THREADNEEDLE UK SELECT TRUST LIMITED · 09/05/2014 · A second interim dividend of 2.45p per share...

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THREADNEEDLEUK SELECT TRUST LIMITED

Annual Financial ReportThreadneedle UK Select Trust Limited (Previously UK Select Trust Limited)for the year ended 31 December 2013

Threadneedle UK Select Trust Limited Annual Financial Report for the year ended 31 December 2013

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Contents

Introductory Information 2

Financial Highlights 2

Dividends 2

Directors and Advisors 3

Chairman’s Statement 4

Investment Manager’s Report 5

The Portfolio 6

Sector Distribution 7

Directors’ Report 8

Directors’ Responsibilities Statement 13

Report of the Audit Committee 14

Independent Auditor’s Report 16

Statement of Comprehensive Income 19

Statement of Financial Position 20

Statement of Changes in Net Assets Attributable to Shareholders 21

Statement of Cash Flows 22

Notes to the Financial Statements 23

Ten Year Record - Unaudited 30


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31 December2013

31 December2012

Net asset value per share 181.33p 147.36p

Equity shareholders’ interest(1) £39.69m £30.44m

Revenue return on ordinary activities for the financial year after taxation £0.70m £0.35m

Capital return/(deficit) on ordinary activities for the financial year after taxation £7.49m £1.57m

Revenue return per ordinary share 3.30p 1.72p

Capital return/(deficit) per ordinary share 35.07p 7.59p

Dividend per ordinary share(2) 4.25p 4.15p

Share Price(3) 178.00p 146.25p

Net asset value total return(4) 28.1% 8.01%

FTSE All-Share total return 20.8% 12.30%

(1) During the year the Company purchased 140,000 ordinary shares of 10p from the market to be held in Treasury. 286,710 ordinary shares of 10p each from the shares held in Treasury were sold during the year. 24,322 shares remain in Treasury at 31 December 2013. These are held for resale and the Company does not intend to cancel these. During the period 1,083,569 ordinary shares of 10p each were issued to shareholders.

(2) The dividend figures include the declared second interim dividend for the relevant financial period.

(3) Source: Daily official list mid market closing price.

(4) Source: Datastream/Threadneedle. Basis: Gross income reinvested.

Dividends

In the Company’s annual report for the year ended 31 December 2012 the Chairman advised that the Board was intending to increase the proportion of income paid out in the first interim dividend in November each year. Earnings per share for the half year amounted to 2.06p (2012: 0.57p) and in line with the Board’s intention the Board declared an interim dividend of 1.80p per share (Six months ended 30 June 2012:0.95p), which was paid on 5 November 2013 to shareholders on the register at 6 September 2013. The Company intends to continue with the policy of paying a second interim dividend each year to shareholders in May of the following year in place of a final dividend. The objective is to rebalance the proportion of the dividends paid by the Company between two interim dividends, so that shareholders will receive an increased portion of the Company’s dividend distribution earlier.

A second interim dividend of 2.45p per share has been declared for 2013 payable on 9 May 2014 to shareholders registered as at close of business on 14 March 2014 (2012: second interim dividend 3.15p). This brings the total dividend paid for the year to 4.25p (2012: 4.15p).

Financial Highlights

Introductory information

Threadneedle UK Select Trust Limited’s (the “Company”) ordinary shares are traded on the Main Market of the London Stock Exchange.

The Company’s share price is published daily under Investment Companies in the Share Information Section in the Financial Times. In addition it is published every Monday on the business pages of The Guernsey Press and Star and Jersey Evening Post.


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Directors and Advisors

J M Le Pelley (Chairman), (Born 1949) resident in Guernsey, Non-executive Chairman. He has retired from private practice as an Advocate of the Royal Court of Guernsey and joined the board in 1983. Other directorships include AcenciA Debt Strategies Limited.

J G West FCA, (Born 1947) resident in the UK, Non-executive Director. He joined the board in 1997. He is a chartered accountant, who has spent his career in asset management. He is currently the Chairman of New City High Yield Fund Limited and a Director of a number of public and private companies, including British Assets Trust Plc and JP Morgan Income and Capital Trust Plc, Aberdeen Smaller Companies High Income Trust. He is also Chairman of Associated British Foods Pension Fund Limited and former chief executive of Lazard Asset Management Limited.

D Warr, (Born 1953) resident in Guernsey, Senior independent, non-executive Director and Audit Committee Chairman. He is a fellow of the Institute of Chartered Accountants in England and Wales and joined the Board in 2006. He is also a Non-executive Director of Breedon Aggregates Limited, Schroder Real Estate Investment Trust Limited, Acorn Income Fund Limited and Unigestion (Guernsey) Limited.

S Farnon, (Born 1960) resident in Guernsey, Non-Executive Director (appointed 12 December 2013). She is a chartered accountant and was a banking and finance Partner with KPMG Channel Islands from 1990 until 2001, Head of Audit KPMG Channel Islands and a former member of The States of Guernsey Public Accounts Committee. She is currently Vice-Chairman of The Guernsey Financial Services Commission and a non executive director of Ravenscroft Limited, HICL Infrastructure Fund Limited, Breedon Aggregates Limited, Standard Life Investments Property Income Trust Limited and Dexion Absolute Limited.

D R Maltwood, (Born 1938) resident in Jersey, Non-executive Director (resigned 31 December 2013).

G Ross Russell, (Born 1933) resident in the UK, Non-executive Director (resigned 31 December 2013).

Advisors

Secretary, Administrator and Registered Office

Kleinwort Benson (Channel Islands) Fund Services LimitedDorey CourtAdmiral ParkSt Peter PortGuernsey GY1 2HT01481 727111

Investment Manager

Threadneedle Asset Management Limited60 St Mary AxeLondon EC3A 8JQUnited Kingdom0207 464 5000

Auditor

Deloitte LLPRegency CourtGlategny EsplanadeSt Peter PortGuernsey GY1 3HW01481 724011

Registrars

Capita Registrars (Guernsey) LimitedMont Crevelt HouseBulwer AvenueSt SampsonGuernsey GY2 4LH0870 162 3100

Brokers and advisors

Canaccord Genuity Limited88 Wood StreetLondonEC2V 7QR0207 523 8000

Bankers and Custodian

HSBC Bank plc8 Canada SquareLondon E14 5HQ


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Review of Performance

I am pleased to report on a very successful year for your Company. Over the twelve months to 31 December 2013 the Company’s net asset value rose by 28.1% on a total return basis compared with the 20.8% total return from the FTSE All-Share Index.

This is the first full year with Threadneedle Asset Management Limited as the Investment Manager and I am sure shareholders will be pleased with the performance of the portfolio. I would encourage shareholders to read the Investment Manager’s report, as this provides a very comprehensive commentary. Since the date of Threadneedle’s appointment on 27 July 2012 to this year’s financial year end, the increase in the net asset value per share has exceeded the benchmark.

Share Price and discount

Over the year, the share price increased by 21.71% from 146.25p to 178.0p. The average premium at which the Company’s shares have traded over the year has been 0.35%. This is a very pleasing result for shareholders.

Gearing

The Company did not have any borrowing facility in place during 2013. On 26 March 2014 the Company entered into a one year £5 million loan facility with Lloyds Bank Plc. The facility will be used to gear the Company’s investment portfolio with the aim of enhancing returns to shareholders and the Board will be looking to target a level of approximately 10% to 20% of the Company’s net asset value. Interest will accrue on the loan at 1% over LIBOR and it is repayable at the option of the Company. A non-utilisation fee of 0.35% per annum is payable on any portion of the facility not drawn down

Earnings and Dividend per share

2013 was a stronger year than 2012 in terms of dividends received from underlying portfolio holdings. The revenue return per share has increased to 3.30p (2012: 1.72p). In keeping with the Company’s policy to pay a progressive dividend, the Board declared a second interim dividend of 2.45p per share on 6 March 2014 in respect of the 2013 financial year (2012: 3.20p). This brings the total dividend payable in respect of the 2013 financial year to 4.25p (2012: 4.15p). This is the first year that the Board has increased the proportion of income paid out in the first interim dividend to lessen the disparity between the dividend payments throughout the year. Shareholders should be aware that whilst the Investment Manager’s strategy generates a degree of income, the focus remains on total return rather than a specific level of income from the Company’s portfolio. The Company might need to make use of its revenue reserves to pay the second interim dividend. In addition it should be noted that scrip dividends are paid from capital reserves and thus do not impinge on revenue reserves, nor do they need to be funded from cash. The Board recognises that the dividend policy, and the ability of shareholders to elect to take a scrip alternative, remain key attractions of the Company.

Directors

In December we were pleased that Susie Farnon joined the Board. Susie is an excellent addition to the Board and brings a wealth of experience and we look forward to her input. At the year-end Derek Maltwood and Graham Ross Russell retired from the Board. I would like to thank both Derek and Graham for their years of service to your Company. They have both given invaluable service over many years and we will miss their wise counsel.

Outlook

Although emerging market led volatility has weighed on equity markets in the early part of 2014, the Investment Manager remains positive on the longer-term prospects for UK equities, as the market benefits from global economic recovery, with more than 75% of investee companies’ earnings coming from overseas. The Company’s portfolio continues to focus on well-managed, fundamentally strong businesses that the Investment Manager believes have realistic potential to deliver positive earnings surprises, helped by selected exposure to growing global markets.

Annual general meeting

In addition to the business regularly proposed by the Board to shareholders at each annual general meeting, the Board is also seeking shareholder authority to issue additional shares to Canaccord Genuity Limited (“Canaccord”), the Company’s corporate broker, at their prevailing net asset value on the basis that Canaccord will on admission sell all these shares back to the Company on market at the same price, free of commission, to be held in treasury.

The shares to be held in treasury will be used by the Company to satisfy demand under the scrip dividend scheme and to be issued into the market for general corporate purposes. Unless the proposal is approved, the Company may need to issue new shares for such purposes; the use of treasury shares will be more efficient and cost effective. In particular, the Company can be more responsive in taking advantage of market demand for its shares and save on the significant fixed costs incurred on each occasion that a further issue of shares is made.

The sale of treasury shares into the market for cash cannot be made at a discount to NAV and will be subject to pre-emption rights unless the Company has capacity under shareholder authority resolution 8 to sell such shares without regard to pre-emption. For the avoidance of doubt, pre-emption rights do not apply in respect of the shares issued out of treasury to satisfy scrip. The pricing of treasury shares used for scrip dividends will be at the average of the closing mid market price over the five business days commencing on the ex-dividend date for the relevant dividend, which is on the same basis that new shares are issued to satisfy scrip dividends. Under the Companies Law and the Articles, the Company may only hold a maximum of up to 10 per cent. of the total number of shares in issue at any time in treasury.

These proposals require the approval of shareholders and are therefore conditional on the passing of the resolutions which will be proposed at the annual general meeting.

JM Le Pelley

Chairman

10 April 2014

Chairman’s Statement


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Inve stment Manager’s Report

Simon Brazier (Portfolio Manager)

Market Background

Like most other developed equity markets, the UK stock market performed robustly in 2013, with the FTSE All-Share index up more than 20% in sterling total return terms. The main drivers of this strong performance were improvement in global economic indicators and more importantly the sustained provision of liquidity in the form of quantitative easing. M&A also provided some support with significant deals including Vodafone’s sale of its stake in Verizon Wireless. Shareholder-friendly activity, such as share buybacks, provided a further boost for the FTSE.

The UK’s economic data showed a steady improvement over the year, with GDP growth reaching 1.9% in 2013, the strongest rate of expansion since 2007. There was also a marked revival in the housing market, which was invigorated by government lending incentives such as ‘Help to Buy’, although muted levels of business investment and sluggish growth in the eurozone raised some questions over the sustainability of the recovery. On the policy front, the Bank of England kept interest rates on hold at 0.5%, while new Bank of England Governor Mark Carney introduced the concept of ‘forward guidance’, a commitment to keep interest rates low as long as certain economic preconditions are met. However, the rapid recovery in the UK economy led to speculation that the Bank would have to recast forward guidance. (This was subsequently confirmed in February 2014 when the Bank abandoned the link between the unemployment rate and monetary policy.)

The best-performing sectors over the year were telecommunications, consumer discretionary and industrials. The materials sector was by far the weakest area of the market and the only sector to produce a negative total return for the year. Energy, consumer staples and utilities also underperformed.

Performance Review

The Net Asset Value significantly outperformed the FTSE All-Share index in 2013. This outperformance stemmed from favourable sector allocation and positive stock selection, with the latter adding the most value.

At the sector level, the portfolio benefited from overweight positions in industrials and consumer discretionary, both of which outperformed in 2013. The underweight in materials was also a positive as the sector was affected by Chinese GDP growth concerns and fears that some mining companies have been too slow to cut capacity and capital expenditure. The underweight position in telecoms was detrimental, however. Stock selection was positive in all sectors except energy, healthcare and utilities. It was particularly strong in the materials and financial sectors, and also worked well in industrials and both of the consumer sectors.

At the security level, significant positive contributors over the year included the holding in BT Group. The fixed-line telecom operator delivered strong results, with positive updates on its fibre service and demand for BT Sport. Our overweight position in the stock helped to offset the effect of not holding Vodafone, which performed strongly on the sale of its stake in Verizon Wireless. The recovery in the housing market helped the portfolio’s position in Breedon Aggregates, which produces construction materials, as well as the holdings in house builders Persimmon and Bellway. Other strong performers included auto and aero parts maker GKN and support services firm Berendsen; both posted good results.

Elsewhere, the overweight position in Daily Mail & General Trust added value, as the media group announced strong results, while the holding in budget airline easyJet was boosted by growing passenger numbers. Booker, the food wholesaler, benefited from optimism over its growth prospects after its acquisition of the Makro chain of cash-and-carry stores. The portfolio participated in IPOs such as Royal Mail, which performed strongly.

The biggest stock-level negatives came from not holding some of the better-performing FTSE 100 stocks such as Vodafone, Lloyds Banking Group and Prudential. Within the portfolio, First Quantum Minerals detracted from returns as the copper price weakened. Other notable detractors included Tullow Oil, which was affected by disappointing drilling results.

Outlook

Fresh signs are emerging that the trading environment is improving in the UK, with many of the company executives we meet now also noticing ‘green shoots’ in the eurozone.

We believe that the outlook remains encouraging at the UK company level and continue to focus on well-managed, fundamentally strong businesses that we believe have realistic potential to deliver positive earnings surprises, helped by selected exposure to growing global markets. Many of our highest-conviction holdings also offer scope to support total returns to shareholders through attractive and sustainable levels of dividend payouts.

Nevertheless, although corporate profits are growing and companies are increasingly putting balance-sheet cash to use, we remain vigilant to the risk that rising investor expectations have also created more scope for profit warnings.

Simon Brazier

Portfolio Manager

Threadneedle Asset Management Limited (“Threadneedle”)

31 March 2014


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Company Market Value

£’000

1 BP 1,693

2 BT Group 1,441

3 GlaxoSmithKline 1,405

4 AstraZeneca 1,065

5 Unilever 1,002

6 Imperial Tobacco 956

7 Royal Dutch Shell 908

8 First Quantum Minerals 902

9 Breedon Aggregates 868

10 Booker Group 846

11 BG Group 842

12 Rio Tinto 829

13 Johnson Matthey 793

14 Sage Group 788

15 Merlin Entertainment 761

16 Legal and General 747

17 Reckitt Benckiser Group 737

18 HSBC Holdings 709

19 DCC 703

20 Smith (DS) 699

21 Smith & Nephew 686

22 Smiths Group 648

23 Daily Mail & General 630

24 Reed Elsevier 630

25 London Stock Exchange Group 630

26 GKN 620

27 Melrose Industries 619

28 Compass Group 601

29 Signet Jewelers 590

30 Wolseley 588

31 AZ Electronic Materials 573

32 Berendson 555

33 Rolls Royce Holdings 555

34 British American Tobacco 541

35 Barclays 534

36 Wood Group (John) 493

37 Carnival 463

38 SVG Capital 425

Company Market Value

£’000

39 Royal Mail 406

40 Essentra 397

41 Glencore Xstrata 396

42 Derwent London 394

43 Aviva 392

44 Rentokil 384

45 Bellway 383

46 Diageo 379

47 Tullow Oil 374

48 Crest Nicholson 374

49 St James’s Place 364

50 AMEC 352

51 Experian Group 349

52 Old Mutual 348

53 SABMiller 347

54 Pearson 338

55 Electrocomponents 333

56 Stagecoach Group 325

57 easyJet 307

58 CRH 307

59 Schroders 307

60 IMI 303

61 ITE Group 297

62 De La Rue 295

63 Wetherspoon (J.D) 285

64 RSA Insurance Group 283

65 PZ Cussons 270

66 Standard Chartered 262

67 Headlam Group 232

68 Ultra Electronics 229

69 Grainger 205

70 G4S 185

71 Persimmon 185

72 Berkeley Group 47

73 Acquisition 1234 3

Total Valuation 39,712

The Portfolio as at 31 December 2013


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Total Total

2013 2012

Sector Classification % %

Oil and Gas

Oil and gas producers 9.6 10.7Oil Equipment, Services and Distribution 2.2 3.0

11.8 13.7

Industrials

Construction and materials 3.0 1.6Aerospace and defence 2.0 2.2General industrials 3.4 2.5Industrial engineering 2.3 3.3Support services 9.5 9.9Industrial transportation 1.0 –

21.2 19.5

Basic Materials

Chemicals 3.4 2.6Mining 5.4 5.1

8.8 7.7

Consumer goods

Automobiles and parts 1.5 1.5Beverages 1.8 2.0Food Producers 2.5 2.7Household goods and home construction 5.0 5.2Tobacco 3.8 3.7Personal goods 0.7 –

15.3 15.1

Consumer Services

General retailers 1.5 0.8Travel and leisure 6.9 7.2Food and drug retailers 2.1 3.2Media 4.8 6.2

15.3 17.4

Health Care

Pharmaceuticals and biotechnology 6.2 5.8Health care equipment and Services 1.8 1.3

8.0 7.1

Telecommunications

Fixed line telecommunications 3.6 3.13.6 3.1

Utilities

Gas, Water and Multi utilities – 2.1– 2.1

Technology

Software and computer services 2.0 1.92.0 1.9

Financials

Banks 3.8 4.5Financial services 3.4 1.5Real estate investments & services 0.5 1.5Real estate investment trusts 1.0 –Non-life insurance 0.7 0.6Life assurance 4.7 3.6

14.1 11.7

Net current (liability)/assets (0.1) 0.7

Net assets 100.00 100.00

Note: The distribution of investments is based on the valuations at 31 December 2013 and at 31 December 2012. All of the investments are listed or quoted on the London Stock Exchange except for Acquisition 1234.

Sector Distribution


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Directors’ Report

The Directors present their report and the annual financial statements for the year ended 31 December 2013 with comparatives for the year ended 31 December 2012. The Directors confirm that the Annual Financial Report taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.

Principal activities

The principal activity of the Company during the year was that of an investment company. The Company is an authorised closed-ended investment scheme regulated by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended. The Company’s ordinary shares have been admitted to the Official List of the UK Listing Authority with a premium listing and to trading on the London Stock Exchange’s Main Market for listed securities.

Name change

At the Annual General Meeting held on 15 August 2013 the Directors were authorised to apply to the Registrar of Companies to change the registered name of the Company to Threadneedle UK Select Trust Limited. The Registrar of Companies confirmed the name change with effect from 27 August 2013.

Revenue and dividend

The statement of comprehensive income set out on page 19 shows a profit for the year amounting to £8,195,000 (2012: £1,919,000). The Directors have declared a second interim dividend of 2.45p which, together with the first interim dividend of 1.80p, makes a total of 4.25p for the year (2012: 4.15p).

The second interim dividend will be paid on 9 May 2014 to ordinary shareholders on the register on 14 March 2014 and a scrip dividend alternative will be offered.

Assets

At the year end the net assets attributable to the ordinary shares were £39,691,000 (2012: £30,443,000). Based on this figure the net asset value of an ordinary share was 181.33p (2012: 147.36p).

Share capital

During the year 140,000 issued ordinary shares of 10p each were purchased by the Company at a total cost of £232,225 and held in Treasury. The authority allowing the Company to purchase its own shares expires at the end of the 2014 annual general meeting and allows the purchase of a maximum of 3,282,505 shares, representing 14.99% of the number of shares in issue on 15 August 2013, being the date of the 2013 annual general meeting. The Board will seek this authority again at the 2014 annual general meeting.

During the year 286,710 ordinary shares of 10p each were issued from the Treasury reserve arising from elections by ordinary shareholders to receive shares in lieu of cash dividends (2012: 316,846) thereby resulting in a total of £475,108 (2012: £384,933) being capitalised. In addition, 1,083,569 new ordinary shares were issued to investors on 4 June 2013 at 1.72p per share, being a premium of 1.4% to the prevailing net asset value, resulting in an additional £1,863,739 being capitalised.

Directors

Substantial shareholdings

At 31 March 2014, the following held a notifiable interest in the Company’s voting rights:

31 March 31 December

2014 2013

Ameriprise Financial Inc 22.21% 22.21%JM & Mrs AE Le Pelley 10.06% 10.06%Mr G Green 6.63% 6.63%

At 31 March 2014, there has been no other notifiable interest in the Company’s voting rights reported to the Company.

The Directors are responsible for the determination of the Company’s investment objectives and policies and have overall responsibility for the Company’s activities. The Directors have put procedures in place to ensure that the Company meets current corporate governance requirements.

Details of the current Board composition, including their roles and other significant commitments, are provided on page 3.

None of the Directors has a contract of service with the Company and, no contract or arrangement subsisted during or at the end of the year in which any directors was materially interested and which was significant in relation to the Company’s business.

Furthermore, they are not entitled to any minimum period of notice or to compensation in the event of their removal as a Director.

The Directors who served on the Board during the year, together with their beneficial interests and those of their spouses and dependent children at 31 December 2013, were as follows:

2013 2012

Shares Shares

J M Le Pelley (Chairman) 2,203,579 2,138,544J G West 34,263 33,900D Warr (Audit Committee Chairman) 115,572 112,162S Farnon * 48,000 N/AD R Maltwood** 3,880 3,766G Ross Russell** 368,469 357,596

* Appointed as a Director of the Company with effect from 12 December 2013.** Resigned as Directors of the Company with effect from 31 December 2013.

There have been no changes in the Directors’ interests in the shares of the Company between 31 December 2013 and 31 March 2014.

Share buy back policy

The Board intends to use its share buyback powers with the objective of minimising any discount at which the Company’s shares trade to their underlying net asset value in normal market conditions. However, shareholders should note that the Board is not bound to undertake share buybacks and will do so entirely at its own discretion, bearing in mind, inter alia, available cash, the remaining shareholder authority the Company has to conduct share buybacks and the ability of the Company to satisfy the applicable statutory solvency tests or any other company law requirements. There is no guarantee that the Board will decide to exercise its buyback powers in any particular case or that it will be successful in achieving its objective.


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Any shares repurchased by the Company will normally be held in treasury to be used, inter alia, to satisfy elections under the Company’s popular scrip dividend scheme.

Gearing

On 26 March 2014 the Company entered into a one year £5 million loan facility with Lloyds Bank Plc. The facility will be used to gear the Company’s investment portfolio with the aim of enhancing returns to shareholders and the Board will be looking to target a level of approximately 10% to 20% of the Company’s net asset value. Interest will accrue on the loan at 1% over LIBOR and it is repayable at the option of the Company. A non-utilisation fee of 0.35% per annum is payable on any portion of the facility not drawn down.

Corporate governance

a) Statements of compliance

The UK Listing Authority’s Listing and Disclosure and Transparency Rules require all overseas companies with a premium listing (which includes the Company) to include a corporate governance statement in its directors’ report, which must contain a reference to the corporate governance code to which the Company is subject and / or the corporate governance code which the Company may have voluntarily decided to apply and / or all relevant information about the corporate governance practices applied beyond the requirements under national law.

The Association of Investment Companies (formerly Association of Investment Trust Companies), of which the Company is a member, has published its Code of Corporate Governance for Investment Companies (the “AIC Code”) and the Corporate Governance Guide for Investment Companies dated February 2013 (the “AIC Guide”), which incorporates the FRC’s UK Corporate Governance Code, the AIC Code and certain requirements of the UKLA Listing Rules. The UK’s Financial Reporting Council (the “FRC”) has confirmed that “it remains the FRC’s view that by following the AIC Corporate Governance Guide investment company boards should fully meet their obligations in relation to the UK Corporate Governance Code and Paragraph LR 9.8.6 of the Listing Rules.”

The Board has considered the principles and recommendations of the AIC Guide. The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Corporate Governance Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to the Company. The Board considers that reporting against the principles and recommendations of the AIC Code will provide better information to shareholders.

The Directors believe that the Company has complied with the provisions of the AIC Code where appropriate, and that it has complied throughout the year with the provisions where the requirements are of a continuing nature.

On 30 September 2011, the Guernsey Financial Services Commission published its Finance Sector Code of Corporate Governance (the “GFSC Code”), which came into effect on 1 January 2012. The GFSC Code provides a framework which applies to all companies in the regulated finance sector in Guernsey. The GFSC Code deals with governance issues under several topics including the Board, accountability, risk management, disclosure and reporting, remuneration and shareholder relations. Companies which report against the AIC Code are deemed to meet the requirements of the GFSC Code.

b) The Board

The Company is led and controlled by a Board comprising non-executive Directors, all of whom have wide experience and are considered to be independent. The Board believes that it is in the shareholders’ best interests for the Chairman to be the point of contact for all matters relating to the governance of the Company.

Mr D Warr has been appointed as the senior independent non-executive Director for the purpose of the AIC Code. The appointment of Directors is considered by the Board who sit on the Nomination Committee. The Board has reviewed its performance and composition, as well as that of its committees and individual Directors, and is content that, following the changes made in December 2013, no further changes to the composition of the Board are necessary or desirable, as it is considered that the performance of all Directors is satisfactory and that they have demonstrated commitment to their roles. Biographical information on each Director is included on page 3.

The Chairman and Mr West have served on the Board for more than nine years. Mr Warr joined the Board in 2006 and Ms Farnon joined the Board in 2013. Whilst the AIC Code recommends that non-executive directors serving more than nine years should be subject to annual re-election, the Articles of Incorporation stipulate that one third, or the number nearest to but not exceeding one third, of the Directors shall retire and offer themselves up for reappointment at each annual general meeting. The Board does not consider it to be in the best interests of the Company to require the majority of Directors to stand for re-election annually and has chosen therefore to adopt best practice in relation to retirement by rotation of two Directors. Therefore two Directors will stand for re-appointment at each annual general meeting, so that the shareholders will have the opportunity to consider each Director’s continuing involvement with the Company every second year.

Following the evaluation of the performance of the Board, its committees and individual Directors, it is considered that the performance of all Directors who are to retire and offer themselves for re-appointment continues to be effective and that they have demonstrated commitment to their roles. In accordance with this policy Mr Le Pelley will at the Company’s forthcoming annual general meeting retire and, being eligible, offer himself for re-election in accordance with Article 21 of the Articles of Association of the Company. In addition, as Ms Farnon was appointed during the year by the Directors, she also will retire and, being eligible, offer herself for re-election.

The Board meets regularly, normally quarterly, with additional meetings should it be considered appropriate to discuss specific issues. The table below lists the number of Board and Committee meetings attended by each Director during the year ended 31 December 2013.

Scheduled

Board

Other

Board

Audit

Committee

Nomination

Committee

Number of Meetings 4 7 2 1JM Le Pelley (Chairman) 4 7 2 1J G West 4 – 2 1D Warr (Audit Committee Chairman)

4 6 2 1

S Farnon* 1 – – –DR Maltwood** 3 2 2 –G Ross Russell** 4 – 1 1

* Appointed as a Director of the Company with effect from 12 December 2013.** Resigned as Directors of the Company with effect from 31 December 2013.

In 2012 and 2013 the Company did not employ any personnel.

Directors’ Report(continued)


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c) Committees, Board Composition and Succession Planning

The Board has established an Audit Committee, a separate report being provided on page 14, and the Board has also established for itself a Nomination Committee. On 12 December 2013 the Board created a Management Engagement and Remuneration Committee, which will meet when necessary, usually at least annually. The Terms of Reference for all Committees are available for inspection at the Company’s registered office during normal business hours.

In addition to conducting an evaluation on the composition of the Board, in terms of size, skills and expertise, a formal and rigorous evaluation of the Board’s own performance, as well as its Committees, is undertaken annually by the Nomination Committee. The Nomination Committee consists of all non-executive Directors.

The objectives of Board planning in terms of its composition and succession are to ensure that the Board is comprised collectively, of fit and proper individuals with the capability to direct the Company in the best interest of its shareholders.

The Nomination Committee and the Board have reviewed the Board’s performance and composition, as well as that of its Committees and individual Directors. Messrs Maltwood and Ross Russell resigned from the Board, with the effect from 31 December 2013. Ms S Farnon was appointed as an independent non-executive Director on 12 December 2013. Ms Farnon has also been appointed to serve as a member on the Audit Committee, Nomination Committee and the Management, Engagement and Remuneration Committee.

Directors’ fees are recommended by the full Board. The emoluments of the Directors for the year were as follows:

2013 2012

Fees Fees

£ £

JM Le Pelley (Chairman) 25,000 25,000DR Maltwood 20,000 20,000G Ross Russell 20,000 20,000JG West 20,000 20,000D Warr (Audit Committee Chairman) 22,500 22,500S Farnon 1,095 –

108,595 107,500

The figures above represent emoluments earned as Directors during the relevant financial year which are paid quarterly in arrears. The Directors receive no other remuneration or benefits from the Company other than the fees stated above. The directors are paid out of pocket expenses for attendance at Board meetings.

With effect from 1 January 2014, the Directors fees were increased to £30,000 for the Chairman and £24,000 for other Directors. In addition the Chairman of the Audit Committee and the Risk Committee will each receive an additional £3,000.

d) Management Engagement and Remuneration Committee

The Management Engagement and Remuneration Committee consists of all non-executive Directors. The Committee has been delegated the responsibility for monitoring and reviewing and making recommendations to the Board on all aspects of the management and administration of the

Company’s assets and corporate records and other ancillary services provided by each of Threadneedle Asset Management Limited, Kleinwort Benson (Channel Islands) Fund Services Limited, Canaccord Genuity Limited, Capita Registrars (Guernsey) Limited and HSBC Bank Plc, as well as any other service providers. The Management Engagement and Remuneration Committee also makes recommendations to the Board on any variations to the terms of the Investment Management Agreement and any agreement with any other service provider which the Committee considers necessary or desirable.

The Committee is authorised to seek any information it requires from any employee or agent of the Company in order to perform its duties. All agents of the Company are directed to co-operate with any reasonable request made by the Committee.

The Committee is authorised by the Board to obtain, at the Company’s expense, outside legal or other professional advice on any matters within its terms of reference if it considers necessary.

e) Risk Committee

The Board has decided to establish a Risk Committee as part of its preparation for complying with the Alternative Investment Fund Managers Directive (“AIFMD”).

As mentioned in the Audit Committee section of the Annual Financial Report, the Board’s intention is to register as a self-managed AIFM with the Financial Conduct Authority (“FCA”) to enable it to continue marketing its shares within the United Kingdom beyond 22 July 2014.

The Risk Committee will assume responsibility for certain of the duties currently undertaken by the Audit Committee.

f) Relations with shareholders

In conjunction with the Board, the broker keeps under review the register of members of the Company. Potential investors are also contacted by the Investment Manager.

All shareholders are encouraged to participate in the Company’s annual general meeting. All Directors normally attend the annual general meeting, at which shareholders have the opportunity to ask questions and discuss matters with the Directors and the Investment Manager.

It is recognised that the AIC Code requires notice of annual general meetings to be dispatched at least 21 clear days before the meeting. The Company will continue to comply with this Code provision in 2014.

Accountability and audit

a) Statement of going concernIn the opinion of the Directors the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the financial statements have been prepared using the going concern basis.

The Directors have arrived at this opinion by considering, inter alia, the following factors:

the Company has sufficient liquidity to meet all on-going expenses Although the Company is in a net current liability position of £20,900 (excluding investments) at the year end the Board regularly reviews the cash flow of the Company and is confident that the Company will have sufficient resources to meet all future obligations.



11


the portfolio of investments held by the Company materially consists of listed investments which are readily realisable and therefore the Company will have sufficient resources to meet its liquidity requirements; and

as at 31 December 2013, the Company had no external borrowings and therefore was under no obligation to repay any borrowing facilities. As at the date of signing the Annual Financial Report the Company had in place a one year £5 million loan facility with Loyds Bank Plc, which has not yet been utilised.

b) Internal controlThe Directors acknowledge that they are responsible for establishing and maintaining the Company’s system of internal control and reviewing its effectiveness. Internal control systems are designed to manage rather than eliminate the failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. They have therefore established an ongoing process designed to meet the particular needs of the Company in managing the risks to which it is exposed, consistent with the guidance provided by the AIC. Such review procedures have been in place throughout the full financial year and up to the date of the approval of the financial statements.

The Board has contractually delegated to Threadneedle the management of the Company’s investments. The management agreement between the Company and its Investment Manager sets out the matters over which the Investment Manager has authority and the limits above which Board approval must be sought. Other matters reserved for the approval of the Board include the report and accounts, communications with shareholders and decisions on strategy.

The safe custody of the Company’s investments is managed by HSBC Plc and Kleinwort Benson (Channel Islands) Fund Services Limited is contracted to provide the Company’s administration, secretarial and accounting functions and Capita Registrars (Guernsey) Limited, its registration function. The Management Engagement and Remuneration Committee will regularly review the performances of the services provided by these companies.

Threadneedle and Kleinwort Benson (Channel Islands) Fund Services Limited maintain their own systems of internal controls, on which they have reported to the Board. The Company, in common with other investment companies, does not have an internal audit function.

The systems are designed to ensure effectiveness and efficient operations, internal control, and compliance with laws and regulations. In establishing the systems of internal control regard is paid to the materiality of relevant risks, the likelihood of costs being incurred and costs of control. It follows therefore that the systems of internal control can only provide reasonable but not absolute assurance against the risk of material misstatement or loss.

There are well established budgeting and forecasting procedures in place and reports are presented to the Board detailing variance against budget and prior year and other performance data. The effectiveness of the internal control systems is reviewed annually by the Board and the Audit Committee. The Audit Committee has a discussion annually with the auditor to ensure that there are no issues of concern in relation to the audit opinion on the accounts and, if necessary, representatives of the Investment Manager would be excluded from that discussion.

The Board regularly takes steps to embed internal control and risk management further into the operations of the Company and to deal with areas of improvement which come to the Investment Manager’s and the Board’s attention.

Investment objective and policy

The Company’s investment objective is to provide shareholders with a total return in excess of the total return on the FTSE All-Share Index, together with a progressive dividend policy.

The Company is permitted to invest in any security listed or quoted on any UK stock exchange provided that no less than 80 per cent of its gross assets at the time an investment is made are invested in constituents of the FTSE All-Share index.

There are no minimum or maximum limits on the number of investments in the portfolio but it is expected that the portfolio will generally comprise shares and securities in 50 to 90 companies. The Company seeks to manage risk in part through heeding the following investment restrictions:

The top five holdings in the Company’s portfolio may not exceed 40 per cent of the total value of the portfolio.

The top three sectors represented in the portfolio may not exceed 50 per cent of the total value of the portfolio.

The securities of no one company may represent more than 10 per cent of the value of the Company’s portfolio measured at the time of acquisition and subsequently, when additions are made to the holding.

The Company will not hold more than 5 per cent of the issued share capital (or voting shares) in any one company.

While the Company may hold shares in other investment companies (including investment trusts), the Company will not invest more than 10 per cent., in aggregate, of the value of its total assets in other listed closed-ended investment funds (save to the extent that such closed-ended investment funds have published investment policies to invest no more than 15 per cent. of their total assets in such other listed closed-ended investment funds).

Cash

The Company intends to be fully invested in normal market conditions but may hold up to 20 per cent of net asset value in cash on deposit (or in short-term money market instruments) during periods in which the Investment Manager believes markets are overvalued or expects them to fall.

Gearing

Gearing may be used selectively in order to leverage the Company’s portfolio to enhance returns where the Board in conjunction with the Investment Manager considers it appropriate to do so.

Derivatives

Subject to the Board giving its prior approval, the Investment Manager is permitted to invest in options and other derivatives for the purposes of efficient portfolio management only.

Investment Process and implementation of investment policy

The Investment Manager’s investment approach is driven by stock selection, with a focus on risk and reward. Reward is derived from valuation and profit opportunity. In terms of risk, it is the level of business risk rather than index weight that determines position size in the portfolio, with portfolio


12

risk minimised through diversification. Considerable emphasis is placed on identifying companies which are well managed, have sustainable franchises, strong balance sheets and cash flow generation, and which trade on attractive valuations relative to peers and history.

During the year under review, the assets of the Company were invested in accordance with the Company’s investment policy. Further details of the performance of the Company and the extent to which the Company’s objectives were achieved can be found in the Chairman’s Statement and Investment Manager’s Report.

The Company’s portfolio consisted of 73 investments as at 31 December 2013. As at 31 December 2013, the portfolio consists primarily of investments issued in the United Kingdom. The top 10 holdings comprise 27.93% of total net assets (2012: 27.08%).

The Company’s gearing stood at nil% as at 31 December 2013 (2012: nil%).

Financial risk profile

The Company’s financial instruments comprise investments, cash and various items such as debtors, creditors etc that arise directly from the Company’s operations. The main purpose of these instruments is the investment of shareholders’ funds.

Market price risk

The main risk arising from the Company’s financial instruments is market price risk.

In accordance with the Company’s investment objectives, the Company does not normally hedge against its exposure to market price risk.

The investment strategy of the Company has been delegated to the Company’s Investment Manager, Threadneedle under an agreement dated 27 July 2012. The Investment Manager operates under agreed parameters and the Board monitors its performance on a regular basis.

Liquidity risk

As set out above and subsequent to the year end, the Company has entered into a one year £5 million loan facility with Lloyds Bank Plc. The Company’s assets comprise securities that can be readily realised to meet its obligations. As a result the Company is able to realise its investments in these instruments at an amount close to their fair value in order to meet its liquidity requirements.

Interest rate risk

The Company’s interest rate sensitive assets and liabilities mainly comprise cash at bank and any bank loan. The cash at bank and bank loan facility are subject to floating rates and any loan facility is considered to be part of the investment strategy of the Company. No other hedging is undertaken in respect of this interest rate risk.

Foreign currency risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign exchange rates.

The Company’s foreign currency risk in 2013 arose from the investment portfolio including cash and was minimal as it was principally Sterling denominated. No hedging was undertaken in respect of this foreign currency exposure. The Company had no significant exposure to foreign currencies as at 31 December 2013 (see note 18).

The Alternative Investments Fund Managers Directive (‘AIFMD’)

The AIFMD, which was required to be transposed by EU Member States into national law by 22nd July 2013 seeks to regulate alternative investment fund managers (‘AIFM’) established in the EU and prohibits such managers from managing any alternative investment fund (‘AIF’) or marketing shares in such funds to investors in the EU unless an AIFMD authorisation is granted to the AIFM.

The UK has implemented the AIFMD in a way that allows the continuation of certain activities after the date of transposition, provided that the authorisation conditions are met within a year after that date (the ‘Transitional Period’). The Company has the benefit of the Transitional Period and has decided that it will be a self-managed AIF and register accordingly with both the Financial Conduct Authority in the UK and the Guernsey Financial Services Commission prior to the 22 July 2014. In deciding on the self-managed option the Board is mindful that the reporting requirements of so doing are less than would be the case if the Investment Manager was appointed the AIFM and therefore considers this approach to be both practical and cost effective.

Subject to registration with the FCA the Company will be able to continue marketing its shares into the UK beyond 22 July 2014.

The Board is implementing the necessary measures to facilitate compliance with AIFMD which includes the establishement of the Risk Committee. It is intended that the Risk Committee will specifically monitor the risks pertaining to the investment portfolio and strategy. This Committee will assume certain of the responsibilities previously undertaken by the Audit Committee.

Auditor

Deloitte LLP has expressed its willingness to continue in office as auditor and a resolution to re-appoint it will be proposed at the forthcoming annual general meeting.

Disclosure of information to the auditor

At the date of approval of the financial statements, the Directors confirm that:

so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware; and

they have taken all steps they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of section 249 of The Companies (Guernsey) Law, 2008.

By order of the Board

JM Le Pelley D Warr

10 April 2014



13

Directors’ Responsibilities Statement

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

The Companies (Guernsey) Law, 2008 (the “Companies Law”) requires the Directors to prepare Financial Statements for each financial year. Under the Companies Law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (“IFRSs”).

Under the Companies 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 these financial statements, International Accounting Standard 1 requires that Directors:

properly select and apply accounting policies;

present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and

make an assessment of the Company’s ability to continue as a going concern.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Law. 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.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in Guernsey and the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

To the best of the knowledge of the Directors:

The financial statements, which have been prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

The Chairman’s Statement, Investment Manager’s Report and Notes to the Financial Statements are incorporated herein by reference and include a true and fair review of the development and performance of the Company and a description of the principal risks and uncertainties that it faces, as required by DTR 4.1.8 of the Disclosure and Transparency Rules.

By order of the Board

JM Le Pelley D Warr

10 April 2014


14

Role and responsibility

This is the report of the Audit Committee which has been prepared with reference to the AIC Code and describes the work of the Committee in discharging its responsibilities.

The Company has established an Audit Committee in compliance with the Financial Conduct Authority’s (FCA’s) Disclosure and Transparency Rule 7.1 and the AIC Code, which reports formally twice each year to the main Board. It has formally delegated duties and responsibilities within written terms of reference which are reviewed and reapproved annually.

The Audit Committee is mandated by the Board to investigate any activity within its terms of reference and to consult externally with legal or other independent professional advisors, as required, to ensure that the Committee adequately discharges its duties and responsibilities, which include:

a) considering the appointment of the external auditor, its letter of engagement, the audit fee, and any questions of resignation or dismissal of the external auditor;

b) reviewing from time to time the cost effectiveness of the audit and the independence and objectivity of the external auditor;

c) developing and implementing policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and report to the Board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken;

d) reviewing the Company’s half-yearly and annual financial reports, not excepting the full Board’s responsibility over the accounts, focusing particularly on:

Any changes in accounting policies and practice;

Major judgmental areas;

Significant adjustments arising from the audit;

The going concern assumption;

Compliance with accounting standards (and in particular accounting standards adopted in the financial year for the first time);

Compliance with applicable legal and regulatory requirements (including inter alia, those of the Financial Conduct Authority, the London Stock Exchange, the Guernsey Financial Services Commission and The Companies (Guernsey) Law, 2008, as amended);

A risk management review; and

Assessing the effectiveness of internal controls

e) discussing any problems and reservations arising from the final audit, and any other matters which the auditor may wish to discuss (in the absence of the Company’s agents where necessary);

f) reviewing the external auditor’s Report to the Audit Committee and determining whether any changes have to be implemented as a result;

g) reviewing, on behalf of the Board, the Company’s system of internal control (including financial, operational, compliance and risk management) and make recommendations to the Board;

h) reviewing from time to time the appropriateness of internal audit reporting by the Company’s agents;

i) considering the major findings of internal investigations and management’s response;

j) reviewing the Company’s operating, financial and accounting policies and practices;

k) considering any other matters specifically delegated to the Committee by the Board from time to time; and

l) confirming to the Board as to whether the annual financial report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.

The committee may review any matter that it considers appropriate not withstanding that it is not specifically mentioned in the above list of duties.

Where non-audit services are provided by the auditor, these engagements are pre-approved by the Audit Committee to ensure that the auditor’s independence and objectivity is not breached. No non-audit services were provided in the year ended 31 December 2013 (2012: £nil).

Composition

Mr Warr is the Chairman of the Audit Committee and Mr West and Ms Farnon are additional members serving on the Committee. In line with what has been considered best practice Mr Le Pelley stepped down from the Audit Committee on 12 December 2013. Only independent non-executive Directors serve on the Audit Committee and the members do not have any links with the Company’s external auditor. They are also independent of the management teams of the Investment Manager, administrator and all other service providers. The Audit Committee meets formally no less than twice a year in Guernsey and on an ad hoc basis if required. In addition, it meets the external auditor at least twice a year. The membership of the Audit Committee and its terms of reference are kept under review.

Significant issues considered regarding the Annual Financial Report

In discharging its responsibilities, the Audit Committee has specifically considered the following significant issues relating to the financial statements:

Significant issue How the issue was addressed

Valuation of the Company’s Investments

The Board reviews the portfolio valuations on a regular basis throughout the year. The Board meets with the Investment Manager at least quarterly and seeks assurance that the pricing basis is appropriate and in line with relevant accounting standards as adopted by the Company and that the carrying values are materially correct.

The Company’s net asset value is calculated on a daily basis by the Administrator, Kleinwort Benson (Channel Islands) Fund Services Limited and published in the Financial Times.

Report of the Audit Committee


15

Report of the Audit Committee(continued)

Significant issue How the issue was addressed

Ownership of the Company’s Investments

The Company’s investments are held in safe custody by HSBC Bank Plc. The Board monitors the performance of the Custodian and also considers the security of the investments held by the Custodian.

The Investment Manager has procedures to ensure that investments can only be made to the extent that the appropriate contractual and legal arrangements are in place to protect the Company’s assets. The Administrator reconciles the investments held according to their records with the Custodian’s records. The Board satisfies itself with these procedures by reviewing the internal control documents of the Administrator. The Board also has regular meetings with the Investment Manager where they discuss the Company’s investments amongst other issues.

Accuracy of calculation of investment management and performance fees

The management fee and any performance fee is calculated in accordance with the contractual terms in the investment management Agreement by the Administrator, Kleinwort Benson (Channel Islands) Fund Services Limited. These calculations are prepared on a daily basis as part of the daily net asset value calculation.

The Board monitors the investment management fee and any performance fee on an ongoing basis. The standard schedule used to calculate the performance fee has been created by the Administrator and reviewed and approved by the Board before being used.

Auditor and audit tenure

The Company’s auditor Deloitte LLP, has acted in this role since 1974 under its current trading name of Deloitte LLP as well as predecessor trading names. The Committee, in conjunction with the Board, is committed to reviewing this appointment on a regular basis to ensure that the Company is receiving an optimal level of service. The appointment of the auditor is reviewed annually and we are satisfied that sufficient safeguards are put in place by the auditor to mitigate risks associated with long association such as regular partner rotation. There are no contractual obligations which restrict the Company’s choice of auditor.

Assessment of the external audit process

The Audit Committee considers the nature, scope and results of the auditor’s work and monitors the independence of the external auditor. Formal reports are received from the auditors on an annual basis relating to the extent of their work, the accuracy of accounting and the correctness of valuation of assets. The work of the auditors in respect of any significant audit issues and consideration of the adequacy of that work is discussed.

The Chairman of the Audit Committee liaises with the Investment Manager and Administrator to discuss the extent of audit work completed to ensure all matters of risk are covered while the Committee assesses the quality of the draft financial statements prepared by the administrator.

The Audit Committee has an active involvement and oversight of the preparation of both half yearly and annual financial statements. Ultimate responsibility for reviewing and approving the Annual Financial Report remains with the Board.

Conclusion in respect of the Annual Financial Report

The production of the Company’s Annual Financial Report is a comprehensive process requiring input from a number of different parties. One of the key governance requirements of the Company’s Annual Financial Report is that it is fair, balanced and understandable. The Board has requested that the Committee advise on whether it considers that the Annual Financial Report fulfil these requirements.

As a result of the work performed, the Committee has concluded that the Annual Financial Report for the year ended 31 December 2013, taken as a whole,is fair,balanced and understandable and provides the information necessary for shareholder’s to assess the Company’s performance,business model and strategy and has reported on these findings to the Board. The Board’s conclusions in this respect are set out in the Directors’ Report on page 8.

D Warr

Chairman of Audit Committee

10 April 2014


16

Independent Auditor’s Report to the members of Threadneedle UK Select Trust Limited

Opinion on financial statements

of Threadneedle UK Select Trust

Limited

In our opinion the financial statements:

give a true and fair view of the state of the Company’s affairs as at 31 December 2013 and of its profit for the year then ended;

have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB); and

have been prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008.

The financial statements comprise the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Cash Flows, the Statement of Changes in Net Assets and the related notes 1 to 20. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as issued by the IASB.

Going concern We have reviewed the directors’ statement on page 10 that the Company is a going concern. We confirm that:

we have not identified material uncertainties related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern which we believe would need to be disclosed in accordance with IFRSs as issued by the IASB; and

we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Company’s ability to continue as a going concern.

Our assessment of risks of material

misstatement

The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team:

Risk How the scope of our audit responded to the risk

Valuation of the Company’s investments There is a risk that the Company’s pricing methodology does not accurately reflect the potential exit price at the year-end date. This risk is heightened when current market conditions may impair the liquidity of the investment portfolio as an element of judgment may need to be incorporated into the valuation.

We tested 100% of the year end prices to prices obtained independently from reliable third party sources. In addition, the liquidity of the portfolio was considered as at the year-end date to assess whether any adjustments to establish the fair value of illiquid or otherwise suspended for trading equities from stale pricing were required.

Ownership of the Company’s investments There is a risk that the Company has not retained the rights and obligations of its investment portfolio, or that the investments portfolio is not recognised on a trade date basis which may result in gains and losses on investments being recognised in an incorrect period.

We received direct confirmation of all positions from the Custodian on both a trade date and settlement date basis and reconciled the trade date basis to the Company’s records in order to test for the recognition of gains and losses in the correct period.

Accuracy of calculation of performance fees The performance fee is payable to the Investment Manager, based on the excess total return of the Company’s net assets compared to the total return of the FTSE All-Share Index, over a 2 year period. The calculation requires reference to a third party index and adjustment to the Company’s NAV to reflect the Company’s total return over the specified performance period. Further detail on the performance fee is included in note 4. As this calculation is complex and considered to be a related party transaction it has been identified as a significant risk.

We determined an expectation of the fees by following the calculation methodology detailed in the agreements entered into by the Company and compared our expectation to the Company’s records with reference to a statistical threshold. For our expectation of the fees, we utilised third party market data in respect of the performance fee benchmark and checked the calculation of the Company’s NAV on a total return basis. We also reviewed the Company’s own calculation of the performance fees and sample tested the fees to invoice, also checking settlement of those samples to bank statements.

The Audit Committee’s consideration of these risks is set out on page 14.

Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.


17

Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

We determined materiality for the Company to be £794k, which is approximately 2% of equity.

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £16k, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

Matters on which we are required to

report by exception

Adequacy of explanations received and accounting records

Under the Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion:

we have not received all the information and explanations we require for our audit; or

proper accounting records have not been kept; or

the financial statements are not in agreement with the accounting records.

We have nothing to report in respect of these matters.

Corporate Governance Statement Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the Company’s compliance with nine provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.

Our duty to read other information in the Annual Report

Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:

materially inconsistent with the information in the audited financial statements; or

apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Company acquired in the course of performing our audit; or

otherwise misleading.

In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.

Respective responsibilities of

directors and auditor

As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report is made solely to the Company’s members, as a body, in accordance with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and/or those further matters we have expressly agreed to report to them on in our engagement letter and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Independent Auditor’s Report to the members of Threadneedle UK Select Trust Limited (continued)


18

Independent Auditor’s Report to the members of Threadneedle UK Select Trust Limited(continued)

Scope of the audit of the financial

statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Richard Garrard

for and on behalf of Deloitte LLP

Chartered Accountants and Recognised AuditorSt. Peter PortGuernsey10 April 2014

19


Statement of Comprehensive Income for the year ended 31 December 2013

2013 2012

NotesRevenue

£’000Capital

£’000Total£’000

Revenue£’000

Capital£’000

Total£’000

Income

Dividend revenue 3 1,152 – 1,152 833 – 833Other income 3 – – – 1 – 1Net gains on financial assets at fair value through profit or loss 10 – 7,708 7,708 – 1,680 1,680Net foreign exchange loss – (1) (1) – (18) (18)

1,152 7,707 8,859 834 1,662 2,496Expenses

Investment management fees 4 45 134 179 31 92 123Performance fees 4 28 82 110 – – –Administration fees 104 – 104 101 – 101Registrar’s fees 25 – 25 25 – 25Auditor’s fees 20 – 20 18 – 18Directors’ fees and expenses 16 112 – 112 114 – 114Legal and professional fees 17 – – – 75 – 75Other expenses 114 – 114 114 – 114

Total operating expenses before finance costs 448 216 664 478 92 570

Operating profit before finance costs 704 7,491 8,195 356 1,570 1,926

Finance costs

Bank charges 12 – – – 2 5 7

Profit for the year 704 7,491 8,195 354 1,565 1,919

Basic return per ordinary share 7 3.30p 35.07p 38.37p 1.72p 7.59p 9.31p

The total column of this statement is the statement of comprehensive income of the Company, with the revenue and capital columns representing supplementary information.

All revenue and capital items in the above statement derive from continuing operations. All income is attributable to the ordinary shareholders of the Company.

The notes on pages 23 to 30 are an integral part of these financial statements.

20


Statement of Financial Position as at 31 December 2013

Notes2013

£’0002012

£’000

Assets

Cash and cash equivalents 8 158 205Due from brokers 9 – 40Other receivables and accrued income 9 84 84Financial assets at fair value through profit or loss 10 39,712 30,255Total assets 39,954 30,584

Liabilities

Other payables and accrued expenses 11 263 141Total liabilities 263 141Net assets attributable to shareholders 39,691 30,443

Represented by:

Share Capital 14 2,192 2,083Treasury Share Reserve 14 (19) (261)

Other reserves 37,518 28,621Net assets attributable to shareholders 39,691 30,443

Number of ordinary shares in issue (net of Treasury shares) 14 21,889,731 20,659,452

Net asset value per share 15 181.33p 147.36p

These financial statements were approved by the Board of Directors on 10 April 2014 and signed on behalf of the Board by:

JM Le Pelley D Warr

10 April 2014


21


Statement of Changes in Net Assets Attributable to Shareholders for the year ended 31 December 2013

Issued share

capital

Treasuryshare

reserve

Share premium

reserve

Capital redemption

reserve

Capital reserve-realised

Capital reserve-

unrealisedRevenue

reserve Total£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000

At 1 January 2013 2,083 (261) 5,401 4,308 13,937 1,002 3,973 30,443Shares repurchased during the year – (233) – – – – – (233)Share subscriptions 109 – 1,755 – – – – 1,864Cash dividends:– 2012 second interim dividend – – – – – – (365) (365)– 2013 first interim dividend – – – – – – (213) (213)Scrip dividends – 475 – – (475) – – –Net profit – – – – 1,873 5,618 704 8,195

At 31 December 2013 2,192 (19) 7,156 4,308 15,335 6,620 4,099 39,691

There is no other recognised income and expenses for the year ended 31 December 2013.

for the year ended 31 December 2012

Issued share

capital

Treasuryshare

reserve

Share premium

reserve

Capital redemption

reserve

Capital reserve-realised

Capital reserve-

unrealisedRevenue

reserve Total£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000

At 1 January 2012 2,083 (153) 5,401 4,308 16,507 (2,748) 4,073 29,471Shares repurchased during the year – (493) – – – – – (493)

Cash dividends:– 2011 second interim dividend – – – – – – (348) (348)

– 2012 first interim dividend – – – – – – (106) (106)Scrip dividends – 385 – – (385)* – –* –Net (loss)/profit – – – – (2,185) 3,750 354 1,919

At 31 December 2012 2,083 (261) 5,401 4,308 13,937 1,002 3,973 30,443

There is no other recognised income and expenses for the year ended 31 December 2012.

* 2012 Scrip dividends amounting to £385,000 deducted from revenue reserves in the financial statements for the year ended 31 December 2012 have been transferred to capital reserves realised, which is consistent with the Board’s policy of allocating scrip dividends against capital reserves realised.


22


Statement of Cash Flows for the year ended 31 December 2013

Notes 2013 2012

£’000 £’000

Cash flows from operating activities

Payments for purchase of financial investments (13,450) (44,097)Proceeds from sale of financial investments 11,727 42,563Dividend received from investments 1,150 978Investment management fee paid (169) (159)Other operating expenses (357) (445)Net cash outflow from operating activities (1,099) (1,160)

Cash flows from financing activities

Interest paid – (10)Share repurchase 14 (233) (493)Share subscriptions 1,864 –Equity dividends paid 6 (578) (454)Net cash inflow/(outflow) from financing activities 1,053 (957)Net decrease in cash and cash equivalents (46) (2,117)

Effect of exchange rate changes on cash and cash equivalents (1) (18)Cash and cash equivalents at the beginning of the year 205 2,340

Cash and cash equivalents at the end of the year 8 158 205


23


Company and is confident that the Company will have sufficient resources to meet all future obligations;

the portfolio of investments held by the Company materially consists of listed investments which are readily realisable and therefore the Company will have sufficient resources to meet its liquidity requirements; and

as at 31 December 2013, the Company had no external borrowings and therefore was under no obligation to repay any borrowings. As at the date of signing the Annual Financial Report the Company had in place a one year £5 million loan facility with Loyds Bank Plc, which has not yet been utilised.

c. Adoption of new and revised standards

Standards not yet affecting the reported results nor the financial position

The same accounting policies, presentation and methods of computation are followed in these annual financial statements as those followed in the preparation of the Company’s audited financial statements for the year ended 31 December 2012.

At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective.

IFRS 8 Aggregation of segments – effective 1 July 2014

IFRS 9 Financial instruments – contains no stated effective date

IAS 19 (revised) Employee benefits – effective 1 July 2014

IAS 24 Related parties – effective 1 July 2014

IAS 36 Impairment of assets – effective 1 January 2014

IAS 38 Intangible assets – effective 1 July 2014

The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Company in the future periods.

New standard adopted

IFRS 13: Fair Value Measurement effective for periods commencing on or after 1 January 2013.

IFRS 13 explains how to measure fair value and aims to enhance fair value disclosures. The guidance includes enhanced disclosure requirements that could result in additional disclosure for reporting entities. These requirements are similar to those in IFRS 7, ‘Financial instruments: Disclosures’, but apply to all assets and liabilities measured at fair value, not just financial ones. IFRS 13 was adopted for the first time for the year ended 31 December 2013 and will be applied prospectively, subject to certain transitional provisions. Additional disclosures have been brought into the financial statements in Note 2 and 10.

Standards effective but not adopted

The following standards became effective 1 January 2013. The board has considered these standards and concluded that they are not applicable to the Company.

IFRS 11 Joint ventures

IFRS 10 Consolidated financial statements (Amendment for investments entities)

IFRS 12 Disclosure of interests in other entities (Amendment for investments entities)

IAS 27 Separate financial statements

IAS 28 Investments in Associates & Joint Ventures

d. Other receivables

Other receivables do not carry any interest, are short-term in nature, and are accordingly stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.

1. GENERAL INFORMATION

The Company is an authorised closed-ended investment company incorporated under The Companies (Guernsey) Law, 2008, as amended, with its registered office situate at Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 2HT. The Company’s shares have been admitted to the Official List of the UK Listing Authority with a premium listing and to trading on the London Stock Exchange’s Main Market for listed securities.

The objective of the Company is to provide shareholders with a total return in excess of the total return on the FTSE All-Share Index, together with a progressive dividend policy.

The Company has no employees.

2. ACCOUNTING POLICIES

a. Basis of preparation

The financial statements have been prepared in accordance with the applicable International Financial Reporting Standards (“IFRS”) and interpretations adopted by the International Accounting Standards Board (“IASB”), and in accordance with the guidelines included in the AIC Statement of Recommended Practice for Financial Statements of Investment Trust Companies issued in January 2003 and revised in January 2009 (“AIC SORP”) to the extent that it is not in conflict with IFRS. The financial statements have been prepared on a historical cost basis except for financial assets held at fair value through profit or loss, which have been measured at fair value.

In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the statement of comprehensive income between items of a revenue and capital nature has been presented alongside the statement of comprehensive income.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial statements in conformity with IFRS requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

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

The critical judgements and key sources of estimation uncertainty are detailed within the accounting policies note below.

b. Going concern

In the opinion of the Directors the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the financial statements have been prepared using the going concern basis.

The Directors have arrived at this opinion by considering, inter alia, the following factors:

the Company has sufficient liquidity to meet all on-going expenses at 31 December 2013; Although the Company is in a net liability position of £20,900 at the year end the Board regularly reviews the cash flow of the

Notes to the Financial Statements

24


the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as ‘active’ if transactions for the asset take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The Company measures financial assets quoted in an active market at mid price.

If there is no quoted price in an active market, then the Company uses valuation techniques that maximises the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation techniques incorporate all of the factors that market participants would take into account in pricing a transaction.

The Company recognises transfers between levels of fair value hierarchy as at the end of the accounting period during which the change has occurred.

f. Net gains/(losses) on financial assets at fair value through profit or loss

Net gains/(losses) on financial assets at fair value through profit or loss includes changes in the fair value of financial assets held at fair value through profit or loss.

Unrealised gains and losses comprise changes in the fair value of financial assets for the year and from reversal of prior year’s unrealised gains and losses for financial assets which were realised in the reporting period.

Realised gains and losses on disposals of financial assets classified as fair value through profit or loss are calculated using the average method. They represent the difference between a financial asset’s initial carrying amount and its disposal amount.

g. Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. A financial liability is any liability that contractually obligates the Company to deliver cash or another financial asset or exchange financial assets or financial liabilities that are potentially unfavourable to the Company, or a contract that will or may be settled in the Company’s own equity instruments. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. As the ordinary shares have no fixed rights to redemption or income they are classified as equity.

h. Bank borrowings

Interest bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs, finance charges, including premiums payable on settlement or redemption and direct issue costs. Interest is accounted for on an accruals basis in the statement of comprehensive income using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

i. Other payables

Other payables are not interest-bearing and are stated at their nominal value.

Purchases of financial assets are recognised at the trade date. Where trades have been executed but the broker requires funds for settlement of the trade, these have been accounted for as due to brokers on the statement of financial position.

j. Dividend revenue, interest revenue and other revenue

Dividend revenue is brought into the statement of comprehensive income as a revenue item on the ex-dividend date or, where no ex-dividend date

Sales of financial assets are recognised at the trade date. Where trades have been executed but are awaiting settlement from the broker, these are accounted for as due from brokers on the statement of financial position.

e. Financial assets

(i) ClassificationThe Company classifies its financial assets as fair value through profit or loss in accordance with IAS 39.

(ii) RecognitionFinancial assets are recognised on the trade date where a purchase is under contract whose terms require delivery within the timeframe established by the market concerned.

(iii) Initial measurementAs the Company’s business is investing in financial assets with a view to profiting from their total return in the form of interest, dividends or increases in fair value and are managed on a portfolio basis to meet the objectives of the Company, listed equities and fixed income securities are designated as fair value through profit or loss on initial recognition and material transaction costs on acquisition and all transaction costs on disposal of the financial asset are expensed as a capital item.

(iv) Subsequent measurementAfter initial measurement, the Company measures its financial assets, which are classified as fair value through profit or loss at fair value. In accordance with the transitional provisions of IFRS 13, the Company has applied the new definition of fair value as set out under fair value measurement.

Subsequent changes in the fair value of the Company’s financial assets are recorded in the statement of comprehensive income under net gains/(losses) on financial assets at fair value through profit or loss. Foreign exchange gains and losses for financial assets at fair value through profit or loss are included within the changes in its fair value.

(v) DerecognitionFinancial assets are derecognised where:

a sale is under contract whose terms require delivery within the timeframe established by the market concerned; or

it is evident, following an impairment review, that the Company can no longer recover any value from the financial asset.

(vi) ImpairmentThe Company is required to evaluate the financial assets in its portfolio to determine if any of the securities are impaired.

Fair value and impairment estimates are made at a specific point in time based on market conditions and information about the financial asset. These estimates are subjective in nature and involve uncertainties and matters of significant judgement.

The Company materially invests in listed or quoted equities and therefore at the reporting date, there were no sources of significant judgement or uncertainty.

(vii) Fair value measurement‘Fair value’ is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date in principal or, in its absence, the most advantageous market to which the Company has access at that date. When available, the Company measures

Notes to the Financial Statements(continued)

25


o. Finance costs

Finance costs are accounted for on an accruals basis. Finance costs are allocated, insofar as they relate to the financing of the Company’s investments, 75% to capital reserve - realised and 25% to revenue account, in line with the Board’s expected long-term split of returns, as outlined in the expenses note above.

p. Segment Reporting

A business segment is a distinguishable component of the Company that is engaged in providing products and services and that is subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of the Company that is engaged in providing products and services and that is subject to risks and returns that are different from those of other economic environments. The Board of Directors is of the opinion that the Company is organised in one main business segment, namely the management of the Company’s investments in order to achieve the Company’s investment objectives as described in note 1 to the financial statements. The Board of Directors is further of the opinion that the Company’s secondary segment reporting format is also organised into one main geographical unit as the location of all investments is materially all within the United Kingdom.

q. Treasury shares

Where the Company purchases its own share capital, the consideration paid, which includes any directly attributable costs, is recognised as a deduction from net assets attributable to shareholders through the Treasury Share reserve.

When such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs, is recognised as an increase in equity and the resulting surplus or deficit on the transaction is transferred to/from the Treasury Share reserve.

3. DIVIDEND AND OTHER INCOME

2013 2012

£’000 £’000

Dividend revenue from investments designated at fair value through profit or loss:

Dividends 1,152 8331,152 833

Other Income – 1– 1

Total income 1,152 834

4. INVESTMENT MANAGEMENT AND PERFORMANCE FEES

Threadneedle was appointed Manager under an Investment Management Agreement with the Company dated 27 July 2012. Commencing 1 October 2012 the management fee was calculated as 0.5% per annum of the value of the funds under management on each Valuation Date in respect of each quarter or such other date or fee as shall be agreed from time to time between the Company and the Manager. The first Valuation Date for the purpose of the Management Fee was 31 December 2012.

The Manager is also entitled to a performance fee that is calculated as at 31 December in each financial year and shall be a fee representing the percentage of the average value of the funds under management on the date of the calculation and on 31 December of the immediately preceding financial year. For the purpose of the first performance fee, the performance fee is calculated for a 15 month period from 1 October 2012 to 31 December 2013.

is quoted, when the Company’s right to receive payment is established. All dividends are shown gross of withholding tax.

Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the amount of the cash dividend is recognised as dividend revenue in the statement of comprehensive income.

Fixed returns on non-equity investments and on debt securities are recognised as a revenue item in the statement of comprehensive income on a time apportionment basis so as to reflect the effective yield on the investment. Other returns on non-equity shares are recognised when the right to the return is established.

Deposit interest is recognised as interest revenue and is included in the statement of comprehensive income on an accruals basis.

Other revenue, such as underwriting commission, is recognised on a received basis as the timing of receipts of this nature is uncertain and therefore the received basis is deemed the most appropriate method to account for this revenue.

k. Functional and presentation currency

The Company’s functional and presentation currency is Sterling, which is the currency of the primary economic environment in which the Company operates. The Company’s performance is evaluated and its liquidity is managed in Sterling, therefore Sterling is considered as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.

l. Foreign currency translations

Foreign currency monetary assets and liabilities are translated into Sterling at the rate of exchange ruling at the statement of financial position date. Transactions during the year in foreign currencies are translated into Sterling at the rate ruling at the date of the transaction. Realised and unrealised foreign exchange gains and losses are recognised in the statement of comprehensive income.

m. Statement of cash flows

The Company is required to prepare a statement of cash flows in accordance with IFRS and has elected to prepare the statement of cash flows on a direct basis.

n. Expenses

All expenses are accounted for on an accruals basis. Expenses are charged through the statement of comprehensive income as revenue except as follows:

expenses which are incidental to the acquisition of an investment are deducted from gains on investments through the statement of comprehensive income as capital;

expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment; and

expenses are charged to the statement of comprehensive income as capital realised where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. In this respect, the Investment Manager’s fee and performance fee have been allocated 75% to the capital reserve - realised and 25% to the revenue reserve in line with the Board’s expected long-term split of returns in the form of capital gains and income respectively from the investment portfolio of the Company.


26


9. OTHER RECEIVABLES AND ACCRUED INCOME

Other receivables

2013 2012

£’000 £’000

Due from brokers – 40Accrued income 74 72Prepayments 10 12

84 124

The Directors consider that the carrying amount of receivables approximates to their fair value.

10. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

2013 2012

Fair Value

% of net assets

Fair Value

% of net assets

£’000 % £’000 %

Financial assets at fair value through profit or loss

– Listed equity securities 39,709 100.04 30,255 99.38– De-listed trading entities 3 0.01 – –

39,712 100.05 30,255 99.38

Net gains/(losses) on financial assets at fair value through profit or loss

2013 2012

£’000 £’000

Realised gains/(losses) 2,090 (2,070)Unrealised gains 5,618 3,750

7,708 1,680

Fair value measurements

The Company adopted the amendment to IFRS 13, effective 1 January 2013. IFRS 13 establishes a fair value hierarchy that prioritises the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under IFRS 13 are as follows:

Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices)

Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs)

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

The performance fee percentage calculated may not exceed 0.25% over a period of 12 months. For the purpose of the first performance fee period (1 October 2012 to 31 December 2013), this percentage is amended to 0.3125 over the 15 month period. The performance fee is calculated as 10% of the total return NAV out-performance of the FTSE All-Share Index (total return) both expressed as a percentage of that as indicated at the end of that year and that of the immediately preceding financial year. A performance fee of £110,000 is attributable for the year ended 31 December 2013 (31 December 2012: £Nil). This performance fee shall be payable within 23 days of 31 March 2014.

5. TAXATION

The Company is exempt from Guernsey Income Tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinances 1989 to 1997 and is charged an annual exemption fee of £600 which is included within other expenses in the statement of comprehensive income.

The Company suffered £4,020 (2012: £11.030) of withholding tax on foreign dividends during the year and this expense has been included in other expenses in the statement of comprehensive income.

6. DIVIDENDS

2013 2012

£’000 £’000

Equity dividends

Ordinary shares

Second interim dividend for 2012: 3.20p (gross) on 11,396,593 shares paid in 2013

365 348

Scrip dividend for 2012 paid in 2013: 179,947 shares issued at a cost of 164.28p per share

295 294

First interim dividend for 2013: 1.80p (gross) on 11,835,814 shares paid in 2013

213 106

Scrip dividend for 2013 paid in 2013: 106,763 shares issued at a cost of 168.13p per share 180 91

1,053 839

7. BASIC RETURN PER ORDINARY SHARE

2013 2012

Revenue Capital Total Revenue Capital Total

pence pence pence pence pence pence

Return 3.30 35.07 38.37 1.72 7.59 9.31

Revenue return per ordinary share is based on the net revenue on ordinary activities of £704,000 (2012: return £354,000) and on 21,361,009 ordinary shares, being the weighted average number of ordinary shares in issue during the year (2012: 20,630,069).

Capital return per ordinary share is based on a net capital profit for the financial year of £7,491,000 (2012: return £1,565,000) and on 21,361,009 ordinary shares, being the weighted average number of ordinary shares in issue during the year (2012: 20,630,069).

8. CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprises bank balances and cash held by the Company including short-term deposits with an original maturity of three months or less. The carrying amount of these assets approximates to their fair value.


27


Income Net Assets

2013 2012 2013 2012

£’000 £’000 £’000 £’000United Kingdom 1,152 834 39,691 30,443

1,152 834 39,691 30,443

Geographical locations are determined by the Company based on the country of primary listing for listed instruments and the country of incorporation for unlisted instruments.

14. SHARE CAPITAL

2013 2012

£’000 £’000

Authorised

100,000,000 ordinary shares of 10p each 10,000 10,000 250,000 5% cumulative preference restrictive voting shares of £1 each 250 250

10,250 10,250

The holders of the five per cent cumulative preference restrictive voting shares shall be entitled, out of profits for dividend, to a fixed cumulative preferential dividend at the rate of five per cent per annum and in a winding-up or on a return of capital shall be entitled to repayment of capital in priority to the ordinary shareholders. At 31 December 2013, no five per cent cumulative preference restrictive voting shares had been issued (2012: none). The ordinary shareholders carry the right to receive any surplus income and in winding-up any surplus assets, after repayment of the preference capital and dividends as above.

2013 2012

£’000 £’000

Issued, called up and fully paid:

21,914,053 ordinary shares of 10p each(2012: 20,830,484) 2,192 2,083

2013

Treasury Share reserve Shares in issue

Shares Cost Shares Cost

Nominal £’000 Nominal £’000

Balance at 1 January 2013 171,032 261 20,830,484 2,083Shares purchased and held in Treasury 140,000 233 – –Shares issued in lieu of dividends from Treasury (286,710) (475) – –Share capital issued during the year – – 1,083,569 109Balance at 31 December 2013 24,322 19 21,914,053 2,192

2012

Treasury Share reserve Shares in issue

Shares Cost Shares Cost

Nominal £’000 Nominal £’000

Balance at 1 January 2012 87,878 153 20,830,484 2,083Shares purchased and held in Treasury 400,000 493 – – Shares issued in lieu of dividends from Treasury (316,846) (385) – – Balance at 31 December 2012 171,032 261 20,830,484 2,083

During 2013 and 2012 no shares were purchased for cancellation.

The determination of what constitutes ‘observable’ requires significant judgment by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The following tables present the Company’s financial assets and liabilities by level within the valuation hierarchy as of 31 December 2013 and 2012:

2013Percentage

of net assets 2012Percentage

of net assets

Level 1 fair value assets £’000 % £’000 %

Investments valued at fair value 39,709 100.04 30,255 99.38Level 2 fair value assets

Investments valued at fair value 3 0.01 – –Total fair value financial assets 39,712 100.05 30,255 99.38

11. OTHER PAYABLES AND ACCRUED EXPENSES

Other payables

2013 2012

£’000 £’000

Administrative fees 52 50Audit fees 20 20Directors’ fees 28 –Investment management fees 48 38Performance fee 110 –Registrars fees 4 7Sundry expenses 1 26

263 141

The Directors consider that the carrying amount of payables approximates to their fair value.

12. LOAN FACILITY

The Company had a revolving 5 year loan facility, secured on the assets of the Company, which expired on 23 September 2012, and was not renewed, with an aggregate principal amount of £2,000,000, for the purposes of future investment. No loan interest was paid during 2013 or 2012.

On 26 March 2014 the Company entered into a one year £5 million loan facility with Lloyds Bank Plc. The facility will be used to gear the Company’s investment portfolio with the aim of enhancing returns to shareholders and the Board will be looking to target a level of approximately 10% to 20% of the Company’s net asset value. Interest will accrue on the loan at 1% over LIBOR and it is repayable at the option of the Company. A non-utilisation fee of 0.35% per annum is payable on any portion of the facility not drawn down.

13. BUSINESS AND GEOGRAPHICAL SEGMENTS

As described in the accounting policies in note 2 to the financial statements the Board of Directors is of the opinion that the Company is organised in one main business segment, namely the management of the Company’s investments in order to achieve the Company’s investment objectives as described in note 1 to the financial statements, and considers this to be the primary reporting format for segment information and no further business segment information not already included in other parts of the financial statements is required.

The Board of Directors is further of the opinion that the Company’s secondary segment reporting format is also organised into one main geographical unit as the location of all of its investments is materially all within the United Kingdom.


28


critical to the Company’s continuing profitability. The Company is exposed to market risk (which includes currency risk, interest rate risk, and price risk), credit risk and liquidity risk arising from the financial assets it holds.

Capital risk management

The capital structure of the Company consists of the cash and cash equivalents and equity attributable to ordinary shareholders, comprising issued share capital, treasury share reserve, share premium reserve, capital redemption reserve, capital reserves and revenue reserve as disclosed in the statement of changes in net assets attributable to shareholders. The Company does not have any externally imposed capital requirements.

The investment objective of the Company is to invest over 80% of its gross assets by value in the UK and the investment policy aims to provide a total return to shareholders in excess of the net total return on the FTSE All-Share Index and a progressive dividend policy. The Company aims to deliver its objective by investing available cash and using leverage whilst maintaining sufficient liquidity to meet ongoing expenses and dividend payments.

The Company’s policy is to provide net income for distribution from the dividend income earned from a portfolio of mainly UK equity securities which are listed on the London Stock Exchange. Further, the Company has allocated to capital 75% of its investment management fee and performance fee in line with the Board’s expectation of long-term returns in the form of capital gains from the investment portfolio of the Company.

During the year under review, the assets of the Company were invested in accordance with the Company’s Investment Manager’s strategy. The Company invests in various sectors and businesses to mitigate the primary risk of the Company, price risk. In addition, price-volatility levels are reviewed and monitored daily.

Concentration risk

Concentration risk is the risk that the Company’s portfolio is not suitably diversified and therefore the Company could become materially exposed to sector specific price fluctuations.

As at 31 December 2013, the Company’s portfolio consisted of 73 investments spread over 9 sectors. Further, the portfolio only held investments issued in the United Kingdom.

The Board has also adopted investment restrictions to manage the risk profile, which are:

The top five holdings in the Company’s portfolio may not exceed 40 per cent of the total value of the portfolio.

The top three sectors represented in the portfolio may not exceed 50 per cent of the total value of the portfolio.

The securities of no one company may represent more than 10 per cent of the value of the Company’s portfolio measured at the time of acquisition and subsequently, when additions are made to the holding.

The Company will not hold more than 5 per cent of the issued share capital (or voting shares) in any one company.

While the Company may hold shares in other investment companies (including investment trusts), the Company will not invest more than 10 per cent., in aggregate, of the value of its total assets in other listed close-ended investment funds (save to the extent that such close-ended

On 1 February 2013, 25,000 shares were purchased for Treasury at a total cost including expenses of £38,452.

On 16 July 2013, 90,000 shares were purchased for Treasury at a total cost including expenses of £152,406.

On 16 October 2013, 25,000 shares were purchased for Treasury at a total cost including expenses of £41,835.

On 9 May 2013, 179,947 shares were issued to shareholders who elected to receive them in lieu of a second interim cash dividend for 2012. On 5 November 2013, 106,763 shares were issued to shareholders who elected to receive them in lieu of a first interim dividend for 2013. Ordinary shares of 10p each, fully paid were issued to shareholders from the Treasury Share reserve held by the Company.

On 30 May 2013, 1,083,569 ordinary shares of 10p each were issued to shareholders with a share capital value of £108,356 and a share premium value of £1,755,381.

15. NET ASSET VALUE PER SHARE

Net asset value per ordinary share is based on net assets attributable to the ordinary shareholders of £39,691,000 (2012: £30,443,000) and on 21,889,731 (2012: 20,659,452) ordinary shares, being the number of ordinary shares in issue at the end of the year.

16. RELATED PARTY TRANSACTIONS

The members of the Board of Directors are listed on page 3 of the annual report. Fees earned by the Directors of the Company during the year were £108,595 (2012: £107,500) of which £27,900 (2012: £Nil) was outstanding at the period end. Allowable expenses claimed by Directors in the course of their duties amounted to £3,565 for the year (2012: £6,202).

Amerprise Financial Inc., the parent of Threadneedle, controlled the voting rights attached to 22.21% of the Company’s shares as at 31 December 2013. Threadneedle exercises discretion over these shares on behalf of its clients and earned investment management fees of £178,500 (2012: £37,800) during the year of which £48,400 (2012: £37,800) was outstanding at the reporting date In addition £110,000 performance fees were accrued for the year (2012: £Nil).

The Company has appointed Kleinwort Benson (Channel Islands) Funds Services Limited to provide administrative, corporate secretarial services and accounting services. Administrative fees (including the accounting and secretarial fee) for the year totalled £104,073 (2012: £100,562) of which £51,751 (2012: £49,578) was outstanding at the period end.

17. LEGAL AND PROFESSIONAL FEES

A one off fee of £75,000 was paid in 2012 to Canaccord Genuity Limited for their services provided after the resignation of Scottish Widows Investment Partnership and concerning the appointment of Threadneedle Asset Management Limited.

18. FINANCIAL RISK MANAGEMENT

Introduction

The Company’s objective in managing risk is the creation and protection of shareholder value. Risk is inherent in the Company’s activities, but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. The process of risk management is


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a) Price risk Price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices whether those changes are caused by factors specific to the individual financial instrument or its issuers, or factors affecting similar financial instruments traded in the market.

In accordance with the Company’s investment objectives, the Company does not hedge against its exposure to market price risk.

The investment strategy of the Company has been delegated to the Company’s Investment Manager, Threadneedle, under an agreement dated 27 July 2012. The Investment Manager operates under agreed parameters and the Board monitors its performance on a regular basis.

Price sensitivityThe following table details the Company’s sensitivity to a 10% increase and decrease in the market prices while all other variables were held constant. 10% is the sensitivity rate used when reporting price risk internally to key management personnel and represents management’s assessment of the possible change in market prices. A positive number indicates an increase in net assets attributable to holders of shares where the market price of the relevant financial instrument increases and a negative number indicates a decrease where the market price of the relevant financial instrument decreases.

Net Assets 10% increase in price

Impact on financial assets at fair value

through profit or loss

Net Assets 10% decrease in price

Impact on financial assets at fair value

through profit or loss

2013 2012 2013 2012

£’000 £’000 £’000 £’000

Increase/(decrease) in net assets attributable to shareholders – Designated as at fair value through profit or loss 3,971 3,025 (3,971) (3,025)

3,971 3,025 (3,971) (3,025)

In practice the actual trading results may differ from the sensitivity analysis above and the difference could be material.

b) Interest rate riskInterest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in interest rates associated with that financial instrument.

The Company’s interest rate sensitive assets and liabilities mainly comprise of cash and cash equivalents. The cash and cash equivalents are subject to floating rates and are considered to be part of the investment strategy of the Company. No other hedging is undertaken in respect of this interest rate risk. As such, the Board does not believe the Company suffers any material interest rate risk.

c) Currency riskForeign currency risk is the risk that a financial instrument will fluctuate because of changes in foreign exchange rates.

investment funds have published investment policies to invest no more than 15 per cent. of their total assets in such other listed close-ended investment funds).

The Board monitors investment restrictions by utilising the Investment Manager’s and the Administrator’s compliance functions. Investment strategy and allocation is monitored by the Board through the use of an Investment Manager.

Credit risk

Credit risk is the risk that an issuer or counterparty may be unable or unwilling to meet a commitment that it has entered into with the Company.

The Company’s principal financial assets are bank balances and cash, other receivables and investments as set out in the statement of financial position which represents the Company’s maximum exposure to credit risk in relation to the financial assets. The credit risk on bank balances is limited because the counterparties are banks with high credit ratings of A-1+ assigned by international credit-rating agencies.

All transactions in listed securities are settled upon delivery using approved brokers. The risk of default is considered minimal as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligations.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its liabilities as they fall due.

The Company’s assets comprise securities that can be readily realised to meet obligations. As a result, the Company is able to realise its investments in these instruments at an amount close to their fair value in order to meet its liquidity requirements. Dividend income is also expected to be sufficient to cover short-term liquidity requirements.

No liquidity analysis for the Company’s financial assets and liabilities has been provided for in the current or prior year as liquidity risk is not considered material.

Country risk

On 17 January 2012 the Financial Reporting Council (“FRC”) released “Responding to the increased country and currency risk in financial reports”.

The FRC released on 17 January 2012 an update for directors of listed companies which includes guidance on responding to the increased country and currency risk as a result of funding pressures on certain European countries, the curtailment of capital spending programmes (austerity measures) and regime changes in the Middle East.

The Board has reviewed the disclosures contained within the annual financial report and believes that no additional disclosures are required since the Company is primarily invested in UK listed equities.

Market risk

Market risk is the possibility that future changes in market prices may make a financial instrument less valuable or more onerous.

The Company’s market risk is managed by the Investment Manager through diversification of the investment portfolio in accordance with the Company’s investment policy.


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Notes:(1) The information provided prior to 2006 in the above statement is prepared

in accordance with UK GAAP and not IFRS.

(2) Following the introduction of FRS16 (IAS 12) all dividends receivable from 1999 have been shown gross of withholding tax whereas previously they were shown net.

(3) Following the introduction of FRS 21 (IAS 10) all dividends paid by the Company from 2004 are accounted for in the period in which the Company is liable to pay them. Such treatment is also consistent with International Financial Reporting Standards. In previous years, the Company accrued dividends in the period in which the net revenue, to which those dividends related, was accounted for.

As at 31 December 2013 and 31 December 2012 the Company’s net currency exposure was as follows:

2013 2012

£’000 % of Net Assets

£’000 % of Net Assets

Euro – 0.00 – 0.00Sterling 39,691 100.00 30,443 100.00United States Dollar – 0.00 – 0.00

39,691 100.00 30,443 100.00

19. PARENT AND ULTIMATE CONTROLLING PARTY

The Board is of the opinion that there is no immediate parent or ultimate controlling party of the Company.

20. EVENTS AFTER THE REPORTING DATE

A second interim dividend of 2.45p per Ordinary Share has been declared for 2013 (2012: second interim dividend 3.20 p). In accordance with the requirements of IFRS, as this was not declared until after the statement of financial position date, no accrual has been reflected in these financial statements for this amount. This dividend will be payable on 9 May 2014 to shareholders on the register as at close of business on 14 March 2014. This, together with the first interim dividend of 1.80p (2012: first interim dividend 0.95p) paid during the year, makes a total of 4.25p for the year. The Company intends to continue with the policy of paying a second interim dividend each year to shareholders in May of the following year in place of a final dividend. Scrip election forms are expected to be sent to all shareholders on or around 1 April 2014 and the latest date for receipt by the Registrar of scrip elections is 22 April 2014.

On 26 March 2014 the Company entered into a one year £5 million loan facility with Lloyds Bank Plc, further details of which are given in note 12.

Ten Year Record- Unaudited

The Ten Year Record set out below has been prepared from the accounting records of the Company. While it does not form part of the financial statements, it should be read in conjunction with them and the Auditor’s report thereon.

Gross

revenue

Net

revenue

after

taxation

Revenue

return per

ordinary

share

Gross

dividends

per

ordinary

share

Ordinary

share

capital

eligible

for

dividends

Net asset

value of

ordinary

shares

(Ex-div)

Year ended

31 December

£’000(1&2) £’000 p p(3) £’000 p

2004 1,536 1,117 2.77 2.93 3,858 97.92005 1,517 880 2.48 2.95 2,073 125.52006 1,041 648 3.12 3.10 2,083 152.92007 1,241 824 3.96 3.25 2,071 158.32008 1,449 1,042 5.04 3.63 2,073 106.92009 1,075 746 3.61 3.75 2,058 149.82010 1,043 692 3.36 3.90 2,069 161.72011 1,307 907 4.38 4.10 2,074 142.12012 834 354 1.72 4.15 2,066 147.42013 1,152 704 3.30 4.25 2,189 181.3


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THREADNEEDLE UK SELECT TRUST LIMITED · 09/05/2014 · A second interim dividend of 2.45p per share...

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Transcript of THREADNEEDLE UK SELECT TRUST LIMITED · 09/05/2014 · A second interim dividend of 2.45p per share...