TIDMRMMC
RNS Number : 3751A
River & Mercantile UK Micro Cap Inv
21 January 2020
River and Mercantile UK Micro Cap Investment Company Limited
(the "Company")
Publication of the Annual Financial Report for the year ended 30
September 2019
21 January 2020
THE COMPANY AT A GLANCE
Investment objective
River and Mercantile UK Micro Cap Investment Company Limited
(the "Company") aims to achieve long term capital growth from
investment in a diversified portfolio of UK micro cap companies,
typically comprising companies with a free float market
capitalisation of less than GBP100 million at the time of
purchase.
Investment strategy and policy
The Company's investment strategy is to take advantage of the
illiquidity risk premium inherent in UK micro cap companies and
exploit fully the underlying investment opportunities in that area
of the market to deliver high and sustainable returns to
Shareholders, in the form of capital gains.
It is expected that the majority of the Company's investible
universe will comprise companies whose securities are admitted to
trading on the Alternative Investment Market of the London Stock
Exchange. While it is intended that the Company will be fully
invested in normal market conditions, the Company may hold cash or
similar instruments.
Carne Global AIFM Solutions (C.I.) Limited (the "Manager") is
the manager of the Company. It delegates portfolio management to
River and Mercantile Asset Management LLP (the "Portfolio
Manager").
About the Portfolio Manager
The Portfolio Manager is an active equity manager, specialising
in UK and global equity strategies since its launch in 2006. Since
2014, it has been part of River and Mercantile Group PLC (the
"Group"). The Group is an advisory and investment solutions
business with a broad range of services, from consulting and
advisory to fully delegated fiduciary management, liability driven
investing and fund management.
George Ensor, the appointed portfolio manager, has been
responsible for the Company's portfolio since February 2018. Please
refer below for George Ensor's biography.
Capital redemptions and dividend policy
The Company is committed to achieving long term capital growth
and, where possible, returning such growth to Shareholders
throughout the life of the Company. Furthermore, the Board believes
that a Net Asset Value in normal circumstances in the region of
GBP100 million will position the Company to take advantage of a
portfolio of micro cap companies. Accordingly, the Directors
operate a Capital Redemption Mechanism under which a portion of the
Company's share capital is redeemed compulsorily to return the Net
Asset Value back to around GBP100 million in order to:
-- enable the Company to exploit fully the underlying investment
opportunity and to deliver high and sustainable returns to
shareholders, principally in the form of capital gains;
-- enable portfolio holdings to have a meaningful impact on the
Company's performance, which might otherwise be marginal within the
context of a larger fund; and
-- ensure that the Company can continually take advantage of the
illiquidity risk premium inherent in micro cap companies.
The Company does not expect to pay significant dividends.
Management of your Company
The Board of the Company comprises a majority of independent
non-executive directors with extensive knowledge of investment
matters, the regulatory and legal framework within which the
Company operates, as well as the various roles played by investment
companies in shareholders' portfolios.
The Board provides oversight of the Company's activities and
ensure that the appropriate financial resources and controls are in
place to deliver the Investment Strategy and manage the risks
associated with such activities. The Board actively and
continuously supervises both the Manager and the Portfolio Manager
in the performance of their respective functions. The Portfolio
Manager is authorised and regulated by the Financial Conduct
Authority and the Manager is authorised and regulated by the Jersey
Financial Services Commission
STRATEGIC REPORT
financial highlights and performance summary
Key Performance Indicators
Net Asset Value ("NAV") total return(1) vs benchmark from
inception
NAV on a total return(2) basis increased by 92.94% from
inception (net of issue costs), outperforming the total return
posted by the benchmark index of 37.24%. Please refer to the chart
below showing the NAV total return versus Numis Smaller Company
plus Alternative Investment Market ("AIM") (excluding Investment
Companies Index) total return(3) (the "benchmark index") from
inception:
[graphs and charts are included in the published Annual
Financial Report which is available on the Company's website at
https://microcap.riverandmercantile.com/literature/annual-reports]
NAV total return vs benchmark for the year ended 30 September
2019
Over the year ended 30 September 2019, the NAV total return of
River and Mercantile UK Micro Cap Investment Company Limited (the
"Company") underperformed against the benchmark index by 10.14%,
recording a NAV total return of (17.48%), which compares with the
total return of (7.34%) posted by the benchmark index.
NAV and Share price
As at As at
30 September 30 September
2019 2018
Net Asset Value per GBP1.8908 GBP2.2913
Ordinary Share
Ordinary Share price GBP1.5700 GBP2.1100
(bid price)(3)
Discount (16.97%) (7.91%)
Period highs and lows
Year ended Year ended Year ended Year ended
30 September 30 September 30 September 30 September
2019 2019 2018 2018
High Low High Low
Net Asset Value per GBP2.2901 GBP1.7746
Ordinary Share GBP2.2913 GBP1.8499
Ordinary Share price GBP2.1100 GBP1.4800
(bid price)(3) GBP2.3000 GBP1.6400
Premium / discount(2,4)
[graphs and charts are included in the published Annual
Financial Report which is available on the Company's website at
https://microcap.riverandmercantile.com/literature/annual-reports]
Capital redemptions
Since inception, the Company has exercised its capital
redemption mechanism on three separate occasions, as detailed
below, redeeming a total of 22,062,526 Ordinary Shares and
returning a total of GBP41,926,929 to Shareholders.
Redemption Date Redemption price per Ordinary Number of Ordinary Shares Amount returned to Shareholders
Share(5) Redeemed
9 June 2017 GBP1.7217 8,712,240 GBP14,999,864
-------------------------------- -------------------------------- --------------------------------
1 December 2017 GBP1.9124 7,843,469 GBP14,999,850
-------------------------------- -------------------------------- --------------------------------
27 July 2018 GBP2.1659 5,506,817 GBP11,927,215
-------------------------------- -------------------------------- --------------------------------
Please refer to note 12 for full details of the Company's
redemption mechanism, including the conditions required for the
Company to be able to operate the capital redemption mechanism.
Ongoing charges
The ongoing charges reflect those expenses which are likely to
recur in the foreseeable future and which relate to the operation
of the Company. The ongoing charges are calculated in accordance
with the Association of Investment Companies (AIC) methodology and
is based on actual costs incurred in the year which are likely to
recur in the foreseeable future. The ongoing charges for the year
ended 30 September 2019 were 1.30% (2018: 1.25%).
Dividend history
In accordance with the Company's stated policy, no dividend was
declared or paid during the year.
For further detail on Key Performance Indicators, refer to the
Executive Summary and the Useful Information for Shareholders
sections below.
(1) - The NAV total return measures how the NAV per Ordinary
Share has performed over a period of time, taking into account of
capital returns. The Company quotes NAV total return as a
percentage change from the initial issuance of Ordinary Shares to
30 September 2019. The Company has not declared a dividend since
inception. The Board monitors the Company NAV total return against
the Numis Smaller Companies plus Alternative Investment Market
("AIM") (excluding Investment Companies Index).
(2) - Source: BNP Paribas Securities Services, Bloomberg
(3) - Source: Bloomberg
(4) - The NAV per share is the value of all the Company's
assets, less any payables it has, divided by the total number of
Ordinary Shares. However, because the Company Ordinary Shares are
traded on the London Stock Exchange's Main Market, the share price
may be higher or lower than the NAV. The difference is known as a
discount or premium. The Company's discount / premium to NAV is
calculated by expressing the difference between the Ordinary Share
price (bid price) and the NAV per share on the same day compared to
the NAV per share on the same day.
(5) - Excludes the cost of each redemption; amounting to a total
of GBP23,700 across all redemptions.
CHAIRMAN'S STATEMENT
The Mouse That Roared
I am sure that many of you will remember Peter Sellers and some
will remember his classic comedy, The Mouse That Roared. However, I
am sure many will not remember that this comedy started life as a
1955 Cold War satirical novel by Irish American writer Leonard
Wibberley, which subsequently launched a series of satirical books
about an imaginary country in Europe called the Duchy of Grand
Fenwick.
It was later converted into the classic comedy in which the tiny
Grand Duchy of Fenwick declares war on the United States with the
aim of glorious defeat and a hefty sum in post-war aid. When the
tiny nation of Grand Fenwick's only export, a special wine, begins
to be produced in California, their entire economy collapses.
Things look dire until Prime Minister Rupert Mountjoy points out
that no country that has declared war on the USA has ever gone
hungry. When Field Marshall Tully Bascombe and the 23 other men in
the Grand Fenwick army invade the United States, their plan to
immediately surrender unravels. For those whose memory has just
been jogged, I trust the trace of a smile is beginning to
develop!
This is no mere Hollywood feat of imagination; micro-nations do
exist and indeed are thriving across the world. They may not be
recognised as such and none to my knowledge are entitled to a seat
at the United Nations. However, they continue to survive and, in
many cases, flourish, in spite of often existing within the
confines of established and much larger nation states. The most
obvious example of this is the Vatican, surrounded by Italy, a tiny
state that has held a special place in the world for centuries as
the home of the head of the Catholic Church. It has its own army,
the Swiss Guard, currency and laws.
The Vatican is often regarded as the smallest state in the
world........or is it? There are, in fact, a raft of independent
nations around the world in many cases obscured from view. A prime
example, hidden deep in the Nevada desert is one of the smallest
republics in the world; Molossia led by its President, Jonathan
Thompson. A country so small it consists of only a few acres of
desert sand interspersed with a bank and post office and two public
phones. It has one export to its neighbouring USA.......rubbish! My
favourite however, is the principality of Seborga nestled next to
the French border with Italy where the head of the principality is
known as "Your Tremendousness"! Perhaps more recognisable to the
general public would be states like Andorra, Monte Carlo,
Liechtenstein, and San Marino. All very successful entities.
I have written many times over the last five years about smaller
entities, from micro Submarines to Ronnie Corbett. The message I am
trying to convey, notwithstanding the fun of identifying the vast
array of micro subjects, is the simple fact that great things can
emerge from small entities. Micro cap companies have delivered far
stronger growth characteristics than many of their larger peers
through the cycle. This is evidenced by long-term data showing
micro cap and smaller UK companies outperforming mid cap and large
cap UK companies. Why is this? Not only do you earn a risk premium
for the risk associated with less liquid companies, but micro cap
companies often have simpler business models, are growing from a
much smaller base and demonstrate greater innovation. Also, as the
argument over active versus passive funds continues, it is worth
pointing out that micro cap investing is an area where active
management can be extremely effective. Micro cap companies are less
researched than ever before, especially after the introduction of
MIFID II, which has enabled the Portfolio Manager to identify
strong micro cap opportunities at attractive valuations through
their own comprehensive fundamental research. We can see examples
in the current portfolio with some fascinating micro businesses
thriving under the shadow of their larger competitors and, in many
cases, disrupting the landscape and delivering far superior
returns. A great example of this is Argentex, a recent IPO and one
that is competing head on with the mainstream banks whilst
succeeding in delivering a better service to their customers and a
superior return to shareholders.
Micro cap investing certainly does not come without risk and we
have seen the downside over the last twelve months where, due to
macro factors such as Brexit and the associated uncertainty, UK
listed stocks and in particular those with a strong domestic focus
have suffered. In my opinion, the portfolio continues to be
pregnant with opportunity and, as our portfolio manager highlights,
once the uncertainty is lifted, regardless of outcome we expect to
see demand for these exciting micro cap stocks increase
significantly.
Performance
As George explains in his report, the last twelve months have
been a challenging. I am very conscious that it has been a
frustrating period both for our portfolio manager and for our
shareholders. Although I would welcome the opportunity to report on
positive performance, there will always be periods where the
factors that our manager follows and that sector of the market to
which we are, as investors, exposed, are not rewarded and this last
year is precisely that.
What is critical during these periods is that portfolio managers
remain true to their investment principles. As George writes in his
report and we have observed during discussions at the Board, this
has been the case. Long term data supports the thesis that micro
cap companies outperform and, whilst this hasn't been true for the
last 12 months, any return to stability could see the current
valuation discount close on both listed micro cap companies in
general and the Company in particular. Thus the Board believes it
would be wrong to change the current investment approach in
reaction to short term macro factors since the Company is committed
to investing for the long term.
Your Board is exercised by the widening of the discount to NAV
which reached 20% at one point before falling back to c15%. We take
this issue very seriously and have held detailed discussions as to
the measures we might take to narrow the discount. In particular,
the Board has considered and rejected instituting buy backs since
we do not judge these actions to be in the best interests of
investors as they would reduce the Company's capital base at a time
when micro cap companies look cheap. Indeed we already have in
place, and have triggered on previous occasions, a redemption
mechanism which is designed to operate when micro cap companies
rise in value. In summary, your Board believes that the UK micro
cap market place remains exciting and one that will deliver very
positive returns.
The NAV total return of the UK micro cap portfolio over the
period was (17.48%), which compares with the total return of
(7.34%) posted by the benchmark index.
Principal Risks and Uncertainties
Explanations of the Company's principal risks and uncertainties
are set out on pages 15 to 23 of the Company's prospectus, which is
available on the Manager's website.
Dividend Policy
The Board does not expect income from the Portfolio to
significantly exceed the anticipated annual running costs of the
Company and therefore does not expect that the Company will pay
significant, or any, dividends although it reserves the right to do
so.
For the period ending 30 September 2019 the Board confirms that
no dividend will be payable.
Summary
We have been through our first difficult period of change as a
Company, however our core principles remain intact. We aim to
deliver long term capital growth and, where possible, return such
growth to shareholders throughout the life of the Company. The
capital redemption process that we established at the time of the
IPO has functioned very well and we continue to believe that a NAV
in the region of GBP100 million will best position the Company to
take profitable advantage of a portfolio of micro cap companies.
The fact that the Continuation Vote at the last AGM was passed by
an overwhelming majority is evidence that Shareholders support this
stance.
I look forward to writing to you once again at the time of our
interim results, but I would like to take this opportunity to thank
all our Shareholders for their support over the past twelve
months.
Andrew Chapman
Chairman
20 January 2020
executive sUMMARY
This Executive Summary is designed to provide information about
the Company's operation and results for the year ended 30 September
2019. It should be read in conjunction with the Chairman's
Statement above and the Portfolio Manager's report below which
provides a detailed review of investment activities for the year
and an outlook for the future.
Corporate summary
The Company was incorporated in Guernsey on 2 October 2014, with
registered number 59106, as a non-cellular company with liability
limited by shares. The Company is registered by the Guernsey
Financial Services Commission ("GFSC") as a registered closed-ended
collective investment scheme pursuant to the Protection of
Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the
Registered Collective Investment Scheme Rules ("RCIS Rules")
2018.
The Company's stated capital is denominated in Sterling and each
share carries equal voting rights.
The Company's Ordinary Shares are listed on the Official List as
maintained by the FCA and admitted to trading on the Main Market of
the London Stock Exchange. As at 30 September 2019, the Company's
issued stated capital comprised 46,445,043 Ordinary Shares (30
September 2018: 46,445,043 Ordinary Shares).
The Company has appointed Carne Global AIFM Solutions (C.I.)
Limited (the "Manager") to act as the Company's Alternative
Investment Fund Manager ("AIFM"). The Manager has delegated
portfolio management of the Company's investment portfolio to the
Portfolio Manager. The Board will actively and continuously
supervise both the Manager and the Portfolio Manager in the
performance of their respective functions.
The Company has appointed BNP Paribas Securities Services
S.C.A., Guernsey Branch (the "Administrator") to provide
administration, custodian and company secretarial services.
The Company is a member of the Association of Investment
Companies ("AIC").
Significant events during the year ended 30 September 2019
On 11 December 2018, the Company signed an Extension Agreement
that varied the terms of the Sterling Facility Agreement (the
"Facility") entered into on 9 December 2016, as amended on 13
December 2017. With effect from 7 December 2018, the Facility was
extended for 364 days to 6 December 2019 and the Company incurred
an extension fee of GBP8,000. The Board decided not to renew the
Facility, which subsequently expired on 6 December 2019. Please
refer to note 15 for further information.
On 27 February 2019, the Company held its Annual General Meeting
("AGM") where all resolutions, including the Continuation
Resolution (refer below), were passed. The Company subsequently
announced that a significant number of votes were cast against
Resolution 1 and Resolution 6 as detailed in the section below.
Significant vote against AGM resolutions
The Board took note of the votes cast against Resolutions 1 and
6 at the AGM held in February 2019. Resolution 1 related to the
receipt and consideration of the Annual Report and Financial
Statements for the year ended 30 September 2018, together with the
Report of the Directors and Auditors therein and Resolution 6
related to the re-election of Mark Hodgson as a Director of the
Company. The Board believes that the votes against Resolution 1
related to the fact that, on 11 February 2019, a shareholder
advisory group published a recommendation to vote against
Resolution 1 stating that the disclosure of the Portfolio Manager's
contract in the Annual Financial Report of the Company did not meet
the advisory group's requirements. Following representations by the
Company, the advisory group agreed that the required information
was indeed included in the Annual Financial Report and, on 13
February 2019, they informed the Company that they had amended
their advice on Resolution 1 to a recommendation to vote in
favour.
The Board believes that the votes against Resolution 6 relate to
the fact that, as disclosed in the Annual Financial Report, Mark
Hodgson is not considered an independent director because he is a
director of Carne Global AIFM Solutions (C.I) Limited ("Carne"). As
explained in our financial statements, Carne is legally the Manager
so that the Company can fully comply with the Alternative
Investment Fund Managers Directive (AIFMD). Carne has formally
delegated portfolio management to the Portfolio Manager. Carne
itself undertakes a rigorous risk management function in respect of
the portfolio and exercises a robust oversight of River &
Mercantile Asset Management LLP, the designated Portfolio Manager.
Carne is completely independent of the Portfolio Manager which
ensures that there are no conflicts of interest as it performs its
oversight functions.
The opinion of the other Directors is that Mark Hodgson provides
considerable and complementary expertise to the Board, particularly
in the area of risk management, in which Carne has a significant
presence. In accordance with the recommendations of the AIC in
relation to non-independent directors, Mark is subject to annual
re-election; and indeed the independent directors also put
themselves forward for annual re-election. The Board has been in
touch with shareholders who we are aware voted against both
Resolutions and found them to be content. The Board would like to
take this opportunity to say that the Chairman is always willing to
meet with shareholders to discuss any questions or issues they
might have about the Company.
Company investment objective
The Company aims to achieve long term capital growth from
investments in a diversified portfolio of UK micro cap companies,
typically comprising companies with a free float market
capitalisation of less than GBP100 million at the time of
purchase.
Company investment policy
The Company invests in a diversified portfolio of UK micro cap
companies. It is expected that the majority of the Company's
investible universe will comprise companies whose securities are
admitted to trading on AIM.
While it is intended that the Company will be fully invested in
normal market conditions, the Company may hold cash on deposit or
invest on a temporary basis in a range of high quality debt
securities and cash equivalent instruments. There is no restriction
on the amount of cash or cash equivalent instruments that the
Company may hold and there may be times when it is appropriate for
the Company to have a significant cash position instead of being
fully or near fully invested.
The Company will not be benchmark-driven in its asset
allocation.
Diversification
The number of holdings in the portfolio will usually range
between 30 and 50.
The portfolio is expected to be broadly diversified across
sectors and, while there are no specific limits placed on exposure
to any sector, the Company will at all times invest and manage the
portfolio in a manner consistent with spreading investment
risk.
Investment restrictions
No exposure to any investee company will exceed 10% of NAV at
the time of investment.
The Company may from time to time take sizeable positions in
portfolio companies. However, in such circumstances, the Company
would not normally intend to hold more than 25% of the capital of a
single investee company at the time of investment.
Although the Company would not normally expect to hold
investments in securities that are unquoted, it may do so from time
to time but such investments will be limited in aggregate to 10% of
NAV.
The Company may invest in other investment funds, including
listed closed-ended investment funds, to gain investment exposure
to UK micro cap companies but such exposure will be limited, in
aggregate, to 10% of NAV at the time of investment.
Borrowing and gearing policy
The Company does not normally intend to employ gearing but at
certain times it may be opportune to do so, for both investment and
working capital purposes. Accordingly, the Company may employ
gearing up to a maximum of 20% of NAV at the time of borrowing.
Refer to note 15 for further details of current borrowing
facilities.
Derivatives
The Company may use derivatives (both long and short) for the
purposes of efficient portfolio management only. The Company will
not enter into uncovered short positions.
Further information can be found in the Portfolio Manager's
Report which is incorporated within this Annual Financial Report
below for informational purposes only.
Investment strategy and approach
The Company's investment strategy is to take advantage of the
illiquidity risk premium inherent in UK micro cap companies and
exploit fully the underlying investment opportunity in the UK micro
cap market to deliver high and sustainable returns to Shareholders,
principally in the form of capital gains in line with the Company
investment objective and policy.
The Company pursues its investment strategy through the
appointment of the Manager as AIFM, whereby the Manager has been
given responsibility, subject to the supervision of the Board, for
the management of the Company in accordance with the Company's
investment objective and policy. The Manager has delegated
portfolio management to the Portfolio Manager. The Company depends
on the diligence, skill, judgement and business contacts of the
Portfolio Manager's investment professionals, in particular George
Ensor, in identifying investment opportunities which are in line
with the investment objective and policy of the Company. The
Portfolio Manager attends all Board meetings at which the
investment strategy and performance of the Company is discussed and
approved.
Key Performance Indicators (KPIs)
The Directors meet regularly to review performance and risk
against a number of key measures.
Returns and Net Asset Value total return
The Board reviews and compares, at each meeting, the performance
of the portfolio as well as the NAV, income and share price of the
Company. The Directors regard the Company's NAV total return as
being the overall measure of value delivered to Shareholders over
the long term. Total return reflects NAV growth of the Company.
The Board is committed to achieving long term capital growth
and, where possible, returning such growth to Shareholders
throughout the life of the Company. Furthermore, the Portfolio
Manager has advised the Board that it believes that a NAV of GBP100
million (at current market levels although this may change over
time) would best position the Company to take advantage of a
portfolio of micro cap companies.
NAV, on a total return basis, increased by 92.94% from inception
which outperformed the total return posted by the benchmark index
of 37.24%. Please refer to the Financial Highlights and Performance
Summary above for NAV total return analysis and note 12 for further
details regarding the redemption mechanism.
Concentration
The Board reviews the industry and asset diversification of the
investment portfolio to ensure that holdings are in line with the
investment restrictions and also to monitor the concentration risk
of the investment portfolio.
Please refer to note 9 for further details regarding investment
limits and risk diversification policies.
As at 30 September 2019, the Company held 44 (2018: 46)
investment holdings of which no exposure in any investee company
exceeded 10% of NAV at the time of investment. A portfolio listing
is shown below which demonstrates the spread of investment risk in
accordance with the investment policy.
Premium / discount
The Directors review the trading prices of the Company's
Ordinary Shares and compare them against their NAV to assess
volatility in the discount or premium of the Ordinary Share prices
to their NAVs during the year. Please refer to the Financial
Highlights and Performance Summary above for further analysis.
Please refer below for further information on the calculation
methodology applied to these KPIs.
Principal risks and uncertainties
When considering the total return of the Company, the Board
takes account of the risk which has been taken in order to achieve
that return. The Board has carried out a robust assessment of the
principal risks facing the Company and has looked at numerous risk
factors, an overview of which is set out below.
Investment and liquidity risk
The Company invests in a diversified portfolio of UK micro cap
companies, typically comprising companies with a free float market
capitalisation of less than GBP100 million at the time of purchase.
These securities are likely to have higher volatility and liquidity
risk than securities on the Main Market of the London Stock
Exchange or the Financial Conduct Authority's Official List. The
relatively small market capitalisation of micro cap companies could
therefore have an adverse effect on the performance of these
investments and can make the market in their shares illiquid. On
this basis prices of micro cap companies are often more volatile
than prices of larger capitalisation stocks, and even small cap
companies.
The Company may have difficulty in selling its investments which
may lead to volatility in the Net Asset Value and, consequently,
market price of shares in the Company. The Company may not
necessarily be able to realise its investments within a reasonable
period, and any such realisations that may be achieved may be at a
considerably lower price than prevailing indicative market prices.
There can therefore be no guarantee that any realisation of an
investment will be on a basis which necessarily reflects the
valuation of that investment.
Risks are monitored by the Manager, which holds monthly AIFM
Risk Committee meetings with the Portfolio Manager. The Manager
provides an update of these AIFM Risk Committee meetings to the
Board on a quarterly basis and the risks are discussed accordingly.
The Board has introduced investment restrictions and guidelines to
limit these risks.
Portfolio concentration and macro-economic risks
The Company predominantly invests in securities in the UK and
has no specific limits placed on its exposure to any industry
sector. Changes in economic conditions in the UK, (for example,
uncertainties as a result of Brexit, interest rates and rates of
inflation, industry conditions, competition, political and
diplomatic events and other factors), could substantially and
adversely affect the Company's prospects, as could changes in
global economic conditions. This exposes the Company to
concentration of geographical concentration risk and may from time
to time lead to the Company having significant exposure to
portfolio companies from certain business sectors. Greater
concentration of investments in any one geographical and / or
industry sector may result in greater volatility in the value of
the Company's investments, and consequently its NAV, and may
materially and adversely affect the performance of the Company and
returns to Shareholders.
While the Company does not include any specific limits on
exposures to any industry sector, the Company does have investment
limits and risk diversification policies in place to mitigate
market and concentration risk. Please refer to note 9 for further
details.
Full details of the Company's risk factors are set out on pages
15 to 23 of the Company's prospectus, which is available on the
Company's website (https://microcap.riverandmercantile.com).
Environmental and social issues
The Company is a closed-ended investment company and so its own
direct environmental impact is minimal. The Board notes that the
companies in which the Company invests will have a social and
environmental impact over which the Company has no control. The
Board notes that the Portfolio Manager's approach to investing
incorporates governance, social and environmental considerations.
Details of measures adopted by the Portfolio Manager are detailed
within the Corporate Responsibility section of their 2019 Annual
Report and Accounts which is available from the Portfolio Manager's
website (https://riverandmercantile.com).
The Directors, the majority of whom are based in the Channel
Islands, have held the majority of their meetings in Guernsey and
therefore the Company's greenhouse gas emissions and environmental
footprint are negligible.
Modern Slavery
As a closed-ended investment company, the Company has a
non-complex structure, no employees and its supply chain is
considered to be low risk given that suppliers are typically
professional advisers based in either in the Channel Islands or the
UK. Furthermore, the Board notes that the Portfolio Manager has
published its statement and policy on slavery and human trafficking
which is available on their website(1) . Based on these factors and
that the Company would not fall into the scope of the UK Modern
Slavery Act 2015 (as the Company does not have any turnover derived
from goods and services) if it was incorporated in the UK, the
Board have considered that it is not necessary for the Company to
make a slavery and human trafficking statement.
(1) -
(https://riverandmercantile.com/modern_slavery_statement)
Board diversity
The Board has due regard for the benefits of experience and
diversity in its membership, including gender, and strives to meet
the right balance of individuals who have the knowledge and
skillset to maximise Shareholder return while mitigating the risk
exposure of the Company. The Board is made up of three male
Directors and one female Director, details of whom are shown below.
All have held the position of Directors since incorporation.
Further information about the Board's policy on diversity is
contained within the Directors and Corporate Governance Report
below.
The Company has no employees and therefore there is nothing
further to report in respect of gender representation within the
Company.
Voting policy on portfolio investments
The Portfolio Manager, in the absence of explicit instructions
from the Board, is empowered to exercise discretion in the use of
the Company's voting rights. All shareholdings are voted at all
company meetings where practicable in accordance with corporate
governance policies, which seek to maximise shareholder value by
constructive use of votes at company meetings and by endeavouring
to use the Company's influence as an investor with a principled
approach to corporate governance.
Life of the Company
The Company has no fixed life. The Directors shall propose one
or more ordinary resolutions at every fifth AGM that the Company
continues as a closed-ended investment company (the "Continuation
Resolution"). The last Continuation Resolution was proposed at the
AGM on 27 February 2019 and was passed by the Company's
Shareholders. The next Continuation Resolution will be proposed at
the AGM in 2024. In the event that a Continuation Resolution is not
passed, the Directors shall formulate proposals to be put to the
Shareholders as soon as is practicable but, in any event, by no
later than six months after the Continuation Resolution is not
passed, to reorganise or reconstruct the Company or for the Company
to be wound up with the aim of enabling the Shareholders to realise
their holdings in the Company.
Future strategy
The Board continues to believe that the investment strategy and
policy adopted is appropriate for and is capable of meeting the
Company's objectives.
The overall strategy remains unchanged and it is the Board's
assessment that the Manager and Portfolio Manager's resources are
appropriate to properly manage the Company's investment portfolio
in the current and anticipated investment environment.
Please refer to the Portfolio Manager's Report below for details
regarding performance to date of the investment portfolio and the
main trends and factors likely to affect those investments.
Going concern
Under the 2016 UK Corporate Governance Code and applicable
regulations, the Directors are required to satisfy themselves that
it is reasonable to assume that the Company is a going concern and
to identify any material uncertainties to the Company's ability to
continue as a going concern for at least 12 months from the date of
approving the annual financial statements.
The Directors are satisfied that, at the time of approving the
financial statements, no material uncertainties exist that may cast
significant doubt concerning the Company's ability to continue for
the foreseeable future. The Directors consider it appropriate to
adopt the going concern basis in preparing the financial
statements.
Viability statement
Under the AIC Code and LR 9.8.6R under the Listing Rules, 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.
As the Company is intended to be a long-term investment vehicle
and having considered the inherent limitations of estimating the
impact of future political and economic conditions, the Directors
have determined five years to be an appropriate period of an
assessment.
The Company's prospects are driven by its business model and
strategy. As explained above, the Company's aim is to achieve long
term capital growth from investment in a diversified portfolio of
UK micro cap companies, typically comprising companies with a free
float market capitalisation of less than GBP100 million at the time
of purchase. The Board, advised by the Portfolio Manager, believes
that the impact on micro cap companies of a return to economic
growth is particularly high because of the knock-on effect of
improved market confidence. Over the medium term, the Portfolio
Manager expects that confidence and risk appetite amongst investors
will grow with improving economic activity. Typically, it would
expect that this will result in valuation metrics rising which will
enhance returns for investors during this period.
The Directors have and continue to monitor the uncertainties in
the political and economic environments in particular the impact as
a result of the UK leaving the EU.
In this context, the Board's central case is that the prospects
for economic activity in the UK will remain such that the
investment objective, policy and strategy of the Company will be
viable for the foreseeable future through a period of at least five
years from the balance sheet date.
In making this judgement, the Board has assessed that the main
risks to the long term viability of the Company are key global and
market uncertainties driven by factors external to the Company
which in turn can impact on the liquidity and NAV of the investment
portfolio. A simulation has been designed to estimate the impact of
these uncertainties on the NAV of the Company at times of stress
based on historical performance data of the Company's benchmark,
using techniques similar to the sensitivity analysis performed in
note 9 - financial risk management.
Taking account of the Company's current position and principal
risks, the Board has a reasonable expectation that the Company will
be able to continue in operation and meet its liabilities as they
fall due over the period of assessment. The Directors expect the
next Continuation Resolution at the AGM in 2024 to be passed.
The Strategic Report was approved by the Board of Directors on
20 January 2020 and signed on its behalf by:
Andrew Chapman Ian Burns
Chairman Audit Committee Chairman
BOARD MEMBERS
All Directors are non-executive.
CHAIRMAN
Andrew Chapman, (Independent). Appointed 2 October 2014.
Andrew holds both a BA and an MPhil in Economic & Social
History. He began his career in 1978 as a UK equity fund
manager.
In 1984, Andrew was appointed to the in-house investment
management team for the British Aerospace Pension Fund, where he
had responsibility for directly investing in a number of listed
markets. In 1991, Andrew took the position of Investment Manager at
United Assurance plc, where he was responsible for asset allocation
and leading a team of in-house fund managers managing approximately
GBP12 billion in assets. Andrew was subsequently a director of
Teather & Greenwood Investment Management Limited, before
joining Hewitt Associates as a Senior Consultant. Between 1994 and
2003, Andrew served as a non-executive director of the Hambros
Smaller Asian Companies Investment Trust plc (which subsequently
became The Asian Technology Trust plc).
In 2003, Andrew was appointed as the first in-house Pension
Investment Manager for the John Lewis Partnership Pension Fund,
with responsibility for the overall investment strategy as well as
the appointment and performance of 27 external fund managers across
all asset classes. He retired from that role in 2012 and then
served as the CIO for The Health Foundation until September
2015.
Since 2012 Andrew has developed a portfolio of roles, including
being a member of the investment committees of: Homerton College
(Cambridge University); Coller Capital Partners; and the Property
Charities Fund. He is also a non-executive director of Steadfast
International Limited, Steadfast Long Capital Limited, GT ERISA
Fund, GT Offshore Fund, and Kidney Care UK.
DIRECTORS
Ian Burns, (Independent) - Chairman of the Audit Committee and
Senior Independent Director. Appointed 2 October 2014.
Ian is a fellow of the Institute of Chartered Accountants in
England & Wales. He is the founder and Executive Director of
Via Executive Limited, a specialist management consulting company
and the managing director of Regent Mercantile Holdings Limited, a
privately owned investment company. He is licensed by the Guernsey
Financial Services Commission as a personal fiduciary.
Ian is currently a non-executive director and audit committee
chairman of London Stock Exchange listed Twenty Four Income Fund
Limited and a non-executive Director of AIM listed Fast Forward
Innovations Limited. He is also a non-executive director of Darwin
Property Management (Guernsey) Limited, Curlew Capital Guernsey
Limited and Premier Asset Management (Guernsey) Ltd.
Trudi Clark, (Independent) - Chairman of the Remuneration and
Nomination Committee and Management Engagement Committee. Appointed
2 October 2014.
Trudi graduated with a first class honours degree in business
studies and is a qualified Chartered Accountant.
Trudi spent 10 years working in chartered accountancy practices
in the UK and Guernsey. In 1991, she joined the Bank of Bermuda to
head their European internal audit function before moving into
private banking in 1993.
Between 1995 and 2005, Trudi worked for Schroders (C.I.)
Limited, an offshore private bank and investment manager. She was
appointed to the position of banking director in 2000 and managing
director in 2003. In 2005, Trudi left Schroders to establish and
run a private family office.
In July 2009, Trudi established the Guernsey practice of David
Rubin & Partners LLP, an internationally known insolvency and
liquidation specialist. Since June 2018 she has been a full time
non-executive director.
Trudi holds several non-executive directorships which include
BMO Commercial Property Trust Limited, NB Private Equity Partners
Limited, The Schiehallion Fund Limited and Alcentra European
Floating Rate Income Fund which are listed on the London Stock
Exchange. She also holds a personal fiduciary licence issued by the
GFSC.
Mark Hodgson. Appointed 2 October 2014.
Mark has over 25 years' financial services experience, with an
extensive banking background having spent over 20 years with HSBC
where he gained an in-depth knowledge of credit, financial markets
and complex lending structures.
Prior to 2006, Mark was regional director for HSBC Invoice
Finance (UK) Limited, where he was responsible for running the
receivables finance business. In 2006, Mark moved to Jersey to head
up HSBC's Commercial Centre, having full operational responsibility
for credit and lending within the jurisdiction.
In 2008, Mark moved to Capita Fiduciary Group as managing
director of Offshore Registration, a regulated role in which he had
responsibility for Jersey, Guernsey and the Isle of Man. Mark also
took on the regulated role of managing director of Capita Financial
Administrators (Jersey) Limited, together with directorships of
regulated and unregulated funds.
In April 2014, Mark joined Carne Global Financial Services
(C.I.) Limited as managing director.
PORTFOLIO MANAGER'S REPORT
The portfolio manager of the Company is George Ensor. George
graduated from Bristol University with an Upper Second Class degree
in Chemistry in 2008, before joining Smith & Williamson
Investment Management as a graduate trainee where he worked for
five years as an analyst and Private Client Investment Manager.
George joined River and Mercantile Asset Management LLP in March
2014 as a UK equity analyst. George is a CFA charter holder.
This Portfolio Manager's Report is compiled with reference to
the investment portfolio. Therefore all positions are calculated by
reference to their official closing prices (as opposed to the
closing bid prices basis within the financial statements). The
estimated unaudited NAV referenced below is calculated on a daily
basis utilising closing bid prices and is inclusive of all
estimated charges and accruals.
REVIEW OF PERFORMANCE
The twelve months to the end of September 2019 was challenging
for the Company with the NAV decreasing by 17.48%, underperforming
the benchmark by 10.14%, which fell 7.34%. Since inception, the NAV
has increased by 92.94%, outperforming the benchmark performance of
37.24% by 55.70%.
[graphs and charts are included in the published Annual
Financial Report which is available on the Company's website at
https://microcap.riverandmercantile.com/literature/annual-reports]
MARKET BACKDROP
Geopolitical wrangling has dominated the market backdrop over
the last twelve months. The US-China trade war is now clearly
having an impact on the US economy with weak business investment,
driven by falling CEO confidence, and the manufacturing sector in
recession whereas US stock markets remain sanguine with the S&P
500 just 2.1% from its all-time high at the end of September.
Eurozone manufacturing has also been in contraction for much of
2019.
Whilst the result of the General Election does not provide
answers to our future trading relationship with the EU, or indeed
any other trading partner, the relative political stability of a
Conservative government with a large majority should provide
encouragement for global investors to return to the market
following a prolonged period of underperformance. This
underperformance has been particularly acute for small and micro
cap indices, with several factors likely contributing. One being
the greater exposure within smaller companies to the domestic
economy; and so a greater exposure to the uncertainty and a lesser
exposure to the benefits of the weakness in sterling which has
boosted international earners. A second factor is the increased
focus on liquidity in the aftermath of high profile daily dealing
funds suspending redemptions which has created an aversion to
illiquidity.
The first chart below shows the NAV performance (dark gold)
against several different UK equity indices from IPO to the start
of the financial year just finished (30 September 2018). The
benchmark Numis Smaller Companies index including AIM, excluding
Investment Companies is shown in black and represents the bottom
10% of UK listed companies. The Numis 1000 excluding Investment
Companies is the smallest 2% of UK main list companies (it does not
include AIM listed companies - unfortunately this data is not
published by Numis). Finally, the MSCI UK Investable Market Index
covers 99% of the free-float adjusted market cap of the UK and so
essentially represents all UK listed equities.
[graphs and charts are included in the published Annual
Financial Report which is available on the Company's website at
https://microcap.riverandmercantile.com/literature/annual-reports]
It is clear from the first chart that, in the period from IPO to
the 30 September 2018, the very smallest (main list) companies
(grey / Numis 1K), outperformed the smallest 10% (black / Numis
Small Cap) which in turn outperformed all UK equities (light gold).
This environment is supportive for our NAV to outperform as we earn
the liquidity premium; an enhanced level of return per annum to
compensate us for the risk of holding illiquid assets.
The second chart shows the same three indices for the twelve
months to 30 September 2019. It is an inversion of the prior chart
and illustrates the underperformance of the smallest listed
companies in the UK. The chart above, and indeed longer-term
charts, support the outperformance of smaller companies and the
long-term performance of the Company's NAV.
[graphs and charts are included in the published Annual
Financial Report which is available on the Company's website at
https://microcap.riverandmercantile.com/literature/annual-reports]
PORTFOLIO POSITIONING
The Style Skyline below illustrates how the portfolio is
positioned for key attributes, or factors, when compared to the
benchmark. Analysis of these factors best allows us to understand
how the portfolio might perform in different environments. For
example, the Skyline shows that there is a significant divergence
in the average market capitalisation (red bar) of the Company and
the benchmark; the Company has a lower average market cap and this
is shown as a negative tilt. This tilt exists due to the Company's
objective to invest in businesses with a free float market
capitalisation of less than GBP100m, whereas the benchmark includes
much larger companies.
The blue value bars show the average valuation of the portfolio
compared to the benchmark. For three of the four factors, including
the second year (FY2) earnings yield (inverse of the PE ratio),
sales to enterprise value (EV) and EBITDA (earnings before
interest, depreciation and amortisation) to EV, the portfolio is
cheaper than the benchmark. The Portfolio Manager's report in the
last year's Annual Financial Report showed that the portfolio was
more expensive on three of the four factors. Valuation is a key
element of our Potential, Valuations, Timing (PVT) investment
philosophy and, all else being equal, the portfolio's valuation
style tilt has improved meaningfully over the last twelve
months.
[graphs and charts are included in the published Annual
Financial Report which is available on the Company's website at
https://microcap.riverandmercantile.com/literature/annual-reports]
The green bars cover the Growth and Quality factors. The four
positive tilts (above the x-axis) are the four Growth factors;
historic earnings and sales growth and forecast earnings and sales
growth. The positive tilt shows that the portfolio holdings have
grown sales and earnings ahead of the benchmark and are forecast to
continue to do so. Importantly, we are not overpaying for these
higher growth investments as the portfolio is cheaper than the
benchmark. Return on equity and net profit margin are Quality
factors; the portfolio holdings have, on average, lower returns
than the benchmark. It is typical to see low return on equity and
net profit margin in Growth businesses as they focus on investment
to drive sales as opposed to returns.
Finally, the last two bars, in yellow, illustrate the financial
leverage of the portfolio and bias to international or domestic
sales. We are invested in less financially geared, better
capitalised business and are in-line with the benchmark when
considering where companies' sales have originated from the UK or
ex-UK.
Shareholders will be aware that we look to invest in different
categories of Potential, diversifying the portfolio across Growth,
Quality, Recovery and Asset-backed investments. As the Style
Skyline data suggests, we continue to have a substantial bias
towards Growth investments but it is lower when compared to the
portfolio at 30 September 2018 when Growth accounted for 53.9%. As
the Portfolio Activity comments will attest, we exited several
early stage Growth stocks and reduced exposure to expensive Growth
stocks with proceeds largely being reinvested into high Quality
businesses.
This is reflected in a higher allocation to Quality (also
covered in the Portfolio Activity discussion), up from 27% at the
start of the period. Two of our Recovery stocks, WYG and Bonmarche,
were bid for, leaving the allocation lower, 4.1% from 6.5%. The
allocation to Asset-backed has increased from 7.7% to 13.1%
although this is largely a result of the re-categorisation of one
holding (from Quality to Asset-backed) plus the performance of the
Gold miners in the last few months of the period.
[graphs and charts are included in the published Annual
Financial Report which is available on the Company's website at
https://microcap.riverandmercantile.com/literature/annual-reports]
PERFORMANCE ATTRIBUTION
Portfolio Holdings with a significant contribution:
[graphs and charts are included in the published Annual
Financial Report which is available on the Company's website at
https://microcap.riverandmercantile.com/literature/annual-reports]
We ran a high conviction position of approximately 5% in
Keystone Law through the year which, combined with the 18% gain in
the shares, delivered a strong contribution. It remains an
attractive, high scoring PVT investment case capable of delivering
high growth and improving return on capital (increasing Quality
credentials).
The Company's precious metal exposure made a strong contribution
with both Shanta Gold and Serabi Gold recovering from depressed
levels with the former gaining 76% and the latter 63%.
Alpha FX (AFX) offers unique and disruptive FX services to
corporates trading internationally and purchasing currency for
commercial purposes. Its business model is highly scalable, and it
generates operating margins in excess of 40%. It focuses on FX
advisory services paid through execution that puts in place rolling
hedging programmes rather than intermittent ad-hoc FX trades with
cliff-edge effects driven by directional bets. Realised and
continuing rapid market share gains from the established banks that
dominate the market underpin strong Growth potential. Management
incentives are strong with the founder-CEO and management holding a
significant proportion of the group's shares. Earnings delivery has
been well above market expectations which, partially offset by
modest multiple contraction, has driven strong share price
performance (+19%).
Tax Systems is a great example of what happens when public
markets fail to recognise the potential of businesses. Having
listed at 67p in July 2016, the business was taken private in 2019
via a private equity backed management buyout at 115p. An
attractive return from IPO and a valuable 12.5% gain in the period
but I expect the management team recognised potential well ahead of
that valuation.
Justifying our ownership of the negative contributors, many of
which we still own, is important as we believe the way we challenge
ourselves when we are wrong is more important than explaining what
we have got right.
The extent of the declines in some of the holdings over the
twelve month period, whilst disappointing, does convey the risk and
illiquidity aversion that has been apparent over the period. For
example, MaxCyte, a business which enables some of the leading cell
therapy companies, fell 49% despite delivering good growth and
announcing several commercial licenses. In our opinion, the
progress that has been made by this company in the last two years
is far from being reflected in the share price. Boku is another
good example; the core business has delivered good growth and is
delivering ahead of IPO expectations but the shares lost 42% over
the period as the market was concerned over the potential of the
acquired Identity business.
SDX Energy, the Egyptian and Moroccan oil and gas producer, did
disappoint on progress with the two key growth assets (South Disouq
and Morocco). The potential from these two opportunities not only
remains attractive but risk-adjusted returns also remain unchanged
from previous expectations, just later. The 57% fall leaves the
shares trading on a 50% discount to book value, despite the strong
recovery of more than 50% from the lows in August on the back of
delivery by the interim CEO and several insider purchases. The
other oil E&P business, Lekoil, also performed poorly, losing
73% as its purchase of an additional stake in one of its prospects
from Afren was challenged with the court ruling that it required
consent from the Nigerian government which was not forthcoming.
Having signed a memorandum of understanding with Schlumberger for
financing of its core production asset, it is looking for industry
partners to finance appraisal and development activities at the
larger prospect, Ogo. Whilst the investment clearly remains high
risk, the company trades at a substantial discount to its
discovered resources NAV and therefore presents asset backed
strategic value.
RA International, the remote locations support services
business, was, unfortunately, guilty of setting overly ambitious
IPO expectations which were missed, leaving the shares trading at a
30% discount to their June 2018 IPO price. When we consider Growth
PVT investment cases, we are looking for businesses that have
delivered attractive growth but are forecast to continue doing so
at an attractive Valuation and with supportive Timing. RA
International has compounded revenue growth of 30% over the three
years to December 2018, leaving consensus sell side forecast of 10%
per annum achievable. It has a cheap valuation, with a PE ratio of
6x December 2019 consensus earnings which fails to recognise that
almost a third of the market cap is held in cash (GBP22m as at the
interims); a substantial discount to the market and peers. If the
company can start to deliver on expectations then the third and
final leg, Timing, will be in place. The substantial contracted
revenue backlog certainly suggests the company has a strong market
position.
Tremor International (formerly Taptica), a global leader in
digital advertising, has made a strategic shift, aided by two
transformational acquisitions (Tremor Video in 2017 and RhythmOne
in 2019), to focus on video, data and connected TV (CTV) where
there is strong Growth potential given increasing consumption of
content through CTV platforms and streaming media. Tremor was the
worst contributor during the period, falling 64% primarily on the
back of valuation multiple contraction and, to a lesser extent,
negative earnings revisions. Mobile advertising underperformance
was a key driver of earnings downgrades during the period as the
business declined faster than expected; the division now represents
less than 30% of sales. Tremor is cash generative with a current
net cash position equivalent to over 30% of the group's market
capitalisation and a prospective free cash flow yield of around
20%.
ULS Technology's core business connects homebuyers with legal
professionals, providing economic benefits to all three parties
involved; the consumer, the legal professional and the intermediary
(ULS). Supply of such legal services is highly fragmented and we
expected the structural growth opportunity to provide some degree
of immunity from cyclical trends in residential housing transaction
volumes. However, increasing competition coupled with adverse
cyclical trends has led to material earnings downgrades compounded
by a derating, driving the shares down 60% over the period. Returns
remain attractive and we believe a recently launched service,
DigitalMove, that significantly streamlines the home moving process
by bringing all parties in the transaction together in a fast,
convenient and secure environment, will improve the company's
market position. This new service differentiates ULS from the
competition and should enable it to reaccelerate growth.
Allergy Therapeutics is a specialty pharmaceutical company
focused on the research and development of allergy vaccines that
deal with the underlying cause and not just the symptoms of
allergies. The vaccine, an ultra-short course injection, offers
convenience with far fewer injections than the market average,
supporting increased adherence, and is the foundation of the
group's well-established commercial position in Europe. As part of
the process to move the group's vaccine platform to full
registration under a new regulatory framework, the company
underwent an important phase three trial which, unfortunately, had
a negative outcome, causing the shares to decline 48%. The data was
inconclusive, in a large part due to the challenges in measuring
the efficacy of vaccines when compared to placebos for allergies.
Whilst disappointing, we do not believe it is as severe as the
market fears, particularly as the regulator is likely to be
reluctant in removing a product from the market that has resulted
in improved clinical outcomes for allergy sufferers. What remains
is a business that has delivered many years of attractive Growth
with significant optionality on new markets (US) and vaccines
(peanut) and at a depressed valuation.
RedT Energy is a developer of liquid energy storage machines,
equivalent to pumped hydro in a box given its long-life and heavy
cycling attributes. It enables arbitrage opportunities from energy
storage and enhances the efficacy of renewable investments. We
expected this to underpin strong Growth potential, however the
roll-out of the group's energy storage technology was much slower
than expected, primarily due to adverse developments in the UK and
German energy markets. As a result, unit production and sales did
not reach a level at which the business could become cash
generative, resulting in additional capital being raised in October
2018. We supported the capital raise in order to fund short-term
working capital to progress delivery of the order pipeline. The
group had begun searching for strategic partners to support and
finance continued growth of the business however, this did not
materialise within the timeframe dictated by the group's financial
position. A strategic review was launched in March 2019, resulting
in cost cutting and another capital raise which we declined to
participate in as we could not see a likely path to realising
Growth potential in the near-term. We exited our small remaining
position in July 2019. Unfortunately, with the shares down 89%,
this is an example of the challenges of investing in poorly funded,
early stage, loss making growth companies. Very little exposure to
this type of investment remains in the portfolio.
PORTFOLIO ACTIVITY
For the final part of the annual review I am going to comment on
trading activity for the financial year. I am only going to comment
on new positions and positions which we have exited but, as you
would expect for an active manager, we do trade our positions,
taking advantage of what we see as attractive prices to add and
trim.
There were 11 positions exited. M&A played a role with Tax
Systems, WYG and Bonmarche all taken private. As discussed, we have
looked to raise capital from expensive Growth stocks and reinvest
into cheaper Growth or Quality investment cases; Ideagen, D4T4
Solutions, FairFX and Frontier Developments were all Growth
investments that were exited as the shares achieved what we
perceived to be at least fair value. We exited a collection of
poorly funded, often loss making early stage Growth stocks
including TrakM8, RedT Energy and Maistro. Finally, Universe Group
was a small (0.4%) Quality position which we exited given a weak
balance sheet and ongoing downgrades.
New positions accounted for 19.4% of the NAV as at the end of
the period. Details on the specific investment cases follow:
Litigation Capital Management (LCM) (4.07% as at 30 September
2019). Purchased at IPO in December 2018, LCM is a litigation
finance business. They have a track record of strong returns going
back to 2012 and completed the IPO to fund growth. Importantly,
unlike peers who use fair value accounting, LCM use cash accounting
so only cash gains are recognised in the P&L. This is a high
conviction Quality thesis supported by the strong returns and
attractive price to book valuation.
Science in Sport (3.03% as at 30 September 2019). The business
owns two leading sports nutrition brands, SiS and PhD. The business
has delivered attractive organic growth over the last five years
and is, having made substantial investments in sales and marketing,
due to deliver maiden profits in the second half of 2019. High
growth and improving profitability will generate attractive returns
for shareholders and underpins the Growth thesis.
Argentex Group (2.98% as at 30 September 2019). Purchased at IPO
in June 2019, the company has a similar investment case to that
described previously for Alpha FX; namely disrupting the corporate
FX services of traditional banks with higher service levels and
lower costs. We took profits in Alpha FX and exited the position in
FairFX to fund the purchase.
XLMedia (2.47% as at 30 September 2019). XLMedia owns and
develops high content websites to generate users, typically online
gamblers, for clients. They typically get paid on a life time share
of revenue for the users they introduce. The shares were depressed
following a profit warning and strategic review and were purchased
at an average price below 50p. The company announced a tender offer
for 9.5% of the company at 80p in July and the founder, now
non-executive director, has continued to buy shares. High margins
and return on capital support the Quality thesis.
Capital Drilling (2.44% as at 30 September 2019). The business
provides drilling services to gold miners in Africa. The core
business is underpinned by stable, long duration production
contracts but there is an opportunity, as evidenced by recent
updates to the market, for both shorter cycle exploration contracts
and more comprehensive mining services contracts. These will drive
higher utilisation of the rigs owned by the company, improving
return on capital and underpinning the Quality investment case.
Sylvania Platinum (1.62% as at 30 September 2019). The business
produces platinum group metals (PGMs) from chrome tailings. PGMs
are typically mined underground in South Africa through old,
inefficient mines requiring high labour and electricity costs. By
re-treating chrome tailings, Sylvania Platinum is a low cost, high
margin producer of PGMs which is likely to remain cash generative
at prices well below what underground mines can tolerate. The
strong net cash balance sheet also de-risks the attractive Quality
investment case.
ULS Technology (1.55% as at 30 September 2019). As detailed in
the Portfolio Attribution section above.
Two small positions were initiated in Hummingbird Resources
(0.72% as at 30 September 2019) and SmartSpace Software (0.46% as
at 30 September 2019). Hummingbird Resources is a Mali based gold
producer which was purchased with proceeds from Shanta Gold in
order to diversify the singe asset risk that is prevalent with
these investments. SmartSpace Software is a small software business
that enables better use of corporate real estate through the
management of hot-desks and meeting rooms. They have signed some
impressive customers but remains early stage, hence the small
position.
SUMMARY & OUTLOOK
The last twelve months has been challenging, with performance
both negative and behind our benchmark. It has been a frustrating
year with strong underlying progress in some stocks not being
recognised and any disappointment being punished. It is our
opinion, supported by long term trends, that this is cyclical not
structural, and the UK micro caps remains a fantastic source of
idiosyncratic risk. The portfolio has a strong bias to Growth but
is, on average, less expensive than the benchmark and invested in
better capitalised companies. The opportunity remains strong with
354 companies with a market capitalisation of between GBP20m and
GBP100m at the end of September 2019.
This report illustrates that we do stick to our proven PVT
investment philosophy of looking to own companies with the
Potential to create substantial shareholder value at Valuations
that provide a margin of safety and where Timing is supportive. I
believe the long term returns of this company are illustrative of
the opportunity set.
Thank you for your ongoing support.
George Ensor
Portfolio Manager
20 January 2020
INVESTMENT PORTFOLIO
Investment Portfolio as at 30 September 2019
The Investment Portfolio below details 33 of the 44 holdings as
at 30 September 2019. This summary excludes portfolio holdings that
are individually less than 1%(1) of the Investment Portfolio's
total.
[graphs and charts are included in the published Annual
Financial Report which is available on the Company's website at
https://microcap.riverandmercantile.com/literature/annual-reports]
(1) Portfolio weightings are based on mid-prices
DIRECTORS' AND CORPORATE GOVERNANCE REPORT
The Directors present the Annual Financial Report of the Company
for the year ended 30 September 2019. The results for the year are
set out in these accounts.
Disclosure of Information to the Auditor
Each of the Directors who were members of the Board at the time
of approving this Report confirms that:
-- to the best of his or her knowledge and belief, there is no
information relevant to the preparation of their report of which
the Auditor was unaware; and
-- he or she has taken all steps a Director might reasonably be
expected to have taken to be aware of relevant audit information
and to establish that the Auditor was aware of that
information.
Directors' interests
Information for each Director is shown above and details of
Directors' remuneration and interests in shares can be found
below.
Financial risk management objectives and policies
The Board is responsible for the Company's system of risk
management and internal controls and meets regularly in the form of
Board meetings to assess the effectiveness of such controls in
managing and mitigating risk.
The key financial risks that the Directors believe the Company
is exposed to include credit risk, liquidity risk, market risk
(including price risk and interest rate risk). Please refer to note
9 for reference to financial risk management disclosure, which
explains in further detail the above risk exposures and policies
and procedures in place to monitor and mitigate these risks.
The Administrator has established an internal controls framework
to provide reasonable but not absolute assurance on the
effectiveness of the internal controls operated on behalf of its
clients. The effectiveness of these controls is assessed by the
Administrator's compliance and risk departments on an on-going
basis and by periodic review by external parties. The
Administrator's compliance team present an assessment of their
review to the Board in line with the compliance monitoring
programme on a quarterly basis.
The Board has reviewed the effectiveness of the Company's system
of risk management and internal controls for the year ended 30
September 2019 and to the date of approval of this Annual Financial
Report.
Fair, balanced and understandable
In assessing the overall fairness, balance and understandability
of the Annual Financial Report the Board has performed a
comprehensive review to ensure consistency and overall balance.
Borrowing limits
The Directors may, if they feel it is in the best interests of
the Company, borrow funds up to a maximum of 20% of NAV at the time
of borrowing. On the 9 December 2016, the Company entered into a
Sterling Facility Agreement, which was subsequently amended and
extended on 13 December 2017, further extended on 11 December 2018
and subsequently expired on 6 December 2019 as the Board decided
not to renew the Facility. Please refer to note 15 for further
details.
Greenhouse gas emissions
Please refer to Strategic Report - "Environmental and social
issues" above for disclosure regarding greenhouse gas
emissions.
Share capital
As at 30 September 2019, the Company had 46,445,043 Ordinary
Shares (30 September 2018: 46,445,043) in issue.
Acquisition of own shares
To assist the Company in addressing any imbalance between the
supply of and demand for Ordinary Shares and thereby assist in
controlling the discount to NAV at which the Ordinary Shares may be
trading, on 27 February 2019 the Company renewed general authority
to purchase in the market up to 14.99% of the Ordinary Shares in
issue as at 27 February 2019, (previously granted on 27 February
2018). This authority expires on the date of the 2020 AGM. During
the year the Company did not purchase any shares in the market.
The Directors will seek a renewal of this authority from
Shareholders at the Company's AGM on 4 March 2020.
Shareholders' interests
As at 30 September 2019, the Company had been notified in
accordance with the Disclosure Guidance and Transparency Rules
("DTR") of the Financial Conduct Authority (which covers the
acquisition and disposal of major shareholdings and voting rights),
of the following Shareholders that had an interest of greater than
5% in the Company's issued stated capital.
Percentage of total
voting rights (%)
Investec Wealth & Investment
Limited 16.19
City of Bradford Metropolitan
District Council 9.81
River and Mercantile Asset Management
LLP 8.85
Smith & Williamson Holdings
Limited 6.90
Derbyshire County Council 6.25
Between 30 September 2019 and 20 January 2020 the Company
received the following additional notifications:
Percentage of total
voting rights (%)
Investec Wealth & Investment
Limited 15.96
Independent Auditor
PricewaterhouseCoopers CI LLP, have indicated their willingness
to continue in office as auditor and a resolution proposing their
re-appointment and to authorise the Directors to determine their
remuneration will be proposed at the forthcoming AGM.
Events after the Reporting Date
The Directors are not aware of any developments that might have
a significant effect on the operations of the Company in subsequent
financial periods not already disclosed in this report or note 17
of the attached financial statements.
Going concern
Under the AIC Code and applicable regulations, the Directors are
required to satisfy themselves that it is reasonable to assume that
the Company is a going concern from date of approval of the
financial statements.
The Directors are satisfied that, at the time of approving the
financial statements, no material uncertainties exist that may cast
significant doubt concerning the Company's ability to continue for
the foreseeable future. The Directors consider it appropriate to
adopt the going concern basis in preparing the financial
statements.
Corporate Governance Statement
a) Corporate Governance Codes
The Code of Corporate Governance issued by the Association of
Investment Companies ("AIC") in July 2016 ("AIC Code") provides
specific corporate governance guidelines to investment
companies.
During February 2019, the AIC released an updated AIC Code of
Corporate Governance for accounting periods beginning on or after 1
January 2019. The Company has reported against the AIC Code issued
in July 2016 and will report against the revised the AIC Code in
the Annual Financial Report for the year ended 30 September
2020.
The Board considers that reporting against the principles and
recommendations of the AIC Code and by reference to the AIC Guide
(which incorporates the UK Code), will enable Shareholders to make
a comprehensive assessment of the Company's governance
principles.
The AIC Code requires listed companies to disclose how they have
applied the principles and complied with the provisions of the UK
Corporate Governance Code (UK Code) as issued by the Financial
Report Council ("FRC").
The FRC has confirmed that AIC member companies who report
against the AIC Code and who follow the AIC Guide will be meeting
obligations in relation to the UK Code, paragraph 9.8.6 of the
Listing Rules and associated disclosure requirements of the DTR.
Copies of the AIC Code, the AIC Guide and the UK Code can be found
on the respective organisations' websites which are
www.theaic.co.uk and www.frc.org.uk respectively.
b) Statement of compliance
The AIC Code comprises 21 principles and the Directors believe
that during the year under review they have complied with all the
recommendations of the AIC Code and the relevant provisions of the
UK Code insofar as they apply to the Company's business except as
set out below:
-- The role of the Chief Executive;
-- Executive Directors' remuneration; and
-- The need for an internal audit function.
For the reasons set out in the AIC Guide, and as explained in
the UK Code, the Board considers these provisions are not relevant
to the position of the Company, being an externally managed
investment company. In particular, all of the Company's day-to-day
management and administrative functions are outsourced to third
parties. As a result, the Company has no executive directors,
direct employees or internal operations. The Company has therefore
not reported further in respect of these provisions.
The Company complies with the corporate governance statement
requirements pursuant to the DTRs by virtue of the information
included in the Corporate Governance section of the Annual
Financial Report.
There is no information that is required to be disclosed under
Listing Rule 9.8.4.
c) The Board
Directors
The Board currently consists of four non-executive directors all
of whom were appointed on 2 October 2014 (date of incorporation).
The Directors are:
-- Andrew Chapman (Independent non-executive Chairman)
-- Ian Burns (Senior Independent non-executive Director and Chairman of the Audit Committee)
-- Trudi Clark (Independent non-executive Director, Chairman of
the Remuneration and Nomination Committee and Management Engagement
Committee)
-- Mark Hodgson (Non-executive Director)
Please refer above for biographies of each Director which
demonstrates their professional knowledge and breadth of
investment, accounting, banking and professional experience.
The Board is chaired by Andrew Chapman, who is independent of
the Manager and Portfolio Manager at the time of his appointment
and remains so. The Chairman is responsible for the leadership of
the Board and ensuring its effectiveness in all aspects of its
role.
Ian Burns has been appointed as the Senior Independent Director
and provides assistance to the Chairman and serves as an
intermediary for the other Directors where necessary.
Directors' Duties and Responsibilities
The Directors have adopted a set of reserved powers, which
establish the key purpose of the Board and detail its major duties.
These duties cover the following areas of responsibility:
-- statutory obligations and public disclosure;
-- approval of the investment policy;
-- strategic matters and financial reporting;
-- Board composition and accountability to Shareholders;
-- risk assessment and management, including reporting,
compliance, monitoring, governance and control;
-- responsible for financial statements; and
-- other matters having material effects on the Company.
These reserved powers of the Board have been adopted by the
Directors to demonstrate clearly the importance with which the
Board takes its fiduciary responsibilities and as an ongoing means
of measuring and monitoring the effectiveness of its actions.
The Board meets at least four times each year and monitors the
Company's share price and NAV and regularly considers ways in which
future share price and overall performance can be enhanced. The
Board is responsible for the safeguarding of the assets of the
Company and taking reasonable steps for the prevention and
detection of fraud and other irregularities. The Portfolio Manager
and Manager together with the Company Secretary also ensure that
all Directors receive, in a timely manner, all relevant management,
regulatory and financial information relating to the Company and
its portfolio of investments. Directors unable to attend a Board
meeting are provided with the Board papers and can discuss issues
arising in the meeting with the Chairman or another non-executive
Director.
Individual Directors may, at the expense of the Company, seek
independent professional advice on any matter that concerns them in
the furtherance of their duties.
Board and Committees
The Board has established three committees, the Audit Committee,
the Management Engagement Committee and the Remuneration and
Nomination Committee. All the independent directors, namely Andrew
Chapman, Ian Burns and Trudi Clark have been appointed to all
Committees.
Each committee operates within clearly defined terms of
reference and duties. The terms of reference for each Committee
have been approved by the Board and are available in full on the
Company's website, https://microcap.riverandmercantile.com.
Audit Committee
The Audit Committee membership comprises all of the Directors
with the exception of Mark Hodgson. The Chairman is a member of the
Committee but he does not chair it. His membership of the Audit
Committee is considered appropriate given his extensive knowledge
of the financial services industry.
Ian Burns is the Chairman of the Audit Committee.
The report on the role and activities of this Committee and its
relationship with the external auditors is set out in the Report of
the Audit Committee below.
Management Engagement Committee
Trudi Clark is the Chair of the Management Engagement Committee.
The Management Engagement Committee membership comprises all of the
Directors with the exception of Mark Hodgson.
The Management Engagement Committee carries out its review of
the Company's advisers through consideration of a number of
objective and subjective criteria and through a review of the terms
and conditions of the advisers' appointments with the aim of
evaluating performance, identifying any weaknesses and ensuring
value for money for the Company's Shareholders. In October 2019,
the Management Engagement Committee formally reviewed the
performance of the Portfolio Manager and other key service
providers to the Company. During this review, no material
weaknesses were identified. Overall the Management Engagement
Committee confirmed its satisfaction with the services and advice
received.
Remuneration and Nomination Committee
Trudi Clark is the Chair of the Remuneration and Nomination
Committee. The Remuneration and Nomination Committee membership
comprises all of the Directors with the exception of Mark
Hodgson.
The Remuneration and Nomination Committee undertake an
evaluation of the Board on an annual basis. The performance of each
Director is considered as part of a formal review by the
Remuneration and Nomination Committee.
The performance of the Board, its Committees and the Directors
was reviewed by the Remuneration and Nomination Committee in
October 2019. It was concluded that all Directors were independent
of the Portfolio Manager, and that Andrew Chapman, Ian Burns and
Trudi Clark were independent of the Manager. Mark Hodgson is not
regarded as independent as detailed below.
The Chair of the Committee reviewed and discussed various areas,
including investment matters, strategy, Shareholder value,
governance, and the process and style of meetings. In addition, the
Committee reviewed the performance of the Chairman in his role and
evaluated all the Directors' personal contributions. It was
concluded that all Directors had a good understanding of the
investments and markets and felt well prepared and able to
participate fully at Board meetings. It was agreed that Board
meetings were effective and all relevant topics were fully
discussed, with the Board having a good range of skills and
competency. The Directors confirm that they have devoted sufficient
time, as considered necessary, to the matters of the Company.
Attendance at scheduled meetings of the Board and its
committees
Board Audit Committee Management Remuneration
Engagement and Nomination
Committee Committee
Number of meetings during
the year ended 30 September
2019(1) 5 3 1 1
------ ---------------- ------------ ----------------
Andrew Chapman 5 3 1 1
------ ---------------- ------------ ----------------
Ian Burns 5 3 1 1
------ ---------------- ------------ ----------------
Trudi Clark 5 3 1 1
------ ---------------- ------------ ----------------
Mark Hodgson 5 2(2) 1(2) 1(2)
------ ---------------- ------------ ----------------
(1) - Includes a quarterly Board meeting, an Audit Committee
meeting, a Management Engagement Committee meeting and a
Remuneration and Nomination Committee meeting held on 8 October
2019.
(2) - Attended with the invitation from the Audit Committee,
Management Engagement Committee and Remuneration and Nomination
Committee, however did not actively participate in the meeting.
Meetings of the Committees generally take place prior to a Board
meeting. The Committee reports to the Board as part of a separate
agenda item, on the activity of the Committee and matters of
particular relevance to the Board in the conduct of their work.
Directors' retirement and rotation
The AIC Guide states that all non-executive Directors should be
submitted for re-election by Shareholders at the first AGM after
their appointment and to re-election thereafter at intervals no
more than three years. Non-executive directors serving more than
nine years should be subject to annual re-election. Nomination for
re-election should not be assumed but be based on disclosed
procedures and continued satisfactory performance. The Articles of
Incorporation state that at each AGM of the Company, any Director
who has been appointed by the Board since the last AGM shall retire
from office and may offer himself for election or re-election by
the members.
In accordance with best practice under the AIC Code, all
Directors stand for re-election by Shareholders annually, the next
occasion being at the AGM to be held on 4 March 2020.
The Board considers that there is a balance of skills and
experience within the Board and each of the Directors contributes
effectively.
Board Independence, Composition and Tenure
The Chairman and all Directors, with the exception of Mark
Hodgson, are considered independent of the Manager and the
Portfolio Manager. Mark Hodgson, who is independent of the
Portfolio Manager, is the Managing Director of the Manager and is
therefore not regarded as independent.
The Directors consider that there are no factors, as set out in
principle 1 or 2 of the AIC Code, which compromise the Chairman's
or other Directors' independence, other than stated above, and that
they all contribute to the affairs of the Company in an adequate
manner. The Board reviews the independence of all Directors
annually. The Company Secretary, BNP Paribas Securities Services
S.C.A., Guernsey Branch through its representative acts as
Secretary to the Board and Committees and in doing so it: assists
the Chairman in ensuring that all Directors have full and timely
access to all relevant documentation; organises induction of new
Directors; and is responsible for ensuring that the correct Board
procedures are followed and advises the Board on corporate
governance matters.
The Board is made up of three male Directors and one female
Director. The Board supports the recommendations of the Davies
Report and believes in and values the importance of diversity,
including gender, to the effective functioning of the Board. The
Board, however, does not consider it appropriate or in the interest
of the Company and its Shareholders to set prescriptive targets for
gender or other diversity on the Board.
The Board has adopted a policy on tenure that is considered
appropriate for an investment company. The Board does not believe
that length of service, by itself, leads to a closer relationship
with the Manager and the Portfolio Manager or necessarily affects a
Director's independence and effectiveness.
The Board considers that boards of investment companies are more
likely to benefit from a long association with a company in that
they will experience a number of investment cycles.
The Board's tenure and succession policy seeks to ensure that
the Board is well balanced and will be refreshed from time to time
by the appointment of new Directors with the skills and experience
necessary to replace those lost by Directors' retirements and meet
future requirements. The Remuneration and Nomination Committee is
committed to ensuring that any vacancies arising are filled by the
most qualified candidates who have complementary skills or who
possess the skills and experience which fill any gaps in the
Board's knowledge or experience. Directors must be able to
demonstrate their commitment and fiduciary responsibility to the
Company. The Board seeks to encompass relevant past and current
experience of various areas relevant to the Company's business.
Directors' remuneration and annual evaluation of the Board and
that of its Audit Committee, Management Engagement Committee and
Remuneration and Nomination Committee and individual Directors
The Remuneration and Nomination Committee periodically reviews
the fees paid to the Directors and compares these with the fees
paid by listed companies generally.
An annual evaluation of the Chairman and each individual
Director, Audit Committee, Management Engagement Committee and
Remuneration and Nomination Committee and Directors is undertaken
considering the balance of skills, experience, independence and
knowledge, its diversity, including gender, how the Board works
together as a unit, and other factors relevant to its
effectiveness. This was conducted by the Chairman having a private
discussion with each Director. The Directors also met without the
Chairman present in order to review the Chairman's performance. It
was concluded that each were satisfactory and the Board and
Committees had a good balance of skills and experience with each
Director making significant contributions in their roles and the
Chairman continuing to display effective leadership.
Details of the remuneration arrangements for the Board and Audit
Committee can be found in the Directors' Remuneration Report below
and in note 6 of the financial statements.
Directors' professional development
The Board believes that keeping up-to-date with key investment
industry developments is essential for the Directors to maintain
and enhance their effectiveness.
Current Directors and newly appointed Directors, if applicable,
are given the opportunity to discuss training and development needs
and are expected to take responsibility for identifying their
training needs and to take steps to ensure that they are adequately
informed about the Company and their responsibilities as a
Director. The Chairman of the Remuneration and Nomination Committee
is responsible for agreeing and reviewing with each Director their
training and development needs.
When a new Director is appointed to the Board, they will be
provided with all relevant information regarding the Company and
their duties and responsibilities as a Director. In addition, a new
Director will also spend time with representatives of the Manager
and the Portfolio Manager in order to learn more about their
processes and procedures. No Directors were appointed during the
year.
The Board is confident that all its members have the knowledge,
ability and experience to perform the functions required of a
director of the Company.
d) Board meetings and relationship with the Manager and Portfolio Manager
Relationship with the Manager and Portfolio Manager
The Board has delegated various duties to external parties
including the management of the investment portfolio, the custodial
services (including the safeguarding of assets), the registration
services and the day-to-day company secretarial, administration and
accounting services. Each of these contracts was entered into after
full and proper consideration by the Board of the quality and cost
of services offered, including the control systems in operation in
so far as they relate to the affairs of the Company.
The Board receives and considers reports regularly from both the
Portfolio Manager and the Manager, with ad hoc reports and
information supplied to the Board as required. The Portfolio
Manager complies with the Company investment limits and risk
diversification policies and has systems in place to monitor cash
flow and the liquidity risk of the Company. The Manager, Portfolio
Manager and the Administrator also ensure that all Directors
receive, in a timely manner, all relevant management, regulatory
and financial information. Representatives of the Manager,
Portfolio Manager and Administrator attend each Board meeting as
required, enabling the Directors to probe further on matters of
concern.
The Directors have access to the advice and service of the
corporate Company Secretary through its appointed representative
who is responsible to the Board for ensuring that Board procedures
are followed and that applicable rules and regulations are complied
with. The Board, the Manager, Portfolio Manager and the
Administrator operate in a supportive, co-operative and open
environment and the Board will actively and continuously supervise
both the Manager, Portfolio Manager and Administrator in the
performance of their respective functions.
Performance of the Portfolio Manager
The Board reviews on an ongoing basis the performance of the
Portfolio Manager and considers whether the investment strategy
adopted is likely to achieve the Company's investment
objective.
Having formally appraised the performance, investment strategy
and resources of the Portfolio Manager, the Board has unanimously
agreed that the interests of the Shareholders as a whole are best
served by the continuing appointment of the Portfolio Manager on
the terms agreed.
The Board believes that the portfolio management fees are
competitive with other investment companies with similar investment
mandates. The key terms of the Investment Management agreement and
the portfolio management fee charged by the Portfolio Manager are
set out in note 4.
Primary focus
The Board meets regularly throughout the year and a
representative of the Manager and the Portfolio Manager is in
attendance at all times when the Board meets to review the
performance of the Company's investments.
The Chairman with assistance from the Manager and the Portfolio
Manager is responsible for ensuring that relevant financial
information, including investment portfolio analysis and financial
plans, including budgets and forecasts, are available to the Board
and discussed at Board meetings. The Chairman encourages open
debate to foster a supportive and co-operative approach for all
participants.
The Board applies its primary focus on the following:
- investment performance, ensuring that investment objectives
and strategy of the Company are met;
- ensuring investment holdings are in line with the Company's investment restrictions;
- review and monitoring financial risk management, operating
cash flows and budgets of the Company; and
- review and monitoring of the key risks to which the Company is
exposed as set out in the Strategic Report.
At each relevant meeting the Board undertakes reviews of key
investment and financial data, transactions and performance
comparisons, share price and NAV performance, marketing and
Shareholder communication strategies, peer group information and
industry issues.
Overall strategy
The Board meets regularly to discuss the investment objective,
policy and approach of the Company to ensure sufficient attention
is given to overall strategy of the Company.
The Board considers the Company's investment objectives, their
continuing relevance and whether the investment policy continues to
meet those Company's investment objectives.
The Board believes that the overall strategy of the Company
remains appropriate.
Monitoring and evaluation of performance of and contractual
arrangements with service providers
The Management Engagement Committee is responsible for reviewing
on a regular basis the performance of the Manager, Portfolio
Manager and the Company's other third party service providers
together with their anti-bribery and corruption policies to ensure
that they comply with the Bribery Act 2010 and the Prevention of
Corruption (Bailiwick of Guernsey) Law, 2003 and ensure their
continued competitiveness and effectiveness and ensure that
performance is satisfactory and in accordance with the terms and
conditions of the respective appointments.
As part of the Committee's evaluation it reviews on an annual
basis the contractual arrangements with the Manager, Portfolio
Manager and major service suppliers.
During this review, no material weaknesses were identified and
overall the Management Engagement Committee confirmed its
satisfaction with the services and advice received.
The Directors have adopted a procedure whereby they are required
to report any potential acts of bribery and corruption in respect
of the Company to BNP Paribas Securities Services S.C.A., Guernsey
Branch as the designated manager for Guernsey Financial Services
Commission purposes.
Review of NAV and share price of Ordinary Share class
The Directors review the trading prices of the Company's
Ordinary Shares and compare them against their NAV to assess
volatility in the discount or premium of the Ordinary Share prices
to their NAVs during the year.
e) Shareholder communications
The main method of communication with Shareholders is through
the Half-Yearly and Annual Financial Report which aims to give
Shareholders a clear and transparent understanding of the Company's
objectives, strategy and results. This information is supplemented
by the publication of the daily NAVs of the Company's Ordinary
Shares on the London Stock Exchange via a Regulatory Information
Service.
The Company's website, https://microcap.riverandmercantile.com,
is regularly updated with quarterly factsheets and provides further
information about the Company, including the Company's Financial
Reports and announcements. The maintenance and integrity of the
Company website is the responsibility of the Directors, which has
been delegated to the Portfolio Manager; 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.
Information published on the internet is accessible in many
countries with different legal requirements relating to the
preparation and dissemination of financial statements and users of
the Company's website are responsible for informing themselves of
how the requirements in their own countries may differ from those
of Guernsey.
The Board believes that the AGM provides an appropriate forum
for investors to communicate with the Board, and encourages
participation. The AGM will be attended by at least the Chairman of
the Audit Committee. There is an opportunity for individual
Shareholders to question the Directors at the AGM. It is the
intention of the Board that the Notice of the AGM and related
papers will be sent to Shareholders at least 20 working days before
that meeting.
The Directors welcome the views of all Shareholders and place
considerable importance upon them.
Other communications
All substantive communications regarding any major corporate
issues are discussed by the Board taking into account
representations from the Manager, Portfolio Manager, the Auditor,
legal advisers, Corporate Brokers and the Company Secretary.
f) Internal Control and Risk Management Systems
A description of the main features of internal controls and risk
management systems in relation to the financial reporting process
can be found below.
Alternative Investment Fund Manager Directive ("AIFMD")
The Company (which is a non-EU AIF for the purposes of the AIFMD
and related regimes in EEA member states) has appointed the Manager
to act as its Alternative Fund Manager ("AIFM"). The Manager is
authorised by the Jersey Financial Services Commission to act as an
AIFM on behalf of alternative investment funds ("AIFs") in
accordance with the Financial Services (Jersey) Law 1998.
The Company is registered with the Guernsey Financial Services
Commission, being the Company's competent regulatory authority, as
a non-EU Alternative Investment Fund (AIF), and the AIFM has
registered with the UK Financial Conduct Authority, under their
relevant national private placement regime.
The Manager has delegated portfolio management of the Company's
investment portfolio to the Portfolio Manager and the Board
actively and continuously supervises both the Manager and the
Portfolio Manager in the performance of their respective
functions.
As the Company and the AIFM are non-EU domiciled no depositary
has been appointed in line with the AIFM Directive. However, BNP
Paribas Securities Services S.C.A., Guernsey Branch has been
appointed to act as custodian.
Information relating to the current risk profile of the Company
and the risk management systems employed by the Manager and
Portfolio Manager to manage those risks, as required under
paragraph 4(c) of Article 23 of the AIFM Directive, is set out in
note 9 - financial risk management. Please refer above for the
Board's assessment of the principal risks and uncertainties facing
the Company.
AIFM Remuneration
The total fee paid to the AIFM by the Company for the year ended
30 September 2019 is disclosed in note 5.
The AIFM is not subject to the provisions of Article 13 of the
AIFMD, which require the AIFM to adopt remuneration policies and
practices in line with the principles detailed in Annex II of the
Directive. However, in accordance with Article 22 of the AIFM
Directive and Article 107 of the AIFM Regulations, the AIFM must
make certain disclosures in respect of the remuneration paid to its
staff.
The AIFM has identified ten staff as falling within the scope of
the disclosure requirements (the "Identified Staff"). These
Identified Staff are senior management, named as Designated Persons
of the AIFM's managerial functions, members of the Board of
Directors of the AIFM, and a risk officer as control function. All
Identified Staff of the AIFM are employees of the Carne Group and
as such receive no separate remuneration for their role within the
AIFM. Instead they are remunerated as employees of other Carne
group companies, with a combination of fixed and variable
discretionary remuneration, where the latter is assessed on the
basis of their overall individual contribution in their role, with
reference to both financial and non-financial criteria and not
directly linked to the performance of the staff of specific
business units or targets reached. The annualised remuneration
amount paid to all of the Identified Staff of the AIFM in respect
of their work for the AIF for the 12 month period to 31 March 2019
was GBP31,095 (31 March 2018: GBP30,845). There was no variable
component to this remuneration and none of the AIFM's Identified
Staff is able to materially impact the risk profile of the Company.
The AIFM manages other AIFs and has no staff other than the
Identified Staff.
This Directors' and Corporate Governance Report was approved by
the Board of Directors on 20 January 2020 and signed on its behalf
by:
Andrew Chapman Ian Burns
Chairman Audit Committee Chairman
REPORT OF THE AUDIT COMMITTEE
Report of the Audit Committee
The Board has appointed an Audit Committee which operates within
clearly defined Terms of Reference.
The Audit Committee includes all of the Directors with the
exception of Mark Hodgson who attends following invitation from the
Audit Committee but does not actively participate in the meetings.
Ian Burns is the Chairman of the Audit Committee and is independent
of the Manager and Portfolio Manager as are all the other Directors
that comprise the committee. All of the Audit Committee's members
have recent and relevant financial and industry experience and the
Chairman of the Audit Committee is a fellow of the Institute of
Chartered Accountants in England & Wales. The Audit Committee
as a whole has competence relevant to the sector in which the
Company operates. Biographical information pertaining to the
members of the Audit Committee can be found in the section of this
Annual Financial Report entitled, "Board Members".
Role of the Committee
The Audit Committee assists the Board in carrying out its
responsibilities in relation to financial reporting requirements,
risk management and the assessment of internal financial and
operating controls. It also manages the Company's relationship with
the external Auditor.
The Audit Committee's main functions are:
- to review and monitor the integrity, fairness and balance of
the financial statements of the Company including its Half-Yearly
Report and Annual Financial Report to Shareholders and any formal
announcements regarding its financial performance, together with
any significant financial reporting issues and areas of judgement
contained within them;
- to advise the Board on whether the Annual Financial Report,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for Shareholders to assess the Company's
performance, position, business model and strategy;
- to review the adequacy and effectiveness of the Company's
financial reporting and internal control policies and procedures
with respect to the Company's record keeping, asset management and
operations for the identification, assessment and reporting of
risks;
- to consider and make recommendations to the Board, to be put
to Shareholders for approval at the AGM, in relation to the
appointment, re-appointment and removal and the provisions of
non-audit services of the external Auditor and to negotiate their
remuneration and terms of engagement on audit and non-audit
work;
- to meet regularly with the external Auditor in order to review
their proposed audit programme and remit of work and the subsequent
Audit Report and to assess the effectiveness of the audit process;
any issues arising from the audit with respect to accounting or
internal controls systems and the level of fees paid in respect of
audit and non-audit work; and
- to annually assess the external Auditor's independence,
objectivity, effectiveness, resources and expertise.
The Audit Committee's Terms of Reference are published on the
Company's website, which will be updated for changes resulting from
the new UK Corporate Governance code effective from the period
beginning 1 October 2019.
Internal controls
The Board is responsible for ensuring that suitable systems of
risk management and internal control are implemented by the
third-party service providers to the Company. The Directors have
reviewed the BNP Paribas Securities Services ISAE 3402 report (on
the description of controls placed in operation, their design and
operating effectiveness for the period from 1 October 2018 to 30
September 2019) on Fund Administration dated 17 December 2019, and
are pleased to note that no significant issues were identified.
In accordance with the FRC's Internal Control: Guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting, and the FRC's Guidance on Audit Committees, the Board
confirms that there is an on-going process for identifying,
evaluating and managing the significant internal control risks
faced by the Company.
As the Company does not have any employees it does not have a
"whistle blowing" policy in place, however the Board has reviewed
the whistleblowing procedures of the Portfolio Manager with no
issues noted. The Company delegates its main administrative
functions to third-party providers who report on their policies and
procedures to the Board.
The Board believes that as the Company delegates its day-to-day
administrative operations to third-parties (which are monitored by
the Board), it does not require an internal audit function.
The Audit Committee met on three occasions and the members'
attendance record can be found above.
Significant risks in relation to the financial statements
The Audit Committee views the valuation of the Company's
investments as a significant risk.
There is a risk that the AIM listed investments are not valued
appropriately in accordance with the requirements set out in IFRS
13 due to the nature of the AIM market and the listed stocks not
being highly liquid, or heavily traded.
The Audit Committee reviews the regular reports from the
Portfolio Manager and Administrator regarding the valuation of the
investments and the Board reviews the NAV of the Company, together
with the value and trading volumes of investments on a regular
basis.
In addition to the above, Mark Hodgson chairs monthly AIFM Risk
Committee meetings where the Company's risk measurement framework
is discussed, including market risk, credit risk, counterparty
risk, operational risk and liquidity risk, in reference to the
investment portfolio and the Company performance thereof. On a
regular basis, Mark Hodgson reports findings to the Board and is
also asked to attend Audit Committee meetings by the Audit
Committee Chairman to assist the Committee to gain assurance as to
the appropriateness and robustness of the valuation methodology
applied to the investment portfolio.
External audit process
The Company's external auditor, PricewaterhouseCoopers CI LLP
(the "Auditor"), were reappointed on 27 February 2019. The Audit
Committee has direct access to the Company's external auditor and
provides a forum through which the external auditor reports to the
Board. Representatives of the external auditor attend meetings of
the Audit Committee at least twice each year.
The Audit Committee met with the Auditor prior to the
commencement of the audit and agreed an audit plan that would adopt
a risk based approach. The Audit Committee and the Auditor agreed
that a portion of the audit effort would include an examination of
the title to and the existence of the Company investments and an
examination of the procedures in place at the Administrator and the
Portfolio Manager in respect of the valuation of the Company's
investment portfolio.
Upon completion of the audit, the Audit Committee discussed with
the Auditor the effectiveness of the audit and considered the
Auditor's independence from the Company since their appointment and
throughout the audit process.
The significant risks regarding both fraud risk - management
override of controls and valuation of the investment portfolio,
were tracked through the period and the Audit Committee challenged
the work performed by the Auditor to test management override of
controls and in addition the audit work undertaken in respect of
valuations of investments held.
For the year ended 30 September 2019, the Audit Committee was
satisfied that there had been appropriate focus and challenge on
the significant and other key areas of audit risk and assessed the
quality of the audit process to be good.
During the year ended 30 September 2019, in addition to the
audit services in respect to the audit of the Company's Annual
Financial Report, the Auditor provided non-audit services in
respect of the review of the Company's Half-Yearly Report for the
period ended 31 March 2019. No other non-audit services were
provided during the year ended 30 September 2019.
To safeguard the objectivity and independence of the external
Auditor from becoming compromised, the Committee has a formal
policy governing the engagement of the external Auditor to provide
non-audit services. The external Auditor and the Directors have
agreed that all non-audit services require the pre-approval of the
Audit Committee prior to commencing any work. Fees for non-audit
services will be tabled annually so that the Audit Committee can
consider the impact on the Auditor's objectivity.
The fees for the audit services were: GBP45,000 (year-end audit)
and the fees for non-audit services were GBP18,400 for review of
the Company's Half-Yearly Report for the period ended 31 March
2019.
The Audit Committee has discussed the report provided by the
Auditor and the Audit Committee is satisfied as to the independence
of the Auditor.
The Committee has reviewed the Auditor's independence policies
and procedures and considers that they are fit for purpose.
Appointment and independence
The Audit Committee considers the reappointment of the external
Auditor, including the rotation of the audit engagement leader, and
assesses their independence on an annual basis. The external
Auditor is required to rotate the engagement leader responsible for
the Company's audit every five years. John Luff has overseen the
audit of the Company for the five financial years since inception
to 30 September 2019 and therefore Tony Corbin will take over as
engagement leader for the year ending 30 September 2020.
The Committee reviews the objectivity and effectiveness of the
audit process on an annual basis and considers whether the Company
should put the audit engagement out to tender. Having considered
the need to tender the position for the current year, the Committee
has provided the Board with its recommendation to the Shareholders
on the reappointment of PricewaterhouseCoopers CI LLP as external
auditor for the year ending 30 September 2020.
Accordingly, a resolution proposing the reappointment of
PricewaterhouseCoopers CI LLP as our auditor will be put to the
Shareholders at the AGM. There are no contractual obligations
restricting the Audit Committee's choice of external auditor and we
do not indemnify our external auditor.
The Committee continues to consider the audit tendering
provisions outlined in the revised UK Code.
This Report of the Audit Committee above was approved by the
Board of Directors on 20 January 2020 and signed on its behalf
by:
For and on behalf of the Audit Committee
Ian Burns
Audit Committee Chairman
DIRECTORS' STATEMENT OF RESPONSIBILITIES
The Directors are responsible for preparing financial statements
in accordance with The Companies (Guernsey) Law, 2008, as amended
("Companies Law") and International Financial Reporting Standards
("IFRS").
Companies Law requires the Directors to prepare financial
statements for each financial year which give a true and fair view
of the state of affairs of the Company and of the profit or loss
for the year.
In preparing those financial statements, the Directors are
required to:
-- select suitable accounting policies and 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;
-- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
-- use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping proper accounting
records, which disclose with reasonable accuracy at any time the
financial position of the Company and to enable them to ensure that
the financial statements comply with Companies Law. The Directors
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.
In accordance with DTR 4.1.12, the Directors confirm to the best
of their knowledge that:
-- the financial statements, which have been prepared in
accordance with IFRS, give a true and fair view of the assets,
liabilities, financial position and profit of the Company; and
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company, together with a description of the principal risks and
uncertainties that they face.
The Annual Financial Report and financial statements, taken as a
whole, are fair, balanced and understandable and provide the
information necessary for Shareholders to assess the Company's
performance, position, business model and strategy.
Andrew Chapman Ian Burns
Chairman Audit Committee Chairman
20 January 2020 20 January 2020
DIRECTORS' REMUNERATION REPORT
Annual Remuneration Statement
This report describes how the Board has applied the principles
of the AIC Code relating to Directors' remuneration.
Changes to the Board
There were no changes to the Board during the year. All
Directors will stand for reappointment at the forthcoming AGM to be
held on 4 March 2020.
Table of Directors Remuneration
Component Director Annual Rate Purpose of reward
(GBP)
Annual All Directors For commitments as non-executive
fee Andrew Chapman (Chairman) GBP25,000 Directors
Ian Burns GBP25,000
Trudi Clark GBP25,000
Mark Hodgson GBP25,000
--------------------------- ------------ ---------------------------------
Additional Andrew Chapman (Chairman GBP15,000 For additional responsibilities
annual of the Board) and time commitment
fee Ian Burns (Chairman GBP5,000
of the Audit Committee)
--------------------------- ------------ ---------------------------------
Expenses Ad hoc Reimbursement of expenses
paid
--------------------------- ------------ ---------------------------------
No other remuneration or compensation was paid or is payable by
the Company during the year to any of the Directors. There has been
no change to the Company's remuneration policy as detailed
below.
The Company has no employees. Accordingly, there are no
differences in policy on the remuneration of Directors and the
remuneration of employees.
No Director is entitled to receive any remuneration which is
performance-related.
Remuneration policy
The determination of the Directors' fees is a matter for the
Remuneration and Nomination Committee. The Remuneration and
Nomination Committee considers the remuneration policy annually to
ensure that it remains appropriately positioned. Members of this
Committee will review the fees paid to the boards of directors of
similar companies. Each director recuses themselves from
participating in decisions relating to his or her own
remuneration.
The Company's policy is for the Directors to be remunerated in
the form of fees, payable quarterly in arrears. No Director has any
entitlement to a pension, and the Company has not awarded any share
options or long-term performance incentives to any of the
Directors.
Directors are authorised to claim reasonable expenses from the
Company in relation to the performance of their duties.
The Company's policy is that the fees payable to the Directors
should reflect the time spent by the Board on the Company's affairs
and the responsibilities borne by the Directors and should be
sufficient to enable high calibre candidates to be recruited. The
policy is for the Chairman of the Board and Chairman of the Audit
Committee to be paid a higher fee than the other Directors in
recognition of their more onerous roles and more time spent. The
Remuneration and Nomination Committee may recommend the amendments
to the level of remuneration paid within the limits of the
Company's Articles of Incorporation.
The Company's Articles of Incorporation limits the aggregate
fees payable to the Board of Directors to a total of GBP150,000 per
annum.
Directors are appointed with the expectation that they are
initially appointed until the following AGM when it is required
that they be re-elected by Shareholders. All Directors have served
since incorporation of the Company.
Service Contracts and Policy on Payment of Loss of Office
Directors have agreed letters of appointment with the Company.
No Director has a service contract with the Company and Directors'
appointments may be terminated at any time by one month's written
notice with no compensation payable at termination upon leaving
office for whatever reason. Directors' appointments are reviewed
during the annual board evaluation, which last took place in
October 2019.
All Directors stand for re-election by Shareholders annually,
the next occasion being at the AGM to be held on 4 March 2020. The
names and biographies of the Directors holding office at the date
of this report are listed above.
Copies of the Directors' letters of appointment are available
for inspection by Shareholders at the Company's Registered Office,
and will be available at the AGM. The dates of their letters of
appointments are shown below.
Dates of letters of appointment
Director Date of letter of appointment Date of last election
Andrew Chapman 21 October 2014 27 February 2019
------------------------------ ----------------------
Ian Burns 21 October 2014 27 February 2019
------------------------------ ----------------------
Trudi Clark 21 October 2014 27 February 2019
------------------------------ ----------------------
Mark Hodgson 21 October 2014 27 February 2019
------------------------------ ----------------------
Director Interests
As at the date of approval of the financial statements,
Directors held the following number of Ordinary Shares in the
Company:
Director Ordinary Shares held
Andrew Chapman 20,562
---------------------
Ian Burns 5,500
---------------------
Trudi Clark 11,445
---------------------
Mark Hodgson 22,040
---------------------
Transactions in Ordinary Shares by Directors are outlined in
note 6. Ordinary Shares held by Directors have decreased in line
with each compulsory redemption.
No Director has any other interest in any contract to which the
Company is a party with the exception of Mark Hodgson who acts as
the Managing Director of the Manager.
Advisers to the Remuneration and Nomination Committee
The Board has not sought the advice or services by any outside
person, at this time, in respect of its consideration of the
Directors' remuneration.
Statement of consideration of Shareholder views
An ordinary resolution to ratify the Directors' remuneration
report will be proposed at the AGM on 4 March 2020.
Trudi Clark
Remuneration and Nomination Committee Chair
20 January 2020
independent auditor's report to THE MEMBERS OF RIVER AND
MERCANTILE UK MICRO CAP INVESTMENT COMPANY LIMITED
Report on the audit of the financial statements
Our opinion
In our opinion, the financial statements give a true and fair
view of the financial position of River and Mercantile UK Micro Cap
Investment Company Limited (the "Company") as at 30 September 2019,
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.
What we have audited
The Company's financial statements comprise:
-- the statement of financial position as at 30 September 2019;
-- the statement of comprehensive income for the year then ended;
-- the statement of changes in shareholders' equity for the year then ended;
-- the statement of cash flows for the year then ended; and
-- the notes to the financial statements, which include a
summary of significant accounting policies.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing ("ISAs"). Our responsibilities under those
standards are further described in the Auditor's responsibilities
for the audit of the financial statements section of our
report.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial
statements of the Company, as required by the Crown Dependencies'
Audit Rules and Guidance. We have fulfilled our other ethical
responsibilities in accordance with these requirements.
Our audit approach
Overview
Materiality
-- Overall Company materiality was GBP0.9 million which represents 1% of net assets.
Audit scope
-- The Company is a closed-ended collective investment scheme,
incorporated in Guernsey, whose ordinary shares are admitted to
trading on the Main Market of the London Stock Exchange.
-- We conducted our audit of the financial statements in
Guernsey, using information provided by BNP Paribas Securities
S.C.A. Guernsey branch (the "Administrator"), River and Mercantile
Asset Management LLP (the "Portfolio Manager") and Carne Global
AIFM Solutions (C.I.) Limited, the Alternative Investment Fund
Manager ("AIFM") all to whom the board of directors has delegated
the provision of certain functions.
-- We tailored the scope of our audit taking into account the
types of investments within the Company, the involvement of third
parties referred to above, the accounting processes and controls
and the industry in which the Company operates.
Key audit matters
-- Valuation of Financial Assets designated at fair value
through profit or loss ("Investments")
Audit scope
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements. In particular, we considered where the directors made
subjective judgements; for example, in respect of significant
accounting estimates that involved making assumptions and
considering future events that are inherently uncertain. As in all
of our audits, we also addressed the risk of management override of
internal controls, including among other matters, consideration of
whether there was evidence of bias that represented a risk of
material misstatement due to fraud.
We tailored the scope of our audit in order to perform
sufficient work to enable us to provide an opinion on the financial
statements as a whole, taking into account the structure of the
Company, the accounting processes and controls, and the industry in
which the Company operates.
Materiality
The scope of our audit was influenced by our application of
materiality. An audit is designed to obtain reasonable assurance
whether the financial statements are free from material
misstatement. Misstatements may arise due to fraud or error. They
are considered material if individually or in aggregate, they could
reasonably be expected to influence the economic decisions of users
taken on the basis of the financial statements.
Based on our professional judgement, we determined certain
quantitative thresholds for materiality, including the overall
Company materiality for the financial statements as a whole as set
out in the table below. These, together with qualitative
considerations, helped us to determine the scope of our audit and
the nature, timing and extent of our audit procedures and to
evaluate the effect of misstatements, both individually and in
aggregate on the financial statements as a whole.
Overall Company materiality GBP0.9 million (2018: GBP1.1
million)
How we determined it 1% of net assets
----------------------------------------
Rationale for the materiality We believe net assets to be the
benchmark most appropriate basis for determining
materiality since this is a key
consideration for members of
the Company when assessing financial
performance. It is also a generally
accepted measure used for companies
in this industry.
----------------------------------------
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP43,900, as well
as misstatements below that amount that, in our view, warranted
reporting for qualitative reasons.
Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the financial
statements of the current period. These matters were addressed in
the context of our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do not provide a
separate opinion on these matters.
Key audit matter How our audit addressed the Key
audit matter
Valuation of Financial Assets
designated at fair value through * We assessed the accounting policy for the Investments,
profit or loss ("Investments") as set out in note 2.3, for compliance with IFRS.
Investments of GBP81.4 million
(Note 8) held at fair value through
profit or loss consist mainly * We understood and evaluated the internal control
of investments in companies whose environment in place at the Administrator over the
securities are admitted to trading valuation of the investment portfolio and the
on the AIM. Investments are the production of the net asset value for the Company. We
main driver for the Company's also discussed the asset selection and monitoring
performance and are considered process with the Portfolio Manager.
to be a key area of focus for
members of the Company. There
is a risk that the AIM listed * We independently obtained the Investments custody
investments are not valued appropriately confirmation and reconciled to the Company's
in accordance with the requirement accounting records, without exception.
set out in IFRS 13 for the price
to be quoted in an active market
in order to be an appropriate * We tested the valuation of the Investments portfolio
measure of fair value. by independently agreeing 100% of the prices used in
the valuation to a third party pricing provider and
IFRS 13 defines an active market recalculated the total valuation as at 30 September
as a market in which transactions 2019.
for the asset take place with
sufficient frequency and volume
to provide pricing information * We obtained the AIFM's monthly liquidity analysis for
on an ongoing basis. the Company's investments and also considered the
results presented to the AIFM Risk Committee as at 30
September 2019. For securities the AIFM identified as
having low trading volumes relative to the Company's
holdings, inquiries were made with the Portfolio
Manager to challenge their assessment of the
liquidity of those investments. We corroborated the
results of these inquiries to supporting
documentation such as trades at or about the quoted
year-end prices. We concluded that the quoted prices
used in the 30 September 2019 valuation were
representative of their fair value.
* We did not identify any differences or issues
required to be reported to those charged with
governance from our testing.
========================================== ==============================================================
Other information
The directors are responsible for the other information. The
other information comprises all the information included in the
Annual Financial Report for the year ended 30 September 2019 but
does not include the financial statements and our auditor's report
thereon.
Our opinion on the financial statements does not cover the other
information and we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information identified above
and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our
knowledge obtained in the audit, or otherwise appears to be
materially misstated. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report in this regard.
Responsibilities of the directors 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, the requirements of
Guernsey law and for such internal control as the directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Company's ability to continue as a
going concern, disclosing, as applicable, matters relating to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Company or to cease
operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial
statements.
As part of an audit in accordance with ISAs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit 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 Company's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by the directors.
-- Conclude on the appropriateness of the directors' use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Company's
ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditor's report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor's report. However, future events or
conditions may cause the Company to cease to continue as a going
concern. For example, the terms on which the United Kingdom may
withdraw from the European Union are not clear, and it is difficult
to evaluate all of the potential implications on the Company and
the wider economy.
-- Evaluate the overall presentation, structure and content of
the financial statements, including the disclosures, and whether
the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the financial statements of the
current period and are therefore the key audit matters. We describe
these matters in our auditor's report unless law or regulation
precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
Report on other legal and regulatory requirements
Under The Companies (Guernsey) Law, 2008 we are required to
report to you if, in our opinion:
-- we have not received all the information and explanations we require for our audit;
-- proper accounting records have not been kept; or
-- the financial statements are not in agreement with the accounting records.
We have no exceptions to report arising from this
responsibility.
We have nothing to report in respect of the following matters
which we have reviewed:
-- the directors' statement set out above 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; and
-- 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.
This report, including the opinion, has been prepared for and
only for the 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.
John Luff
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
20 January 2020
STATEMENT OF COMPREHENSIVE INCOME
For the year from 1 October 2018 to 30 September 2019
Year ended Year ended
30 September 30 September
2019 2018
Notes GBP GBP
----------------------------------------------- ------ --------------- ---------------
Income
Investment income 3 1,177,507 997,614
Net (loss)/gain on financial assets
designated at fair value through
profit or loss 8 (19,739,019) 27,755,470
Foreign exchange gains 10,026 7,692
------------------------------------------------- ------ --------------- ---------------
Total (loss)/income (18,551,486) 28,760,776
------------------------------------------------- ------ --------------- ---------------
Expenses
Portfolio performance fees recovery/(expense) 4 1,210,297 (3,620,612)
Portfolio management fees 4 (668,888) (795,033)
Operating expenses 5 (566,330) (639,994)
Finance costs 15 (24,726) (21,246)
Total expenses (49,647) (5,076,885)
------------------------------------------------- ------ --------------- ---------------
(Loss)/Profit before taxation (18,601,133) 23,683,891
------------------------------------------------- ------ --------------- ---------------
Taxation - -
----------------------------------------------- ------ --------------- ---------------
(Loss)/Profit after taxation and
total comprehensive (loss)/income (18,601,133) 23,683,891
------------------------------------------------- ------ --------------- ---------------
Basic and diluted (loss)/earnings
per Ordinary Share 13 (0.4005) 0.4527
The Company has no items of other comprehensive income, and
therefore the (loss)/profit after taxation for the year is also the
total comprehensive (loss)/income.
All items in the above statement are derived from continuing
operations. No operations were acquired or discontinued during the
year.
The notes below form an integral part of these financial
statements.
STATEMENT OF FINANCIAL POSITION
As at 30 September 2019
30 September 30 September
2019 2018
Notes GBP GBP
--------------------------------------- ------ -------------------- -------------
Non-current assets
Financial assets designated at
fair value through profit or loss 8 81,386,681 102,227,116
Current assets
Cash and cash equivalents 6,543,864 4,674,315
Trade receivables - securities
sold awaiting settlement 36,862 819,559
Other receivables 7 202,078 121,637
Total current assets 6,782,804 5,615,511
--------------------------------------- ------ -------------------- -------------
Total assets 88,169,485 107,842,627
--------------------------------------- ------ -------------------- -------------
Current liabilities
Trade payables - securities purchased
awaiting settlement (108,088) -
Other payables 10 (243,203) (1,423,300)
--------------------------------------- ------ -------------------- -------------
Total current liabilities (351,291) (1,423,300)
--------------------------------------- ------ -------------------- -------------
Total liabilities (351,291) (1,423,300)
--------------------------------------- ------ -------------------- -------------
Net assets 87,818,194 106,419,327
--------------------------------------- ------ -------------------- -------------
Capital and reserves
Stated capital 12 - -
Share premium 12 28,391,852 28,391,852
Retained earnings 59,426,342 78,027,475
--------------------------------------- ------ -------------------- -------------
Equity Shareholders' funds 87,818,194 106,419,327
--------------------------------------- ------ -------------------- -------------
The financial statements were approved and authorised for issue
by the Board of Directors on 20 January 2020 and signed on its
behalf by:
Andrew Chapman Ian Burns
Chairman Audit Committee Chairman
The notes below form an integral part of these financial
statements.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the year ended 30 September 2019
Stated Retained
capital Share premium earnings Total
Note GBP GBP GBP GBP
------------------------------ ------ ---------- -------------- ------------- -------------
Opening equity Shareholders'
funds at 1 October 2018 - 28,391,852 78,027,475 106,419,327
-------------------------------------- --------- -------------- ------------- -------------
Total comprehensive loss
for the year - - (18,601,133) (18,601,133)
Closing equity Shareholders'
funds at 30 September 2019 - 28,391,852 59,426,342 87,818,194
-------------------------------------- --------- -------------- ------------- -------------
For the year ended 30 September 2018
Stated Retained
capital Share premium earnings Total
Note GBP GBP GBP GBP
------------------------------ ----- --------- -------------- ----------- -------------
Opening equity Shareholders'
funds at 1 October 2017 - 55,333,617 54,343,584 109,677,201
------------------------------ ----- --------- -------------- ----------- -------------
Total comprehensive income
for the year - - 23,683,891 23,683,891
Transactions with owners,
recorded directly in equity
Redemption of Ordinary
Shares 12 - (26,927,065) - (26,927,065)
Ordinary Share redemption
costs 12 - (14,700) - (14,700)
------------------------------ ----- --------- -------------- ----------- -------------
Closing equity Shareholders'
funds at 30 September 2018 - 28,391,852 78,027,475 106,419,327
------------------------------ ----- --------- -------------- ----------- -------------
The notes below form an integral part of these financial
statements.
STATEMENT OF CASH FLOWS
For the year ended 30 September 2019
Year ended Year ended
30 September 30 September
2019 2018
Notes GBP GBP
-------------------------------------------------------------- ------ ------------------- --------------
Cash flow from operating activities
(Loss)/Profit after taxation and total
comprehensive (loss)/income for the year (18,601,133) 23,683,891
Adjustments to reconcile (loss)/profit
after taxation to net cash flows:
* Realised gain on financial assets designated at fair
value through profit or loss 8 (3,689,629) (25,702,170)
* Unrealised loss/(gain) on financial assets designated
at fair value through profit or loss 8 23,428,648 (2,053,300)
Purchase of financial assets designated
at fair value through profit or loss(1) 8 (26,431,000) (21,826,770)
Proceeds from sale of financial assets
designated at fair value through profit
or loss(2) 8 28,423,201 44,141,957
Changes in working capital
Increase in other receivables and prepayments 7 (80,441) (25,229)
(Decrease)/Increase in other payables 10 (1,180,097) 613,522
Net cash from operating activities 1,869,549 18,831,901
-------------------------------------------------------------- ------ ------------------- --------------
Cash flows from financing activities
Redemption of Ordinary Shares 12 - (26,927,065)
Ordinary Share redemption costs paid 12 - (14,700)
Net cash used in financing activities - (26,941,765)
-------------------------------------------------------------- ------ ------------------- --------------
Net increase/(decrease) in cash and cash
equivalents in the year 1,869,549 (8,109,864)
-------------------------------------------------------------- ------ ------------------- --------------
Cash and cash equivalents at the beginning
of the year 4,674,315 12,784,179
-------------------------------------------------------------- ------ ------------------- --------------
Cash and cash equivalents at the end
of the year 6,543,864 4,674,315
-------------------------------------------------------------- ------ ------------------- --------------
(1) - Payables outstanding at 30 September 2019 relating to
purchases of financial assets designated at fair value through
profit amounted to GBP108,088 (30 September 2018: GBPnil).
(2) - Receivables outstanding at 30 September 2019 relating to
sales of financial assets designated at fair value through profit
amounted to GBP36,862 (30 September 2018: GBP819,559).
The notes below form an integral part of these financial
statements.
NOTES TO THE FINANCIAL STATEMENTS
1. General information
The Company was incorporated as a non-cellular company with
liability limited by shares in Guernsey under The Companies
(Guernsey) Law, 2008 (the "Companies Law") on 2 October 2014. It
listed its Ordinary Shares on the Premium Segment of the Official
List as maintained by the FCA and was admitted to trading on the
Main Market of the London Stock Exchange on 2 December 2014.
The Company has been registered by the GFSC as a registered
closed-ended collective investment scheme pursuant to the
Protection of Investors (Bailiwick of Guernsey) Law, 1987, as
amended, and the RCIS Rules 2018. The Company registered number is
59106.
The Company's registered address is BNP Paribas House, St
Julian's Avenue, St Peter Port, Guernsey, GY1 1WA.
2. Accounting policies
The principal accounting policies applied in the preparation of
these financial statements are set out below. These policies have
been consistently applied to all the years presented, unless
otherwise stated.
2.1 Basis of preparation
a) Statement of Compliance
The financial statements have been prepared in accordance with
the Companies Law and with International Financial Reporting
Standards ("IFRS") which comprise standards and interpretations
approved by the International Accounting Standards Board ("IASB"),
and interpretations issued by the IFRS Interpretations Committee
("IFRIC") as approved by the International Accounting Standards
Committee ("IASC") which remain in effect. The financial statements
give a true and fair view of the Company's affairs and comply with
the requirements of the Companies Law.
The financial statements have been prepared under a going
concern basis. The Directors are satisfied that, at the time of
approving the financial statements, no material uncertainties exist
that may cast significant doubt concerning the Company's ability to
continue for the foreseeable future. The Directors consider it
appropriate to adopt the going concern basis in preparing the
financial statements.
b) Basis of measurement
These financial statements have been prepared on a historical
cost basis adjusted to take account of the revaluation of financial
assets designated at fair value through profit or loss.
c) Functional and presentation currency
The Company's functional currency is Pounds Sterling, which is
the currency of the primary economic environment in which it
operates. The Company's performance is evaluated and its liquidity
is managed in Pounds Sterling. Pounds Sterling is therefore
considered as the currency that most faithfully represents the
economic effects of the underlying transactions, events and
conditions. The financial statements are presented in Pounds
Sterling.
d) Critical accounting assumptions, estimates and judgements
The preparation of the financial statements in conformity with
IFRS, requires the Company to make judgements, estimates and
assumptions that affect items reported in the Statement of
Financial Position and Statement of Comprehensive Income and the
disclosure of contingent assets and liabilities at the date of the
financial statements. It also requires management to exercise its
judgement in the process of applying the Company's accounting
policies. 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.
The Directors have used their judgement to determine that the
functional currency is Pounds Sterling (refer to note 2.1 (c)
above) and that all financial assets designated at fair value
through profit or loss are traded within an active market (note
2.3(c) below).
e) New standards, amendments and interpretations
The Company applied IFRS 9 - Financial Instruments ("IFRS 9")
which became effective for the Company from 1 October 2018. This
did not result in a restatement of previous financial statements.
The nature and effect of this change is disclosed below.
IFRS 9 replaced IAS 39 - Financial Instruments: Recognition and
Measurement
IFRS 9 introduced a new approach to the classification of
financial assets which is driven by the business model in which the
asset is held and their cash flow characteristics. A new business
model approach was introduced which does allow certain financial
assets to be categorised as "amortised cost" or "fair value through
other comprehensive income" in certain circumstances; in other
circumstances those assets are measured as "fair value through
profit or loss". IFRS 9 carries forward the derecognition
requirements of financial assets and liabilities from IAS 39. The
Directors have undertaken an assessment of the impact of IFRS 9 on
the Company's financial statements and concluded that there is no
impact to the recognition and measurement of the Company's
financial assets and liabilities.
During the year, a number of other new standards, amendments and
interpretations became applicable for the current reporting period
which are not relevant to the Company's operations.
There are a number of new standards, amendments and
interpretations to existing standards that will become effective in
future accounting periods that have not been adopted by the
Company.
2.2 Foreign currency translations
Foreign exchange gains and losses resulting from the settlement
of transactions in foreign currencies and from the translation of
monetary assets and liabilities at year end exchange rates to
Pounds Sterling are recognised in the Statement of Comprehensive
Income as foreign exchange gains/(losses).
Non-monetary items such as financial assets designated at fair
value through profit or loss measured at fair value in a foreign
currency, are translated using exchange rates at the Statement of
Financial Position date when the fair value was determined. Effects
of exchange rate changes on non-monetary items measured at fair
value on a foreign currency are recorded as part of the fair value
gain or loss.
As at 30 September 2019 all financial assets designated at fair
value through profit or loss are held in Pounds Sterling.
2.3 Financial instruments
Financial Assets
a) Classification
The Company classifies its investments in equity securities as
financial assets designated at fair value through profit or loss as
they are held for investment purposes. These financial assets 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 on a fair value basis together with other related financial
information. Furthermore, these financial assets do not possess
contractual cash flows.
Financial assets also include cash and cash equivalents as well
as trade receivables and other receivables which are classified at
amortised cost using the effective interest rate method.
b) Recognition, measurement and derecognition
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 designated at fair value through
profit or loss are measured initially at fair value. Transaction
costs are expensed as incurred and movements in fair value are
recorded in the Statement of Comprehensive Income. Subsequent to
initial recognition, all financial assets designated at fair value
through profit or loss are measured at fair value.
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.
c) 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.
As at 30 September 2019, the Company held investments in a
diversified portfolio of UK micro cap companies, typically
comprising companies with a free float market capitalisation of
less than GBP100 million at the time of purchase, whose securities
are admitted to trading on AIM or the main market of the London
Stock Exchange. Investments are valued at fair value, which are
quoted bid prices for investments traded in active markets.
The Directors determined that an active market exists based on
the frequency and volume of transactions of each asset. As all the
Company's financial assets are quoted securities which are traded
in active markets as at 30 September 2019, in the opinion of the
Directors, the quoted price for the financial assets as at 30
September 2019 is representative of fair value.
d) Valuation process
The Directors are in ongoing communications with the Portfolio
Manager and hold meetings on a timely basis to discuss performance
of the investment portfolio and the valuation methodology and in
addition review monthly investment performance reports.
The Directors analyse the investment portfolio in terms of both
investment mix and fair value hierarchy and consider the impact of
general credit conditions and/or events that occur in the global
corporate environments which may impact the economic conditions in
the UK and ultimately on the valuation of the investment
portfolio.
Financial liabilities
a) Classification
Securities purchased awaiting settlement represent payables for
investments that have been contracted for but not yet settled or
delivered on 30 September 2019. Financial liabilities include
amounts due to brokers and other payables which are held at
amortised cost using the effective interest rate method.
b) Recognition, measurement and derecognition
Financial liabilities are recognised initially at fair value,
net of transaction costs incurred and are subsequently carried at
amortised cost using the effective interest rate method. Financial
liabilities are derecognised when the obligation specified in the
contract is discharged, cancelled or expires.
2.4 Dividend income, interest income and expenses
Dividends receivable on equity shares are recognised as revenue
for the period on an ex-dividend basis. Interest income and
expenses are recognised in the Statement of Comprehensive Income
using the effective interest rate method.
2.5 Operating expenses
Operating expenses are recognised on an accruals basis and are
recognised in the Statement of Comprehensive Income.
2.6 Cash and cash equivalents
Cash includes cash at bank. Cash equivalents are short term,
highly liquid investments with original maturities of three months
or less that are readily convertible to known amounts of cash and
are subject to an insignificant risk of changes in value.
2.7 Trade receivables and trade payables
Trade receivables and payables represent securities sold and
securities purchased, respectively, that have been contracted for
but not yet settled or delivered on the Statement of Financial
Position date.
These amounts are recognised initially at fair value and
subsequently measured at amortised cost. At each period end, the
Company measures the loss allowance on trade receivables at an
amount equal to the lifetime expected credit losses if the credit
risk has increased significantly since initial recognition. If, the
credit risk has not increased significantly since initial
recognition, the Company will measure the loss allowance at an
amount equal to 12-month expected credit losses.
Significant financial difficulties of the broker, probability
that the broker will enter bankruptcy or financial reorganisation
and default in payments are all considered indicators that a loss
allowance may be required. A significant increase in credit risk is
defined by the Directors as any contractual payment which is more
than 30 days past due.
2.8 Segmental reporting
The Directors view the operations of the Company as one
operating segment, being investment in UK micro cap companies. All
significant operating decisions are based upon analysis of the
Company's investments as one segment. The financial results from
this segment are equivalent to the financial results of the Company
as a whole, which are evaluated regularly by the chief operating
decision-maker (the Board with insight from the Portfolio
Manager).
2.9 Contingent liabilities and provisions
A contingent liability is a possible obligation depending on
whether some uncertain future event occurs; or a present obligation
but payment is not probable or the amount cannot be measured
reliably. A provision is recognised when:
- the Company has a present legal or constructive obligation as a result of past events;
- it is probable that an outflow of resources will be required to settle the obligation; and
- the amount has been reliably estimated.
2.10 Taxation
The Company has applied for and been granted exemption from
liability to income tax in Guernsey under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance, 1989 as amended by the Director of
Income Tax in Guernsey for the current period. Exemption must be
applied for annually and will be granted, subject to the payment of
an annual fee, which is currently fixed at GBP1,200 per applicant,
provided the Company qualifies under the applicable legislation for
exemption.
It is the intention of the Directors to conduct the affairs of
the Company so as to ensure that it continues to qualify for exempt
company status for the purposes of Guernsey taxation.
2.11 Stated capital
Ordinary Shares are classified as equity in accordance with IAS
32 - "Financial Instruments: Presentation" as these instruments
include no contractual obligation to deliver cash and the
redemption mechanism is not mandatory.
Costs directly attributable to the issue of new Ordinary Shares
and redemption of existing Ordinary Shares are shown in equity as a
deduction from the proceeds.
Please refer to note 12 for details regarding the redemption
mechanism of Ordinary Shares.
2.12 Capital risk management
The Board defines capital as financial resources available to
the Company. The Company's capital as at 30 September 2019
comprises its stated capital, share premium and retained earnings
at a total of GBP87,818,194 (2018: GBP106,419,327).
The Company's objectives when managing capital are to:
- safeguard the Company's ability to continue as a going concern;
- provide returns for Shareholders; and
- maintain an optimal capital structure to minimise the cost of capital.
The Board monitors the capital adequacy of the Company on an
on-going basis and all three of the Company's objectives regarding
capital management have been met. The Company has no imposed
capital requirements.
3. Investment income
Year ended Year ended
30 September 30 September
2019 2018
GBP GBP
Dividend income 1,156,888 966,527
Bank interest 20,619 31,087
Total investment income 1,177,507 997,614
--------------------------- -------------- --------------
4. Portfolio management and performance fees
On 3 November 2014, the Company signed an Investment Management
agreement with the Manager and the Portfolio Manager, whereby the
Manager delegated to the Portfolio Manager overall responsibility
for the discretionary management of the Company assets in
accordance with the Company's investment objective and policy.
The Manager or the Portfolio Manager may voluntarily terminate
the Investment Management agreement by providing six months' notice
in writing. The Manager's power to terminate the appointment of the
Portfolio Manager under the Investment Management agreement may
only be exercised under the direction of the Board and the Manager
has agreed to comply with the instructions of the Board as regards
to any proposed termination of the Portfolio Manager's
appointment.
Under the agreement, the Portfolio Manager is entitled to
receive a base fee and performance fee. The Portfolio Manager base
fee is payable monthly in arrears at a rate of one-twelfth of 0.75%
of NAV. A performance fee equal to 15% of the amount by which the
Company's NAV outperforms the total return on the benchmark, (being
Numis Smaller companies plus AIM (excluding Investment Companies)
total return index), will be payable to the Portfolio Manager over
a performance period.
The performance period is the period between two redemptions,
being the first business day after the calculation date, (referable
to the earlier redemption (opening date)), and the end day of the
calculation date (referable to the later redemption (closing
date)). The first opening date was the date of admission and in
circumstances in which a performance fee may be payable upon
termination of this Agreement, the final closing date shall be the
date in which the agreement is terminated. The calculation date is
the date determined by the Board for the calculation of the price
to be paid on any particular exercise of the redemption
mechanism.
The performance fee is only paid when the Company implements the
redemption mechanism as detailed in note 12.
During the year ended 30 September 2019, the Company recognised
the reversal of the performance fees accrued as at 30 September
2018 of GBP1,210,297 (during the year ended 30 September 2018 the
Company recognised performance fees expense of GBP3,620,612). As at
30 September 2019, no performance fees were accrued (30 September
2018: GBP1,210,297) as the Company's NAV total return
underperformed the benchmark and no performance fees were paid
during the period (30 September 2018: GBP3,012,821). Please refer
to the Financial Highlights and Performance Summary for details of
the Company's previous redemptions above.
5. Operating expenses
Year ended Year ended
30 September 30 September
2019 2018
GBP GBP
Administration fees 128,417 165,382
Directors' fees 120,000 120,000
AIFM fees 54,000 54,000
Audit fees 45,000 38,110
Broker fees 40,000 48,231
Transaction fees 32,852 48,016
Non-audit fees 18,400 17,800
Registrar fees 18,214 20,937
Custody fees 17,953 18,968
Legal and professional fees 13,359 29,162
Sundry expenses 78,135 79,388
------------------------------- -------------- --------------
Total operating expenses 566,330 639,994
------------------------------- -------------- --------------
Non-audit fees
Non-audit fees incurred during the year ended 30 September 2019
relating to interim review services amounted to GBP18,400 (2018:
GBP17,800). Non-audit fees payable as at 30 September 2019 were
GBPnil (30 September 2018: GBPnil).
AIFM fee
On 21 October 2014, the Company signed an AIFM agreement with
the Manager to act as the Company's AIFM. Under the agreement, the
Manager is entitled to an annual fixed fee of GBP54,000. The annual
fixed fee is paid quarterly in arrears. AIFM fees payable as at 30
September 2019 were GBP13,611 (30 September 2018: nil). The AIFM
agreement can be terminated by either the Company or the Manager by
giving the other not less than ninety days' written notice or on
immediate notice on the occurrence of certain "cause" events.
Custody fee
On 21 October 2014, the Company signed a Global Custody
Agreement with the Manager and the Administrator, whereby the
Company appointed the Administrator to carry out custodian
services. In its role as custodian, the Administrator is entitled
to a fee payable by the Company on a transaction by transaction and
ad-valorem fee basis. Custody fees payable as at 30 September 2019
were GBP955 (30 September 2018: GBP1,101).
Registrar fee
With effect from 19 March 2018, the Company's Registrar has been
Computershare Investor Services (Guernsey) Limited. The registrar
is entitled to an annual maintenance fee plus disbursements.
Administration fee
On 21 October 2014, the Company signed an agreement with the
Administrator to provide administrative, compliance oversight and
company secretarial services to the Company. Under the
administration agreement, the Administrator will be entitled to a
minimum annual fixed fee for fund administration services, company
secretarial and compliance services. These fees are paid monthly in
arrears. Ad hoc other administration services are chargeable on a
time cost basis. In addition, the Company will reimburse the
Administrator for any out of pocket expenses. Administration fees
payable as at 30 September 2019 were GBP20,706 (30 September 2018:
GBP10,884).
Broker fee
On 20 January 2015, the Company signed a Corporate Stockbroker
and Financial Adviser agreement with Winterflood Investment Trusts
(a division of Winterflood Securities Limited) ("Winterflood"), to
provide corporate stockbroker and financial adviser services to the
Company. Under the agreement, Winterflood was entitled to a fee
payable by the Company of GBP50,000 per annum payable half yearly
in arrears.
On 1 August 2018, the Company announced it had replaced
Winterflood with Cantor Fitzgerald Europe ("Cantor Fitzgerald"), to
provide corporate stockbroker and financial adviser services to the
Company as the Company's sole broker. Under the agreement, Cantor
Fitzgerald is entitled to a fee payable by the Company of GBP40,000
per annum payable quarterly in arrears. Total broker fees incurred
during the year were GBP40,000 (30 September 2018: GBP48,231).
Broker fees payable as at 30 September 2019 were GBP3,333 (30
September 2018: GBP11,467).
6. Directors' fees and interests
The Directors of the Company were remunerated for their services
at a fee of GBP25,000 per annum (GBP40,000 for the Chairman) and
the Chairman of the Audit Committee received an additional GBP5,000
for his services in this role.
The Company has no employees other than the Directors.
Directors' fees payable as at 30 September 2019 were GBP30,000
(2018: GBP29,589).
On 2 October 2018, Ian Burns purchased 5,500 Ordinary Shares at
a price of GBP2.1250 per share, with a total market value of
GBP11,688.
On 15 July 2019, Andrew Chapman purchased 7,000 Ordinary Shares
at a price of GBP1.6588 per share, with a total market value of
GBP11,612.
As at the date of approval of the Annual Financial Report,
Andrew Chapman, Trudi Clark, Mark Hodgson and Ian Burns held
20,562, 11,445, 22,040 and 5,500 Ordinary Shares in the Company
respectively. No pension contributions were payable in respect of
any of the Directors.
7. Other receivables
30 September 30 September
2019 2018
GBP GBP
Dividend receivable 194,378 113,889
Prepayments 6,334 7,705
Bank interest receivable 1,365 42
Ordinary Share receivable 1 1
------------------------------- ------------------- ------------- -------------
Total other receivables 202,078 121,637
------------------------------- ------------------- ------------- -------------
The Directors believe that these balances are fully recoverable
and therefore have not recognised any expected credit losses.
8. Financial assets designated at fair value through profit or
loss
30 September 30 September
2019 2018
GBP GBP
Financial assets designated at fair value
through profit or loss 81,386,681 102,227,116
-------------------------------------------------------- ------------- -------------
The Company has invested the proceeds raised from the initial
Ordinary Share issue and subsequent Ordinary Share tap issues in a
portfolio of UK micro cap companies in line with its investment
strategy. These investments are predominantly comprised of
companies whose securities are admitted to trading on the AIM, with
a free float market capitalisation of less than GBP100 million at
the time of purchase.
Fair value hierarchy
IFRS 13 'Fair Value Measurement' requires an analysis of
investments valued at fair value based on the reliability and
significance of information used to measure their fair value.
The Company categorises its financial assets according to the
following fair value hierarchy detailed in IFRS 13 that reflects
the significance of the inputs used in determining their fair
values:
Level 1: Quoted market price (unadjusted) in an active market
for an identical instrument.
Level 2: Valuation techniques based on observable inputs, either
directly (i.e., as prices) or indirectly (i.e., derived from
prices). This category includes instruments valued using: quoted
market prices in active markets for similar instruments; quoted
prices for identical or similar instruments in markets that are
considered less than active; or other valuation techniques where
all significant inputs are directly or indirectly observable from
market data.
Level 3: Valuation techniques using significant unobservable
inputs. This category includes all instruments where the valuation
technique includes inputs not based on observable data and the
unobservable variable inputs have a significant effect on the
instrument's valuation. This category includes instruments that are
valued based on quoted prices for similar instruments where
significant unobservable adjustments or assumptions are required to
reflect differences between the instruments.
30 September
2019
Level 1 Level 2 Level 3 Total
Financial assets GBP GBP GBP GBP
Financial assets designated
at fair value through profit
or loss 81,386,681 - - 81,386,681
------------------------------- ------------ -------- -------- -------------
30 September
2018
Level 1 Level 2 Level 3 Total
Financial assets GBP GBP GBP GBP
Financial assets designated
at fair value through profit
or loss 102,227,116 - - 102,227,116
------------------------------- ------------ -------- -------- -------------
Financial assets designated at fair value through profit or loss
reconciliation
The following table shows a reconciliation of all movements in
the fair value of financial assets categorised within Level 1 to 3
between the beginning and the end of the reporting period.
30 September 2019 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
---------------------------------- ------------- -------- -------- -------------
Opening valuation 102,227,116 - - 102,227,116
---------------------------------- ------------- -------- -------- -------------
Purchases during the year 26,539,088 - - 26,539,088
Sales - proceeds during the
year (27,640,504) - - (27,640,504)
Realised gain on financial
assets designated at fair
value through profit or loss(1) 3,689,629 - - 3,689,629
Unrealised loss on financial
assets designated at fair
value through profit or loss(2) (23,428,648) - - (23,428,648)
Closing valuation 81,386,681 - - 81,386,681
Total net loss on financial
assets for the year ended
30 September 2019 (19,739,019) - - (19,739,019)
---------------------------------- ------------- -------- -------- -------------
(1) Realised gain on financial assets designated at fair value
through profit or loss is made up of GBP11,956,166 gain and
GBP(8,266,537) loss.
(2) Unrealised loss on financial assets designated at fair value
through profit or loss is made up of GBP11,314,680 gain and
GBP(34,743,328) loss.
During the year ended 30 September 2019, there were no
reclassifications between levels of the fair value hierarchy.
30 September 2018 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
---------------------------------- ------------- -------- -------- -------------
Opening valuation 97,606,392 - - 97,606,392
---------------------------------- ------------- -------- -------- -------------
Purchases during the year 21,826,770 - - 21,826,770
Sales - proceeds during the
year (44,961,516) - - (44,961,516)
Realised gain on financial
assets designated at fair
value through profit or loss(3) 25,702,170 - - 25,702,170
Unrealised gain on financial
assets designated at fair
value through profit or loss(4) 2,053,300 - - 2,053,300
Closing valuation 102,227,116 - - 102,227,116
Total net gain on financial
assets for the year ended
30 September 2018 27,755,470 - - 27,755,470
---------------------------------- ------------- -------- -------- -------------
(3) Realised gain on financial assets designated at fair value
through profit or loss is made up of GBP28,254,645 gain and
GBP(2,552,475) loss.
(4) Unrealised gain on financial assets designated at fair value
through profit or loss is made up of GBP22,948,843 gain and
GBP(20,895,543) loss.
During the year ended 30 September 2018, there were no
reclassifications between levels of the fair value hierarchy.
Please refer to note 2.3 for valuation methodology of financial
assets designated at fair value through profit or loss.
As at 30 September 2019, none of the investments held are deemed
to be illiquid in nature and on this basis are not subject to any
special arrangements.
9. Financial risk management
The Company's activities expose it to a variety of financial
risks; market risk (including price risk, interest rate risk and
foreign currency risk), credit risk and liquidity risk.
9.1 Market risk
a) Price risk
Price risk is the risk that the Company's performance will be
adversely affected by changes in the markets in which it
invests.
As at 30 September 2019, the Company held investments in a
diversified portfolio of UK micro cap companies, comprising
companies with a free float market capitalisation of less than
GBP100 million at the time of purchase. The relatively small market
capitalisation of micro cap companies can make the market in their
shares illiquid. Therefore prices of UK micro cap companies are
often more volatile than prices of larger capitalisation stocks,
and even small cap companies.
While the Company does not include any specific limits placed on
exposures to any industry sector, the Company does have investment
limits and risk diversification policies in place to mitigate
market and concentration risk. Investments limits in place
include:
-- the number of holdings in the investment portfolio will usually range from 30 to 50.
-- no exposure in any investee company will exceed 10% of NAV at the time of the investment.
However, any significant event which affects a specific industry
sector in which the investment portfolio has a significant holding
could materially and adversely affect the performance of the
Company. To mitigate market risk, the Board and Portfolio Manager
actively monitor market prices throughout the financial period and
meet regularly in order to consider investment strategy.
Please refer below for sensitivity analysis on the impact on the
Statement of Comprehensive Income and NAV of the Company, if the
fair value of the investments designated at fair value through
profit or loss at the year end increased or decreased by 15% (2018:
15%):
30 September Increase Decrease
2019 by 15% by 15%
Financial assets GBP GBP GBP
------------------------------- ------------- ----------- -------------
Financial assets designated
at fair value through profit
or loss 81,386,681 12,208,002 (12,208,002)
-------------------------------- ------------- ----------- -------------
30 September Increase Decrease
2018 by 15% by 15%
Financial assets GBP GBP GBP
------------------------------- ------------- ----------- -------------
Financial assets designated
at fair value through profit
or loss 102,227,116 15,334,067 (15,334,067)
-------------------------------- ------------- ----------- -------------
The Directors consider a 15% (2018: 15%) movement to be
reasonable given their assessment of the volatility of the AIM
market during the year ended 30 September 2019. The above
calculations are based on the investment valuation at the Statement
of Financial Position date and are not representative of the period
as a whole, and may not be reflective of future market
conditions.
b) Interest rate risk
Interest rate risk is the risk that the fair value of financial
instruments and related income from cash and cash equivalents will
fluctuate due to changes in market interest rates.
The majority of the Company's interest rate exposure arises on
the level of income receivable on cash deposits. Financial assets
designated at fair value through profit or loss are equity
investments and therefore the valuation of these investments and
income receivable is not directly exposed to interest rate risk.
Furthermore, the Company would be exposed to interest rate risk on
any amounts drawn down under the facility detailed in note 15.
The Company has not had any borrowings during the year (2018:
GBPnil). The table below details the Company's exposure to interest
rate risks:
30 September 30 September 30 September
2019 2019 2019
Interest Non-interest Total
bearing (*) bearing
GBP GBP GBP
---------------------------- ------------------- ------------- ------------- -------------
Assets
Financial assets designated at
fair value through profit or loss - 81,386,681 81,386,681
Cash and cash equivalents 6,543,864 - 6,543,864
Trade receivables - securities
sold awaiting settlement - 36,862 36,862
Other receivables (excluding prepayments) - 195,744 195,744
------------------------------------------------- ------------- ------------- -------------
Total assets 6,543,864 81,619,287 88,163,151
------------------------------------------------- ------------- ------------- -------------
Liabilities
Trade payables - securities purchased
awaiting settlement - (108,088) (108,088)
Other payables - (243,203) (243,203)
Total liabilities - (351,291) (351,291)
---------------------------------------- ---------- ----------- -----------
Total interest sensitivity
gap 6,543,864 81,267,996 87,811,860
---------------------------------------- ---------- ----------- -----------
(*) - floating rate and due within 1 month
30 September 30 September 30 September
2018 2018 2018
Interest Non-interest Total
bearing (*) bearing
GBP GBP GBP
------------------------------------------- ------------- ------------- -------------
Assets
Financial assets designated at
fair value through profit or loss - 102,227,116 102,227,116
Cash and cash equivalents 4,674,315 - 4,674,315
Trade receivables - securities
sold awaiting settlement - 819,559 819,559
Other receivables (excluding prepayments) - 113,932 113,932
-------------------------------------------- ------------- ------------- -------------
Total assets 4,674,315 103,160,607 107,834,922
-------------------------------------------- ------------- ------------- -------------
Liabilities
Other payables - (1,423,300) (1,423,300)
Total liabilities - (1,423,300) (1,423,300)
----------------------------- ---------- ------------ ------------
Total interest sensitivity
gap 4,674,315 101,737,307 106,411,622
----------------------------- ---------- ------------ ------------
(*) - floating rate and due within 1 month
Interest rate sensitivity analysis
If interest rates had changed by 50 basis points, (considered to
be a reasonable illustration based on observation of current market
conditions), with all other variables remaining constant, the
effect on the net profit for the year would be as detailed
below:
30 September 30 September
2019 2018
GBP GBP
------------------------------ ------------- -------------
Increase of 50 basis points 32,719 23,372
Decrease of 50 basis points (32,719) (23,372)
------------------------------ ------------- -------------
c) Foreign currency risk
Foreign currency risk is the risk that the values of the
Company's assets and liabilities are adversely affected by changes
in the values of foreign currencies by reference to the Company's
functional currency, being Pounds Sterling.
The Company has not been exposed to any material foreign
currency risk during the year.
During the year ended 30 September 2019 and 30 September 2018,
all transactions were in Pounds Sterling, with the exception of
several dividend income and cash transactions which were in USD.
Although the Company does not pursue a policy of hedging such
currencies back to Pounds Sterling, it may do so from time to time,
depending on market conditions. During the year ended 30 September
2019, the Company entered into nil (2018: nil) currency purchase
spot contracts to mitigate the foreign currency exposure.
As at 30 September 2019, USD cash of $131,279 (2018: $77,738)
and income receivable of $nil (2018: $31,978) were held. Any
reasonable change in foreign exchange rates will have an immaterial
impact and therefore no sensitivity analysis has been provided.
9.2 Credit risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Company. The Board of Directors has in
place monitoring procedures in respect of counterparty risk which
is reviewed on an ongoing basis.
The Company's credit risk is attributable to its cash and cash
equivalents, trade receivables - securities sold awaiting
settlement and other receivables.
At the reporting date, the Company's financial assets exposed to
credit risk amounted to the following:
30 September 30 September
2019 2018
GBP GBP
Cash and cash equivalents 6,543,864 4,674,315
Trade receivables - securities sold awaiting
settlement 36,862 819,559
Other receivables (excluding
prepayments) 195,744 113,932
------------------------------------------------ ---------------------- -------------
Total assets 6,776,470 5,607,806
------------------------------------------------ ---------------------- -------------
All cash is placed with BNP Paribas Securities Services S.C.A.,
Guernsey Branch.
BNP Paribas Securities Services S.C.A, is a wholly owned
subsidiary of BNP Paribas Securities Services S.A. which is
publicly traded with a credit rating of A+ (2018: A) from Standard
& Poor's.
Credit risk of cash and custodian is mitigated by the Company's
policy to only undertake significant transactions with leading
commercial counterparties.
All transactions in listed securities are settled for upon
delivery using approved brokers. The risk of default is considered
minimal, as delivery of securities sold is only made once the
broker has received payment. Payment is made on a purchase once the
securities have been received by the broker. The trade will fail if
either party fails to meet its obligation.
The financial assets designated at fair value through profit or
loss are held by BNP Paribas Securities Services S.C.A, Guernsey
branch, the Company's custodian, in a segregated account. In the
event of bankruptcy or insolvency of the Administrator, the
Company's rights with respect to the securities held by the
custodian may be delayed or limited. The Company did not
participate in stock lending during the year.
9.3 Liquidity risk
Liquidity risk is the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to meet
financial commitments as and when these fall due for payment.
Liquidity risk is monitored on an ongoing basis by the Board of
Directors and Portfolio Manager to ensure that the Company
maintains sufficient working capital in cash or near cash form to
be able to meet the Company's ongoing requirements to pay accounts
payable and accrued expenses.
In addition, the Company's liquidity management policy involves
projecting cash flows and considering the level of liquid assets
necessary to ensure the Company remains a going concern. The
Company's investments all comprise of investments in companies
whose securities are admitted to trading on AIM. The Company would
expect to be able to liquidate a sufficient number of investments
within 7 days or less in the event cash was required to cover
expenses.
The table below shows the residual contractual maturity of the
financial liabilities as at 30 September 2019:
Maturity analysis of financial liabilities
Less than 3 to 12 More than
3 months months 1 year Total
GBP GBP GBP GBP
Financial liabilities
Other payables(1) (225,203) (18,000) - (243,203)
------------------------------ ---------- --------- ---------- ----------
Total undiscounted financial
liabilities (225,203) (18,000) - (243,203)
------------------------------ ---------- --------- ---------- ----------
The table below shows the residual contractual maturity of the
financial liabilities as at 30 September 2018:
Less than 3 to 12 More than
3 months months 1 year Total
GBP GBP GBP GBP
Financial liabilities
Other payables(1) (197,702) (1,225,598) - (1,423,300)
Total undiscounted financial
liabilities (197,702) (1,225,598) - (1,423,300)
------------------------------ ---------- ------------ ---------- ------------
(1) - Included in other payables is a performance fee payable of
GBPnil (2018: GBP1,210,297). Please refer to note 4 for further
details regarding calculation of performance fee and when this sum
will be payable.
In accordance with Article 23(4)(a) and (b) of AIFMD Directive,
the AIFM has assessed that the financial assets designated at fair
value through profit or loss held by the Company are not deemed to
be illiquid in nature, and as such, are not subject to any special
liquidity arrangements and that the AIF has no new arrangements in
place for managing liquidity.
10. Other payables
30 September 30 September
2019 2018
GBP GBP
Portfolio management fees 54,886 66,512
Audit fees 45,000 38,110
Directors' fees 30,000 29,589
Administration fees 20,706 10,884
AIFM fees 13,611 -
Broker fees 3,333 11,467
Registrar fees 1,000 583
Custody fees 955 1,101
Portfolio performance fees - 1,210,297
Sundry expenses 73,712 54,757
Total other payables 243,203 1,423,300
------------------------------ ------------- -------------
11. Contingent liabilities and commitments
As at 30 September 2019, the Company had no contingent
liabilities or commitments (2018: nil).
12. Stated capital and share premium
Authorised
The authorised share capital of the Company is represented by an
unlimited number of redeemable Ordinary Shares at no par value.
Allotted, called up and fully-paid
Ordinary Shares Number of Stated Share
shares capital premium
GBP GBP
------------------------------------ ------------- --------- -------------
Total issued share capital as at
1 October 2018 46,445,043 - 28,391,852
------------------------------------ ------------- --------- -------------
Ordinary Shares redeemed during - - -
the year
------------------------------------ ------------- --------- -------------
Total issued share capital as at
30 September 2019 46,445,043 - 28,391,852
------------------------------------ ------------- --------- -------------
Number of Stated Share
shares capital premium
GBP GBP
---------------------------------- ------------- --------- -------------
Total issued share capital as at
1 October 2017 59,795,329 - 55,333,617
------------------------------------ ------------- --------- -------------
Ordinary Shares redeemed during
the year (13,350,286) - (26,941,765)
------------------------------------ ------------- --------- -------------
Total issued share capital as at
30 September 2018 46,445,043 - 28,391,852
------------------------------------ ------------- --------- -------------
As at 30 September 2019, the Company had 46,445,043 Ordinary
Shares (2018: 46,445,043) in issue.
Each holder of Ordinary Shares is entitled to attend and vote at
all general meetings that are held by the Company. Each holder is
also entitled to receive payment of a dividend should the Company
declare such a dividend payment. Any dividends payable by the
Company will be distributed to the holders of the Company Ordinary
Shares, and on the winding-up of the Company or other return of
capital (other than by way of a repurchase or redemption of shares
in accordance with the provisions of the Articles and the Companies
Law), the Company's surplus assets, after payment of all creditors,
will be distributed among the holders of the Company Ordinary
Shares.
The Board anticipates that returns to Shareholders will be made
through the Company's redemption mechanism and therefore does not
expect that the Company will pay any dividends.
No dividends have been declared or paid during the year (2018:
nil).
Issuance of Ordinary Shares
No Ordinary Shares were issued during the year ended 30
September 2019 (2018: nil Ordinary Shares issued).
Redemption mechanism
As the Company has been established as a closed-ended collective
investment scheme, there is no right or entitlement attaching to
the Ordinary Shares that allows them to be redeemed or repurchased
by the Company at the option of the Shareholder.
The redemption mechanism allows the Board to redeem any number
of shares at the prevailing NAV per share at the calculation date,
(being the date determined by the Board for the calculation of the
price to be paid on any particular exercise of the redemption
mechanism), less the cost of redemption. This right will only be
exercised in specific circumstances and for the purpose of
returning capital growth.
Accordingly, assuming that the NAV exceeds GBP100 million, the
Directors intend to operate the redemption mechanism to return the
NAV back to around GBP100 million in order to:
-- enable the Company to exploit fully the underlying investment
opportunity and to deliver high and
sustainable returns to Shareholders, principally in the form of capital gains;
-- enable portfolio holdings to have a meaningful impact on the
Company's performance, which might otherwise be marginal within the
context of a larger fund; and
-- ensure that the Company can continually take advantage of the
illiquidity risk premium inherent in micro cap companies.
The Directors are not obliged to operate the redemption
mechanism and will not do so if:
-- calculation and publication of the NAV has been suspended; or
-- the Directors are unable to make the solvency statement required by Guernsey law; or
-- other circumstances exist that the Board believes make the
operation of the redemption mechanism undesirable or
impracticable.
Redemptions will, subject to compliance with all applicable law
and regulation, be carried out pro rata to a Shareholder's holding
of Ordinary Shares, but all redemptions will normally be subject to
a de minimis value to be returned of approximately GBP10 million
(before costs). The Company will not redeem fractions of
shares.
The price at which any Ordinary Shares are redeemed under the
redemption mechanism will be calculated by reference to unaudited
NAV calculations. To the extent that any redemption takes place at
a time when the Ordinary Shares are trading at a significant
premium to the prevailing unaudited NAV, Shareholders may receive
an amount in respect of their redeemed Ordinary Shares that is
materially below the market value of those shares prior to
redemption.
In order to facilitate any redemptions, the Company may be
required to dispose of assets within the investment portfolio.
There is no certainty of the price that can be achieved on such
sales and any sale price could be materially different from the
carrying value of those assets. Consequently, the value received in
respect of redeemed Ordinary Shares may be adversely affected where
the Company is not able to realise assets at their carrying values.
In addition, during any period when the Company is undertaking
investment portfolio realisations, it may hold the sale proceeds
(which could, in aggregate, be a material amount) in cash, which
could impact the Company's returns, until the redemption is
implemented and the cash is distributed to Shareholders.
Investors should note that the redemption mechanism has a
specific and limited purpose, and no expectation or reliance should
be placed on the redemption mechanism being operated on any one or
more occasions or as to the proportion of Ordinary Shares that may
be redeemed or as to the price at which they will be redeemed. The
redemption mechanism may also lead to a more concentrated and less
liquid portfolio, which may adversely affect the Company's
performance and value.
In the absence of the availability of the redemption mechanism,
Shareholders wishing to realise their investment in the Company
will be required to dispose of their shares on the stock market.
Accordingly, Shareholders' ability to realise their investment at
any particular price and/or time may be dependent on the existence
of a liquid market in the shares.
On 1 December 2017, the Company completed its second compulsory
redemption of Ordinary Shares where 7,843,469 Ordinary Shares were
redeemed and cancelled at a redemption price of GBP1.9124 per
Ordinary Share, (which excludes costs of redemption of GBP9,000),
returning GBP14,999,850 to Shareholders.
On 27 July 2018, the Company completed its third compulsory
redemption of Ordinary Shares where 5,506,817 Ordinary Shares were
redeemed and cancelled at a redemption price of GBP2.1659 per
Ordinary Share (which excludes costs of redemption of GBP5,700),
returning GBP11,927,215 to Shareholders.
13. Basic and diluted earnings per Ordinary Share
Year ended Year ended
30 September 30 September
2019 2018
GBP GBP
Total comprehensive (loss)/income
for the year (18,601,133) 23,683,891
Weighted average number of Ordinary Shares
during the year 46,445,043 52,312,195
Basic and diluted (loss)/earnings
per Ordinary Share (0.4005) 0.4527
14. Net Asset Value per Ordinary share
30 September 30 September
2019 2018
GBP GBP
Net Asset Value 87,818,194 106,419,327
Number of Ordinary Shares at
year end 46,445,043 46,445,043
Net Asset Value per Ordinary
Share 1.8908 2.2913
15. Finance costs
On 9 December 2016, the Company entered into a Sterling Facility
Agreement (the "Facility") for a GBP2,000,000 revolving credit
facility with BNP Paribas Securities Services S.C.A. (the "Lender")
and BNP Paribas Securities Services S.C.A., Guernsey Branch (the
"Custodian"); and Security Interest Agreement between the Company,
the Lender and Custodian.
Loan interest of 2.05% per annum over LIBOR would have been paid
on any outstanding loan amounts and a loan commitment fee of 0.50%
per annum was payable on the available commitment, being
GBP2,000,000 less the amount of any outstanding loan, during the
availability period. In addition, a loan arrangement fee of
GBP8,000 was paid on the date of the facility agreement.
The Company agreed to adhere to the following covenants under
the terms of the Facility at all times during the availability
period:
-- any amounts drawn down did not exceed 20% of the NAV of the Company;
-- that the gross value of the Company's investment assets
quoted on the London Stock Exchange's Main and Alternative
Investment Markets (and any additional assets subject to prior
approval by all parties) exceeded any amounts drawn down by three
times; and
-- that the NAV of the Company was not less than GBP30,000,000.
On 13 December 2017, the Company signed an Extension and
Amendment Agreement that varied the terms of the Facility entered
into on 9 December 2016. With effect from the 20 December 2017, the
loan commitment was increased to GBP5,000,000 and the loan interest
amended to 1.75% per annum over LIBOR. A loan extension fee of
GBP8,000 was paid, on the date of the Extension and Amendment
Agreement. The termination date was amended to be 7 December
2018.
On 11 December 2018, the Company signed an Extension Agreement
that varied the terms of the Facility entered into on 9 December
2016, as amended on 13 December 2017. With effect from 7 December
2018, the Facility was extended for 364 days to 6 December 2019 and
the Company incurred an extension fee of GBP8,000. There was no
change to the loan commitment, loan commitment fee or interest
rate.
The Board decided not to renew the Facility, which subsequently
expired on 6 December 2019.
16. Related party disclosure
The Manager and Portfolio Manager are deemed related parties and
all transactions between these related parties were conducted on
terms equivalent to those prevailing in an arm's length
transaction. Please refer to note 4 for further detail.
As at 30 September 2019, the Portfolio Manager held 4,110,768
(2018: 4,310,768) voting rights in the Company.
George Ensor is deemed to be a related party as he is the Fund
Manager of the Portfolio Manager. As at the date of approval of the
Annual Financial Report, he held 20,170 (2018: 20,170) Ordinary
Shares in the Company.
The Directors are entitled to remuneration for their services.
Please refer to note 6 for further detail of Ordinary Shares held
in the Company by Andrew Chapman, Ian Burns, Trudi Clark and Mark
Hodgson. Mark Hodgson is the Managing Director of the Manager.
For Directors' fees, portfolio management fees and AIFM fees
payable as at 30 September 2019 please refer to note 10.
17. Material events after the Statement of Financial Position
date
There were no events which occurred subsequent to the year end
until the date of approval of the annual financial statements,
which would have a material impact on the annual financial
statements of the Company as at 30 September 2019.
During the period 30 September 2019 to 14 January 2020, the NAV
per share increased by 4.10% from GBP1.8908 to GBP1.9684.
18. Controlling party
In the Directors' opinion, the Company has no ultimate
controlling party.
USEFUL INFORMATION FOR SHAREHOLDERS
Alternative performance measures disclosure
In accordance with ESMA Guidelines on Alternative Performance
Measures ("APMs") the Board has considered what APMs are included
in the Annual Financial Report and financial statements which
require further clarification. An APM is defined as a financial
measure of historical or future financial performance, financial
position, or cash flows, other than a financial measure defined or
specified in the applicable financial reporting framework. APMs
included in the financial statements, which are unaudited and
outside the scope of IFRS, are deemed to be as follows:
NAV total return vs benchmark
The NAV total return measures how the NAV per Ordinary Share has
performed over a period of time, taking into account of capital
returns. The Company quotes NAV total return as a percentage change
from the initial issuance of Ordinary Shares to 30 September 2019.
The Company has not declared a dividend since inception.
The Board monitors the Company NAV total return against the
Numis Smaller Company plus Alternative Investment Market ("AIM")
(excluding Investment Companies) Index.
Please refer to Financial Highlights and Performance Summary
section above for NAV total return vs benchmark analysis.
NAV to market price discount / premium
The NAV per share is the value of all the Company's assets, less
any payables it has, divided by the total number of Ordinary
Shares. However, because the Company's Ordinary Shares are traded
on the London Stock Exchange's Main Market, the share price may be
higher or lower than the NAV. The difference is known as a discount
or premium. The Company's discount / premium to NAV is calculated
by expressing the difference between the Ordinary Share price (bid
price)(1) and the NAV per share on the same day compared to the NAV
per share on the same day.
At 30 September 2019, the Company's Ordinary Shares traded at
GBP1.5700 (2018: GBP2.1100), reflecting a discount of 16.97% (2018:
discount of 7.91%) to the NAV per Ordinary Share of GBP1.8908
(2018: GBP2.2913).
Ongoing charges
The ongoing charges ratio for the year ended 30 September 2019
was 1.30% (2018: 1.25%). The AIC's methodology for calculating an
ongoing charges figure is based on annualised ongoing charges of
GBP1,188,439 (2018: GBP1,330,301) divided by average NAV in the
period of GBP89,980,648 (2018: GBP106,044,349).
Calculating ongoing charges
The ongoing charges are based on actual costs incurred in the
year excluding any non-recurring fees in accordance with the AIC
methodology. Expense items have been excluded in the calculation of
the ongoing charges figure when they are not deemed to meet the
following AIC definition:
"Ongoing charges are those expenses of a type which are likely
to recur in the foreseeable future, whether charged to capital or
revenue, and which relate to the operation of the investment
company as a collective fund, excluding the costs of
acquisition/disposal of investments, financing charges and
gains/losses arising on investments. Ongoing charges are based on
costs incurred in the year as being the best estimate of future
costs."
Please refer below for ongoing charges reconciliation for the
years ended 30 September 2019 and 30 September 2018:
30 September 30 September
2019 2018
GBP GBP
Total expenses for the year: 49,647 5,076,885
----------------------------------------------- ------------- -------------
Expenses excluded from the calculation of
ongoing charges figures, in accordance with
AIC's methodology:
Portfolio Performance fees recovery/(expense) 1,210,297 (3,620,612)
Legal and professional fees (5,928) (21,191)
Sundry expenses (30,684) (35,519)
Transaction fees (32,852) (48,016)
Finance costs (24,726) (21,246)
----------------------------------------------- ------------- -------------
Total ongoing charges for the year 1,165,754 1,330,301
----------------------------------------------- ------------- -------------
Calculating an average NAV
The AIC's methodology for calculating average NAV for the
purposes of the ongoing charges figure is to use the average of NAV
at each NAV calculation date. On this basis the average NAV figure
has been calculated using the daily NAVs over the years ended 30
September 2019 and 30 September 2018.
(1) - Source: Bloomberg
Company information
Board members Advocates to the Company
Andrew Chapman (Chairman) (as to Guernsey law)
Ian Burns (Chairman of the Audit Carey Olsen
Committee and Senior Independent P.O. Box 98
Director) Carey House
Trudi Clark (Chairman of the Les Banques
Remuneration and Nomination St Peter Port
Committee and Management Engagement Guernsey
Committee) GY1 4BZ
Mark Hodgson
Registered Office Custodian
BNP Paribas House BNP Paribas Securities Services
St Julian's Avenue S.C.A., Guernsey Branch(1)
BNP Paribas House
St Julian's Avenue
St Peter Port St Peter Port
Guernsey Guernsey
GY1 1WA GY1 1WA
Portfolio Manager Independent Auditor
River and Mercantile Asset Management PricewaterhouseCoopers CI LLP
LLP PO Box 321
30 Coleman Street Royal Bank Place
London 1 Glategny Esplanade
EC2R 5AL St Peter Port
Guernsey
GY1 4ND
Manager Administrator and Company Secretary
Carne Global AIFM Solutions
(C.I.) Limited BNP Paribas Securities Services
Channel House S.C.A., Guernsey Branch(1)
BNP Paribas House
Green Street St Julian's Avenue
St Helier St Peter Port
Jersey Guernsey
JE2 4UH GY1 1WA
Corporate Broker Registrar
Cantor Fitzgerald Europe Computershare Investor Services
One Churchill Place (Guernsey) Limited
Canary Wharf 1(st) Floor, Tudor House
London Le Bordage
E14 5RB St Peter Port
Guernsey
GY1 1DB
Solicitors to the Company
(as to English law)
CMS Cameron McKenna Nabarro
Olswang LLP
Cannon Place
78 Cannon Street
London
EC4N 6AF
(1) - BNP Paribas Securities Services S.C.A. Guernsey Branch is
regulated by the Guernsey Financial Services Commission.
The Company has published the Annual Financial Report for the
year ended 30 September 2019 on its website
(https://microcap.riverandmercantile.com/literature/annual-reports).
The 2019 Annual Financial Report includes the Company's results for
the year ended 30 September 2019.
Enquiries:
Cantor Fitzgerald Europe
Robert Peel
Tel: +44 (0) 20 7894 7719
River and Mercantile Asset Management LLP
James Barham
Tel: +44 (0) 20 7601 6262
Camarco
PR Agency
Rebecca Noonan
Tel: +44 (0) 20 3757 4981
BNP Paribas Securities Services S.C.A., Guernsey Branch -
Company Secretary
Jasper Cross
Tel: +44 (0) 1481 750859
A copy of the Company's Annual Financial Report will be
available shortly from the Company Secretary, (BNP Paribas
Securities Services S.C.A., Guernsey Branch, BNP Paribas House, St
Julian's Avenue, St Peter Port, Guernsey, GY1 1WA).
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into, or forms part of, this
announcement.
River and Mercantile UK Micro Cap Investment Company Limited is
regulated by the Guernsey Financial Services Commission
A copy of this announcement is and will be available, subject to
certain restrictions relating to persons resident in restricted
jurisdictions for inspection on the Company's website at
microcap.riverandmercantile.com.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR FLFFDLIIIFII
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January 21, 2020 02:00 ET (07:00 GMT)
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