Source - PRN


THE INVESTMENT COMPANY PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2016

The full Annual Report and Accounts for the year ended 30 June 2016 can be found on the Company’s website: http://www.mitongroup.com/tic.

DIRECTORS (all non-executive)

Sir David Thomson Bt. (Chairman)
S. J. Cockburn
P. S. Allen
M. H. W. Perrin (Audit Committee Chairman and Senior Independent Director)


STRATEGIC REPORT

SUMMARY OF RESULTS

At 30 June 2016  At 30 June 2015   Change 
Equity shareholders’ funds     16,991,639  18,452,970    -7.9%
Number of ordinary shares in issue 4,772,049              4,739,549*  +0.7%
Net asset value (“NAV”) per ordinary share
356.07p

389.34p 

-8.5%
Ordinary share price (mid) 365.50p 375.00p  -2.5%
Premium/(discount) to NAV 2.65%    (3.68%)
At 30 June 2016    At 30 June 2015   
Total return per ordinary share** (11.21)p 16.91p 
Return after taxation per ordinary share (4.03)p 17.62p 
Dividends paid/declared per ordinary share 20.70p  23.60p 
* Excluding 32,500 shares held in Treasury.
** The total return per ordinary share is based on total comprehensive income after taxation as detailed in the Consolidated Statement of Comprehensive Income and in note 6 and is shown to enable comparison with other investment trust companies.


FINANCIAL CALENDAR

November Payment of first interim dividend for the year ending 30 June 2017.
December Annual General Meeting.
February Payment of second interim dividend for the year ending 30 June 2017.
February/March Announcement of Half-Yearly Financial Report.
May Payment of third interim dividend for the year ending 30 June 2017.
August Payment of fourth interim dividend for the year ending 30 June 2017.
September/October Announcement of Annual Results.


CHAIRMAN’S STATEMENT

This statement covers the year ending 30 June 2016.

Markets were volatile over the year, with the Sterling exchange rate falling back abruptly in the last few days of June following the announcement of the result of the UK Referendum. This event boosted the share prices of the largest multi-nationals because most of their sales and profits come from overseas, whereas the share prices of most domestically focused stocks fell back on account of fears of slower UK growth.

These diverging trends meant that the FTSE All-Share Index fell 1.5% over the year, whereas the FTSE UK MidCap Index fell 4.9%. Fixed income investments were more resilient and mainstream government bonds actually increased in price during the year with the FTSE Actuaries UK Conventional Gilts All Stocks Index up 10.0% in the period.

The Company’s portfolio is invested mainly in domestic stocks, and hence their share prices tended to fall back especially towards the end of the year. Many of the Company’s fixed income holdings stand at good yields because they are infrequently traded, with little movement in spite of the positive trend in bond markets.

The combination of these factors meant the NAV of the Company fell from 389.34p to 356.07p, a fall of 8.5% over the year.  Dividends have been declared for shareholders which in aggregate amount to 20.7p, which represents a yield of 5.8% on the NAV at the year end of 356.07p.

The Company’s strategy aims to generate an attractive level of dividend income distributed to shareholders four times a year, along with potential for capital appreciation over time. Alongside this, the fluctuations of the NAV of the Company tends to be lowly correlated with the fluctuations of mainstream equity indices such as the FTSE All-Share Index.

The low market correlation was unhelpful in the year to June 2016, when many of the largest stocks performed well following the devaluation of Sterling. However, this factor has enhanced returns of the Company over the period since its reorganisation in June 2013 (details of which can be found below). The total return for shareholders since reorganisation, including the dividend income has been 22.9%, which compares with a total return on the FTSE All-Share Index of 18.6%. This has been achieved with a mix of assets in the portfolio that tend to have much lower volatility than the equity indices.

Although there are concerns regarding a potential consumer recession in the UK, there are also opportunities for recovery in those stocks following the devaluation of Sterling. The Company has the advantage that it can pick between either large or smaller companies, and invest in either straight equity or via fixed income securities. As such the portfolio tends to have a wider opportunity set for investment, as well as more scope closely to manage the risk/reward ratio of the portfolio as appropriate. We continue to believe that the Company remains well-placed to deliver attractive returns for shareholders in the coming years.

Since the Company’s share price has stood at a premium to NAV from time-to-time, the Board has reissued the shares held in Treasury to satisfy investor demand. Such issue of shares, and the resultant increase in assets, serves to reduce our Ongoing Charges Ratio. Our policy will be to continue to issue shares at a premium to NAV at a price that will be non-dilutive and of benefit to existing shareholders.

At the forthcoming Annual General Meeting there shall be, as planned at the time of the reconstruction in 2013, a continuation resolution put to shareholders. The Directors believe the Company is well placed to deliver on its objectives in relation to returns to shareholders achieved through its historic portfolio of high-yielding fixed interest securities and new, well-researched equity investments in UK companies with good dividend growth prospects. Certain significant shareholders have expressed a strong preference to continue. Accordingly, your Directors recommend that members vote in favour of the continuation resolution.

Sir David Thomson
Chairman

4 October 2016


MANAGER’S REPORT

Market returns in the year to June 2016
Returns in the year were dominated by the UK’s decision to leave the EU on 23 June 2016. Even prior to this announcement equity markets were unsettled. Following the UK Referendum result there was a significant devaluation of Sterling. This favoured some of the large multi-nationals since most of their profits are generated in overseas currencies. In contrast, companies with a domestic bias were generally marked down, given that there will be greater uncertainty over the next two years, which may reduce ongoing business investment in the UK economy.

Over the full year the FTSE All-Share Index fell 1.5%. There are three components to this index. The FTSE 100 Index, which includes heavy weightings in many of the multi-nationals that are expected to benefit from the Sterling devaluation, which fell just 0.26% in the year. In contrast, the FTSE 250 Index, a measure of middle sized companies, fell 7.2%, and the FTSE Small Capitalisation Index (excluding Investment Trusts) fell 6.5%. The AIM All-Share Index, which includes smaller quoted companies listed on AIM, fell 6.3% in the same period.

The Company holds a number of fixed income investments in the form of notes, debentures and preference shares which tend to hold up well at times of uncertainty. For example the prices of UK Gilts were marked up after the UK Referendum since UK growth expectations were considered less attractive, so the FTSE Actuaries UK Conventional Gilts All Stocks Index rose 10.0% over the year. However, many of the holdings in this portfolio are infrequently traded, so their prices didn’t reflect the appreciation of UK Gilts in the final few days of the financial year. In addition, if anything, the price of many of the UK bank notes initially fell after the UK Referendum, and therefore they have greater scope for improvement in the coming year.

Portfolio
Approximately half of the portfolio is invested in a range of preference shares, loan stocks, debentures and notes. Although the largest corporate exposure in the portfolio is to Lloyds Banking Group through a series of perpetual notes, there are around 40 issues from different corporates in the portfolio. It is difficult to purchase more of these issues because there are almost no significant sellers in the market given their obvious yield attractions.

The other half of the portfolio is invested in a number of equities – mainly smaller quoted companies – that are often paying premium dividend yields. Small companies tend to have greater growth potential. As world growth has moderated this is now becoming more important to investors. Most institutions have few shares of small companies in their portfolios given that they are, by their nature, naturally diminutive in scale and under-researched. But prior to the credit boom, institutional portfolios were fully weighted in smaller companies, given that as a group they tend to have better growth potential even at times of economic austerity.

We therefore anticipate that the growing allocation of capital will be matched by a growing flow of smaller company fund raisings. We are expecting a growing number of issues of convertible loan stock and convertible preference share issues in time. These instruments offer the new investor a regular income at a premium yield, along with the right to convert into the quoted shares if the relevant share price appreciates significantly. Whilst such issues have been relatively rare over recent years, they were popular prior to the credit boom. We have been reviewing an increasing number of such issues over the last eighteen months. The most notable purchase of convertible loan stock in the period was issued by Aggregated Micro Power Holdings plc, a company that develops and operates facilities that convert wood and waste into energy. This issue has a coupon of 8% and now comprises some 3.1% of the portfolio.

During the period, profits were taken on Quantum Pharmaceutical and Hiscox, which were sold entirely, and Charles Taylor and Safestyle which were both reduced. New holdings were purchased in Phoenix Holdings, Hostelworld, Bilby, Coral Products and Stobart. In addition one tranche of the Lloyds Banking Group Notes was called during the year.

Criteria for selecting new investments for the portfolio
There are five criteria that the managers use to determine the scope for the business to deliver good and growing dividends in the longer term.

The prospect of turnover growth - If a business is to sustain and grow its dividend, then the portfolio should include companies that will generate more cash in the coming years. Without ongoing turnover growth this is near-impossible to achieve over time.

Sustained or improving margins - We are particularly sensitive as to how well companies look after their customers, since a business can only sustain attractive margins if its customers are happy. If margins decline, any turnover growth may not feed through to improvement in cash generation of the business.

A forward-looking management team - Businesses often need to make commercial decisions based on incomplete information. A thoughtful and forward-looking team has a better chance of making better decisions.

Robust balance sheet - There are disproportionate advantages in having the independence of a strong balance sheet during a period of elevated economic and political risks. Conversely, corporates with imprudent borrowings can risk the total loss of shareholders’ capital.

Low expectation valuation - Many of the most exciting stocks enjoy higher stock market valuations but almost few can consistently beat the high expectations baked into their share prices. Those with low expectations tend to be less vulnerable to disappointment, but conversely can enjoy excellent share price rises if they surprise on the upside.

Companies that meet these criteria on a prospective basis are believed to be in the best position to deliver attractive returns to shareholders, as well as offering moderated risk.

These criteria, used in reverse, can also be useful in determining the timing of portfolio holdings that should be considered for divestment. So for example, a business in danger of suffering turnover declines would naturally be expected to generate less cash flow in future years and thereby struggle to sustain a good dividend payment over time, let alone grow it. Clearly these decisions need to be taken in conjunction with consideration of their market prices at the time.

Performance
Over the year most of the fixed income holdings in the portfolio were largely unchanged in price, in spite of the moves in the gilts market.  However, the share prices of equities that suffered a setback in trading have been particularly vulnerable. For example Entu and Gable disappointed in the period, with Hostelworld also reporting a reduced inclination for city breaks after the terrorist incidents in Paris and Brussels. These were offset to a degree by the 10%+ rises of the share prices of KCOM, Esure, Royal Mail, SCS, Conviviality and Manx Telecom in spite of the unsettled market conditions.

Overall the NAV of the Company fell 8.5% over the twelve month period. Greater detail of the portfolio at the year-end is outlined below.

Prospects
The slowdown in Chinese growth, and the added uncertainty for the EU after the UK has left, imply that the investment prospects overseas have significant challenges.

World growth has continued to slow, with little prospect of any acceleration.

The setback in UK share prices towards the end of the Company’s year suggests that there may be some scope for a recovery in asset prices in due course. Clearly the devaluation of Sterling is expected to inflate the cost of fuel, clothing and some foods in the coming year, and this might reduce the ability of the UK consumer to spend so freely. However, there are also some businesses that are expected to benefit from the devaluation of Sterling.

So whilst it is anticipated that the economic headwinds could inhibit the appreciation of markets generally, we are hopeful that a portfolio with good participation in both the ordinary shares of smaller UK quoted businesses and stocks paying a fixed level of premium income will not only be more resilient, but could generate an element of capital gain over time. 

We believe the outlook for the Company continues to be favourable.

Gervais Williams and Martin Turner
Miton Asset Management Limited

4 October 2016


TWENTY LARGEST INVESTMENTS
At 30 June 2016



Stock


Number


Issue

Book
cost
£
Market or
Directors’
valuation
£
% of
total
portfolio
1 Lloyds Banking Group
7.625% perpetual notes (LBG Capital) 478,000 0.03 204,360 449,941 2.74
7.875% perpetual notes (LBG Capital) 362,000 0.05 245,997 340,968 2.08
7.281% perpetual notes (Bank of Scotland) 400,000 0.27 315,331 443,640 2.70
765,688 1,234,549 7.52
2 Phoenix Group Holdings
7.25% perpetual notes 1,060,000 0.53 811,923 1,051,414 6.41
Ordinary €0.0001§ 22,584 0.01 199,271 181,011 1.10
1,011,194 1,232,425 7.51
3 Royal Bank of Scotland Group
9% series ‘A’ non-cum pref (NatWest) 500,000 0.36 362,920 637,500 3.88
Sponsored ADR each rep pref C (NatWest) 20,000 0.20 55,473 388,989 2.37
418,393 1,026,489 6.25
4 Charles Taylor
Ordinary 1p§ 228,571 0.34 397,913 548,570 3.34
5 Manx Telecom
Ordinary 0.2p§ 274,274 0.24 409,235 540,320 3.29
6 The Fishguard & Rosslare Railways and Harbours Company
3.5% Guaranteed preference stock 790,999 63.91 441,810 522,059 3.18
7 Newcastle Building Society
6.625% sub notes 23/12/19 600,000 2.40 405,438 510,000 3.11
8 Aggregated Micro Power
8% conv loan notes 2021 500,000 2.50 500,000 500,000 3.05
9 600 Group
8% conv loan notes 14/02/20 500,000 5.88 500,000 470,000 2.86
10 Coral Products
Ordinary 1p§ 2,500,000 3.03 500,000 462,500 2.82
11 KCOM Group
Ordinary 10p§ 413,519 0.08 407,699 436,263 2.66
12 Aviva
Ordinary 25p§ 107,878 0.00 476,285 424,931 2.59
13 Fairpoint Group
Ordinary 1p§ 400,000 0.88 442,261 420,000 2.56
14 REA Holdings
9.5% loan notes 31/12/17 300,000 2.00 298,254 291,000 1.77
7.5% US Dollar loan notes 30/06/17 150,000 0.44 76,740 95,377 0.58
374,994 386,377 2.35
15 Esure Group
Ordinary 0.08333p§ 131,583 0.03 356,903 376,459 2.29
16 Investec Investment Trust
3.5% cum pref £1 461,508 35.50 271,938 281,520 1.72
5% cum pref £1 104,043 30.12 92,858 91,558 0.56
364,796 373,078 2.28
17 Direct Line Insurance Group
Ordinary 10.909p§ 105,621 0.01 354,049 364,181 2.22
18 Randall & Quilter Investment Holdings
Ordinary 2p§ 387,000 0.54 450,873 359,910 2.19
19 Amalgamated Metal Corporation
5.4% cum pref £1 256,065 18.21 144,049 186,927 1.14
6% cum pref £1 213,510 23.72 103,844 170,808 1.04
247,893 357,735 2.18
20 Anglo Pacific Group
Ordinary 2p§ 432,903 0.25 346,322 350,651 2.14
9,171,746 10,896,497 66.39
§ Issues with unrestricted voting rights.
The Group has a total of 76 portfolio investment holdings in 61 companies.


CORPORATE SUMMARY

Investment Objective
The Company’s investment objective is to provide shareholders with an attractive level of dividends coupled with capital growth over the long-term, through investment in a portfolio of equities, preference shares, loan stocks, debentures and convertibles.

Investment Policy
The Company invests in equity and fixed income securities. It is expected the fixed income securities would include preference shares, loan stocks, debentures, notes, convertibles and related instruments and be issued by UK quoted companies with a wide range of market capitalisations. The conversion rights or equity warrants would normally convert into the underlying equity of the quoted company. The equity portion of the portfolio would principally invest in UK quoted companies, with a wide range of market capitalisations, which are anticipated to pay a growing stream of dividends.

Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Company’s direct investments, as described below. The Company will not enter into uncovered short positions.

Risk diversification
Portfolio risk is mitigated by investing in a diversified spread of investments. Investments in any one company shall not, at the time of acquisition, exceed 15% of the value of the Company’s investment portfolio. In the long term, it is expected that the Company’s investments will generally be a portfolio of around 75 or more different companies, most of which will represent individually no more than 5% of the value of the Company’s total investment portfolio, as at the time of acquisition.

The Company will not invest more than 10% of its gross assets, at the time of acquisition, in other listed closed-ended investment funds, whether managed by the Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.

Unquoted investments
The Company does not intend to invest in unquoted equity securities. The Company may invest in unquoted fixed income securities from time to time subject to prior Board approval.

Borrowing and gearing policy
The Company may use gearing, including bank borrowings and the use of derivative instruments such as contracts for differences. The Company may borrow (through bank facilities and derivative instruments) up to 15% of NAV (calculated at the time of borrowing).

Investment strategy
The Manager uses a bottom-up investment approach to selecting a diversified portfolio of equity and fixed income securities.

The investment approach can be described as active and universal, as the Company will not seek to replicate any benchmark and will target a significant proportion of issues from smaller quoted companies within an overall diversified portfolio. Potential investments are assessed against the key criteria, including yield, along with an assessment of the prospects of underlying corporate growth prospects, market positions, calibre of management and risk and financial resilience.

Dividend Policy
The dividend policy has been adjusted to make it more sustainable, taking the dividend in the first year after reorganisation, being the year ended 30 June 2014, which amounted to 20.7p and seeking to gradually grow it going forward. Any growth in the dividend beyond 20.7p will be reflected in the quantum of the fourth interim dividend.

Capital Structure
In June 2013 the capital structure of the Company was amended with 4,994,805 preference shares exchanged for 1,547,665 ordinary shares (the “Reorganisation”).

In addition, there are 1,717,565 fixed rate preference shares of 50p in issue, all of which are held by a wholly owned subsidiary of the Company. The fixed rate preference shares are non-voting, are entitled to receive a cumulative dividend of 0.01p per share per annum, and are entitled to receive their nominal value, 50p, on a distribution of assets or winding up. Preference shares are disclosed as equity in accordance with IAS 32.

On 29 June 2016, the Company sold for cash 32,500 ordinary shares previously held in Treasury, at a price of 363p per share (before expenses). As at 30 June 2016 and the date of this Annual Report, the Company’s share capital consists of 4,772,049 ordinary shares of 50p each. The Company holds no shares in Treasury. At general meetings of the Company, holders of ordinary shares are entitled to one vote on a show of hands and on a poll, to one vote for every share held.

Total Assets and Net Asset Value
The Group had total net assets of £16,991,639 and a NAV of 356.07p per ordinary share at 30 June 2016.

Business Model
The principal activity of the Company is the investment in equity securities of quoted UK companies with a wide range of market capitalisations, preference shares and prior charge securities with a view to achieving a high rate of income and capital growth over the medium term. The Company has been granted approval from HM Revenue & Customs (“HMRC”) as an investment trust under s1158/1159 of the Corporation Tax Act 2010 (“s1158/1159”) and will continue to be treated as an investment trust company, subject to there being no serious breaches of the conditions for approval.

The principal conditions that must be met for approval by HMRC as an investment trust for any given accounting period are that the Company’s business should consist of “investing in shares, land or other assets with the aim of spreading investment risk and giving members of the company the benefit of the results” and the Company must distribute a minimum of 85% of all its income as dividend payments. The Company must also not be a close company. The Directors are of the opinion that the Company has conducted its affairs for the year ended 30 June 2016 so as to be able to continue to qualify as an investment trust.

The Company’s status as an investment trust allows it to obtain an exemption from paying taxes on the profits made from the sale of its investments and all other net capital gains. Investment trusts offer a number of advantages for investors, including access to investment opportunities that might not be open to private investors and to professional stock selection skills at lower cost.

The Company owns Abport Limited, an investment dealing company, and New Centurion Trust Limited, a dormant investment company.

Principal Risks and Uncertainties
The management of the business and the execution of the Group’s strategy are subject to a number of risks.  A robust assessment of the principal risks to the Group has been carried out, including those that would threaten its business model, future performance, solvency and liquidity. A summary of the risk management and internal control processes can be found in the Corporate Governance Statement in the full Annual Report. The key business risks affecting the Group are:

(i) Investment decisions: the performance of the Group’s portfolio is dependent on a number of factors including, but not limited to the quality of initial investment decisions and the strategy and timing of sales;

(ii) Investment valuations: the valuation of the Group’s portfolio and opportunities for realisations depend to some extent on stock market conditions and interest rates; and

(iii) Macroeconomic environment for preference shares and prior charge securities: the environment for issuing of new preference shares and prior charge securities determines whether new issues become available, thus affecting the choice and scope of investment opportunities for the Group.

Risk management
Specific policies for managing risks are summarised below and have been applied throughout the period:

1. Market price risk
The Manager monitors the prices of financial instruments held by the Group on a regular basis. In addition, it is the Board’s policy to hold an appropriate spread of investments in the portfolio in order to reduce risks arising from investment decisions and investment valuations. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. Most of the equity investments held by the Group are listed on the London Stock Exchange.

2. Interest rate risk
In addition to the impact of the general investment climate, interest rate movements may specifically affect the fair value of investments in fixed interest securities. The Manager monitors the applicable interest rates and yields associated with the securities.

3. Liquidity risk
The Group’s assets mainly comprise readily realisable quoted securities that can be sold to meet funding commitments if necessary. Short term flexibility is achieved through the use of overdraft facilities.

Additional risks and uncertainties include:

Credit risk: The failure of a counterparty to a transaction to discharge its obligations under that transaction that could result in the Group suffering a loss. Normal delivery versus payment practice and review of counterparties and custodians by the Manager mean that this is not a significant risk.

Discount volatility: The Company’s shares may trade at a price which represents a discount to its underlying NAV.

Regulatory risk: The Company operates in an evolving regulatory environment and faces a number of regulatory risks. A breach of s1158/1159 would result in the Company being subject to capital gains tax on portfolio investments. Breaches of other regulations, including the Companies Act 2006, the UKLA Listing Rules, the UKLA Disclosure Guidance and Transparency Rules, or the Alternative Investment Fund Managers’ Directive, could lead to a detrimental outcome. Breaches of controls by service providers to the Company could also lead to reputational damage or loss. The Board monitors compliance with regulations, with reports from the Manager and the Administrator.

Protection of assets: The Group’s assets are protected by the use of an independent custodian, BNY Mellon. In addition, the Group operates clear internal controls to safeguard all assets.

These and other risks facing the Group are reviewed regularly by the Board.

Key Performance Indicators (“KPIs”)
The Board reviews performance by reference to a number of KPIs and considers that the most relevant KPIs are those that communicate the financial performance and strength of the Group as a whole. The Board and Manager monitor the following KPIs:

  • NAV performance relative to the FTSE All-Share Index (total return)
    The NAV per ordinary share at 30 June 2016 was 356.07p per share (2015: 389.34p). The total return of the NAV after adding back dividends paid was -2.9%. This compares with a total return on the FTSE All-Share Index of +2.2%.
  • Discount/premium of share price in relation to NAV
    Over the year to 30 June 2016, the Company’s share price moved from trading at a discount of 3.68% to a premium of 2.65%.
     
  • Ongoing Charges Ratio
    The Ongoing Charges Ratio for the year to 30 June 2016 amounted to 2.5%. The management fee for the year was reduced by £64,373 in order to achieve the maximum Ongoing Charges Ratio permitted under the Management Agreement, as explained below.

Management
The Group’s investments are managed by Miton Asset Management Limited (“Miton”).

The Company has a Manager with a distinctive philosophy

  • Miton is an independent fund management company quoted on AIM with an extensive shareholder base of major institutions and a particularly robust balance sheet.
  • Miton is distinctive from most other fund managers in that many of its funds do not use traditional benchmarks since they can bring unintentional risks that can impede the day-to-day managers’ ability to maximise absolute return in unsettled markets.
  • Through anticipating post credit boom trends, Miton proposes investment strategies that are set up with forthcoming trends in mind, rather than slavishly following the consensus.
  • Many of Miton’s funds have greater scope to manage volatility more closely than others, with an aim better to sustain its clients’ assets through market cycles.

Miton asks more of its managers
Miton believes that able fund managers are better placed to deliver for clients if they have wide ranging flexibility. Limiting the investment universe to a short list of benchmark stocks can be demotivating since the risk/reward ratio of the portfolio could be constrained unnecessarily. The best managers can take advantage of this wider flexibility better to moderate portfolio risk, as well as enhancing their clients’ returns through selecting the best from a wider range of potential investments.

In addition, Miton also places great emphasis on its fund managers doing their own analysis since it believes this ensures that they have greater conviction in subsequent investment decisions, and are less vulnerable to becoming panicky sellers when a share price moves adversely.

Details of the Manager
Miton has a team of fund managers researching the full universe of quoted UK stocks. The day-to-day management of the portfolio is carried out by Gervais Williams and Martin Turner, who research all quoted companies, and are particularly known for successfully investing in many of the smaller quoted stocks.

Gervais Williams
Gervais joined Miton in March 2011 as Managing Director of the Miton Group. He has been an equity portfolio manager since 1985, including 17 years as Head of UK Smaller Companies and Irish Equities at Gartmore. He won the Grant Thornton Investor of the Year Award in 2009 and 2010, and was awarded Fund Manager of the Year 2014 by What Investment?

Martin Turner
Martin joined Miton in May 2011. Martin and Gervais have had a close working relationship since 2004 and their complementary expertise and skills led to a series of successful companies being backed. Martin qualified as a Chartered Accountant with Arthur Andersen, and also has extensive experience at Rothschild, Merrill Lynch and Collins Stewart, where as Head of Small/Mid Cap Equities his role covered their research, sales and trading activities.

Management Arrangements
The Company appointed Miton Trust Managers Limited (“MTM” or “Manager”) as its Alternative Investment Fund Manager (“AIFM”) under an agreement dated 22 July 2014 (the “Management Agreement”). MTM has been approved as an AIFM by the UK’s Financial Conduct Authority (“FCA”). Miton Asset Management Limited has been appointed by MTM as Investment Manager to the Company pursuant to a delegation agreement.

Under the terms of the Management Agreement, the Manager has discretion to buy, sell, retain, exchange or otherwise deal in investment assets for the account of the Company.

The Manager is entitled to receive from the Company or any member of its subsidiaries in respect of its services provided under the Management Agreement, a management fee payable monthly in arrears calculated at the rate of one-twelfth of 1% per calendar month of the NAV for its services under the Management Agreement, save that its management fee will be reduced by such amount (being not more than the fees payable to the Manager in respect of any year (exclusive of VAT)) so as to seek to ensure that the Ongoing Charges Ratio of the Company does not exceed 2.5% per annum.

The Management Agreement is terminable by either the Manager or the Company giving to the other not less than six months’ written notice, such notice not to expire earlier than the second anniversary of commencement. The Management Agreement may be terminated earlier by the Company with immediate effect on the occurrence of certain events, including the liquidation of the Manager or appointment of a receiver or administrative receiver over the whole or any substantial part of the assets or undertaking of the Manager or a material breach by the Manager of the Management Agreement which is not remedied. The Company may also terminate the Management Agreement should Gervais Williams cease to be an employee of the Manager’s group and, within three months of his departure, is not replaced by a person whom the Company considers to be of equal or satisfactory standing. The Company may also terminate the Management Agreement if a continuation vote is not passed.

Environmental, Human Rights, Employee, Social and Community Issues
The Board consists entirely of non-executive Directors. Day-to-day management of the business is delegated to the Manager. As an investment trust, the Company has no direct impact on the community or the environment, and as such has no environmental, human rights, social or community policies. In carrying out its investment activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly. The Board comprises four male Directors. In relation to gender diversity considerations, whilst there are currently no female Directors of the Company, members of the Board are appointed on merit, against objective criteria set by the Board acting as the Nomination Committee.

On behalf of the Board

Sir David Thomson
Chairman

4 October 2016


Going Concern
At the forthcoming Annual General Meeting, shareholders will be asked to vote on the continuation of the Company as a closed-ended investment company. Should shareholders agree that the Company should continue to operate as an investment company, a similar ordinary resolution will be proposed at every annual general meeting thereafter.

The Directors believe that it is appropriate to adopt the going concern basis in preparing the financial statements as the assets of the Group consist mainly of securities which are readily realisable. The Directors are of the opinion that the Group has adequate resources to continue in operational existence for the foreseeable future. In arriving at this conclusion, the Directors have considered the liquidity of the portfolio and the Group’s ability to meet obligations as they fall due for a period of at least 12 months from the date that these financial statements were approved.

Viability Statement
The Directors have assessed the viability of the Company over a three year period, taking account of the Company’s position and the risks as set out in the Strategic Report.

The period assessed balances the long-term aims of the Company, the Board’s view that the success of the Company is best assessed over a longer time period and the inherent uncertainty of looking out for too long a period. During this period, the Company will put forward an ordinary resolution for the continuation of the Company, with the vote taking place at the forthcoming Annual General Meeting, and every year annual general meeting thereafter.

As part of its assessment of the viability of the Company, the Board has considered the principal risks and uncertainties and the impact on the Company of a significant fall in the value of its portfolio.

To provide this assessment, the Board has considered the Company’s financial position and its ability to liquidate its portfolio to meet its expenses or other liabilities as they fall due.

  • The Company invests largely in debt, preference shares and equity instruments issued by companies listed and traded on stock exchanges. These are traded, and whilst some may be less liquid than larger quoted companies, the portfolio is well diversified by both number of holdings and industry sector.
  • The expenses of the Company are predictable and modest in comparison with the assets in the portfolio. There are no commitments that would change that position.
  • The Ongoing Charges Ratio of the Company is capped at 2.5%.

In addition to considering the principal risks above and the financial position of the Company as described above, the Board has also considered the following further factors:

  • the Board and the Manager will continue to adopt a long-term view when making investments;
  • regulation will not increase to a level that makes the running of the Company uneconomical; and
  • the performance of the Company will be satisfactory and should performance be less than the Board deem acceptable it has powers to take appropriate action.

Accordingly, the Directors have formed the reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three years.

The full Annual Report contains the following statements regarding responsibility for the financial statements.


STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing this Annual Report and the financial statements in accordance with applicable United Kingdom law and regulations and those International Financial Reporting Standards (“IFRS”) adopted by the European Union and Article 4 of the International Accounting Standards (“IAS”). Company law requires the Directors to prepare financial statements for each financial period which present fairly the financial position of the Group and the financial performance and cash flows of the Group for that period.

In preparing those financial statements, the Directors are required to:

  • select suitable accounting policies and then apply them consistently;
  • make judgements and estimates that are reasonable and prudent;
  • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
  • state whether applicable IFRS have been followed, subject to any material departures disclosed and explained in the financial statements;
  • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business; and
  • provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations, and for ensuring that the Annual Report includes information required by the Listing Rules of the FCA.

The financial statements are published on the Company’s website, www.mitongroup.com/tic, which is maintained on behalf of the Company by the Manager. Under the Management Agreement, the Manager has agreed to maintain, host, manage and operate the Company’s website and to ensure that it is accurate and up-to-date and operated in accordance with applicable law. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and accordingly, the Auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom covering the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction.

We confirm that to the best of our knowledge:

  • the Group financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and
  • this Annual Report includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces.

The Directors consider that the Annual 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 position and performance, business model and strategy.

On behalf of the Board

Sir David Thomson
Chairman

4 October 2016


NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company’s statutory accounts for the years ended 30 June 2016 or 30 June 2015 but is derived from those accounts. Statutory accounts for the year ended 30 June 2015 have been delivered to the Registrar of Companies and statutory accounts for the year ended 30 June 2016 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor’s report can be found in the Company’s full Annual Report and Accounts atwww.mitongroup.com/tic.


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 June 2016

Year to 30 June 2016 Year to 30 June 2015
Revenue   Capital    Total    Revenue  Capital  Total 
Notes £   £    £    £  £  £ 
Realised gains/(losses) on investments 11 -   528,892    528,892    (596,101) (596,101)
Unrealised losses on investments held at fair value through profit or loss 11 -   (1,278,227)   (1,278,227)  (863,664) (863,664)
Movement in impairment provision on investments held as available for sale -         (72,680)   (72,680)   1,530,422  1,530,422 
Exchange gains on capital items -           1,845    1,845    2,934  2,934 
Investment income 2 1,085,970   -    1,085,970    1,248,030  1,248,030 
Investment management fee 3 (113,705)  -    (113,705)   (163,607) (163,607)
Other administrative expenses 4 (342,277)  -    (342,277)   (309,824) (309,824)
Return before finance costs and taxation 629,988   (820,170)   (190,182)   774,599  73,591  848,190 
Finance costs
Loan note interest -   -    -    (12,474) (12,474)

Return before taxation

629,988  

(820,170)  

(190,182)  

762,125 

73,591 

835,716 
Taxation 5 (995)  -    (995)   (486) (486)

Return after taxation

628,993  

(820,170)  

(191,177)  

761,639 

73,591 

835,230 
Other comprehensive income
Movement in unrealised appreciation on investments held as available for sale
Recognised in equity -   (151,492)   (151,492)   282,377  282,377 
Recognised in return after taxation -   (188,607)   (188,607)   (316,308) (316,308)
Other comprehensive income after taxation -   (340,099)   (340,099)   (33,931) (33,931)

Total comprehensive income after taxation

628,993  

(1,160,269)  

(531,276)  

761,639 

39,660 

801,299 
Return after taxation per 50p ordinary share
Basic and diluted 6         13.27p (17.30)p (4.03)p 16.07p 1.55p 17.62p
Return on total comprehensive income after taxation per 50p ordinary share
Basic and diluted 6 13.27p (24.48)p (11.21)p 16.07p 0.84p 16.91p

The total column of this statement is the Consolidated Statement of Comprehensive Income of the Group prepared in accordance with IFRS. The supplementary revenue and capital columns are prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies (“AIC SORP”).

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period.

The notes below form part of these financial statements.


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 June 2016


Issued
capital
£

Share
premium
£
Capital
redemption
reserve
£

Revaluation 
reserve 
£ 

Capital 
reserve 
£ 

Revenue 
account 
£ 


Total 
£ 
Balance at
1 July 2015
2,386,025 4,453,903 2,408,820 2,340,947  6,858,154  5,121  18,452,970 
Total comprehensive income
Net return for the period - - - (820,170) 628,993  (191,177)
Movement in unrealised appreciation on investments held as available for sale:
- Recognised in equity - - - (151,492) (151,492)
- Recognised in return after taxation - - - (188,607) (188,607)
Transactions with shareholders recorded directly to equity
Sale of Treasury shares - - - 117,384  117,384 
Ordinary dividends paid - - - (1,047,439) (1,047,439)
Balance at
30 June 2016
2,386,025 4,453,903 2,408,820 2,000,848   6,155,368  (413,325)  16,991,639 
Balance at
1 July 2014
2,386,025 4,453,903 2,408,820 2,374,878 6,784,563 285,104 18,693,293
Total comprehensive income
Net return for the period - - - - 73,591 761,639 835,230
Movement in unrealised appreciation on investments held as available for sale:
- Recognised in equity - - - 282,377 - - 282,377
- Recognised in return after taxation - - - (316,308) - - (316,308)
Transactions with shareholders recorded directly to equity
Ordinary dividends paid - - - - - (1,041,622) (1,041,622)
Balance at
30 June 2015

2,386,025

4,453,903

2,408,820

2,340,947

6,858,154

5,121

18,452,970

The notes below form part of these financial statements.


COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 30 June 2016


Issued ordinary share capital
£

Issued preference share
capital
£



Share
premium
£


Capital
redemption
reserve
£



Revaluation 
reserve 
£ 



Capital 
reserve 
£ 



Revenue 
account 
£ 




Total 
£ 
Balance at
1 July 2015
2,386,025 858,783 4,453,903 2,408,820 2,337,024 4,316,659  2,525,031  19,286,245 
Total comprehensive income
Net return for the period - - - - (812,820) 587,194 (225,626)
Movement in unrealised appreciation on investments held as available for sale:
- Recognised in equity - - - - (159,771) (159,771)
- Recognised in return after taxation - - - -    (187,677)      (187,677)
Transactions with shareholders recorded directly to equity
Sale of Treasury shares - - - - 117,384  117,384 
Ordinary dividends paid - - - - (1,047,439) (1,047,439)
Preference share dividends paid - - - - (174) (174)
Balance at
30 June 2016
2,386,025 858,783 4,453,903 2,408,820 1,989,576  3,621,223  2,064,612 17,782,942 
Restated Balance at
1 July 2014
2,386,025 858,783 4,453,903 2,408,820 2,381,595 4,232,428 2,805,672 19,527,226
Total comprehensive income
Net return for the period - - - - 84,231 761,153 845,384
Movement in unrealised appreciation on investments held as available for sale:
- Recognised in equity - - - 286,197 - - 286,197
- Recognised in return after taxation - - - (330,768) - - (330,768)
Transactions with shareholders recorded directly to equity
Ordinary dividends paid - - - - - (1,041,622) (1,041,622)
Preference share dividends paid - - - -  - - (172) (172)
Restated Balance at
30 June 2015
2,386,025 858,783 4,453,903 2,408,820 2,337,024 4,316,659 2,525,031 19,286,245

The notes below form part of these financial statements.


CONSOLIDATED BALANCE SHEET
As at 30 June 2016



Note
Group  
2016  
£  
Group 
2015 
£
Non-current assets
Investments 11 16,410,045   17,820,229
Current assets
Trade and other receivables 14 425,351   308,741
Investments available for sale 1,952   1,662
Cash and bank balances 664,859   512,856
1,092,162   823,259
Current liabilities
Trade and other payables 15 510,568   190,518
510,568   190,518
Net current assets 581,594   632,741
Net assets 16,991,639   18,452,970
Capital and reserves
Issued ordinary share capital 8 2,386,025   2,386,025
Share premium 4,453,903   4,453,903
Capital redemption reserve 2,408,820   2,408,820
Revaluation reserve 2,000,848   2,340,947
Capital reserve 6,155,368   6,858,154
Revenue reserve (413,325)  5,121
Shareholders’ funds 10 16,991,639   18,452,970
NAV per 50p ordinary share 356.07p 389.34p

These financial statements were approved by the Board of The Investment Company PLC on 4 October 2016 and were signed on its behalf by:

Sir David Thomson
Chairman

Company Number: 4205

The notes below form part of these financial statements.


COMPANY BALANCE SHEET
As at 30 June 2016




Note

Company
2016
£
Restated
Company
2015
£
Restated
Company
2014
£
Non-current assets
Investments 11 16,410,045 17,820,229 17,486,703
Investments in subsidiaries 12 862,656 862,656 862,656
17,272,701 18,682,885 18,349,359
Current assets
Trade and other receivables 14 494,662 317,187 171,703
Investments available for sale - - -
Cash and bank balances 521,960 507,373 1,711,321
1,016,622 824,560 1,883,024
Current liabilities
Trade and other payables 15 506,381 221,200 339,457
5% Loan notes maturing 2015 - - 365,700
506,381 221,200 705,157
Net current assets 510,241 603,360 1,177,867
Net assets 17,782,942 19,286,245 19,527,226
Capital and reserves
Issued ordinary share capital 8 2,386,025 2,386,025 2,386,025
Issued preference share capital 9 858,783 858,783 858,783
Share premium 4,453,903 4,453,903 4,453,903
Capital redemption reserve 2,408,820 2,408,820 2,408,820
Revaluation reserve 1,989,576 2,337,024 2,381,595
Capital reserve 3,621,223 4,316,659 4,232,428
Revenue reserve 2,064,612 2,525,031 2,805,672
Shareholders’ funds 10 17,782,942 19,286,245 19,527,226

These financial statements were approved by the Board of The Investment Company PLC on 4 October 2016 and were signed on its behalf by:

Sir David Thomson
Chairman

Company Number: 4205

The notes below form part of these financial statements.


CONSOLIDATED AND COMPANY CASH FLOW STATEMENTS
For the year ended 30 June 2016

Group Company
Year to 
30 June 
2016 
£ 
Year to 
30 June 
2015 
£
Year to 
30 June 
2016 
£ 
Year to 
30 June 
2015 
£
Cash flows from operating activities
Cash received from investments     1,087,015  1,145,391 1,034,428  1,134,684
Interest received 154 134
Sundry income          627  72,274 627  72,274
Investment management fees paid      (121,053)    (265,255) (121,053) (265,255)
Cash paid to and on behalf of employees         (36,111) (35,466) (36,111) (35,466)
Other cash payments       (319,804) (310,345) (309,433) (298,630)
Withholding tax paid             (995) (486) (995) (486)
Net cash inflow from operating activities
609,679 

606,267

567,463 

607,255
Cash flows from financing activities
Loan note interest paid (17,033) (17,033)
Loan notes redeemed (365,700) (365,700)
Dividends paid on ordinary shares (1,047,439) (1,053,128) (1,047,439) (1,053,128)
Net cash outflow from financing activities (1,047,439) (1,435,861) (1,047,439) (1,435,861)
Cash flows from investing activities
Purchase of investments (2,252,996) (3,152,010) (2,252,996) (3,152,010)
Sale of investments 2,840,914  2,737,210 2,840,914  2,737,210
Loans from subsidiaries - 36,523
Loans to subsidiaries - (95,200) -
Net cash inflow/(outflow) from investing activities 587,918  (414,800) 492,718  (378,277)
Net increase/(decrease) in cash and cash equivalents 150,158  (1,244,394) 12,742  (1,206,883)
Reconciliation of net cash flow to movement in net cash
Increase/(decrease) in cash      150,158  (1,244,394) 12,742  (1,206,883)
Exchange rate movements            1,845  2,935 1,845  2,935
Loan notes redeemed 365,700 365,700
Increase/(decrease) in net cash       152,003  (875,759) 14,587  (838,248)
Net cash at start of period     512,856  1,388,615 507,373  1,345,621
Net cash at end of period        664,859  512,856 521,960  507,373
Analysis of net cash
Cash and bank balances 664,859 512,856 521,960 507,373
664,859 512,856 521,960 507,373

The notes below form part of these financial statements.


NOTES TO THE FINANCIAL STATEMENTS
At 30 June 2016

1 Accounting Policies

(a) Basis of preparation
The Investment Company plc is a public limited company incorporated and registered in England and Wales.

The consolidated financial statements, which comprise the audited results of the Company and its wholly owned subsidiaries, Abport Limited and New Centurion Trust Limited (together referred to as the ‘‘Group’’), for the year ended 30 June 2016 have been prepared under the historical cost basis, as modified by the measurement at fair value of investments, and in conformity with IFRS as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and the Companies Act 2006 applicable to companies reporting under IFRS.

The Company has been approved as an investment trust by HMRC under s1158/1159. As a result the consolidated financial statements have also been prepared in accordance with the AIC SORP for the financial statements of investment trust companies and venture capital trusts, except to any extent where it is not consistent with the requirements of IFRS.

The financial statements have been prepared on a going concern basis, being a period of at least 12 months from the date that these financial statements were approved, and on the basis that approval as an investment trust company will continue to be met.

The Directors have made an assessment of the Group’s ability to continue as a going concern and are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern, having taken into account the liquidity of the Group’s investment portfolio and the Group’s financial position in respect of its cash flows, borrowing facilities and investment commitments.  The Group, therefore, continues to adopt the going concern basis in preparing its consolidated financial statements.

The financial statements are presented in Sterling, which is the Group’s functional currency as the UK is the primary environment in which it operates.

(b) Basis of consolidation
The subsidiaries are consolidated from the date of their acquisition, being the date on which control is obtained, and will continue to be consolidated until the date that such control ceases. Control comprises being exposed, or having rights, to variable returns through its power over the investee. The financial statements of the subsidiaries are prepared for the same reporting year as the parent Company, using consistent accounting policies. All inter-company balances and transactions, including unrealised profits arising from them are eliminated.

As permitted by Section 408 of the Companies Act 2006, the Company has not presented its own Income Statement. The amount of the Company's return for the financial year dealt with in the financial statements of the Group is a loss after tax of £191,177 (2015: profit after tax of £845,384).

(c)  Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment of business, being investment business. The Group primarily invests in companies listed in the UK.

(d) Critical accounting judgements and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires judgements, estimates and assumptions that affect the application of policies and the reported amounts in the Balance Sheet, the Income Statement and the disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future period if the revision affects both current and future periods.

The unquoted investments are valued by reference to valuation techniques approved by the Directors and in accordance with the International Private Equity and Venture Capital Valuation (‘IPEVC’) guidelines.

(e) Cash and cash equivalents
Cash comprises cash in hand, overdrafts and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

For the purpose of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts when applicable.

(f) Foreign currency
Transactions denominated in foreign currencies are converted to Sterling at the actual exchange rate as at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are reported at the rate of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the capital reserve or the revenue account depending on whether the gain or loss is of a capital or revenue nature.

(g) Income
Dividends received from UK registered companies are accounted for net of imputed tax credits. Dividends from overseas companies are shown gross of any non-recoverable withholding taxes which are described separately in the Consolidated Statement of Comprehensive Income.

Dividends receivable on quoted equity shares are taken to revenue on an ex-dividend basis. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company’s right to receive payment is established. Fixed returns on non-equity shares are recognised on a time-apportioned basis.

Special dividends are taken to revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the Board reviews all relevant information as to the reasons for the sources of the dividend on a case-by-case basis.

When the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend forgone is recognised as income. Any excess in the value of the cash dividend is recognised in the capital column.

Where, before recognition of dividend income is due, there is any reasonable doubt that a return will actually be received, for example as a consequence of the investee company lacking distributable reserves, the recognition of the return is deferred until the doubt is removed.

All other income is accounted for on a time-apportioned accruals basis using the effective interest rate method and is recognised in the Consolidated Statement of Comprehensive Income.

(h) Expenses and finance costs
All expenses and finance costs are accounted for on an accruals basis.

Expenses incurred directly in relation to placings and offers for subscription of shares are deducted from equity and charged to the share premium account.

(i) Taxation
Deferred tax is provided on an undiscounted basis on all timing differences that have originated, but not reversed, by the Balance Sheet date based on tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax assets are only recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of timing differences can be deducted. In line with the recommendations of the AIC SORP, the allocation method used to calculate the tax relief on expenses charged to capital is the “marginal” basis. Under this basis, if taxable income is capable of being offset entirely by expenses charged through the revenue account, then no tax relief is transferred to the capital account.

No taxation liability arises on gains from sales of fixed asset investments by the Group by virtue of its investment trust status. However, the net revenue (excluding UK dividend income) accruing to the Group is liable to corporation tax at the prevailing rates.

(j) Dividends
Ordinary dividends are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the Statement of Changes in Equity. Ordinary dividends declared and approved by the Company after the Balance Sheet date have not been recognised as a liability of the Company at the Balance Sheet date.

(k) Earnings per ordinary share
The Group calculates both basic and diluted earnings per ordinary share using the weighted average number of shares outstanding during the period.

(l) Investments
The Group’s business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. The portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Group’s Board of Directors.

Investments are recognised and derecognised on the trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned.

Investments are initially recognised at cost, being the fair value of the consideration given. After initial recognition, investments are measured at fair value.

All investments held that have been purchased by the Group since obtaining approval as an investment trust from 1 July 2013 are classified as at “fair value through profit or loss”. Realised and unrealised gains and losses on investments classified as at “fair value through profit or loss” are recognised in the Consolidated Statement of Comprehensive Income and allocated to the Capital reserve.

Investments held at 30 June 2016 which were purchased prior to 1 July 2013 are classified as ‘‘assets available for sale”. These investments have not been reclassified as at “fair value through profit or loss” in accordance with IFRS 39 Financial Instruments Recognition and Measurement. Realised gains and losses and movement in impairment provision on investments classified as “assets available for sale” are recognised in the Consolidated Statement of Comprehensive Income and allocated to the Capital reserve. Movement in unrealised appreciation on investments classified as “assets available for sale” is recognised in the Revaluation reserve.

All investments for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy in note 11, described as follows, based on the lowest significant applicable input:

Level 1 reflects financial instruments quoted in an active market.

Level 2 reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets.

Level 3 reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data. For investments that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing the categorisation (based on the lowest significant applicable input) at the date of the event that caused the transfer.

For investments actively traded in organised financial markets, fair value is generally determined by reference to quoted market bid prices of closing prices for SETSqx (London Stock Exchange’s electronic trading service quotes and crosses) stocks sourced from the London Stock Exchange on the Balance Sheet date, without adjustment for transaction costs necessary to realise the asset.

Unlisted stocks are reviewed and valued by the Board on a regular basis and the fair value is determined based on estimates using present values or other valuation techniques.

The fair value of financial assets that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques used include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity-specific inputs.

(m) Derivative instruments – held for trading
Derivatives, including Index Put options, which are listed investments are classified as financial assets or liabilities held for trading. They are initially recorded at cost (being the premium paid to purchase the option) and are subsequently valued at fair value at the close of business at the year end and included in fixed assets or current assets/liabilities depending on their maturity date.

Changes in the fair value of derivative instruments are recognised as they arise in the Consolidated Statement of Comprehensive Income.

(n) Investments in subsidiaries
Investments in subsidiaries are stated at cost less provision for diminution in value.

(o) Impairment review
At each Balance Sheet date, a review is carried out to assess whether there is any objective evidence that the Group’s available for trading financial assets have become impaired. Where such evidence exists, the amount of any impairment loss is recognised immediately in the Consolidated Statement of Comprehensive Income. Any excess of the impairment loss over the amount previously recognised in equity is recognised in the Consolidated Statement of Comprehensive Income.

If, in a subsequent period, the fair value of available for sale financial assets increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed and the amount of the reversal is recognised in profit or loss where it relates to a debt instrument.

(p) Reserves
Issued preference share capital
The fixed rate preference shares are non-voting, are entitled to receive a cumulative dividend of 0.01p per share per annum, and are entitled to receive their nominal value, 50p, on a distribution of assets or a winding up. Preference shares are disclosed as capital and reserves in accordance with IAS 32 (Financial Instruments: Disclosure and Presentation).

Capital reserve
The following are accounted for within the capital reserve:

  • gains and losses on the realisation of investments;

  • net movement arising from changes in the fair value of investments held and classified as at “fair value through profit or loss” that can be readily converted to cash without accepting adverse terms;

  • net movement in the impairment provision of investments available for sale; and

  • net movement from changes in the fair value of derivative financial instruments.

Revaluation reserve
The revaluation reserve represents the accumulated unrealised gains on the Group’s held-for trading investments.

(q) Accounting developments
The accounting policies adopted are consistent with those of the previous financial year. The following accounting standards and their amendments were in issue at the period end but will not be in effect until after this financial year. We are still considering the impact these Accounting Standards will have on the financial statements.

International Financial Reporting Standards Effective date
IFRS 7 Financial Instruments (IFRS 9 Disclosures) 1 January 2018
IFRS 9 Financial Instruments 1 January 2018
IFRS 15 Revenue from Contracts with Customers 1 January 2018
IFRS 16 Leases 1 January 2019


2 Income

Year ended
30 June 2016
£
Year ended
30 June 2015
£
Income from investments:
UK dividends 547,381 525,521
Un-franked dividend income 171,642 276,399
UK fixed interest 313,733 362,877
1,032,756 1,164,797
Other income:
Bank deposit interest - 154
Sundry income - 66,750
Underwriting commission 627 5,524
Net dealing gains of subsidiaries 52,587 10,805
Total income 1,085,970 1,248,030


3 Investment Management fee

Year ended
30 June 2016
£
Year ended
30 June 2015
£
Investment Management fee 113,705 163,607

Under the terms of the Management Agreement, the Manager is entitled to receive from the Company or any member of the Company in respect of its services provided under this Agreement, a management fee payable monthly in arrears equal to one-twelfth of 1% per calendar month of the NAV of the Company. For these purposes, the NAV shall be calculated as at the last business day of each month and is subject to the Ongoing Charges Ratio of the Company not exceeding 2.5% per annum in respect of any completed financial year.

At 30 June 2016 an amount of £7,255 (2015: £14,603) was outstanding and due to the Manager.


4 Other Expenses

Year ended
30 June 2016
£
Year ended
30 June 2015
£
Administration and secretarial services 112,041 83,545
Auditors’ remuneration for:
-  audit of the Group's financial statements 26,750 28,450
Directors’ remuneration (see the Directors’ Remuneration Report in the full Annual Report) 58,000 56,000
Salaries 14,000 14,000
Pension costs 12,107 11,563
Various other expenses 119,379 116,266
342,277 309,824

The average number of employees as at 30 June 2016 was one (2015: one).

Their aggregate remuneration comprised:

2016 
£ 
2015 
£
Staff costs
Wages and salaries 14,000  14,000
Social security costs -
Total 14,000  14,000
Pension costs
Pension payments 22,107  21,563
Pension provision release (10,000) (10,000)
Total 12,107  11,563

The Company has a provision of £70,485 (2015: £80,489) in respect of future pension payments.  The assets are held by the Company.

Key management personnel are considered to be the same as the non-executive Directors.


5 Taxation

Year ended
30 June 2016
Year ended
30 June 2015
Revenue
£
Capital
£
Total
£
Revenue
£
Capital
£
Total
£
Overseas taxation suffered 995 - 995 486 - 486

   

Year ended
30 June 2016
Year ended
30 June 2015
Revenue 
£ 
Capital 
£ 
Total 
£ 
Revenue 
£
Capital 
£
Total 
£
Return on ordinary activities 629,988  (820,170) (190,182) 762,125 73,591 835,716
                         
Theoretical tax at UK corporation tax rate of 20% (2015: 20.75%) 125,998  (164,034) (38,036) 158,141 15,270 173,411
Effects of:
UK dividends that are not taxable (109,033) (109,033) (109,046) - (109,046)
Overseas dividends that are not taxable (34,772) (34,772) (57,353) - (57,353)
Non-taxable investment losses 164,034  164,034  - 384,449 384,449
Movement in impairment provision not deductible for tax purposes - (399,719) (399,719)
Overseas taxation suffered 995  995  486 - 486
Expenses not deductible for tax 17,807  17,807  8,258 - 8,258
995  995  486 - 486

Factors that may affect future tax charges
The Company has excess management expenses of £1,423,322 (2015: £1,333,798). It is unlikely that the Company will generate sufficient taxable income in the future to use these expenses to reduce future tax charges and therefore no deferred tax asset has been recognised.

Due to the Company's status as an investment trust and the intention to continue meeting the conditions required to obtain approval as an investment trust in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.


6 Return per Ordinary Share

Year ended
30 June 2016
Year ended
30 June 2015
Revenue  Capital   Total   Revenue Capital Total
Return after taxation
Return attributable to ordinary shareholders (£) 628,993  (820,170)  (191,177)  761,639 73,591 835,230
Weighted average number of ordinary shares in issue (excluding shares held in Treasury) 4,739,727  4,739,549
Return per ordinary share (pence) 13.27p (17.30)p (4.03)p 16.07p 1.55p 17.62p

The return on total comprehensive income per ordinary share has been calculated to enable comparison of the returns per share shown in the annual reports of other investment trust companies. A reconciliation is shown below:

Year ended
30 June 2016
Year ended
30 June 2015
Revenue   Capital   Total    Revenue Capital Total 
Return on total comprehensive income
Return attributable to ordinary shareholders (£) 628,993   (820,170)  (191,177)  761,639 73,591 835,230 
Add other comprehensive income recognised in equity (£) -   (151,492)  (151,492)  - 282,377 282,377 
Add other comprehensive income recognised in profit and loss (£) -   (188,607)  (188,607)  -   (316,308) (316,308)
Return attributable to ordinary shareholders (£) 628,993  (1,160,269)  (531,276) 761,639 39,660 801,299
Weighted average number of ordinary shares in issue (excluding shares held in Treasury) 4,739,727 

 
4,739,549
Return per ordinary share (pence) 13.27p (24.48)p (11.21)p 16.07p 0.84p 16.91p


7 Dividends per Ordinary Share

Year ended
30 June 2016
£
Year ended 
30 June 2015 
£
Unclaimed dividends in respect of prior periods - (11,506)
In respect of the prior period:
Fourth interim dividend 7.10p (2015: 5.72p) 336,508 271,102
In respect of the year under review:
First interim 5.00p (2015: 5.50p) 236,977 260,676
Second interim dividend 5.00p (2015: 5.50p) 236,977 260,675
Third interim dividend 5.00p (2015: 5.50p) 236,977 260,675
1,047,439 1,041,622
Dividend declared in respect of the year under review:
Fourth interim dividend 5.70p (2015: 7.10p) 272,007 338,816


8 Issued Ordinary Share Capital

Group and Company
2016
Group and Company
2015
Number £ Number £
Ordinary shares of 50p each 4,772,049 2,386,025 4,772,049 2,386,025

The ordinary shares entitle the holders to receive all ordinary dividends and all remaining assets on a winding up, after the fixed rate preference shares have been satisfied in full.

The Company does not hold any ordinary shares in Treasury (2015: 32,500).


9 Issued Preference Share Capital

Group Restated
Company
2016 2015 2016 2015
Issued preference share capital - - 858,783 858,783
- - 858,783 858,783

The 1,717,565 fixed rate preference shares of 50p each are non-voting, entitled to receive a cumulative dividend of 0.01p per share per annum, and are entitled to receive their nominal value, 50p, on a distribution of assets or a winding up. The whole of the issue is held by New Centurion Trust Limited, a wholly owned subsidiary of the Company.

During the year the Directors have reappraised the presentation of these preference shares, in the accounts of the Company, and on balance have resolved that they are more appropriately treated as equity. In the prior year they were disclosed as a non-current liability and the comparative information for the June 2014 Balance Sheet, being the earliest prior period presented, has accordingly been restated. This change has no impact on the consolidated accounts and the Group NAV and earnings per share.

The Directors do not consider the fair values of the Company’s financial instruments to be significantly different from the carrying values.


10 Net Asset Value per Ordinary Share

The NAV per ordinary share is calculated as follows:

2016 
£ 
2015 
£
Net assets 16,991,639  18,452,970
Ordinary shares in issue, excluding own shares held in Treasury
4,772,049 

4,739,549
NAV per ordinary share 356.07p 389.34p

The underlying investments of the wholly owned subsidiary New Centurion Trust Limited comprise issued preference share capital, as discussed in note 9, in the Company and, being effectively eliminated on consolidation, the valuation thereof does not impact the NAV attributable to ordinary shareholders.


11 Investments

Group Company
2016 
£ 
2015 
£
2016 
£ 
2015 
£
Available for sale 8,056,096  8,659,711 8,056,096  8,659,711
At fair value through profit and loss 8,353,949  9,160,518 8,353,949  9,160,518
Total investments designated at fair value 16,410,045  17,820,229 16,410,045  17,820,229
Investments available for sale Group Company
2016 
£ 
2015 
£
2016 
£ 
2015 
£
Opening book cost 7,117,829 8,820,454 7,175,542 8,917,129
Opening net investment holding gains/(losses) 1,541,882 45,391 1,484,169  (51,284)
Total investments designated as available for sale 8,659,711 8,865,845 8,659,711 8,865,845
Movements in the period:
Purchases at cost - -
Sales - proceeds (374,663) (920,806) (374,663) (920,806)
          - gains/(losses) on sales 183,827  (781,819) 181,732  (820,781)
Increase/(decrease) in investment holding gains (412,779) 1,496,491 (410,684) 1,535,453
Closing valuation 8,056,096 8,659,711 8,056,096 8,659,711
Closing book cost 6,926,993 7,117,829 6,982,611 7,175,542
Closing net investment holding gains 1,129,103 1,541,882 1,073,485 1,484,169
8,056,096 8,659,711 8,056,096 8,659,711

 
Analysis of changes in investment holding gains
Movement in impairment provision (72,680) 1,530,422 (72,680) 1,530,422
Recognised in equity (151,492) 282,377 (151,492) 282,377
Recognised in return after taxation (188,607) (316,308) (188,607) (316,308)
Movement in sales to parent company - 2,095  38,962
(412,779) 1,496,491 (410,684) 1,535,453

   

Investments held at fair value through profit and loss
Group

Company
2016 
£ 
2015 
£
2016 
£ 
2015 
£
Opening book cost 9,502,059  8,098,735 9,502,059  8,098,735
Opening net investment holding (losses)/gains (341,541) 522,123 (341,541) 522,123
Total investments designated at fair value 9,160,518  8,620,858 9,160,518  8,620,858
Movements in the period:
Purchases at cost 2,592,167  3,152,010 2,592,167  3,152,010
Sales - proceeds (2,465,574) (1,934,404) (2,465,574) (1,934,404)
          - gains on sales 345,065  185,718 345,065  185,718
Increase in net investment holding losses (1,278,227) (863,664) (1,278,227) (863,664)
Closing valuation 8,353,949  9,160,518 8,353,949  9,160,518
Closing book cost 9,973,717  9,502,059 9,973,717  9,502,059
Closing net investment holding losses (1,619,768) (341,541) (1,619,768) (341,541)
8,353,949  9,160,518 8,353,949  9,160,518

   

Group
Year ended
Company
Year ended
30 June 2016 
£ 
30 June 2015 
£
30 June 2016 
£ 
30 June 2015 
£
Transaction costs
Costs on acquisitions 1,336  7,441 1,336  7,441
Costs on disposals 4,231  3,973 3,694  3,973

5,567 

11,414

5,030 

11,414
Group
Year ended
Company
Year ended
30 June 2016 
£ 
30 June 2015 
£
30 June 2016 
£ 
30 June 2015 
£
Analysis of capital gains
Gains/(losses) on sale of investments 528,892  (596,101) 526,797  (635,063)
Movement in investment holding (losses)/gains (1,691,006) 632,827 (1,688,911) 671,789
(1,162,114) 36,726 (1,162,114) 36,726

Fair Value Hierarchy

IFRS 13 requires classification of financial instruments measured at fair value at one of three levels according to the relative reliability of the inputs used to estimate the fair values.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset as follows:

Level 1 – valued using quoted prices, unadjusted in active markets for identical assets or liabilities.

Level 2 – valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted prices included in level 1.

Level 3 – valued by reference to valuation techniques using inputs that are not based on observable market data or the asset or liability.

The table below sets out fair value measurements of financial instruments as at 30 June 2016, by the level in the fair value hierarchy into which the fair value measurement is categorised.

At 30 June 2016 Level 1
£
Level 2
£
Level 3
£
Total
£
Fixed asset investments held by the Company 11,309,018 395,902 4,705,125 16,410,045
Current asset investments held by a trading subsidiary 1,868 84 - 1,952
11,310,886 395,986 4,705,125 16,411,997
At 30 June 2015 Level 1
£
Level 2
£
Level 3
£
Total
£
Fixed asset investments held by the Company 12,648,728 398,853 4,772,648 17,820,229
Current asset investments held by a trading subsidiary 1,662 - - 1,662
12,650,390 398,853 4,772,648 17,821,891

Valuation process for Level 3 investments

Investments classified within level 3 have unobservable inputs. Level 3 investments can typically include unlisted equity and corporate debt securities and over the counter (“OTC”) derivative instruments. As observable prices are not available for these securities, the Group has used valuation techniques to derive the fair value. In respect of the unquoted investments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with IPEVC Guidelines. New investments are initially carried at cost, for a limited period, being the price of the most recent investment in the investee. This is in accordance with IPEVC Guidelines as the cost of recent investments will provide a good indication of fair value. IFRS 13 defines fair value as 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 (i.e. exit price).

The unobservable inputs include consideration of anticipated return of capital, expected future cashflows and the impact of market conditions. The Directors have considered these values and have determined valuations based upon this information.

The values, inputs and variations are reviewed on a regular basis. This includes risks, the return of capital, cashflows and liquidity.

The table below presents the movement in level 3 investments that were accounted for at fair value for the year ending 30 June 2016.

Year ended 30 June 2016
Group 
£ 
Company 
£ 
Opening balance 4,772,648 3,225,201 
Movement in impairment provision on investments available for sale     (47,788)       129,857
Movement in unrealised appreciation on investments available for sale recognised in equity       4,340         82,538
Movement in unrealised appreciation on investments available for sale recognised in return after taxation       930         28,211
Purchases at cost     604,305       813,065 
Movement in unrealised gains on investments at fair value through profit or loss 2,808  2,808 
Realised loss       (50,578)       (52,671)
Sales proceeds (581,540) (581,540)
Closing balance 4,705,125  4,705,125 


12 Investments in Subsidiaries

Company
2016 
£ 
2015 
£
At cost 5,410,552  5,410,552
Provision for diminution in value (4,547,896) (4,547,896)
At cost 862,656  862,656

At 30 June 2016, the Company held interests in the following subsidiary companies:


Country of
Incorporation
% share
of capital
held
% share
of voting
rights

Nature of
business

Abport Limited

England

100%

100%
Investment dealing company
New Centurion Trust Limited
England

100%

100%
Investment holding company (dormant)


13 Substantial Share Interests

The Company has notified interests in 3% or more of the voting rights of the following companies:

Company % share of voting rights
Associated British Engineering 4.88
Coral Products 3.03


14 Trade and Other Receivables

Group Company
2016
£
2015
£
2016
£
2015
£
Amount due from subsidiaries - - 69,311 8,446
Accrued income 71,707 105,542 71,707 105,542
Due from brokers 234,707         118,000 234,707          118,000
Dividends receivable 109,479 77,579 109,479 77,579
Taxation recoverable 2,371 2,108 2,371 2,108
Other receivables 7,087 5,512 7,087 5,512
425,351 308,741 494,662 317,187

The carrying amount of trade receivables approximates to their fair value. Trade and other receivables are not past due at 30 June 2016.


15 Trade and Other Payables

Group Company
2016
£
2015
£
2016
£
2015
£
Preference dividends payable to the Company’s wholly owned subsidiary - - 518 344
Amount due to subsidiaries - - - 34,335
Due to brokers 339,170 - 339,170 -
Investment management fees 7,255 14,603 7,255 14,603
Other trade payables and accruals 164,143 175,915 159,438 171,918
510,568 190,518 506,381 221,200


16 Analysis of Financial Assets and Liabilities

Investment Objective and Policy
The investment objective of the Group is to generate income and capital growth over the medium term. The Group’s investing activities in pursuit of its investment objective involve certain inherent risks.

The Group’s financial instruments comprise investments in fixed interest securities and prior charge investments, borrowings for investment purposes, cash balances and debtors and creditors that arise directly from its operations.

Risks
The risks identified arising from the Group’s financial instruments are market risk (which comprises market price risk and interest rate risk, liquidity risk and credit and counterparty risk). The Group may enter into derivative contracts to manage risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below.

Market risk
Market risk arises mainly from uncertainty about future prices of financial instruments used in the Group’s business. It represents the potential loss the Group might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Group assesses the exposure to market risk when making each investment decision and these risks are monitored by the Manager on a regular basis and the Board at quarterly meetings with the Manager.

(i) Market price risk
Market price risk (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.

The Board manages the risks inherent in the investment portfolio by ensuring full and timely reporting of relevant information from the Manager. Investment performance and exposure are reviewed at each Board meeting.

The Group invests in other funds and is susceptible to market price risk arising from uncertainties about future values of those investee funds. The Manager makes investment decisions after an extensive assessment of the underlying fund, its strategy and the overall quality of the underlying fund’s manager. The Group’s policy requires the Manager to complete a full reassessment of each of the investee funds on a quarterly basis and track the performance of each investee fund on a weekly basis.

The Group’s investment restrictions prohibit it from investing more than 20% of its assets in any one investee fund.

The direct impact of a 5% movement in the value of the portfolio investments and current asset investments amounts to £820,599 (2015: £891,095), being 17p (2015: 19p) per ordinary share. The analysis is based on closing balances only and is not representative of the year as a whole.

The Group mainly invests in equities of other entities that are publicly traded on the London Stock Exchange and is therefore subject to movements in the FTSE index.

2016
£
2015
£
Securities available for sale 8,058,048 8,661,373
Securities at fair value through profit and loss 8,353,949 9,160,518
Total investment 16,411,997 17,821,891
2016
£
2015
£
Securities available for sale 402,902 433,069
Securities at fair value through profit and loss 417,697 458,026
Effect on post-tax profit for the year and on equity 820,599 891,095

(ii) Interest rate risk
Interest rate movements may affect the level of income receivable on cash deposits. The Group’s financial assets and liabilities, excluding short-term debtors and creditors, may include investment in fixed interest securities, such as UK corporate debt stock, whose fair value may be affected by movements in interest rates. The majority of the Group’s financial assets and liabilities, however, are non-interest bearing. As a result, the Group’s financial assets and liabilities are not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates.

The possible effects on the fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions.

(iii) Liquidity risk
The Group’s assets mainly comprise readily realisable quoted and unquoted securities that can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the ability to liquidate listed securities. An analysis of the securities is given in note 11.

Cash flow forecasting is performed in the operating entities of the Group and aggregated by the Manager. The Manager monitors the rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs. The forecasting takes into consideration covenant compliance, regulatory or legal requirements, for example the restrictions applicable to investment trusts set by HMRC s1158/1159 of the Corporation Tax Act 2010.

These reports allow it to manage its obligations. A maturity analysis is not presented as the Manager does not consider this to be a material risk.

(iv) Credit and counterparty risk
Credit risk is the risk of financial loss to the Group if the contractual party to a financial instrument fails to meet its contractual obligations.

The maximum exposure to credit risk as at 30 June 2016 was £1,092,000 (2015: £823,000). The calculation is based on the Group’s credit risk exposure as at 30 June 2016 and this may not be representative for the whole year.

The Group’s listed investments are held on its behalf by Bank of New York Mellon acting as the Group’s custodian. Bankruptcy or insolvency of the custodian may cause the Group’s rights with respect to securities held by the custodian to be delayed. The Board monitors the Group’s risk by reviewing the custodian’s internal controls report.

Where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Group of default.

Investment transactions are carried out with a number of brokers whose creditworthiness is reviewed by the Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Group’s custodian bank ensures that the counterparty to any transaction entered into by the Group has delivered on its obligations before any transfer of cash or securities away from the Group is completed.

Cash is only held at banks that have been identified by the Board as reputable and of high credit quality.

Derivatives
The Manager may use derivative instruments in order to ‘hedge’ the market risk of part of the portfolio. The Manager reviews the risks associated with individual investments and, where they believe it appropriate, may use derivatives to mitigate the risk of adverse market (or currency) movements. The Manager discusses regularly the hedging strategy with the Board.

At the year end, there were no derivative contracts open (2015: one).

Fair values of financial assets and financial liabilities
All financial assets and liabilities of the Group are either carried in the Balance Sheet at fair value through profit or loss, or the Balance Sheet amount is a reasonable approximation of fair value. The same accounting valuation methods were applied in 2015, with the exception of the Subsidiaries which were consolidated, as discussed in note 1.

Capital management policies
The type and maturity of the Group’s borrowings are analysed in note 9 and the Group’s equity is analysed in note 8. Capital is managed so as to maximise the return to shareholders while maintaining a capital base to allow the Group to operate effectively. Capital is managed on a consolidated basis. The Group is not a member of any body that imposes minimum levels of regulatory capital. No significant external constraints in the management of capital have been identified in the past.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell securities to reduce debt.

Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including current and non-current borrowings as shown in the Consolidated Balance Sheet) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the Consolidated Balance Sheet plus net debt. The gearing ratios at 30 June 2016 and 2015 were as follows:

2016
£
2015
£
Cash and bank balances 664,859 512,856
Net cash 664,859 512,856
Ordinary shareholders’ funds 16,991,639 18,452,970
Gearing (net debt/ordinary shareholders’ funds) nil nil

The Group’s objectives, policies and processes for managing capital have remained unchanged since its launch.


17 Transactions with Related Parties

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.

The amounts paid and payable to the Manager, together with details of the Management Agreement, are disclosed in note 3.

Fees paid to the Company’s Directors are disclosed in the Directors Remuneration Report. At the year end there was £4,000 payable in relation to Directors fees (2015: £5,000).

ANNUAL GENERAL MEETING

Notice is hereby given that the 150th Annual General Meeting of The Investment Company plc (“the Company”) will be held at the offices of Miton Group plc, Paternoster House, 65 St Paul’s Churchyard, London EC4M 8AB on Thursday, 8 December 2016 at 12.30 pm.

NATIONAL STORAGE MECHANISM

A copy of the Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/nsm

ENDS

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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