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Annual Financial Report

Released 07:00 23-Nov-2018

Annual Financial Report

MANCHESTER AND LONDON INVESTMENT TRUST PLC
(the “Company”)

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 JULY 2018

The full Annual Report and Financial Statements for the year ended 31 July 2018 can be found on the Company’s website at www.mlcapman.com/manchester-london-investment-trust-plc.


STRATEGIC REPORT

Financial Summary

Total Return Year to 
31 July 
 2018 
Year to  
31 July  
2017  
Percentage 
 increase/ 
(decrease)

Total return (£’000)

26,792 

20,055  

33.59% 

Return per Ordinary Share

115.27p 

92.43p  

24.71% 

Total revenue return per Ordinary Share

(2.00p)

0.91p(i)

(319.78%)

Dividend per Ordinary Share

12.00p 

9.00p  

33.33% 

   

Capital As at
31 July
2018 
As at 
31 July 
2017 
Percentage 
increase/ 
(decrease) 

Net assets attributable to equity Shareholders(ii) (£’000)

130,388

94,661 

37.74% 

Net asset value (“NAV”) per Ordinary Share

532.81p

429.05p 

24.18% 

NAV total return(iii)†

26.87%

26.91%

(0.04%)

Benchmark performance - Total return basis(iv)

9.23%

14.71%

(5.48%)

Share price

526.00p

381.00p

38.06% 

Share price discount to NAV

1.28%

11.20%

(9.92%)

(i) Restated following a change in accounting policy. The total return remains unchanged. See note 2.

(ii) NAV as at 31 July 2018 includes a net £1,601,000 increase in respect of own Shares bought back and resold during the year (2017: £1,879,000 increase) and a net £9,628,000 increase in respect of new shares issued in the year (2017: nil).

(iii) Total return including dividends reinvested, as sourced from Bloomberg.

(iv) MSCI UK Investable Market Index (MXGBIM), as sourced from Bloomberg.

Ongoing Charges Year to
31 July
2018 
Year to
31 July
2017
Ongoing charges as a percentage of average net assets*
1.00%

0.95%

* Calculated in accordance with the guidelines issued by the Association of Investment Companies (the “AIC”).
See Glossary below.


CHAIRMAN’S STATEMENT

Results for the year ended 31 July 2018

The portfolio remains focused on larger capitalisation stocks listed in developed markets which are seeking global growth.

The Company’s portfolio performance for the financial year under review has led to a NAV total return per Share of 26.9%* (2017: 22.3%*). The outperformance of the Company against our benchmark for the three years to 31 July 2018 on a total return basis now stands at 67.3%* (2017:36.6%*).

The discount the Shares trade at to their NAV per Share has narrowed during the year and was just over 1% at the year end (2017:11.2%).

Dividend

The Directors are proposing a final ordinary dividend of 8.0 pence per Share for the financial year 2018. Accordingly, on a per Share basis, the dividends proposed or paid out in respect of the 2018 financial year total 12.0 pence, including the 4.0 pence interim dividend paid in May 2018. These dividends represent a yield of 2.3% on the Share price as at the year end (2017: 2.4%).

Alternative Investment Fund Manager and Depositary

Following the increase in its assets under management, the Company appointed its Investment Manager, M&L Capital Management Limited (the “Manager” or “MLCM”), as the Alternative Investment Fund Manager (the “AIFM”) of the Company and Indos Financial Limited as its Depositary on 17 January 2018, in accordance with the requirements of the EU Alternative Investment Fund Managers Directive (“AIFMD”).

The Board

The Board is delighted to welcome Daniel Wright who was appointed as a non-executive Director of the Company on 29 October 2018. Mr Wright, a chartered accountant, has a broad range of experience in both the public and private sectors and is currently the executive chairman of Accrol Group Holdings plc.

I shall be retiring from the Board at the conclusion of the forthcoming Annual General Meeting, when David Harris will succeed me as Chairman of the Company. Daniel Wright will become the Audit Committee chairman and the Senior Independent Director following the Annual General Meeting. The Audit Committee will comprise Daniel Wright and David Harris.

I have every confidence in the future of the Company under the direction of my colleagues.

Annual General Meeting

I look forward to welcoming Shareholders to our forty-sixth Annual General Meeting, to be held at the Members Room, Chartered Accountants’ Hall, One Moorgate Place, London EC2R 6EA at 11.45 am on Tuesday, 15 January 2019.

Peter Stanley
Chairman

22 November 2018

* Source: Bloomberg. See Glossary below.


MANAGER’S REVIEW

Portfolio management

The portfolio delivered a high double-digit outperformance against the benchmark driven by our sector positioning.

The portfolio segments can be broken down in contribution to base currency performance terms over the year as follows:


Total return of underlying sector holdings in local currency
(excluding costs and foreign exchange)


2018 


2017 
Technology investments 19.5%  21.5% 
Consumer investments 8.4%  6.3% 
Healthcare investments 0.9%  1.9% 
Other (including costs, carry and foreign exchange) (1.9%) (2.8%)
Total NAV per Share return 26.9%  26.9% 

Source: Bloomberg.

Technology investments

Technology (under which we include the Information Technology GICS (Global Industry Classification Standard) sector and technology/disruption orientated funds) delivered roughly 72% of NAV total return per Share.

The four largest holdings in this sector, Alphabet Inc, Microsoft Corporation, Alibaba Group Holding Ltd and Tencent Holdings Ltd, accounted for around 50% of the sector return.

Other material positive performers included NVIDIA Corporation, salesforce.com Inc, Polar Capital Technology Trust plc, Scottish Mortgage Investment Trust PLC, PayPal Holdings Inc, Apple Inc, Adobe Systems Inc, ROBO Global Robotics and Automation GO UCITS ETF, Facebook Inc, Intuit Inc and Activision Blizzard Inc. There were no material negative contributors.

We further increased our exposure to technology this year. The portfolio’s delta-adjusted exposure to the sector is now around 75% of net assets.

Consumer investments

Consumer (under which we include both the Consumer Staples and the Consumer Discretionary GICS sectors) delivered around 31% of NAV total return per Share.

Amazon.com Inc was the dominant driver of this return, with the rest of the sector holdings roughly breaking even between them.

Other material positive contributors included LVMH Moët Hennessy Louis Vuitton SE and Pernod Ricard SA.

The only material negative performer was JD.com Inc, which we disposed of during the year.

The portfolio’s delta-adjusted exposure to the sector remains around 20% of net assets.

Healthcare and pharmaceutical investments

Healthcare (under which we include the Healthcare GICS sector and Healthcare-orientated funds) delivered roughly 3% of NAV total return per Share.

Material positive contributors included Align Technology Inc and Zoetis Inc.

The only material negative performer was GlaxoSmithKline plc, which we disposed of during the year.

We disposed of all Pharmaceutical exposure during the year and hence the portfolio’s delta-adjusted exposure to the Healthcare sector now represents just 1% of net assets.

Other investments

We increased short positions over the year, particularly in the Real Estate and Banking sectors. Other investments now represent around negative 5% of net assets.

Professional negligence liability risks

The Manager maintains professional indemnity insurance to cover the potential liability risks arising from professional negligence. The Manager does not hold specific additional own funds against liability arising from its own professional negligence.

Valuation

The Manager has overall responsibility and oversight on how the Company’s assets are priced and valued. In addition, the Manager consults with the Board of the Company in determining the various methodologies and procedures applied when pricing and valuing the securities of the Company.

The Manager’s valuation policy sets out its approach to the valuation of the Company’s portfolio of assets. Oversight of the policy, and determination of the valuation of assets which are unlisted or for which published prices are not available, is the responsibility of the Manager’s Valuation Committee, which operates independently of the Manager’s portfolio management function.

The Valuation Committee meets at least on a monthly basis and reports to the Company’s Board on all issues relating to the valuation of the Company.

The valuation policy has been prepared to clarify the methodology used in valuing all of the securities that constitute the portfolio of the Company and explains the generic methodology or protocol used for valuing different types of securities, valuation methodologies and procedures for each security that is part of the portfolio of the Company. The values of those securities are an integral part of the Company’s NAV and NAV per Share calculation. The NAV of the Portfolio is calculated by the Administrator to the nearest two decimal places in Sterling, which is the base currency of the portfolio, as at the valuation point. The NAV is calculated weekly.

The vast majority of the portfolio consists of quoted equities, whose prices are published by independent sources.

The valuation policy specifies how the Company’s securities will be priced. It should, however, be noted that financial reporting requirements oblige the Board to ensure that the audited financial statements of the Company are prepared such that all securities are measured at ‘Fair Value’.

Quoted equities, which form the vast majority of the Company’s investment portfolio, are valued daily. The valuation intervals of other assets vary according to their nature but all assets are re-valued at least annually.

M&L Capital Management Limited
Manager

22 November 2018

Equity exposures and portfolio sector analysis

Equity exposures (longs)
As at 31 July 2018

Company Sector * Valuation 
£’000 
% of net 
assets 
Amazon.com, Inc. Consumer Discretionary 25,583  19.62 
Alphabet Inc.** Information Technology 20,471  15.70 
Microsoft Corporation** Information Technology 19,578  15.02 
Alibaba Group Holding Ltd** Information Technology 16,771  12.86 
Apple Inc. Information Technology 6,702  5.14 
Tencent Holdings Ltd** Information Technology 5,831  4.47 
salesforce.com, Inc. Information Technology 4,862  3.73 
PayPal Holdings Inc.** Information Technology 4,828  3.70 
Polar Capital Technology Trust plc Funds 4,826  3.70 
Facebook Inc. Information Technology 4,319  3.31 
Scottish Mortgage Investment Trust plc Funds 4,062  3.11 
NVIDIA Corporation** Information Technology 3,668  2.81 
LVMH Moët Hennessy Louis Vuitton SE** Consumer Discretionary 2,863  2.20 
Zoetis Inc. Health Care 2,416  1.85 
Adobe Systems Inc.** Information Technology 2,266  1.74 
Activision Blizzard Inc.** Information Technology 2,211  1.70 
Electronic Arts** Information Technology 2,022  1.55 
Booking Holdings** Consumer Discretionary 1,477  1.13 
Match.com** Information Technology 1,316  1.01 
Align Technology Information Technology 1,108  0.85 
Ubisoft** Information Technology 977  0.75 
Zalando** Consumer Discretionary 871  0.67 
Ctrip.com** Consumer Discretionary 715  0.55 
Avast** Information Technology 260  0.20 
Total long equities exposure 140,003  107.37 
Unlisted debentures 221  0.17 
Total long positions 140,224  107.54 
Other net assets and liabilities (9,836) (7.54)
Net assets 130,388  100.00 

* GICS – Global Industry Classification Standard.
** Including equity swap exposures as detailed in note 14.

Portfolio sector analysis
As at 31 July 2018


Sector
% of net 
 assets 
Information Technology 74.5 
Consumer Discretionary 24.2 
Funds 6.8 
Healthcare & Pharmaceuticals 1.8 
Unlisted debentures 0.2 
Cash and other net current assets and liabilities (7.5)
Net assets 100.0 


PRINCIPAL PORTFOLIO HOLDINGS (BASED ON NET DELTA-ADJUSTED EXPOSURE)

Amazon.com Inc. (“Amazon”)

Amazon is the world’s largest e-commerce company and is a major disruptive force in the retail market. Amazon is also increasingly becoming a much broader content and services platform for both consumers and businesses. In particular, Amazon Web Services is a leading provider of public cloud computing.

Alphabet Inc. (“Alphabet”)

Alphabet is a global technology company that is at the forefront of innovation of internet-based services and future technologies. Current areas of Alphabet’s portfolio include online advertising, Google search, YouTube, cloud computing, Nest and Android operating systems. Future areas of growth for Alphabet may also include Internet of Things, driverless vehicles, healthcare and artificial intelligence.

Microsoft Corporation (“Microsoft”)

Microsoft is best known for the Windows operating system and Office products. Longer-term focus for Microsoft lies in the public cloud market, where it is building a strong platform to compete against Amazon and Alphabet.

Alibaba Group Holding Ltd (“Alibaba”)

Alibaba is China’s largest e-commerce platform. We expect e-commerce to drive further share gains from traditional retail channels. Like Amazon, Alibaba is also extending its platform in new directions, with payments, media, entertainment and cloud offerings.

Tencent Holdings Ltd (“Tencent”)

Tencent is a Chinese internet giant, with positions in online gaming, social media, digital payments and digital entertainment.

Polar Capital Technology Trust plc (“Polar Capital”)

Polar Capital is a technology-focused investment trust. The fund gives us exposure to more niche areas of the sector and trades at a small discount.

PayPal Holdings Inc. (“Paypal”)

PayPal is a global digital payments company. We see growth driven by increasing penetration of e-commerce and technological disruption to traditional payment models.

Facebook Inc. (“Facebook”)

Facebook is the largest global social media platform. The company is building an interesting portfolio of other social media platforms and technologies, such as WhatsApp, Messenger and Oculus Rift VR to strengthen the Facebook ecosystem.

Scottish Mortgage Investment Trust PLC (“Scottish Mortgage”)

Scottish Mortgage is a disruption-orientated investment trust managed by Baillie Gifford. They share a similar philosophy to us and allow us to get exposure to a number of non-listed fast growth companies such as Uber and Airbnb.

NVIDIA Corporation (“Nvidia”)

Nvidia is the world leader in graphics processing unit (GPU) chips, used for video games, artificial intelligence and cloud applications.

Percentage of portfolio by holding at the year end*:

Alphabet Inc. 15.71%
Amazon.com Inc. 15.60%
Microsoft Corporation 15.03%
Alibaba Group Holding Limited 12.87%
Tencent Holdings Ltd 4.31%
Polar Capital Technology Trust plc 3.70%
PayPal Holdings Inc. 3.39%
Facebook Inc. 3.29%
Scottish Mortgage Investment Trust PLC 3.12%
NVIDIA Corporation 2.82%

* Based on net delta-adjusted exposure.

Investment record of the last ten years

Year ended Total 
Return  £’000 
Return per 
Ordinary Share* 
(p) 
Dividend per 
Ordinary 
 Share 
(p) 
Net assets £’000 NAV per
Share*
(p)
31 July 2009 645  4.43  10.50  57,495 328.44
31 July 2010 13,151  71.75  11.50  85,203 379.40
31 July 2011 15,691  69.87  12.50  98,267 437.60
31 July 2012 (19,945) (88.81) 13.00  75,515 336.26
31 July 2013 2,522  11.23  13.75  75,050 334.19
31 July 2014 (6,295) (28.08) 13.75  64,361 293.20
31 July 2015 2,483  11.47  6.00  63,074 293.35
31 July 2016 13,424  62.50  13.36  75,546 350.81
31 July 2017 20,055  92.43  9.00  94,661 429.05
31 July 2018 26,792  115.27  12.00  130,388 532.81

* Basic and fully diluted.

Business model

The Company is an investment company as defined by Section 833 of the Companies Act 2006 and operates as an investment trust in accordance with Section 1158 of the Corporation Tax Act 2010.

The Company is also governed by the Listing Rules and Disclosure Guidance and Transparency Rules of the Financial Conduct Authority (the “FCA”) and is listed on the Premium Segment of the Main Market of the London Stock Exchange under the EPIC code “MNL”.

A review of investment activities for the year ended 31 July 2018 is detailed in the Manager’s Review above.

Investment objective

The investment objective of the Company is to achieve capital appreciation together with a reasonable level of income.

Investment policy

Asset allocation

The Company’s investment objective is sought to be achieved through a policy of actively investing in a diversified portfolio, comprising UK and overseas equities and fixed interest securities. The Company seeks to invest in companies whose shares are admitted to trading on a regulated market. However, it may invest in a small number of equities and fixed interest securities of companies whose capital is not admitted to trading on a regulated market. Investment in overseas equities is utilised by the Company to increase the risk diversification of the Company’s portfolio and to reduce dependence on the UK economy in addressing the growth and income elements of the Company’s investment objective.

The Company may invest in derivatives, money market instruments, currency instruments, contracts for differences (“CFDs”), futures, forwards and options for the purposes of (i) holding investments and (ii) hedging positions against movements in, for example, equity markets, currencies and interest rates.

There are no maximum exposure limits to any one particular classification of equity or fixed interest security. The Company’s investments are not limited to any one industry sector and its current investment portfolio is spread across a range of sectors. The Company has no specific criteria regarding market capitalisation or credit ratings in respect of investee companies.

Risk diversification

The Company intends to maintain a relatively focused portfolio, seeking capital growth by investing in approximately 20 to 40 securities. The Company will not invest more than 15% of the gross assets of the Company at the time of investment in any one security. However, the Company may invest up to 50% of the gross assets of the Company at the time of investment in an investment company subsidiary, subject always to other restrictions set out in this investment policy and the Listing Rules.

The Company intends to be fully invested whenever possible. However, during periods in which changes in economic conditions or other factors so warrant, the Manager may reduce the Company’s exposure to one or more asset classes and increase the Company’s position in cash and/or money market instruments.

Gearing

The Company may borrow to gear the Company’s returns when the Manager believes it is in Shareholders’ interests to do so. The Company’s investment policy and the Articles permit the Company to incur borrowing up to a sum equal to two times the adjusted total of capital and reserves. Any change to the Company’s borrowing policy will only be made with the approval of Shareholders by special resolution.

The effect of gearing may be achieved without borrowing by investing in a range of different types of investments including derivatives. The Company will not enter into any investments which have the effect of increasing the Company’s net gearing beyond the above limit.

General

In addition to the above, the Company will observe the investment restrictions imposed from time to time by the Listing Rules which are applicable to investment companies with shares listed on the Official List of the United Kingdom Listing Authority (“UKLA”) under Chapter 15.

In accordance with the Listing Rules, the Company will manage and invest its assets in accordance with the Company’s investment policy. Any material changes in the principal investment policies and restrictions (as set out above) of the Company will only be made with the approval of Shareholders by ordinary resolution.

In the event of any breach of the investment restrictions applicable to the Company, Shareholders will be informed of the remedial actions to be taken by the Board and the Manager by an announcement issued through a regulatory information service approved by the FCA.

Dividend policy

The Company may declare dividends as justified by funds available for distribution. The Company will not retain in respect of any accounting period an amount which is greater than 15% of revenue profit in that period.

The dividend payments are split in order to better reflect the sources of the Company’s income. Recurring income from dividends on underlying holdings is paid out as ordinary dividends, whilst non-recurring (other investment) income is paid out as special dividends.

Results and dividends

The results for the year are set out in the Statement of Comprehensive Income and the Statement of Changes in Equity below.

For the year ended 31 July 2018, the net revenue return attributable to Shareholders was negative £465,000 (2017: positive £198,000) and the net capital return attributable to Shareholders was £27,257,000 (2017: £19,857,000). Total Shareholders’ funds increased by 37.7% to £130,388,000 (2017: £94,661,000).

The dividends paid/proposed by the Board for 2017 and 2018 are set out below:

Year ended 
31 July 2018
pence per Share
Year ended
31 July 2017
pence per Share
Interim ordinary dividend 4.00 1.82
First special dividend - 1.18
Proposed final ordinary dividend 8.00 1.76
Proposed final special dividend - 4.24
12.00 9.00

Subject to the approval of Shareholders at the forthcoming Annual General Meeting, the proposed final ordinary dividend will be payable on 15 February 2019 to Shareholders on the register at the close of business on 25 January 2019. The ex-dividend date will be 24 January 2019.

Further details of the dividends paid in respect of the years ended 31 July 2018 and 31 July 2017 are set out in note 8 below.

Principal risks and uncertainties

The Board considers that the following are the principal risks and uncertainties facing the Company and the actions taken to manage each of these are set out below. If one or more of these risks materialised, it could potentially have a significant impact upon the Company’s ability to achieve its investment objective. These risks are formalised within the risk matrix maintained by the Company’s Manager.

Risk How the risk is managed
Investment Performance Risk
The performance of the Company may not be in line with its investment objectives.
Investment performance is monitored daily by both the investment and risk functions of the AIFM. This includes a daily performance attribution analysis from the independent risk function (on both an absolute and relative basis) highlighting the return contribution of all investments. The AIFM takes an active risk management approach and regularly cuts or hedges underperforming investments.

Other investment risk metrics monitored on a daily basis include: Delta-Adjusted Exposure, Parametric Value at Risk, Monte Carlo Simulation Value at Risk, Historical Simulation Value at Risk (VaR measures are calculated at 95%, 97.5% and 99% confidence levels), FX exposure, Portfolio Beta, Portfolio Gamma, Net Long Exposure/Net Assets ratio, Active Share, Portfolio Historic Volatility, Portfolio Modelled Volatility and the key drivers of modelled volatility.
Key Man Risk and Reputational Risk
The Company may be unable to fulfil its investment objectives following the departure of critical staff.
The AIFM has a remuneration policy that incentivises key staff to take a long-term view as variable rewards are spread over a five-year period. The AIFM also has documented policies and procedures, including a business continuity plan, to ensure continuity of operations in the unlikely event of a departure.

The AIFM has a comprehensive compliance framework to ensure strict adherence to relevant rules and requirements.
Fund Valuation Risk
The Company’s valuation is not accurately represented to investors.
NAVs are produced independently by the Administrator, based on the Company’s valuation policy.

Valuation is overseen and reviewed by the AIFM’s Valuation Committee which reconciles and checks NAV reports prior to publication.

It should be noted that the vast majority of the portfolio consists of quoted equities, whose prices are provided by independent market sources; hence material input into the valuation process is rarely required from the Valuation Committee.
Third-Party Service Providers
Failure of outsourced service providers in performing their contractual duties.
All outsourced relationships are subject to an extensive dual-directional due diligence process and to ongoing monitoring. Where possible, the Company appoints a diversified pool of outsourced providers to ensure continuity of operations should a service provider fail.

The cyber security of third-party service providers is a key risk that is monitored on an ongoing basis. The safe custody of the Company’s assets may be compromised through control failures by the Depositary or Custodian, including cyber security incidents. To mitigate this risk, the AIFM receives monthly reports from the Depositary confirming safe custody of the Company’s assets held by the Custodian.
Regulatory Risk
A breach of regulatory rules/other legislation resulting in the Company not meeting its objectives or investors’ loss.
The AIFM adopts a series of pre-trade and post-trade controls to minimise breaches. MLCM uses a fully integrated order management system, electronic execution system, portfolio management system and risk system developed by Bloomberg. These systems include automated compliance checks, both pre and post execution, in addition to manual checks from the investment team. All trades are reviewed by the Chief Risk and Compliance Officer at MLCM prior to release to the Prime Broker. The AIFM undertakes ongoing compliance monitoring of the portfolio through a system of daily reporting.

Furthermore, there is additional oversight from the Depositary, which ensures that there are three distinct layers of independent monitoring.
Fiduciary Risk
The Company may not be managed to the agreed guidelines.
The Company has a clear documented investment policy and risk profile. A strong system and monitoring culture, with an independent second line function, provide oversight on a daily basis and more formally through various monthly governance committees.
Fraud Risk
Fraudulent actions may cause harm to the Company’s investment activities and objectives.
The AIFM has extensive fraud prevention controls and adopts a zero tolerance approach towards fraudulent behaviour and breaches of protocol surrounding fraud prevention. The transfer of cash or securities involve the use of dual authorisation and two factor authentication to ensure fraud prevention, such that only authorised personnel are able to access the core systems and submit transfers. The second line of defence has access to core systems to ensure complete oversight of all transactions.

In addition to the above, the Board considers the following to be the principal financial risks associated with investing in the Company: market risk, interest rate risk, liquidity risk, currency rate risk and credit and counterparty risk. An explanation of these risks and how they are managed along with the Company’s capital management policies are contained in note 18 of the Financial Statements below.

The Board, through the Audit Committee, has undertaken a robust assessment and review of all the risks stated above and in note 18 of the Financial Statements, 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.

In accordance with guidance issued to directors of listed companies, the Directors confirm that they have carried out a review of the effectiveness of the systems of internal financial control during the year ended 31 July 2018, as set out in the full Annual Report. There were no matters arising from this review that required further investigation and no significant failings or weaknesses were identified.

Year-end gearing

At the year end, gross long equity exposure represented 107.37% (2017: 109.97%) of net assets.

Key performance indicators

The Board considers the most important key performance indicator to be the comparison with its benchmark index. This is referred to in the Financial Summary above.

The other key measures by which the Board judges the success of the Company are the Share price, the NAV per Share and the ongoing charges measure.

Total net assets at 31 July 2018 amounted to £130,388,000 compared with £94,661,000 at 31 July 2017, an increase of 37.74%, whilst the fully diluted NAV per Ordinary Share increased to 532.81p from 429.05p.

Net revenue return after taxation for the year was a negative £465,000 (2017: positive £198,000), a decrease of 334.85%.

The Share price during the period under review has been quoted at discounts to NAV ranging from 17.69% to a premium of 1.93%.

Ongoing charges set out above is a measure of the total expenses (including those charged to capital) expressed as a percentage of the average net assets over the year. The Board regularly reviews the ongoing charges measure and monitors Company expenses.

Future development

The Board and the Manager do not currently foresee any material changes to the business of the Company in the near future.

Management arrangements

Under the terms of the management agreement, MLCM will manage the Company's portfolio in accordance with the investment policy determined by the Board. The management agreement has a termination period of three months. At a General Meeting of the Company held on 2 May 2018, the Company was authorised to enter into a side letter to the management agreement, which replaced the existing portfolio management fees and performance fees with a variable portfolio management fee. Details of the revised fee arrangements and the fees paid to the Manager during the year are disclosed in note 4 to the Financial Statements.

The Manager is authorised and regulated by the FCA.

M&M Investment Company Plc, which is controlled by Mark Sheppard who forms part of the Manager’s investment management team, is the controlling Shareholder of the Company. Further details regarding this are set out in the Directors’ Report in the full Annual Report.

Alternative Investment Fund Managers Directive (the “AIFMD”)

The AIFMD is applicable to all alternative investment funds including the Company. During the year, MLCM, in its capacity as the then Sub-Threshold Manager of the Company, submitted a notice to the FCA that their assets under management from managing the Company had permanently exceeded the sub-threshold limit under the AIFMD on 26 July 2017. Subsequently, as stated in the Chairman’s Statement above, MLCM was appointed as the Company’s AIFM with effect from 17 January 2018. As a result, in addition to the portfolio management fees set out above, MLCM receives an annual risk management and valuation fee of £59,000 to undertake its duties as the AIFM.

The AIFMD requires certain information to be made available to investors before they invest and requires that material changes to this information be disclosed in the Annual Report.

Remuneration

In the year to 31 July 2018, the total remuneration paid to the entire staff of the Manager was £380,000 (2017: £327,000), payable to an average staff number throughout the year of 3 (2017: 2).

The management of MLCM is undertaken by Mark Sheppard and Richard Morgan, to whom a combined total of £263,000 (2017: £325,000) was paid by the Manager during the year.

The remuneration policy of the Manager is to pay fixed annual salaries, with non-guaranteed bonuses, dependent upon performance only. These bonuses are generally paid in the Company’s Shares, released over a three-year period.

Leverage

For the purposes of AIFMD, leverage is any method which increases the Company’s exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company’s exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company’s positions after the deduction of Sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of Sterling cash balances and after certain hedging and netting positions are offset against each other.

The leverage policy has been approved by the Company and the AIFM. The policy limits the leverage ratio that can be deployed by the Company at any one time to 275% (gross method) and 250% (commitment method). This includes any gearing created by its investment policy. This is a maximum figure as required by regulation and not necessarily the amount of leverage that is actually used. The leverage ratio as at 31 July 2018 measured by the gross method was 141% and that measured by the commitment method was 117%.

Risk profile

The risk profile of the Company as measured through the Synthetic Risk Reward Indicator (“SRRI”) score is currently at 6 on a scale of 1 to 7 as at 31 July 2018. This score is calculated on the Company’s five-year annualised NAV volatility. Liquidity, counterparty and currency risks are not captured on the scale. The Manager will periodically disclose the current risk profile of the Company to investors. The Company will make this disclosure on its website at the same time as it makes its Annual Report and Financial Statements available to investors or more frequently at its discretion.

Liquidity arrangements

The Company currently holds no assets that are subject to special arrangements arising from their illiquid nature. The Company would disclose the percentage of its assets subject to such arrangements, if applicable, on its website at the same time as it makes its Annual Report and Financial Statements available to investors or more frequently at its discretion.

Continuing appointment of the Manager

The Board keeps the performance of MLCM, in its capacity as the Company’s Manager, under continual review. It has noted the good long-term performance record and commitment, quality and continuity of the team employed by the Manager. As a result, the Board concluded that it was in the best interests of the Shareholders as a whole that the appointment of the Manager on the agreed terms should continue.

Human rights, employee, social and community issues

The Board consists entirely of non-executive Directors. The Company has no employees and day-to-day management of the business is delegated to the Manager and other service providers. As an investment trust, the Company has no direct impact on the community or the environment, and as such has no human rights, social or community policies. In carrying out its investment activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly. Further details of the Environmental, Social and Governance policy can be found in the Statement of Corporate Governance in the full Annual Report. Details of the Company’s Board composition and related diversity considerations can be found in the Statement of Corporate Governance.

Gender diversity

At 31 July 2018, the Board comprised three male Directors. As stated in the Statement of Corporate Governance, the appointment of any new Director is made on the basis of merit.

Approval

This Strategic Report has been approved by the Board and signed on its behalf by:

Peter Stanley
Chairman

22 November 2018


DIRECTORS

Peter Stanley (Chairman)
David Harris (Chairman of the Audit Committee and Senior Independent Director)
Brett Miller
Daniel Wright

All the Directors are non-executive. Mr Stanley, Mr Harris and Mr Wright are independent of the Company’s Manager.


ETRACTS FROM THE DIRECTORS’ REPORT

Share capital

At 31 July 2018, the Company’s issued Share capital comprised 24,471,985 Ordinary Shares of 25 pence each, of which none were held in Treasury.

At general meetings of the Company, Ordinary Shareholders are entitled to one vote on a show of hands and on a poll, to one vote for every Ordinary Share held. Shares held in Treasury do not carry voting rights.

In circumstances where Chapter 11 of the Listing Rules would require a proposed transaction to be approved by Shareholders, the controlling Shareholder (see the full Annual Report for further details) shall not vote its Shares on that resolution. In addition, any Director of the Company appointed by M&M Investment Company Plc, the controlling Shareholder, shall not vote on any matter where conflicted and they will act independently from M&M Investment Company Plc and have due regard to their fiduciary duties.

Issue of Shares

At the 2017 Annual General Meeting, Shareholders approved the Board’s proposal to authorise the Company to allot Ordinary Shares up to an aggregate nominal amount of £1,846,899; additional Ordinary Shares could be allotted up to a further aggregate nominal amount of £1,846,899 by way of a rights issue. In addition, the Directors were authorised to issue shares up to an aggregate nominal value of £554,069 on a non-pre-emptive basis.

On 6 December 2017, the Company announced that M&M Investment Company Plc, the controlling Shareholder in the Company, had subscribed for 1,078,849 new Ordinary Shares of 25 pence each at 444.92 pence per Share. These Shares were admitted to trading on the London Stock Exchange on 12 December 2017. This transaction was deemed to be a smaller related party transaction within the definition of Listing Rule 11.1.10R as the percentage ratios were less than 5% but exceeded the 0.25% threshold set out in LR 11.1.10R(1).

The Company further announced on 24 January 2018 that it had issued 125,000 new Ordinary Shares of 25 pence each at a price of 480.50 pence per Share in order to meet ongoing market demand. These Shares were admitted to trading on the London Stock Exchange on 30 January 2018.

At a General Meeting held on 2 May 2018, the Board was authorised to issue further Ordinary Shares up to a maximum nominal amount of £1,177,129.25; the Company was also granted the authority to issue these Shares on a non-pre-emptive basis. In addition, a resolution was passed at the General Meeting permitting the Company to issue Shares pursuant to these authorities to M&M Investment Company Plc as a related party of the Company.

On 6 June 2018, the Company announced that M&M Investment Company Plc had subscribed for 811,094 new Ordinary Shares of 25 pence each at 533.20 pence per Share. These Shares were admitted to trading on the London Stock Exchange on 12 June 2018.

Post year end, the Company announced on 12 September 2018 that M&M Investment Company Plc had subscribed for 673,034 new Ordinary Shares of 25 pence each at 542.30 pence per Share. These Shares were admitted to trading on the London Stock Exchange on 18 September 2018.

All share issues detailed above were made at a price equal to the latest reported NAV as at the day of the issue.

As at the date of this report, the total voting rights were 25,145,019.

Purchase of Shares

At the 2017 Annual General Meeting, Shareholders approved the Board’s proposal to authorise the Company to acquire up to 14.99% of its issued Share capital (excluding Treasury Shares) amounting to 3,322,201 Shares.

The Company did not purchase any of its own Shares during the year or since the year end.

Sale of Shares from Treasury

At the 2017 Annual General Meeting, Shareholders approved the Board’s proposal to authorise the Company to waive pre-emption rights in respect of up to 2,216,276 Treasury Shares and to permit the allotment or sale of Shares from Treasury at a discount to NAV.

During the year, the Company sold 394,254 (with a nominal value of £98,563.50) of its Ordinary Shares from Treasury for a net consideration (after costs) of £1,601,000, generating a surplus of £617,000 which is recognised in the Share Premium account. The number of Shares sold out of Treasury during the year, as set out below, represented 1.8% of the issued Share capital at 31 July 2017:

• on 3 October 2017, 100,000 Shares sold at 385p per Share;
• on 20 October 2017, 75,000 Shares sold at 400p per Share;
• on 27 October 2017, 75,000 Shares sold at 410p per Share;
• on 31 October 2017, 94,254 Shares sold at 420p per Share; and
• on 1 November 2017, 50,000 Shares sold at 430p per Share.

As at the date of this report, no shares were held in Treasury.

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 Company’s business and assets, the Directors consider that the Company 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 Company’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.

Cashflow projections have been reviewed and show that the Company 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 prospects of the Company over a five-year period. The Directors consider five years to be a reasonable time horizon to consider the continuing viability of the Company, however they also consider viability for the longer-term foreseeable future.

In their assessment of the viability of the Company, the Directors have considered each of the Company’s principal risks and uncertainties as set out in the Strategic Report above and in particular, have considered the potential impact of a significant fall in global equity markets on the value of the Company’s investment portfolio overall. The Directors have also considered the Company’s income and expenditure projections and the fact that the Company’s investments mainly comprise readily realisable securities which could be sold to meet funding requirements if necessary. On that basis, the Board considers that five years is an appropriate time period to assess continuing viability of the Company.

In forming their assessment of viability, the Directors have also considered:

• internal processes for monitoring costs;
• expected levels of investment income;
• performance of the Manager;
• portfolio risk profile;
• liquidity risk;
• gearing limits;
• counterparty exposure; and
• financial controls and procedures operated by the Company.

Based upon these considerations, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period.


STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RELATION TO THE ANNUAL REPORT AND FINANCIAL STATEMENTS

The Directors are responsible for preparing the Company’s Annual Report and Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Financial Statements for each financial period. Under that law, they have elected to prepare the Financial Statements in accordance with International Financial Reporting Standards (“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 Company and of the profit or loss of the Company for that period.

In preparing the 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 Company and to enable them to ensure that the 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 Company 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 ensuring that the Annual Report includes information required by the Listing Rules and Disclosure Guidance and Transparency Rules of the FCA.

The Financial Statements are published on the Company’s website, www.mlcapman.com/manchester-london-investment-trust-plc, which is maintained on behalf of the Company by the Manager. 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:

i.   the Financial Statements, prepared in accordance with the IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and return of the Company; and

ii.  the Annual Report includes a fair review of the development and performance of the business and position of the Company, together with a description of the principal risks and uncertainties that it faces.

The Directors consider that the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company’s position and performance, strategy and business model and strategy.

On behalf of the Board

Peter Stanley
Chairman

22 November 2018


NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company’s statutory accounts for the years ended 31 July 2018 and 31 July 2017 but is derived from those accounts. Statutory accounts for the year ended 31 July 2017 have been delivered to the Registrar of Companies and statutory accounts for the year ended 31 July 2018 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor’s report can be found in the Company’s full Annual Report at www.mlcapman.com/manchester-london-investment-trust-plc.


STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 July 2018


2018
2017 
 (restated) 

Notes
Revenue 
£’000 
Capital  £’000  Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Gains
Gains on investments at fair value through profit or loss*

27,587 

27,587 


20,064 

20,064 
Investment income 3 767  767  1,053  1,053 
Other investment income* 3
Gross return 767  27,587  28,354  1,053  20,064  21,117 
Expenses
Management fee 4 (695) (695) (424) (424)
Other operating expenses 5 (434) (1) (435) (365) (89) (454)
Total expenses (1,129) (1) (1,130) (789) (89) (878)
Return before finance costs and tax
(362)

27,586 

27,224 

265 

19,975 

20,293 
Finance costs* 6 (45) (329) (374) (19) (118) (137)
Return on ordinary activities before tax
(407)

27,257  

26,850 

245 

19,857 

20,102 
Taxation 7 (58) (58) (47) (47)
Return on ordinary activities after tax
(465)

27,257  

26,792 

198 

19,857 

20,055 
pence  pence  pence  pence  pence  pence 
Return per Ordinary Share Basic and fully diluted 9
(2.00)

117.27  

115.27 

0.91 

91.52 

92.43 

* Figures for the year ended 31 July 2017 have been restated following a change in accounting policy. Total return on ordinary activities after tax for these periods are unaffected. See note 2.

The total column of this statement is the Income Statement of the Company 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 AIC (“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 for the year after tax is also the total comprehensive income.


The notes below form part of these Financial Statements.


STATEMENT OF CHANGES IN EQUITY
For the year ended 31 July 2018



Notes
Share
capital
£’000
Share
premium
£’000
Treasury 
Shares 
£’000 
Capital 
reserve*
£’000 
Retained   
earnings**
£’000   

Total 
£’000 
Balance at 1 August 2017 5,614 35,865 (984) 29,351  24,815    94,661 
Changes in equity for 2018
Total comprehensive income - - 27,257  (465)   26,792 
Dividends paid 8 - - (2,294)   (2,294)
Share sales from treasury 16 - 617 984  -    1,601 
Shares issued 15 504 9,124 -    9,628 
Balance at 31 July 2018 6,118 45,606 56,608  22,056    130,388 
Balance at 1 August 2016 5,614 35,317 (2,315) 9,415  27,515    75,546 
Changes in equity for 2017 (restated)
Total comprehensive income*** - - 19,857  198    20,055 
Goodwill written back - - 79  -    79 
Dividends paid 8 - - (2,898)  (2,898)
Share sales from treasury 16 - 548 1,331  -    1,879 
Balance at 31 July 2017*** 5,614 35,865 (984) 29,351  24,815   94,661 

* Within the balance of the Capital reserve, £8,378,000 relates to realised gains (2017: £2,383,000) and is distributable by way of a dividend. The remaining £48,230,000 relates to unrealised gains and losses on financial instruments (2017: £26,968,000) and is non-distributable.

** Fully distributable by way of a dividend.

*** The year ended 31 July 2017 has been restated following a change in accounting policy. The total comprehensive income remains unchanged. See note 2.

The notes below form part of these Financial Statements.


STATEMENT OF FINANCIAL POSITION
As at 31 July 2018

2018  2017 
Notes £’000  £’000 
(restated)
Non-current assets
Investments at fair value through profit or loss 10 102,204  76,106 
Current assets
Unrealised derivative assets 14 4,123  5,173 
Trade and other receivables 11 31  4,486 
Cash and cash equivalents 12 27,858  11,205 
32,012  20,864 
Current liabilities
Unrealised derivative liabilities 14 (3,332) (2,046)
Trade and other payables 13 (496) (263)
(3,828) (2,309)
Net current assets 28,184  18,555 
Net assets 130,388  94,661 
Capital and reserves
Ordinary Share Capital 15 6,118  5,614 
Shares held in Treasury 16 (984)
Share premium 45,606  35,865 
Capital reserve* 56,608  29,351 
Retained earnings* 22,056  24,815 
Total equity 130,388  94,661 
Basic and fully diluted net asset value per Ordinary Share 17
532.81p 

429.05p 

* Figures for 31 July 2017 have been restated following a change in accounting policy as detailed in note 2. Total equity Shareholders’ funds are unaffected.

The Financial Statements were approved by the Board of Directors and authorised for issue on 22 November 2018 and are signed on its behalf by:

Peter Stanley
Chairman

Manchester and London Investment Trust Public Limited Company
Company Number: 01009550

The notes below form part of these Financial Statements.


STATEMENT OF CASH FLOWS
For the year ended 31 July 2018

2018 
£’000 
2017 
£’000 
Cash flow from operating activities
Return on operating activities before tax 26,850  20,102 
Interest expense 374  137 
Gain on investments held at fair value through profit or loss (27,240) (16,736)
Decrease/(increase) in receivables 60  (55)
Increase/(decrease) in payables (75)
Tax paid (54) (57)
Non-cash expenses 79 
Derivative instruments cash flows 2,656  (1,585)
Net cash generated from operating activities 2,646  1,810 

Cash flow from investing activities
Purchases of investments (27,702) (38,162)
Sales of investments 33,041  13,422 
Net cash inflow/(outflow) from investing activities 5,339  (24,740)

Cash flow from financing activities
Equity dividends paid (2,294) (2,898)
Resale of Ordinary Shares 1,483  1,879 
Issue of Shares 9,628 
Interest paid (149) (98)
Net cash generated/(used) in financing activities 8,668  (1,117)

Net increase/(decrease) in cash and cash equivalents

16,653 

(24,047)
Cash and cash equivalents at beginning of year 11,205  35,252 
Cash and cash equivalents at end of year 27,858  11,205 

The notes below form part of these Financial Statements.


NOTES FORMING PART OF THE FINANCIAL STATEMENTS
For the year ended 31 July 2018

1. General information and accounting policies

Manchester and London Investment Trust plc is a public limited company incorporated in the UK 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 and its investment approach is detailed in the Strategic Report.

The Financial Statements of the Company have been prepared in accordance with International Financial Reporting Standards (“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 the AIC SORP, supplementary information which analyses the Statement of Comprehensive Income between items of revenue and capital nature has been prepared alongside the Statement of Comprehensive Income.

The Financial Statements are presented in Sterling, which is the Company’s functional currency as the UK is the primary environment in which it operates, rounded to the nearest £’000s, except where otherwise indicated.

The Financial Statements have been prepared on the historical cost basis, except for the revaluation of certain investments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

Going concern

The Financial Statements have been prepared on the going concern basis, being a period of at least 12 months from the date 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 Company’s ability to continue as a going concern and are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern, having taken into account the liquidity of the Company’s investment portfolio and the Company’s financial position in respect of its cash flows, borrowing facilities and investment commitments (of which there are none of significance).

Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. The Company primarily invests in companies listed in the UK and other recognised international exchanges.

Accounting developments

In the current year, the Company has applied a number of amendments to IFRS issued by the IASB mandatorily effective for an accounting period that begins on or after 1 January 2017. These include annual improvements to IFRS, changes in the IAS 7 Statement of Cash Flows, legislative and regulatory amendments to changes in disclosure and presentation requirements. Their adoption has not had any material impact on these Financial Statements.

The Company has not early adopted new and revised IFRS that were in issue at the year end but will not be in effect until after this financial year end. The Directors have considered the impact of the changes upon the Financial Statements. At the date of authorising these Financial Statements, the following standards and interpretations which had not been applied in these Financial Statements were in issue and have now become effective. The impact of IFRS 9 in future periods may increase disclosure requirements and change the presentation of investments and current assets. This may require the consideration of the business model and future expected cash flows in holding financial assets. This is not expected to have a material impact. IFRS 15 specifies how and when revenue is recognised and enhances disclosures. Given the nature of the Company’s revenue streams from financial instruments, the provisions of this standard are not expected to have a material impact.



International Financial Reporting Standards
Effective date (accounting dates beginning on or after)
IFRS 2 Share-based payments (amendments) 1 January 2018
IFRS 9 Financial Instruments (IFRS 7 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

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 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 areas requiring the most significant judgement and estimation in the preparation of the Financial Statements are: valuation of derivatives, accounting for the value of unquoted investments; recognising and classifying unusual or special dividends received as either revenue or capital in nature; accounting for revenue and expenses in relation to contracts for difference; and setting the level of dividends paid and proposed in satisfaction of both the Company’s long-term objective and its obligations to adhere to investment trust status rules under Section 1158 of the Corporation Tax Act 2010. The policies for these are set out in the notes to the Financial Statements below.

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.

There were no significant accounting estimates or critical accounting judgements in the year.

Investments

During the year, the Company revised its accounting policy relating to investments. Further information relating to the change in policy and an analysis of the impact on the comparative Financial Statements, can be found in note 2.

Investments are measured initially, and at subsequent reporting dates, at fair value, and derecognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time-frame of the relevant market. 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 Statement of Comprehensive Income as a capital item. On disposal, realised gains and losses are also recognised in the Statement of Comprehensive Income as capital items.

All investments for which fair value is measured or disclosed in the Financial Statements are categorised within the fair value hierarchy in note 10.

Financial instruments

During the year, the Company revised its accounting policy regarding financial instruments. Further information relating to the change in policy and an analysis of the impact on the comparative Financial Statements, can be found in note 2.

The Company may use a variety of derivative instruments, including equity swaps, futures, forwards and options under master agreements with the Company’s derivative counterparties to enable the Company to gain long and short exposure on individual securities.

The Company recognises financial assets and financial liabilities when it becomes a party to the contractual provisions of the instrument. Listed options and futures contracts are recognised at fair value through profit or loss valued by reference to the underlying market value of the corresponding security, traded prices and/or third party information.

Notional dividend income arising on long positions is recognised in the Statement of Comprehensive Income as revenue. Interest expenses on long positions are allocated to capital.

Unrealised changes to the value of securities in relation to derivatives are recognised in the Statement of Comprehensive Income as capital items.

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 translated at the Statement of Financial Position 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 capital or revenue in nature.

Cash and cash equivalents

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

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

Trade receivables, trade payables and short-term borrowings

Trade receivables, trade payables and short-term borrowings are measured at amortised cost or approximate fair value.

Revenue recognition

Revenue is recognised when it is probable that economic benefits associated with a transaction will flow to the Company and the revenue can be reliably measured.

Dividends from overseas companies are shown gross of any non-recoverable withholding taxes which are disclosed separately in the Statement of Comprehensive Income.

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

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

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

Other investment income includes gains and losses on the trading of shares, equity swaps and futures, net of commissions, interest and other costs.

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

Expenses and finance cost

All expenses are accounted for on an accruals basis and, with the exception of capital interest, are charged to revenue. All other administrative expenses are charged through the revenue column in the Statement of Comprehensive Income.

Expenses incurred in issuing or the buyback of Shares to be held in Treasury are charged to the capital reserve.

Taxation

The charge for taxation is based on the net revenue for the year and any deferred tax.

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 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 investment income) accruing to the Company is liable to corporation tax at prevailing rates.

Dividends payable to Shareholders

Dividends to Shareholders are recognised as a liability in the period in which they are approved and are taken to the Statement of Changes in Equity. Dividends declared and approved by the Company after the Statement of Financial Position date have not been recognised as a liability of the Company at the Statement of Financial Position date.

Ordinary Share capital

Nominal value of total Ordinary Shares issued.

Shares held in Treasury

Consideration paid for the purchase of Shares held in Treasury.

Share premium

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

• costs associated with the issue of equity;
• premium on the issue of Shares; and
• premium on the sales of Shares held in Treasury over the market value.

Capital reserve

The following are taken to capital reserve:

• gains and losses on the realisation of investments;
• increases and decreases in the valuation of the investments held at the year end;
• write-off of goodwill;
• exchange differences of a capital nature; and
• expenses, together with the related taxation effect, allocated to this reserve in accordance with the above policies.

Retained earnings

The revenue reserve represents accumulated profits and losses and any surplus profits. The surplus accumulated profits are distributable by way of dividends.

2. Change in accounting policy

During the year, the Company changed its policy with regards to the recognition of realised gains and losses on investments, derivative instruments and associated interest charges.

Previously, upon disposal of investments, realised gains and losses were recognised in the Statement of Comprehensive Income as capital or revenue dependent on their nature. A position was deemed to be revenue rather than capital if the position had been opened and closed and the duration that the position was open was less than 12 months. Changes to core holdings were not classified as revenue regardless of their duration. Positions opened but not yet closed were deemed to be capital investments in nature until closed, at which point their duration determined if they were classified as revenue rather than capital.

Unrealised changes to the value of securities in relation to derivatives were allocated initially to capital, until realisation, where they were similarly allocated to either revenue or capital dependent upon their nature. Notional interest expenses on long positions were initially allocated 100% to capital whilst the position was unrealised and upon realisation expensed through the Statement of Comprehensive Income as revenue or capital in accordance with the Company’s revenue recognition accounting policy.

The Company has voluntarily elected that, to be in line with normal market practice, all unrealised and realised gains and losses on the disposal of investments and the realisation of derivative instruments are to be recognised in the Statement of Comprehensive Income as capital, along with associated notional interest expenses on long positions.

The revised accounting policies in full are outlined in note 1 above.

The voluntary changes in accounting policy have the following impact on the Financial Statements:

Year ended 31 July 2017
£’000 
 (original)
£’000 
 (restated)
£’000  
  (movement) 
Statement of Comprehensive Income
Revenue
Other investment income 1,532  (1,532)
Finance costs (35) (19) 16 
Return on ordinary activities after tax 1,714  198  (1,516)
Return per Share (pence) 7.90  0.91  (6.99)
Capital
Gains on investments at fair value through profit or loss
18,532 

20,064 

1,532 
Finance costs (102) (118) (16)
Return on ordinary activities after tax 18,341  19,857  1,516 
Return per Share (pence) 84.53  91.52  6.99 
Statement of Financial Position
Capital reserves 27,835  29,351  1,516 
Retained earnings 26,331  24,815  (1,516)

3. Income

2018
£’000
2017 
£’000 
(restated)
Other investment income* -
Dividends from listed investments 639 996 
Interest 128 57 
767 1,053 

* Figures for 2017 have been restated following a change in accounting policy. See note 2.

4. Management fee

2018 2017
£’000 £’000
Management fee 695 424

Prior to the appointment of MLCM as AIFM on 17 January 2018, the annual fee payable to the Manager was 0.5% of the Company’s NAV, payable quarterly in arrears. Subsequent to the appointment as the AIFM, an additional Risk Management and Valuation fee equating to £59,000 on an annualised basis is charged to the Company.

In May 2018, the fee arrangement was revised. Under the new agreement, the fee payable to the Manager is equal to 0.5% per annum of the Company’s NAV (the “Base Fee”), calculated as at the last business day of each calendar month (the “Calculation Date”), and is paid monthly in arrears. An uplift of 0.25% of the NAV will be applied to the fee, should the performance of the Company over the 36-month period to the Calculation Date be above that of the Company’s benchmark. Should the performance of the Company over the 36-month period to the Calculation Date be below that of the Company’s benchmark, the fee will be reduced to the lower adjusted amount of 0.25% of the NAV. In addition, the Risk Management and Valuation fee equating to £59,000 on an annualised basis continues to be charged by the AIFM. The Manager is also reimbursed any expenses incurred by it on behalf of the Company.

The fee is not subject to Value Added Tax (“VAT”). Transactions with the Manager during the year are disclosed in note 19.

The management fee is chargeable to revenue.

5. Other operating expenses

2018 2017
Revenue £’000 Capital £0’00 Revenue
 £’000
Capital £’000
Directors’ fees 51 - 48 -
Auditors’ remuneration 35 - 33 -
Registrar fees 41 - 14 -
Depositary fees 31 - - -
Goodwill written off - - - 79
Other expenses 276 1 270 10
434 1 365 89
Fees payable to the Company’s Auditor for the audit of the Company Financial Statements
35

-

33

-
35 - 33 -

Other operating expenses include irrecoverable VAT where appropriate.

No non-audit services were provided by Deloitte LLP in the year to 31 July 2018.

6. Finance costs

2018 2017 
£’000 £’000 
 (restated)
Charged to revenue 45 19 
Charged to capital 329 118 
374 137 

Finance costs include financing charged by the Prime Brokers on open long positions and are allocated to capital on the basis disclosed in note 1. The figures for 2017 have been restated following a change in accounting policy. See note 2 for further information.

7. Taxation

2018 2017
(restated)
Revenue 
£’000 
Capital  £’000  Total 
£’000 
Revenue 
£’000 
Capital £’000  Total 
£’000 
Current tax
Overseas tax not recoverable 58  58  61  61 
Overseas tax refunds (14) (14)
58  58  47  47 
The charge for the year can be reconciled to the profit per the Statement of Comprehensive Income as follows:
(Loss)/profit before tax (407) 27,257  26,850  245  19,857  20,102 
Tax at the UK corporation tax rate of 19% (2017: 19.67%)
(77)

5,179 

5,102 

48 

3,906 

3,954 
Tax effect of non-taxable dividends/unrealised profits
(19)


(19)

(21)


(21)
Income not subject to UK corporation tax
(59)


(59)

(49)


(49)
Profits on investment appreciation not taxable

(5,241)

(5,241)


(3,883)

(3,883)
Current year losses utilised (23) (23)
Unrelieved tax losses and other deductions arising in the period
155 

62 

217 

22 


22 
Overseas tax not recoverable 58  58  61  61 
Overseas tax refunds -  (14) (14)
Total tax charge 58  58  47  47 

The figures for the year ended 31 July 2017 have been restated following a change in accounting policy. The total tax remains unchanged. See note 2.

At 31 July 2018, there was an unrecognised deferred tax asset, measured at the substantively enacted rate of 17%, of £604,000 (2017: £360,000). This deferred tax asset relates to surplus management expenses. It is unlikely that the Company will generate sufficient taxable profits in the foreseeable future to recover these amounts and therefore the asset has not been recognised in the year, or in prior years.

As at 31 July 2018, the Company had unrelieved capital losses of £9,330,000 (2017: £9,330,000). There is therefore, a related unrecognised deferred tax asset, measured at the substantively enacted rate of 17%, of £1,586,000 (2017: £1,586,000). These capital losses can only be utilised to the extent that the Company does not qualify as an investment trust in the future and, as such, the asset has not been recognised.

8. Dividends


Amounts recognised as distributions to equity holders in the period:
2018
£’000
2017
£’000
Final ordinary dividend for the year ended 31 July 2017 of 1.76p (2016: 1.85p) per Share
395

398
First final special dividend for the year ended 31 July 2017 of nil (2016: 7.5p) per Share
-

1,615
Final special dividend for the year ended 31 July 2017 of 4.24p (2016: 1.05p) per Share
952

226
Interim ordinary dividend for the year ended 31 July 2018 of 4.0p (2017: 1.82p) per Share
947

400
First special dividend for the year ended 31 July 2018 of nil (2017: 1.18p) per Share
-

259
2,294 2,898

The Directors are proposing a final ordinary dividend of 8.0p for the financial year 2018. These proposed dividends have been excluded as a liability in these Financial Statements in accordance with IFRS.

We also set out below the total dividend payable in respect of the financial year, which is the basis on which the requirements of Section 1158 of the Corporation Tax Act 2010 are considered.

2018
£’000
2017
£’000
Interim ordinary dividend for the year ended 31 July 2018 of 4.0p
(2017: 1.82p) per Share

947

400
Proposed final ordinary dividend for the year ended 31 July 2018 of 8.0p (2017: 1.76p) per Share*
2,012

395
Interim special dividend for the year ended 31 July 2018 of nil (2017: 1.18p) per Share

259
Proposed final special dividend for the year ended 31 July 2018 of nil
(2017: 4.24p) per Share*


952
2,959 2,006

*Based on the total Shares eligible to receive dividend as at 22 November 2018.

9. Return per Ordinary Share

2018 2017
 (restated)
Net Return 
£’000 
Ordinary Shares* Total 
(p) 
Net Return
£’000
Ordinary Shares* Total 
(p)
Basic and fully diluted return:
Net revenue return after taxation
(465)

23,242,213

(2.00)

198

21,697,085

0.91 
Net capital return after taxation
27,257 

23,242,213

117.27 

19,857

21,697,085

91.52 
Total 26,792  23,242,213 115.27  20,055 21,697,085 92.43 

* Weighted average number of Ordinary Shares in issue (excluding those Shares held in treasury in note 16) during the year.

Basic revenue, capital and total return per Ordinary Share is based on the net revenue, capital and total return for the period and on the weighted average number of Ordinary Shares in issue (excluding those Shares held in Treasury per note 16) of 23,242,213 (2017: 21,697,085).

The figures for the year ended 31 July 2017 have been restated following a change in accounting policy. The total return remains unchanged. See note 2.

10. Investments at fair value through profit or loss

2018
£’000
2017
£’000
Investments:
Listed investments 101,983 75,877
Unlisted investments 221 229
102,204 76,106

   

2018 2017
Listed 
£’000 
Unlisted 
£’000 
Total 
£’000 
Total 
£’000 
Analysis of investment portfolio movements:
Opening cost at 1 August 53,560  100  53,660  31,880 
Opening unrealised appreciation at
1 August

22,317 

129 

22,446 

7,119 
Opening fair value at 1 August 75,877  229  76,106  38,999 
Movements in the year:
Purchases at cost 27,702  27,702  38,162 
Sales proceeds (28,671) (28,671) (17,792)
Realised profit on sales 4,442  4,442  1,410 
Increase/(decrease) in unrealised appreciation
22,633 

(8)

22,625 

15,327 
Closing fair value at 31 July 101,983  221  102,204  76,106 
Closing cost at 31 July 57,033  100  57,133  53,660 
Closing unrealised appreciation at
31 July

44,950 

121 

45,071 

22,446 
Closing fair value at 31 July 101,983  221  102,204  76,106 

Fair value hierarchy

Financial assets of the Company are carried in the Statement of Financial Position at fair value. The fair value is the amount at which the asset could be sold or the liability transferred in an orderly transaction between market participants, at the measurement date, other than a forced or liquidation sale. The Company measures fair values using the following hierarchy that reflects the significance of the inputs used in making the measurements.

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

• Level 1 – valued using quoted prices unadjusted in an active market.

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

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

The tables below set out fair value measurements of financial instruments as at the year end, by their category in the fair value hierarchy into which the fair value measurement is categorised.

Financial assets at fair value through profit or loss at 31 July 2018

Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Equity investments 101,983 - - 101,983
Debentures - 221 - 221
Derivatives – assets - 4,123 - 4,123
Total 101,983 4,344 - 106,327

Financial assets at fair value through profit or loss at 31 July 2017

Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Equity investments 75,877 - - 75,877
Debentures - 229 - 229
Derivatives – assets - 5,173 - 5,173
Total 75,877 5,402 - 81,279

There have been no transfers during the period between Level 1 and 2 fair value measurements and no transfers into or out of Level 3 fair value measurement.

The fair value of the Level 2 debentures is based on the average of the latest available trades using a valuation technique commonly used by market participants making the maximum use of market inputs.

The fair value of Level 2 derivatives are determined by the input of the latest traded price of the related underlying investment.

Financial liabilities at 31 July 2018

Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Derivatives - liabilities - 3,332 - 3,332

Financial liabilities at 31 July 2017

Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Derivatives - liabilities - 2,046 - 2,046

Transaction costs

During the year, the Company incurred transaction costs of £68,000 (2017: £138,000) on the purchase and disposal of investments.

Analysis of capital gains and losses

2018  2017 
£’000  £’000 
Gains on sales investments 4,442  1,410 
Investment holding gains 22,625  15,327 
Realised gains on derivative instruments 1,535  1,714 
Unrealised losses on derivative instruments (1,363) 1,649 
Realised gains/(losses) on currency balances and trade settlements 348  (36)
27,587  20,064 

11. Trade and other receivables

2018
£’000
2017
£’000
Dividend receivables 3 92
Due from brokers - 4,370
Other receivables - 13
Prepayments 28 11
31 4,486

12. Cash and cash equivalents

2018
£’000
2017
£’000
Cash and cash equivalents 27,858 11,205
27,858 11,205

Details of what comprises cash and cash equivalents can be found in note 1.

13. Trade and other payables

2018
£’000
2017
£’000
Trade payables 327 88
Accruals 169 175
496 263

14. Derivatives

The Company may use a variety of derivative contracts, including equity swaps, futures, forwards and options under master agreements with the Company’s derivative counterparties to enable the Company to gain long and short exposure on individual securities. Derivatives are valued by reference to the underlying market value of the corresponding security.

The net fair value of derivatives at 31 July 2018 was a positive £791,000 (2017: positive £3,127,000). The corresponding gross exposure on equity swaps as at 31 July 2018 was £38,020,000 (2017: £28,223,000). The total exposure of negative equity swaps was £6,034,000 (2017:nil). The net marked to market futures and options total value as at 31 July 2018 was negative £3,000,000 (2017: negative £1,807,000).

2018
£’000
2017
£’000
Assets
Unrealised derivative assets 4,123 5,173
Current liabilities
Unrealised derivative liabilities 3,332 2,046

The above liabilities are secured against assets held with the Prime Brokers.

The current levels of collateral as at 31 July 2018 are:

• Morgan Stanley & Co. International plc £50.9m (2017: £32.4m)

• JP Morgan Chase & Co. £79.6m (2017: £54.7m)

15. Share capital

2018 2017
Ordinary Share capital Number 
 (’000)
£’000 Number 
 (’000)
£’000
Ordinary Shares of 25p each issued and fully paid
Balance as at 1 August 22,457  5,614 22,457  5,614
Shares issued 2,015  504 -
Balance as at 31 July 24,472  6,118 22,457  5,614

During the year, the Company issued 2,014,943 Ordinary Shares of 25p each to the market (2017: none) for a net consideration (after costs) of £9,628,000, generating a Share Premium of £9,124,000. This represented 9.0% of the Shares in issue as at 31 July 2017.

16. Shares held in Treasury

2018 2017
Number 
(’000)

£’000 
Number 
(’000)

£’000 
Balance as at 1 August 394  984  923  2,315 
Shares bought back during the year
Shares sold during the year (394) (984) (529) (1,331)
Balance as at 31 July 394  984 

During the year, the Company sold 394,254 (1.8% of the Shares in circulation as at 31 July 2017) (2017: 528,368 (2.5% of the Shares in circulation as at 31 July 2016)) of its Ordinary Shares from Treasury for a net consideration (after costs) of £1,601,000 (2017: £1,879,000), generating a surplus of £617,000 (2017: £548,000) which is recognised in the Share Premium account. The Company bought back none of its Ordinary Shares (2017: none).

17. Net asset value per Share

Net asset value per Share Net assets
attributable
2018 
(p)
2017 
(p)
2018
£’000
2017
£’000
Ordinary Shares: basic and fully diluted 532.81  429.05  130,388 94,661

The basic NAV per Ordinary Share is based on net assets at the year end and 24,471,985 (2017: 22,062,788) Ordinary Shares in issue, adjusted for any Shares held in Treasury.

18. Risks – investments, financial instruments and other risks

Investment objective and policy

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

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

The Company’s financial instruments can comprise:

• shares and debt securities held in accordance with the Company’s investment objective and policy;

• derivative instruments for trading and investment purposes;

• cash, liquid resources and short-term debtors and creditors that arise from its operations; and

• current asset investments and trading.

Risks

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

These policies remained unchanged since the beginning of the accounting period.

Market risk

Market risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss the Company might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Company 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.

Details of the long equity exposures held at 31 July 2018 are shown above.

If the price of these investments and equity swaps had increased by 3% at the reporting date with all other variables remaining constant, the capital return in the Statement of Comprehensive Income and the net assets attributable to equity holders of the Company would increase by £4,207,000.

A 3% decrease in share prices would have resulted in an equal and opposite effect of £4,207,000, on the basis that all other variables remain constant. This level of change is considered to be reasonable based on observation of current market conditions.

At the year end, the Company’s direct equity exposure to market risk was as follows:

Company
2018 2017
£’000 £’000
Equity long exposures
Investments held in equity form 102,204 76,106
Long exposure held in equity swaps 38,020 28,224
140,224 104,330

Interest rate risk

Interest rate risk arises from uncertainty over the interest rates charged by financial institutions. It represents the potential increased costs of financing for the Company. The Manager actively monitors interest rates and the Company’s ability to meet its financing requirements throughout the year and reports to the Board.

Liquidity risk

Liquidity risk reflects the risk that the Company will have insufficient funds to meet its financial obligations as they fall due. The Directors have minimised liquidity risk by investing in a portfolio of quoted companies that are readily realisable.

The Company's uninvested funds are held almost entirely with the Prime Brokers or on interest-bearing deposits with UK banking institutions.

As at 31 July 2018, the financial liabilities comprised:

Company
2018
£’000
2017
£’000
Unrealised derivative liabilities 3,332 2,046
Trade payables and accruals 496 263
3,828 2,309

The above liabilities are stated at amortised cost or approximate fair value.

The Company manages liquidity risk through constant monitoring of the Company’s gearing position to ensure the Company is able to satisfy any and all debts within the agreed credit terms.

Currency rate risk

Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. If Sterling had strengthened by 3% against all other currencies at the reporting date, with all other variables remaining constant, the total return in the Statement of Comprehensive Income and the net assets attributable to equity holders of the Company would have increased by £3,299,000. If the Sterling had weakened by 3% against all currencies, there would have been an equal and opposite effect. This level of change is considered to be reasonable based on observation of current market conditions.

The Company’s material foreign currency exposures are laid out below.


Sterling 

US Dollar 

Euro 
Hong Kong 
 Dollar 

Other 

Total 
£’000  £’000  £’000  £’000  £’000  £’000 
Equity exposure 9,109  93,095  102,204 
Derivative assets 35  1,930  428  1,730  4,123 
Derivative liabilities (57) (3,027) (232) (12) (4) (3,332)
Cash* 11,784  17,717  729  (2,382) 10  27,858 
Other net assets (466) (465)
20,405  109,716  925  (664) 130,388 

* Includes balances held in margin accounts relating to equity swaps.

The Company constantly monitors currency rate risk to ensure balances, wherever possible, are translated at rates favourable to the Company.

Credit and counterparty risk

Credit risk is the risk of financial loss to the Company if the contractual party to a financial instrument fails to meet its contractual obligations.

The maximum exposure to credit risk as at 31 July 2018 was £32,012,000 (2017: £20,864,000). The calculation is based on the Company’s credit risk exposure as at 31 July 2018 and this may not be representative for the whole year.

The Company’s quoted investments are held on its behalf by the Prime Brokers. Bankruptcy or insolvency of the Prime Brokers may cause the Company’s rights with respect to securities held by the Prime Brokers to be delayed. The Manager and the Board monitor the Company’s risk and exposures.

Where the Manager makes an investment in a bond, corporate or otherwise, the credit worthiness of the issuer is taken into account so as to minimise the risk to the Company of default. The credit standing and other associated risks are reviewed by the Manager.

Investment transactions are carried out with a number of brokers where creditworthiness is reviewed by the Manager.

Cash is only held at banks that have been identified by the Board as reputable and of high credit quality. The Manager reviews these on a continual basis with regular updates to the Board.

Capital management policies

The structure of the Company’s capital is noted in the Statement of Changes in Equity and managed in accordance with the investment objective and policy set out in the Strategic Report.

The Company’s capital management objectives are to maximise the return to Shareholders while maintaining a capital base to allow the Company to operate effectively and meet obligations as they fall due.

The Board, with the assistance of the Manager, monitors and reviews the capital on an ongoing basis.

The Company is subject to externally imposed capital requirements:

- as a public company, the Company is required to have a minimum Share capital of £50,000; and

- in accordance with the provisions of Sections 832 and 833 of the Companies Act 2006, the Company, as an investment company:

These requirements are unchanged since last year and the Company has complied with them at all times.

A sensitivity analysis has not been prepared for interest risk, as the Company is not materially exposed to interest rates.

19. Related party transactions

MLCM, a company controlled by Mark Sheppard, is the Manager of the Company. On 17 January 2018, MLCM was also appointed as the AIFM of the Company. Mr Sheppard is also a director of M&M Investment Company Plc (“MMIC”), which is the controlling Shareholder of the Company.

The Manager receives a monthly management fee for these services which in the year under review amounted to a total of £695,000 (2017: £424,000) excluding VAT. The balance owing to the Manager as at 31 July 2018 was £88,000 (2017: £119,000). Also payable to the Manager during the year were expenses incurred on behalf of the Company of £18,000 (2017: £26,000). The balance owing to MLCM for the recharge of expenses incurred in the year was £nil (2017: £3,000).

Prior to the appointment of the AIFM, Midas Investment Management Limited (“Midas”), a company also controlled by Mr Sheppard, provided additional services to the Company. Fees charged by Midas included a monthly financial advisory fee and commissions on the purchase and sale of investments and the provision of the ISA & Savings schemes. During the year under review, total fees amounted to £2,000 (2017: £10,000).

In December 2017, MMIC subscribed for a further 1,078,849 new Ordinary Shares of 25 pence each at 444.92 pence, issued in the same month. In June 2018, MMIC subscribed to a further 811,094 new Ordinary Shares of 25 pence each at 533.20 pence per Share, issued in the same month. Total consideration amounted to £9,125,000, of which the surplus of £8,576,000 (after associated costs) was recognised in the Share Premium account.

Details relating to the Directors’ emoluments are found in the Directors’ Remuneration Report in the full Annual Report.

20. Ultimate control

The holding company and ultimate controlling Shareholder throughout the year and the previous year was MMIC, a company incorporated in the UK and registered in England and Wales. This company was controlled throughout the year and the previous year by Mr M Sheppard and his immediate family.

A copy of the financial statements of MMIC can be obtained by writing to its company secretary at 12a Princess Gate Mews, London SW7 2PS.

21. Post Statement of Financial Position events

As disclosed in the Extracts from the Directors’ Report above, on 12 September 2018, MMIC subscribed for 673,034 new Ordinary Shares for a total consideration of £3,650,000, of which £3,482,000 was recognised in the Share Premium account.

There were no other significant events since the end of the reporting period.


GLOSSARY

Active share

Active share is a measure of the percentage of stock holdings in a manager’s portfolio that differ from the comparative benchmark index. It is calculated by summing the absolute differences between benchmark and portfolio holdings’ weights, then dividing by two (to eliminate double counting). An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index (when using leverage, maximum active share levels can exceed 100%).

Custodian and Prime Broker

The custodian is a financial institution that holds securities for safekeeping. Prime brokerage is the bundling of services by investment banks enabling the Company to borrow securities and cash in order to be able to invest on a netted basis and achieve an absolute return. The Prime Broker provides a centralised securities clearing facility for the Company so the Company’s collateral requirements are netted across all deals handled by the Prime Broker.

Gearing

Gearing refers to the level of the Company’s debt to its equity capital. The Company may borrow money to invest in additional investments for its portfolio. If the Company’s assets grow, the Shareholders’ assets grow proportionately more because the debt remains the same. But if the value of the Company’s assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets.

Gearing represents borrowings at par less cash and cash equivalents (including any outstanding trade or foreign exchange settlements) expressed as a percentage of Shareholders’ funds.

Potential gearing is the Company’s borrowings expressed as a percentage of Shareholders’ funds.

Equity gearing is the Company’s borrowings adjusted for cash and bonds expressed as a percentage of Shareholders’ funds.

Leverage

For the purposes of the Alternative Investment Fund Managers (“AIFM”) Directive, leverage is any method which increases the Company’s exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company’s exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company’s positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.

Net asset value (“NAV”)

The NAV is Shareholders’ funds expressed as an amount per individual Share. Shareholders’ funds are the total value of all the Company’s assets, at a current market value, having deducted all liabilities and prior charges at their par value (or at their asset value). The total NAV per Share is calculated by dividing the NAV by the number of Ordinary Shares in issue excluding Treasury Shares.

Discount/premium

If the Share price is lower than the NAV per Share it is said to be trading at a discount. The size of the discount is calculated by subtracting the Share price from the NAV per Share and is usually expressed as a percentage of the NAV per Share. If the Share price is higher than the NAV per Share, this situation is called a premium.

Ongoing charges ratio

As recommended by the AIC in its guidance, ongoing charges are the Company’s annualised expenses (excluding finance costs and certain non-recurring items) of £57,000 expressed as a percentage of the average monthly net assets of the Company during the year of £111,772,000.

Total assets

Total assets include investments, cash, current assets and all other assets. An asset is an economic resource, being anything tangible or intangible that can be owned or controlled to produce value and to produce positive economic value. Assets represent the value of ownership that can be converted into cash. The total assets less all liabilities will be equivalent to total Shareholders’ funds.

Total return

Total return statistics enable the investor to make performance comparisons between investment trusts with different dividend policies. The total return measures the combined effect of any dividends paid, together with the rise or fall in the Share price or NAV. This is calculated by the movement in the NAV or Share price plus dividend income reinvested by the Company at the prevailing NAV or Share price.

NAV Total Return 31 July 2018 31 July 2017
Closing NAV per Share (p) 532.81 429.05
Total dividends paid in the year ended 31 July 2018 (2017) (p)
10.00

13.40
Adjusted closing NAV (p) 542.81 442.45 a
Opening NAV per Share (p) 429.05 350.81 b
NAV total return unadjusted (c=((a-b)/b)) (%) 24.18 26.12 c
NAV total return adjusted %* 26.87 26.91

* Based on NAV price movements and dividends reinvested at the relevant cum dividend NAV value during the period. Where the dividend is invested and the NAV value falls this will further reduce the return or, if it rises, any increase will be greater. The source is Morningstar who have calculated the return on an industry comparative basis.


ANNUAL GENERAL MEETING

Notice is hereby given that the Annual General Meeting of Manchester and London Investment Trust plc will be held at the Members Room, Chartered Accountants’ Hall, One Moorgate Place, London EC2R 6EA on Tuesday, 15 January 2019 at 11.45 am.

The notice of this meeting will be circulated to Shareholders with the full Annual Report and will also be available at www.mlcapman.com/manchester-london-investment-trust-plc.


NATIONAL STORAGE MECHANISM

A copy of the Annual Report and Financial Statements and Notice of Annual General Meeting 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.

LEI: 213800HMBZXULR2EEO10

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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