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Diverse Inc Trust  -  DIVI   

Annual Financial Report

Released 07:00 04-Aug-2017

Annual Financial Report

THE DIVERSE INCOME TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2017

The Directors present the Annual Financial Report of The Diverse Income Trust plc (the “Company” or “Diverse”) for the year ended 31 May 2017. The full Annual Report and Accounts can be accessed via the Company’s website, www.mitongroup.com/dit, or by contacting the Company Secretary on 01392 477500.


STRATEGIC REPORT

RESULTS FOR THE YEAR TO 31 MAY 2017

3.00p of ordinary dividends for the year The three interim dividends and the proposed final dividend for the year amount to 3.00p, compared with 2.80p in the previous year, an increase of 7.1%. The Company has also recommended a special dividend of 0.40p per share, which reflects a year when many special dividends were also paid by the companies in the portfolio.

Revenue reserves increased to £15.5m Revenue reserves of the Group increased to £15.5m over the year. The reserves of the Company are available to be used to smooth the dividend distributions to shareholders in future years. 

13.6% growth in capital The net asset value (“NAV”) per share rose from 91.02p to 103.43p over the year. This compares with an increase in the FTSE All-Share Index of 20.0% over the year to 31 May 2017.

SUMMARY OF RESULTS

At 31 May 2017     At 31 May 2016    Change   
NAV per ordinary share 103.43p   91.02p  13.6%
Ordinary share price (mid) 102.50p   93.75p  9.3%
(Discount)/premium to NAV (0.90)% 3.00%
Revenue return per ordinary share 4.02p   3.33p 
Ordinary dividends per ordinary share paid/declared 3.00p   2.80p  7.1%
Special dividend per ordinary share declared 0.40p   -   
Total dividends per ordinary share paid/declared 3.40p   2.80p 
Ongoing charges (further details below) 1.15%  1.18%

CHAIRMAN’S STATEMENT

This is the sixth Annual Report of The Diverse Income Trust plc and covers the year ended 31 May 2017.

Annual Returns
Returns over the year were dominated by the UK’s decision to withdraw from the European Union. Some of the best performing stocks were the largest quoted companies, as their overseas earnings and dividends rose in value as the sterling exchange rate fell. Alongside this, many growth stocks also performed strongly. These factors led the FTSE All-Share Index to rise 20.0%, the FTSE SmallCap Index (excluding Investment Companies) to appreciate 20.4% and the FTSE AIM All-Share Index to rise by 34.2% over the year to May 2017.

In spite of many smaller dividend-oriented stocks being out of the limelight over the year under review, the NAV of the Company still appreciated well with a capital gain of 13.6%.

Dividends
The Board is recommending a final dividend of 0.8p, which takes the total dividends for the year to 3.0p, an increase of just over 7%. On top of this, the Board is also recommending a special dividend of 0.4p for the year. The Company has a particular focus on investing in quoted companies that are generating good and growing dividends, which has been successfully reflected in the strong underlying growth in revenue and a good number of special dividends received from the portfolio investments. Revenue per share rose from 3.3p to 4.0p over the year.

Returns Since Issue
I am delighted to report that, following another year of positive returns, your Company’s NAV has increased by 106.9% since launch in April 2011. Over this period, the FTSE All-Share Index has appreciated by 30.5%, whilst the FTSE SmallCap (excluding Investment Companies) Index rose 86.4% and the FTSE AIM All-Share just 7.8%. Your Company's exceptional returns mean it has been amongst the top performers within its peer group.

Borrowing
In September 2016, the Company entered into a £25m unsecured revolving loan facility agreement with The Royal Bank of Scotland, replacing the previous overdraft facility with The Bank of New York Mellon. The facility is available for three years and provides the scope in certain circumstances to raise the level of borrowing to £50m. Further details of the facility can be found in note 5 below. The facility was undrawn as at 31 May 2017.

Board
Calum Thomson joined the Board on 20 December 2016. He brings to the Board extensive experience, including the auditing of investment trusts, which is especially relevant in his role as Chairman of the Audit Committee. I would like to thank Jane Tufnell for her second spell as the Audit Committee Chair on an interim basis prior to Calum’s appointment.

Outlook
The principal and consistent focus of your Company has been to deliver a meaningful and growing dividend for shareholders. This is generated from the selection of a diverse portfolio of both larger and smaller UK-quoted companies, based on the Manager’s thorough research. This diversity also seeks to limit stock specific risk through investing via modestly-sized holdings. The sharp appreciation of several market indices in recent years may have led to the longer-term advantages of this strategy being less obvious at present. The Board is confident that the Company can continue to deliver exceptional long-term returns.

Investing over a wider opportunity set of quoted companies puts the Company in a better position to generate superior dividend growth over time and, in turn, superior capital growth. The incidence of special dividends along the way further enhances investor return.

Overall, it is the diversity of the portfolio, the financial strength of many of the underlying companies and the ability to hold a Put option in combination together that explains why the strategy has greater scope to successfully navigate any periods of market uncertainty that may lie ahead.

Michael Wrobel
Chairman
3 August 2017

WHAT MITON BRINGS TO THE COMPANY

Independent thinking
We believe Miton is an agile fund manager. We hope this comes through in our investment thinking that we believe gives greater consideration to the risk of market trends evolving in future. This is important at all times, but following Brexit, when market trends may indeed be changing more significantly, the willingness to anticipate major changes in markets could be particularly relevant.

Over recent years, the global slowdown has led to many companies finding it harder to grow. In addition, some commentators suggest that the UK may be more vulnerable after the election of a minority government to a recession and the UK’s withdrawal from the EU. The Diverse strategy has a wider investment universe, which we believe puts the Company in a better position to generate ongoing dividend growth. We believe that it is the success in identifying stocks that were able to fund dividend growth that has been a key driver of the Company’s strong performance since issue.

Overall, we believe that fund strategies like that of Diverse come about not only as a result of independent thought, but also greater attention to the management of risk. We believe it is the combination of both that can be a key driver of premium long-term returns for clients.

Closely matching our conviction
All fund managers are mindful as to the degree of risk their portfolios carry on behalf of clients. However, within Miton, we seek to ensure our fund managers’ convictions are especially closely matched to the assembled risks within the portfolio.

One way we do this is by asking our fund managers to carry out their own analysis on the companies. This means they have a fuller understanding of the areas where the analysis may be particularly sensitive or potentially vulnerable and it avoids the risks associated with second guessing the level of conviction of analysts’ opinions.

Ultimately, our aim is to ensure the level of the fund managers' conviction is fully reflected in the stance of the Diverse portfolio.

Portfolio construction
Clear investment thinking also leads to good portfolio construction.

The consequence of these factors is that the positioning of portfolios within funds like the Company may be sometimes rather different from most others. This places an extra requirement on us to be especially clear in explaining the reasoning for the differences.

Details of the Manager
Miton has a team of fund managers researching the full universe of UK quoted 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 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.

MANAGER’S REVIEW OF THE YEAR

The Overall Objective of the Company
Over the last thirty years, equity markets may have suffered occasional setbacks, but fortunately these have been followed by strong recoveries shortly thereafter. This pattern of returns has led to a degree of insensitivity regarding downside risk, since the underlying trend has been relentlessly positive. Over time, the sheer scale of market appreciation has led to a narrowing of the investment universe, as funds have become increasingly attentive to outperforming the mainstream indices, rather than just delivering attractive absolute returns.

The investment universe for equity income strategies tends to be narrower than other funds because only a subset of stocks have premium dividend yields. The limited number of index constituents, along with the more limited number of dividend yield stocks, means some UK equity income strategies invest as much as 5% or 10% in their largest holdings. These stock specific risks are often replicated within competitor funds as well, since they have similar strategies.

Monocultures can be more vulnerable. In our view, the scale of change coming through in the political and economic trends means this is a good moment for market participants to be a lot more attentive to downside risk. The fact is that we have had this opinion for some time, and it explains why Diverse was set up with a wider investment universe at launch.

The Company’s aim is to generate an attractive dividend yield, with a focus on generating dividend growth through investing in a wide-ranging portfolio of holdings. The success of Diverse will be determined by its ability to generate a good and growing dividend over time. However, we also believe that success in generating a more attractive income stream will also come through in premium capital return as well.

Implementing the Investment Strategy
Academic evidence suggests that the long-term return on an individual stock is heavily determined by its initial yield at the time of investment and the changes to the dividend thereafter. Specifically, if a company pays growing dividends, then over time this tends to drive a sustained rise in its share price. In contrast, those that suffer dividend cuts are often subject to share price setbacks.

Generally, we believe companies with ongoing productivity improvements have the best prospects of generating sustained and growing dividends. Therefore, we prefer stocks that are generating attractive cash paybacks on corporate capital expenditure, so they have the future cashflow that can fund future dividend growth. We find the following five factors helpful in identifying those with the most attractive risk/reward ratios, and the potential for generating a sustained and growing stream of dividends.

Turnover growth – Although some companies can succeed in growing their profits without much turnover growth, in general, durable dividend growth over time comes from those that progressively expand their turnover.

Sustained margins – A company that generates ongoing turnover growth may find it does not grow its cashflow much if its profit margins fall back at the same time. The best kinds of productivity improvement should reduce the cost of goods, whilst also justifying some improvement to the market price as well.

Management of risk – All investment carries risks, but often those moving the fastest are obliged to take the greatest risks. In general, we aim to moderate portfolio risk by investing in companies where the management team limit their risks, even though this may hold back growth to a steadier pace. Such companies still carry plenty of potential to deliver an attractive return for their shareholders over time.

Better balance sheets – Many corporates have taken on extra debt over the past decade given the exceptionally low interest rates. However, we prefer investments with net cash balances or those with modest debt relative to the headroom on the facility.

Low entry valuations – The upside potential on an investment is often greater when the valuation on entry is modest. In general, we favour stocks where the overall market capitalisation reflects some issues in the past, since sometimes there is plenty of upside should things improve and they are not reflecting the potential for the future.

With few institutional investors actively researching the full range of larger and smaller quoted companies, we believe there are still plenty of stocks with low entry valuations, even after the general market appreciation of recent years.

Progress over the Year
Whilst world economic growth has remained relatively modest over the year under review, equity markets have appreciated well. Sterling fell back after the Brexit vote in June and the devaluation of the pound boosted the share prices of many multinational companies. This was particularly true of several FTSE 100 Index stocks which also benefited from the recovery of commodities, and those that pay their dividends in overseas currencies. The FTSE 100 Index delivered a capital return of 20.7% over the year to 31 May 2017.

The share prices of many smaller companies were more mixed, with some added caution over the prospects of domestic stocks offset by large rises in some of the largest AIM growth stocks. The net effect was that the FTSE AIM All-Share Index rose 34.2% over the year to 31 May 2017, whilst the FTSE SmallCap (excluding Investment Companies) Index returned 20.4%.

Since an income portfolio does not hold growth stocks in the main, the Company has not benefited from the major rises amongst some of the larger AIM stocks. Nevertheless, there were some strong performers in the fund, with IG Design up 104.1% and Burford Capital appreciating by 178.3% over the twelve months to May 2017. A major rise in the dividends from Stobart Group also drove their share price as well, with it appreciating 116.8% over the period. In contrast, the share price of Fairpoint disappointed after extra working capital was required for their legal business, and the debt management business returns were impacted by a change in regulation. Finally, the largest detractor to performance in the year was the Put option, where the major rise in the FTSE 100 Index led its market value to fall rather more rapidly than the normal monthly decay cost.

Overall, the NAV of the Company rose 13.6% over the year, which is rather less than the comparative indices in the year. Perhaps of more relevance, the portfolio has continued to generate good levels of organic income growth over the year to 31 May 2017.

Generally, stock specific risk in the portfolio remains very well diversified, with 141 holdings across a wide range of industry sectors. Only two holdings represent more than 2% of the portfolio, with Stobart Group at 3.0% and IG Design at 2.0%. Normally, we would have trimmed a 3% holding since the dividend yield would have fallen back after such strong share price appreciation. However, the dividend of Stobart Group has grown so rapidly that the running yield at the current share price is still very attractive. For now, the holding is retained because the current dividend yield and dividend growth prospects remain so compelling. A summary of all 40 of the largest holdings in the portfolio at the end of May is outlined below.

Current Market Trends and Outlook
Long bond yields have now reached such low levels that the scope for further rises in the market valuation is becoming more limited. Meanwhile, electoral attitudes have changed, and this presages a major realignment of the political and economic norms.

Periods of change like this can offer greater opportunity for the most agile and sure-footed. In particular, companies with strong balance sheets have a higher chance of sustaining good and growing dividends even were economic headwinds to become more adverse. Alongside this, there is greater scope for investors to pick out the most mispriced stocks when selecting within a wider opportunity set, since few institutional investors actively research the full range of larger and smaller income stocks.

Therefore, we remain upbeat about the prospects for the Company. Whilst many of the mainstream stocks have already performed strongly over recent years, the Company is still invested in many stocks that we believe are undervalued.

Diverse’s Strategy for Managing the Portfolio through any Potential Market Setbacks
Over the period under review, equity markets have been quite volatile, mainly on the upside for now, but there will always be downside risk as well, should there be an unexpected economic setback. As an investment trust, Diverse has two strategies that can help the Company to generate a better return for shareholders through any potential period of volatility.

A FTSE 100 Put Option
The first is via the purchase of a Put option. This means the Company can sell the FTSE 100 Index at a certain level (6,500 in our case) after the stock market has sold off. An option like this is not dissimilar to purchasing car or house insurance in that it adds a degree of insurance to the Company’s portfolio, so the Company itself could benefit from collecting an additional capital sum generally proportionate to the scale of the FTSE 100 setback below 6,500.

However, options like this come with a cost – a bit like an insurance premium. Specifically, the time value of the Put option will gradually decay over the insured period (to March 2019 in our case), irrespective of whether the markets suffer any fluctuations or not. The initial cash cost of any Put option is therefore very important, since its resale value generally falls over time (assuming markets are relatively flat) and ultimately becomes worthless if the FTSE 100 Index does not fall significantly below 6,500.

With this in mind, the Company has two factors that aim to reduce the overall cost of the Put option to the lowest possible level should markets continue to hold up well prior to March 2019. This has been carried out in two ways previously:

In addition to these methods, we have found a way to reduce the cost of the monthly decay of the Put option a little further. If we deferred the start of the term of the Put option from the current date to March 2018, the monthly decay cost is reduced to around 0.05% or so. The term of the Put option still extends to March 2019, and it seems there is almost no reduction in the upside value of this deferred Put option compared with the previous, slightly more costly strategy.

The key advantage of having Put options in the portfolio is that their resale value would be expected to rise proportionate to a market selloff. The full level of that appreciation would be related to the duration of the remaining term of the option as well as the scale of the market setback. If the Put option were to be sold when markets were low, then the cash proceeds could be used to purchase additional equities for the portfolio at a time when their share prices were depressed. The added holdings in the portfolio would then enhance its recovery potential thereafter. Alongside this, the Company would benefit from the extra income from the new holdings added during this period.

In summary, the Put option strategy puts Diverse in a position where it has scope to take advantage of any major market setback, at a relatively modest running cost, if markets do not drop back significantly in the period through to March 2019.

The Debt Facility
A second strategy to enhance returns through a period of elevated market volatility is the use of a debt facility. The Company has an agreed debt facility which offers the potential to borrow £25m, with the scope in certain circumstances to raise the level of borrowing to £50m. However, normally the Company does not utilise it. This is because the key risk with debt is that, if there was a severe market sell-off, then the covenants on the debt facility could force the Company to repay some, or potentially all, of the outstanding debt after the market had dropped. This has the disadvantage of obliging the Company to liquidate some of its portfolio holdings just at a time when share prices would be depressed. In short, a geared fund can end up at a disadvantage during a setback, whereas an ungeared portfolio can at least continue to hold its portfolio throughout the period of volatility, and thereby fully participate in any subsequent market recovery.

Importantly, we believe the Company has plenty of scope to generate an attractive long-term return without relying on debt. Therefore, the plan is to ensure the Company is not significantly borrowed at a time when markets were at risk of a setback.

The great advantage of this strategy is that the under-ultilised debt facility should normally be available to buy additional stocks after the market setback at hopefully unusually attractive entry prices. Following the market bottom, the portfolio would then have extra recovery potential – funded by the debt facility. If the market were to go on and recover, then shareholders would benefit from the appreciation of the extra shares purchased during the market setback, as well as the associated extra dividend income (offset in part by the interest costs on the debt).

Conclusions
The purpose of the Company has been to invest so that the dividend of the fund will grow at a better rate than most others. Through utilising both the FTSE 100 Put option and having a debt facility in place, the Company would be in a position to purchase additional holdings were equity markets to suffer a significant setback. This would enhance the underlying dividend income generated by the Company’s portfolio. It would also put the Company in a position to participate in greater scale in any market recovery after a setback.

Gervais Williams and Martin Turner
Miton Asset Management Limited
3 August 2017

PORTFOLIO INFORMATION AS AT 31 MAY 2017

Rank Company Sector & main
activity
Valuation
£’000
% of net
assets
Yield¹
1 Stobart Industrials 11,877 3.0 4.9 
2 IG Design2 Consumer Goods 7,889 2.0 1.0 
3 Charles Taylor Industrials 6,984 1.7 4.5 
4 Amino Technologies2 Technology 6,418 1.6 2.9 
5 Conviviality2 Consumer Services 6,075 1.5 3.7 
6 4Imprint Consumer Services 6,018 1.5 2.4 
7 Safecharge International2 Industrials 5,851 1.5 4.6 
8 Lok’n Store2 Financials 5,825 1.5 2.1 
9 Park2 Financials 5,447 1.4 3.4 
10 Mucklow (A&J) Financials 5,225 1.3 4.3 
Top 10 investments 67,609 17.0
11 Hostelworld Consumer Services 4,784 1.2 3.7 
12 Costain Industrials 4,784 1.2 2.6 
13 Shoe Zone2 Consumer Services 4,778 1.2 9.8 
14 Phoenix Financials 4,684 1.2 6.7 
15 Lloyds Banking Financials 4,578 1.2 4.3 
16 Zotefoams Basic Materials 4,569 1.2 1.8 
17 Treatt Basic Materials 4,520 1.1 0.9 
18 Concurrent Technologies2 Technology 4,445 1.1 2.3 
19 Randall & Quilter2 Financials 4,423 1.1
20 Aviva Financials 4,372 1.1 4.4 
Top 20 investments 113,546 28.6
21 Macfarlane Industrials 4,290 1.1 3.2 
22 EasyJet Consumer Services 4,263 1.1 3.8 
23 CML Microsystems Technology 4,240 1.1 1.5 
24 Beazley Financials 4,204 1.1 4.3 
25 Bioventix2 Health Care 4,097 1.0 2.4 
26 Burford Capital2 Financials 4,079 1.0 0.8 
27 Legal & General Financials 4,059 1.0 5.7 
28 Greene King Consumer Services 4,052 1.0 4.3 
29 Sainsbury (J) Consumer Services 4,029 1.0 3.6 
30 Safestyle UK2 Consumer Services 4,021 1.0 3.7 
Top 30 investments 154,880 39.0
31 Morses Club2 Financials 3,993 1.0 4.8 
32 eSure Financials 3,992 1.0 5.0 
33 Accrol2 Consumer Goods 3,953 1.0
34 Gateley2 Industrials 3,938 1.0 3.3 
35 Eddie Stobart Logistics2 Industrials 3,864 1.0
36 Inspired Energy2 Industrials 3,859 1.0 2.6 
37 Dairy Crest Consumer Goods 3,837 1.0 3.7 
38 RPC Industrials 3,823 1.0 2.9 
39 Direct Line Insurance Financials 3,793 0.9 7.1 
40 Hiscox Financials 3,771 0.9 2.2 
Top 40 investments 193,703 48.8
Balance held in 92 equity investments 182,076 45.9
Total equity investments 375,779 94.7
600 Group 8% Convertible Loan Notes 14/02/2020 (unlisted)
2,506

0.6
Sirius Minerals Finance 8.5% Convertible Loan Notes 28/11/2023 (USD)
1,661

0.4
Intercede Group 8% Secured Convertible Loan Notes 29/12/2021 (unlisted)
1,550

0.4
Active Energy 8% Loan Notes 31/03/2022 (unlisted) 1,428 0.4
St. Modwen Properties 6.25% 07/11/2019 Bonds 854 0.2
Aggregated Micro Power 8% Secured Convertible Loan Notes 30/03/2021 (unlisted)
611

0.2
Sigmaroc 6% Unsecured Convertible Loan Notes 04/01/2022 (unlisted)
321

0.1
Gable Holdings 7.5% Loan Notes 30/09/2018 (unlisted) - -
William Sinclair 8% Convertible Loan Notes 17/12/2018 (unlisted)
-

-
Fixed interest investments 8,931 2.3
Total investments 384,710 97.0
Listed Put option
            FTSE 100 – March 2018 6,000 Put 1,385 0.3
Other net assets 10,538 2.7
Net assets 396,633 100.0

¹ Source: Interactive Data. Based on historical yields and therefore not representative of future yield.
² AIM/NEX listed.

A copy of the full portfolio of investments as at 31 May 2017 is available on the Company’s website, www.mitongroup.com/dit.

Invested portfolio capital by sector

%
Financials 24.9
Consumer Services 21.8
Industrials 21.0
Consumer Goods 10.6
Technology 5.9
Basic Materials 5.4
Telecommunications 3.0
Cash and Fixed Interest 2.3
Health Care 2.2
Oil & Gas 1.1
Other 1.0
Utilities 0.8
100.0

Invested portfolio capital by Index or Exchange

%
FTSE 100 Index 16.8
FTSE 250 Index 16.0
FTSE SmallCap Index 14.4
FTSE Fledgling Index 5.0
AIM/NEX Exchanges 38.5
Other 7.0
Cash and Fixed Interest 2.3
100.0

Portfolio investment income by Index or Exchange

%
FTSE 100 Index 19.2
FTSE 250 Index 17.2
FTSE SmallCap Index 13.0
FTSE Fledgling Index 3.8
AIM/NEX Exchanges 36.4
Other 6.3
Cash and Fixed Interest 4.1
100.0

Estimated annual income by sector¹

%
Financials 33.9
Consumer Services 23.0
Industrials 17.7
Consumer Goods 6.1
Basic Materials 4.8
Telecommunications 4.1
Cash and Fixed Interest 4.1
Technology 3.2
Oil & Gas 0.9
Other 0.9
Health Care 0.7
Utilities 0.6
100.0

1 Projected income based on portfolio as at 31 May 2017.
Source: Interactive Data.

A Summary of the Total Costs Involved in Managing Diverse

Investment trusts differ from some other forms of collective funds in that they are set up as independent corporations with their operations overseen by a board that is separate from and independent of the fund management group that manages the capital. In addition, they are listed, with their shares traded on an approved exchange – which, in our case, is the London Stock Exchange (“LSE”).

Running costs are deducted from the total assets of the Company on a pro-forma basis so the NAV published each day is expressed after costs. The figures below are the costs paid by the Company over the year under review and are expressed as a percentage of the average asset value of the Company over the year.

2017  2016 
Fund management fees 0.96  0.98 
Administration costs, including Company Secretarial fees 0.03  0.03 
Directors/Auditor/Depositary/Registrar/Custodian and Stockbroker fees 0.10  0.11 
All other direct costs, including VAT on the fees above, plus marketing, legal, printing, insurance and bank charges 0.06  0.06 
Ongoing charges 1.15  1.18 

In addition, the Company also pays transaction charges that are levied when shares are bought or sold in the portfolio. These are dealing commissions paid to stockbrokers and stamp duty, a Government tax paid on transactions (which is zero when dealing on the AIM/NEX exchanges).

Costs paid in dealing commissions 0.05  0.05 
Stamp duty, a Government tax on transactions 0.06  0.05 
Overall costs including charges on transactions 1.261 1.281

The annual costs can be compared to the overall returns generated by the Company in the year. The total return on ordinary activities after taxation includes the appreciation of the portfolio and amounted to 73.8% (2016: 50.8%), and the revenue total return on ordinary activities after taxation amounted to 26.2% (2016: 49.2%). In the year under review, the overall costs therefore amounted to 1.26% compared with a total return before costs of 17.7% (2016: 9.0%), and 16.4% (2016: 7.7%) after all costs had been deducted.

Given that stock markets fluctuate over the years, the running costs of the Company should perhaps be considered in the context of the average annual returns generated by the Company. The overall costs during the year to 31 May 2017 of 1.26% can be compared to an average annual return (after the deduction of costs) of 17.5% (2016: 15.8%) per annum since issue.

1 Transactions conducted by the Company also involve some loss of value due to the dealing spread in stock exchange prices. Spreads range from less than 1% in the most actively traded large cap stocks to more than 3% in the smallest, most infrequently traded stocks. The exact loss of value is difficult to determine precisely, but is normally less than half of the dealing spread at the time of the transaction. In a large percentage of the transactions, especially in the smallest stocks, the stock is passed through from sizeable seller to sizeable buyer on a ‘put through’ basis with potentially no loss of value through the spread. During the year under review, this cost is believed to be very modest in comparison to the NAV.

Investment Objective
The Company’s investment objective is to provide shareholders with an attractive and growing level of dividends coupled with capital growth over the long term.

Investment Policy
The Company invests primarily in UK quoted or traded companies with a wide range of market capitalisations, but a long-term bias toward small and mid cap equities. The Company may also invest in large cap companies, including FTSE 100 constituents, where it is believed that this may increase shareholder value.

The Manager adopts a stock specific approach in managing the Company’s portfolio and therefore sector weightings are of secondary consideration. As a result of this approach, the Company’s portfolio does not track any benchmark index.

The Company may utilise derivative instruments including index-linked notes, contracts for differences, covered options and other equity-related derivative instruments for efficient portfolio management, gearing and investment purposes. 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. Typically it is expected that the Company will hold a portfolio of between 80 and 160 securities, predominantly most of which will represent no more than 1.5% of the value of the Company’s 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. In addition to this restriction, the Directors have further determined that no more than 15% of the Company’s gross assets will, at the time of acquisition, be invested in other listed closed-ended investment funds (including investment trusts) notwithstanding whether or not such funds have stated policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.

Unquoted Investments
The Company may invest in unquoted companies from time to time subject to prior Board approval. Investments in unquoted companies in aggregate will not exceed 5% of the value of the Company’s investment portfolio as at the time of investment.

Borrowing and Gearing Policy
The Board considers that long-term capital growth can be enhanced by the use of gearing which may be through 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).

The Board oversees the level of gearing in the Company, and reviews the position with the Manager on a regular basis.

In the event of a breach of the investment policy set out above and the investment and gearing restrictions set out therein, the Manager shall inform the Board upon becoming aware of the same and if the Board considers the breach to be material, notification will be made to the LSE.

No material change will be made to the investment policy without the approval of shareholders by ordinary resolution.

BUSINESS MODEL

Diverse was launched on 28 April 2011. It is registered in England as a public limited company and is an investment company in accordance with the provisions of Sections 832 and 833 of the Companies Act 2006.

The principal activity of the Company is to carry on business as an investment trust. The Company intends at all times to conduct its affairs so as to enable it to qualify as an investment trust for the purposes of Sections 1158/1159 of the Corporation Tax Act 2010 (“S1158/1159”). The Directors do not envisage any change in this activity in the foreseeable future.

The Company has been granted approval from HM Revenue & Customs (“HMRC”) as an investment trust under 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 continuing approval by HMRC as an investment trust 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 may only retain 15% of its investment income without distributing it 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 31 May 2017 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.

The Company has a wholly-owned subsidiary, DIT Income Services Limited. The purpose of the subsidiary is to invest in shorter-term holdings, where the gains after corporation tax can be passed up to the parent company by way of dividends, thus improving the position of the Company’s revenue account.

Investment Policy
The Company’s full investment policy set out above contains information on the policies which the Company follows relating to asset allocation, risk diversification and gearing, and includes maximum exposures, where relevant.

The Company invests primarily in quoted or traded UK companies with a wide range of market capitalisations but a long-term bias toward small and mid cap equities with a view to achieving the Company’s investment objective.

The Manager adopts a stock-specific approach in managing the Company’s portfolio and therefore sector weightings will be of secondary consideration. As a result of this approach, the Company’s portfolio will not track any benchmark index.

At the Annual General Meeting (“AGM”) held on 12 October 2016, shareholders approved a change to the Company’s investment policy to increase the maximum number of securities that may be held in the portfolio.

PERFORMANCE AND RISKS

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

¹ Source: Cenkos Securities
² Average of the other UK Equity Trusts that have reported over the previous twelve months.

Dividends
Ordinary dividends totalling 3.00p and a special dividend of 0.40p per ordinary share have been paid, declared or proposed in respect of the year ended 31 May 2017. The special dividend was proposed because many of the companies in the portfolio also paid special dividends over the period.

First interim dividend: 0.70p paid on 28 February 2017 (29 February 2016: 0.65p)
Second interim dividend: 0.70p paid on 31 May 2017 (31 May 2016: 0.65p)
Third interim dividend: 0.80p payable on 31 August 2017 (31 August 2016: 0.75p)
Final dividend: 0.80p payable on 30 November 2017 (30 November 2016: 0.75p)
Special dividend: 0.40p payable on 30 November 2017 (30 November 2016: nil)

A final dividend of 0.80p per ordinary share and a special dividend of 0.40p per ordinary share have been recommended by the Board. Subject to shareholder approval at the forthcoming AGM, these dividends will be paid together on 30 November 2017 to shareholders on the register at the close of business on 29 September 2017. The ex-dividend date will be 28 September 2017.

Principal Risks and Uncertainties
The Company is exposed to a variety of risks and uncertainties that could cause its asset price or the income from the investment portfolio to reduce, possibly by a sizeable percentage in the most adverse circumstances. The Board, through delegation to the Audit Committee, has undertaken a robust assessment and review of the principal risks facing the Company, together with a review of any new risks which may have arisen during the year, including those that would threaten its business model, future performance, solvency or liquidity. These risks are formalised within the Company’s risk matrix. Information regarding the Company’s internal control and risk management procedures can be found in the Corporate Governance Statement in the full Annual Report. The principal financial risks and the Company’s policies for managing these risks and the policy and practice with regard to financial instruments are summarised in note 19 to the financial statements.

The Board has also identified the following additional risks and uncertainties:

Investment and strategy
Risk: There can be no guarantee that the investment objective of the Company will be achieved.

The Company does not follow any benchmark. Accordingly, the portfolio of investments held by the Company will not mirror the stocks and weightings that constitute any particular index or indices, which may lead to the Company’s shares failing to follow either the direction or extent of any moves in the financial markets generally (which may or may not be to the advantage of shareholders).
Mitigation: The Manager has in place a dedicated investment management process which is designed to maximise the chances of the investment objective being achieved. The Board reviews regular investment and financial reports from the Manager to monitor this.
Smaller companies
Risk: The Company will invest primarily in quoted UK companies with a wide range of market capitalisations but a long-term bias toward small and mid cap equities. Smaller companies can be expected, in comparison to larger companies, to be less mature businesses, have more restricted depth of management and a higher risk profile. In addition, the relatively small market capitalisation of such companies can make the market in their shares illiquid. Prices of smaller capitalisation stocks are often more volatile than prices of larger capitalisation stocks and the risk of insolvency of many smaller companies (with the attendant losses to investors) is higher.
Mitigation: The Board looks to mitigate this risk by ensuring the Company holds a spread of investments, achieved through limiting the size of new holdings at the time of investment to typically between 1% and 1.5% of the portfolio. All potential investee companies are researched by the Manager prior to investment.
Sectoral diversification
Risk: The Company is not constrained from weighting to any sector. This may lead to the Company having significant exposure to portfolio companies from certain business sectors from time to time. Greater concentration of investments in any one sector may result in greater volatility in the value of the Company’s investments and consequently its NAV.
Mitigation: The Company seeks to achieve attractive returns by investing in weightings that are different from the overall market, yet also seeks to ensure that individual variances are not so extreme as to leave shareholders at risk of portfolio volatility that is unreasonably poor. Even though there may be significant exposures to a single sector, this will be achieved by holding a number of different stocks in the portfolio.
Dividends
Risk: The Company’s investment objective includes the aim of providing shareholders with an attractive and growing dividend. There is no guarantee that any dividends will be paid in respect of any financial year or period. The ability to pay dividends is dependent on a number of factors, including the level of dividends earned from the portfolio and the net revenue profits available for that purpose.

The redemption of shares pursuant to the redemption facility may also reduce distributable reserves to the extent that the Company is unable to pay dividends.
Mitigation: The Company maintains accounting records and produces forecasts that are designed to reduce the likelihood that the Company will not have sufficient distributable resources to meet its dividend objective.
Share price volatility and liquidity/marketability risk
Risk: The market price of the Company’s shares, like shares in all investment companies, may fluctuate independently of the NAV and thus may not reflect the underlying NAV of the shares. The shares could trade at a discount or premium to NAV at different times, depending on factors such as supply and demand for the shares, market conditions and general investor sentiment.
Mitigation: The Company has in place an annual redemption facility whereby shareholders can voluntarily tender their shares. The Board monitors the relationship between the share price and the NAV. The Company has taken powers to re-purchase shares should there be an imbalance in the supply and demand leading to a discount. Since launch, however, the Company’s shares have tended to trade at a premium to NAV. The Company has powers to issue shares (only at a premium to NAV) should there be good investment opportunities and the size of the Company had not become too large to continue to meet its objectives.
Gearing
Risk: The Company’s investment strategy may involve the use of gearing to enhance investment returns, which exposes the Company to risks associated with borrowings. Gearing may be generated through the use of options, futures, options on futures, swaps and other synthetic or derivative financial instruments. Such financial instruments inherently contain much greater leverage than a non-margined purchase of the underlying security or instrument.

While the use of borrowings should enhance the total return on the shares where the return on the Company’s underlying assets is rising and exceeds the cost of borrowing, it will have the opposite effect where the return on the Company’s underlying assets is rising at a lower rate than the cost of borrowing or falling, further reducing the total return on the shares.

As a result, the use of borrowings by the Company may increase the volatility of the NAV per share.
Mitigation: The Company has a revolving credit facility in place, as detailed in note 5 to the financial statements. At 31 May 2017, the facility was undrawn.

The Company is limited to a maximum gearing of 15% of the net assets. There was no gearing at 31 May 2017 (2016: nil).
Key man risk
Risk: The Company depends on the diligence, skill, judgement and business contacts of the Manager’s investment professionals and its future success could depend on the continued service of these individuals, in particular Gervais Williams.
Mitigation: The Company may terminate the Management Agreement should Gervais Williams cease to be an employee of the Manager’s group and is not replaced by a person whom the Company considers to be of equal or satisfactory standing within three months of his departure.
Engagement of third party service providers
Risk: The Company has no employees and the Directors have all been appointed on a non-executive basis. Whilst the Company has taken all reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with is obligations, the Company is reliant upon the performance of third party service providers for its executive function.
Mitigation: The Company operates through a series of contractual relationships with its service providers. These contracts, supported by service level agreements where appropriate, set out the terms on which a service is to be provided to the Company. The Board reviews performance of all the service providers both in the Board meetings and in the Management Engagement Committee meetings, where the terms on which the service providers are engaged are also reviewed. The Board also receives assurance or internal controls reports from key service providers. In addition, the contracts provide the Company with protection in the event of failure to perform by a service provider.

SHARE CAPITAL

Share Issues
At the AGM held on 12 October 2016, the Directors were granted the authority to allot ordinary shares up to an aggregate nominal amount of £38,349. No shares have been issued under this authority. This authority is due to expire at the Company’s AGM to be held on 10 October 2017 and proposals for its renewal are set out in the Directors’ Report in the full Annual Report.

There are no restrictions concerning the transfer of securities in the Company or on voting rights; no special rights with regard to control attached to securities; no agreements between holders of securities regarding their transfer known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid.

Purchase of Own Shares
At the AGM held on 12 October 2016, the Directors were granted the authority to buy back up to 57,484,737 ordinary shares. No ordinary shares have been bought back under this authority. The authority will expire at the next Annual General Meeting when a resolution for its renewal will be proposed (see the Directors’ Report in the full Annual Report for further information).

Treasury Shares
Shares bought back by the Company may be held in treasury, from where they could be re-issued at a premium to NAV quickly and cost effectively. This provides the Company with additional flexibility in the management of its capital base. No shares were purchased for, or held in, treasury during the year or since the year end.

Share Redemptions
Valid redemption requests were received under the Company’s redemption facility for the 31 May 2017 Redemption Point in relation to 1,103,305 ordinary shares, representing 0.29% of the issued share capital. As permitted under the Company’s Articles of Association, these shares were matched with buyers and sold at a calculated Redemption Price of 103.02p per share.

Current Share Capital
As at the year end and the date of this Report, there were 383,487,239 ordinary shares and 50,000 management shares (see note 9 to the financial statements) in issue.

MANAGEMENT, SOCIAL, ENVIRONMENTAL AND DIVERSITY MATTERS

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

The Manager receives a management fee of 1.0% per annum on the adjusted market capitalisation of the Company up to £300m and 0.8% per annum on the average market capitalisation above £300m. The management fee is calculated and payable monthly in arrears.

In addition to the basic management fee, and for so long as a Redemption Pool is in existence, the Manager is entitled to receive from the Company a fee calculated at the rate of one-twelfth of 1.0% per calendar month of the NAV of the Redemption Pool on the last business day of the relevant calendar month.

In accordance with the Directors’ policy on the allocation of expenses between income and capital, in each financial year 75% of the management fee payable is charged to capital and the remaining 25% to revenue.

The management agreement is terminable by either the Manager or the Company giving to the other not less than 12 months’ written notice. 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 is not replaced by a person whom the Company considers to be of equal or satisfactory standing within three months of his departure.

The Company has given certain market standard indemnities in favour of the Manager in respect of the Manager’s potential losses in carrying on its responsibilities under the management agreement.

The Board appointed Bank of New York Mellon as its Depositary and Custodian under an agreement dated 22 July 2014. The annual fee for depositary services due to Bank of New York Mellon is 0.025% of gross assets, subject to a minimum fee of £15,000 per annum. The Company and the Depositary may terminate the Depositary Agreement with three months’ written notice.

Company secretarial and administrative services are provided by Capita Sinclair Henderson Limited, under an agreement dated 7 April 2011, for a current annual fee of £115,000, increasing annually in line with the UK Retail “all items” Index. The fees are paid in equal monthly instalments in arrears. This agreement may be terminated by 12 months’ written notice subject to provisions for earlier termination as provided therein.

Continuing Appointment of the Manager
The Board keeps the performance of the Manager under continual review, and the Management Engagement Committee conducts an annual appraisal of the Manager’s performance, and makes a recommendation to the Board about the continuing appointment of the Manager. As the Manager has delegated the investment management function to the Investment Manager, the performance of the Investment Manager is also regularly reviewed. It is the opinion of the Directors that the continuing appointment of the Manager is in the interests of shareholders as a whole. The reasons for this view are that the Manager has executed the investment strategy according to the Board’s expectations and has demonstrated superior risk-adjusted returns relative to the broader market and the peer group.

The Directors also believe that by paying the management fee calculated on a market capitalisation basis, rather than a percentage of assets basis, the interests of the Manager are more closely aligned with those of shareholders.

Environmental, Human Rights, Employee, Social and Community Issues
Since the Company does not have any employees, the day-to-day management of these areas 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.

Environmental, Social and Governance (“ESG”) factors are central to the investment process as misjudgements on these matters can incur major additional costs to the portfolio holdings, as well as undermining their equity return through reputational damage. In company meetings, the Manager routinely questions the corporate management on a variety of topics, such as safety records and the make-up of their board papers, to ensure companies are adhering to best practice. These questions can be quite wide ranging. For example, the Manager has raised issues ranging from the use of antibiotics in livestock, to how individual companies police the working conditions in the overseas plants of their suppliers.

Gender Diversity
The Board of Directors of the Company comprises two female and three male Directors.

The Strategic Report has been approved by the Board of Directors.

On behalf of the Board
Michael Wrobel
Chairman
3 August 2017

Directors
Michael Wrobel – Chairman
Paul Craig
Lucinda Riches – Chair of the Management Engagement Committee
Calum Thomson – Chairman of the Audit Committee
Jane Tufnell – Senior Independent Director

All Directors are non-executive and are independent of the Manager.

Going Concern

The Directors consider that it is appropriate to adopt the going concern basis in preparing the financial statements. After making enquiries, and bearing in mind the nature of the Group’s business and assets, the Directors consider 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.

Cash flow projections have been reviewed and show that the Group has sufficient funds to meet both its contracted expenditure and its discretionary cash outflows in the form of the dividend policy.

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.

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’s portfolio of a significant fall in UK markets.

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.

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

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 the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (“IFRS”) as adopted by the European Union.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with IFRS. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that year.

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

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 Financial Conduct Authority.

The financial statements are published on the Company’s website, www.mitongroup.com/dit, 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 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
Michael Wrobel
Chairman
3 August 2017

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company’s statutory accounts for the years ended 31 May 2017 and 31 May 2016 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies, and those for 2017 will be delivered 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 at: www.mitongroup.com/dit.

CONSOLIDATED INCOME STATEMENT

          Year ended
          31 May 2017
    Year ended
    31 May 2016
Note Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Gains on investments held at fair value through profit or loss

12




56,868 


56,868 




16,876 


16,876 
Foreign exchange (losses)/gains

(15)

(15)



Losses on derivatives held at fair value through profit or loss

13




(10,896)


(10,896)




(1,087)


(1,087)
Income 2 17,019  17,019  14,368  14,368 
Management fee 3 (852) (2,555) (3,407) (851) (2,554) (3,405)
Other expenses 4 (734) (734) (667) (667)
Return on ordinary activities before finance costs and taxation


15,433 



43,402 



58,835 



12,850 



13,240 



26,090 
Finance costs 5 (34) (100) (134) (13) (39) (52)
Return on ordinary activities before taxation

15,399 


43,302 


58,701 


12,837 


13,201 


26,038 
Taxation 6 (48) (48)
Return on ordinary activities after taxation
7

15,407 

43,302 

58,709 

12,789 

13,201 

25,990 
pence  pence  pence  pence  pence  pence 
Return per ordinary share
7

4.02 

11.29 

15.31 

3.33 

3.44 

6.77 

The total column of this statement is the Income Statement of the Group prepared in accordance with IFRS, as adopted by the European Union. The supplementary revenue and capital columns are presented 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 year.

There is no other comprehensive income, and therefore the return on ordinary activities after tax is also the total comprehensive income.

The notes form part of these financial statements.


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY




Group



Note

Share 
capital 
£’000 
Share 
premium 
account 
£’000 

Special 
reserve 
£’000 

Capital
reserve
£’000

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2016 434  192,244  45,775  99,342  11,250  349,045 

Total comprehensive income:
Net return for the year          43,302  15,407  58,709 
Transactions with shareholders recorded directly to equity:
Equity dividends paid 8 (11,121) (11,121)
As at 31 May 2017 434  192,244  45,775  142,644  15,536  396,633 

   




Group



Note

Share 
capital 
£’000 
Share
premium
account
£’000

Special 
Reserve 
£’000 

Capital
reserve
£’000

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2015 387  192,244 48,558  86,141 9,199  336,529 

Total comprehensive income:
Net return for the year - 13,201 12,789  25,990 
Transactions with shareholders recorded directly to equity:
Issue of management shares
9

50 

-


-


50 
Cancellation of ordinary shares
9

(3)

-

(2,783)

-


(2,786)
Equity dividends paid 8 - - (10,738) (10,738)
As at 31 May 2016 434  192,244 45,775  99,342 11,250  349,045 

The notes form part of these financial statements.


PARENT COMPANY STATEMENT OF CHANGES IN EQUITY




Company



Note

Share 
capital 
£’000 
Share 
premium 
account 
£’000 

Special 
reserve 
£’000 
 
Capital 

Reserve 
£’000 

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2016 434  192,244  45,775  99,342  10,604  348,399 

Total comprehensive income:
Net return for the year 43,302  15,345  58,647 
Transactions with shareholders recorded directly to equity:
Equity dividends paid 8 (11,121) (11,121)
As at 31 May 2017 434  192,244  45,775  142,644  14,828  395,925 

   




Company



Note

Share 
capital 
£’000 
Share
premium
account
£’000

Special 
reserve 
£’000 

Capital
reserve
£’000

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2015 387  192,244 48,558  86,141 8,792  336,122 

Total comprehensive income:
Net return for the year - 13,201 12,550  25,751 
Transactions with shareholders recorded directly to equity:
Issues of management shares
9

50 

-


-


50 
Cancellation of ordinary shares
9

(3)

-

(2,783)

-


(2,786)
Equity dividends paid 8 - - (10,738) (10,738)
As at 31 May 2016 434  192,244 45,775  99,342 10,604  348,399 

The notes form part of these financial statements.



CONSOLIDATED AND PARENT COMPANY BALANCE SHEETS



Note
Group 
31 May 2017 
£’000 
Group 
31 May 2016 
£’000 
Company 
31 May 2017 
£’000 
Company 
31 May 2016 
£’000 
Non-current assets:
Investments held at fair value through profit or loss
12

384,710 

339,313 

384,710 

339,313 
Current assets:
Derivative instruments 13 1,385  8,026  1,385  8,026 
Trade and other receivables 16 3,337  2,064  3,337  2,064 
Cash and cash equivalents 7,628  2,983  7,625  2,348 
12,350  13,073  12,347  12,438 

Current liabilities:
Trade and other payables 17 (427) (3,341) (1,132) (3,352)
(427) (3,341) (1,132) (3,352)

Net current assets

11,923 

9,732 

11,215 

9,086 
Total net assets 396,633  349,045  395,925  348,399 

Capital and reserves:
Share capital – ordinary shares 9 384  384  384  384 
Share capital – management shares
9

50 

50 

50 

50 
Share premium account 10 192,244  192,244  192,244  192,244 
Special reserve 10 45,775  45,775  45,775  45,775 
Capital reserve 10 142,644  99,342  142,644  99,342 
Revenue reserve 10 15,536  11,250  14,828  10,604 
Shareholders’ funds 396,633  349,045  395,925  348,399 

pence 

pence 
Net asset value per ordinary share
11

103.43 

91.02 

The amount of the Company's return for the financial year is a profit after tax of £58,647,000 (2016: £25,751,000).

These financial statements were approved by the Board of The Diverse Income Trust plc on 3 August 2017 and were signed on its behalf by:

Michael Wrobel
Chairman
Company no.: 7584303

The notes form part of these financial statements.
 


CONSOLIDATED AND PARENT COMPANY CASH FLOW STATEMENTS

Group 
31 May 2017 
£’000 
Group 
31 May 2016 
£’000 
Company 
31 May 2017 
£’000 
Company 
31 May 2016 
£’000 
Operating activities:
Net return before taxation 58,701  26,038  58,639  25,799 
Increase in net investments and derivatives gains (45,972) (15,789) (45,972) (15,789)
Purchase of investments (69,452) (62,216) (69,452) (62,216)
Sale of investments 80,923  66,022  80,923  66,022 
Purchase of derivative instruments (7,445) (17,243) (7,445) (17,243)
Sale of derivative instruments 3,190  10,237  3,190  10,237 
Exchange losses/(gains) on capital items 15  (5) 15  (5)
Revolving loan facility in Financing (below) 170  170 
(Increase)/decrease in trade and other receivables (1,273) (1,273)
(Decrease)/increase in trade and other payables (2,914) 2,384  (2,220) 1,988 
Withholding tax recoverable/(paid) (48) (48)
Net cash inflow from operating activities 15,951  9,381  16,583  8,746 
Financing:
Management shares 50  50 
Cancellation of shares (2,786) (2,786)
Revolving loan facility drawdown 15,000  15,000 
Revolving loan facility repayment (15,000) (15,000)
Revolving loan facility arrangement fee paid (63) (63)
Revolving loan facility non-utilisation fee paid (45) (45)
Revolving loan facility interest paid (62) (62)
Equity dividends paid (11,121) (10,738) (11,121) (10,738)
Net cash outflow from financing (11,291) (13,474) (11,291) (13,474)
Increase/(decrease) in cash and cash equivalents 4,660  (4,093) 5,292  (4,728)
Reconciliation of net cash flow movements in funds:
Cash and cash equivalents at the start of the year 2,983  7,071  2,348  7,071 
Exchange movements (15) (15)
Net cash inflow/(outflow) from cash and cash equivalents
4,660 

(4,093)

5,292 

(4,728)
Cash at the end of the year 7,628  2,983  7,625  2,348 
Cash and cash equivalents comprise the following:
Cash at bank 7,628  2,983  7,625  2,348 
7,628  2,983  7,625  2,348 
Cash and cash equivalents received/(paid) during the period includes:
Dividend received 12,091  10,624  12,091  10,624 
Investment income and interest received 5,092  3,617  5,029  3,379 
Interest paid (1) (40) (1) (40)

The notes form part of these financial statements.



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 General Information and Significant Accounting Policies
Diverse is a company incorporated and registered in England and Wales. The principal activity of the Company is that of an investment trust company within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010.

The Group’s annual financial statements for the year ended 31 May 2017 have been prepared in conformity with IFRS as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board (“IASB”), and as applied in accordance with the provisions of the Companies Act 2006. The annual 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.

Basis of Preparation
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been prepared alongside the Income Statement.

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, rounded to the nearest £’000, except where otherwise indicated.

Going Concern
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 the resources to continue in business 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 (of which there are none of significance). Therefore, the consolidated financial statements have been prepared on the going concern basis.

Basis of Consolidation
IFRS 10 sets out the principles for the presentation and preparation of consolidated financial statements and establishes a single control model that applies to all entities.

The Company has made the significant accounting judgement that the Company meets the definition of an investment entity. However, the Company’s wholly-owned subsidiary, DIT Income Services Limited, is an extension of the Company through which it provides services that relate to the investment entity’s investment activities and the subsidiary is not itself an investment entity.  Therefore the subsidiary has been consolidated. The Group financial statements therefore consolidate the financial statements of the Company and its subsidiary, drawn up to 31 May 2017. The subsidiary is consolidated from the date of 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 subsidiary 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 profit after tax of £58,647,000 (2016: £25,751,000).

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.

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. The Directors are 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
*Years beginning on or after

Critical Accounting Judgements and Key Sources of Estimation Uncertainty
The preparation of financial statements in conformity with IFRS requires management to make 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.

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. This 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.

Upon initial recognition, the investments held by the Company, except for the investment in the subsidiary, are designated at ‘fair value through profit or loss’. They are included initially at fair value, which is taken to be their cost (excluding expenses incidental to the acquisition, which are written off in the Income Statement and allocated to ‘capital’ at the time of acquisition). When a purchase or sale is made under a contract, the terms of which require delivery within the time-frame of the relevant market, the investments concerned are recognised or derecognised on the trade date. Subsequent to initial recognition, investments are valued at fair value through profit or loss. For listed investments this is deemed to be bid market prices or closing prices for Stock Exchange Electronic Trading Service – quotes and crosses (“SETSqx”).

Changes in fair value of investments are recognised in the Income Statement as a capital item. On disposal, realised gains and losses are also recognised in the Income Statement as capital items.

The investment in the subsidiary company, DIT Income Services Limited, is held at cost (£1) (2016: £1). Investments held as current assets by the subsidiary undertaking are classified as ‘held for trading’ and are at fair value. Dealing profits or losses on these investments are taken to revenue in the Income Statement. There were no investments held by the subsidiary at the year end (2016: none).

All investments for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy in note 12.

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 and non-monetary assets held at fair value 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.

Financial Instruments
Derivatives, including Index Put options, which are listed investments, are classified as financial instruments at fair value through profit or loss 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 capital column of the Income Statement.

Cash and Cash Equivalents
For the purposes of the Balance Sheet, 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 purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts when applicable.

Trade Receivables, Trade Payables and Short-term Borrowings
Trade receivables, trade payables and short-term borrowings are measured at amortised cost.

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 Income Statement.

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 using the effective interest method.

Special dividends are taken to the 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.

All other income is accounted for on a time-apportioned accruals basis and is recognised in the Income Statement.

Expenses and Finance Costs
All expenses are accounted for on an accruals basis. On the basis of the Board’s expected long-term split of total returns in the form of capital and revenue returns of 75% and 25% respectively, the Company charges 75% of its management fee and finance costs to capital. All other administrative expenses are charged through the revenue column in the Income Statement.

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

Taxation
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes at the reporting date. 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 Company by virtue of its investment trust status. However, the net revenue (excluding UK dividend income) accruing to the Company is liable to corporation tax at the prevailing rates.

Dividends Payable to Shareholders
Dividends to shareholders 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. 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.

Special Reserve
The special reserve was created by a cancellation of the share premium account by order of the High Court in February 2012. Its main purpose is to allow the Company to meet annual redemption requests for ordinary shares. The costs of repurchasing ordinary shares and meeting annual redemption requests, including related stamp duty and transaction costs, are also charged to the special reserve.

Share Capital
The Company classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. The share capital of the Company comprises redeemable ordinary shares (“ordinary shares”), C shares, when in issue, and management shares.

The Company is a closed-ended investment company with an unlimited life. The ordinary shares are not puttable instruments because redemption is conditional upon certain market conditions and/or Board approval. As such, they are not required to be classified as debt under IAS 32 ‘Financial Instruments: Disclosure and Presentation’.

As defined in the Articles of Association, redemption of ordinary shares is at the sole discretion of the Directors, therefore the ordinary shares have been classified as equity.

The issuance, acquisition and resale of ordinary shares are accounted for as equity transactions and no gain or loss is recognised in the Income Statement.

Share Premium
The share premium account represents the accumulated premium paid for shares issued in previous periods above their normal value less issue expenses. This is a reserve forming part of the non-distributable reserves. The following items are taken to this reserve:

Capital Reserve
The following are taken to this reserve:

Revenue Reserve
The revenue reserve represents the surplus accumulated profits and is distributable.

2 Income

Year ended 
31 May 2017 
£’000 
Year ended 
31 May 2016 
£’000 
Income from investments:
UK dividends 11,456  10,816 
UK REIT dividend income 286  256 
Unfranked dividend income 4,433  2,746 
UK fixed interest 694  274 
16,869  14,092 
Other income:
Bank deposit interest
Exchange gains/(losses) 14  (5)
Net dealing profit of subsidiary* 63  238 
Underwriting income 65  43 
Total income 17,019  14,368 

* Represents realised trading gains and losses from trading transactions. There are no other expenses/income in respect of the subsidiary.

3 Management Fee

Year ended
31 May 2017
Year ended
31 May 2016
Revenue
£’000
Capital
£’000
Total
£’000
 Revenue
£’000
 Capital
£’000 
       Total
£’000
Management fee 852 2,555 3,407 851 2,554 3,405

The basic management fee payable to the AIFM is calculated at the rate of one-twelfth of 1.0% of the adjusted market capitalisation of the Company up to £300m and one-twelfth of 0.8% on the market capitalisation in excess of £300m on the last business day of each calendar month. The basic management fee accrues daily and is payable in arrears in respect of each calendar month. For the purpose of calculating the basic fee, the ‘adjusted market capitalisation’ of the Company is defined as the average daily mid-market price for an ordinary share and C share (when in issue), multiplied by the number of relevant shares in issue, excluding those held by the Company in treasury, on the last business day of the relevant month. In addition, the AIFM is entitled to receive a management fee on any Redemption Pool, as detailed in the Strategic Report above.

At 31 May 2017, an amount of £305,000 (2016: £283,000) was outstanding and due to Miton Trust Managers Limited in respect of management fees.

4 Other Expenses

Year ended
31 May 2017
£’000
Year ended
31 May 2016
£’000
Secretarial services 114 113
Auditor’s remuneration for:
Audit of the Group’s financial statements (payable by the Company only)
30

30
Directors’ fees (see the Directors’ Remuneration Report in the full Annual Report)
121

132
Other expenses 469 392
734 667

The audit of the Group's financial statements includes the cost of the audit of DIT Income Services Limited of £2,000 (2016: £2,000), which is paid by the parent company.

5 Finance Costs

Year ended
31 May 2017
Year ended
31 May 2016
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Bank debit interest 10  30  40 
BNYM £7.5m overdraft facility administration fee





12 
RBS £25m revolving loan facility arrangement fee

10 

14 



RBS £25m revolving loan facility non-utilisation fee
13 

40 

53 



RBS £25m revolving loan facility interest
16 

46 

62 



34  100  134  13  39  52 

The Company entered into a £25m revolving loan facility with The Royal Bank of Scotland (“RBS”) in September 2016. The facility provides the scope in certain circumstances to raise the level of borrowing to £50m.

The facility bears interest at the rate of 1.35% over LIBOR on any drawn down balance and a non-utilisation fee of 0.4% on any undrawn balance. The facility may be drawn in sterling or other currencies as approved by the lender.

The facility is due for renewal in September 2019.

An arrangement fee of £62,500 has been paid to RBS and is being amortised over the 3-year period of the facility.

The facility contains covenants which require that net borrowings will not, at any time, exceed 25% of the adjusted net asset value, and the net asset value shall, at all times, be equal to or greater than £210m. If the Company breaches either covenant, then it is required to notify the Bank of any default and the steps being taken to remedy it.

As at 31 May 2017, the facility was undrawn. The Company had drawn down £15m in March 2017, which was repaid in full on 31 May 2017.

This facility replaced the previous uncommitted revolving credit facility agreement with The Bank of New York Mellon (“BNYM”) of £7.5m.

6 Taxation

Year ended
31 May 2017
Year ended
31 May 2016
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Overseas tax not recoverable
23 


23 



Overseas tax – reversal of prior year’s tax now recoverable

(31)


-


(31)






Tax (recovery)/cost for the year
(8)


(8)

        - 


   

Year ended
31 May 2017
Year ended
31 May 2016
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Return on ordinary activities before taxation
15,399 

43,302 

58,701 

12,837 

13,201 

26,038 
Theoretical tax at UK corporation tax rate of 19.83% (2016: 20%)

3,054 


8,587 


11,641 


2,567 


2,640 


5,207 
Effects of:
- UK dividends that are not taxable
(2,272)


(2,272)

(2,150)


(2,150)
- Overseas dividends that are not taxable
(882)


(882)

(562)


(562)
- Realised dealing gains (12) (12) (48) (48)
- Non-taxable investment gains

(9,113)

(9,113)


(3,159)

(3,159)
- Overseas taxation suffered
23 


23 

48 


48 
- Prior year's irrecoverable withholding tax previously expensed

(31)




(31)






- Unrelieved expenses 112  526  638  193  519  712 
Tax (recovery)/charge for the year
(8)


(8)

48 


48 

Factors That May Affect Future Tax Charges

The Company has excess management expenses of £13,764,000 (2016: £10,605,000) that are available to offset future taxable revenue. At 31 May 2017, the Company has not recognised a deferred tax asset of £2,340,000 (2016: £2,121,000), calculated using the standard rate of corporation tax in the UK of 17%, in respect of these accumulated expenses as they will only be recoverable to the extent that there is sufficient future taxable revenue. It is unlikely that the Company will generate sufficient taxable income in the future to utilise these expenses to reduce future tax charges and therefore no deferred tax charge has been recognised.

The income from the subsidiary subject to taxation was £63,000 (2016: £238,000) and was offset against excess management expenses held by the Company using group relief.

In addition, deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company under HMRC rules.

7 Return per Share

Ordinary Shares

The return per ordinary share is based on the net profit after taxation of £58,709,000 (2016: £25,990,000) and on 383,487,239 (2016: 383,583,414) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

The return per ordinary share detailed above can be further analysed between revenue and capital as follows:

Year ended
31 May 2017
Year ended
31 May 2016
Revenue Capital Total Revenue Capital Total
Basic & diluted
Net profit (£’000) 15,407 43,302 58,709 12,789 13,201 25,990
Weighted average number of ordinary shares in issue

383,487,239


383,583,414
Return per ordinary share (pence)

4.02


11.29


15.31


3.33


3.44


6.77

8 Dividends per Ordinary Share

Amounts recognised as distributions to equity holders in the year:

Year ended
31 May 2017
Year ended
31 May 2016

£’000
pence
per share

£’000
pence
per share
In respect of the previous period:
Third interim dividend 2,876 0.75 - -
Fourth interim dividend - - 3,835 1.00
Final dividend 2,876 0.75 1,917 0.50
In respect of the year under review:
First interim dividend 2,684 0.70 2,493 0.65
Second interim dividend 2,685 0.70 2,493 0.65
Dividends distributed during the year 11,121 2.90 10,738 2.80

The Directors have declared a third interim dividend in respect of the year ended 31 May 2017 of 0.80p per ordinary share payable on 31 August 2017 to all shareholders on the register at close of business on 30 June 2017. A final dividend of 0.80p per ordinary share and a special dividend of 0.40p per ordinary share have also been recommended by the Board. Subject to shareholder approval at the forthcoming AGM, these dividends will be payable on 30 November 2017 to shareholders on the register at close of business on 29 September 2017. The ex-dividend date will be 28 September 2017.

The total dividends payable in respect of the financial year for the purposes of the income retention test for Section 1158 of the Corporation Tax Act 2010 are set out below.

Year ended
31 May 2017 
£’000 
Year ended 
31 May 2016 
£’000 
Revenue available for distribution by way of dividends for the year 15,407  12,789 
First interim dividend 0.70p (2016: 0.65p) per ordinary share (2,684) (2,493)
Second interim dividend 0.70p (2016: 0.65p) per ordinary share (2,685) (2,493)
Declared third interim dividend 0.80p (2016: 0.75p) per ordinary share
(3,068)

(2,876)
Proposed final dividend of 0.80p (2016: 0.75p) per ordinary share (3,068) (2,876)
Proposed special dividend of 0.40p (2016: nil) per ordinary share (1,534)
Estimated revenue reserve retained for the year 2,368  2,051 

9 Called-Up Share Capital

31 May 2017  31 May 2016 
number  £’000  number  £’000 
Ordinary shares 0.1p each
Opening balance 383,487,239  384  386,687,239  387 
Issue of ordinary shares -  
Cancellation of ordinary shares


(3,200,000)

(3)
383,487,239  384  383,487,239  384 

The rights and restrictions attached to shares, together with the capital structure of the Company, are set out in the full Annual Report.

Redemption of Ordinary Shares

The Company, which is a closed-ended investment company with an unlimited life, has a redemption facility through which shareholders are entitled to request the redemption of all or part of their holding of ordinary shares on an annual basis on 31 May in each year. As set out in the Articles of Association, the Board may, at its absolute discretion, elect not to operate the annual redemption facility in whole or in part. Accordingly, the ordinary shares have been classified as equity.

The Company had received redemption requests for 1,103,305 ordinary shares in respect of the 31 May 2017 Redemption Point. All of these shares were matched with buyers at a calculated Redemption Price of 103.02 pence per share. Following this and at the date of this Report, the issued share capital and voting rights remain unchanged at 383,487,239 ordinary shares.

Details of the redemption facility are set out in the full Annual Report.

Management Shares

The 50,000 management shares with a nominal value of £1 each were allotted to Miton Group plc on 30 March 2011, the parent company of the Manager, on the basis of an undertaking to pay one-quarter of their nominal value on or before 30 March 2016 and the balance on demand. The management shares are non-voting and non-redeemable and, upon a winding-up or on a return of capital of the Company, shall only receive the fixed amount of capital paid up on such shares and shall confer no right to any surplus capital or assets of the Company.

As at 31 May 2017, £12,500 had been paid up (2016: £12,500).

10 Reserves




2017
    Share 
premium 
 account 
    £’000 

Special 
reserve 
£’000 
Capital  reserve 
realised 
     £’000 
Capital 
reserve 
unrealised 
         £’000 

Revenue  reserve 
      £’000 
Opening balance 192,244  45,775  35,160  64,182  11,250 
Net gain on realisation of investments


21,707 


Exchange losses on settlements and currency accounts





(15)




Unrealised net increase in value of investments



35,161 

Movement in value of derivative instruments


(8,306)

(2,590)

Management fees/finance costs charged to capital


(2,655)


Equity dividends paid (11,121)
Revenue return on ordinary activities after tax




15,407 
Closing balance 192,244  45,775  45,891  96,753  15,536 

The distributable reserves of the Company are £106,495,000 (2016: £91,539,000).




2016
Share
premium
account
£’000

Special 
reserve 
£’000 
Capital  reserve 
realised 
£’000 
Capital 
reserve 
unrealised 
£’000 

Revenue 
reserve 
£’000 
Opening balance 192,244 48,558  19,821  66,320  9,199 
Cancellation of ordinary shares
-

(2,783)



Net gain on realisation of investments
-


18,213 


Exchange gain on settlements and currency accounts

-








Unrealised net decrease in value of investments
-



(1,337)

Movement in value of derivative instruments
-


(286)

(801)

Management fees/finance costs charged to capital
-


(2,593)


Equity dividends paid - (10,738)
Revenue return on ordinary activities after tax
-




12,789 
Closing balance 192,244 45,775  35,160  64,182  11,250 

At a General Meeting of the Company held on 6 April 2011, a resolution was passed approving the cancellation of the Company’s share premium account.

The Court subsequently confirmed this cancellation on 22 February 2012 and an amount of £48,558,000 was transferred from the Company’s share premium account to its special reserve. This amount can be treated as a distributable reserve for all purposes permitted by the Companies Act 2006 (as amended), and will enhance substantially the ability of the Company to meet annual redemption requests and to buy-back its own shares either into treasury or for cancellation.

11 Net Asset Value per Ordinary Share

The net asset value per ordinary share and the net asset values attributable at the year end were as follows:

Net asset value
per share
31 May 2017
pence
Net assets
attributable
31 May 2017
£’000
Net asset value
per share
31 May 2016
pence
Net assets
attributable
31 May 2016
£’000
Ordinary shares
- Basic and diluted

103.43

396,633

91.02

349,045

Net asset value per ordinary share is based on net assets at the year end and 383,487,239 ordinary shares (2016: 383,487,239), being the number of ordinary shares in issue at the year end.

The net asset value of £1 (2016: £1) per management share is based on net assets at the year end of £50,000 (2016: £50,000) and 50,000 (2016: 50,000) management shares. The shareholders have no right to any surplus capital or assets of the Company.

12 Investments

Group and Company 31 May 2017 
£’000 
31 May 2016
£’000
Investment portfolio summary:
Opening book cost 271,661  257,254
Opening investment holding gains 67,652  68,989
Total investments designated at fair value 339,313  326,243

   

Group and Company 31 May 2017 
£’000 
31 May 2016 
£’000 
Analysis of investment portfolio movements
Opening valuation 339,313  326,243 
Movements in the period:
Purchases at cost 69,452  62,216 
Sales - proceeds (80,923) (66,022)
          - gains on sales 21,707  18,213 
Increase in investment holding gains 35,161  (1,337)
Closing valuation 384,710  339,313 
Closing book cost 281,897  271,661 
Closing investment holding gains 102,813  67,652 
Total closing investments designated at fair value 384,710  339,313 

   

Year ended
31 May 2017
£’000
Year ended
31 May 2016
£’000
Transaction costs:
Costs on acquisitions 272 235
Costs on disposals 118 95
390 330

   

Year ended 
31 May 2017 
£’000 
Year ended 
31 May 2016 
£’000 
Analysis of capital gains/(losses)
Realised gains on sales 21,707 18,213 
Movement in unrealised gains/(losses) 35,161 (1,337)
56,868 16,876 

Fair Value Hierarchy

The Group is required to classify fair value measurements using a fair value hierarchy that reflects the subjectivity of the inputs used in measuring the fair value of each asset. 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. an exit price).The fair value hierarchy has the following levels:

The level in the fair value hierarchy within which the fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value of the investment.

The following table analyses within the fair value hierarchy the Group’s financial assets and liabilities (by class) measured at fair value at 31 May 2017.

Financial assets at fair value through profit or loss at 31 May 2017 Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Equity investments 375,779 - - 375,779
Derivative contracts 1,385 - - 1,385
Fixed interest bearing securities 2,515 - 6,416 8,931
379,679 - 6,416 386,095
Financial assets at fair value through profit or loss at 31 May 2016 Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Equity investments 330,342 2,962 - 333,304
Derivative contracts 8,026 - - 8,026
Fixed interest bearing securities 846 1,237 3,926 6,009
339,214 4,199 3,926 347,339

At 31 May 2017, all the Company’s financial assets at fair value through profit or loss (including the listed Put option) are included in Level 1 with the exception of the Loan Notes in William Sinclair, 600 Group, Aggregated Micro Power, Gable Holdings, Intercede, Sigmaroc and Active Energy, which are all classified as Level 3 investments (2016: same with the exception of the Intercede, Sigmaroc and Active Energy Loan Notes).

There are no Level 2 investments as at 31 May 2017 (2016: Accrol Group (Placing Shares) and Private & Commercial Finance 6% Notes).

Valuation Process for Level 3 Investments

Investments classified within Level 3 have significant 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 using recognised valuation methodologies including discounted cash flow modelling where relevant.

The Level 3 investments held by the Company currently consist of fixed interest bearing securities valued by the Manager with valuation confirmations provided to the Board on a regular basis. The equity securities of the issuing company of the Level 3 investments held are or have been publicly listed and, therefore, detailed public information is available to substantiate the future prospects of the issuing company. This information includes reported results, commentary on current trading and third party research.

The Group has seven Level 3 investments, being the holdings in William Sinclair, 600 Group, Aggregated Micro Power, Gable Holdings, Intercede, Sigmaroc and Active Energy Loan Notes. There are no other significant unobservable inputs with the measurement of its fair value at this stage and there have been no changes in valuation techniques during the year.

The following table summarises the Company’s Level 3 investments that were accounted for at fair value in the year ended 31 May 2017.

Year ended 
31 May 2017 
Level 3 
£’000 
Year ended 
31 May 2016 
Level 3 
£’000 
Opening fair value investments 3,926  3,142 
Purchase at cost 3,299  2,548 
Sales proceeds (1,495) (1,608)
Movement in investment holding gains
movement in unrealised 686  (156)
Closing fair value of investments 6,416  3,926 

Trading Income

The Company’s subsidiary completes trading transactions. The value of assets held by the subsidiary as at 31 May 2017 was £nil (2016: £nil). The difference between the sale and purchase of assets is trading income recognised in the Income Statement.

13 Derivative Contracts

Typically, derivative contracts serve as components of the Company’s investment strategy and are utilised primarily to structure and hedge investments, to enhance performance and reduce risk to the Group (the Company does not designate any derivative as a hedging instrument for hedge accounting purposes). The derivative contracts that the Company may hold from time to time or issue include: index-linked notes, contracts for differences, covered options and other equity-related derivative instruments.

Derivatives often reflect, at their inception, only a mutual exchange of promises with little or no transfer of tangible consideration. However, these instruments can involve a high degree of leverage and are very volatile. A relatively small movement in the underlying value of a derivative contract may have a significant impact on the profit and loss and net assets of the Group.

The Company’s investment objective sets limits on investments in derivatives with a high risk profile. The Manager is instructed to closely monitor the Company’s exposure under derivative contracts and any use of the 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. The Company will not enter into uncovered short positions.

As at 31 May 2017, the Group has positions in the following type of derivative:

Options

Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period.

The Company purchases either Put or Call options through regulated exchanges and OTC markets. Options purchased by the Company provide the Company with the opportunity to purchase (Call options) or sell (Put options) the underlying asset at an agreed-upon value either on or before the expiration of the option. The Company is exposed to credit risk on purchased options only to the extent of their carrying value, which is their fair value.

During the year, the Company sold the FTSE 100 – June 2017 6,000 Put option and purchased a FTSE 100 – March 2018 6,000 Put option. At the Balance Sheet date, the Put option had a fair value of £1,385,000 and a notional portfolio exposure of £141,676,000. Unrealised holding losses of £6,060,000 are detailed in the table below.

During the prior year, the Company sold the FTSE 100 – June 2016 5,800 Put option, purchased and sold a FTSE 100 March 2017 6,000 Put option, and purchased a FTSE 100 – June 2017 6,000 Put option. At the Balance Sheet date, the Put option had a fair value of £8,026,000 with a notional portfolio exposure of £117,388,000. Unrealised holding losses of £3,470,000 are detailed in the table below.

Listed Put options at fair value through profit or loss at
31 May 2017
Year ended 
31 May 2017 
£’000 
Year ended 
31 May 2016 
£’000 
Opening book cost 11,496  4,776 
Opening investment holding loss (3,470) (2,669)
Total investments designated at fair value 8,026  2,107 
Analysis of investment portfolio movements
Opening valuation 8,026  2,107 
Movements in the period:
Purchases at cost 7,445  17,243 
Sales – proceeds (3,190) (10,237)
– losses on sales (8,306) (286)
Movement in unrealised loss (2,590) (801)
Closing fair valuation 1,385  8,026 
Closing book cost 7,445  11,496 
Closing unrealised loss (6,060) (3,470)
Closing fair value 1,385  8,026 

   

At 
31 May 2017 
£’000 
At 
31 May 2016 
£’000 
Analysis of capital losses on options
Realised losses on sales (8,306) (286)
Movement in unrealised losses (2,590) (801)
(10,896) (1,087)

Since the year end, the Company has closed out the long position in the FTSE 100 – March 2018 6,000 Put, and has opened a long position in a FTSE 100 – March 2019 6,500 Put and opened a short position in a FTSE 100 – March 2018 6,500 Put.

14 Substantial Share Interests

The Company has notified interests in 3% or more of the voting rights of 32 (2016: 28) investee companies (none of which are closed-end investment funds). The Board does not consider any of the Company’s other equity investments to be individually material in the context of the financial statements.

15 Investment in Subsidiary

The Company owns the whole of the issued ordinary share capital (£1) of DIT Income Services Limited, an investment dealing company registered in England and Wales. The subsidiary is held at cost of £1 and has provided loans to the Company amounting to £705,000 at 31 May 2017 (2016: £11,000).

The registered office is Beaufort House, 51 New North Road, Exeter, Devon EX4 4EP.

16 Trade and Other Receivables

Group Company
31 May 2017
£’000
31 May 2016
£’000
31 May 2017
£’000
31 May 2016
£’000
Amounts due from brokers 1,474 255 1,474 255
Dividends receivable 1,376 1,586 1,376 1,586
Accrued income 100 54 100 54
Taxation recoverable 279 103 279 103
Prepayments and other debtors
108

66

108

66
3,337 2,064 3,337 2,064

17 Trade and Other Payables

Group Company
31 May 2017 £’000 31 May 2016
£’000
31 May 2017
£’000
31 May 2016
£’000
Amounts due to brokers - 2,962 - 2,962
Amounts due to subsidiary - - 705 11
Other creditors 427 379 427 379
427 3,341 1,132 3,352

18 Capital Commitments and Contingent Liabilities

As at 31 May 2017, there were no outstanding commitments or contingent liabilities (2016: none).

19 Analysis of Financial Assets and Liabilities

Investment Objective and Policy

The Group’s investment objective and policy are detailed above.

The Group’s investing activities in pursuit of its investment objective involve certain inherent risks.

The Group’s financial instruments comprise:

The risks identified arising from the Group’s financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency risk), liquidity risk and credit and counterparty risk. The Group may enter into derivative contracts to manage risk. The Group has held, sold and taken out listed Put options against the FTSE 100 Index during the year. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies have remained unchanged since the beginning of the accounting year.

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 Manager 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.

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’s exposure to other changes in market prices as at 31 May 2017 on its equity and debt investments and listed Put index option held at fair value through profit or loss was £386,095,000 (2016: £347,339,000).

A 10% increase in the market value of its listed equity investments at 31 May 2017 would have increased net assets attributable to shareholders by £38,610,000 (2016: £34,734,000). An equal change in the opposite direction would have decreased the net assets and net profit available to shareholders by an equal and opposite amount. The analysis is based on closing balances only and is not representative of the year as a whole.

Interest rate risk

Interest rate movements may affect the level of income receivable on cash deposits and payable on its revolving credit facility. 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. There was limited exposure to interest bearing liabilities during the year ended 31 May 2017 (2016: same).

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.

As disclosed in note 5, during the year the Company ended an uncommitted revolving credit facility with BNYM, in September 2016, and entered into a new, unsecured revolving loan facility with RBS. The new facility was undrawn as at the Balance Sheet date (2016: BNYM facility undrawn).

As detailed above, at 31 May 2017 the Company held nine (2016: six) fixed income securities representing 2.3% of the total investment portfolio (2016: 1.7%).

The interest rate profile of the Group (excluding short-term debtors and creditors) was as follows:





As at 31 May 2017
Weighted
average
interest
rate
%


Floating  rate 
£’000 



Fixed rate
£’000
Assets and liabilities
Fixed interest securities 7.85 - 8,931
Cash at bank - 7,628 -
Bank overdraft - - -
7,628 8,931

   




As at 31 May 2016
Weighted
average
interest
rate
%



Floating  rate 
£’000 



Fixed rate
£’000
Assets and liabilities
Fixed interest securities 6.58 - 6,009
Cash at bank - 2,983 -
Bank overdraft - - -
2,983 6,009

The weighted average interest rate is based on the current yield of each asset, weighted by its market value.

The weighted average fixed interest rate is based on the current yield of each asset, weighted by its current market value. The maturity dates and nominal interest rates on these investments held at fair value through profit or loss are shown in the portfolio information above. The weighted average years to maturity are 4.20 years (2016: 2.60 years).

The floating rate assets and liabilities consist of cash deposits on call earning interest at the prevailing market rates and the bank overdraft, with interest payable at the rate of 1.75% above the prevailing bank base rate (currently 0.50%).

The interest rate risk sensitivity of the Group on its floating rate assets and liabilities is given below:

If interest rates had been 50 basis points higher or lower and all other variables were held constant, the Group’s net assets and profit for the year ended 31 May 2017 would decrease/increase by £38,000 (2016: decrease/increase by £15,000). This is attributable to the Group’s exposure to interest rates on its floating rate cash balances and bank overdraft as at the year ended 31 May 2017, and is not considered by the Directors to be representative for the year as a whole.

Foreign currency risk

Although the Company’s performance is measured in sterling, a proportion of the Group’s assets may be either denominated in other currencies or are in investments with currency exposure. Any income denominated in a foreign currency is converted into sterling upon receipt. At the Balance Sheet date, all the Group’s assets were denominated in sterling and accordingly the only currency exposure the Group has is through the trading activities of its investee companies.

Liquidity Risk

Liquidity risk is not considered to be significant as the Group’s assets primarily comprise cash and readily realisable securities, which can under normal conditions be sold to meet funding commitments if necessary. They may, however, be difficult to realise in adverse market conditions. The Group can achieve short-term flexibility by the use of its overdraft facility.

The maturity profile of the Group’s financial liabilities of £427,000 (2016: £3,341,000) are all due in one year or less.

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 31 May 2017 was £12,350,000 (2016: £13,073,000). The calculation is based on the Group’s credit risk exposure as at 31 May 2017 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.

None of the Group’s assets are past due or impaired (2016: same).

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 was one derivative contract open (2016: one). The FTSE 100 Put option aims to provide a limited degree of protection from a fall in the value of the FTSE 100 Index and has a strike price of 6,000, and would not materially impact the portfolio returns if a large market movement did occur. No other contracts were entered into during the year (2016: the Group also entered and exited a March 2017 6,000 Put option).

Capital Management Policies

The Company’s capital management objectives are:

As stated in the investment policy, the Company has authority to borrow up to 15% of net asset value through a mixture of bank facilities and certain derivative instruments. There were no borrowings as at 31 May 2017 (2016: £nil). Also, as a public company the minimum share capital is £50,000.

2017   
£’000   
2016   
£’000   
The Company’s capital at 31 May comprised:
Debt:
Bank loan facility/bank overdraft facility -    -   
Equity:
Equity share capital 434    434   
Retained earnings and other reserves 396,199    348,611   
Total shareholders’ funds 396,633    349,045   
Debt as a % of net assets 0.00% 0.00%

The Board, with the assistance of the Manager, monitors and reviews the broad structure of the Company’s capital on an ongoing basis. This review includes:

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

20 Transactions with the Manager and Related Parties

The amounts paid to the Manager pursuant to the management agreement are disclosed in note 3. Management fees for the year amounted to £3,407,000 (2016: £3,405,000).

As at the year end, the following amounts were outstanding in respect of management fees: £305,000 (2016: £283,000).

Fees paid to the Company’s Directors are disclosed in the Directors' Remuneration Report in the full Annual Report. At the year end, there were no outstanding fees payable to Directors (2016: £nil).

There were no other identifiable related parties at the year end.

ANNUAL GENERAL MEETING

The Company’s Annual General Meeting will be held on Tuesday, 10 October 2017 at 11.30am, at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH.

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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Annual Financial Report - RNS