 36,112,878
Cash and cash equivalents at the end of
the year 2(d) 5,622,127 6,357,459
============= =============
NOTES TO THE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE
2011
1. GENERAL INFORMATION
FRM Credit Alpha Limited, a closed ended Investment Company, was
incorporated in Guernsey on 1 March 2007 under the laws of
Guernsey, with registered number 46497. The Company has three share
classes that are authorised for issue; Euro Shares, Sterling Shares
and US Dollar Shares. At 30 June 2011 only Sterling Shares were in
issue.
The Company was launched with the objective of seeking to
generate significant returns over cash, with low volatility and
beta to global credit markets, when measured over a market cycle.
By investing in a combination of investee funds managed by managers
who adopt research-based value/event driven or long-short
approaches, the Company believed that volatility and peak-to-trough
drawdowns would be lower than those typically delivered by
long-only approaches. The Company sought to achieve its objective
by investing in a portfolio of underlying investee funds pursuing a
variety of different credit and credit-related trading strategies.
In addition, the Company could invest in a wide variety of
financial instruments. The Company has entered into a managed
wind-down phase following the approval of proposals that were put
to Shareholders at an EGM of the Company held on 17 March 2011, and
the objective was modified to focus on realising the underlying
assets whilst at the same time maximising the level of capital
being returned to investors.
The Sterling Shares are listed on the Main Market of the London
Stock Exchange.
The Company has no employees (30 June 2010: none).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principle accounting policies applied in the preparation of
this annual financial report are set out below. These policies have
been consistently applied to all years presented, unless otherwise
stated. As detailed in notes 1 and 15, the Company has now entered
into a managed wind-down phase and so these accounting policies and
the notes that follow should be read in the context of the Company
being in managed wind-down and of the Company's objective now being
to focus on realising the underlying assets whilst at the same time
maximising the level of capital being returned to investors.
(a) Basis of preparation
The annual financial report has been prepared in accordance with
International Financial Reporting Standards ("IFRS") and the
Disclosure and Transparency rules of the Financial Services
Authority. The annual financial report has been prepared under the
historical cost convention as modified by the revaluation of
financial assets and financial liabilities at fair value through
profit or loss.
The preparation of the annual financial report in conformity
with IFRS requires the use of certain critical accounting
estimates. It also requires the Board of Directors to exercise its
judgement in the process of applying the Company's accounting
policies. The areas involving a higher degree of judgement or
complexity or areas where assumptions and estimates are significant
to the annual financial report are disclosed in note 2(k). This
annual financial report is prepared on a break-up basis since the
Company has entered into a managed wind-down phase.
Standards, amendments and interpretations that are not yet
effective but relevant to the Company's operations:
IFRS 9 "Financial Instruments" is effective for periods
beginning on or after 1 January 2013. IFRS 9 specifies how an
entity should classify and measure financial assets, including some
hybrid contracts. It 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.
-- Initially measured at fair value plus, in the case of a
financial asset not at fair value through profit or loss,
particular transactions costs.
-- Subsequently measured at amortised cost or fair value.
These requirements improve and simplify the approach for
classification and measurement of financial assets compared with
the requirements of IAS 39. They apply a consistent approach to
classifying financial assets and replace the numerous categories of
financial assets in IAS 39, each of which had its own
classification criteria. They also result in one impairment method,
replacing the numerous impairment methods in IAS 39 that arise from
the different classification categories.
The Company is currently in the process of evaluating the
potential effect of this standard. The standard is not expected to
have a significant impact on the annual financial report since the
majority of the financial assets of the Company are at fair value
through profit or loss.
All references to net assets throughout this document refer to
the net assets attributable to holders of Sterling Shares unless
otherwise stated.
(b) Foreign currency translation
(i) Functional and presentation currency
The annual financial report is prepared in US dollars ("US$"),
this being the Company's functional and presentational currency.
Management has chosen US$ as the functional and presentation
currency for the Company to reflect the fact that most of the
Company's investments are denominated in US$.
(ii) Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at
year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the Statement
of Comprehensive Income. Foreign exchange gains and losses relating
to cash and cash equivalents are presented in the Statement of
Comprehensive Income within "net foreign currency gains". 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 within "other
net changes in fair value in financial assets and liabilities at
fair value through profit or loss".
(c) Financial instruments
(i) Classification
In accordance with IAS 39, the Company classifies its
investments as financial assets and liabilities at fair value
through profit or loss. These financial assets and liabilities are
classified as held for trading or designated by the Board of
Directors at fair value through profit or loss at inception.
Financial assets or financial liabilities held for trading are
those acquired or incurred principally for the purposes of selling
or repurchasing in the near term or derivatives. The Company does
not classify any derivatives as hedges in a hedging relationship.
All underlying investee funds held by the Company have been
designated by the Board of Directors as held at fair value through
profit or loss.
(ii) Recognition/de-recognition
The Company recognises financial assets and financial
liabilities at fair value through profit or loss on the trade date
- the date it commits to purchase or sell short the instruments.
From this date any gains and losses arising from changes in fair
value of the assets or liabilities are recognised. Investments 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.
(iii) Valuation of investments
Investments in underlying investee funds are valued at fair
value, as determined by each underlying investee fund's independent
administrator or investment manager. In determining fair value, the
administrator or investment manager utilises the valuations of the
underlying investee funds to determine the fair value of its fund
interests. The underlying investee funds in which the Company is
invested value securities and other financial investments on a
mark-to-market or fair value basis of accounting. The estimated
fair values of certain of the investments of the underlying
investee funds may include private placements and other securities
for which prices are not readily available.
These estimated fair values are determined by the administrators
or investment managers of the respective underlying investee funds
and may not reflect amounts that could be realised upon immediate
sale, or amounts that ultimately may be realised.
Accordingly, the estimated fair values may differ significantly
from the values that would have been used had a ready market
existed for these investments and the differences could be
material. A number of underlying investee funds changed their
redemption terms so as to restrict investor redemptions by gating
redemptions, suspending redemptions or creating side pockets,
extending notice periods, delaying redemption payments and
introducing or extending lock periods.
It is the view of the Board of Directors that despite these
redemption restrictions the Net Asset Value ("NAV") provided by the
underlying investee fund managers or their administrators
represents the most appropriate basis for fair value of these
assets. As such no adjustments have been made to the value of the
assets in these in the annual financial report.
Forward foreign exchange contracts are valued at the forward
rate at the closing date throughout the life of the residual period
of the contract. Realised and unrealised gains or losses resulting
from foreign exchange contracts are recognised in the Statement of
Comprehensive Income within "other net changes in fair value on
financial assets or financial liabilities at fair value through
profit or loss".
(d) Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at
call with banks and short-term investments in an active market with
original maturities of three months or less.
(e) Expenses
Expenses are accounted for on an accruals basis and are charged
to the Statement of Comprehensive Income in the year in which they
are incurred.
(f) Redemption of shares
Subject to the Directors exercising their discretion to operate
the Redemption Facility on any given occasion, Shareholders may
request to have some or all of their Sterling Shares redeemed for
cash in a Redemption Offer. Depending on the liquidity within the
Company's portfolio, the Directors may elect to pay redemption
proceeds either: (i) at a value equal to the prevailing Net Asset
Value per Share as at the relevant Redemption Facility Date less
costs of redemption; or (ii) at a value equal to the prevailing Net
Asset Value per Share as at 31 March of the following year less the
costs of redemption (each a "Redemption Facility Calculation
Date").
(g) Interest income and expense
Interest income and expense is recognised in the Statement of
Comprehensive Income on an accruals basis using the effective
interest method.
(h) Sales awaiting settlement
Sales awaiting settlement represent receivables that have been
contracted for but not yet settled on the Statement of Financial
Position date. These amounts are recognised initially at fair value
and subsequently measured at amortised cost using the effective
interest method, less provision for impairment. A provision for
impairment is established when there is objective evidence that the
Company will not be able to collect all amounts due from the
relevant counterparty. Significant financial difficulties of the
counterparty, probability that the counterparty will enter
bankruptcy or financial reorganisation and default in payments are
considered indicators that the amount is impaired.
(i) Taxation
The Company has applied for and has been granted exempt status
for Guernsey tax purposes. A company that has exempt status for
Guernsey tax purposes is exempt from Guernsey income tax under the
provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance,
1989 and is charged an annual exemption fee of GBP600.
From 1 January 2008, the Income Tax Authority in Guernsey
abolished the exempt regime for some entities. At the same time the
standard rate of income tax was reduced from 20% to 0%. Therefore
some entities previously exempt from tax under the Income Tax
(Exempt Bodies) (Guernsey) ordinance, 1989 are now taxed at 0%.
However the Income Tax Authority has confirmed that collective
investment schemes such as the Company can continue to apply for
exempt status.
(j) Profit/(loss) for the year from operations
Income not distributed is included in profit/(loss) for the year
from operations.
(k) Critical accounting estimates and judgements in applying
accounting policies
The Company makes estimates and assumptions that affect the
reported amounts of assets and liabilities within the next
financial year. Estimates are continually evaluated and based on
historical experience and other factors, including expectations of
further events that are believed to be reasonable under the current
circumstances.
(l) Statement of cash flows
The cash amount shown on the Statement of Cash Flows is the net
amount reported in the Statement of Financial Position as cash and
cash equivalents. The indirect method has been applied in the
preparation of the Statement of Cash Flows.
(m) Operating Segments
Operating Segments are reported in a manner consistent with the
internal reporting used by the Chief Operating Decision-Maker
("CODM"). The CODM, who is responsible for allocation of resources
and assessing the performance of the Operating Segment, has been
identified as the Board of Directors. The Board of Directors makes
the strategic resource allocations on behalf of the Company. The
Company is managed as one Operating Segment.
6. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Board of Directors are ultimately responsible for the
Company's system of internal control and for reviewing its
effectiveness. The Board of Directors have established an ongoing
process for identifying, evaluating and managing significant risks
faced by the Company which involves the Directors conducting, at
least annually, a review of the Company's system of internal
control, covering all controls including financial, operational,
compliance and risk management.
The Board of Directors has reviewed the effectiveness of the
system of internal control. In particular, it has reviewed and
updated the process for identifying and evaluating significant
risks affecting the Company and the policies by which these risks
are managed. The internal control systems are designed to meet the
Company's particular needs and the risks to which it is
exposed.
Accordingly, the internal control systems are designed to manage
rather than 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.
The Company is exposed to a number of risks as a result of the
financial instruments it holds. The Company's investment activities
expose it to various types of risk taken by the Company and the
managers of the underlying investee funds, which are associated
with the financial instruments and markets in which they invest.
The following summary is not intended to be a comprehensive list of
all risks and investors should refer to the Prospectus for a more
detailed discussion of the risks inherent to investing in the
Company.
Market risk
The Company can be exposed to market risks by virtue of the
underlying investee funds that the Company invests in. Those
underlying investee funds may take exposure to a wide range of
market factors including equity, credit, foreign exchange, interest
rate, emerging and commodity markets. Additionally they may make
use of complex derivative instruments to take and manage these
exposures. FRM analysts monitor the underlying investee fund
managers on a continuing basis on behalf of the Company to ensure
that managers have the correct operational controls, systems and
skills to manage these risks. Additionally, FRM has an automated
fund performance exception reporting process to identify funds that
are performing out of line with expectations (which will measure
relative analysis to their historic track record and their peer
group). Exceptions are discussed at a monthly meeting with the
Chief Investment Officer and recorded by the risk team.
Market risks at the underlying investee funds portfolio level
are controlled via the use of diversification across a wide range
of underlying investee fund styles and holdings. This
diversification is monitored and controlled via the use of a Value
at Risk ("VaR") system.
The broad characteristics of the methodology used to calculate
the VaR are as follows:
Using return data for the underlying investee funds in each
portfolio a return distribution for each fund is estimated. This
distribution captures the pertinent features of each of the
underlying investee fund's returns, including return, volatility
and any downside risk inherent in the Company. In particular it
captures any "fat" tailed effects that a fund may possess. A
maximum of five years data is used in this calculation. For funds
with short histories, statistical methods are used to backfill the
data to a period of sixty months.
Statistical methods are then used to simulate a range of
possible outcomes for the entire portfolio. These methods not only
take into account the correlation between funds (as measured by a
covariance matrix), but also the likelihood of tail events
happening together. Using this distribution of portfolio returns
the overall VaR of the portfolio can then be estimated.
These estimates are produced on a monthly basis by FRM's risk
management team and compared against a set of limits. If the actual
values exceed these limits then deviation is discussed with the
relevant portfolio manager to agree a relevant course of action.
Courses of action may include reducing certain positions, hedging
certain factor exposures or changing the limit. Limits are reviewed
and signed off by the Chief Investment Officer on a quarterly
basis. Currently these expected maximums are set at a value of -2%
(30 June 2010: -2%), which means that 95% of the time the maximum
monthly loss suffered by the portfolio is not expected to be worse
than -2% (30 June 2010: -2%). Since inception, the actual values
for the portfolio have ranged from -1% to -6.1% (30 June 2010: -1%
to -6.1%).
As at 30 June 2011 the VaR estimate for the Company was -2.55%
(30 June 2010: -2.7%).
Limitations of the VaR methodology include the following:
The measure is a point-in-time calculation, reflecting positions
as recorded at that date, which do not necessarily reflect the risk
positions held at any other time;
That VaR is a statistical estimation and therefore it is
possible that there could be, in any period, a greater number of
days in which losses could exceed the calculated VaR than implied
by the confidence level; and
That although losses are not expected to exceed the calculated
VaR on, say 95% of occasions, on the other 5% of occasions, losses
will be greater and might be substantially greater than the
calculated VaR.
Currency Risk
The Company can be directly exposed to foreign exchange risks by
virtue of investments in share classes of funds that are not
denominated in its functional currency. Similarly, Shareholders in
the Company can be directly exposed to foreign exchange risks when
investing in share classes of the Company that are not denominated
in the Company's functional currency. In order to mitigate the
foreign exchange risk arising from either of these types of
exposures, the Manager had a policy until 30 December 2010 of
hedging the capital value of such exposures using a rolling program
of currency forwards initiated on a monthly basis. In addition
there was a secondary policy to adjust the hedge, where possible,
for material movements in the intra-month profit and loss of the
underlying investee funds and/or the Company.
Where intra-month performance data was available, and the
estimated NAV movement of the investments and/or Company exceeded
0.9% of the NAV of the Company, additional non-deliverable forwards
that mature at the expiry of the relevant swap were executed to
hedge these movements. This was done by the Manager's investment
administration team. They compared the NAV at the time that the
initial forward was placed (e.g. 25 May for settlement end June)
against any estimates that were generated for May month end and the
May month end final NAV and then if at any point there had been a
movement of more than 0.9% since the NAV at the time the initial
forward was placed they instructed additional forwards to expire at
June month end.
In accordance with the Company's policy, the Manager monitored
the Company's currency exposure twice a month.
With effect from 30 December 2010, the Company announced that
its currency hedging programme had ceased with immediate effect. It
is possible that the underlying investee funds within the portfolio
will incur foreign currency risk as an intentional or unintentional
part of their investment strategies.
Interest Rate Risk
The Company, by virtue of its credit facility as detailed in
note 10 on page 34, could have been directly exposed to interest
rate risks when this credit facility was in use. The credit
facility for the Company was a floating rate facility referenced to
US Dollar LIBOR and as such any movement in the LIBOR rate will
have impacted on the gross returns of the portfolio. However, any
impact was not significant given the nature of the credit facility
in place.
In practice the returns of the Company's underlying investee
funds are, for the most part likely to be positively correlated
with LIBOR and as such it is likely that the increase in the
returns of the investments will have more than offset any increased
borrowing costs over the long term, thereby neutralising any long
term interest rate risk. It is, however, possible that underlying
investee funds within the portfolio will incur interest rate risk
as an intentional or unintentional part of their investment
strategies.
The interest rate risk profile of the Company's financial assets
and liabilities as at 30 June 2011 and 30 June 2010 was:
30 June 2011 30 June 2010
US$ US$
Financial assets not carrying
interest 38,909,498 85,595,374
Financial liabilities not carrying
interest 118,037 239,796
Financial assets carrying interest 5,622,127 6,357,459
Credit risk
Credit risk relates to the extent to which failures by
counterparties to discharge their obligations could reduce the
amount of future cash flows from financial assets on hand as at the
Statement of Financial Position date. The Company minimises its
exposure to credit risk by only dealing with counterparties with
high credit ratings and the Manager monitors credit concentrations
to reduce associated risk. At the Statement of Financial Position
date the Company had all of its cash and cash equivalents held with
its Custodian, although from time to time the Company may
additionally place cash deposits with banks, limited to those rated
AA or higher.
Assets held by the Company which potentially expose the Company
to credit risk comprise cash balances and receivables in respect of
redeemed investments in underlying investee funds.
The Company is also exposed indirectly at underlying investee
fund level and seeks to actively manage this exposure by performing
due diligence checks on each of the underlying investee fund
managers.
The Company's Custodian is J.P.Morgan Chase Bank, National
Association (London Branch). Underlying investee fund holdings are
registered in J.P.Morgan nominee accounts which specifically relate
to the Company. In respect of cash held by the Custodian, the
Company may rank as an unsecured creditor in the event of the
Custodian's insolvency and any such cash balances may not be
recoverable. Client money is segregated and stored in designated
client money accounts within J.P.Morgan Chase Bank, National
Association (London Branch).
In the event of a default by the Custodian, whether or not the
Company could continue would be dependent upon the level of cash
lost. Generally cash balances within the Company are kept at a
minimum level necessary to meet operational requirements so as to
keep the Company fully invested in underlying investee fund assets.
On this basis, it would be expected that the Company would be able
to continue in operation.
The current ratings of J.P.Morgan Chase Bank, N.A. are: S&P
AA+/A-1+; Moody's Aa1 / P-1; and Fitch AA- /F1+.
The Manager also keeps track of any sizeable cash balances that
build up in the Company and then places these in money market funds
or on deposit with other banks to ensure that the exposure to any
one financial institution is minimised.
All underlying investee fund redemption proceeds are actively
monitored by both the Investment Adviser and the Custodian. When
underlying investee fund redemptions are placed, the Custodian will
follow up with the underlying investee fund administrator to ensure
that the redemption request has been received and actioned. They
will also ascertain when redemption proceeds are due and will
follow up with the administrator if redemption proceeds are not
received by this date.
Additionally, the Investment Adviser will follow up with the
underlying investee fund administrator and/or manager if redemption
proceeds are not received by the dates specified in the underlying
investee funds' offering documentation. All outstanding receivables
are tracked and monitored on a regular basis and escalated where
necessary.
Liquidity risk
Liquidity risk is the risk that the Company is unable to meet
its obligations as and when they fall due.
The Company invests in alternative investment products, which
can be highly illiquid. With some underlying investee funds, the
Company can only sell their units at certain dates, which may occur
monthly, quarterly, annually or less frequently. A lack of
liquidity may also result from limited trading opportunities in
alternative investment products.
The Company may, from time to time, invest in derivative
contracts traded over the counter, which are not traded in an
organised market and may be illiquid.
As a result, the Company may not be able to liquidate quickly
its investments in these instruments at an amount close to their
fair value to meet its liquidity requirements or to respond to
specific events.
In accordance with the Company's policy, the Manager monitors
the Company's liquidity position on a regular basis with regard to
maintaining a reasonable level of liquidity. Significant variation
from reasonable levels will result in notification to the Board of
Directors. The Company is closed ended and therefore, save for the
operation of the Redemption Facility or a distribution being
declared by the Directors as part of the managed wind down process,
the Shareholders cannot redeem their holdings. Liquidity risk is
therefore mitigated as the Board of Directors and Investment
Manager are able to manage liquidity risk with respect to the
liquidity of the underlying assets held.
The Portfolio Management team is responsible for constructing
portfolios with appropriate liquidity profiles, which may be
specified directly by clients or by third party credit providers.
The liquidity impact of any given trade or corporate action is
considered by the portfolio managers who will seek advice from the
respective sector analyst when making trading decisions. When
trades are requested by the Portfolio Management team, the
Investment Administration team review the proposed trade to ensure
that it complies with any specified liquidity constraints. Trades
which do not comply with portfolio liquidity constraints are not
executed, and referred back to the respective portfolio
manager.
As at 30 June 2011 a number of underlying investee funds in
which the Company invests had restructured so as to restrict
investor redemptions. Restructured funds are defined as those
underlying investee funds that have undertaken various levels of
restructuring which have generally altered the original liquidity
terms per their offering documents. These changes have included
creating new share classes (such as continuing and/or liquidating
share classes), implementing redemption gates, suspending
redemptions, creating side pockets, extending notice periods,
delaying redemption payments and introducing or extending lock
periods. There have been no changes in respect of these underlying
investee funds subsequent to the year end.
Having factored in these redemption restrictions and taking into
account redemption requests already submitted to underlying
investee fund managers prior to the year end it is estimated that
as at 30 June 2011 and 30 June 2010 the liquidity profile of the
Company was as follows:
30 June 30 June 2010
2011
% of % of
Total Assets Total
Assets
Up to one month liquidity 29.20% 25.05%
One to three months liquidity 6.82% 23.59%
Three to six months liquidity 1.91% 9.84%
Up to annual liquidity 9.64% 7.94%
Liquidity of more than one year 52.43% 33.58%
Total 100.00% 100.00%
================ ================
The Company entered a managed wind-down phase with effect from
17 March 2011. The portfolio manager is liquidating the portfolio
under the supervision of the Board with a view to maximising the
capital returned to Shareholders. On 11 May 2011, the Company
resolved to make an initial distribution of GBP31,000,000. On 14
July 2011, the Company resolved to make a second distribution of
approximately GBP8,000,000. As the liquidation of the portfolio
progresses and capital is distributed to Shareholders the portfolio
will become progressively more concentrated in a small number of
illiquid investments. This is reflected by the fact that
approximately 78% of the portfolio as at 30 June 2011 is invested
in assets with a liquidity profile of greater than six months.
It is the view of the Directors that despite these redemption
restrictions the NAV provided by the underlying investee fund
managers or their administrators represents the most appropriate
basis for fair value of these assets. As such no adjustments have
been made to the value of these assets in the annual financial
report
The table below analyses the Company's financial liabilities
into relevant maturity groupings based on the remaining year at the
financial reporting date to the contractual maturity date. The
amounts in the table are the contractual undiscounted cash
flows.
Balances due within 12 months equal their carrying balances, as
the impact of discounting is not significant.
Liquidity risk (continued)
There follows a table to split the liabilities into periods of
up to 1 month, 1 to 3 months and 3 to 6 months:
30 June 2011 (US$)
Up to 1 1 to 3 3 to 6
Month Months Months Total
Accrued expenses and other
liabilities payable 62,579 55,458 - 118,037
Total Liabilities 62,579 55,458 - 118,037
=========== =========== =========== ===========
30 June 2010 (US$)
Up to 1 1 to 3 Months 3 to 6
Month Months Total
Accrued expenses and other
liabilities payable 29,611 210,185 - 239,796
Total Liabilities 29,611 210,185 - 239,796
=========== ================= =========== ===========
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FSAFSFFFSEIF
Finncap (LSE:FCAP)
Historical Stock Chart
From Jun 2024 to Jul 2024
Finncap (LSE:FCAP)
Historical Stock Chart
From Jul 2023 to Jul 2024