TIDMRMMC
RNS Number : 0654J
River & Mercantile UK Micro Cap Inv
18 December 2020
River and Mercantile UK Micro Cap Investment Company Limited
(the "Company")
Publication of the Annual Financial Report for the year ended 30
September 2020
A copy of the Company's Annual Financial Report will shortly be
available on the Company's website
https://riverandmercantile.com/funds/rm-uk-micro-cap-investment-company,
on the National Storage Mechanism
https://data.fca.org.uk/#/nsm/nationalstoragemechanism and will also be posted to shareholders.
THE COMPANY AT A GLANCE
Purpose
River and Mercantile UK Micro Cap Investment Company Limited
(the "Company") is an investment company. Its purpose is to deliver
the investment objective detailed below.
Investment objective
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 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 ensures 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 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 110.06% from
inception (net of issue costs), outperforming the total return
posted by the benchmark index of 33.42%. Please refer to the chart
below showing the NAV total return versus Numis Smaller Companies
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 will be available on the Company's website
shortly at
https://riverandmercantile.com/funds/rm-uk-micro-cap-investment-company
]
NAV total return vs benchmark for the year ended 30 September
2020
Over the year ended 30 September 2020, the NAV total return of
the Company outperformed against the benchmark index by 11.66%,
recording a NAV total return of 8.88%, which compares with the
total return of -2.78% posted by the benchmark index.
NAV and Share price
As at As at
30 September 30 September
2020 2019
Net Asset Value per GBP2.0586 GBP1.8908
Ordinary Share
Ordinary Share price GBP1.5800 GBP1.5700
(bid price)(3)
Discount (23.25%) (16.97%)
Period highs and lows
Year ended Year ended Year ended Year ended
30 September 30 September 30 September 30 September
2020 2020 2019 2019
High Low High Low
Net Asset Value per GBP2.1120 GBP1.2860 GBP2.2901 GBP1.7746
Ordinary Share
Ordinary Share price GBP1.7100 GBP0.8450 GBP2.1100 GBP1.4800
(bid price)(3)
Premium / discount(2,4)
[graphs and charts are included in the published Annual
Financial Report which will be available on the Company's website
shortly at
https://riverandmercantile.com/funds/rm-uk-micro-cap-investment-company
]
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 are 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 2020 were 1.35% (2019: 1.30%).
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 below and the Useful Information for Shareholders
section below.
(1) - The NAV total return measures how the NAV per Ordinary
Share has performed over a period of time, taking into account
capital returns. The Company quotes NAV total return as a
percentage change from the initial issuance of Ordinary Shares to
30 September 2020. 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 art of finding profitable niches in The Waste Land
T.S. Eliot's poem, "The Waste Land", is widely regarded as one
of the most important of the 20th century. It illuminates the after
effects of World War I and explores the uncomfortable themes of
war, trauma, disillusion and death. The central theme focuses on
the decline of all the old assumptions that had previously held
society together. Consequently, society has ruptured and there is
no return to the certainties of the old way of life.
This may well seem like too sombre a note to begin my Chairman's
Statement, but I do think that many aspects of Eliot's masterpiece
are applicable to the trauma that has engulfed the world since the
advent of COVID-19. However, I do sincerely believe that out of the
wreckage will appear new ways of thinking and acting. I do not need
to point out the benefits of less business travel on the
environment and the added positive effects on family life of our
ability to work more flexibly. Whether it's showing our
appreciation for our key workers, remaining committed to our local
businesses or supporting the community with our personal time and
resources, during this period of continuous challenge we have come
together to support each other and work our way through to the
other side of this global pandemic.
From out of this Waste Land, the pertinent question for the
readers of this Annual Financial Report to ask is, how is one meant
to continue to find exciting small and micro-cap companies to
invest in that will be able to emerge stronger from the
pandemic?
Part of the answer, I think, is having a very clear strategy
without letting all the devastation that is happening send you off
course. Your Portfolio Manager has been doing just that, pursuing
the same strategy for almost 6 years that has generated results
well in excess of the index benchmark. This is a fundamental
research strategy that considers valuation, the company's potential
and the timing of any investment. It is this steadfast focus that
is so vital when statistics, the media and the apparent economic
devastation, can combine to produce such a challenging environment
in which to make investment decisions.
It may well seem counter-intuitive but when you are investing in
the equivalent of T.S. Eliot's Waste Land, the opportunity to find
profitable niches for investment actually increased. Indeed, in
times like this, if you stick to your strategy, the fundamentals of
some companies in the UK micro-cap world appear even more
attractive.
Right now, we are facing the repercussions of the changes in the
Government's furlough scheme combined with a second spike in
COVID-19 cases and the tightening of lockdown rules which will
impact many businesses. Whilst this may provide a weak platform for
any certainty, in the world of UK micro-caps, valuations are
attractive and the lack of broker guidance for smaller companies
leaves an excellent opportunity for uncovering profitable gems. In
short, it is a time when the active fund manager who has the
confidence to stick to their strategy, should be able to discover
those niches that, in less trying times, may have been much more
difficult to unearth.
I would like to take this opportunity on behalf of the Board to
congratulate the Portfolio Manager on his performance over the last
year. In the 12 months to 30 September 2020 the portfolio NAV was
up 8.9% versus the Benchmark down 2.8%. Over the five years to 30
September 2020 the portfolio NAV has achieved an annualised
performance of +13.3% versus the Benchmark +4.4%.
The Board is very aware of their commitment to operate a
redemption mechanism. This is due to the fact that the Portfolio
Manager believes that a Net Asset Value of around GBP100m would
best position your Company to take maximum advantage of a portfolio
of micro-cap companies. As at 16 December 2020, the Net Asset Value
of the Company is at GBP106.2m and the Board is also aware that all
redemptions will normally be subject to a minimum value to be
returned to shareholders of approximately GBP10m. I can assure you
that the Board will continue to monitor the position closely.
The Board is cognizant that the shares trade at a 20% plus
discount to NAV which is surprising given the current NAV and
redemption commitment to return capital at par (as highlighted
above). Please be assured that the Board is actively working with
its advisors to narrow the current discount.
Andrew Chapman
Chairman
17 December 2020
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 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 River and Mercantile UK Micro Cap Investment Company
delivered strong NAV performance in the twelve month period to the
end of September 2020 with the NAV increasing 8.9%, outperforming
the benchmark, which fell 2.8%, by 11.7%.
Since inception, the NAV has increased 110.1%, outperforming the
benchmark performance of 33.4% by 76.6%.
Period NAV Benchmark* Active Return
========================================= ========== =================== =========================
1 year 8.9% -2.8% 11.7%
3 years p.a. 3.9% -2.5% 6.4%
5 years p.a. 13.3% 4.4% 8.9%
Since Inception p.a. 13.6% 5.1% 8.5%
Source: River and Mercantile Asset Management LLP, BNP Paribas, Bloomberg Performance to 30
September 2020. Since inception is 02 December 2014. *Benchmark: Numis Smaller Companies plus
AIM (Excluding Investment Companies)
MARKET BACKDROP
The twelve month decline of 2.8% in the Company's benchmark
hides a great deal of volatility. The first quarter was dominated
by inflows into UK equities following a historic Conservative
election victory, resulting in the index gaining over 13% from the
start of the period to the high in early January. This was followed
by a drawdown of over 41% as equity indices reacted to the COVID-19
pandemic. The index then recovered by just under 47%, driven
initially by the exceptional global fiscal and monetary support and
then by the economic recovery as case numbers stabilised.
Markets continue to be dominated by these two factors; caution
on one hand with the risk of further shutdowns stalling the
recovery versus fiscal stimulus and vaccine success on the other.
Add to this the current uncertainty around Brexit, something that
is becoming a regular fixture, uncertainty on employment as
furlough support tapers and narrow market leadership. There are
more reasons than usual to admit that any attempt to forecast what
might happen in the future is a fool's errand.
There is however one recent development which has been
particularly supportive of the Company's outperformance; the
outperformance of UK smaller company equities when compared to the
wider UK market. If we compare the total return of the Company's
benchmark (Numis Smaller Companies plus AIM excluding Investment
Companies benchmark) of 33.4%, to the wider UK equities return
(based on the the MSCI UK IMI) of 10.8%, since the Company's
inception in December 2014 to the end of September 2020, then we
can see that smaller companies have materially outperformed. In the
prior annual report, I commented on the prolonged period of
underperformance for smaller companies. In fact, on the same basis
as above, smaller companies underperformed in every calendar
quarter from, and including, the second quarter of 2018 to the
third quarter of 2019. That's six consecutive quarters of
underperformance. Since then, with the exception of the second
quarter in 2020, smaller companies have outperformed.
Growth versus value has been a topic of great debate. It is
clear to me that both need to be considered; no rational investor
would choose the more expensive of two identical assets and the
growth rate that a company can sustainably deliver is key to
calculating value. To borrow a phrase from Warren Buffett, "the two
approaches are joined at the hip".
Accepting common definitions, growth stocks have clearly
outperformed value stocks, and materially so recently. This is
evident in the long-term relative performance of the MSCI UK Growth
Index versus the MSCI UK Value Index, as shown below. The indices
are created by splitting the wider UK index (MSCI UK Index) into
stocks that have value attributes and growth attributes
(re-balanced semi-annually).
[graphs and charts are included in the published Annual
Financial Report which will be available on the Company's website
shortly at
https://riverandmercantile.com/funds/rm-uk-micro-cap-investment-company
]
It is worth explaining how the indices are built. MSCI uses
eight factors including historic sales and earnings growth, book to
price, forward PE ratio and dividend yield. Stocks fall in to one
of four categories depending on how they score on the eight
factors: value and non-growth, growth and non-value, growth and
value and non-growth and non-value. Whilst the former two clearly
sit in their respective indices, the latter two are split between
the indices such that half the wider universe sits in each
index.
Why am I explaining this? The point is that the indices are not
opposites and as such the commentary can be misleading. Whilst the
growth index is biased to stocks that show strong growth
attributes, it also has a bias to non-value (or expensive) stocks
that the methodology excludes from the value index. Cheap growth
stocks are included in both indices.
The outperformance of growth under this widely used analysis is
therefore not simply the outperformance of growth but also the
outperformance of expensive stocks. Expensive stocks have longer
duration - that is, it takes them longer to pay down their market
cap in free cash generation than cheaper, shorter duration
stocks.
When treasury yields fall - as has happened since mid-2018 and
with new lows reached in 2020 - long duration assets outperform.
This is evident in the chart overleaf which shows the shorter-term
relative performance of the MSCI UK Growth index compared to the
Value index.
[graphs and charts are included in the published Annual
Financial Report which will be available on the Company's website
shortly at
https://riverandmercantile.com/funds/rm-uk-micro-cap-investment-company
]
The logic therefore stands that we would expect short duration
assets, including value stocks, to outperform if/when Treasury
yields move up. For me, the "if/when" element of the prior sentence
is the key uncertainty for style performance over the next few
years. We will, as always, maintain a multi-factor approach.
The recent outperformance of growth is particularly extreme, and
you will notice in the comments on portfolio activity that many of
the new investments over the last year have been into Recovery and
Asset-backed investment cases which tend to have greater value
credentials.
PORTFOLIO POSITIONING
As previously described, our investment philosophy is a
multi-factor approach combining company fundamentals, valuation and
momentum. We are looking to invest in companies that have Potential
to create shareholder value at attractive Valuations with
supportive Timing.
Investors will be aware that within our PVT Philosophy there are
four forms of Potential: Growth, Quality, Recovery and
Asset-backed. The portfolio continues to have a bias to Growth;
that is investing in companies that have the potential to grow
revenues and profits at a higher rate than average. Quality,
companies that have high and improving return on capital, remains
the second largest category.
Recovery and Asset-backed opportunities, and cash, make up the
balance of the portfolio. When we invest in Recovery stocks, we are
looking to buy into companies where returns are depressed when
compared to the last ten years but have begun to improve. And with
Asset-backed, confidence in the value of the assets is key and we
look for asset value upgrades to drive the share price
performance.
The exposure to different categories as at the 30 September 2020
is shown overleaf.
[graphs and charts are included in the published Annual
Financial Report which will be available on the Company's website
shortly at
https://riverandmercantile.com/funds/rm-uk-micro-cap-investment-company
]
When compared on the same ex-cash basis to category exposure at
the 30 September 2019, Growth is 5% higher having been 49%, Quality
is 7% lower, Recovery 4% higher and Asset -backed 2% lower.
The following table illustrates some of the key factor
characteristics of the portfolio and the equivalent data for the
benchmark.
[graphs and charts are included in the published Annual
Financial Report which will be available on the Company's website
shortly at
https://riverandmercantile.com/funds/rm-uk-micro-cap-investment-company
]
Focusing on Growth P otential, the Company's portfolio has a
bias to companies that have historically grown revenue and sales at
a faster rate than the market (as demonstrated by the benchmark
data). For instance, the realised 3Y historic growth rate in
revenue for the portfolio is 23% which is almost double the 11.7%
realised by the benchmark.
On V aluation, the average valuation of the portfolio is cheaper
than the benchmark. For example, on a two year forward basis, the
average PE ratio for the portfolio is 11.8x which is a discount of
more than 25% to the benchmark's 15.9x.
Finally, on T iming, this is most easily demonstrated by
comparing three month EPS revisions for the portfolio compared to
the benchmark. The portfolio's average upgrade of 3.9% is ahead of
the 3% average seen for the benchmark.
PORTFOLIO ATTRIBUTION
MaxCyte had the greatest impact on portfolio returns in the
period. The company is a market leader, backed by intellectual
property, in the high growth cell therapy industry. Their market
position as a key partner to pharmaceutical and cell therapy
companies has delivered compound annual revenue growth of 25%, all
organic, over six years. Whilst the company has consistently
delivered, supporting our conviction, the share price has not
reflected this. The shares underperformed through 2018 and 2019 and
were a drag to performance. We supported fund raises in February
2019 at 170p and in April 2020 at 131p. The shares were valued at
368p at the end of September 2020.
MaxCyte is our largest position and, at 7.3% of NAV at the end
of the period, our only position in excess of 5%. It is worth
noting that we own two separate lines of stock and the holding has
been illustrated as such in the portfolio holdings disclosure, the
two lines will combine into one on the anniversary of the most
recent (April 2020) fund raise.
The recent developments in MaxCyte are also noteworthy and have,
in my opinion, contributed to the recent share price performance.
The first is that the company is planning to dual list on the
NASDAQ exchange in the US by the end of 2021, and by doing so raise
the profile of the company with US investors. The second
development is the announcement that CARMA, a wholly owned
therapeutics company which is progressing a phase 1 trial, will be
independently financed from next year. This is a challenging part
of the business to value and the company's valuation was being
negatively impacted given the R&D funding requirements that it
required. As such, the business should be profitable and
self-funding from 2021.
Venture Life was the second most significant contributor to
returns, the shares gained 159% over the period. The company
manufactures self-care products on both an own-brands and a
third-party basis. The company delivered 65% organic growth largely
due to the success of their Chinese distribution agreement for oral
care products and their re-launched hand sanitising brand,
DisinPlus. Given the spare capacity in their manufacturing site,
the company required limited additional cost investment to deliver
the higher revenue. Profits therefore increased at a much higher
rate than sales with EBITDA (earnings before interest, tax,
depreciation and amortisation) 368% higher than the prior
period.
Our precious metals exposure also made a meaningful positive
contribution. Gold producers Shanta Gold, Hummingbird Resources and
Serabi gained 109%, 49% and 26% respectively on the elevated gold
price which set a new record high in August. Each company
demonstrated strong operational delivery and progressed with both
their exploration and acquisition strategies. Our position in
Capital Ltd (previously Capital Drilling) also performed well with
the investment thesis of returns improving as fleet utilisation
improves playing out. Finally, Sylvania Platinum gained 68% in the
quarter on both strong delivery and high platinum group metal
prices, particularly Rhodium.
I covered the poor performance of XLMedia, Adept Technology, SDX
Energy and Ince Group in the interim report. I flagged that we had
sold down the position in XLMedia to just 0.5% and we completed the
exit of this position in the second half. I also made the case that
the market's view of the other three underperformers, Adept
Technology, SDX Energy and Ince Group, seemed harsh. This remains
the case, particularly so for SDX Energy. The investment case has
been strengthened by a number of positive updates, including a high
value commercial gas discovery, the value of which have not been
recognised in the share price performance. As a reminder, the
business is almost entirely exposed to fixed price gas
contracts.
Adept Technology has played a key role in migrating hundreds of
schools to the cloud, enabling them to work remotely, and helped
hundreds of doctors' practices become virtual practices. Ince Group
remains in the early stages of the recovery investment case but has
grown revenue, improved gross margin from the international offices
and paid down some debt since reporting numbers in August.
There are two additions to the first half underperformers that
require commentary. Science in Sport, the sports nutrition brand,
lost 29% in the period. With only a third of 2019 sales generated
online, lockdown had a significant impact on the company's bricks
and mortar distribution channel. For revenue to be down just 5%
year on year in the six months to June and for gross profit and
underlying operating profit to be marginally better is, in my
opinion, a fantastic result, but one that has not been recognised
by the market.
Finally, the company with the most substantial negative
contribution to the portfolio of the twelve month period was Tekmar
Energy . The investment case is premised on the group's core
capability, the protection of undersea cables. This may sound
trivial but a broken cable to an offshore wind farm is an expensive
problem to fix and Tekmar have a fail-safe, low cost solution. Add
to this the strong growth opportunity in offshore wind and the
result should be a high returns business exposed to a strong
structural growth story. It was this investment case, supported by
an attractive valuation and positive earnings momentum that made
Tekmar a high conviction position. The shares lost 50% in the year;
supply chain disruptions in China meant that the company had to
source more expensive parts, impacting gross margin. Project delays
have also impacted revenue for the six months to the end of
September. These disappointments have resulted in the departure of
the CEO. We had reduced our position ahead of the large share price
decline in February and continued to reduce the position
thereafter.
PORTFOLIO ACTIVITY - NEW POSITIONS AND EXITS
In total, there were 13 new entries to the portfolio over the
period and 14 positions exited. Turnover has been relatively high
but understandable given the volatility and corporate issuance. I
will comment on the new positions in order of their position size
at 30 September 2020:
Instem (2.4%) - a great example of a company that is a market
leader in a small niche. The company provides software solutions to
life sciences companies which enable them to collect, analyse and
submit data to clinical agencies such as the FDA (Food and Drug
Administration). As is typical for software businesses with leading
market shares, the company has historically delivered high return
on capital, supporting the Quality investment case, whilst also
successfully delivering organic and acquisitive growth. The latter
is set to continue given the fund raise that was completed in June
for that purpose, which we supported.
Flowtech Fluidpower (2.1%) - we invested in this specialist
distributor of fluid power products which has consistently
delivered attractive gross margins to support the self-help
Recovery thesis. We believe returns can at least recover back to
levels where they have previously been and that is currently far
from priced in given their depressed valuation. The business
continued to generate cash and pay down debt in the first six
months of 2020.
Joules (2.0%) - as a clothes retailer with over 100 stores, it
is understandable that Joules' margins collapsed in their financial
year to May 2020. However, with a strong eCommerce offering, which
has delivered substantial growth, and the ongoing rent negotiations
which are expected to decrease fixed costs, the future margin
opportunity is exciting. This supports the Recovery investment case
with the level of conviction aided by the strong balance sheet.
Cake Box (1.9%) - the franchise business model that Cake Box
employs requires limited capital, delivering high return on capital
and underpinning the Quality investment case. There is also an
attractive case for growth, through the addition of franchisee
stores every year, and the company has seen demand from future
franchisees strengthen over the recent period. Strong recent like
for like trading has also supported T iming, adding to our
conviction in the holding.
Kooth (1.8%) - mental health is a public health service where,
unfortunately, demand outstrips supply. Kooth provides free mental
health services to children and young people in the UK through the
provision of digital services including content and counselling.
The company contracts with the NHS and is encouraged to drive usage
in the target demographic to expand contracts. Kooth is the clear
market leader and believes that the opportunity within children and
young people in the UK is worth up to GBP85m per annum, supporting
the Growth thesis.
Mind Gym (1.7%) - the company provides behavioural science
training to corporates and is an example of a company that we
considered at IPO (we failed to build conviction given the
expensive valuation). The shares have since underperformed,
providing us with an attractive entry point into a compelling
Growth thesis. Whilst the business has typically delivered face to
face training, there is clearly an ongoing need for the product and
the mode of delivery has, like so many other things, pivoted to
digital.
GetBusy (1.6%) - a document and task management software
business that is re-investing cash generated from one mature
solution, Virtual Cabinet, to drive growth in another, SmartVault,
and launch a third, GetBusy. The key to the business is strong
vertical knowledge delivering solutions which meet the requirements
of their customers. These are typically accountancy firms for the
two existing document management solutions. Recent trading has been
more than resilient with recurring revenue growing by 18% in the
first half of the year, highlighting the strong Growth
credentials.
Ten Lifestyle (1.6%) - a technology-led concierge business with
a B2B2C business model. Ten offers clients including Visa,
Mastercard and HSBC a concierge service for their customers to
reduce churn and maximise customer lifetime value. The company has
had success with new contract wins and the investment in technology
is enabling high drop through margins on incremental revenues.
Despite an historic bias to booking flights and hotels, the company
has guided that revenues for the year to the end of August 2020
will only be marginally lower than the prior year. Given the
circumstances, this is another impressive trading result.
The City Pub Group (1.5%) - Freehold ownership of 30 of the
company's 52 pubs underpins the Asset-backed investment case. We
invested in the fundraise at 50p in March and have since added to
the position. Whilst pub trading is currently challenged, the
company is better placed than most given its scale, quality of
assets and strong balance sheet. The directors valued the assets of
the company at 132p per share at 30(th) June 2020.
Manolete (1.4%) - is the dominant funder in the UK insolvency
market. Manolete typically buys insolvency cases with minimal
upfront capital and an agreement to pay away a percentage of any
post cost award. A track record of high returns supports the
Quality investment case with T iming likely to be supported over
the next few years by an elevated number of insolvency events.
The Ince Group (1.1%) - an international legal services company
which has grown through acquisition. We supported a fund raise to
re-build the balance sheet in January. The company has delivered
year-on-year revenue growth in the first five months of their
current financial year and improved gross margin from their
international operations. The company's current enterprise value of
GBP22m compares to prior year revenue of GBP98.5m and I would
expect the company to re-rate to a more normal EV/Sales multiple as
it the company proves its cash generation capabilities and pays
downs debt.
SigmaRoc (0.8%) - the company is pursuing a buy-and-build
strategy in construction materials. As a small player with a
decentralised model, it is able to acquire good assets that are
non-core to other businesses on attractive terms with obvious
opportunities for improvement, underpinning the Quality investment
case. Breedon Plc has very successfully executed on a similar
strategy. SigmaRoc has acquired five businesses since 2017 and, in
each cash, has realised attractive margin improvements.
Revolution Bars (0.6%) - operates 73 leasehold bars. The company
had begun to deliver on a self-help Recovery investment case in
2019 with a focus on closing marginal sites and re-investing in the
existing estate to drive improved like-for-like trading. The
company raised GBP15m in July to support the business through what
is going to be an extended period of tough trading. The current
enterprise value of approximately GBP20m compares to the average
EBITDA over the last seven years of GBP13m per annum.
I commented on the exits from Cello Health, Nasstar, Tremor
International, Berkeley Energia, Dekeloil, Altitude, Cyanconnode,
Genedrive and Lekoil in the interim statement. As previously noted,
we completed the exit of XLMedia in the second half. Clearstar was
sold following a bid from Hanover partners and Wey Education was
exited on valuation concerns. Both Driver Group and Smartspace
Software were exited on poor earnings momentum.
OUTLOOK
These are not easy times for writing outlook comments.
Importantly, we do not have an approach which is premised on
forecasting what is about to happen. We do have a tried and tested
philosophical approach and process that has supported attractive
alpha for both this and other strategies since 2006.
The opportunity set remains as rich as ever; the combination of
our approach, the lack of sell side coverage and the inability for
larger funds to access this part of the market remains supportive
for investing in great undervalued businesses. UK equities are a
consensus underweight for global asset allocators and, whilst
narrower than a year ago, there remains an additional discount on
smaller cap equities within the UK.
George Ensor
Portfolio Manager
17 December 2020
INVESTMENT PORTFOLIO
Investment Portfolio as at 30 September 2020
The Investment Portfolio below details the Company's holdings as
at 30 September 2020, exclusive of cash and cash equivalents.
Name Sector Weight (%)
------------------------------- ------------------------ -----------
Maxcyte Inc Health Care 4.5
------------------------------- ------------------------ -----------
Sigma Capital Group Plc Real Estate 4.3
------------------------ -----------
Litigation Capital Management
Limited Financials 4.2
------------------------------- ------------------------ -----------
Diversified Gas & Oil Plc Energy 3.9
------------------------ -----------
Keystone Law Group Plc Industrials 3.8
------------------------------- ------------------------ -----------
Venture Life Group Plc Consumer Staples 3.5
------------------------ -----------
Shanta Gold Ltd Materials 3.4
------------------------------- ------------------------ -----------
Boku Inc Information Technology 3.3
------------------------ -----------
Aquis Echange Plc Financials 3.1
------------------------------- ------------------------ -----------
Alpha FX Group Plc Financials 3.1
------------------------ -----------
SIS Science In Sport Plc Consumer Staples 3.0
------------------------------- ------------------------ -----------
Argentex Group Plc Financials 2.9
------------------------ -----------
Maxcyte Inc Health Care 2.8
------------------------------- ------------------------ -----------
RA International Group Plc Industrials 2.7
------------------------ -----------
Capital Drilling Ltd Energy 2.6
------------------------------- ------------------------ -----------
DX Group Plc Industrials 2.5
------------------------ -----------
Allergy Theraputics Plc Health Care 2.4
------------------------------- ------------------------ -----------
Instem plc Health Care 2.4
------------------------ -----------
Sylvania Platinum Ltd Materials 2.3
------------------------------- ------------------------ -----------
SDX Energy Plc Energy 2.2
------------------------ -----------
Flowtech Fluidpower Plc Industrials 2.1
------------------------------- ------------------------ -----------
Joules Group Plc Consumer Discretionary 2.0
------------------------ -----------
AFH Financial Group Plc Financials 2.0
------------------------------- ------------------------ -----------
Cake Box Holdings Plc Consumer Staples 1.8
------------------------ -----------
Kooth Plc Health Care 1.8
------------------------------- ------------------------ -----------
Hummingbird Resources Plc Materials 1.8
------------------------ -----------
Mind Gym PLC Industrials 1.7
------------------------------- ------------------------ -----------
Tekmar Group Plc Energy 1.6
------------------------ -----------
Cambria Automobiles Plc Consumer Discretionary 1.6
------------------------------- ------------------------ -----------
Ten Lifestyle Group Plc Consumer Discretionary 1.6
------------------------ -----------
GetBusy Plc Information Technology 1.5
------------------------------- ------------------------ -----------
Adept Technology Group Plc Communication Services 1.5
------------------------ -----------
ULS Technology Plc Consumer Discretionary 1.5
------------------------------- ------------------------ -----------
Serabi Gold Plc Materials 1.5
------------------------ -----------
The City Pub Group PLC Consumer Discretionary 1.5
------------------------------- ------------------------ -----------
Manolete Partners Plc Financials 1.4
------------------------ -----------
STM Group Plc Financials 1.2
------------------------------- ------------------------ -----------
Brand Architekts Group Plc Consumer Staples 1.1
------------------------ -----------
The Ince Group PLC Industrials 1.1
------------------------------- ------------------------ -----------
Real Estate Investors Plc Real Estate 1.1
------------------------ -----------
SigmaRoc PLC Materials 0.8
------------------------------- ------------------------ -----------
Revolution Bars Group Plc Consumer Discretionary 0.6
------------------------ -----------
Harvest Minerals Ltd Materials 0.2
------------------------------- ------------------------ -----------
Source: River and Mercantile Asset Management LLP
(1) Portfolio weightings are based on mid-prices
Principal Risks and Uncertainties
The Board is responsible for the Company's system of internal
control and risk management but has delegated the responsibility
for ensuring the daily monitoring of risk to the Manager. The Board
accesses the robustness of the risk controls by reviewing, at each
quarterly meeting, the risk reports produced by the Manager, and by
assessing the overall risk profile of the Company as well as
identifying any emerging risks and uncertainties which are likely
to affect the Company.
The principal risks and emerging risks faced by the Company are
summarised below:
Principal Risk Key controls
Investment and liquidity risk
The Company invests in a diversified Risks are monitored by the Manager,
portfolio of UK micro cap companies, which holds monthly AIFM Risk
typically comprising companies Committee meetings with the Portfolio
with a free float market capitalisation Manager. The Manager provides
of less than GBP100 million at an update of these AIFM Risk Committee
the time of purchase. These securities meetings to the Board on a quarterly
are likely to have higher volatility basis and the risks are discussed
and liquidity risk than securities accordingly. The Board has introduced
on the Main Market of the London investment restrictions and guidelines
Stock Exchange or the Financial to limit these risks. The Portfolio
Conduct Authority's Official Manager also undertakes on-going
List. The relatively small market reviews of the underlying investee
capitalisation of micro cap companies companies, particularly those
could therefore have an adverse whose businesses are impacted
effect on the performance of by the pandemic.
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. Many businesses
are facing additional financial
challenges due to demand fluctuations,
and/or additional cost of supplies
currently, due to the COVID-19
pandemic.
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.
Portfolio concentration and macro-economic
risks
The Company predominantly invests While the Company does not include
in securities in the UK and has any specific limits on exposures
no specific limits placed on to any industry sector, the Company
its exposure to any industry does have investment limits and
sector. Changes in economic conditions risk diversification policies
in the UK, (for example, uncertainties in place to mitigate market and
as a result of Brexit, the impact concentration risk. Please refer
of COVID-19, interest rates and to note 9 for further details.
rates of inflation, industry
conditions, competition, political Full details of the Company's
and diplomatic events and other risk factors are set out on pages
factors), could substantially 15 to 23 of the Company's prospectus,
and adversely affect the Company's which is available on the Company's
prospects, as could changes in website (https://microcap.riverandmercantile.com).
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.
Reliance on third party service
providers
The Company has no employees The Board monitors and receives
and is reliant on the performance reports on the performance of
of third-party service providers. its key service providers and
Failure by the Portfolio Manager may in any event terminate all
or any other third-party service key contracts on normal commercial
provider to perform in accordance terms.
with the terms of its appointment
could have a material detrimental
impact on the operation of the
Company. This could include failure
of a counterparty on whom the
Company is reliant.
During this year, the Board elevated
this to a principal risk in light
of the increasing prevalence
of cyber related events and the
impact of COVID-19 testing business
continuity plans of third party
service providers.
Share price discount
The imbalance of the Company's The discount is reported and reviewed
share price trading at a discount at least quarterly. The Company
to NAV may diminish the attractiveness operates the redemption mechanism
of the Company to existing investors. to return capital to investors
as outline in note 12. Other discount
During the year under review, control mechanisms such as share
the share price traded consistently buy backs and tender offers are
at a wide discount to NAV, which regularly considered with the
widened further during the global Company's brokers. The Board has
COVID-19 pandemic and was at also appointed a public relations
its widest point on 23 March adviser to widen interest in the
2020 where shares traded at a Company's shares
discount to NAV of 37.17%. This
has caused the Directors to elevate
this to a principal risk.
Emerging risks
During the current financial period the main emerging risk has
been the impact of COVID-19 on the Company and its underlying
investment portfolio. The Company itself has been well placed to
withstand the effects of the pandemic since it has no gearing or
constraints on liquidity. At all times the Company holds sufficient
cash reserves to meet on-going expenditure. The Portfolio Manager
continues to monitor specific COVID-19 risks associated with the
underlying investment portfolio. During the pandemic all service
providers have moved to remote working but without any adverse
impact to services.
Investors are placing increased emphasis on environmental,
social and governance issues (ESG) and the Board sees any failure
by the Portfolio Manager to identify future potential issues within
the underlying portfolio in this area is a key emerging risk which
may lead to the Company's shares becoming less attractive to
investors. The Board welcomes the increasing emphasis being placed
by shareholders and investors on ESG matters and is confident,
through the adoption by the Portfolio Manager of a comprehensive
ESG policy which is fully endorsed by the Board and the Board
receiving regular reporting on ESG issues, that appropriate
controls are in place to mitigate this emerging risk.
Section 172 Statement and Principal Decisions
Through adopting the AIC Code, the Board acknowledges its duty
to comply with section 172 of the UK Companies Act 2006 to act in a
way that promotes the success of the Company for the benefit of its
members as a whole, having regard to (amongst other things):
a) consequences of any decision in the long-term;
b) the interests of the Company's employees;
c) need to foster business relationships with suppliers, customers and others;
d) impact on community and environment;
e) maintaining reputation; and
f) act fairly as between members of the Company.
The Board recognises its key role in promoting the Company's
core values of diversification, innovation, adaptation and
integrity and so the Board conducts its own meetings and its
interactions with stakeholders within a culture of openness to
alternative views from directors, advisers, and shareholders,
challenge of prevailing approaches, and respect for all parties as
well as the goals of the Company.
Information on how the Board has engaged with its stakeholders
and promoted the success of the Company, through the decisions it
has taken during the year, whilst having regard to the above, is
outlined below. T he Company has no employees.
Stakeholder How the Board engages
Shareholders The Company would not exist without
the capital of its shareholders
and its ongoing success is dependent
on their continued support. The
Board therefore ensures that
multiple lines of communication
with shareholders are actively
promoted. The Annual General
Meeting ensures a forum in which
the views of all shareholders
are sought by the Board through
the resolutions proposed and
it is also an opportunity for
shareholders to question the
members of the Board face to
face. In addition, the Board
requires the Company's Corporate
Broker to maintain communication
with major shareholders and report
back to the Board at quarterly
meetings on the tenor and substance
of such communication. Since
the Company's inception, the
Board has encouraged both the
Corporate Broker and the Portfolio
Manager to meet directly with
shareholders both for the purposes
of communicating the Company's
strategy and performance as well
as to listen to the views of
shareholders. These views are
reported back to the Board at
their regular meetings. Responding
in part to the widening discount,
the Board engaged Camarco as
the Company's Public Relations
Adviser to broaden the reach
of the Company's shareholder
engagement to include more retail
investors. The Board has consistently
expressed the priority it places
on the Corporate Broker, the
Portfolio Manager and the Public
Relations Adviser co-ordinating
their efforts on the Board's
behalf to ensure the widest range
of investor views is available
to inform the Board's deliberations.
Furthermore, the Chairman and
other Directors are available
to meet with major shareholders
where such meetings would be
welcomed. The Company provides
regular information updates to
shareholders, including the daily
NAV announcement to the markets
and portfolio updates, the latter,
since July 2020, now being published
every month, rather than quarterly.
---------------------------------------
Stakeholder How the Board engages
---------------------------------------
Service providers All key service providers report
to the Board at every quarterly
Board meeting, with representatives
of the service providers present
to answer questions from Directors.
In accord with the Company's culture
of openness, challenge and respect,
the Chairman actively encourages
feedback from the Company's service
providers as appropriate to their
field of expertise. The Board,
through its Management Engagement
Committee, also seeks to ensure
that the terms of engagement are
commercially equitable for each
service provider, as the success
of the Company is encouraged by
forming stable partnerships with
successful and motivated advisers.
---------------------------------------
The wider community and the environment Refer to environmental and social
issues below.
---------------------------------------
Principal decisions
The table below sets out principal decisions taken by the Board
during the year which have the greatest impact on the Company's
long term success. The Board considers the factors outlined under
section 172 and the wider interests of stakeholders as a whole in
all decisions it takes on behalf of the Company.
Principal decision Stakeholder interests
Engagement of Camarco as Public The Board has been actively seeking
Relations Adviser ways to reduce the ongoing discount,
which it recognises is a key concern
for investors. In December 2019,
the Board engaged Camarco as the
Company's Public Relations Adviser,
having determined that their motivated
and focussed contribution to publicising
the Company's story would complement
the efforts of the Broker and
the Portfolio Manager. In particular,
Camarco would facilitate communications
with retail investors, with the
purpose of generating increased
interest in the Company's shares
and also of providing a further
channel of communication between
the Board and the Company's shareholder
base. While this strategy clearly
cannot directly reduce the discount,
it is likely that increased interest
combined with broadening the shareholder
base to further include those
more likely to be free to trade
in smaller lots will tend to increase
upward pressure on the share price.
------------------------------------------
Change of corporate broker The Company's appointment of N+1Singer
was another instance of the Board's
efforts to address the discount.
In making the appointment, the
Board was cognisant of the range
of services the new Broker could
offer and agreed an additional
element of remuneration linked
to reduction in the discount,
this being in the interests of
both shareholders and the newly
appointed Broker.
------------------------------------------
executive sUMMARY
This Executive Summary is designed to provide information about
the Company's operation and results for the year ended 30 September
2020. It should be read in conjunction with the Chairman's
Statement above and the Portfolio Manager's report above 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 with a premium
listing on the Main Market of the London Stock Exchange.
Significant events during the year ended 30 September 2020
Appointment of Public Relations Adviser
On 5 December 2019, the Board engaged Camarco as the Company's
Public Relations Adviser to allow for an increased emphasis on
public relations and marketing to widen appeal and investor
interest in the Company.
Facility agreement
On 11 December 2018, the Company signed an Extension Agreement
that varied the terms of the Sterling Facility Agreement (the
"Facility") with BNP Paribas Securities Services S.C.A. 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.
Appointment of Corporate Broker
On 1 July 2020, the Company announced it had appointed N+1
Singer Advisory LLP as the Company's sole corporate broker
following Cantor Fitzgerald's withdrawal from providing corporate
broker services in this area of the UK market.
COVID-19
The COVID-19 epidemic is believed to have originated in Wuhan,
Hubei, China. While containment efforts were made to slow the
spread of the epidemic the outbreak has now spread globally and led
to the World Health Organisation declaring the COVID-19 outbreak a
pandemic on 11 March 2020.
The Board is aware that global financial markets have been
monitoring and reacting to the outbreak. All markets have incurred
increased volatility and uncertainty since the onset of the
pandemic.
The Board has also noted the operational risks that are posed to
the Company and its service providers due to global and local
movement restrictions that have been enacted by various
governments. COVID-19 pandemic is an unprecedented event and the
eventual impact on the global economy and markets will largely
depend on the scale and duration of the outbreak. The Board will
continue to monitor this situation.
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.
Currently the Company has no gearing or borrowing facilities,
please refer to note 15 for further details of 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
above 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.
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 and the redemption mechanism is in
place to prevent the NAV significantly exceeding this figure.
NAV, on a total return basis, increased by 110.06% from
inception which outperformed the total return posted by the
benchmark index of 33.42%. 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 2020, the Company held 43 (2019: 44)
investment holdings of which no exposure in any investee company
exceeded 10% of NAV at the time of investment. A portfolio listing
is shown above which demonstrates the spread of investment risk in
accordance with the investment policy.
Premium / discount
The Board discusses the extent of the discount in detail at
every Board meeting, engaging with the Portfolio Manager, Broker
and now the Public Relations Adviser to generate strategies for
narrowing the discount. The appointment of Camarco as Public
Relations Adviser to the Company in December 2019 was part of a
strategy to increase the reach of the Company to retail investors
with the twin goals of increasing demand for the Company's shares
and broadening the range of shareholders to include those more
likely to trade in smaller numbers of shares. The view of the Board
and its advisers is that this is likely to overcome the relative
illiquidity of the Company's shares which is perpetuating a
situation in which an exaggerated discount might appear at odds
with the performance provided by the Portfolio Manager. In
addition, on the appointment of the new Corporate Broker, the Board
agreed a fee with a performance related element tied to the
reduction of the discount. While the Board believes that the
redemption mechanism should act as a corrective to the discount, it
is actively considering, in consultation with the Company's key
stakeholders, additional mechanisms that may assist in reducing the
discount.
Refer above for further analysis and below for further
information on the methodology used in calculating these KPIs.
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 People, Sustainability and Corporate Social
Responsibility section of their 2020 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, with
most attending virtually due to COVID-19 travel restrictions 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.
Voting and Engagement
The directors believe that they have a fiduciary responsibility
to improve the management of companies for all stakeholders whilst
not compromising our objective of achieving strong financial
returns. The best way to create wealth for our shareholders is to
be invested in companies that over time optimise their returns to
shareholders. For companies to achieve this objective, the company
should endeavour to ensure the long-term viability of its business,
and to manage effectively its relationships with all stakeholders.
The Board delegates responsibility to the Portfolio Manager and has
approved the Portfolio Manager's approach to Voting and Engagement,
details of which can be found at
https://riverandmercantile.com/esg/voting-and-engagement .
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 above 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 AIC Code, 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 financial statements.
The Board is 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, being 12 months after approval of the
financial statements. In addition, the Company's holdings of cash
and cash equivalents, the liquidity of investments and the income
deriving from those investments, means the Company has adequate
financial resources to meet its liabilities as they fall due.
Therefore, the Board consider it appropriate to adopt the going
concern basis in preparing the financial statements.
In making this assessment, the Board has considered the impact
of Covid-19 on the Company, a statement on which can be found
above, and are confident that it remains appropriate to adopt the
going concern basis.
(1) - ( https://riverandmercantile.com/modern_slavery_statement
)
Viability statement
Under the AIC Code the Board is required to make a "viability
statement" which considers the Company's current position and
principal risks and uncertainties combined with an assessment of
the prospects of the Company in order to be able to state that they
have a reasonable expectation that the Company will be able to
continue in operation over the period of their assessment.
The Company is intended to be a long-term investment vehicle
with no fixed life however, having considered the inherent
limitations of estimating the impact of future political and
macro-economic conditions on the Company, the Directors have
decided to assess the viability of the Company over a period of
five years.
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
17 December 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.
Key Relevant Skills
-- 42 years investment experience, with an emphasis on equity markets
-- Extensive experience in selecting and managing external fund managers
-- A current member of several fund boards
-- Strong background in governance and risk management
DIRECTORS
Ian Burns, (Independent) - Chairman of the Audit Committee and
Senior Independent Director. Appointed 2 October 2014.
Ian qualified as a Chartered Accountant with Ernst & Young.
He spent 20 years working in private client fiduciary businesses,
ending up as Managing Director of Investec Trust globally. He then
spent two years with one of Guernsey's leading privately owned fund
administration companies.
Subsequently, Ian founded Via Executive Limited, a specialist
management consulting company and was appointed 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 also holds a number of appointments as a non executive
director of companies engaged in a diverse range of investment
activities and is a non-executive director of the following public
companies: Twenty Four Income Fund Limited (Audit Committee
Chairman), Fast Forward Innovations Limited (Chairman).
Key Relevant Skills
-- Extensive operational and risk management knowledge
-- Qualified chartered accountant with extensive financial
experience including chairing audit committees of listed funds
-- Working in financial services since 1988
-- Providing strategic consulting advice to financial services companies
-- Advising on modern corporate governance standards and
developing risk management measurement and mitigation
frameworks
-- Family office, inheritance and private client trustee experience
-- Supervising technical accounting issues including specialist disclosure of risk
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 and The Schiehallion Fund Limited, which are listed on the
London Stock Exchange. She also holds a personal fiduciary licence
issued by the GFSC.
Key Relevant Skills
-- Qualified chartered accountant with extensive financial experience
-- Working in financial services since 1987
-- Strong background in risk and corporate governance
-- Experience of several Investment Company Boards
Mark Hodgson. Appointed 2 October 2014.
Mark Hodgson is a Channel Islands fund director based in Jersey,
with considerable experience in the administration of Channel
Islands funds. He has a broad fund expertise covering a wide range
of differing asset classes, including real estate, infrastructure,
credit and private equity.
Mark joined Carne in April 2014. He has over 25 years of
financial services experience, with an extensive banking
background. Mark spent over 20 years with HSBC Global Bank where he
gained in depth knowledge of credit, financial markets and complex
Real Estate structures. Prior to moving to Jersey Mark was Regional
Director for HSBC Invoice Finance (UK) running their receivables
finance business.
Mark moved to Jersey in 2006 to Head up HSBC's Commercial Centre
having full operational responsibility for credit and lending
within the jurisdiction. In 2008 he moved to Capita Fiduciary Group
as Managing Director Offshore Registration (a regulated role) with
responsibility for Jersey, Guernsey and the Isle of Man. Mark also
took on the responsibility as Managing Director of Capita Financial
Administrators (Jersey) Limited (regulated role) together with
directorship appointments of regulated and unregulated funds
boards.
Mark sits on a number of very high-profile real estate boards
including: Kennedy Wilson Investment Management Limited, Aviva
Jersey Investors Jersey Unit Trust Management Ltd and LaSalle
Investment Management (Jersey) Ltd. He has a broad range of funds
experience covering a range of debt and credit funds.
Key Relevant skills
-- 25 years financial services experience, 15 years of being the member of various boards
-- Extensive fund risk management experience across multiple asset classes
-- A strong background in board governance
Directors' Report
The Directors present their report and the audited financial
statements for the year ended 30 September 2020. The results for
the year are set out in these accounts.
Dividend Policy
Details of the Company's capital redemptions and dividend policy
are shown above. The Company does not expect to pay significant
dividends and no dividends have been declared or paid during the
year (2019: none).
Share Capital
As at 30 September 2020, the Company had 46,445,043 Ordinary
Shares (30 September 2019: 46,445,043) in issue.
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.
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 4 March 2020 the Company renewed general authority to
purchase in the market up to 14.99% of the Ordinary Shares in issue
as at 4 March 2020, (previously granted on 27 February 2019). This
authority expires on the date of the 2021 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 2 March 2021.
Directors' shareholdings
The Directors who held office at the year end and their
interests in the ordinary shares of the Company were as
follows:
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.
Shareholders' interests
As at 30 September 2020, 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
Ltd 11.26
City of Bradford Metropolitan
District Council 9.81
River and Mercantile Asset Management
LLP 8.85
Premier Miton Group plc 7.68
Smith & Williamson 6.41
Derbyshire County Council 6.25
Between 30 September 2020 and 17 December 2020 the Company
received the following additional notifications:
Percentage of total
voting rights (%)
Investec Wealth & Investment
Ltd 12.10
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.
Matters Reserved for the Board
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 Portfolio Manager has the delegated power to make investment
decisions on behalf of the Company within the framework of the
investment objective and investment policy. The Board exerts
oversight of the decisions of the Portfolio Manager both through
its appointed Manager and by direct reporting at quarterly board
meetings. The Portfolio Manager provides written reports to the
Board and a representative of the Portfolio Manager is present at
every quarterly Board meeting to present the report and answer
questions from the board. In addition the Manager provides regular
risk reporting on the Company's investment portfolio and the
Portfolio Manager at each quarterly Board meeting.
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.
Disclosures required under LR 9.8.4R
The Financial Conduct Authority's Listing Rule 9.8.4R requires
that the Company includes certain information relating to
arrangements made between a controlling shareholder and the
Company, waivers of Directors' fees, and long-term incentive
schemes in force. The Directors confirm that there are no
disclosures to be made in this regard.
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.
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 their knowledge and belief, there is no
information relevant to the preparation of their report of which
the Auditor was unaware; and
-- they have 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.
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.
Corporate Governance Statement
Introduction
The Company has a premium listing on the London Stock Exchange
and is therefore required to report on how the principles of the UK
Corporate Governance Code (the "UK Code") have been applied. Being
an investment company, a number of the provisions of the UK Code
are not applicable as the Company has no executive directors or
internal operations.
The Board has considered the principles and provisions of the
AIC Code. The AIC Code addresses all the principles and provisions
set out in the UK Code, as well as setting out additional
provisions on issues that are of specific relevance to the
Company.
The Board considers that reporting against the principles and
provisions of the AIC Code, which has been endorsed by the
Financial Reporting Council and the Guernsey Financial Services
Commission, provides more information to stakeholders. The AIC Code
is available on the AIC website www.theaic.co.uk . It includes an
explanation of how the AIC Code adapts the principles and
provisions set out in the UK Code to make them relevant to
investment companies.
The Company has complied with all the principles and provisions
of the AIC Code during the year ended 30 September 2020.
Set out below is where stakeholders can find further information
within the Annual Financial Report about how the Company has
complied with the various Principles and Provisions of the AIC
Code.
1. Board Leadership and Purpose
Purpose above
-------
Strategy above
-------
Values and culture below
-------
Shareholder Engagement above
-------
Stakeholder Engagement above
-------
2. Division of Responsibilities
Director Independence below
-------
Board meetings below
-------
Relationship with the Portfolio below
Manager
-------
Management Engagement Committee below
-------
3. Composition, Succession and Evaluation
Remuneration and Nomination below
Committee
-------
Director re-election below
-------
Use of an external search agency n/a(1)
-------
Board evaluation below
-------
4. Audit, Risk and Internal Control
Audit Committee below
-------
Emerging and principal risks above
-------
Risk management and internal below
control systems
-------
Going concern statement above
-------
Viability statement above
-------
5. Remuneration
Directors' Remuneration Report below
(1) The Company did not appoint any new Directors during the year.
The Directors' Report was approved by the Board of Directors on
17 December 2020 and signed on its behalf by:
Andrew Chapman
Chairman
BOARD AND COMMITTEES
Values and Culture
Since its inception the Board of Directors of the Company has
upheld the values on which it was founded. The Directors recognise
the purpose of the Company to deliver high and sustainable returns
to Shareholders. Delivery of the investment objective has been
achieved throughout its history through both investment capability
and long held values that centre around diversification,
innovation, adaptation and integrity.
These values are underpinned by the culture the Board
demonstrates in the way in which the Directors interact with each
other and with the Company's service providers. In particular,
openness, challenge and respect are encouraged as key to developing
and implementing the strategies that will deliver the Company's
objective.
The Board
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 I ndependent n on-executive Director and Chairman of the Audit Committee)
-- Trudi Clark ( Independent n on-executive Director, Chairman
of the Remuneration and Nomination Committee and Management
Engagement Committee)
-- Mark Hodgson (Non-executive Director)
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.
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 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 the Manager has a
significant presence.
The Board reviews the independence of all Directors
annually.
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' re-election
As required by the AIC Code, all Directors stand for re-election
by Shareholders annually, the next occasion being at the AGM to be
held on 2 March 2021.
Please refer above for biographies of each Director which
demonstrates their professional knowledge and breadth of
investment, accounting, banking and professional experience. The
Board considers that there is a balance of skills and experience
within the Board and each of the Directors contributes
effectively.
Board diversity
The Board is made up of three male Directors and one female
Director. 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 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.
Tenure policy
The Board has adopted a policy on the tenure of its independent
Directors that aligns with the AIC Code of Corporate Governance and
none of the three independent Directors, including the Chairman of
the Board will serve for more than nine years. The Board has thus
adopted a staged succession plan that maintains a balance between
the strength added through continuity and experience as well as the
benefits of new members bringing fresh perspectives. The Board will
continue to assess annually each Board members independence.
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.
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 and is chaired by Ian Burns. 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.
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 September 2020,
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.
Board and Committee evaluation
The Remuneration and Nomination Committee performs an annual
internal evaluation of the Board, its Committees and each Director,
this was last undertaken in September 2020.
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 confirmed that they have devoted
sufficient time, as considered necessary, to the matters of the
Company.
Succession plan
The Board's succession plan 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.
All directors have served on the Board since the launch of the
Company and Mr Burns is retiring as part of the staged succession
plan that will ensure no independent non-executive director serves
on the Board for longer than nine years.
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.
In accordance with the succession plan, during the year the
Remuneration and Nomination Committee engaged OSA Recruitment to
identify a suitably qualified and experienced director to join the
board who can assume the role of audit committee chairman on the
retirement of Mr Burns. A further announcement will be made early
in 2021. OSA Recruitment have no connections to the Company or its
Directors.
Board meetings
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 Portfolio Manager and Manager together with the Company
Secretary 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. 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.
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.
Attendance at scheduled meetings of the Board and its
committees
Board Audit Management Remuneration
Committee Engagement and Nomination
Committee Committee
Number of meetings during
the year ended 30 September
2020 7 5 2 2
------ ----------- ------------ ----------------
Andrew Chapman 6(1) 5 2 2
------ ----------- ------------ ----------------
Ian Burns 7 5 2 2
------ ----------- ------------ ----------------
Trudi Clark 7 5 2 2
------ ----------- ------------ ----------------
Mark Hodgson 7 n/a n/a n/a
------ ----------- ------------ ----------------
(1) Andrew Chapman was unable to attend the 20 January 2020 ad
hoc board meeting to approve the 2019 annual report due to
illness.
Service providers
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.
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.
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 monthly 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. The Directors
welcome the views of all Shareholders and place considerable
importance upon them.
In addition to the Annual General Meeting and the monthly
publication of factsheets, the Board requires its Corporate Broker
to maintain regular contact with shareholders, to co-ordinate and
facilitate meetings between shareholders and the Portfolio Manager
and to report back to the Board the views of investors expressed at
those meetings. The Chairman is always willing to meet with
shareholders to discuss any questions or issues they might have
about the Company.
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.
AIFMD Report
Alternative Investment Fund Manager Directive ("AIFMD")
The Company (which is a non-EU AIF for the purposes of the AIFM
Directive and related regimes in EEA member states) has appointed
the Manager to act as its Alternative Investment 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 AIFM has delegated portfolio management of the Company's
investment portfolio to the Portfolio Manager and the Board
actively and continuously supervises both the AIFM 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 AIFMD. However, BNP Paribas
Securities Services S.C.A., Guernsey Branch has been appointed to
act as custodian.
The current risk profile of the Company and the risk management
systems employed by the AIFM to manage those risks
Information relating to the current risk profile of the Company
and the risk management systems employed by the AIFM 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.
Leverage
There has been no change to the maximum level of leverage which
the AIFM may employ on behalf of the Company. The Company may
employ gearing up to a maximum of 20% of Net Asset Value at the
time of borrowing. The actual level of gearing at 30 September 2020
was 0%.
Material changes to information
Article 23 of AIFMD requires certain information to be made
available to investors before they invest and requires material
changes to this information to be disclosed in the annual report.
There have been no material changes to the information requiring
disclosure.
AIFM remuneration
The total fee paid to the AIFM by the Company for the year ended
30 September 2020 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 and members of the Board of
Directors of the AIFM. 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 2020 was GBP 39,655 (31 March 2019: GBP 31,095)
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.
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, which are available on the
Company's website.
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" above.
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 m o nitor the i nteg r it y, f airness and balan
ce of the f i nancial state ments of the C o m pany incl u ding its
Half-Yearly Rep ort and A nn ual Fi n a ncial Rep ort to Shareh
older s and any formal announcements regarding its financial
performance, together with any significant financial reporting
issues and areas of judgement contained within them;
- to advise t h e Board on w het h er the An n ual Financial
Report, ta ken as a w h ole, is fair, balanced and u n der sta n
dable and pro vides the in f o r mation nec e ssary f or S hareh
olders to assess the C o m pan y 's per f o r mance, po s ition, b
us i ness m odel and strateg y;
- to review t he adeq uacy and ef fecti ven e ss of t he C o m p
a n y 's f i nancial reporting and inter n al co ntrol policies and
proced u res with respect to the C o m pan y 's record keeping, as
set man a g e ment and operatio ns f or the identi ficatio n, as
sess ment a nd reporting of ris ks;
- to co nsider and m a ke rec o m men datio ns to t he Boar d,
to be put to Shar e h olders f or appro val at the AGM, in relation
to the appoin t m e nt, r e -appoin t ment a nd r e m o val a nd
the pro visions of n o n - a u d it ser vices of t he exter nal Au
ditor and to n e gotiate their r e muneration and ter ms of e ng a
g e m e nt on audit and n o n -au dit w or k;
- to meet reg ular ly w ith t he e x ter nal Au dit or in order
to review t heir propo sed au dit pro g ram me and r e mit of w ork
and the s u b seq u e nt Audit Report and to assess the ef fectiv e
n e ss of the au dit proce s s; any i s s ues arising f r om the a
u dit with respect to acco unti ng or inter n al co ntrols s yste
ms a nd the l e vel of fees paid in respect of au dit and n o n - a
u dit w or k; and
- to an n ually a ss e ss t he exter nal Au ditor 's i n depen
dence, ob j ectivit y, ef fecti v e nes s, reso u rces and ex
pertise.
Internal controls and risk management systems
The Board is responsible for ensuring that suitable systems of
risk management and internal control are implemented, including
systems that include financial controls to address financial risks,
by the third-party service providers and keeping these systems
under review to ensure their continuing adequacy.
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 April 2019 to 31 March 2020) on Fund Administration, 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. In particular, the committee discussed,
reviewed and considered the implications of COVID-19 for the
Company's service providers both in terms of effectiveness and the
maintenance of appropriate internal controls.
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 five 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. The Committee also considered the implications of the
COVID-19 pandemic on both the valuation and liquidity of the
investment portfolio and concluded that it remained appropriate to
estimate the fair value of the Company's financial assets based on
quoted prices (refer to note 2.3(c) for further details).
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 4 March 2020. 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 audit procedures would be performed over the title to and the
existence of the Company's investments and the procedures in place
at the Administrator and the Portfolio Manager in respect of the
valuation of the Company's investment portfolio would be understood
and evaluated.
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 2020, 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 2020, 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 2020. No other non-audit services were
provided during the year ended 30 September 2020.
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: GBP49,300 (year-end audit)
and the fees for non-audit services were GBP19,135 for review of
the Company's Half-Yearly Report for the period ended 31 March
2020.
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. Accordingly Tony Corbin took
over as engagement leader this year from John Luff who had overseen
the audit of the Company for the five financial years since
inception to 30 September 2019.
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 2021.
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 will seek to adopt best practice guidance in
conducting audit tenders, as issued by the FRC and other governing
bodies as applicable.
This Report of the Audit Committee was approved by the Board of
Directors on 17 December 2020 and signed on its behalf by:
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 it faces.
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
17 December 2020 17 December 2020
DIRECTORS' REMUNERATION REPORT
This report describes how the Board has applied the principles
of the AIC Code relating to Directors' remuneration. An ordinary
resolution to approve the Directors' remuneration report will be
proposed at the AGM on 2 March 2021.
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 and there has
been no change to the Company's remuneration policy as detailed
below during the course of the year.
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 themself 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.
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, although the Board is currently reviewing
Directors' compensation in line with market trends. Ensuring
Directors fees remain in line with the market is important during
this period of Board refreshment to ensure that the Company
continues to attract the most talented individuals.
Trudi Clark
Remuneration and Nomination Committee Chair
17 December 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 2020,
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 2020;
-- 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
significant accounting policies and other explanatory
information.
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 GBP1.0 million which
represents 1% of net assets.
==================================================================
Audit scope
* The company is a closed-ended investment company,
incorporated in Guernsey, whose ordinary shares are
admitted to trading with a premium listing 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") 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")
* Directors' consideration of the potential impact of
COVID-19
==================================================================
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 GBP1.0 million (2019: GBP0.9
million)
How we determined it 1% of net assets
-------------------------------------
Rationale for the materiality We believe that net assets is
benchmark the most appropriate benchmark
because this is the key metric
of interest to members of the
company. 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 GBP47,800, 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 We assessed the accounting policy
designated at fair value through for the Investments, as set out
profit or loss ("Investments") in note 2.3, for compliance with
Investments of GBP92.9 million IFRS.
(note 8) held at fair value through We understood and evaluated the
profit or loss consist mainly internal control environment
of equities in companies whose in place at the Administrator
securities are admitted to trading over the valuation of the investment
on the AIM. The accounting policies portfolio and the production
for the Investments are set out of the net asset value for the
in note 2.3. company. We also discussed the
Investments are the main driver asset selection and monitoring
for the company's performance process with the Portfolio Manager.
and are considered to be a key We tested the valuation of the
area of focus for members of Investments by independently
the company. There is a risk agreeing 100% of the prices used
that the AIM listed investments in the valuation to a third-party
are not valued appropriately pricing provider and recalculated
in accordance with the requirement the total valuation as at 30
set out in IFRS 13 for the price September 2020.
to be quoted in an active market We obtained the AIFM's monthly
in order to be an appropriate liquidity analysis for the Investments
measure of fair value, and we and also considered the results
therefore consider this to be presented to the AIFM Risk Committee
a key audit matter. as at 30 September 2020. We independently
IFRS 13 defines an active market obtained and analysed each security's
as a market in which transactions trading volumes for the year
for the asset take place with ended 30 September 2020. For
sufficient frequency and volume securities identified as having
to provide pricing information low trading volumes, relative
on an ongoing basis. to the company's holdings, inquiries
were made with the Portfolio
Manager to challenge their assessment
of whether there is an active
market for these securities.
We corroborated the results of
these inquiries to supporting
documentation such as trades
at or around the year-end. We
concluded that the quoted prices
used as at 30 September 2020
were representative of their
fair value.
We independently obtained the
custody confirmation for the
Investments and reconciled to
the company's accounting records,
without exception.
We have nothing to report to
those charged with governance
in respect of the above procedures.
======================================= ==================================================================
Directors' consideration of the We obtained from the directors
potential impact of COVID-19 their assessment that supports
The directors have considered their conclusion with respect
the potential impact of events to the going concern statement.
that have been caused by the We discussed with the directors
pandemic, COVID-19, on the current the critical estimates and judgements
and future operations of the applied in their assessment so
company. we could understand and challenge
The directors have prepared the the rationale and underlying
financial statements of the company factors incorporated and the
on a going concern basis, and sensitivities applied as a result
believe this assumption remains of COVID-19.
appropriate. This conclusion We inspected the assessment provided
is based on the assessment that, to evaluate consistency with
notwithstanding the significant our understanding of the operations
market uncertainties, they are of the company, the investment
satisfied that the company has portfolio and with any market
adequate resources to continue commentary already made by the
in operational existence for Portfolio Manager.
at least 12 months from the date We reviewed the assessment to
of approval of these financial confirm that the directors have
statements and that the company considered alternative scenarios
and its key third party service in their evaluation of the potential
providers have in place appropriate impact of COVID-19 on the company.
business continuity plans thus We considered the appropriateness
will be able to maintain service of the disclosures made by the
levels through the COVID-19 pandemic. directors in respect of the impact
As a result of the impact of of COVID-19 on the company.
COVID-19 on the wider financial We confirmed that the directors
markets and the company's share have analysed and are satisfied
price, we have determined the with the business continuity
directors' consideration of the plans of all key service providers
potential impact of COVID-19 as part of their COVID-19 operational
(including their associated estimates resilience review.
and judgements) to be a key audit In discussing, challenging and
matter. evaluating the estimates and
Refer to the Chairman's Statement, judgments made by management
Portfolio Manager's Report and and the directors in their assessments,
Executive Summary for disclosures we noted the following factors
on COVID-19. that were considered to be fundamental
in their consideration of the
potential impact of COVID-19
on the current and future operations
of the company and which support
the going concern statement:
* The company has no leverage as at 30 September 2020
and as at the date of approval of these financial
statements;
* Whilst the valuations of certain investments have
been impacted by COVID-19, the company outperformed
the benchmark index for the year ended 30 September
2020;
* The cash and cash equivalents as at 30 September 2020
of GBP3.9m are sufficient to cover the average annual
expenses run rate of c.GBP1.2m (excluding performance
fees which only crystallise upon a redemption); and
* The company does not have a set dividend target to
meet, hence cash outflows for dividend payments are
not required.
We have nothing to report to
those charged with governance
in respect of the above procedures.
======================================= ==================================================================
Other information
The directors are responsible for the other information. The
other information comprises all the information included in the
Annual Financial Report (the "Annual Report") 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 the
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 related 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 over a period of at least
twelve months from the date of approval of the financial
statements. 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.
-- 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.
Use of this report
This independent auditor's report, including the opinions, 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 these opinions, 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.
Report on other legal and regulatory requirements
Company Law exception reporting
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.
Listing Rules of the Financial Conduct Authority (FCA)
The company has reported compliance against the 2019 AIC Code of
Corporate Governance (the "Code") which has been endorsed by the UK
Financial Reporting Council as being consistent with the UK
Corporate Governance Code for the purposes of meeting the company's
obligations, as an investment company, under the Listing Rules of
the FCA.
We have nothing material to add or draw attention to in respect
of the following matters which we have reviewed based on the
requirements of the Listing Rules of the FCA:
-- The directors' confirmation that they have carried out a
robust assessment of the principal and emerging risks facing the
company, including a description of the principal risks, what
procedures are in place to identify emerging risks, and an
explanation of how those risks are being managed or mitigated.
-- The directors' explanation as to how they have assessed the
prospects of the company, over what period they have done so and
why they consider that period to be appropriate, and their
statement as to whether they have a reasonable expectation that the
company will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any
necessary qualifications or assumptions.
We have nothing to report having performed a review of the
directors' statement that they have carried out a robust assessment
of the principal and emerging 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
Code; and considering whether the statements are consistent with
the knowledge and understanding of the company and its environment
obtained in the course of the audit.
Additionally, we have nothing to report in respect of our
responsibility to report when:
-- The directors' statement relating to Going Concern in
accordance with Listing Rule 9.8.6R(3) is materially inconsistent
with our knowledge obtained in the audit.
-- The statement given by the directors that they consider the
Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the
members to assess the company's position and performance, business
model and strategy is materially inconsistent with our knowledge of
the company obtained in the course of performing our audit.
-- The section of the Annual Report describing the work of the
Audit Committee does not appropriately address matters communicated
by us to the Audit Committee.
-- The directors' statement relating to the company's compliance
with the Code does not properly disclose a departure from a
relevant provision of the Code specified, under the Listing Rules,
for review by the auditors.
________________________________________________________________________________
Tony Corbin
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
17 December 2020
STATEMENT OF COMPREHENSIVE INCOME
For the year from 1 October 2019 to 30 September 2020
Year ended Year ended
30 September 30 September
2020 2019
Notes GBP GBP
----------------------------------------------- ------ --------------- ---------------
Income
Investment income 3 1,100,172 1,177,507
Net gain/(loss) on financial assets
designated at fair value through
profit or loss 8 8,904,203 (19,739,019)
Foreign exchange gains - 10,026
------------------------------------------------- ------ --------------- ---------------
Total income/(loss) 10,004,375 (18,551,486)
------------------------------------------------- ------ --------------- ---------------
Expenses
Portfolio performance fees (expense)/recovery 4 (1,046,428) 1,210,297
Portfolio management fees 4 (651,766) (668,888)
Operating expenses 5 (499,421) (566,330)
Finance costs 15 (4,521) (24,726)
Foreign exchange losses (7,520) -
----------------------------------------------- ------ --------------- ---------------
Total expenses (2,209,656) (49,647)
------------------------------------------------- ------ --------------- ---------------
Profit/(loss) before taxation 7,794,719 (18,601,133)
------------------------------------------------- ------ --------------- ---------------
Taxation - -
----------------------------------------------- ------ --------------- ---------------
Profit/(loss) after taxation and
total comprehensive income/(loss) 7,794,719 (18,601,133)
------------------------------------------------- ------ --------------- ---------------
Basic and diluted earnings/(loss)
per Ordinary Share 13 0.1678 (0.4005)
The Company has no items of other comprehensive income, and
therefore the profit/(loss) after taxation for the year is also the
total comprehensive income/(loss).
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 2020
30 September 30 September
2020 2019
Notes GBP GBP
--------------------------------------- ------ ------------- --------------------
Non-current assets
Financial assets designated at fair
value through profit or loss 8 92,934,986 81,386,681
Current assets
Cash and cash equivalents 3,929,910 6,543,864
Trade receivables - securities sold
awaiting settlement 73,663 36,862
Other receivables and prepayments 7 73,083 202,078
Total current assets 4,076,656 6,782,804
--------------------------------------- ------ ------------- --------------------
Total assets 97,011,642 88,169,485
--------------------------------------- ------ ------------- --------------------
Current liabilities
Trade payables - securities purchased
awaiting settlement (104,945) (108,088)
Other payables and accruals 10 (1,293,784) (243,203)
--------------------------------------- ------ ------------- --------------------
Total current liabilities (1,398,729) (351,291)
--------------------------------------- ------ ------------- --------------------
Total liabilities (1,398,729) (351,291)
--------------------------------------- ------ ------------- --------------------
Net assets 95,612,913 87,818,194
--------------------------------------- ------ ------------- --------------------
Capital and reserves
Stated capital 12 - -
Share premium 12 28,391,852 28,391,852
Retained earnings 67,221,061 59,426,342
--------------------------------------- ------ ------------- --------------------
Equity Shareholders' funds 95,612,913 87,818,194
--------------------------------------- ------ ------------- --------------------
The financial statements were approved and authorised for issue
by the Board of Directors on 17 December 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 2020
Stated Retained
capital Share premium earnings Total
GBP GBP GBP GBP
------------------------------ ---------- -------------- ----------- -----------
Opening equity Shareholders'
funds at 1 October 2019 - 28,391,852 59,426,342 87,818,194
------------------------------- --------- -------------- ----------- -----------
Total comprehensive income
for the year - - 7,794,719 7,794,719
Closing equity Shareholders'
funds at 30 September 2020 - 28,391,852 67,221,061 95,612,913
------------------------------- --------- -------------- ----------- -----------
For the year ended 30 September 2019
Stated Retained
capital Share premium earnings Total
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
------------------------------- --------- -------------- ------------- -------------
The notes below form an integral part of these financial
statements.
STATEMENT OF CASH FLOWS
For the year ended 30 September 2020
Year ended Year ended
30 September 30 September
2020 2019
Notes GBP GBP
-------------------------------------------------------------- ------ -------------- --------------
Cash flow from operating activities
Profit/(loss) after taxation and total
comprehensive (loss)/income for the year 7,794,719 (18,601,133)
Adjustments to reconcile profit/(loss)
after taxation to net cash flows:
* Realised gain on financial assets designated at fair
value through profit or loss 8 (2,344,487) (3,689,629)
* Unrealised (gain)/loss on financial assets designated
at fair value through profit or loss 8 (6,559,716) 23,428,648
Purchase of financial assets designated
at fair value through profit or loss(1) 8 (32,221,333) (26,431,000)
Proceeds from sale of financial assets
designated at fair value through profit
or loss(2) 8 29,537,287 28,423,201
Changes in working capital
Decrease/(increase) in other receivables
and prepayments 7 128,995 (80,441)
Increase/(decrease) in other payables 10 1,050,581 (1,180,097)
Net cash (used in)/from operating activities (2,613,954) 1,869,549
-------------------------------------------------------------- ------ -------------- --------------
Net (decrease)/increase in cash and cash
equivalents in the year (2,613,954) 1,869,549
-------------------------------------------------------------- ------ -------------- --------------
Cash and cash equivalents at the beginning
of the year 6,543,864 4,674,315
-------------------------------------------------------------- ------ -------------- --------------
Cash and cash equivalents at the end
of the year 3,929,910 6,543,864
-------------------------------------------------------------- ------ -------------- --------------
(1) - Payables outstanding at 30 September 2020 relating to
purchases of financial assets designated at fair value through
profit amounted to GBP104,945 (30 September 2019: GBP108,088).
(2) - Receivables outstanding at 30 September 2020 relating to
sales of financial assets designated at fair value through profit
amounted to GBP73,663 (30 September 2019: GBP36,862).
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 Share s 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 applies for the first time IFRS 16 - Leases and
IFRIC 23 - Uncertainty over Income Tax Treatments, which became
effective on 1 January 2019. The Company does not participate in
leasing arrangements and the Directors have determined that, as at
30 September 2020, the Company has no uncertain tax positions that
would be disclosed under IFRIC 23 - Uncertainty over Income Tax
Treatments. Accordingly, the application of IFRS 16 - Leases and
IFRIC 23 - Uncertainty over Income Tax Treatments, respectively, do
not have an impact on the Company's financial statements.
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 2020 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.
Cash and cash equivalents, trade receivables, other receivables
and prepayments are classified at amortised cost. These financial
assets are initially recognised at fair value plus transaction
costs and subsequently measured at amortised cost.
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 2020, 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 2020, in the opinion of the
Directors, the quoted price for the financial assets as at 30
September 2020 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 2020. 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 Investment income
Dividends receivable on equity shares are recognised as revenue
for the period on an ex-dividend basis and net of withholding
taxes, as the withholding taxes are deducted at source and are not
a tax on profits. Interest income and expenses are recognised in
the Statement of Comprehensive Income using the effective interest
rate method.
2.5 E xpenses
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 Company
is not obligated to apply the redemption mechanism.
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 2020
comprises its stated capital, share premium and retained earnings
at a total of GBP95,612,913 (2019: GBP 87,818,194 ).
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
2020 2019
GBP GBP
Dividend income(1) 1,095,656 1,156,888
Bank interest 4,516 20,619
Total investment income 1,100,172 1,177,507
--------------------------- -------------- --------------
(1) Net of withholding taxes of GBP174,716 (2019:
GBP139,155).
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. During the year ended 30 September 2020, the Company
incurred management fees expense of GBP651,766 (30 September 2019:
GBP668,888).
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) over a performance period will be payable to
the Portfolio Manager upon a redemption.
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 2020, the Company recognised
performance fees expense of GBP1,046,428 (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 as
the Company's NAV total return performance was below the
benchmark).
As at 30 September 2020, performance fees accrued were
GBP1,046,428 (30 September 2019: GBPnil) as the Company's NAV total
return is currently outperforming the benchmark. No performance
fees were paid during the period (30 September 2019: GBPnil) as
there has not been a redemption. Please refer to the Financial
Highlights and Performance Summary for details of the Company's
previous redemptions.
5. Operating expenses
Year ended Year ended
30 September 30 September
2020 2019
GBP GBP
Administration fees 128,639 128,417
Directors' fees 119,918 120,000
AIFM fees 54,192 54,000
Audit fees 52,798 45,000
Transaction fees 42,977 32,852
Broker fees 38,707 40,000
Custody fees 20,599 17,953
Non-audit fees 19,135 18,400
Registrar fees 16,569 18,214
Legal and professional fees 6,670 13,359
Sundry expenses (783) 78,135
------------------------------- -------------- --------------
Total operating expenses 499,421 566,330
------------------------------- -------------- --------------
Non-audit fees
Non-audit fees incurred during the year ended 30 September 2020
relating to interim review services amounted to GBP19,135 (2019:
GBP18,400). Non-audit fees payable as at 30 September 2020 were
GBPnil (30 September 2019: GBPnil).
AIFM fee
On 21 October 2014, the Company signed an AIFM agreement with
the Manager to act as the Company's AIFM. Under that agreement, the
Manager was entitled to an annual fixed fee of GBP54,000 which was
increased to GBP58,000 per annum effective 1 September 2020 when
the Company signed an amended agreement. All other provisions of
the AIFM agreement dated 21 October 2014 remained the same.
The annual fixed fee is paid quarterly in arrears. AIFM fees
payable as at 30 September 2020 were GBP13,574 (30 September 2019:
GBP13,611). 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 2020
were GBP1,096 (30 September 2019: GBP955).
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 2020 were GBP10,926 (30 September 2019:
GBP20,706).
Broker fee
On 1 August 2018, the Company announced it had appointed 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 was
entitled to a fee payable by the Company of GBP40,000 per annum
payable quarterly in arrears.
On 1 July 2020, the Company announced it had appointed Nplus1
Singer Advisory LLP ("N+1 Singer"), to provide corporate
stockbroker and financial adviser services to the Company, as the
Company's sole broker, following Cantor Fitzgerald's withdrawal
from providing corporate broker services in this area of the UK
market. Under the agreement, N+1 Singer is entitled to a fee
payable by the Company of GBP40,000 per annum payable quarterly in
advance.
In addition, N+1 Singer is entitled to a one-off bonus fee
contingent upon the average daily discount over the three months to
31 December 2021. The bonus will be payable to N+1 Singer only if
the Company's average daily discount will be no greater than 8%
during this period; with a maximum bonus payable to N+1 Singer of
GBP11,800 per annum, should the Company's shares be trading at a
premium during this period, reduced accordingly if the average
daily discount lies between 8% and 0% during this period.
Total broker fees incurred during the year were GBP38,707 (30
September 2019: GBP40,000). Broker fees payable as at 30 September
2020 were GBP13,333 (30 September 2019: GBP3,333).
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 2020 were GBP30,165 (30
September 2019: GBP30,000 ).
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
2020 2019
GBP GBP
Dividend receivable 51,480 194,378
Prepayments 6,580 6,334
Interest and other receivable 15,022 1,365
Ordinary Share receivable 1 1
-------------------------------- ---- ------------- -------------
Total other receivables 73,083 202,078
-------------------------------- ---- ------------- -------------
The Directors believe that these balances are fully recoverable
and therefore have not recognised any loss allowance on 12-month
expected credit losses.
8. Financial assets designated at fair value through profit or
loss
30 September 30 September
2020 2019
GBP GBP
Financial assets designated at fair value
through profit or loss 92,934,986 81,386,681
------------------------------------------------------- ------------- -------------
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 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
2020
Level 1 Level 2 Level 3 Total
Financial assets GBP GBP GBP GBP
Financial assets designated
at fair value through profit
or loss 92,934,986 - - 92,934,986
------------------------------- ----------- -------- -------- -------------
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
------------------------------- ----------- -------- -------- -------------
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 2020 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
---------------------------------- ------------- -------- -------- -------------
Opening valuation 81,386,681 - - 81,386,681
---------------------------------- ------------- -------- -------- -------------
Purchases during the year 32,218,190 - - 32,218,190
Sales - proceeds during the
year (29,574,088) - (29,574,088)
Realised gain on financial
assets designated at fair
value through profit or loss(1) 2,344,487 - - 2,344,487
Unrealised gain on financial
assets designated at fair
value through profit or loss(2) 6,559,716 - - 6,559,716
Closing valuation 92,934,986 - - 92,934,986
Total net gain on financial
assets for the year ended
30 September 2020 8,904,203 - - 8,904,203
---------------------------------- ------------- -------- -------- -------------
(1) Realised gain on financial assets designated at fair value
through profit or loss is made up of GBP10,898,127 gain and
GBP(8,553,640) loss.
(2) Unrealised gain on financial assets designated at fair value
through profit or loss is made up of GBP20,669,693 gain and
GBP(14,109,977) loss.
During the year ended 30 September 2020, there were no
reclassifications between levels of the fair value hierarchy.
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(3) 3,689,629 - - 3,689,629
Unrealised loss on financial
assets designated at fair
value through profit or loss(4) (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)
---------------------------------- ------------- -------- -------- -------------
(3) 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.
(4) 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.
Please refer to note 2.3 for valuation methodology of f inancial
assets designated at fair value through profit or loss.
As at 30 September 2020, 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 2020, 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% (2019:
15%):
30 September Increase Decrease
2020 by 15% by 15%
Financial assets GBP GBP GBP
------------------------------- ------------- ----------- -------------
Financial assets designated
at fair value through profit
or loss 92,934,986 13,940,248 (13,940,248)
-------------------------------- ------------- ----------- -------------
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)
-------------------------------- ------------- ----------- -------------
The Directors consider a 15% (2019: 15%) movement to be
reasonable given their assessment of the volatility of the AIM
market during the year ended 30 September 2020. 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 (2019:
GBPnil). The table below details the Company's exposure to interest
rate risks:
30 September 30 September 30 September
2020 2020 2020
Interest Non-interest Total
bearing (*) bearing
GBP GBP GBP
------------------------------------------- ------------- ------------- -------------
Assets
Financial assets designated at
fair value through profit or loss - 92,934,986 92,934,986
Cash and cash equivalents 3,929,910 - 3,929,910
Trade receivables - securities
sold awaiting settlement - 73,663 73,663
Other receivables (excluding prepayments) - 66,503 66,503
-------------------------------------------- ------------- ------------- -------------
Total assets 3,929,910 93,075,152 97,005,062
-------------------------------------------- ------------- ------------- -------------
Liabilities
Trade payables - securities purchased
awaiting settlement - (104,945) (104,945)
Other payables - (1,293,784) (1,293,784)
Total liabilities - (1,398,729) (1,398,729)
---------------------------------------- ---------- ------------ ------------
Total interest sensitivity
gap 3,929,910 91,676,423 95,606,333
---------------------------------------- ---------- ------------ ------------
(*) - floating rate and due within 1 month
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
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
2020 2019
GBP GBP
------------------------------ ------------- -------------
Increase of 50 basis points 19,650 32,719
Decrease of 50 basis points (19,650) (32,719)
------------------------------ ------------- -------------
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 2020 and 30 September 2019,
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
2020, the Company entered into nil (2019: nil) currency purchase
spot contracts to mitigate the foreign currency exposure.
As at 30 September 2020, USD cash of $nil (2019: $131,279) and
income receivable of $nil (2019: $nil) 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
2020 2019
GBP GBP
Cash and cash equivalents 3,929,910 6,543,864
Trade receivables - securities sold awaiting
settlement 73,663 36,862
Other receivables (excluding
prepayments) 66,503 195,744
------------------------------------------------ ------------- -------------
Total assets 4,070,076 6,776,470
------------------------------------------------ ------------- -------------
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+ (2019: 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.
The Company measures credit risk and expected credit losses
using probability of default, exposure at default and loss given
default. Management consider both historical analysis and forward
looking information in determining any expected credit loss. At 30
September 2019 and 30 September 2020, management consider the
probability of default to be close to zero as the counterparties
have a strong capacity to meet their contractual obligations in the
near term. As a result, no loss allowance has been recognised based
on 12-month expected credit losses as any such impairment would be
wholly insignificant to the Company.
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 2020:
Maturity analysis of financial liabilities
Less than 3 to 12 More than
3 months months 1 year Total
GBP GBP GBP GBP
Financial liabilities
Trade payables - securities
purchased awaiting settlement (104,945) - - (104,945)
Other payables and accruals(1) (247,355) (1,046,429) - (1,293,784)
-------------------------------- ---------- ------------ ---------- ------------
Total undiscounted financial
liabilities (352,300) (1,046,429) - (1,398,729)
-------------------------------- ---------- ------------ ---------- ------------
The table below shows the residual contractual maturity of the
financial liabilities as at 30 September 2019:
Less than 3 to 12 More than
3 months months 1 year Total
GBP GBP GBP GBP
Financial liabilities
Trade payables - securities
purchased awaiting settlement (108,088) - - (108,088)
Other payables and accruals (225,203) (18,000) - (243,203)
Total undiscounted financial
liabilities (333,291) (18,000) - (351,291)
-------------------------------- ---------- --------- ---------- ----------
(1) - Included in other payables is a performance fee payable of
GBP1,046,428 (2019: GBPnil ) . 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 and accruals
30 September 30 September
2020 2019
GBP GBP
Portfolio performance fees 1,046,428 -
Portfolio management fees 119,563 54,886
Audit fees 54,199 45,000
Directors' fees 30,165 30,000
AIFM fees 13,574 13,611
Broker fees 13,333 3,333
Administration fees 10,926 20,706
Registrar fees 2,000 1,000
Custody fees 1,096 955
Sundry expenses 2,500 73,712
Total other payables and accruals 1,293,784 243,203
------------------------------------- ------------- -------------
11. Contingent liabilities and commitments
As at 30 September 2020, the Company had no contingent
liabilities or commitments (2019: 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 2019 46,445,043 - 28,391,852
------------------------------------ ----------- --------- -----------
Ordinary Shares redeemed during - - -
the year
------------------------------------ ----------- --------- -----------
Total issued share capital as at
30 September 2020 46,445,043 - 28,391,852
------------------------------------ ----------- --------- -----------
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
------------------------------------ ----------- --------- -----------
As at 30 September 2020, the Company had 46,445,043 Ordinary
Shares (2019: 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's
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's
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 (2019:
nil).
Issuance of Ordinary Shares
No Ordinary Shares were issued during the year ended 30
September 2020 (2019: 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. T his 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.
13. Basic and diluted earnings per Ordinary Share
Year ended Year ended
30 September 30 September
2020 2019
GBP GBP
Total comprehensive income/(loss)
for the year 7,794,719 (18,601,133)
Weighted average number of Ordinary Shares
during the year 46,445,043 46,445,043
Basic and diluted earnings/(loss)
per Ordinary Share 0.1678 (0.4005)
14. Net Asset Value per Ordinary share
30 September 30 September
2020 2019
GBP GBP
Net Asset Value 95,612,912 87,818,194
Number of Ordinary Shares at
year end 46,445,043 46,445,043
Net Asset Value per Ordinary
Share 2.0586 1.8908
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 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
The Manager is a related party and is entitled to an annual
fixed fee as disclosed in note 5. Mark Hodgson is the Managing
Director of the Manager.
The Portfolio Manager
The Portfolio Manager is a related party and is entitled to
management and performance fees as disclosed in note 4.
George Ensor is also a related party as he is the Fund Manager
of the Portfolio Manager. On 23 January 2020, he purchased 19,830
Ordinary Shares at a price of GBP1.6422 per share and on 23 March
2020, he purchased 20,000 Ordinary Shares at a price of GBP0.9717
per share.
As at 30 September 2020, the Portfolio Manager and George Ensor
held the following voting rights in the Company:
30 September 30 September
2020 2019
Portfolio Manager 4,110,768 4,110,768
------------- -------------
George Ensor 60,000 20,170
------------- -------------
The Directors
The Directors are entitled to remuneration for their services
and also hold Ordinary Shares in the Company as disclosed in note
6.
All transactions between these related parties and the Company
were conducted on terms equivalent to those prevailing in an arm's
length transaction.
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 2020.
During the period 30 September 2020 to 16 December 2020, the NAV
per share increased by 11.08% from GBP2.0586 to GBP2.2867.
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 beginning of the financial year or initial issuance of
Ordinary Shares to 30 September 2020. 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.
Please refer 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 2020, the Company's Ordinary Shares traded at
GBP1.5800 (2019: GBP1.5700), reflecting a discount of 23.25% (2019:
discount of 16.97%) to the NAV per Ordinary Share of GBP2.0586
(2019: GBP1.8908).
Ongoing charges
The ongoing charges ratio for the year ended 30 September 2020
was 1.35% (2019: 1.30%). The AIC's methodology for calculating an
ongoing charges figure is based on annualised ongoing charges of
GBP1,164,194 (2019: GBP1,188,439) divided by average NAV in the
period of GBP86,684,667 (2019: GBP89,980,648).
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 2020 and 30 September 2019:
30 September 30 September
2020 2019
GBP GBP
Total expenses for the year: 2,209,656 49,647
----------------------------------------------- ------------- -------------
Expenses excluded from the calculation of
ongoing charges figures, in accordance with
AIC's methodology:
Portfolio Performance fees (expense)/recovery (1,046,428) 1,210,297
Legal and professional fees - (5,928)
Sundry expenses (8,497) (30,684)
Transaction fees (42,977) (32,852)
Finance costs (4,521) (24,726)
----------------------------------------------- ------------- -------------
Total ongoing charges for the year 1,107,233 1,165,754
----------------------------------------------- ------------- -------------
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 2020 and 30 September 2019.
(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
N+1 Singer Advisory LLP Computershare Investor Services
One Bartholomew Lane (Guernsey) Limited
London 1(st) Floor, Tudor House
EC2N 2AX Le Bordage
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.
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).
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
https://riverandmercantile.com/funds/rm-uk-micro-cap-investment-company
.
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END
FR FLFEEFLLDLII
(END) Dow Jones Newswires
December 18, 2020 02:00 ET (07:00 GMT)
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