AIF.L Regulatory News (AIF)

ACORN INCOME FUND LD - Annual Financial Report

PR Newswire

London, April 7

Acorn Income Fund Limited

Annual Financial Report

For the year ended 31 December 2015

The Company has today, in accordance with DTR 6.3.5, released its Annual Financial Report for the year ended 31 December 2015. The Report will shortly be available via the Investment Manager’s website https://www.premierfunds.co.uk/media/838791/acorn-income-fund-annual-report-2015.pdf 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 ?xed 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 O?cial 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 enhance income for Ordinary Shareholders by investing approximately 20% to 30% of the Company’s assets in high yielding instruments which are predominantly ?xed 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 diversi?ed 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 Zero Dividend 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 ?nance 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 signi?cant 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 di?erence, futures, forwards and options. These investments may be used for hedging positions against movements in, for example; equity markets, currencies and interest rates. In addition, these instruments will only be used for e?cient portfolio management purposes. The Company will not use such instruments to engage in trading transactions. The Company will not maintain derivative positions should the total underlying exposure of these positions exceed one times adjusted total capital reserves.

Performance Summary

for the year ended 31 December 2015

* assumes dividends reinvested

** calculated in accordance with the Articles

*** non cumulative cover

# calculated in accordance with International Financial Reporting Standards

# # adjusted for debt repayment and the issue of new Ordinary Shares and ZDP Shares Sources: Index data: Bloomberg. Total return on gross and net assets, PFM Ltd, JP Morgan Cazenove

Company Summary

History

The Company was incorporated on 5 January 1999 and commenced its activities on 11 February 1999. The Company was leveraged through a ?oating rate loan facility. The portfolio was divided into two sub portfolios, a Smaller Companies Portfolio representing approximately 75% of the total with the balance invested in an Income Portfolio investing in ?xed income securities and investment company shares. A further placing was completed in November 1999. On 5 January 2007 an EGM authorised a tender o?er to provide a cash exit for shareholders wishing to sell their shares at close to net asset value (NAV), and a change of manager from Collins Stewart Fund Management Limited to Premier Asset Management (Guernsey) Limited (PAMG). Unicorn Asset Management Limited was retained as Investment Adviser on the Smaller Companies Portfolio. Following an EGM on 15 December 2011 the Company’s bank facility was re?nanced with an issue of Zero Dividend Preference Shares (ZDP Shares). Following shareholder approval in May 2013 the Company raised £10 million through a placing of Ordinary Shares and ZDP Shares in the necessary ratio to maintain the capital structure. Subsequent to the placing the Company has raised further capital through tap issues of both classes of share at a premium to the “package” net asset value and also bought back shares into Treasury or for cancellation at a discount to “package” net asset value.

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 2015

2015 was another satisfying year for Acorn shareholders. Both the J.P. Morgan Cazenove and Numis Securities annual reviews ranked Acorn’s Ordinary Shares as the 11th best performing in share price terms in 2015 from across the whole investment company sector (Annual reviews). It was also a year in which Simon Moon and Fraser Mackersie, who took on full responsibility as Investment Advisers on the Smaller Companies Portfolio in 2014, were able to dispel any doubts that there may have been as to their having the skills and experience to sustain the track record that John McClure had established for Acorn from its launch in 1999.

During the year Acorn was short listed in the Specialist Income sector for the Investment Week Investment Company of the Year Awards 2015.

Investment Performance

The UK equity market was flat during 2014 with the FTSE 100 Total Return Index and the FTSE All-Share Total Return Index rising just 1.0%. Small companies had an excellent first half to 2015 which resulted in strong outperformance of the broader market over the year as a whole. The FTSE Small cap (ex Investment Companies) Total Return Index increased by 13.0% and the Numis Smaller Companies Index (ex Investment Companies) total return rose 10.6%. Sterling bond markets were lacklustre. The Merrill Lynch Sterling Non Gilts Index rose 0.71%. Acorn’s gross asset portfolio performance (adjusted for share issuance and buybacks) showed a total return of 17% outperforming the small cap indices. The Ordinary Share net asset value total return was 22.1% showing the benefit of gearing on the Ordinary Shares in a period when gross assets were rising. Ordinary shareholders also gained from a narrowing of discount to net asset value. Share price total return was 36.1% over the year.

The Zero Dividend Preference Shares appreciated in value by 1.93% over the year. This was less than the increase in NAV due to a reduction in the premium to NAV at which the shares traded.

Asset Allocation

Shareholders will be aware that Acorn normally operates with between 70% and 80% of its total assets allocated to the Smaller Companies Portfolio and between 20% and 30% in the Income Portfolio. At the start of the year the allocation to the Smaller Companies Portfolio was 75%. During the first half the allocation to the Smaller Companies Portfolio was increased to 77.5%. Our Investment Advisers were positive about the relative valuation of smaller companies compared to larger companies but nervous that a correction in the FTSE 100 Index could impact on the wider market. For this reason the board agreed to the use of derivatives to take a short position on the FTSE 100 Index while increasing allocation to the Smaller Companies Portfolio. This protection was taken out when the FTSE 100 Index stood at around 7000 in May 2015 and closed out when the index fell to 6000 in August 2015. During this period small cap stocks held up well against this sharp decline in the FTSE 100 Index and the strategy was a positive contributor to performance. Our Investment Advisers have remained relatively negative on the outlook for the broader bond market and the allocation to the Income Portfolio has been held at 22.5%. Within the Bond Portfolio our Investment Adviser focuses on special situations within the fixed interest market and also invests in certain higher yielding investment companies which can provide both high income and asset class diversification.

In the Smaller Companies Portfolio our Investment Advisers have retained the focus on stocks that are beneficiaries of a recovering UK domestic economy and have sound balance sheets and relatively high levels of dividend cover. Security of dividend is a key attraction of Smaller Companies at a time when dividend cover on many larger cap stocks has been in decline. Acorn’s investment universe for the Smaller Companies Portfolio is the stocks within the Numis Smaller Companies Index (being the bottom 10% of the UK market by value, which at the year end extended to market capitalisations of £1.32 billion). During the year there was conscious decision to reduce the Smaller Companies Portfolio’s weighting in larger cap stocks within the investment universe and increase exposure to stocks under £500m market cap. 

Discount Management

The Company has the power to issue shares at a premium to net asset value and to buy back into Treasury or for cancellation at a discount. In the early part of the year market sentiment towards smaller companies remained weak after a period of relative underperformance and the Company’s Ordinary Shares were trading at a significant discount to net asset value. During January and February 2015, as part of its discount management programme, the Company bought back 150,000 Ordinary Shares and 201,348 Zero Dividend Preference Shares (ZDPs) at discount levels that were enhancing to net asset value for ongoing shareholders. Between August and December, when the rating of the shares had improved the Company issued 317,360 Ordinary Shares and 425,998 ZDPs. These issues were done at a premium to the package net asset value (the NAV of Ordinary Shares and ZDPs combined).

At the start of the year the Ordinary Shares were on a discount of 9.16% and by the year end the discount had moved to a premium of 1.02%.

Volatility

Once again the Company’s brokers Numis Securities has carried out an analysis of Acorn’s performance and volatility against peer group funds over a 5 year period. The analysis shows that Acorn remains one of the top performing companies in both the UK small and mid cap sectors and in the UK Equity Income sector and has achieved this with net asset value volatility which is well below average for its peer groups (source Numis Securities; 5 years to 31/12/2015). This is a pattern that Acorn has consistently displayed.

Earnings and Dividends

The first two dividends in 2015 were paid at 3.25p per share. The quarterly distribution was increased by 7.7% to 3.5p for the September and December payments. For the full year the dividend totalled 13.75p, a 7.84% increase on the 12.75p for 2014. Acorn’s revenue account remained healthy. Revenue earnings per share for the year were 18.49p (16.22p in 2014). Revenue reserves stood at £996,144 at the start of the year and had increased to £1,735,911 at the year end, equivalent to a reserve of 11.0p per ordinary share.

The Alternative Investment Fund Managers Directive (AIFMD)

The Company registered as an ‘Alternative Investment Fund’ (“AIF”) on 3 August 2015 and is self managed. Please refer to the Directors’ Report for appropriate AIFMD disclosures.

Annual General Meeting

The notice of the Company’s forthcoming Annual General Meeting (AGM) to be held pursuant to section 199 of the Law is set out below. Resolutions relating to the following item of special business will be proposed at that meeting.

Discontinuation Vote

The Company's Articles provide for a discontinuation resolution, proposing that the Company ceases to continue as presently constituted to be put to shareholders at every fifth AGM. The next discontinuation vote is due to be put to the shareholders at the AGM on 26 September 2016 under resolution 10.

Your Board has reviewed the investment mandate and considers that it continues to provide a valid and potentially profitable investment strategy. Your Board has also reviewed the performance and capability of the Investment Manager and Investment Advisers. The Board is pleased to note the continuing excellent investment performance relative to indices and peers. The Board is also satisfied that the Investment Manager and Investment Advisers are well resourced and well able to fulfil their responsibilities.

The ZDPs fall due for repayment on 31 January 2017 and the Board intends, if the Ordinary shareholders support the continuation of the Company, to assess the potential to issue further Zero Dividend Preference Shares or arrange another appropriate form of gearing. The Board currently anticipates that attractively priced and structured gearing will be available and therefore that the Company will be able to continue to provide Ordinary shareholders with a high level of income, underpinned by the material revenue reserves discussed above, and the opportunity for capital growth driven principally by the Smaller Companies Portfolio.

Accordingly the Directors are recommending Ordinary shareholders to vote AGAINST resolution 10 thereby supporting the continuation of the Company in its present form. Those Directors holding Ordinary shares in the company also intend to vote against resolution 10.

It should be noted that a vote in favour of the resolution is a vote for discontinuance of the Company. In previous discontinuation votes the Directors are aware that some shareholders inadvertently voted for discontinuance as their proxy agents or custodians had incorrectly treated a vote in favour of this resolution as being a vote in line with the Board's recommendation. The Board would therefore urge shareholders to check that their voting wishes are accurately fulfilled by their custodians and voting agents.

The resolution will be a special resolution and will need 75% of those shareholders who vote, to vote in favour of the resolution for it to be carried.

Outlook

The forthcoming referendum on whether or not the UK should remain within the EU presents the greatest near term uncertainty for the UK stock market. An exit from the EU might well trigger further sterling weakness, however Acorn’s Smaller Companies Portfolio is invested in UK companies which are generally focused towards the domestic economy so the impact of currency volatility is diminished. Our Investment Adviser for the Smaller Companies Portfolio remains confident that the investee companies can prosper whether the UK is in or out of the EU. Whilst the overwhelming expectation for interest rates is that they will remain low over the next year or more an unexpected rise would impact on fixed interest valuations and for this reason our Investment Adviser for the Income Portfolio intends to keep duration relatively short and hence less exposed to a surprise rate increase.

Helen Green

Chairman

Investment Advisers’ Report

The Smaller Companies Portfolio

During the twelve month period to 31st December 2015 the Smaller Companies Portfolio returned 19.6% (capital return) - outperforming a rise of 7.9% by the Numis Smaller Companies Index (Ex Investment Companies, capital gain).

The period under review proved to be a challenging year for equity investors as concerns around slowing emerging market growth weighed heavily on larger capitalised companies. Weaker demand for commodities combined with continuing high levels of output caused natural resource prices to fall sharply in the second half of the year. The impact of this was most significant at the larger end of the market cap scale, which has an international and commodity bias.

In contrast UK quoted smaller companies, which tend to be more domestically focussed, enjoyed a relatively strong period of performance during 2015. The general election in May marked a clear turning point in investor sentiment towards smaller UK quoted companies. Our focus at the smaller end of the market cap scale, with no direct exposure to commodity based stocks, saw the portfolio enjoy a strong year in 2015. The combination of low interest rates, low inflation and falling unemployment continued to support our positive stance on the UK Consumer.

The number of holdings within the portfolio increased to 45 during the period following the addition of 14 new holdings and disposal of 10 existing positions. Two of the new additions to the portfolio were through Initial Public Offerings (IPOs).

The new additions to the portfolio were: FDM Group, an international provider of trained IT personnel; Pendragon, the car retailer; Palace Capital, a real estate investment company focussed on UK assets outside of London; Sprue Aegis, a developer of smoke and carbon monoxide alarms; Jarvis Securities, a retail stockbroking service provider; Braemar Shipping Services, a provider of ship broking, technical and logistical services to the marine and energy industries; Hostelworld, the global online booking platform for hostels; Photo-Me International, the operator of photo booths and mobile laundry units; Quarto, the illustrated book publisher; Gateley Holdings, a national commercial law firm; Headlam Group, a floor covering distributor; Amino Technologies, a manufacture of internet enabled set top boxes and Lavendon, a European focused powered access rental company.

Positions in Lookers, Electrocomponents, Premier Farnell, Interserve, Berendsen, Air Partner, John Menzies, Cineworld and James Cropper were all exited in full. The net effect of these disposals lowered the average market capitalisation of the portfolio to just over £300m. In addition to the transactions outlined above a small position in Kainos, the provider of IT, consulting and software solutions, was bought and sold during the period. The share price performed strongly immediately following IPO and we decided not to increase our initial allocation into a full position at the higher level.

The strongest contributor to performance was Conviviality (55%), the Group completed the reverse takeover of Matthew Clark, an independent drinks wholesaler, which will create a major UK drinks distributor, serving both the ‘on’ and ‘off’-trade markets. Clipper Logisitics (73%), also continued to perform strongly, winning a number of significant contracts during the period. These contracts included the provision of an innovative ‘click and collect’ service for John Lewis through the Waitrose store network. Other notable contributors to performance were Macfarlane (56%), Safestyle (47%) and James Halstead (50%).

The main detractor from performance was DX Group (-78%); which announced that lower volumes in the DX Exchange business would have a significant impact on profits for the full year. UK Mail (-48%) also endured a difficult year as the company experienced operational issues as it transitioned to a new automated parcel distribution hub. Whilst disappointing in the short term, it is worth noting that these two detractors from performance remain in the minority.

It is pleasing to report on a strong year for the portfolio. Our focus remains on profitable, cash generative, well financed, dividend paying stocks at the lower end of the market cap scale which we feel leaves us well positioned to generate strong returns over our mid to long term investment horizon.

Fraser Mackersie and Simon Moon

Unicorn Asset Management Limited

The Income Portfolio

Portfolio Performance

The Income Portfolio strongly outperformed the broader Sterling bond market1 during the period, generating a return of 2.85% (before expenses) in what proved to be a turbulent market that afforded index investors1 only 0.70%. The management of yield curve risk generated excess return of 0.18%, with sector allocation contributing 0.15%, and 1.67% being attributable to the selection of individual credits and bond issues.

Sterling Government bond yields pushed wider during the first half of 2015, before stabilising in the second half in anticipation of the Federal Reserve’s long awaited rate hike, which came at the December Federal Open Market Committee (FOMC) meeting. Persistent weakness in commodity markets tied to softening Chinese growth forecasts tainted the global macro-picture, prompting equities to decline sharply in August, before finishing the year significantly lower, while exhibiting significant volatility. Credit spreads were no exception to the negative sentiment, and despite an initial tightening as gilt yields rose, widened materially through the remainder of the year.

Inflation provided elusive with the Consumer Price Index showing 0% year on year inflation in February 2015 and turning negative in September 2015, as Food and Energy price deflation was taken into account leaving markets to speculate as to the Bank of England’s response. 

1Merrill Lynch Sterling Non-Gilts Index

Portfolio Activity

We remained active in the Consumer sector during the year, selling the holding in British American Tobacco and adding prepared-food producer Bakkavor, as well as holdings in Heathrow and Anheuser Busch Inbev. We also added a new holding in Tesco Property Finance as mixed opinions among the rating agencies created forced sellers and headline risk caused investors to lose sight of the added security provided by the underlying property portfolio. Staying with the theme of headline risk, we departed from the zero allocation to Basic Materials, taking a position in Glencore as the market sold off strongly on the above mentioned price deflation, to a level which we felt to offer material value, given the miner’s strong balance sheet and financial flexibility.

We initiated an overweight position in the Communications sector, adding names such as BT, ITV and Orange, while trimming the exposure to Sky. We view the dynamics of the sector as continuing to evolve to present what we see as attractive value opportunities, preferring to hold those companies with a strong competitive position, diverse revenue streams, and which are well placed to efficiently monetise past capital expenditure. The allocation to Technology was reduced by exiting the position in Apple in expectation of moderating growth in core markets and more aggressive financial policy.

We unwound the thematic trade on European property which had served the portfolio well over the course of the year, cutting the position in Helical Bar convertible bonds and taking profits on the position in UK Mortgages Limited which performed well following its July IPO. We exercised the conversion option on our holding in VIB Vermoegen convertible bonds and disposed of the equity at an attractive premium. We also took profits on the positions in the convertible bonds of Derwent London and Unite Group following strong performance.

We added two structured notes to the portfolio; a Credit Linked Note (CLN) which earns an attractive return linked to the default rate among a basket of European credits, and a relative value product linked to the outperformance of a basket of US financials relative to the S&P 500 Index. Both holdings offer diversification from traditional bonds and compelling yields, within highly liquid structures.

Outlook

The indications that the major credit markets have diverged have become more prominent of late. We would expect an increase in default rates in the US to push spreads wider going forward, particularly in the high yield market as high-cost energy producers fail to cover cash operating costs in the oil price environment that the market is currently pricing in. Such a widening is likely to unjustifiably permeate into European markets, despite an almost inevitable continuation of loose monetary policy and a solidification of economic growth painting a brighter picture for credit. We expect such a move to present opportunities, particularly in certain areas of the European credit markets, for active investors willing to get their hands dirty with the fundamentals.

In particular, we hold a bias for issuers who derive stable cash-flow from within their own region, which should prove defensive amidst volatility while capturing the benefits of economic growth on the upside. We see value in certain de-leveraging stories, many of which have arisen from the often debt-fuelled M&A activities of the last few years, and in those corporates in a position to comfortably reduce, or indeed invert, capital expenditure without doing so at the expense of their operations.

We note that the US treasury market is pricing in a level of forward inflation that increasingly recognises the possibility of a near-term recession, and remain vigilant to the possibility that in its hesitance to raise rates the Federal Reserve may have missed the cycle, however this in our perception remains a tail risk. We retain our optimistic view on the UK economic recovery, although we would take further comfort in signs of a more balanced recovery being reflected in Purchasing Managers’ indices and other economic data. We maintain the short duration position relative to the Sterling bond market going into 2016.

The threat that the Chinese have overleveraged heading into a new slower-growth economy also looms large, while uncertainty over the reliability of Chinese economic data persists. While we continue to consciously limit exposure to Eurozone credit who derive material revenues from China, we would highlight that China accounted for less than 16% of Eurozone exports in the 11 months to November 2015, increasing by 4% YoY while Chinese imports grew by 16%. We therefore view the weakening of European credit indices in sympathy of weak Chinese data as an overreaction, albeit one which markets may well repeat.

While the income portfolio has no direct exposure to the energy sector, and we continue to foresee a Chinese slowdown manifesting itself more so in market volatility rather than economic reality, the exception to this view is a depressed demand for commodities, specifically should a shock to Chinese lending markets cause a sharp slowdown in construction. We maintain a cautious position on those corporates exposed to the commodities cycle, although as discussed we have been willing to take measured risks where the fundamentals of a particular issuer suggest a market overreaction to the downside. An interesting aside will be the impact on any banks which saw fit to finance the North American rush to alternative energy extraction methods in a $100 oil environment.

We expect volatility across UK markets to heighten as we approach the referendum on EU membership, with the risk of a ‘Brexit’ being compounded by the implication from the SNP that a ‘yes’ vote would serve as a catalyst for a renewed campaign for an independent Scotland. Despite the previous outcome arguably serving as a litmus test for this time around, given the new found prominence of the SNP in Westminster could well result in similar, if not greater, spike in gilt market volatility and weakness in Sterling than was witnessed in September 2014. As we write this report at the end of March Sterling has already weakened by 6.5% against the euro and 4.6% against the US dollar, year to date.

The outlook for 2016 presents multiple threats. In addition to those aforementioned, idiosyncratic risk which materialised for a number of corporates during 2015, in dramatic fashion in some instances, remains in the forefront of investors’ minds. At the time of writing, both bond and equity markets are exhibiting levels of volatility not seen since 2011 and 2012, respectively. It is likely that the portfolio will continue to reduce in number of holdings, as opportunities materialise which allow us to express ideas with conviction.

Paul Smith

Premier Fund Managers Limited

Schedule of Principal Investments

as at 31 December 2015

Directors’ Biographies

for the year ended 31 December 2015

Directors

The Directors for the whole year ended 2015 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.

Both Helen Green and David Warr are chartered accountants and all three have extensive non-executive director experience. Further details of the quali?cations 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 2013. Helen is a chartered accountant. She has been employed by Sa?ery Champness, a top 20 ?rm of chartered accountants, since 1984. She quali?ed as a chartered accountant in 1987 and became a partner in the London o?ce in 1997. Since 2000 she has been based in the Guernsey o?ce 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 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 Channel Island Securities 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 quali?ed as a chartered accountant in 1976. In 1981 David was appointed a partner in Reads & Co. a Guernsey based ?rm of chartered accountants, which he helped develop into a more broadly based ?nancial 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 most noticeably as Vice-Chairman of the Guernsey Community Foundation LBG. David is a resident of Guernsey.

*Details of the Directors’ other directorships for public companies can be found on Director’s report below.

Directors’ Report

for the year ended 31 December 2015

The Directors have pleasure in presenting their business review, report and ?nancial statements of the Company for the year ended 31 December 2015.

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 de?ned 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.

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 in 23 July 2014. This notification enabled Acorn to market its shares (issue new shares) in the UK.

In the early part of 2015 the Company notified the Financial Conduct Authority that it was revoking the Article 42 notification as with the shares trading at a discount at the time there was little prospect of issuing new shares in the near term and there were cost savings to be achieved by revoking the notification. However with the shares trading at asset value the Company submitted a new Article 42 Notification to the FCA under the National Private Placement Regime on 3 August 2015 so that the issue of shares through tap issues could recommence. Now that the Company has made issues of shares under this regime it will be necessary to remain within it.

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 2015 the commitment exposure level was 54% and the gross leverage level was 56%.

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.

Foreign Account Tax Compliance Act (“FATCA”)

FATCA requires certain ?nancial 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 ?nancial institution within the scope of the legislation that fails to comply with this requirement. On 13 December 2013, the Intergovernmental Agreement between the United States and the States of Guernsey implementing FATCA was signed.

On 22 October 2013 an Intergovernmental Agreement between the United Kingdom (“UK”) Government and the States of Guernsey to implement a similar provision between the States of Guernsey and the UK was signed. The Board of the Company has taken all necessary steps to ensure that the Company is FATCA compliant and con?rms that the Company is registered and has been issued a Global Intermediary Identi?cation Number (“GIIN”) by the IRS. The Company will use its GIIN to identify that it is FATCA compliant to all ?nancial counterparties.

Common Reporting Standard

The CRS is a standard developed by the Organisation for Economic Co-operation and Development (OECD) and is a global approach to the automatic exchange of tax information. Guernsey has now adopted the CRS which came into effect on 1 January 2016.

The CRS has replaced the UK Inter-Governmental Agreement (IGA) from 1 January 2016. However, it will still be necessary to submit the 2014 and 2015 reports for the UK IGA by 30 June 2016. The first report for CRS will be made to the Director of Income Tax by 30 June 2017.

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.

Discontinuation Vote

The Notice of the Annual General Meeting contains a resolution giving shareholders the opportunity to vote for the discontinuance of the Company in its present form. The Directors are recommending that shareholders vote against discontinuance.

If the vote is carried (ie if shareholders vote for the Company to cease in its present form) the Board will canvas the views of key shareholders and take advice from the Company's broker as to whether shareholders would support or welcome any proposals as an alternative to or in addition to a voluntary liquidation and return of cash, Such alternative proposals may include unitisation, reorganisation or reconstruction of the Company.

Having established shareholders' preferences the Directors will formulate proposals that will be set out in a circular to shareholders. The Articles require that these proposals are published within three months of the meeting at which the special resolution was passed.

If the proposal is for the Company to enter voluntary liquidation and distribute cash to shareholders this will require approval of Ordinary shareholders at an EGM. If the proposals involve an early redemption of the ZDPs (which are scheduled to be repaid on 31 January 2017) or any actions that would be detrimental to the financial interests of the ZDPs the proposals would also need approval of the ZDP shareholders at a class meeting. 

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 ?nancial 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 su?cient liquidity to meet all ongoing expenses. The Company has net current assets of £3,177,910 at the year end. In addition the Board regularly reviews the cash ?ow of the Company and is con?dent that the Company will have su?cient 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;

· as at 31 December 2015, the Company had no borrowings other than the ZDP Shares which, as explained in Note 13, will have a final capital entitlement on the 31 January 2017. The Company is not therefore under any obligation to repay any borrowing before that date; and

· in accordance with the Company’s Articles of Incorporation shareholders will not have an opportunity to vote on the Company’s discontinuation until September 2016. The outcome of the discontinuation vote is unknown and therefore creates some uncertainty on the validity of the going concern basis however the Board is recommending that shareholders vote against the discontinuance resolution and has no reason to presume that shareholders will not support the continuation if the company.

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 2018. 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 not withstanding that the Board will be required by the Articles of Association to put forward a proposal for the discontinuance of the Company at the 2016 AGM as they have no reason to presume that shareholders will not support the continuation of the Company.

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 below (and in Note 18) and, in particular, the impact of a significant fall in regional 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.

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 2018 subject to shareholders supporting the continuation of the Company at the 2016 AGM.

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 on Note 8. The Company made a revenue return for the year of 18.49 pence (2014: 16.22 pence) per Ordinary Share and a capital return of 55.60 pence (2014:-27.12 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 now undertaken by the Risk Committee (see Director’s report for details of the Risk Committee), which was established on 19 November 2014 and will meet 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 20 January 2016. Prior to the establishment of the Risk Committee the Audit Committee undertook the role of reviewing the Company’s risk and that process of review had been in place since the Company’s incorporation. 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 a?ected by a number of risks. External factors to the Company may either adversely or favourably a?ect 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 prior 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 judgement 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).

Currency risk

The majority of the Company’s assets and all of its liabilities are denominated in sterling however some of the investments in the Income Portfolio may be denominated in foreign currencies. Generally, these exposures are hedged back to sterling and there is unlikely to be any significant direct currency risk.

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. Replacing this leverage after the current ZDP issue has redeemed 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.

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.

· Consideration of the revenue projection.

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

The annual on-going charges figure for the year was 1.69% (2014: 1.70%). 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 2015 and 2014 a performance fee was not payable.

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 2015 the TER was 1.02% (2014: 1.24%). The calculation of costs excludes performance fees, non-routine administration and professional fees. The net management fee charged in 2015 was £596,754 (2014: £575,556).

Share Price Rating and Discount Management including information on treasury shares

At the Annual General Meeting on 25 August 2015 the Directors obtained shareholder approval to issue up to an aggregate nominal amount of £15,468.33 Ordinary Shares and an aggregate nominal amount of £20,763.39 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 25% of the issued Ordinary and ZDP Shares as at 25 August 2015 specifically 3,865,536 Ordinary Shares and 5,188,770 ZDP Shares and authority to buyback a further 5% (of the shares in issue as at 25 August 2015) to manage any discount.

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 Ltd, a wholly-owned, Guernsey incorporated subsidiary of Premier Asset Management Limited.

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 Ltd has delegated a number of its duties and responsibilities to PFM Ltd and Unicorn Ltd. In relation to the Income Portfolio and Smaller Companies Portfolio respectively, both PFM Ltd and Unicorn Ltd act as Investment Advisers who are responsible for the identification and analysis of investments meeting the investment objectives and strategy of the Company. PFM Ltd and Unicorn Ltd 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 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 Full List of Investment Holdings Listing.

Administration Agreement

With effect from 1 April 2015, the administration of the Company changed from JTC (Guernsey) Limited to Northern Trust International Fund Administration Services (Guernsey) Limited (“Northern Trust”).

Custodian

With effect from 1 April 2015, the custodian of the Company changed from BNP Paribas Securities Services SCA to Northern Trust (Guernsey) Ltd.

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 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 will offer themselves for re-election every 6 years. As a result of this principle the Directors were elected as follows:

Helen Green was re-elected in 2013, and is eligible for re-election in 2019.

David Warr was elected in 2013, and is eligible for re-election in 2019.

Nigel Ward will be eligible for re-election in 2018.

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

· Henderson Diversified Income Limited*

· John Laing Infrastructure Fund Limited*

· City Natural Resources High Yield Trust Plc.*

· Landore Resources Limited**

· Advance Frontier Markets Fund Limited**

(Resigned 2 December 2015)

David Warr

· Advance Frontier Markets Fund Limited Limited**

· Threadneedle UK Select Trust Limited*

· Breedon Aggregates Limited**

· Schroder Real Estate Investment Trust Limited*

(Resigned 11 September 2015)

Nigel Ward

· Crystal Amber Fund Limited**

· Fair Oaks Income Fund Limited#

* Listed on the Main Market of the LSE

** Traded on the Alternative Investment Market of the LSE

# Traded on the Specialist Fund Market 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.

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 33,000 Ordinary Shares in the capital of the Company, which represented an interest of 0.19% of the Company’s Ordinary Shares in issue as at 31 December 2015.

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

Board Responsibilities

The Board comprises three 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. Biographies of the Directors appear after Schedule of Principal Investments demonstrating the wide range of skills and experience they bring to the Board.

In January 2016, the Chairman will have 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. It has therefore determined that in performing her role as Director, the Chairman remains wholly independent.

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

There were no substantial interests to be disclosed as at 4 April 2016 the latest practicable date for disclosure in this report.

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 Ltd and Unicorn Ltd, 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 2015 the number of Board meetings attended were 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”). Each Committee consists of the whole Board. Due to the size of the Company the Board consider it would be overly burdensome to establish separate committees that do not comprise all of the non-executive directors of the Company. 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 above.

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 through open advertising. 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 will meet 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 Ltd and Unicorn Ltd 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 Ltd and Unicorn Ltd provide the Board with updates at each quarterly board meeting and at any other time that the Board requests.

With effect from 1 April 2015, after changing from JTC (Guernsey) Limited (formerly known as JTC Fund Managers (Guernsey) Limited), administration and company secretarial duties of the Company are performed by Northern Trust International Fund Administration Services (Guernsey) Ltd .

Registrar duties are performed by Anson Registrars Limited.

With effect from 1 April 2015, the Custody of assets, after changing from BNP Paribas Trust Company (Guernsey) Limited, 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 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 Ltd. The monitoring programme ensures that all activities of PFM Ltd, 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 Ltd and the Administrator, the latest visit being to Unicorn Ltd on 15 February 2016. A visit to Northern Trust has been scheduled for April 2016. 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.

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 Ltd. 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 (FRC’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

7 April 2016

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

for the year ended 31 December 2015

Statement of Directors’ Responsibilities

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

The Law requires the Directors to prepare financial statements for each financial year. In accordance with section 243 (3) (a) of the Law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards as issued by the IASB and applicable law.

The Financial Statements are required by the Law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. The accounts of the Company comply with the Law as enacted as at 31 December 2015.

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 and prudent;

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

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Law. They 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 who held office at the date of approval of the Directors’ Report confirm that they consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.

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

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 each aware, there is no relevant audit information of which the Company’s Auditor is unaware; and 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.

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.

Directors’ Responsibility Statement

The Directors confirm to the best of their knowledge that:

(a) The Management Report (comprising the Chairman’s Statement, the Investment Advisers’ Reports, Directors’ Report, Audit Committee Report and notes to the financial statements) includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces; and

(b) The financial statements, prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB), give a true and fair view of the assets, liabilities, financial position and profits of the Company.

Signed on behalf of the Board by:

Helen Green

Chairman

7 April 2016

Audit Committee Report

for the year ended 31 December 2015

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, where 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 annual financial statements, 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 28 October 2015 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 year ended 31 December 2015. 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 risk. 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 Adviser 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 and accounts. 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 and accounts remains with the Board.

· The Audit Committee holds an annual meeting to approve the Company’s annual financial report and accounts before its publication. At a meeting held on 28 October 2015 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 balance 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;

· reports highlighting the 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 the presentation received when deciding to reappoint.

As the Company is not a FTSE 350 company it is not necessary to put the appointment of the Auditor out to tender. Further, having satisfied itself that the Auditor remains independent and effective, the Audit Committee has recommended to the Board that KPMG be reappointed as Auditor for the year ending 31 December 2016.

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

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

David Warr

Chairman of the Audit Committee

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

Opinions and conclusions arising from our audit

Opinion on financial statements 

We have audited the financial statements of Acorn Income Fund Limited (the “Company”) for the year ended 31 December 2015 which comprise the statement of comprehensive income, the statement of financial position, the statement of cash flows, the statement of changes in equity, and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as issued by the IASB. In our opinion, the financial statements: 

· give a true and fair view of the state of the Company’s affairs as at 31 December 2015 and of its return for the year ended 31 December 2015; 

· have been properly prepared in accordance with International Financial Reporting Standards as issued by the IASB; and 

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

Our assessment of risks of material misstatement

The risks of material misstatement detailed in this section of this report are those risks that we have deemed, in our professional judgment, to have had the greatest effect on: the overall audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team. Our audit procedures relating to these risks were designed in the context of our audit of the financial statements as a whole. Our opinion on the financial statements is not modified with respect to any of these risks, and we do not express an opinion on these individual risks.

In arriving at our audit opinion above on the financial statements, the risk of material misstatement that had the greatest effect on our audit was as follows:

Valuation of investments (£86,634,633)

Refer to the Report of the Audit Committee, Note 1 accounting policies and Note 10 Financial Assets Designated as at Fair Value through Profit or Loss disclosures

· The risk – The Company has invested 139% of its net assets at 31 December 2015 into listed equities and bonds. The Company’s investments are valued based on market prices. 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 our audit.

· Our response – Our audit procedures with respect to the valuation of investments included, but were not limited to, testing of the Company’s controls in relation to the monthly net asset value calculation, evaluating the appropriateness of the valuation techniques and obtaining the market price for each investment from an independent source and assessing whether this represented an active price based on market information. We compared this price to that used by the administrator in the preparation of the financial statements.

We also considered the Company’s disclosures (see Note 1) in relation to the use of estimates and judgments regarding valuation of investments and the Company’s valuation policies adopted and fair value disclosures in Note 10 for compliance with International Financial Reporting Standards as issued by the IASB.

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

Materiality is a term used to describe the acceptable level of precision in financial statements. Auditing standards describe a misstatement or an omission as “material” if it could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The auditor has to apply judgment in identifying whether a misstatement or omission is material and to do so the auditor identifies a monetary amount as “materiality for the financial statements as a whole”.

The materiality for the financial statements as a whole was set at £1,873,000. This has been calculated using a benchmark of the Company’s net asset value (of which it represents approximately 3%) which we believe is the most appropriate benchmark as net asset value is considered to be one of the principal considerations for members of the Company in assessing the financial performance of the Company.

We agreed with the audit committee to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of £93,600, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.

Our audit of the Company was undertaken to the materiality level specified above, which has informed our identification of significant risks of material misstatement and the associated audit procedures performed in those areas as detailed above. The audit was performed at the offices of the Administrator.

Whilst the audit process is designed to provide reasonable assurance of identifying material misstatements or omissions it is not guaranteed to do so. Rather we plan the audit to determine the extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements does not exceed materiality for the financial statements as a whole. This testing requires us to conduct significant depth of work on a broad range of assets, liabilities, income and expense as well as devoting significant time of the most experienced members of the audit team, in particular the Responsible Individual, to subjective areas of the accounting and reporting process.

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

Disclosures of principal risk

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

· the Directors’ Viability Statement, concerning the principal risks, their management and, based on that, the Directors’ assessment and expectations of the Company’s continuing in operation over the 3 years to 31 December 2018; or

· the disclosures in the basis of preparation (note 1a) note to the financial statements concerning the use of the going concern basis of accounting.

Matters on which we are required to report by exception 

Under International Standards on Auditing (“ISAs”) (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the Annual Report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.

In particular, we are required to report to you if:

· we have identified material inconsistencies between the knowledge we acquired during our 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 members to assess the Company’s performance, business model and strategy; or

· the Audit Committee Report does not appropriately address matters communicated by us to the audit committee.

Under the Companies (Guernsey) Law, 2008, we are required 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.

Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company’s compliance with the eleven provisions of the UK Corporate Governance Code specified for our review. 

We have nothing to report in respect of the above responsibilities.

Scope of report and responsibilities

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 and, in respect of any further matters on which we have agreed to report, on terms we have agreed with the Company. 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.

Respective responsibilities of directors and auditor

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

Steven D Stormonth For and on behalf of KPMG Channel Islands Limited Chartered Accountants and Recognised AuditorsGuernsey7 April 2016

Statement of Comprehensive Income

for the year ended 31 December 2015

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 these financial statements.

Statement of Financial Position

as at 31 December 2015

The financial statements were approved by the Board of Directors and authorised for issue on 7 April 2016 and signed on its behalf by:

Chairman

The notes form an integral part of these financial statements

Statement of Cash Flows

for the year ended 31 December 2015

The notes form an integral part of these financial statements

Statement of Changes in Equity

as at 31 December 2015

The notes form an integral part of these financial statements

Statement of Changes in Equity

as at 31 December 2014

The notes form an integral part of these financial statements

Notes to the Financial Statements

for the year ended 31 December 2015

1 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") 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.

During the current year certain presentation changes to note 10 have been made in an effort to more appropriately classify items. As a result, the fixed interest investments held within the investment portfolio have been reclassified from Level 1 instruments to Level 2 instruments to match the current year changes. As at 31 December 2014, the result of these reclassifications has no impact on the net asset value or the net result of the financial year.

The accounts have been prepared on a going concern basis. The disclosure on going concern in the Report of the Directors forms part of the financial statements.

The following Standards or Interpretations have been adopted in the current year.

IFRS 8 Operating Segments (effective for annual periods beginning on or after 1 July 2014). This amendment will require that an entity discloses the judgements made by management in applying the aggregation criteria to operating segments. It also clarifies that an entity shall only provide reconciliation of the total of the reportable segments' assets to the entity's assets if the segment assets are reported regularly.

IFRS 13 Fair value measurement – (amendment effective for annual periods beginning on or after 1 July 2014). Clarifies that the scope of the portfolio exception defined in paragraph 52 of IFRS 13 includes all contracts accounted for within the scope of IAS 39 Financial instruments: Recognition and Measurement or IFRS 9 Financial Instruments, regardless of whether they meet the definition of financial assets or financial liabilities as defined in IAS 32 Financial Instruments.

IAS 24 Related Party Disclosure (amendments effective for annual periods beginning on or after 1 July 2014). Clarifies that an entity providing key management personnel services to the reporting entity or to the parent of the reporting entity is a related party of the reporting entity.

The following Standards or Interpretations have been issued by the IASB but not yet adopted by the Company:

IFRS 7 Financial Instruments: Disclosures – Deferral of mandatory effective date of IFRS 9 and amendments relating to additional hedge accounting disclosure (and consequential amendments). Applied only when IFRS 9 is adopted, which is effective for annual periods beginning on or after 1 January 2018.

IFRS 7 Financial instruments: Amendments resulting from September 2014 Annual improvements to IFRSs, effective for annual periods beginning on or after 1 January 2016.

IFRS 9 Financial Instruments – classification and measurement of financial assets effective for annual periods beginning on or after 1 January 2018. The standard contains revised guidance including new general hedge accounting requirements that align hedge accounting more closely with an entities risk management approach and a new expected credit loss model for calculating impairment on financial assets.

IAS 1 Presentation of Financial Statements: Disclosure initiative effective 1 January 2016.

IAS 7 Statement of Cash Flows: Disclosure initiative effective 1 January 2017.

Other requirements of IFRS 9 relating to accounting for liabilities and derecognition of financial instruments are effective for annual periods beginning on or after 1 January 2018.

The Directors have considered the above and are of the opinion that these Standards and Interpretations are not expected to have an impact on the Company’s financial statements except for the presentation of additional disclosures and changes to the presentation of components of the financial statements. These items will be applied in the first financial period for which they are required.

(b) Use of estimates and judgements

The preparation of the financial statements in conformity with IFRSs 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 ongoing 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 estimates and judgements in allocating expenses between Revenue and Capital and in ascertaining the risk disclosures contained in Note 18. The Directors use estimates and judgements in valuing the market value of the investments contained in Note 10.

(c) Ordinary Share Capital

Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of Ordinary Shares are recognised as a deduction from equity.

(d) 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.

(e) 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 pays an annual fee of £1,200.

(f) Treasury Shares

Treasury shares are classified as a deduction from equity and recorded for the consideration paid.

(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 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. 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 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 effective interest rate “EIR” basis. Dividends are recognised on the ex-dividend date. All investment income is treated as a revenue 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 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 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 changes 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 the Statement of Comprehensive Income. Unrealised gains and losses on movement in fair value of investments are recognised 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 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, 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 stated at market value, with the resulting net realised and unrealised gains and losses being reflected in the Statement of Comprehensive Income.

(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 has determined that the Company has two reportable segments (2014: 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 period end are presented in the Investment Advisers’ Report.

(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 investment 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 investment management reports that are reviewed by the Board.

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

Geographical information

In presenting information on the basis of geographical segments, segment revenue is based on the domicile countries of the investees and counterparties to derivative transactions.

The Company did not hold any non-current assets during the year other than financial instruments (2014: £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 (2014: The Board was not aware of any shareholder with a holding greater than 10% at the tear end).

3 INVESTMENT INCOME

4 GAINS/(LOSSES) 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 April 2015 to 31 March 2016. The Management Agreement may be terminated by either party on 12 months’ written notice. Please refer to note 1(h) for details on how expenses are charged to the capital reserve and revenue account.

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 was not payable to the Investment Manager for the year ended 2015 (2014: Nil).

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 point 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.

During the four month period ended 30 April 2015, £5,750 was earned by JTC (Guernsey) Limited in respect of administration services. Termination costs of £20,000 were also paid to JTC (Guernsey) Limited.

6 DIRECTORS’ REMUNERATION

Under their terms of appointment, each Director is paid a fee of £25,000 per annum by the Company, except for the Chairman, who receives £27,500 per annum.

7 INTEREST PAYABLE AND SIMILAR CHARGES

8 DIVIDENDS IN RESPECT OF ORDINARY SHARES

9 EARNINGS PER SHARE

Ordinary Shares

The total return per Ordinary Share (per IFRS) is based on the total gain on ordinary activities for the year attributable to Ordinary Shareholders of £11,524,981 (2014: loss of £1,741,189) and on 15,556,337 (2014: 15,970,605) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gain 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 £2,876,020 (2014: £2,590,349) and on 15,556,337 (2014: 15,970,605) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gain per share are identical.

The capital return per Ordinary Share (per IFRS) is based on the capital return on ordinary activities for the year attributable to Ordinary Shareholders of £8,648,961 (2014: loss of £4,331,538) and on 15,556,337 (2014: 15,970,605) shares, being the weighted average number of shares in issue during the year. There are no dilutive instruments and therefore basic and diluted gain per share are identical.

ZDP shares

The return per ZDP Share is based on the appropriation in respect of ZDP Shares and the amortisation of ZDP Share issue costs totalling £1,593,477 (2014: £1,497,946) and on 20,881,947 (2014: 21,438,894) 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 2015, the closing fair value of investments comprises £68,531,238 (Dec 2014: £57,956,148) of equity shares, £18,064,090 (Dec 2014: £18,252,746) of fixed income securities and an asset of £39,305 (Dec 2014: liability £58,018) in respect of long gilts held.

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);

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 investment as at the reporting date:

Financial assets designated as at fair value through profit or loss

During the current year fixed interest investments held within the investment portfolio have been transferred from Level 1 instruments to Level 2 instruments in an effort to more appropriately classify financial assets. As a result, the prior year has also been reclassified from Level 1 instruments to Level 2 instruments to match the current year changes.

The following table is a reconciliation of investments the Company held during the years ended 31 Dec 2015 and 31 Dec 2014 at fair value using unobservable inputs (Level 3):

During the current year unobservable investments held by the Company have been transferred from Level 1 instruments to Level 3 instruments in an effort to more appropriately classify financial assets. As a result, the prior year has also been reclassified from Level 1 instruments to match the current year changes.

For investments categorised in Level 3 as at 31 December 2015, the below details the valuation methodologies used:

BC Capital Limited – Given the unique nature as a litigation finance provider it is difficult to make valuation comparisons. Furthermore, there are no secondary market trades in this security that we are aware off. BC Capital Limited is trading well and can arrange finance if required on more favourable terms than calling the balance on the Contingent Partly-Paid Preference Share Units (“COPPs”). However as there remains a possibility of the stock being called, the Directors consider valuation at cost to be the fair value of the investment.

Refer to Note 1 (l) for further information on the valuation process.

Lehman Brother Holdings Capital Trust V 6.9% - These bonds were subordinated and are in default and the Investment Adviser does not expect any return of capital or interest and the bonds are valued at zero.

Petromena AS 10.85% 2014 – The bonds are in default and are priced from a Bloomberg bond valuation model.

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

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

There have been no transfers between levels of the fair value hierarchy during the period under review. 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.

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

(amounts falling due within one year)

13 ZDP SHARES

The fair value of the ZDP Shares as 31 December was £27,917,997 (31 December 2014: £27,096,918).

ZDP Shares carry no entitlement to income distributions made by the Company. The ZDP Shareholders will not receive dividends but will have a final capital entitlement at the end of their life on 31 January 2017 of 138 pence. 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 suffcient on 31 January 2017 to meet the final capital entitlement of the ZDP Shares. If the Company had been wound up on 31 December 2015, the ZDP Shares would have had an entitlement of 128.89 pence each. The ZDP Shareholders have the right to receive notice of and attend, but shall not have the right to vote at, any general meeting.

Under the Articles of Association, the Company is obliged to redeem all of the ZDP Shares on 31 January 2017 (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 21,189,384 (2014: 20,964,734). The number of ZDP Shares held in treasury as at 31 December 2015 was 1,880,547 (2014: 2,328,919). The non-amortisation of the ZDP Shares in line with the Articles has the effect of increasing NAV per Ordinary Shares by 0.44 pence.

14 SHARE CAPITAL

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 2015 was £171,867 (31 December 2014: £173,533).

15 TREASURY RESERVE

The Treasury Shares were purchased in the market at various prices ranging from £2.83 to £3.06 (2014: £2.84 to £3.76) and held by the Company in treasury.

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.

£596,754 (2014: £575,556) of costs were incurred by the Company with this related party in the year, of which £156,977 (2014: £136,987) was due to this related party as at 31 December 2015.

Directors’ remuneration is disclosed in Note 6.

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 and derivative financial assets;

(c) ZDP Shares; and

(d) Derivative financial assets.

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 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 review 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.

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 15% increase and decrease in the market prices, with 15% 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.

At 31 December 2015, if market prices had been 15% higher with all the other variables held constant, the return attributable to shareholders for the year would have been £12,995,195 (2014: £11,422,631) 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 20.82% (2014: 21.86%).

If market prices had been 15% lower with all the other variables held constant, the return attributable to shareholders for the year would have been £12,995,195 (2014: £11,422,631) 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 20.82% (2014: 21.86%).

(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 10% of the Company's gross assets in any one smaller company equity, more than 7.5% in any one fixed interest security and more than 20% in any one investment company or fund.

The Company has no significant concentration of credit risk, with exposure spread over a large number of counterparties. At 31 December 2015 the Company's largest exposure to a single investment was £3,101,000 (2014: £2,350,000), 3.44% (2014: 3.01%) 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 The Northern Trust Company, which at the time of signing this report held a credit rating, as rated by Moody’s, of Aa2. The GILT is held with J.P. Morgan who at the time of signing this report held a credit rating, as rated by Moody’s, of 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 review 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 and the settlement of the obligation upon maturity of the ZDP Shares on 31 January 2017. The ZDP Share liability will be settled through realisation of the Company's investment portfolios.

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 ZDP Shares will not pay dividends but will have a final capital entitlement at the end of their life on 31 January 2017 of 138 pence. 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 31 January 2017 to meet the final capital entitlement of the ZDP Shares.

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 maturities of financial assets and 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 2015:

As at 31 December 2014:

Interest rate sensitivity takes account of the effect of interest rate movements on cash balances, loan amounts and fixed interest securities. 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 2015 would have increased by approximately £7,333 (2014: £2,403) or 0.008% (2014: 0.003%) 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 2015 would have decreased by approximately £7,333 (2014: £2,403) or 0.008 % (2014: 0.003 %) 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 2015, the Company's holdings in derivatives translated into GBP were as specified below:

At 31 December 2014, 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 London Stock Exchange, the Ordinary Shares may trade at a discount or premium to their Net Asset Value per Share on occasion. However, the Directors and the 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 the special reserve. The non distributable reserves comprise the capital reserve and the treasury reserve. The special reserve was created on the cancellation of part of the Company’s share premium account.

(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 7 April 2016. Subsequent events have been evaluated until this date.

A dividend of 3.50p was declared on 21 January 2016 and was paid to Ordinary Shareholders on 29 March 2016.

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