AIF.L Regulatory News (AIF)

Acorn Income Fund - Annual Financial Report

PR Newswire

London, April 10

Acorn Income Fund Limited

Annual Financial Report

For the year ended 31 December 2018

LEI: 213800UAZN7G46AHQM67

(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)

The Company has today, in accordance with DTR 6.3.5, released its Annual Financial Report for the year ended31 December 2018. The Report will shortly be available via the Investment Manager’s website www.premierfunds.co.uk/acorn-income-fund-limited/literature and will also be available for inspection online at www.morningstar.co.uk/uk/NSM website.

Investment Objectives and Policy

Investment Objectives

The investment objective and policy of Acorn Income Fund Limited (the “Company” or “Acorn”) is to provide shareholders with high income and also the opportunity for capital growth.

The Company’s assets comprise investments in equities and fixed interest securities in order to achieve its investment objective. The Company’s investments are held in two portfolios. Approximately 70% to 80% of the Company’s assets are invested in smaller capitalised United Kingdom companies, admitted to the Official List of the Financial Conduct Authority (the “FCA”) and traded on the main market of the London Stock Exchange (the “LSE”) or traded on the Alternative Investment Market (“AIM”) at the time of investment. The Company also aims to enhance income for Ordinary shareholders by investing approximately 20% to 30% of the Company’s assets in high yielding instruments which are predominantly fixed interest securities but may include up to 15% of the Company’s overall portfolio (measured at the time of acquisition) in high yielding investment company shares.

The proportion of the overall portfolio held in the Smaller Companies Portfolio and the Income Portfolio varies from day to day as the market prices of investments move. The Directors retain discretion to transfer funds from one portfolio to the other and generally expect between 70% to 80% of the investments to be held in the Smaller Companies Portfolio.

While the Company’s investment policy is to spread risk by maintaining diversified portfolios, there are no restrictions on the proportions of either of the portfolios which may be invested in any one geographical area, asset class or industry sector. However, not more than 7.5% of the Company’s gross assets may be invested in securities issued by any one company as at the time of investment, save that (i) in respect of the Income Portfolio only, investments may be made in other investment funds subject only to the restriction set out in paragraph (c) of the section headed “Investment Restrictions” below; and (ii) in respect of the Smaller Companies Portfolio only, provided that not more than 10% of the Company’s gross assets are invested in securities issued by any one company at any time, the 7.5% limit may be exceeded on a short term basis, with Board approval, where a company whose securities form part of the Smaller Companies Portfolio issues new securities (for example by way of a rights issue).

The Company’s capital structure is such that the underlying value of assets attributable to the Ordinary Shares is geared relative to the rising capital entitlements of the Preference Shares (“ZDP Shares”). The Company’s gearing policy is not to employ any further gearing through long-term bank borrowing. Save with the prior sanction of ZDP shareholders, the Company will incur no indebtedness other than short term borrowings in the normal course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares.

Investment Restrictions

For so long as required by the LSE Listing Rules in relation to closed-ended investment companies, the Company has adopted the following investment and other restrictions:

(a) the Company will at all times invest and manage its assets in a way which is consistent with its objective of spreading investment risk and in accordance with its published investment policy;

(b) the Company will not conduct any significant trading activity; and

(c) not more than 10% in aggregate of the value of the total assets of the Company at the time the investment is made will be invested in other listed closed-ended investment funds. The Listing Rules provide an exception to this restriction to the extent that those investment funds which have stated investment policies to invest no more than 15% of their total assets in other listed closed-ended investment companies.

Derivatives

The Company may invest in derivatives, money market instruments and currency instruments including contracts for difference, futures, forwards and options. These investments may be used for hedging positions against movements in, for example, equity markets, currencies and interest rates, for investment purposes and for efficient portfolio management. The Company’s use of such instruments for investment purposes is limited to 5 per cent of the total assets of the Company. The Company will not use such instruments to engage in any significant trading activity. The Company will not maintain derivative positions should the total underlying exposure of these positions (excluding any currency hedges) exceed one times adjusted total capital and reserves.

Dividend Policy

The Company’s policy is to provide Ordinary shareholders with a high income relative to the average dividend yield of the UK Smaller companies comprised in the Numis Smaller Companies Index ex Investment Companies. The Company aims to pay a regular quarterly dividend in March, June, September and December. It is intended to distribute substantially all of the Company’s net income after expenses and taxation; however the Company may retain a proportion of the Company’s income in each year as a revenue reserve to assist in providing long term stability in dividend distributions. Dividends may be paid to holders of Ordinary Shares whenever the financial position of the Company, in the opinion of the Directors, justifies such payment, subject to the Company being able to satisfy the solvency test, as defined under the Companies (Guernsey) Law 2008. The Board is alert to the potential for new share issuance to dilute earnings and accordingly will have regard to the size and timing of new share issues. The ZDP shares do not carry a right to a dividend.

Performance Summary

for the year ended 31 December 2018

* assumes dividends reinvested

** calculated in accordance with the Articles

# calculated in accordance with International Financial Reporting Standards

## adjusted for share buybacks

Sources: Index data: Bloomberg, Total return on gross and net assets, PFM, JP Morgan Cazenove

Company Summary

History

The Company was incorporated on 5 January 1999 and commenced its activities on 11 February 1999. The portfolio is divided into two sub portfolios, a Smaller Companies Portfolio representing approximately 70-80% of the total with the balance invested in an Income Portfolio investing in fixed income securities, investment company shares and structured investments. The Company has always been leveraged, initially through bank debt and now through Zero Dividend Preference Shares. In December 2016, shareholders approved the extension of the Zero Dividend Preference Shares setting a new redemption date of 28 February 2022.

Capital Structure

Company Details

Financial Calendar

Company Website

https://www.premierfunds.co.uk/investors/investments/investment-trusts/acorn-income-fund

Chairman’s Statement

Year to 31 December 2018

Dear Shareholder

During the first quarter of 2018 the UK market suffered a setback which mirrored the US market decline in response to fears of rising inflationary pressures and higher interest rates. After which, the second quarter showed a slow recovery with the Company performing marginally better than the small cap sector. As explained in the Company’s Interim Report for the period ended 30 June 2018 there was one stock specific issue, Conviviality Plc, which went into administration during the second quarter. The Company made a net profit on the holding, but it did impact overall performance. The fourth quarter was particularly unforgiving - given the global backdrop - and is explained more fully in the Investment Adviser reports.

Investment Performance

The NAV total return of the Company’s ordinary shares in 2018 was -16.9%. Whilst this was disappointing, the UK market in general and smaller companies in particular suffered under a difficult global macro backdrop and the ongoing uncertainty of a Brexit resolution; the total return on the FTSE All-Share Index and the Numis Smaller Companies (ex Investment Companies) Index was -9.5% and -15.4% respectively. The share price total return was -23.7%, reflecting a significant widening of the discount during the year.

The fall in share price total return comprises two elements - a reduction in the value of the assets and a widening of the discount. 

Fall in Asset Value

Equity markets across the world fell in 2018 for a variety of well documented reasons; concerns about the US economy, Chinese growth slowing and Brexit to name but a few. In the UK the deadlock over the exit from Europe has weighed on equities, with the more domestically focussed small companies underperforming the more internationally focussed large caps. Acorn, with Unicorn as Investment Adviser for the Smaller Companies Portfolio, invests at the lower end of the market cap range so was particularly impacted.

The gearing, through Zero Dividend Preference Shares (“ZDPs”), is a long standing component of the Fund which was introduced to enhance returns over the long term. However during periods of stress, such as that experienced in 2018, it detracts from performance which is why the ordinary share Net Asset Value ("NAV") fell by a greater percentage than the decline in total assets. The gearing level at the year end was 51.8%. The Income Portfolio, which is run by Paul Smith at Premier Asset Management, provides an element of balance to the gearing but does not match it completely.

Widening of the Discount

During periods of weaker equity markets and domestic uncertainty the discount (difference between the value of the assets and the share price) on investment trusts can widen. During 2018 the discount on the ordinary shares widened from around 5% to over 13%, reflecting the market taking a more pessimistic view of UK smaller companies.

Asset Allocation

Coming into 2018, Acorn’s Investment Advisers had remained positive on the outlook for the UK smaller companies in which the Company is invested and cautious about the outlook for bond markets. Your board supported these views. As a consequence asset allocation at the start of the year was approximately 83% to the Smaller Companies Portfolio and 17% to the Income Portfolio. During a period of equity outperformance the advisers were minded to rebalance during the current year and by year-end the weighting was 74% in the Smaller Companies Portfolio and 26% in the Income Portfolio.

Zero Dividend Preference Shares (‘ZDPs’)

The number of ZDPs in issuance is 21,230,989. At the year end, the ZDPs were trading at a 2.1% Premium and were 2.4x covered.

Share Issuance and Buy Backs

The Board continues to monitor the discount and to consider whether further buy backs are an appropriate measure to enhance long term shareholder value.

The Company has power to issue shares at a premium to net asset value and to buy back into Treasury or for cancellation at a discount. These transactions are generally executed in both classes of share in the correct ratio to maintain the capital structure. Shares are issued at a premium to the package net asset value (the NAV of ordinary shares and ZDPs combined) and buy backs at a discount to the package net asset value, such that the transaction will always enhance cover for the ZDP shares and be NAV enhancing for the ordinary shares.

There were two buy backs during the course of the year, in August, totalling 100,000 ordinary shares and 134,232 ZDP shares undertaken as a measure to stabilise the share price during a period of acute volatility.

Earnings and Dividends

The first interim dividend for 2018 was increased by 10% and maintaining that quarterly distribution for the rest of the year made a total dividend of 19.80p which represented an increase of 10% on the total dividend for 2017.

Earnings per share for the year of 21.62p covered the dividend distribution by 109% and resulted in an addition to revenue reserves.

Regulation

Updates in the Markets in Financial Instruments Directive (“MiFID II”) became effective on 3 January 2018. One of the main changes introduced by the Directive relates to investment research. Under MiFID II, investment managers are only permitted to receive external research from third parties when it is paid for from a separate Research Payment Account (“RPA”) managed in accordance with the rules of the Financial Conduct Authority (“FCA”). MiFID II has not led to a material change in returns or overall costs for the Company as our Investment Advisers had advised the Company that they will meet the cost of external investment research. In compliance with the new Packaged Retail and Insurance-based Investment Products (“PRIIPs”) regulations which also came into effect on 3 January 2018 the Company has published Key Information Documents (“KIDs”) for the ordinary shares and ZDPs which can be viewed on the Company’s website.

Your Directors have made a submission in response to the FCA’s call for input on the PRIIPs regulations expressing concerns that the performance, risk and cost data contained in KIDs could be misleading.

Outlook

We have very strong belief and confidence in the long term attractions of our investment strategy and confidence in our Investment Advisers to steer our asset allocation and stock selection. Pleasingly, despite the ongoing domestic uncertainty and broader market nervousness the dividend of the Company increased by 10% during 2018. Throughout the year the Investment Advisers have continued to meet the majority of our investee companies on a regular basis and have undertaken a large number of site visits. As active managers they continue to assess a number of potential new investment opportunities but remain comfortable with their current portfolios.

Brexit

The Board has carefully considered the potential impact of Brexit on the Company. We have noted that domestically focused UK smaller companies could be exposed to weaker consumer demand and higher input costs from imported goods that might arise from a badly managed Brexit. However these concerns are already to a degree discounted in the current valuations of UK smaller companies and our Investment Adviser remains in close contact with our investee companies to assess the impact of any ultimate Brexit scenario on their trading prospects.

Board Refreshment

The board were very pleased to be able to announce the appointment of Nigel Sidebottom as a non-executive director in February 2019. We believe that retaining Nigel’s wealth of experience in closed-ended funds, and Acorn in particular following his retirement from Premier, will be valuable to shareholders. The next step in this process is that I am standing down from the board at the AGM in August 2019 having served 12 years as a board member and 7 years as your Chairman. The board are currently looking for a further director to replace me.

Amendments to the Management Agreement

Your directors have negotiated amendments to the management agreement that formalise within a contractual framework many of the ancillary services that the manager provides, such as asset allocation, shareholder relations and the provision and maintenance of a website. In conjunction with these amendments, the notice period on the management agreement has been negotiated down from 12 months to 6, which the directors regard as best market practice. However, recognising the added contractual burden placed on the Manager through these changes your directors agreed to an initial 12 month period before any notice to terminate the contract can be served. As this change could result in a higher termination cost to the Company if notice was served during the first 6 months, the change has been categorised as a smaller related party transaction under the FCA’s Listing Rules.

Contact with shareholders

Shareholders are always welcome to attend the Annual General Meeting in August or to contact me directly through the email address acorn_income_fund_limited@ntrs.com.

There is a dedicated website where you may also like to find further information:

https:/www.premierfunds.co.uk/investors/investments/investment-trusts/acorn-income-fund

Thank you for your ongoing support as an investor in our Company.

Helen Green

Chairman

Investment Advisers’ Report

The Smaller Companies Portfolio

During the twelve month period to 31 December 2018 the Smaller Companies Portfolio generated a total return -14.0%, outperforming a fall of -15.4% by the Numis Smaller Companies Index (Ex Investment Companies) (“NSCI”).

2018 was a tough year for equity markets globally as investors faced the prospect of slowing global growth, tighter monetary policy, an escalating trade war between the US and China, and the impact of the ongoing uncertainty surrounding Brexit. In UK markets this dynamic resulted in negative index returns across the major indices, with UK Small and Mid-Caps underperforming their larger quoted peers. The Smaller Companies Portfolio was not immune to this dynamic but did manage to outperform the NSCI during the period.

Following a relatively strong year for the portfolio in 2017 the period under review proved far more challenging, with Brexit in particular affecting the valuations of more domestically focussed companies. A fall in the value of sterling against the US dollar during the year took the decline since the EU referendum in 2016 to over 14%, reversing some of the sterling recovery witnessed in 2017. This overall trend continues to favour the more internationally focussed large caps over smaller quoted companies. The uncertainty around Brexit has created a challenging combination of weaker consumer confidence and significantly higher input costs from imported goods.

The final quarter of 2018 was particularly challenging as expectations of rising interest rates in the US triggered a sharp sell-off in equities globally. The Smaller Companies’ Portfolio fell by 10.8% during the quarter, holding up a little better than the NSCI decline of 13.1%.

At the time of writing the terms of our exit from the EU remain unclear and although we believe the overall operational impact on our holdings has been limited to date, it has clearly affected investors’ appetite for UK equities. We remain hopeful of a satisfactory outcome emerging from this disappointing episode in British politics, although exactly what shape any agreement will take remains to be seen.

In the meantime equity valuations are increasingly appealing, companies overall remain in relatively good health and dividend payments continue to grow. As a result we enter 2019 with a high quality selection of companies in the portfolio at very attractive valuations.

The number of holdings within the portfolio fell by three to 46 during the period following the addition of four new holdings and disposal of seven positions. The portfolio participated in one Initial Public Offering (IPO) during the period: Integrafin (+54bps), a platform provider to financial advisors. Unusually for the portfolio that IPO was bought and sold in the period following strong share price growth and resultant yield compression, locking in significant profit. The six remaining disposals were Midwich, Van Elle, BBA Aviation, Low & Bonar, Headlam, and Conviviality, which was the biggest stock specific story of the period and unfortunately, a negative one:

Conviviality (-379bps), was the primary detractor from performance during the period. Despite issuing an inline trading update at the end of January 2018, just 5 weeks later the Company released a series of extremely disappointing market updates in quick succession, and ultimately confirmed that it had appointed administrators. We wrote down the value of the remaining holding to zero after the suspension of the shares. Whilst performance for the period has been severely hampered by Conviviality, we remain in positive territory overall on this investment as a result of active profit taking and dividend income received during the holding period of over four and a half years.

Other negative contributors to performance came from Warpaint (-164bps) and Clipper Logistics (-128bps). Warpaint, a cosmetics business, issued a profit warning in autumn indicating that pre-Christmas resupply orders from retailers had been lower than anticipated. Clipper Logistics, an e-fulfilment and logistics services company, had lower than expected final results against the backdrop of a weaker retail environment.

Negative returns from other holdings were generally driven by deratings on market sentiment rather than stock specific issues. The extent of this derating was stark with the average price earnings multiple on the portfolio falling by some 18% over the year, as such the portfolio now sits at far more attractive valuations than it did at the beginning of the period.

In addition to the IPO mentioned above new positions were initiated in: Marshalls, the block paving manufacturer and supplier to the commercial and domestic market; Iomart, the provider of managed hosting, and Saga, the over-50s focussed provider of insurance and travel services.

Notable positive contributions to performance came from Telecom Plus (+59bps), the parent company of Utility Warehouse; Somero (+58bps), the manufacturer of concrete screeding equipment; and (as mentioned above) Integrafin (+54bps).

This was clearly a challenging period for the portfolio as a combination of negative market sentiment and one major stock specific issue combined to generate a disappointing negative total return, albeit ahead of the portfolio benchmark. Despite this setback we remain confident with the long term prospects for our investee companies. The continued growth in dividends received during the year provides further confidence in the strength of the portfolio and the derating experienced over the year positions the portfolio on an attractive valuation. As ever we remain mindful of the significant external factors which have led to fairly volatile markets in 2018 and will continue to influence equities in the coming year. Against this back drop we continue to invest in the best smaller companies we can find which offer the attractive combination of growing profits and dividend income over our long term investment horizon.

Fraser Mackersie and Simon Moon

Unicorn Asset Management Limited

The Income Portfolio

The tightening of global monetary policy and the historically tight spreads offered on corporate bonds were our biggest concerns for bond markets at the start of the year. Indeed both scenarios provided headwinds to investors at different points of the year, culminating with a material sell-off in corporate bonds into the year-end as softening macro data raised market concerns about slowing global growth and possible recession risk. At the same time liquidity conditions are still tightening; the Fed has tried to reassure the market that its path is data dependent whilst the ECB still appear on a slow but sure course towards tighter monetary policy. Meanwhile the Bank of England has continually raised concerns about the tightness of UK labour markets with a lack of clarity on how the UK will exit the EU seemingly the main barrier to further rate hikes. In the meantime uncertainty weighs on business and consumer confidence.

Against this backdrop, the outlook for credit valuations still feels challenged, especially if slower growth and lower corporate earnings transpire. We maintain that long dated/high duration credit will continue to be volatile and vulnerable to further capital losses and prefer to maintain more modest duration exposure in instruments which we feel have better risk-return characteristics.

Examples of bonds which fit this criteria and have the benefit of adding some global exposure away from the UK include Wells Fargo bonds which mature in 2022 and Fidelity International bonds maturing in 2024 which both have an attractive yield relative to an equivalent gilt. Hybrid bonds issued by telecoms company Orange have an attractive yield to call in 2023 which we feel the company is likely to exercise. 

We also hold protection against rising US inflation Whilst inflation in the U.S. has fallen, some members of the U.S Federal Reserve have suggested that it is considering letting inflation run hotter in some periods to balance out periods of undershooting and this should mean that inflation risk needs to be priced higher. Markets also seem too complacent that falling inflation is a foregone trend especially as wage growth continues to rise and could work its way into higher output prices as companies look to sustain margins.

Of course, the weakness in some UK corporate bonds provides an attractive opportunity especially when the instrument is short dated, giving greater visibility over the earnings and debt profile. The negative impact on sentiment within UK property enables us to hold British Land convertible bonds offering an attractive yield as a regular bond with under two years until maturity and a low debt profile. Another UK company performing well but subject to the poor sentiment caused by Brexit uncertainty is PhoenixLife which is demonstrating the benefits of its recent acquisitions by meeting increased cash flow targets and raising regulatory capital levels.

Away from the bond markets, the portfolio holds more alternative investments to diversify risk. These include strategies focused on the discount that an investment trades at rather than taking a directional view on the investment. In addition some of these discount opportunities have been bought with a specific short term catalyst, such as a continuation vote, which could erode the discount. Other alternative holdings to bonds include Supermarket Income REIT which offers a yield of double the broad bond market from a portfolio of defensive supermarket property assets.

The portfolio also holds some structured investments which give a range of exposures including buying protection from widening credit spreads, defined returns contingent on equity index levels, and relative performance differentials between UK property shares.

Importantly the relationship between bonds and equities appears to be less predictable these days and the safest government bonds feel like an expensive hedging tool for risk assets, given the unwinding of ultra-loose monetary policy and the low yields on offer. The historical negative correlation benefits of bonds rising when equity markets fall seems to be a much more uncertain relationship as we witnessed at various points during the last year. Holding some investments with different drivers of returns from traditional bond markets, as well as shorter duration, more defensive bond holdings, is therefore important in endeavouring to deliver a more absolute return profile. The majority of currency risk within the portfolio is reduced by using foreign exchange contracts so that currency movements are not a driver of the portfolio’s return.

Paul Smith

Premier Fund Managers Limited

Schedule of Principal Investments

 as at 31 December 2018

Directors’ Biographies

for the year ended 31 December 2018

Directors

The Directors for the whole year ended 2018 were as follows:

Helen Green

Nigel Ward

David Warr

All three Directors of the Board are non-executive Directors and are considered independent of the Investment Manager.

As noted in the Chairman's Statement, Nigel Sidebottom was appointed to the Board on 5 February 2019 and is not considered independent by virtue of his recent employment with PAM.

Both Helen Green and David Warr are chartered accountants and all three have extensive non-executive director experience. Further details of the qualifications and suitability of each of the Director’s appointments are as follows:

Helen Foster Green (Chair)

Helen joined the Company in January 2007 and has been Chairman of the Company since 22 August 2012. She was re-elected as Chairman of the Company in August 2017. Helen is a Fellow of the Institute of Chartered Accountants in England and Wales having qualified as a chartered accountant in 1987. She has been employed by Saffery Champness, a top 20 firm of chartered accountants, since 1984 and became a partner in the London office in 1998. Since 2000 she has been based in the Guernsey office where she is client liaison director responsible for trust and company administration. Helen serves on the boards of both LSE listed companies and AIM listed companies*. Helen is a resident of Guernsey.

John Nigel Ward

Nigel joined the Company in December 2011. Nigel has over 40 years experience of international investment markets, credit and risk analysis, portfolio management, corporate and retail banking, corporate governance, compliance and the managed funds industry gained at Nat West, TSB Bank, Baring Asset Management and Bank Sarasin. Nigel is a full-time non-executive director serving on a number of company boards which have LSE or The International Stock Exchange Listings*. He is a founding Commissioner of the Guernsey Police Complaints Commission, an Associate of the Institute of Financial Services, a member of the Institute of Directors and holder of the IoD Diploma in Company Direction. Nigel is a resident of Guernsey.

David John Warr

David joined the Company in August 2012. David is a Fellow of the Institute of Chartered Accountants in England and Wales having qualified as a chartered accountant in 1976. In 1981 David was appointed a partner in Reads & Co. a Guernsey based firm of chartered accountants, which he helped develop into a more broadly based financial services business leading up to its sale at the end of 1998. David’s experience at Reads & Co. included audit, trust and company administration. David now acts as a non-executive director on a number of UK listed companies* whilst combining those responsibilities with charitable work. David is a resident of Guernsey.

Nigel Sidebottom

Nigel joined the Company in February 2019. Nigel is a Chartered Fellow of the Chartered Institute of Securities and Investment and a Chartered Wealth Manager. Between 2005 and 2018 he was Deputy Chief Investment Officer and Head of Closed Ended Funds at Premier Asset Management, the parent company of the Company’s investment Manager. He has over 30 years’ experience in private client stockbroking and in investment management and has served as a non-executive director on a number of LSE listed companies. Nigel is resident in the UK.

*Details of the Directors’ other directorships for public companies can be found in the Directors’ Report.

Directors’ Report

for the year ended 31 December 2018

The Directors have pleasure in presenting their business review, report and financial statements of the Company for the year ended 31 December 2018.

Principal Activities and Business Review

The principal activity of the Company is to carry on business as an investment company. The Directors do not envisage any change in these activities for the foreseeable future. A description of the activities of the Company in the period under review is given in the Chairman’s Statement.

Business and Tax Status

The Company is a closed-ended investment company, incorporated with limited liability in Guernsey on 5 January 1999, registered number 34778. The Company operates under The Companies (Guernsey) Law, 2008, (the “Law”), the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended and the Authorised Closed Ended Investment Scheme Rules 2008.

The Company’s Ordinary Shares and ZDP Shares are traded on the LSE with the Ordinary Shares having a premium listing and the ZDP Shares having a standard listing, as defined by the LSE.

The Company’s management and administration takes place in Guernsey and the Company has been granted exemption from income tax within Guernsey by the Administrator of Income Tax. It is the intention of the Directors to continue to operate the Company so that each year this tax-exempt status is maintained.

In respect of the Criminal Finances Act 2017 which has introduced a new corporate criminal offence (“CCO”) of ‘failing to take reasonable steps to prevent the facilitation of tax evasion’, the Board confirms that they are committed to zero tolerance towards the criminal facilitation of tax evasion.

Alternative Investment Fund Managers Directive (“AIFMD”)

The Company is an ‘Alternative Investment Fund’ (“AIF”), as defined by the Alternative Investment Fund Managers Directive (“AIFMD”) and is self managed. The Company was approved as an AIF and submitted an Article 42 Notification to the FCA under the National Private Placement Regime on 3 August 2015.

The Directors have set a maximum gearing level for the purpose of AIFMD of 400% for both the commitment exposure level and gross leverage level. As at 31 December 2018 the commitment exposure level was 43% and the gross leverage level was 50%.

Regulatory disclosures, including the Company’s Investor Disclosure Document, are provided on the Company's website www.premierfunds.co.uk/investors/investments/ investment-trusts/acorn-income-fund.

Discontinuation Vote

At the Annual General Meeting held on 26 September 2016, shareholders were given the opportunity in accordance with Article 53.1 of the Articles of incorporation of the Company to vote for the discontinuance of the Company. The special resolution was not carried and it was noted that the Company would continue in its present form. The next discontinuation resolution will be proposed at the Annual General Meeting in 2021.

Foreign Account Tax Compliance Act (“FATCA”)

FATCA requires certain financial institutions outside the United States (“US”) to pass information about their US customers to the US tax authorities, the Internal Revenue Service (the “IRS”). A 30% withholding tax is imposed on the US source income and disposal of assets of any financial institution within the scope of the legislation that fails to comply with this requirement.

The Board of the Company has taken all necessary steps to ensure that the Company is FATCA compliant and confirms that the Company is registered and has been issued a Global Intermediary Identification Number (“GIIN”) by the IRS. The Company will use its GIIN to identify that it is FATCA compliant to all financial counterparties.

Common Reporting Standard

The Common Reporting Standard (“CRS”) is a global standard for the automatic exchange of financial account information developed by the Organisation for Economic Co-operation and development (“OECD”), which has been adopted in Guernsey and which came into effect in January 2016.

The Company is subject to Guernsey regulations and guidance on the automatic exchange of tax information and the Board will therefore take the necessary actions to ensure that the Company is compliant in this regard.

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 on a 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 ongoing expenses. The Company has net current assets of £2,999,832 at the year end. In January 2017, the ZDP Shares were refinanced and their life was extended to 28 February 2022. In addition, 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;

· both the Income and Smaller Companies Portfolios consist substantially of listed investments which are readily realisable and therefore the Company has sufficient resources to meet its liquidity requirements; and

· as at 31 December 2018, the Company had no borrowings other than the ZDP Shares which, as explained in Note 13, have a final capital entitlement on 28 February 2022.

Viability Statement

In accordance with provision C.2.2 of the UK Corporate Governance Code, published by the Financial Reporting Council in September 2014 (the “Code”), the Directors have assessed the prospects of the Company over the three year period to 31 December 2021. The Directors consider that three years is an appropriate period to assess the viability of an investment company for the purpose of giving assurance to shareholders.

In determining the appropriate period of assessment, the Directors had regard to the general advice that equity investment should be made on a medium to longer term view (perhaps 3 to 10 years) but also to evidence that the average holding time for an equity investment is under 3 years. The Directors consider that 3 years is a sufficient investment time horizon to be relevant to shareholders and that choosing a longer time period can present difficulties given the lack of longer term economic visibility.

In its assessment of the viability of the Company, the Directors have considered each of the Company’s principal risks and uncertainties detailed in the principal risks section on the following pages (and in Note 18) and, in particular, the potential impact on the Company and its activities of a disorderly Brexit, and the impact of a significant fall in equity markets on the value of the Company’s investment portfolio.

The Directors have also considered the Company’s income and expenditure projections and the fact that the Company’s investments comprise readily realisable securities which can be expected to be sold to meet funding requirements if necessary. The Directors also noted that the next discontinuation resolution will be proposed at the annual general meeting in 2021.

Based on the Company’s processes for monitoring operating costs, share price discount, the Manager’s compliance with the investment objective, asset allocation, the portfolio risk profile, gearing, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period to 31 December 2021.

Gearing Policy

The Company’s gearing policy is not to employ any gearing through long-term bank borrowing. Save with the prior sanction of the ZDP shareholders the Company will not incur any indebtedness other than short term borrowings in the normal course of business such as to settle share trades or borrowings to finance the redemption of the ZDP Shares.

Results and Dividends

The results attributable to Ordinary shareholders for the period are shown in the Statement of Comprehensive Income. The Company made a revenue return for the year of 21.62 pence (2017: 20.36 pence) per Ordinary Share and a capital loss of (103.97) pence (2017: capital return of 77.09 pence) per Ordinary Share.

Principal Risks

The Board has an on-going process in place for identifying, evaluating and managing the significant risks faced by the Company. The responsibility for carrying out the risk review is undertaken by the Risk Committee (see the Directors’ Report for details of the Risk Committee), which meets at least four times per year. The results of the risk evaluations are then reported back to the Board. The last risk assessment took place on 5 February 2019. The current process is in line with the Association of Investment Companies (“AIC”) Code of Corporate Governance (the “AIC Code”).

Company Risks

Risks of the Structure of the Company and gearing

The Company’s business could be materially and adversely affected by a number of risks. External factors to the Company may either adversely or favourably affect the volatility and liquidity of the Smaller Companies Portfolio and Income Portfolio (the “Portfolios”), as well as their values. These can be caused by economic conditions, changes to tax laws, competition and a number of other factors.

Investors holding either Ordinary Shares or ZDP Shares should have carefully considered whether these investments, given the risks attached, are suitable for them.

The market value of ZDP Shares will be affected by changes in general interest rates, with upward movements in interest rates likely to lead to reductions in the market value of ZDP Shares although not affecting the ultimate redemption value.

Although the holders of ZDP Shares have a priority entitlement to the other assets of the Company (after payment of its liabilities) on a winding-up, if the gross assets of the Company fall to a level that is insufficient to redeem the ZDP Shares in full, investors in the ZDP Shares would receive a lower payment than the Fixed Capital Entitlement on the ZDP Shares repayment date.

In certain circumstances, such as a major fall in the capital value of the Portfolios such that the Final Capital Entitlement of the ZDP Shares is significantly uncovered but where the Company’s Portfolios are still generating revenue, the interests of ZDP shareholders and the Ordinary shareholders may conflict. In such circumstances, the Directors may find it impossible to meet fully, both sets of expectations and so will need to act in a manner which they consider to be fair and equitable to both Ordinary shareholders and ZDP shareholders but having regard to the entitlements of each class of shares.

Further risks to the ZDP Shares include the lower level of regulatory protection than applies to premium listed shares.

The Ordinary Shares are geared by the ZDP Shares and should be regarded as carrying above average risk since a positive Net Asset Value (“NAV”) for the Ordinary shareholders will be dependent upon the Company’s assets being sufficient to meet those prior entitlements of the holders of ZDP Shares. As a consequence of the gearing, a decline in the value of the Company’s investment portfolio will result in a greater percentage decline in the NAV of the Ordinary Shares.

Ordinary shareholders do not have a right for their shares to be redeemed and those Ordinary shareholders wishing to realise their investment will be required to dispose of their shares on the stock market.

Market liquidity in the shares of companies such as the Company is less than market liquidity in shares issued by larger companies traded on the LSE. There can be no guarantee that a liquid market will exist for the Ordinary Shares or the ZDP Shares which may prevent any holder of Ordinary Shares or ZDP Shares from disposing of such shares at a price or at such time that they wish.

The Company’s future performance depends on the success of its strategy, the skill and judgements of the Investment Manager and of the Investment Advisers. The departure of key personnel of either provider may have an adverse effect on the performance of the Company.

The Company may use derivatives to hedge exposure to currency risk and interest rate risk. No assurance can be given that any hedging strategies which may be used by the Company will be successful under all or any market conditions and, if unsuccessful, could have an adverse effect on the Company’s financial position.

Risk Associated With Investment In Other Investment Companies

The Income Portfolio may contain higher yielding investment company shares (including shares of split capital investment trusts). As a result of the gearing in some investment company shares, any increase or decrease in the value of the investments held by those investment companies might magnify movements in their NAV and consequently affect the value of the Income Portfolio. In accordance with the Listing Rules, where appropriate, the Company makes Stock Exchange announcements detailing its holdings in other UK listed investment companies which themselves do not have a stated investment policy to invest no more than 15% of their gross assets in other UK listed investment companies (including investment trusts).

Market Price Risk

Since the Company invests in financial instruments, market price risk is inherent in these investments. In order to minimise this risk, a detailed analysis of the risk/reward relationship of each investee company is undertaken by the Investment Advisers prior to making investments.

Interest Rate Risk

The Company's investment portfolios, particularly the Income Portfolio, include investments bearing interest at fixed rates. Generally when interest rates rise the market prices of fixed interest securities fall and when interest rates fall the prices of fixed interest securities rise. The Company will therefore be exposed to movements in interest rates. The Company has fixed rate leverage through its ZDP Shares. In January 2017, the redemption date of the Company’s ZDP shares was extended to 28 February 2022 at a rate of 3.85% per annum. Replacing this leverage in 2022 might involve the Company paying a higher accrual rate on an issue of new ZDP Shares if interest rates have risen.

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulties in meeting its obligations associated with its financial liabilities that are settled by delivery of cash or another financial asset. Some of the Company’s investments in smaller company equities and in certain bond issues may have relatively low levels of daily turnover such that it might take several days or even weeks to sell a holding into the market.

Discount Volatility

Being a closed-end fund, the Company’s shares may trade at a discount or premium to their NAV. The magnitude of this discount or premium fluctuates daily and can vary significantly. Thus, for a given period of time, it is possible that the market price could decrease despite an increase in the Company’s NAV.

The Directors review the discount levels regularly. The Investment Advisers actively communicate with the Company’s major shareholders and potential new investors, with the aim of managing discount levels.

Brexit

The UK’s vote to leave the EU has introduced new uncertainties and instability into the financial markets. As the process of a major country leaving the EU has no precedent, the Board and the Investment Manager expect an ongoing period of market uncertainty as the implications are processed.

Company Performance

Key Performance Indicators and Analysis of Company’s Performance

At each quarterly board meeting, the Directors consider a number of performance measures in order to assess the Company’s success in achieving its objectives. The key areas reviewed are as follows:

· Review of the history of the NAV.

· Receive an update on the market activity of the Ordinary Shares and the ZDP Shares by Numis Securities Limited, the Company’s corporate broker.

· Receive updates on the performance of both the Income Portfolio and the Smaller Companies Portfolio from the Investment Advisers.

· Discount to NAV.

· Consideration of the revenue projection.

On-going Charges and Total Expense Ratio (the “TER”)

The annual on-going charges figure for the year was 1.57% (2017: 1.53%). This figure which has been prepared in accordance with the recommended methodology provided by the Association of Investment Companies and represents the annual percentage reduction in shareholder returns as a result of recurring operational expenses. In 2018, a performance fee amounting to £nil (2017: £559,967) was accrued.

The TER of the Company is calculated as a percentage of costs against total assets at the year end and is capped at 1.5%. For 2018 the TER was 1.24% (2017: 1.04%). The calculation of costs excludes performance fees, non-routine administration and professional fees. The net management fee charged in 2018 was £722,795 (2017: £729,457).

Share Price Rating and Discount Management including information on treasury shares

At the Annual General Meeting on 20 August 2018, the Directors obtained shareholder approval to issue up to 1,591,668 Ordinary Shares and 2,136,522 ZDP Shares, also obtaining the necessary pre-emption waiver from the ZDP shareholders in respect of any new issue of ZDP Shares.

The shareholders approved renewal of the Company’s authority to buy back Ordinary Shares and ZDP Shares up to 14.99%. As at 20 August 2018, 2,385,911 Ordinary Shares and 3,202,646 ZDP Shares were authorised to be purchased.

The Directors also obtained authority to sell from treasury Ordinary Shares at a discount to the prevailing NAV per Ordinary Share, provided that the authority conferred was limited to issues or sales of Ordinary Shares at the same time as ZDP Shares are issued or sold from treasury at a premium, such that, the combined effect of the issue or sale of Ordinary Shares and the issue or sale of ZDP Shares at a premium is that; (i) the NAV per Ordinary Share is thereby increased; and (ii) gearing is not thereby increased.

The Company intends to seek annual renewal of these authorities from shareholders at each future general meeting to be held under section 199 of the Law. In accordance with the Law, any share buy backs will be affected by the purchase of a package of Ordinary Shares and ZDP Shares (in a specified ratio as set out in the Company’s Prospectus) in the market for cash at a package price which in aggregate is at a discount to the prevailing NAVs of each class of Share, where the Directors believe such a purchase will enhance shareholder value. Shares which are purchased may be cancelled or held in treasury.

Investment Management and Administration

Management Agreement and Fees

The Board is responsible for the determination of the Company’s investment policy and has overall responsibility for the Company’s day-to-day activities. The Company has, however, entered into a Management Agreement with PAMG, a wholly-owned, Guernsey incorporated subsidiary of Premier Asset Management Group PLC.

The Manager has discretion to make minor changes to the portfolios and also has discretion to move cash from the Smaller Companies Portfolio to the Income Portfolio. The Manager will refer any proposals to the Board to materially alter the split of assets between the Income Portfolio and the Smaller Companies Portfolio. The Board determines when any potential investment limits can be exceeded, dividend levels and the appropriate issue size for the ZDP Shares and hence the level of gearing.

Under separate Investment Adviser Agreements, PAMG has delegated a number of its duties and responsibilities to PFM and Unicorn. In relation to the Income Portfolio and Smaller Companies Portfolio respectively, both PFM and Unicorn act as Investment Advisers who are responsible for the identification and analysis of investments meeting the investment objectives and strategy of the Company. PFM and Unicorn are authorised and regulated by the FCA.

The Board keeps under review the performance of the Investment Manager and the Investment Advisers. In the opinion of the Directors the continuing appointment of the Investment Manager on the terms agreed is in the interest of shareholders as a whole, due to the experience and proven track record of the fund management team in the chosen markets. The Directors consider the investment performance of the Company is satisfactory relative to the markets in which the Company invests.

A list of the top 20 holdings for each portfolio is shown on the Schedule of Principal Investments of this report and the top 10 holdings for each portfolio is included in the monthly fund factsheet, available on the Company’s website.

For the Company’s full holdings information please refer to the Unaudited Full List of Investment Holdings.

Administration Agreement

The administration of the Company is undertaken by Northern Trust International Fund Administration Services (Guernsey) Limited (“Northern Trust”).

Custodian

The custodian of the Company is Northern Trust (Guernsey) Limited.

Segmental Reporting

The Company has two reportable segments, being the Income Portfolio and the Smaller Companies Portfolio. Each of these portfolios is managed separately, entail different investment objectives and contain investments in different products. A more comprehensive disclosure can be found within Note 2 of the Notes to the Financial Statements.

Corporate Governance

On 1 October 2013, the Company became a member of the AIC, and on 19 November 2013 the Company formally resolved to adopt and comply with the AIC Code.

The Financial Reporting Council (“FRC”) has confirmed that an AIC member which reports against the AIC Code and who follows the AIC Corporate Governance Guide for Investment Companies (the “AIC Guide”), will be meeting their Listing Rule obligations in relation to reporting against The UK Code of Corporate Governance (the “UK Code”).

Statement of Compliance with the UK Code

The Board of the Company has considered the principles and recommendations of the AIC Code by reference to the AIC Guide. The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK 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, and by reference to the AIC Guide (which incorporates the UK Code), will provide better information to shareholders.

Due to the Ordinary Shares having a premium listing on the LSE, the Company must comply with Listing Rule 9.8.6(5) which requires the Company to apply the provisions of the UK Code to the extent that they are considered relevant to the Company. By complying with the AIC Code the Company is meeting its obligation under the UK Code and as such is not required to report further on issues contained in the UK Code which are irrelevant to it. The Directors place a high degree of importance on ensuring that high standards of corporate governance are maintained within the Company.

The AIC Code is available for download from the AIC website: www.theaic.co.uk.

With effect from 1 January 2012, the Company was also required to comply with the Guernsey Financial Services Commission Financial Sector Code of Corporate Governance (the “Guernsey Code”). As the Company reports under the AIC Code it is deemed to meet the Guernsey Code and the Board has undertaken to evaluate its corporate governance compliance on an on-going basis.

The Company has complied with the recommendations of the AIC Code and the relevant provisions of the UK Code throughout the year, except as set out below. The UK Code includes provisions relating to:

· the role of the chief executive;

· executive directors’ remuneration; and

· the need for an internal audit function.

For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to the Company, being an externally managed investment company. In particular, all of the Company’s day to day management and administrative functions are outsourced to third parties. As a result, the Company has no executive directors, employees or internal operations. The Company therefore has not reported further in respect of these provisions.

Other areas of non-compliance with the AIC Code by the Company, and the reasons therefore, are as follows:

The Company has not appointed a Senior Independent Director. This is not in accordance with the recommendations in principle 1 of the AIC Code but is felt to be appropriate for the size and nature of the Company.

The non-executive Directors of the Company do not meet without the Chairman present to appraise the Chairman’s performance. This is not in accordance with principle 1 of the AIC Code. However, the Company has a Chairman’s Performance Evaluation Questionnaire which is completed by all Directors (other than the Chairman) and analysed annually to facilitate the review of the Chairman’s performance.

The Company does not comply with principle 3 of the AIC code; as per the Company’s Articles of Incorporation, the Directors are not subject to re-election by the shareholders except in their first year of appointment, nor are they appointed for specific terms as required by these provisions, as this is not felt to be appropriate for the size and nature of the Company. However, the Board has determined in order to facilitate good corporate governance practice in line with principle 2 of the AIC Code, each director, subsequent to 2016, offers themselves for re-election every 3 years until their ninth year of service. Any Director with over nine years service shall be eligible for re-election every year thereafter. As a result of this principle the Directors were elected as follows:

Helen Green was re-elected in 2018, and is next eligible for re-election in 2019.

David Warr is next eligible for re- election in 2019.

Nigel Ward is next eligible for re-election in 2019.

In accordance with principle 5 of the AIC Code, the following details are of all other public Company directorships and employment held by each director and shared directorships of any commercial company held by two or more Directors:

Helen Green

· CQS Natural Resources Growth and Income Plc*

· Landore Resources Limited**

· Aberdeen Emerging Markets Investment Company Limited*

· UK Mortgages Limited#

David Warr

· Aberdeen Frontier Markets Investment Company Limited**

· Hadrian’s Wall Secured Investments Limited*

Nigel Ward

· Crystal Amber Fund Limited**

· Fair Oaks Income Fund Limited#

· Hadrian’s Wall Secured Investments Limited*

Nigel Sidebottom (appointed 5 February 2019)

· None

* Listed on the Main Market of the LSE

** Traded on the AIM of the LSE

# Traded on the Specialist Fund Segment of the LSE

The Company does not comply with principle 9 of the AIC Code as it does not have a formal policy on diversity, however the Company has established a Nomination Committee that adheres to formal terms of reference and which is responsible for identifying any gaps on the Company’s board that need to be filled. When considering candidates the Board has due regard to the benefits of diversity on the board and amongst other considerations this includes gender.

The UK Code was recently revised, and became effective for accounting periods commencing 1 January 2019. Following a consultation the 2019 AIC Code has been endorsed by the FRC and the Guernsey Financial Services Commission. The Directors intend to report on the Company’s compliance with the revised code in the Annual Report for the year ending 31 December 2019.

Conflicts of Interest

None of the Directors nor any persons connected with them had a material interest in any of the Company’s transactions, arrangements or agreements at the date of this report and none of the Directors has or had any interest in any transaction which is or was unusual in its nature or conditions or significant to the business of the Company, and which was effected by the Company during the reporting period.

David Warr holds 63,000 Ordinary Shares in the capital of the Company, which represented an interest of 0.40% of the Company’s Ordinary Shares in issue as at 31 December 2018.

Nigel Sidebottom holds 4,366 Ordinary Shares in the capital of the Company, which represented an interest of 0.03% of the Company’s Ordinary Shares in issue as at 31 December 2018, and 5,205 ZDP Shares in the capital of the Company, which represented an interest of 0.02% of the Company’s ZDP Shares in issue as at 31 December 2018.

At the date of this report, there are no outstanding loans or guarantees between the Company and any director.

Board Responsibilities

The Board comprises four non-executive Directors, who meet at least quarterly to consider the affairs of the Company in a prescribed and structured manner. All Directors are considered independent of the Investment Manager for the purposes of the AIC Code and Listing Rule 15.2.12A, except for Nigel Sidebottom by virtue of his recent employment with Premier Fund Managers Limited. Biographies of the Directors for the period from 1 January 2018 to the date of this report appear in the Directors’ Biographies demonstrating the wide range of skills and experience they bring to the Board.

As at the beginning of 2016, the Chairman had served on the Board for over nine years. The Board has taken the view that independence is not necessarily compromised by the length of tenure on the Board and experience can add significantly to the Board's strength. However, the Chairman will stand down from the board at the AGM in August having served 12 years as a board member and 7 years as Chairman. The board anticipate identifying a new Chairman before the AGM on 16 August 2019.

The Directors, in the furtherance of their duties, may take independent professional advice at the Company’s expense, which is in accordance with principle 13 of the AIC Code. The Directors also have access to the advice and services of the Company Secretary through its appointed representatives who are responsible to the Board for ensuring that the Board’s procedures are followed and that applicable rules and regulations are complied with. To enable the Board to function effectively and allow the Directors to discharge their responsibilities, full and timely access is given to all relevant information.

The Directors are requested to confirm their continuing professional development is up to date and any necessary training is identified during the annual performance reviews carried out and recorded by the Nomination Committee.

Substantial Shareholdings

As at 10 April 2019, the latest practicable date for disclosure in this report, the Company’s only shareholder with a holding greater than 10% was HSBC Issuer Services Common Depositary Nominee (UK) Limited.

None of the Directors has a contract of service with the Company.

Shareholder Communication

In line with principle 19 of the AIC Code, the Investment Advisers communicate with both the Chairman and shareholders and are available to communicate and meet with major shareholders. The Company has also appointed Numis to liaise with all major shareholders together with PFM and Unicorn, all of who report back to the Board at quarterly board meetings ensuring that the Board is fully aware of shareholder sentiment and expectation.

Director Attendance

During the year ended 31 December 2018, the number of Board meetings attended was as follows:

Committees

The Company has established four committees: the Audit Committee, the Nomination Committee, the Remuneration and Management Engagement Committee and the Risk Committee (together the “Committees”). The Nomination and Risk Committees comprise the whole Board. Helen Green, Nigel Ward and David Warr sit on the Audit Committee and Remuneration and Management Engagement Committee. The Terms of Reference for each committee is available on request to the Administrator.

The Audit Committee

A full report regarding the Audit Committee can be found in the Audit Committee Report.

Nomination Committee

In accordance with the AIC Code, a Nomination Committee has been established. David Warr has been appointed Chairman. The Nomination Committee meets at least once a year in accordance with the terms of reference and reviews, inter alia, the structure, size and composition of the Board. When the appointment of a non-executive director is being considered the Nomination Committee will make recommendations to the Board after evaluating candidates from a wide range of backgrounds. Whilst considering the composition of the Board, the Nomination Committee will be mindful of diversity, inclusiveness and meritocracy and, in considering a new candidate, the Nomination Committee will apply comparative analysis of candidates’ qualifications and experience, applying pre-established clear, neutrally formulated and unambiguous criteria to determine the most suitable candidate sought for the specific position.

Other duties of the Nomination Committee are to give full consideration to succession planning for Directors, to regularly review the leadership needs of the non-executive Directors, ensure non-executive Directors receive a formal letter of appointment and to review the results of the Board’s performance evaluation process.

Remuneration and Management Engagement (“RME”) Committee

Nigel Ward has been appointed Chairman of the RME Committee. The RME Committee meets at least once a year to determine and agree with the Board the framework for the remuneration of the Company’s Chairman, Directors and service providers, taking into account remuneration trends and all other factors which it deems necessary. The RME Committee also reviews contractual terms and performance of all service providers to ensure their satisfactory conduct and performance.

Details of the Directors’ remuneration can be found in Note 6.

Risk Committee

The Risk Committee was established on 19 November 2014. Nigel Ward has been appointed the Chairman of the Risk Committee which meets at least four times per year. The Risk Committee reviews the effectiveness of the Company’s internal controls and risk management systems and procedures on a quarterly basis, actively seeking to identify, manage and monitor risks such as Market, Credit, Liquidity, Counterparty, Operational and Leverage. In doing so the Risk Committee reviews a quarterly report from the Investment Adviser and reviews arrangements for monitoring investment risk. The Risk Committee also ensures that the risk profile of the Company’s portfolios are appropriate to the size; structure and investment strategies applied and reports its findings and recommendations to the Board quarterly.

Internal Control and Financial Reporting

The Board is responsible for establishing and maintaining the Company’s systems of internal control ensuring that they are designed to meet the particular needs of the Company and the risks to which it is exposed, and by their very nature provide reasonable, but not absolute, assurance against material misstatement or loss. The key procedures which have been established to provide effective internal control are as follows:

Investment advice is provided by PFM and Unicorn under Investment Adviser Agreements. The Board is responsible for setting the overall investment policy and monitors the actions of the Investment Advisers at regular board meetings. Both PFM and Unicorn provide the Board with updates at each quarterly board meeting and at any other time that the Board requests.

The administration and company secretarial duties of the Company are performed by Northern Trust International Fund Administration Services (Guernsey) Limited.

Registrar duties are performed by Anson Registrars Limited.

The Custody of assets, is undertaken by Northern Trust (Guernsey) Limited.

The duties of investment management, accounting and the custody of assets are segregated. The procedures of the individual parties are designed to complement one another.

The Directors of the Company clearly define the duties and responsibilities of their agents and advisers. The appointment of agents and advisers is conducted by the Board after consideration of the quality of the parties involved; the Board monitors their on-going performance and contractual arrangements. A detailed annual review of the main service providers is undertaken by the RME Committee and their findings are reported to the Board.

Mandates for authorisation of investment transactions and expense payments are set out by the Board.

The Board reviews detailed financial information produced by the Investment Advisers and the Administrator on a regular basis.

The Board is provided, on a quarterly basis, with a Compliance Report produced by a specialist Compliance and Legal department at PAM. The monitoring programme ensures that all activities of PFM, for the year under review, have been in accordance with both internal procedures and with FCA principles for firms and individuals. The Compliance team also makes regular external visits to both Unicorn and the Administrator, the latest visit being to Unicorn on 25 April 2018. A visit to Northern Trust took place on 23 May 2018. The Secretary provides a report at each quarterly Board meeting which highlights any areas of non compliance with any applicable regulations and laws. The Board has access, at all times, to all relevant compliance personnel.

The Company does not have an internal audit department. All the Company’s management and administration functions are delegated to independent third parties and it is therefore felt there is no need for the Company to have an internal audit facility.

No significant findings were found during the internal controls review.

Packaged Retail and Insurance-based Investment Products (“PRIIPs”)

As a listed closed-ended fund, the Company falls under the definition of a retail investment product for PRIIPs Regulation issued by the FCA which came into effect 1 January 2018. As such, the Company is required to produce KIDs which are available on the Company’s website www.premierfunds.co.uk/investors/investments/investment trusts/acorn-income-fund

Relations with shareholders

All holders of Ordinary Shares in the Company have the right to receive notice of, and attend and vote at the general meetings of the Company. The holders of ZDP Shares have the right to receive notice of all general meetings but only have the right to attend and vote if the business of the meeting proposes a resolution which will vary, modify or abrogate any of the special rights attached to the ZDP Shares.

At each general meeting of the Company, the Board and the Investment Advisers are available to discuss issues affecting the Company. This is in accordance with principle 19 of the AIC Code. Only Ordinary Shares carry full voting rights, holders of ZDP Shares are only entitled to vote on issues affecting their share class. The primary responsibility for shareholder relations lies with PFM. However, the Directors are always available to enter into dialogue with shareholders and the Chairman is always willing to meet major shareholders as the Company believes such communication to be important.

Anti-Bribery and Corruption Policy

The Company has adopted a zero tolerance policy towards bribery and is committed to carrying out business fairly, honestly and openly.

Voting and Stewardship code

The Investment Manager is committed to the principles of the Financial Reporting Council’s UK Stewardship Code (the ‘Code’) and this also constitutes the disclosure of that commitment required under the rules of the FCA (Conduct of Business Rule 2.2.3).

Signed on behalf of the Board by:

Helen Green

Chairman

10 April 2019

Statement of Directors’ Responsibility in Respect of the Annual Financial Report

for the year ended 31 December 2018

Statement of Directors’ Responsibilities

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

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards as issued by the IASB and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable, relevant and reliable;

· state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;

· assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

· use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect 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 governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.

Disclosure of information to auditors

The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are aware, there is no relevant audit information of which the Company’s Auditor is unaware; and that each Director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information.

Responsibility statement of the Directors in respect of the annual financial report

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

· the Management Report (comprising the Chairman’s Statement, the Investment Advisers’ Reports, Directors’ Report and Audit Committee Report) includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

We consider 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 position and performance, business model and strategy.

Reappointment of auditor

The Auditor, KPMG Channel Islands Limited, has expressed its willingness to continue in office as Auditor. A resolution proposing their reappointment will be submitted at the forthcoming general meeting to be held pursuant to section 199 of the Law.

Signed on behalf of the Board by:

Helen Green

Chairman

10 April 2019

Audit Committee Report

for the year ended 31 December 2018

In accordance with the AIC Code an Audit Committee has been established consisting of David Warr, Helen Green, and Nigel Ward. David Warr is the Chairman of the Audit Committee.

The Audit Committee meets at least twice a year and, when requested, provides advice to the Board on whether the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides information necessary for the shareholders to assess the Company’s performance, business model and strategy. The Audit Committee also reviews, inter alia, the financial reporting process and the system of internal control and management of financial risks including understanding the current areas of greatest financial risk and how these are managed by the Investment Manager, reviewing the annual report and accounts, assessing the fairness of preliminary and interim statements and disclosures and reviewing the external audit process. The Audit Committee is responsible for overseeing the Company’s relationship with the external auditor (the ‘Auditor’), including making recommendations to the Board on the appointment of the Auditor and their remuneration.

The Audit Committee considers the nature, scope and results of the Auditor’s work and reviews, and develops and implements a policy on the supply of any non-audit services that are to be provided by the Auditor. The Audit Committee annually reviews the independence and objectivity of the Auditor and also considers the appointment of an appropriate Auditor.

At the Audit Committee meeting on 6 November 2018 the appointment of the Auditor was considered and the Board subsequently decided that the Auditor was sufficiently independent and was appropriately appointed in order to carry out the audit for the year ended 31 December 2018. During the year under review, the Auditor was not engaged to provide any non-audit services to the Company.

The valuation of the Company’s investments, given that they represent the majority of net assets of the Company is considered to be a significant area of focus. In discharging its responsibilities the Audit Committee has specifically considered the valuation of investments as follows:

· The Board reviews the portfolio valuations on a regular basis throughout the year and meets with the Investment Advisers at least quarterly. It also 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 correct.

· The Company’s net asset value is calculated twice weekly using a third party pricing source.

· The Audit Committee receives and reviews reports from the Investment Advisers and the Auditor relating to the Company’s annual financial report. The Audit Committee focuses particularly on compliance with legal requirements, accounting standards and the Listing Rules and ensures that an effective system of internal financial and non-financial controls is maintained. The ultimate responsibility for reviewing and approving the annual financial report remains with the Board.

· The Audit Committee holds an annual meeting to approve the Company’s annual financial report before its publication. At a meeting held on 6 November 2018 the Audit Committee met with the Auditor to discuss the audit plan and approach. During this meeting it was agreed with the Auditor that the area of significant audit focus related to the valuation of investments given that they represent the majority of net assets of the Company. The scope of the audit work in relation to this asset class was discussed. At the conclusion of the audit, the Audit Committee met with the Auditor and discussed the scope of their annual audit work and also their audit findings.

· The Audit Committee reviews the scope and results of the audit, its cost effectiveness together with the independence and objectivity of the Auditor. The Audit Committee has particular regard to any non-audit work that the Auditor may undertake and the terms under which the Auditor may be appointed to perform non-audit services. In order to safeguard the Auditor’s independence and objectivity, the Audit Committee ensures that any other advisory and/or consulting services provided by the Auditor does not conflict with their statutory audit responsibilities.

To fulfil its responsibilities regarding the independence of the Auditor, the Audit Committee considered:

· a report from the Auditor describing their arrangements to identify, report and manage any conflicts of interest; and

· the extent of the non-audit services provided by the Auditor.

To assess the effectiveness of the Auditor, the committee reviewed:

· the Auditor’s fulfilment of the agreed audit plan and variations from it;

· the audit findings report highlighting any major issues that arose during the course of the audit; and

· the effectiveness and independence of the Auditor having considered the degree of diligence and professional scepticism demonstrated by them.

The Audit Committee is satisfied with KPMG Channel Islands Limited’s (“KPMG”) effectiveness and independence as Auditor.

As KPMG has been previously engaged to provide the annual audit the Board was able to rely on both; their previous experiences with KPMG and their conduct during the current year audit.

Audit Tender

During the prior year the Audit Committee initiated and completed the process of tendering the external audit of the Company for the financial year ending December 2018.

Following a review of the tender presentations, the Audit Committee members unanimously agreed to recommend the continuing appointment of KPMG as auditors, deeming this course of action to be in the best interests of shareholders, by virtue of the strength, of the KPMG audit team in terms of their depth, spread of knowledge of the sector and that they remain fully independent of the board.

The terms of reference of the Audit Committee are available from the Administrator on request.

During the year the Audit Committee met four times and of those meetings all Audit Committee members were in attendance.

David Warr

Chairman of the Audit Committee

10 April 2019

Independent Auditor’s Report To The Members of Acorn Income Fund Limited

Our opinion is unmodified

We have audited the financial statements of Acorn Income Fund Limited (the “Company”), which comprise the statement of financial position as at 31 December 2018, the statements of comprehensive income, cash flows and changes in equity for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying financial statements:

— give a true and fair view of the financial position of the Company as at 31 December 2018, and of the Company’s financial performance and the Company’s cash flows for the year then ended;

— are prepared in accordance with International Financial Reporting Standards (IFRS); and

— comply with the Companies (Guernsey) Law, 2008.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Company in accordance with, UK ethical requirements including FRC Ethical Standards as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion.

Key audit matters: our assessment of the risks of material misstatement

Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters were as follows:

Our application of materiality and an overview of the scope of our audit

Materiality for the financial statements as a whole was set at £1,824,000, determined with reference to a benchmark of net assets of £60,815,955, of which it represents approximately 3% (2017: approximately 3%).

We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding £91,000, in addition to other identified misstatements that warranted reporting on qualitative grounds.

Our audit of the Company was undertaken to the materiality level specified above, which has informed our identification of key audit matters and the associated audit procedures performed in those areas as detailed above.

We have nothing to report on going concern

We are required to report to you if we have anything material to add or draw attention to in relation to the directors’ statement in note 1(a) to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in this respect.

We have nothing to report on the other information in the Annual Report

The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.

Disclosures of principal risks and longer-term viability

Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:

· the directors’ confirmation within the Viability Statement that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity;

· the Principal Risks disclosures describing these risks and explaining how they are being managed or mitigated; and

· the directors’ explanation in the Viability Statement as to how they have assessed the prospects of the Company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Corporate governance disclosures

We are required to report to you if:

· we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy; or 

· the section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.

We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the 2016 UK Corporate Governance Code specified by the Listing Rules for our review. 

We have nothing to report to you in these respects.

We have nothing to report on other matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:

· the Company has not kept proper accounting records; or

· the financial statements are not in agreement with the accounting records; or

· we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit.

Respective responsibilities

Directors’ responsibilities 

As explained more fully in their statement, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. 

Auditor’s responsibilities 

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. 

A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 

The purpose of this report and restrictions on its use by persons other than the Company’s members as a body

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 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.

Barry Ryan

For and on behalf of KPMG Channel Islands Limited

Chartered Accountants and Recognised Auditors, Guernsey

10 April 2019

Statement of Comprehensive Income

for the year ended 31 December 2018

The supplementary revenue return and capital return columns have been prepared in accordance with the Statement of Recommended Practice (“SORP”) issued by the Association of Investment Companies (“AIC”).

In arriving at the results for the financial year, all amounts above relate to continuing operations. No operations were acquired or discontinued in the year.

The notes form an integral part of the financial statements.

Statement of Financial Position

as at 31 December 2018

The financial statements were approved by the Board of Directors and authorised for issue on 10 April 2019 and signed on its behalf by:

Helen Green

Chairman

The notes form an integral part of the financial statements.

Statement of Cash Flows

for the year ended 31 December 2018

The notes form an integral part of the financial statements.

Statement of Changes in Equity

As at 31 December 2018

As at 31 December 2017

The notes form an integral part of the financial statements.

Notes to the Financial Statements

for the year ended 31 December 20181 ACCOUNTING POLICIES

(a) Basis of preparation

The financial statements, which give a true and fair view, have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), the Association of Investment Companies (“AIC”) Statements of Recommended Practice (“SORP”) (as revised in November 2014) where this is consistent with the requirements of IFRS and in compliance with the Companies (Guernsey) Law, 2008. All accounting policies adopted for the period are consistent with IFRS issued by the IASB. The financial statements have been prepared on an historical cost basis except for the measurement at fair value of financial assets designated as at fair value through profit or loss and derivative financial instruments.

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 on a 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 ongoing expenses. The Company has net current assets of £2,999,832 at the year end. In January 2017, the ZDP Shares were refinanced and their life was extended to 28 February 2022. In addition, 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;

• both the Income and Smaller Companies Portfolios consist substantially of listed investments which are readily realisable and therefore the Company has sufficient resources to meet its liquidity requirements; and

• as at 31 December 2018, the Company had no borrowings other than the ZDP Shares which, as explained in Note 13, have a final capital entitlement on 28 February 2022.

New standards, amendments and interpretations effective during the reporting period

- IFRS 9 Financial Instruments (Effective 1 January 2018)

IFRS 9 'Financial Instruments' amends IAS 39. IFRS 9 specifies how an entity should classify and measure financial assets, including some hybrid contracts. The standard requires all financial assets to be classified on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of IAS 39. The standard applies a consistent approach to classifying financial assets and replaces the numerous categories of financial assets in IAS 39, each of which had its own classification criteria.

The requirements for financial liabilities are mostly carried forward unchanged from IAS39. However, some changes were made to the fair value option for financial liabilities to address the issue of own credit risk.

The standard also results in one impairment method, replacing the numerous impairment methods in IAS 39 that arise from the different classification.

General approach

With the exception of purchased or originated credit impaired financial assets, expected credit losses ("ECL") are required to be measured through a loss allowance at an amount equal to:

- the 12-month ECL (ECL that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or

- full lifetime ECL (ECL that result from all possible default events over the life of the financial instrument).

The application of IFRS 9 does not change the measurement and presentation of the Company’s financial instruments as they are measured at fair value through profit or loss.

No new accounting standards were effected or adopted during the year having an effect on the financial statements.

(b) Use of estimates and judgements

The preparation of the financial statements in conformity with IFRS requires the Directors to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an on going basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

The Directors use judgements in allocating expenses between Revenue and Capital and in ascertaining the risk disclosures contained in Note 18. The Directors use judgements in valuing the market value of the investments contained in Note 10.

No significant estimates have been used.

(c) Dividend Policy

The Company aims to pay a regular quarterly dividend in March, June, September and December. It is intended to distribute substantially all of the Company’s net income after expenses and taxation; however the Company may retain a proportion of the Company’s income in each year as a revenue reserve to assist in providing long term stability in dividend distributions.

(d) Share Capital

Ordinary shares are classified as equity. Share capital includes the nominal value of ordinary shares that have been issued and any premiums received on the initial issuance of shares. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds.

When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury reserve included in other reserves in the Statement of Financial Position. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity and the resulting surplus or deficit on the transaction is presented within share premium.

(e) Zero Dividend Preference Shares

Under IAS 32, the ZDP Shares are classified as financial liabilities and are held at amortised cost. Appropriation for the period in respect of ZDP Shares is included in the Statement of Comprehensive Income as a finance cost and is calculated using the effective interest rate method (“EIR”). The costs of issue of the ZDP shares are being amortised over the period until the ZDP shares will be redeemed.

(f) Taxation

The Company has been granted exemption under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 from Guernsey Income Tax, and has elected to remain exempt following changes to in the Guernsey tax regime. The Company paid an annual fee of £1,200 (2017: £1,200).

(g) Capital Reserve

The following are accounted for in this reserve:

– gains and losses on the realisation of investments;

– expenses charged to this account in accordance with the expenses policy below;

– increases and decreases in the valuation of the investments held at the year end; and

– unrealised exchange differences of a capital nature.

(h) Expenses

All expenses are accounted for on an accruals basis and are recognised in profit or loss. Expenses are charged to the capital reserve where a connection with the maintenance or enhancement of the value of the investments can be demonstrated.

75% of the Company’s management fee and 100% financing costs are charged to the capital reserve in line with the Board’s expected long-term split of returns between income and capital gains from the investment portfolio.

100% of any performance fee, commissions paid and the appropriation in respect of ZDP Shares is charged to the capital reserve.

All other expenses are charged through the revenue reserve.

(i) Investment income

Interest income and distributions receivable are accounted for on an accruals basis. Interest income relates only to interest on bank balances. Bond income is accounted for using the EIR basis. Dividends are recognised on the ex-dividend date. Investment income is treated as a revenue item, except for special dividends of a capital nature which are treated as a capital item, in the Statement of Comprehensive Income.

(j) Foreign currency translation

The currency of the primary economic environment in which the Company operates (the functional currency) is Great British Pounds (“GBP”) which is also the presentational currency.

Transactions denominated in foreign currencies are translated into GBP at the rate of exchange ruling at the date of the transaction.

Monetary assets and liabilities, other than investments, denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in profit or loss in the Statement of Comprehensive Income. Foreign exchange differences relating to investments are taken to the capital reserve. Realised and unrealised foreign exchange differences on non-capital assets or liabilities are taken to profit or loss in the Statement of Comprehensive Income in the period in which they arise.

(k) Cash and cash equivalents

Cash and cash equivalents are defined as cash in hand, demand deposits and short term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of change in value. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash, deposits at bank and money market deposits with a maturity of less than 3 months.

(l) Investments

All investments have been designated as financial assets at “fair value through profit or loss”. Investments are initially recognised on the date of purchase at fair value, with transaction costs recognised in profit or loss in the Statement of Comprehensive Income. Unrealised gains and losses on movement in fair value of investments are recognised in profit or loss in the Statement of Comprehensive Income. Investments are derecognised on the date of sale. Gains and losses on the sale of investments, which is the difference between its initial cost and sale value, will be taken to the profit or loss in the Statement of Comprehensive Income in the period in which they arise. For investments actively traded in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices as at the close of business on the reporting date.

For investments not actively traded, the Directors will consider where practical, multiples used in recent transactions in comparable stocks. Where there are no comparable listed or unlisted stocks the Directors will take into consideration the performance of the stock, maturity date and finance arrangements to determine the fair value.

(m) Derivatives

Derivatives consist of forward exchange contracts which are initially measured at fair value and any directly attributable transaction costs are recognised in profit or loss in the Statement of Comprehensive Income as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are generally recognised in profit or loss in the Statement of Comprehensive Income. Derivatives contracts in a receivable position (positive fair value) are reported as financial assets at fair value through profit or loss. Derivatives contracts in a payable position (negative fair value) are reported as financial liabilities at fair value through profit or loss.

(n) Trade date accounting

All “regular way” purchases and sales of financial assets are recognised on the “trade date”, i.e. the date that the entity commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of the asset within the timeframe generally established by regulation or convention in the market place.

(o) Segmental reporting

The Company retains two Investment Advisers, Unicorn Asset Management Limited and Premier Fund Managers Limited for the Smaller Companies Portfolio and Income Portfolio respectively. As the Board reviews the performance of each portfolio separately and decides on the allocation of resources based on this performance, the Board, as chief operating decision maker, has determined that the Company has two reportable segments (2017: two).

The Board is charged with setting the Company’s investment strategy in accordance with the Prospectus. They have delegated the day to day implementation of this strategy to its Investment Advisers but retain responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions. The investment decisions of the Investment Advisers are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board. The Investment Advisers have been given full authority to act on behalf of the Company, including the authority to purchase and sell securities and other investments on behalf of the Company and to carry out other actions as appropriate to give effect thereto. Whilst the Investment Advisers may make the investment decisions on a day to day basis regarding the allocation of funds to different investments, any changes to the investment strategy or major allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Advisers. The Board, therefore, retains full responsibility as to the major allocation decisions made on an ongoing basis. The Investment Advisers will always act under the terms of the Prospectus.

The key measure of performance used by the Board to assess the Company’s performance and to allocate resources is the total return on the Company’s net asset value (“NAV”), as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

The schedule of principal investments held as at the year end is presented above.

(p) Offsetting

Financial assets and liabilities are offset and the net amount is reported in the Statement of Financial Position when there is currently a legally and contractually enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. A current legally and contractually enforceable right to offset must not be contingent on a future event. Furthermore, it must be legally and contractually enforceable in (i) the normal course of business; (ii) the event of default; and (iii) the event of insolvency or bankruptcy of the Company and all of the counterparties.

2 OPERATING SEGMENTS

The Company has two reportable segments, being the Income Portfolio and the Smaller Companies Portfolio. Each of these portfolios is managed separately as they entail different investment objectives and strategies and contain investments in different products.

For each of the portfolios, the Board reviews internal management reports on a quarterly basis. The objectives and principal investment products of the respective reportable segments are as follows:

Information regarding the results of each reportable segment follows. Performance is measured based on the increase in value of each portfolio, as included in the internal management reports that are reviewed by the Board.

Segmental information is measured on the same basis as that used in the preparation of the Company’s financial statements.

Geographical information

In presenting information on the basis of geographical segments, segment revenue and segment assets are based on the domicile countries of the investees and counterparties to derivative transactions. The table below excludes net gains on financial assets designated as at fair value through profit or loss and gains or losses on derivative instruments.

The Company did not hold any non-current assets during the year other than financial instruments (2017: £nil).

Major customers

The Company regards its shareholders as customers. The Company’s only shareholder with a holding greater than 10% at the year end was HSBC Issuer Services Common Depositary Nominee (UK) Limited (2017: HSBC Issuer Services Common Depositary Nominee (UK) Limited).

3 INVESTMENT INCOME

4 (LOSSES)/GAINS ON DERIVATIVE FINANCIAL INSTRUMENTS

5 EXPENSES

Manager’s fee

* The Company has entered into a Management Agreement with Premier Asset Management (Guernsey) Limited, a wholly-owned, Guernsey incorporated subsidiary of Premier Asset Management Limited. The Investment Manager receives a management fee of 0.7% per annum of total assets (subject to a minimum of £100,000) calculated monthly and payable quarterly in arrears, out of which it pays fees to the Investment Advisers. The Investment Manager is also paid a shareholder communication and support fee, currently £3,100 for the twelve months from 1 May 2017 to 30 June 2018. Please refer to Note 1(h) for details on how expenses are charged to the capital reserve and revenue account. The Management Agreement may be terminated by either party on 12 months’ written notice. The Company has entered into an agreement with the Investment Manager for the provision of AIFM reporting services for a fee of £19,450 per annum from 1 September 2017.

Performance fee

*\* The Investment Manager is also potentially entitled to a performance fee equal to 15% of any excess of the NAV per Ordinary Share (together with any dividends paid) over the higher of the first benchmark or the second benchmark. The first benchmark is the NAV per share immediately following the tender in January 2007 increasing at 10% per annum compound. The second benchmark is the highest NAV per Ordinary Share as of the last calculation day in any preceding financial period commencing after completion of the tender in January 2007 in respect of which a performance fee has been paid compounded at 10% per annum. A performance fee amounting to £nil was accrued for the year ended 31 December 2018 (2017: £559,967).

Administrator’s fee

**\* The Company entered into an Administration Agreement with Northern Trust International Fund Administration Services (Guernsey) Limited on 1 April 2015. The Company shall pay the Administrator a fee of 12 basis points per annum on the net assets between £0 – £100 million, 10 basis points per annum on the net assets between £100 million – £150 million and 8 basis points per annum on the net assets over £150 million subject to a minimum of £7,000 per month. The Administration Agreement may be terminated by either party on ninety days notice.

6 DIRECTORS’ REMUNERATION

Under their terms of appointment, each Director is paid a basic fee of £25,000 per annum by the Company. In addition to this, the Chairman receives an extra £10,000 per annum, the Audit Committee Chairman receives an extra £7,500 per annum, and the Risk Committee Chairman receives an extra £5,000 per annum.

A special resolution was passed on 20 December 2016 for the new Articles of Incorporation which included that the ordinary remuneration of the Directors shall not exceed in aggregate of £200,000 per annum.

7 INTEREST PAYABLE AND SIMILAR CHARGES

8 DIVIDENDS IN RESPECT OF ORDINARY SHARES

Further details on the Company’s dividend policy can be found in Investment Objectives and Policy.

9 EARNINGS PER SHARE

Ordinary Shares

The total return per Ordinary Share (per IFRS) is based on the total loss on ordinary activities for the year attributable to Ordinary shareholders of £13,076,162 (2017: gain of £15,509,763) and on 15,878,637 (2017: 15,916,178) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gains per share are identical.

The revenue return per Ordinary Share (per IFRS) is based on the revenue return on ordinary activities for the year attributable to Ordinary shareholders of £3,432,935 (2017: £3,240,046) and on 15,878,637 (2017: 15,916,178) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gains per share are identical.

The capital return per Ordinary Share (per IFRS) is based on the capital loss on ordinary activities for the year attributable to Ordinary shareholders of £16,509,097 (2017: capital return of £12,269,717) and on 15,878,637 (2017: 15,916,178) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gains per share are identical.

ZDP shares

The return per ZDP Share is based on the appropriation in respect of ZDP Shares, the amortisation of ZDP Share issue costs and ZDP Share issue costs totalling £1,173,644 (2017: £1,337,797) and on 21,314,146 (2017: 21,306,025) shares, being the weighted average number of ZDP Shares in issue during the year.

10 FINANCIAL ASSETS DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS

As at 31 December 2018, the closing fair value of investments comprises £65,758,921 (Dec 2017: £87,436,540) of Smaller Companies Portfolio, £23,570,636 (Dec 2017: £15,862,279) of Income Portfolio. The Market value of open Futures included in the Income Portfolio totalled £74,111 (Dec 2017: £10,387). Refer to the Unaudited Full List of Investment Holdings for further detail.

IFRS 13 requires the fair value of investments to be disclosed by the source of inputs using a three-level hierarchy as detailed below:

Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);

Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and

Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

Details of the value of each classification are listed in the table below. Values are based on the market value of the investments as at the reporting date:

Financial assets designated as at fair value through profit or loss

Bonds and structured investments are priced by reference to market quotations which incorporate assessment of yield, maturity and the instrument’s terms and conditions.

The following table is a reconciliation of investments the Company held during the years ended 31 Dec 2018 and 31 Dec 2017 at fair value using unobservable inputs (Level 3):

For investments categorised in Level 3 as at 31 December 2018, the below details the valuation methodologies used:

Silverdell plc – The stock is suspended and is valued at zero. The Investment Adviser does not expect any return of capital.

DW Catalyst Fund – The company was placed into liquidation in 2017. Four redemption payments have been made and no further payments are expected.

Derivative financial assets and liabilities designated as at fair value through profit or loss

It is the Company’s policy to recognise all the transfers into the levels and transfers out of the levels at the end of the reporting year. Transfers into each level shall be disclosed and discussed separately from transfer out of each level.

There was a transfer from Level 1 to Level 3 in the prior year for DW Catalyst Fund. There was a transfer from Level 1 to Level 3 in the current year for Conviviality Plc. Conviviality Plc stock entered administration in the period and is valued at zero. The Investment Adviser does not expect any return of capital.

During the year ended 31 December 2018, JPMorgan Structured Programme 0.00% 17/03/2021 and Gli Finance Limited Red Zdp 2019 Npv were transferred from Level 1 to Level 2 due to an analysis of trading activity. There were no transfers from Level 1 to Level 2 during the year ended 31 December 2017.

During the year ended 31 December 2018, Barclays plc 8% Perp- 2049 was transferred from Level 2 to Level 1 due to an analysis of trading activity. There were no transfers from Level 2 to Level 1 during the year ended 31 December 2017.

The derivative financial instruments held by the Company have been classified as Level 2. This is in accordance with the fair value hierarchy. The Company uses widely recognised valuation models for determining fair value of derivative financial instruments that use only observable market data and require little management judgement and estimation.

11 RECEIVABLES

12 PAYABLES

13 ZDP SHARES

The fair value of the ZDP Shares as at 31 December 2018 was £32,164,948 (31 December 2017: £32,314,897). The ZDP shares are classified under Level 1 based on unadjusted quoted prices in active markets. Since valuations are based on quoted prices that are readily and regularly available in an active market, the valuation does not entail a significant degree of judgement (2017: Level 1).

A Continuation Offer proposal to ZDP shareholders was published in November 2016, whereby such holders were given an opportunity to either receive their 2017 Final Capital Entitlement of 138p or to continue their investment in the existing ZDP Shares. Shareholders approved the scheme and 91.4% of ZDP shareholders elected to remain invested.

Following the proposals, 19,523,014 ZDP Shares were elected for the Continuation Offer with a further 1,842,207 New ZDP Shares being issued through an Initial Placing at 140.0p which represented a premium of 1.4% to the opening NAV per New ZDP Share.

1,834,160 ZDP Shares were elected for Redemption at their 2017 Final Capital Entitlement of 138p.

ZDP Shares carry no entitlement to income distributions to be made by the Company. The ZDP Shares will not pay dividends but have a final capital entitlement at the end of their life on 28 February 2022 of 167.2 pence following the extension of the life of the existing ZDP Shares from 31 January 2017.

It should be noted that the predetermined capital entitlement of a ZDP Share is not guaranteed and is dependent upon the Company’s gross assets being sufficient on 28 February 2022 to meet the final capital entitlement of ZDP Shares.

Under the Articles of Incorporation, the Company is obliged to redeem all of the ZDP Shares on 28 February 2022 (if such redemption has not already been effected).

The number of authorised ZDP Shares is 50,000,000. The number of issued ZDP Shares is 21,230,989 (31 Dec 2017: 21,365,221). The non-amortisation of the ZDP Shares in line with the Articles has the effect of increasing the NAV per Ordinary Share by 0.10 pence.

14 SHARE CAPITAL AND PREMIUM

The Ordinary Shares (excluding treasury shares) are entitled to participate in all dividends and distributions of the Company. On a winding-up holders of Ordinary Shares are entitled to participate in the distribution and the holders of Ordinary Shares are entitled to receive notice of and attend and vote at all general meetings of the Company.

The issued and fully paid capital as at 31 December 2018 was £196,606 (31 December 2017: £197,106).

15 OTHER RESERVES

TREASURY RESERVE

The other reserves presented on the Statement of Financial Position comprise the treasury reserve of (£4,780,162) and special reserve of £10,000,000 totalling £5,219,838.

ORDINARY SHARES

A Special reserve of £10,000,000 was created on the cancellation of part of the Company’s Share premium account.

16 RELATED PARTIES

Premier Asset Management (Guernsey) Limited is the Company’s Investment Manager and operates under the terms of the Management Agreement in force which delegates its authority over the Company’s investment portfolios.

£722,795 (2017: £729,457) of costs were incurred by the Company with this related party in the year, of which £171,180 (2017: £188,256) was due to this related party as at 31 December 2018.

During the year ended 31 December 2018, £nil (31 December 2017: £559,967) was charged as performance fees of which, £nil (31 December 2017: £559,967) remained payable at year end.

The directors’ remuneration is disclosed in Notes 5 and 6.

David Warr holds 63,000 (31 Dec 2017: 63,000) Ordinary Shares in the capital of the Company, which represented an interest of 0.40% (31 Dec 2017: 0.40%) of the Company’s Ordinary Shares in issue as at 31 December 2018.

Nigel Sidebottom holds 4,366 (31 Dec 2017: 4,366) Ordinary Shares in the capital of the Company, which represented an interest of 0.03% (31 Dec 2017: 0.03%) of the Company’s Ordinary Shares in issue as at 31 December 2018, and 5,205 (31 Dec 2017: 5,205) ZDP Shares in the capital of the Company, which represented an interest of 0.02% (31 Dec 2017: 0.02%) of the Company’s ZDP Shares in issue as at 31 December 2018.

17 FINANCIAL INSTRUMENTS

The Company’s main financial instruments comprise:

(a) Cash and cash equivalents that arise directly from the Company’s operations;

(b) Investments in listed entities, receivables and payables;

(c) ZDP Shares; and

(d) Derivative financial instruments.

18 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The following table details the categories of financial assets and liabilities held by the Company at the reporting date:

Loans and receivables presented above represents cash and cash equivalents, balances due from brokers and other receivables (excluding prepayments) as detailed in the Statement of Financial Position.

Financial liabilities measured at amortised cost presented above represents accrued expenses and ZDP Shares as detailed in the Statement of Financial Position.

Derivative financial assets and liabilities presented above represent forward foreign exchange contracts. Unrealised gains and losses on movement in fair value are recognised in the Statement of Comprehensive Income.

The main risks arising from the Company’s financial instruments are market price risk, credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Board regularly reviews and agrees policies for managing each of these risks and these are summarised in notes 18(a) to 18(e).

(a) Market Price Risk

Market price risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Investment Advisers actively monitor market prices and report to the Board as to the appropriateness of the prices used for valuation purposes. The Investment Advisers also attempt to minimise market price risk by undertaking a detailed analysis of the risk/reward relationship of each investee company prior to any investment being made.

Unicorn monitors the industry concentration exposure for the Smaller Companies Portfolio.

Details of the Company’s Investment Objective and Policy are given inside the front cover of this Report.

Price sensitivity

The following details the Company’s sensitivity to a 25% (2017: 15%) increase and decrease in the market prices, with 25% being the sensitivity rate used when reporting price risk internally to key management personnel and representing management’s assessment of the possible change in market prices. The sensitivity rate was increased from 15% to 25% to recognise uncertainties in the market.

At 31 December 2018, if market prices had been 25% (2017: 15%) higher with all the other variables held constant, the return attributable to shareholders for the year would have been £23,332,389 (2017: £15,494,823) greater, due to the increase in the fair value of financial assets at fair value through profit or loss. This would represent an increase in Net Assets of 37% (2017: 20.00%).

If market prices had been 25% (2017: 15%) lower with all the other variables held constant, the return attributable to shareholders for the year would have been £23,332,389 (2017: £15,494,823) lower, due to the decrease in the fair value of financial assets at fair value through profit or loss. This would represent a decrease in Net Assets of 37% (2017: 20.00%).

At 31 December 2018, the Company’s largest exposure to a single investment was £2,485,707 (2017: £3,275,287), 2.68% (2017: 3.01%) of total assets.

(b) Credit Risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Company. The Directors receive financial information on a regular basis which is used to identify and monitor risk. It is the Company's policy not to invest, at the time of investment, more than 7.5% in any one fixed interest security.

The Company has no significant concentration of credit risk, with exposure spread over a large number of counterparties. At 31 December 2018, the Company’s largest exposure to a single counterparty was £2,713,460 (2017: £4,868,965), 2.93% (2017: 4.47%) of total assets.

Investors should be aware that the prospective returns to shareholders mirror the returns under the quoted securities held or entered into by the Company and that any default by an issuer of any such quoted security held by the Company would have a consequential adverse effect on the ability of the Company to pay some or all of the entitlement to its shareholders. Such a default might, for example, arise on the insolvency of an issuer of a quoted security.

The Company’s financial assets exposed to credit risk are as follows:

The credit ratings of the bonds, as rated by Moody’s Investor Services Inc (“Moodys”) were:

The cash and cash equivalents were held with Northern Trust (Guernsey) Limited, a fully owned subsidiary of The Northern Trust Company, which at the year ended 31 December 2018 held a credit rating, as rated by Moody’s, of Aa2 (31 December 2017: Aa2) . The long gilt future is held with J.P. Morgan who at the year ended 31 December 2018 held a credit rating, as rated by Moody’s, of A2 (31 December 2017: Aa2). The Investment Adviser for the Income Portfolio selects investments having regard to their potential return and the credit risk associated with them. The Investment Adviser carries out its own assessment of credit risk and the rating provided by a credit rating agency is just one of the factors taken into account. The absence of a rating is not necessarily a reflection on credit risk. The Board reviews the whole portfolio at quarterly board meetings.

(c) Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting its obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s main financial commitments are its ongoing operating expenses.

The ZDP Shares will not pay dividends but will have a final capital entitlement at the end of their life on 28 February 2022 of 167.2 pence. It should be noted that the predetermined capital entitlement of the 2022 ZDP Shares is not guaranteed and is dependent upon the Company’s gross assets being sufficient on 28 February 2022 to meet the final capital entitlement of the ZDP Shares.

The Investment Advisers ensure that the Company has sufficient liquid resources available to fulfil its operational plans and to meet its financial obligations as they fall due. This is monitored by carrying out a solvency calculation on a quarterly basis by reference to management accounts and revenue projections. The Board will approve a Solvency Certificate resolution prior to declaring any interim distributions.

The Board intends to monitor the financial position of the Company to ensure that it has sufficient liquid resources available to fulfil its obligation upon maturity of the ZDP Shares.

The table below details the residual contractual undiscounted maturities of financial liabilities:

(d) Interest Rate Risk

The Company could hedge interest rate risk using various different methods.

The following table details the Company’s exposure to interest rate risks. It includes the Company’s assets and liabilities at fair values, categorised by the earlier of contractual re-pricing or maturity date measured by the carrying value of the assets and liabilities:

As at 31 December 2018:

As at 31 December 2017:

Interest rate sensitivity takes account of the effect of interest rate movements on cash balances. Interest rate risk does not affect the cash flows of the fixed interest securities but does affect the fair value and as such this sensitivity has been reflected in the market price risk disclosures at Note 18(a).

Interest rate sensitivity

If interest rates had been 25 basis points higher and all other variables were held constant, the Company’s return attributable to Ordinary shareholders for the year ended 31 December 2018 would have increased by approximately

£7,212 (2017: £12,441) or 0.008% (2017: 0.011%) of Total Assets, due to an increase in the amount of interest receivable on the bank balances.

If interest rates had been 25 basis points lower and all other variables were held constant, the Company’s return attributable to Ordinary shareholders for the year ended 31 December 2018 would have decreased by approximately

£7,212 (2017: £12,441) or 0.008% (2017: 0.011%) of Total Assets, due to a decrease in the amount of interest receivable on the bank balances.

(e) Foreign Exchange Risk

Forward currency transactions are used to hedge the foreign currency exposure in bonds, other investments and cash balances held within the Income Portfolio. The purpose of the hedge is to protect the Company’s assets from a decline in value that might arise from the depreciation of a foreign currency against Sterling.

At 31 December 2018, the Company’s holdings in derivatives translated into GBP were as specified below:

At 31 December 2017, the Company’s holdings in derivatives translated into GBP were as specified below:

Exchange rate exposures are managed by minimising the amount of foreign currency held at any one time and entering into forward exchange contracts.

The following table sets out the Company’s total exposure to foreign currency risk and the net exposure to foreign currencies of the monetary assets and liabilities:

Amounts in the above table are based on the carrying value of monetary assets and liabilities and the underlying principal amount of forward currency contracts.

(f) Capital Management

The principal investment objectives of the Company are to provide shareholders with a high income and also the opportunity for capital growth.

The Company’s investments are held in two portfolios. The Company’s assets comprise investments in equities and fixed interest and other income-bearing securities in order to achieve its investment objectives. Approximately 70%–80% of the portfolio are invested in smaller capitalised United Kingdom companies, admitted to the Official List of the Financial Conduct Authority (the “FCA”) and traded on the London Stock Exchange (the “LSE”) or traded on the Alternative Investment Market (“AIM”) at the time of investment. The Company also aims to further enhance income for shareholders by investing approximately 20%–30% of its assets in high yielding securities which will be predominantly fixed income securities (including corporate bonds, preference and permanent interest bearing shares, convertible and reverse convertible bonds and debentures) but may include up to 15% of the portfolio (measured at time of acquisition) in high yielding investment company shares.

As the Company’s Ordinary Shares are traded on the LSE, the Ordinary Shares may trade at a discount or premium to their Net Asset Value per Share on occasion. However, the Directors and the Investment Manager monitor the discount on a regular basis and can use share buy backs to manage the discount.

The Company monitors capital on the basis of the carrying amount of equity as presented on the face of the Statement of Financial Position. Capital for the reporting periods under review is summarised as follows:

The distributable reserves comprises the revenue reserve and other reserves. The other reserves presented on the Statement of Financial Position comprise the treasury reserve and special reserve as detailed in Note 15. The special reserve of £10,000,000 was created on the cancellation of part of the Company’s share premium account. The non distributable reserves comprise the capital reserve.

(g) Dividend levels

Dividends paid on the Company’s Ordinary Shares rely on receipt of interest payments and dividends from the securities in which the Company invests. The Company’s revenue levels are monitored on a regular basis by the Board and the Investment Advisers.

19 SUBSEQUENT EVENTS

These Financial Statements were approved for issue by the Board on 10 April 2019. Subsequent events have been evaluated until this date.

A dividend of 5.2p was declared on 5 February 2019 and was paid to ordinary shareholders on 29 March 2019.

Nigel Sidebottom was appointed to the Board on 5 February 2019 and is not considered independent by virtue of his recent employment with PAM.

Unaudited Full List of Investment Holdings

Glossary

Cover

The Cover on the ZDP Shares measures the amount by which the final redemption value of the ZDP Shares is covered by the total assets of the Company allowing for all prior ranking liabilities and the accrual of expenses to capital over the remaining period to the redemption of the ZDP Shares. The calculation used in this report is for non-cumulative cover and represents a fraction where the numerator is equal to the gross assets of the Company less current liabilities (other than debt and liabilities to ZDP shareholders) less the Company’s revenue reserves and the denominator is the aggregate amount payable to ZDP shareholders on the repayment date plus any other borrowing plus the cumulative management fee charged to capital over the remaining period to the repayment date. The full definition of the calculation is set out in the Company’s Prospectus that can be found on the Company’s website.

Cover Test

A required Cover of not less than 2.0 times.

Discount/Premium

If the share price of an investment company is lower than the NAV per share, the shares are said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, the shares are said to be trading at a premium.

Gearing

Also known as leverage. Gearing is introduced when a company borrows money or issues prior ranking share classes such as ZDP Shares, to buy additional investments. The objective is to enhance returns to ordinary shareholders but there is the risk of the opposite effect if the additional investments fall in value.

Yield

The annual interest payments on a fixed-interest security, or the annual dividends on an equity (less any withholding tax) expressed as a percentage of the current market value of the security.

Net Asset Value (“NAV”)

NAV is the assets attributable to Ordinary shareholders expressed as an amount per individual share. Within this report two different methods are used for calculating NAV. One using the accounting standards specified by International Financial Reporting Standards (“IFRS”) and one which has been calculated in accordance with the Company’s Articles of Association. The latter is the method which would be used to calculate the amount due to Ordinary shareholders on the winding up of the Company. However, the Financial Statements are prepared in accordance with IFRS. Where the IFRS method has been used it will be indicated.

Alternative Performance Measures

In accordance with ESMA Guidelines on Alternative Performance Measures ("APMs") the Board has considered what APMs are included in the annual report and accounts which require further clarification. APMs are defined as a financial measure of historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. The APMs included in the annual report and accounts, which is unaudited and outside the scope of IFRS is deemed to be Net Assets calculated in accordance with the Articles.

Net Assets reconciliation per Ordinary Shares and ZDP Shares