Weiss Korea Opp Regulatory News (WKOF)

Weiss Korea Opportunity Fund - Annual Financial Report

PR Newswire

London, April 24

WEISS KOREA OPPORTUNITY FUND LTD.LEI 213800GXKGJVWN3BF511

ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2017

The Company has today, released its Annual Report and Audited Financial Statements for the year ended 31 December 2017. The Report will shortly be available from the Company's website www.weisskoreaopportunityfund.com.

For further information, please contact:

Summary Information

The CompanyWeiss Korea Opportunity Fund Ltd. (“WKOF” or the “Company”) was incorporated with limited liability in Guernsey, as a closed-ended investment company on 12 April 2013. The Company’s Shares were admitted to trading on the Alternative Investment Market (“AIM”) of the London Stock Exchange (the “LSE”) on 14 May 2013.

The Company is managed by Weiss Asset Management LP (the “Investment Manager”), a Boston-based investment management company registered with the Securities and Exchange Commission in the United States of America.

Investment Objective and Dividend PolicyThe Company's investment objective is to provide Shareholders with an attractive return on their investment, predominantly through long-term capital appreciation. The Company is geographically focussed on South Korean companies. Specifically the Company invests primarily in listed preferred shares issued by companies incorporated in South Korea, which in many cases have traded and continue to trade at a discount to the corresponding common shares of the same companies. Since the Company's Admission to AIM, the Investment Manager has assembled a portfolio of South Korean preferred shares that it believes are undervalued and could appreciate based on the criteria that it selects. The Company may, in accordance with its investment policy, also invest some portion of its assets in other securities, including exchange-traded funds, futures contracts, options, swaps and derivatives related to Korean equities, and cash and cash equivalents.

The Company intends to return to Shareholders all dividends received, net of withholding tax on an annual basis.

Investment PolicyThe Company is geographically focused on South Korean companies. Some of the considerations that affect the Investment Manager’s choice of securities to buy and sell may include the discount at which a preferred share is trading relative to its respective common share, its dividend yield, its liquidity and the weighting of its common share (if any) in the MSCI Korea 25/50 Net Total Return Index (the “Korea Index”), among other factors. Not all of these factors will necessarily be satisfied for particular investments. The Investment Manager will not generally make decisions based on corporate fundamentals or its view of the commercial prospects of the issuer. Preferred shares are selected by the Investment Manager at its sole discretion, subject to the overall control of the board of directors of the Company (the “Board”).

The Company invests primarily in South Korean preferred shares, but it may invest some portion of its assets in other securities, including exchange-traded funds, futures contracts, options, swaps and derivatives related to Korean equities, and cash and cash equivalents. The Company does not have any concentration limits.

The Company has purchased certain credit default swaps on the sovereign debt of South Korea and put options on iShares MSCI South Korea as general market and portfolio hedges, but has generally not hedged its exposure to interest rates or foreign currencies during the year ended 31 December 2017 (2016: Nil).

Share Buy backsDuring the year ended 31 December 2017, the Company purchased 5,000,000 (2016: 100,000) of its own shares at a consideration of £8,137,189 (31 December 2016: £120,480) under its general buyback authority. These shares have subsequently been cancelled.

For additional information on share buy backs refer to Note 18.

Shareholder InformationNorthern Trust International Fund Administration Services (Guernsey) Limited (the “Administrator”) is responsible for calculating the Net Asset Value (“NAV”) per Share of the Company. The unaudited NAV per Ordinary Share is calculated on a weekly basis and at the month end by the Administrator, and is announced by a Regulatory News Service and is available through the Company’s website www.weisskoreaopportunityfund.com.

Company financial highlights and performance summary for the year ended 31 December 2017

As at close of business on 23 April 2018, the latest published NAV per share had decreased to £1.6975 (as at 17 April 2018) and the share price stood at £1.67.

Total expense ratioThe annualised total expense ratio for the year ended 31 December 2017 was 1.81% (31 December 2016: 1.80%). The annualised total expense ratio includes charges paid to the Investment Manager and other expenses divided by the average NAV for the year.

Chairman’s Review 

We are pleased to provide the 2017 Annual Financial Report on the Company. During the period from 31 December 2016 to 31 December 2017 (the “Period”), the Company’s NAV increased by 29.4%,[1] slightly underperforming the reference MSCI Korea 25/50 Net Total Return Index, which returned 32.6% in GBP.[2] Since the Admission of the Company to AIM in May 2013 the Total Return of the Company has increased by 104.1% compared to Index returns of 63.0%. A report from the Investment Manager follows.

One relatively recent change in the Company’s portfolio, which will be discussed in more detail in the Investment Manager’s report, is that the Company has entered into certain portfolio hedge positions intended to provide some level of protection against potential adverse geopolitical and macroeconomic conditions in South Korea.

As a result of the implementation of the Packaged Retail and Insurance-based Investment Products Regulation, the Company published a Key Information Document (“KID”) on 29 December 2017. The Company is required by EU regulation to produce this document, and the contents and assumptions used therein are strictly prescribed under the applicable rules. As a result, I would strongly discourage investors from relying solely on this document in making investment decisions. The requirements specific to the KID to provide information in a particular simple format lead to a presentation that might result in investors drawing different conclusions than they might draw if they had read the Company’s full documents and financial reports which provide a much more informative description of the Company’s strategy and risks. In particular, we do not believe the return assumptions for the future are realistic.

As discussed in prior communications, during the Period, the Company offered Shareholders the opportunity to elect to realise all or a part of their shareholding in the Company (the “Realisation Opportunity”). Approximately 8.6% of Ordinary Shares were submitted for realisation. On 15 May 2017, the Company’s Portfolio was divided into two pools: a Continuation Pool and a Realisation Pool. Once divided, the Company carried out an orderly wind up of the Realisation Pool, and fully returned the capital in the Realisation Pool through two redemptions in mid-July and mid-August 2017.

Prior to the Realisation, the Directors declared a dividend of 3.3262 pence per share (period ended 30 June 2016: 2.2416 pence per share) to distribute the income received by the Company in respect of the year ended 31 December 2016. This dividend was paid to all Shareholders regardless of any election they made under the Realisation Opportunity.

Since its inception, the Company has not made use of leverage to fund investments. However, as stated in the Admission Document, the Company reserves the right to do so in the future.

The Company has continued its active share repurchase program as part of its discount management strategy. During the Period, the Company repurchased 5,000,000 shares. Since Admission, and as at the date of this document, the Company has repurchased 12,590,250 shares of the original 105,000,000 Ordinary Shares issued at Admission. The Board is authorised to repurchase up to 40% of the Company's outstanding Ordinary Shares in issue as at 19 July 2017. Where appropriate the Board has also put in place standing instructions with the Company’s broker, N+1 Singer Advisory LLP, for the repurchase of the Company’s shares during closed periods when the Board is not permitted to give individual instructions, typically around the preparation of the Annual and Half-Yearly Financial Reports. The Board believes that the share repurchase program is an excellent discount control mechanism and that it is mutually beneficial for continuing and exiting Shareholders. We will continue to keep Shareholders informed of any share repurchases through public announcements.

If you would like to speak with the Investment Manager or learn about potential opportunities to meet with them, please contact the Company’s broker, N+1 Singer. I would like to thank Shareholders for their support, and look forward to the continued success of the Company in the future. I would also like to thank Weiss Asset Management LP, as well as the other service providers, all of whom have contributed greatly to the Company.

Sincerely,Norman CrightonChairman23 April 2018 

[1] This return includes all dividends paid to the Company’s Shareholders, but does not assume such dividends are reinvested.

[2] MSCI total return indices are calculated as if any dividends paid by constituents are reinvested at their respective closing prices on the ex-date of the distribution.

Investment Manager’s Report

For the year ended 31 December 2017

In the past year, the NAV of WKOF was up 29.4% in GBP, including dividends. By comparison, the MSCI Korea 25/50 Net Total Return Index was up 32.6% in GBP. Since its inception in May 2013 WKOF is up 104.1%; over the same period the MSCI Korea 25/50 net total return index was up 63.0% in GBP.

Investors should be aware that year-to-year fluctuations in returns are most likely to be the result of “noise”. Although over long periods we expect to achieve significant outperformance from the discounts narrowing and the higher dividend yield on discounted preference shares relative to their corresponding ordinary shares, in shorter time periods we may underperform. The fund is committed to investing your money in highly discounted South Korean preferred shares that have the same, or better, economic entitlements as the ordinary shares. In addition, we believe the South Korean companies in the fund's portfolio trade at a substantial discount to similar companies in similar markets globally. We think of this, therefore, as a somewhat rare opportunity to invest in doubly discounted stocks. However, the distribution of companies with preference shares differs significantly from the distribution of companies in most benchmarks. For instance, the vast majority of the companies in the South Korean pharmaceutical sector do not have preference shares, so if pharmaceutical stocks perform exceptionally well, as they have over the past 12 months, this would be a drag on the relative performance of WKOF. Our sector representation is also skewed toward the preference shares that are trading at the largest discounts relative to our estimate of the expected discount. This can also contribute to a divergence between our sector exposure and the sector exposure of the indices.

The South Korean stock market overcame numerous negatives to achieve exceptionally high returns in 2017. The U.S. threatened to terminate the U.S. free trade agreement with South Korea, and in early October, South Korea agreed to initiate negotiations to amend the trade agreement. After the U.S. deployed the THAAD missile system in South Korea, the Chinese imposed an unofficial boycott. Sales of Hyundai and Kia in China plummeted, causing their shares to underperform the broader market. The decrease in Chinese tourists caused revenue at AmorePacific, the South Korean cosmetics giant, to fall around 10%, causing a 32% fall in operating income.

In last year's letter, we wrote that ‘Unexpected’ events occur much more frequently than people estimate. In 2017, North Korea exploded a hydrogen bomb, and had several successful launches of long-range ballistic missiles. The U.S. has responded with threats to attack North Korea. There is a non-trivial probability that the U.S. may initiate military action against North Korea. According to media reports, the Trump administration withdrew its nominee as ambassador to South Korea because he voiced scepticism about the wisdom of giving North Korea a “bloody nose”. On the other hand, President Trump has just announced a willingness to talk with Kim Jong-Un, the leader of North Korea.

It is hard to predict how North Korea would respond to a U.S. military strike, but there is certainly the risk that a sequence of responses and counter- responses could have devastating effects on South Korea. We hate to be expressing concerns about the market impact of a sequence of events that could potentially result in millions of casualties, but as fiduciaries we can’t ignore the risks associated with military conflict when discussing the risks of investing in South Korea.

The South Korean stock market and the South Korean economy shrugged off all of this troubling news to achieve the best performance of any major market in 2017. (GDP grew 3.1% in 2017, which may have contributed to equity returns.) Despite the risks described above, credit default swaps on South Korean sovereign debt are cheap. With Board approval, last year we bought South Korean sovereign credit default swaps as well as out of the money South Korean index puts to protect our investors from certain extreme risks. As with any form of insurance, these hedges will be a drag on performance during normal periods. As of end-2017, the Company owned South Korean credit default swaps with a notional value of approximately £74 million and a market value of around £1 million; the market value of the index puts was about £0.1 million. In the portfolio section, we’ll provide a fuller discussion of credit default swaps on South Korean sovereign debt.

Portfolio Review

As of year-end we had 41 positions in the fund. The weighted average discount of the preferred shares in the fund was 41.9%. This discount was calculated by weighting the discount of each preferred share by its value in the portfolio. We will comment further on this metric for measuring discounts later in the report.

During the year, we were net buyers of preference shares trading at large discounts. Due in part to the large discounts on the preference shares in our portfolio, combined with what we see as the overall relative undervaluation of the South Korean stock market, the trailing 12 month price to earnings ratio was 7.1x. As this valuation indicates, by being patient and taking a long-term view, our team has succeeded in putting together what we believe to be an attractive portfolio of undervalued securities. 

Absent a major geopolitical event, the long run growth prospects for South Korea seem strong. According the OECD, 70% of 25-34 year olds in South Korea have a tertiary degree. This was the highest percentage of any OECD country: the U.S. and OECD average are both below 50%. South Korea also continues to score exceptionally well on all components the PISA exam[3] including a new test that measures collaborative problem-solving skills. 

Samsung Electronics Co.

The Samsung preference share class has been by far our largest position, comprising 25% of NAV as of year end. No other company comprises nearly so large a fraction of our assets. Samsung was up 49%[4] in 2017, despite its vice-chairman and de facto leader Lee Jae-yong having been arrested on February 17 and spending the rest of the year in prison, during which time he was limited to one 30 minute visit per day. Samsung Corporate Strategy Office chief Choi Gee-sund and President Chang Choong-ki were arrested at the same time and subsequently resigned. On October 13, the CEO of Samsung Electronics unexpectedly retired, saying that Samsung Electronics faces an “unprecedented crisis”. On 5 February 2018 an appeals court in South Korea suspended the sentences of those three senior executives. This was a strange decision since Lee had admitted to bribery; but Lee said it was coerced by Park Geun-hye, who was the President of South Korea at the time. The judge said that Park “browbeat” Samsung’s executives into giving her bribes (seemingly implying that giving a bribe is acceptable if it is demanded sufficiently often). 

Samsung has recently announced a 50-1 stock split on both its ordinary and preferred shares. The stock splits take effect in May 2018. On 28 February 2018, Samsung ordinary shares traded at 2,353,000 Korean won (£1,576) per share (the preference shares traded at 1,995,000 KRW). These high prices may have discouraged purchases by retail investors so the stock split could provide a boost to the stock price. Samsung preference shares are trading at a price to earnings ratio of 6.6x, with return on equity of 20% and price to book of 1.15.[5]

Credit Default Swaps on Korean Sovereign Debt

One could reasonably argue that the South Korean market deserves to be cheap due to geopolitical risk, but that would not explain the further discounts on the preference shares. Furthermore, if the low valuations of South Korean stocks were due to geopolitical risk, we would expect this risk to be reflected in significantly higher prices for South Korean sovereign credit default swaps. As of the end of February 2018, the 5 year South Korean government credit default swap was trading at only about 50 basis points of annual premium. For comparison, this is about 35 bps higher than the corresponding UK credit default swaps and about 40 basis points higher than the corresponding German credit default swaps. This creates a potential opportunity for an investor to achieve attractive risk-adjusted returns by buying the preference shares, and hedging geopolitical risk and other macro-economic risks by buying credit default swaps on South Korean sovereign debt. 

As their name implies, holders of a credit default swap are paid if the underlying debt defaults. The payment is a function of the price at which the underlying debt trades after default. Thus a credit default swap is a form of insurance against default, and a credit default swap against the sovereign debt of South Korea is a form of catastrophe insurance. The price of a credit default swap is essentially the yearly insurance premium paid for protection against default. While it is highly unlikely that South Korea, or the government of any other major economy, will default, the probability of default would surely increase if there was a military conflict with North Korea, or a trade war with the U.S., or a global economic crisis – perhaps triggered by a sharp rise in U.S. interest rates to combat inflationary pressures generated by feckless fiscal policy, or by higher than expected default rates and lower than expected recovery rates on covenant lite loans of highly leveraged non-financial corporations (globally debt of non-financial corporations is 96% of GDP).[6] In any of those cases, the price of our credit default swaps would be expected to rise,[7] providing a cushion against a fall in equity prices or a widening of the discount on preference shares (during global crises, illiquid securities often fall more than liquid ones, so there would be an increased risk than usual of a large fall in the price of the less liquid preference shares).

Comments on Portfolio Discount Calculations

In our monthly fact sheet and other investor reports, we disclose the weighted average discount of the portfolio of preferred shares to the corresponding ordinary shares. In calculating this metric, the discount of each preferred share class that WKOF owns is weighted by the price of the preferred shares times the number of preferred shares WKOF owns. At the end of 2017, this weighted average discount of preferred shares held was 41.9%.

An alternative metric calculating the discount of a portfolio of preferred shares is to aggregate the value of all the preference shares and their corresponding ordinary shares and then compute the discount in terms of the difference between the value of the portfolio of preferred shares and a hypothetical portfolio of the corresponding ordinary shares (this hypothetical portfolio would contain the same number of ordinary shares of each company as the number of preferred shares we held) divided by the value of the hypothetical ordinary share portfolio. As of the end of 2017, the discount of the Company’s portfolio of preferred shares to this hypothetical ordinary share portfolio would have been 46%. The difference in the calculation of the discount weighting methodology becomes more significant as the variance of the preferred share discounts increases.[8] Since there is no standard methodology for computing the discount of a preferred share portfolio, and since weighting the individual discounts by the value of the preferred shares gives a smaller (and therefore more conservative) average discount, we have chosen to report the first metric. 

The effect of the variance of discounts on the computation of the average discount complements the discussion in a previous communication about the way the variance of discounts affects computations of returns from discounts narrowing. A hypothetical portfolio in which all the preference shares were trading at a discount of 40% would have a smaller return from discounts halving than would a hypothetical portfolio also with a 40% weighted average discount but where half the value came from shares trading at a 60% discount and half trading at a 20% discount. Examples such as this are NOT predictions for returns on the Company’s portfolio. They are only intended to illustrate some mathematical properties of average discounts as conventionally computed, and to draw attention to the potential for a portfolio with some preference shares at very large discounts to generate outsized gains if discounts were to fall proportionately or even collapse.

Conclusion

While the returns of WKOF since its inception in May 2013 have been gratifying, we would advise against using short-term or even intermediate-term returns as predictors of future returns. Recent research by Bradford Cornell et. al. has found that 3 year returns of mutual funds do not seem to predict longer term returns, and indeed appear to be negatively correlated with longer term returns.9 Although those researchers did not study the correlation between 4 year returns and future returns, we would expect that the relationship continues to hold, albeit in a weaker form. Instead of using our returns as predictors of future returns, or even as indicators of investment acumen, we would instead encourage you to think about whether a strategy of investing in South Korean preference shares that are trading at large discounts makes sense as a long run investment; and to think about whether we are able to choose the preference shares with particularly favourable long-term prospects. As you are no doubt aware, the South Korean preference shares have the same or slightly better economic entitlements than their corresponding ordinary shares but continue to trade at significantly lower prices than the corresponding ordinary shares. The primary difference between the ordinary shares and the preference shares is that the latter does not have voting rights. In other countries, the lack of voting rights does not currently have negative effects of nearly the same magnitude.

Since voting rights are probably no more valuable in South Korea than in the other countries with non-voting shares, and may be less valuable, there does not seem to be a rational justification for the price disparity. It is impossible to know when, if ever, markets will reflect rational value. In particular, we cannot predict when or if the discounts on South Korean preference shares will collapse, but markets tend to eventually reflect fundamental values.

Finding and profiting from these sorts of irrational price disparities is our goal as an investment manager. We have thus far profited from some narrowing of discounts, especially in the early months of the fund’s existence. By exercising discipline in our purchases of preference shares, we have been able to assemble a portfolio of preference shares that we believe are highly undervalued. We also have made use of some quantitative filters to help choose preference shares that are trading at larger discounts than would be implied by their dividend yield and liquidity. We are hedging many geopolitical risks by buying credit default swaps when they seem priced at levels that seem cheap relative to the insurance they provide. 

Andrew Weiss continues to be a major holder of shares in WKOF, and believes that WKOF offers a highly attractive opportunity for long-term investors.

Weiss Asset Management LP23 April 2018

[3] The Programme for International Student Assessment (PISA exam) is a worldwide study by the Organization for Economic Cooperation and Development (OECD) in member and non-member nations of 15-year old school pupils’ scholastic performance in mathematics, science, reading, critical reasoning and collaborative problem-solving.

[4] Return including dividends, in GBP.

[5] As of February 28, 2018.

[6] Standard and Poors, Global Corporate Leverage Trends 2018, February 5, 2018, cited in Gillian Tett, “The Corporate debt problem refuses to recede,” Financial Times, February 9, 2018, p. 8.

[7] For example, in 2008 the price of South Korean credit default swaps increased sharply.

[8] For instance, in the extreme case of a portfolio where all constituent preferred shares have the same discount, the average discount will be identical to the discount of each preferred share, regardless of weighting methodology.

[9] Bradford Cornell, Jason Hsu and David Nanigian, “Does Past Performance Matter in Investment Manager Selection?”, Journal of Portfolio Management, Summer 2017.

Directors

The Company has three non-executive Directors, all of whom are considered independent of the Investment Manager and details are set out below.

Norman Crighton (aged 51)

Mr Crighton is Chairman of the Company. He is also a non-executive director of Global Fixed Income Realisation Limited and chairman of RM Secured Direct Lending plc. Norman was, until May 2011, an investment manager at Metage Capital Limited where he was responsible for the management of a portfolio of closed-ended funds and has more than 25 years’ experience in closed-ended funds having worked at Olliff and Partners, LCF Edmond de Rothschild, Merrill Lynch, Jefferies International Limited and latterly Metage Capital Limited. His experience covers analysis and research as well as sales and corporate finance. Norman is British and resident in the United Kingdom. Mr Crighton was appointed to the Board in 2013.

Stephen Charles Coe (aged 52)

Stephen is currently Chairman of TOC Property Backed Lending Trust plc. He is also director (and Chairman of the Audit Committee) of Raven Russia Limited and Leaf Clean Energy Company. He has been involved with offshore investment funds and managers since 1990 with significant exposure to property, debt, emerging markets and private equity investments.

He qualified as a Chartered Accountant with Price Waterhouse Bristol in 1990 and remained in audit practice, specialising in financial services, until 1997. From 1997 to 2003 he was a director of the Bachmann Group of fiduciary companies and Managing Director of Bachmann Fund Administration Limited, a specialist third party fund administration company. From 2003 to 2006 Stephen was a director with Investec in Guernsey and Managing Director of Investec Trust (Guernsey) Limited and Investec Administration Services Limited. He became self employed in August 2006 providing services to financial services clients. 

Robert Paul King (aged 54)

Rob is a non-executive director for a number of open and closed ended investment funds including Tufton Oceanic Assets Limited, where he is chairman, and Chenavari Capital Solutions Limited. Before becoming an independent non-executive director in 2011 he was a director of Cannon Asset Management Limited and their associated companies. Prior to this he was a director of Northern Trust International Fund Administration Services (Guernsey) Limited (formerly Guernsey International Fund Managers Limited) where he had worked from 1990 to 2007. He has been in the offshore finance industry since 1986 specialising in administration and structuring of offshore open and closed ended investment funds. Rob is British and resident in Guernsey.

Report of the Directors

The Directors of the Company present their Annual Report and Audited Financial Statements for the year ended 31 December 2017.

Principal Activity

The Company was incorporated with limited liability in Guernsey on 12 April 2013 as a company limited by shares and as an authorised closed-ended investment company. The Company’s Shares were admitted to trading on the AIM of the LSE on 14 May 2013. As an existing closed-ended fund, the Company is deemed to be granted an authorised declaration in accordance with Section 8 of the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended and Rule 6.02 of the Authorised Closed Ended Investment Schemes Rules 2008 on the same date as the Company obtained consent under the Control of Borrowing (Bailiwick of Guernsey) Ordinance 1959 to 1989.

Investment Objective and Investment Policy

The investment objective and investment policy of the Company is to provide Shareholders with an attractive return on their investment, predominantly though long-term capital appreciation, by investing primarily in listed South Korean preferred shares. The full investment objective and investment policy is detailed in Summary Information of the Annual Report.

Going Concern

The Directors believe that the Company has adequate financial resources to meet its liabilities as they fall due in the foreseeable future and for at least twelve months from the date of this report, and that it is appropriate for the Financial Statements to be prepared on a going concern basis.

Viability Statement

In accordance with provision C.2.2 of the UK Corporate Governance Code (the “UK Code”), published by the Financial Reporting Council in April 2016, the Board has assessed the prospects of the Company over the three year period to 23 April 2021 (the “Viability Period”).

On 20 March 2017, the Company offered all Shareholders the right to elect, during the election period, to realise some or all of the value of their ordinary shares, less applicable costs and expenses, on to the Realisation Date. Shareholders representing a total of 8,044,769 shares elected to participate in the realisation.

The Board and the Investment Manager believe that the investment opportunity provided by the Company remains compelling, but the viability of the Company is clearly contingent on the investment opportunity remaining in place, a matter which the Board monitors on an on-going basis. As the South Korean preference shares held by the Company trade at a discount compared with ordinary shares for the same companies, the Company remains attractive to long term investors over the Viability Period.

The Board’s assessment of the Company over the Viability Period has been made with reference to the Company’s current financial position and prospects, strategy, and risk appetite, having considered the Company’s principal risks and uncertainties detailed below. It is possible to imagine a number of scenarios, such as war or political events, which could severely impact the liquidity of the Company’s investments; therefore, the Board has also considered the Company’s likely cash flows and the liquidity of its portfolio.

It is noted that the Company currently has no gearing, though borrowing is permitted under its constitution. In the event that the Company did consider taking on debt, the Board would carefully assess the Company’s ability to meet the debt obligations as they become due.

The Board also assumes that the regulatory and fiscal regimes under which the Company operates will continue in broadly the same form during the Viability Period. The Board speaks with its broker and legal advisers on a regular basis to understand issues impacting the Company’s regulatory and fiscal structure.

The Board considers the principal risks affecting the viability of the Company are as follows:

Notice period of Investment Manager

The Board has assumed that the Investment Manager will remain in place during the Viability Period; however, the Board acknowledges the risk of the Investment Manager serving a twelve month notice period under the Management Agreement. To mitigate this risk, the Board meets and communicates regularly with the Investment Manager to review its performance and the Board’s relationship with the Investment Manager.

Failure of the Custodian to carry out its obligations to the Company

The Company’s assets are held in accounts maintained by the Company’s Custodian. Failure by the Custodian to carry out its obligations to the Company in accordance with the terms of the Custodian agreement could have an impact on the viability of the Company. To mitigate this risk, the Board regularly receives reports from the Custodian, and through the Management and Engagement Committee, monitors the relationship with the Custodian.

Loss of license or listing

The Board has assumed that the Company will retain its regulatory status and listing throughout the Viability Period. The Company Secretary, Administrator and Broker report to the Board at least quarterly on regulatory matters and confirm compliance with listing and other regulatory requirements.

Failure to implement and poor execution of the investment strategy

The Company maintains an investment policy, discussed in Summary Information section. The policy states that the Company must invest primarily in listed South Korean preference shares, and also states that investments in other types of securities are allowed as long as the investments track South Korean companies or market as a whole. Failure to implement the investment strategy or poor execution by the Investment Manager would have an effect on the viability of the Company. The Board ensures that the policy is being implemented in the quarterly Board Meetings, where the Investment Manager and Investment Adviser present reports to the Board detailing the current portfolio and investment performance.

The risks specifically associated with the South Korean economic and political climate are discussed in the Investment Manager’s Report.

Based on the Company’s processes for monitoring operating costs, the share price discount, the Investment Manager’s compliance with the investment objective, asset allocation, the portfolio risk profile, liquidity risk and the robust assessment of the principal risks and uncertainties facing the Company, the Board has 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 Viability Period to April 2021.

International Tax Reporting

For purposes of the US Foreign Accounts Tax Compliance Act, the Company registered with the US Internal Revenue Service (“IRS”) as a Guernsey reporting Foreign Financial Institution (“FFI”) in November 2014, received a Global Intermediary Identification Number (2A7KNV.99999.SL.831), and can be found on the IRS FFI list.

The Common Reporting Standard (“CRS”) is a global standard for the automatic exchange of financial account information developed by the Organisation for Economic Co-operation and Development (“OECD”), which has been adopted by Guernsey and which came into effect on 1 January 2016.

The Board will take necessary actions to ensure that the Company is compliant with Guernsey regulations and guidance in this regard.

Results and Dividends

The results for the year ended 31 December 2017 are set out in the Statement of Comprehensive Income. An annual dividend of 3.3262 pence per share (£3,123,626) was approved on 4 May 2017 and paid on 2 June 2017, in respect of the year ended 31 December 2016. An annual dividend of 2.2416 pence per share (£2,183,536) was approved on 2 June 2016 and paid on 28 June 2016, in respect of the year ended 31 December 2015.

The Board will declare an interim dividend on 7 June 2018 with a record date on 14 June 2018 for the year ended 31 December 2017, based on dividends received primarily from investments in Korean preferred shares.

Shareholder Information

Further Shareholder information can be found in the Summary Information.

Investment Management

The Investment Manager of the Company is Weiss Asset Management LP, a Delaware limited partnership formed on 10 June 2003 (the “Investment Manager”). The key terms of the Investment Management Agreement and specifically the fee charged by the Investment Manager are set out in Note 19 of the Financial Statements. The Board believes that the investment management fee is competitive with other investment companies with similar investment mandates.

The Board reviews, on an on-going basis, the performance of the Investment Manager and considers whether the investment strategy utilised is likely to achieve the Company’s investment objective.

Having considered the portfolio performance and investment strategy, the Board has unanimously agreed that the interests of the Shareholders as a whole are best served by the continuing appointment of the Investment Manager on the terms agreed.

Directors

The details of the Directors of the Company during the year and at the date of this Report are set out in the Directors section.

Directors’ Interests

The Directors who held office at 31 December 2017 and up to the date of this Report held the following numbers of ordinary shares beneficially:

There have been no changes in the interests of the above Directors during the year.

Substantial Interests

Disclosure and Transparency Rules (“DTRs”) are now comprised in the Financial Conduct Authority handbook. Section 5, the only section of the DTRs which applies to AIM-listed companies, requires substantial Shareholders to make relevant holding notifications to the Company. The Company must then disseminate this information to the wider market. Details of major Shareholders in the Company can be found in Note 11.

Corporate Governance

The Company does not have a Main Market Listing on the LSE and as such; the Company is not required to comply with the UK Corporate Governance Code (April 2016) (the “UK Code”) as issued by the Financial Reporting Council. However, the Board is committed to high standards of corporate governance and has implemented a framework for corporate governance which it considers to be appropriate for an investment company in order to comply with the main principles of the UK Code. By complying with the main principles of the UK Code, the Company is deemed to comply with the Code of Corporate Governance (the “GFSC Code”) issued by the Guernsey Financial Services Commission.

The Board has considered the principles and recommendations of the UK Code, and considers that reporting against the UK Code will provide better information to Shareholders. To ensure on-going compliance with these principles the Board receives a report from the Company Secretary, at each quarterly meeting, identifying how the Company is in compliance and identifying any changes that might be necessary.

The Board, having reviewed the UK Code, considers that it has maintained procedures during the year ended 31 December 2017 and up to the date of this report to ensure that it complies with the UK Code except as explained elsewhere in the Report.

Role of the Board

The Board is the Company’s governing body and has overall responsibility for maximising the Company’s success by directing and supervising the affairs of the business and meeting the appropriate interests of Shareholders and relevant stakeholders, while enhancing the value of the Company and also ensuring protection of investors. A summary of the Board’s responsibilities is as follows:

- statutory obligations and public disclosure;

- strategic matters and financial reporting;

- risk assessment and management including reporting compliance, governance, monitoring, and control; and

- other matters having a material effect on the Company.

The Board’s responsibilities for the Annual Report are set out in the Statement of Directors’ Responsibilities.

The Board has engaged external companies to undertake the investment management, administrative, and custodial activities of the Company. Documented contractual arrangements are in place with these companies which define the areas where the Board has delegated responsibility to them.

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

In seeking to achieve this, the Directors have set out the Company’s investment objective and policy, have explained how the Board and its delegated committees operate and how the Directors review the risk environment within which the Company operates and, set appropriate risk controls. Furthermore, throughout the Annual Report and Financial Statements, the Board has sought to provide further information to enable Shareholders to better understand the Company’s business and financial performance.

Composition and Independence of the Board

The Board currently comprises three non-executive Directors, all of whom are considered independent of the Investment Manager. The Directors of the Company are listed in the Directors section.

The Chairman is Mr Crighton. Biographies for Mr Crighton and all other Directors appear in the Directors section. In considering the independence of the Chairman, the Board has taken note of the provisions of the UK Code relating to independence, and has determined that Mr Crighton is an Independent Director.

The Board believes it has a good balance of skills and experience to ensure it operates effectively. The Chairman is responsible for leadership of the Board and ensuring its effectiveness.

As the Chairman is an Independent Director, no appointment of a Senior Independent Director has been made. The Company has no employees and therefore there is no requirement for a Chief Executive, or a whistleblowing policy.

The Company holds a minimum of four Board Meetings per year to discuss general management, structure, finance, corporate governance, marketing, risk management, compliance, asset allocation and gearing, contracts, and performance. The quarterly Board Meetings are the principal source of regular information for the Board enabling it to determine policy and to monitor performance, compliance, and controls. These meetings are supplemented by communication and discussions throughout the year.

A representative of the Investment Manager, Administrator, and Company Secretary may attend each Board Meeting either in person or by telephone thus enabling the Board to fully discuss and review the Company’s operations and performance. Each Director has direct access to the Investment Manager and Company Secretary and may, at the expense of the Company, seek independent professional advice on any matter.

Attendance at the Board and other Committee Meetings during the year was as follows:

Board Diversity

The Board considers the composition of the Board on an on-going basis.

Re-election

The Articles of Incorporation provide that one-third of the Directors retire by a voluntary rotation basis at each AGM. However, in order to meet the highest standards of corporate governance, the Directors have agreed to stand for election annually.

The Directors may at any time appoint any person to be a Director either to fill a casual vacancy or as an addition to the existing Directors. Any Director so appointed shall hold office only until, and shall be eligible for re-election at, the next AGM following their appointment, but shall not be taken into account in determining the Directors or the number of Directors who are to retire by a voluntary rotation basis, at that meeting if it is an AGM.

Board Performance

The Board undertakes an evaluation of its own performance and that of individual Directors on an annual basis. In order to review its effectiveness, the Board carries out a process of formal self-appraisal. The Board considers how it functions as a whole and also reviews the individual performance of its members. This process is conducted by the respective Chairman reviewing each members’ performance, contributions, and commitment to the Company by reviewing a questionnaire each Board member has completed. This last took place in the Board Meeting held on 14 November 2017.

The Board considers it has a breadth of experience relevant to the Company, and the Directors believe that any changes to the Board’s composition can be managed without undue disruption.

Committees of the Board

The Board has established an Audit Committee and a Management and Engagement Committee. All Terms of Reference for both Committees are available from the Company Secretary upon request or on the Company’s website, www.weisskoreaopportunityfund.com.

Audit Committee

The Company has established an Audit Committee with formally delegated duties and responsibilities within written terms of reference. The Audit Committee is chaired by Mr Coe. The Audit Committee’s other members are Mr Crighton and Mr King. The Audit Committee meets formally at least twice a year.

Appointment to the Audit Committee is for a period of up to three years, which may be extended for two further three year periods.

The table in this report sets out the number of Audit Committee Meetings held during the year ended 31 December 2017 and the number of such meetings attended by each Audit Committee member.

A report of the Audit Committee detailing responsibilities and activities is presented in the Audit Committee Report.

Management and Engagement Committee

The Company has established a Management and Engagement Committee, with formally delegated duties and responsibilities within written terms of reference. The Management and Engagement Committee is chaired by Mr King. The Management and Engagement Committee’s other members are Mr Crighton and Mr Coe. The Management and Engagement Committee meets formally once a year.

The principal duties of the Management and Engagement Committee are to review the performance of and contractual arrangements with the Investment Manager and all other service providers to the Company (other than the External Auditor).

During the Management and Engagement Committee meeting held on 19 July 2017, fees for the services provided by the Investment Manager as well as the other service providers were reviewed. The Management and Engagement Committee increased the fee of N+1 Singer from £50,000 to £75,000 taking into consideration the additional services provided and high quality of service.

As at 31 December 2017, Directors fees were: £30,000 payable to Mr Crighton as Chairman of the Board, £27,500 to Mr Coe as Chairman of the Audit Committee and £24,000 to Mr King. The Directors fees were increased with effect from 1 July 2017.

Nomination Committee

The Board does not have a separate Nomination Committee. The Board as a whole fulfils the function of a Nomination Committee. Any proposal for a new Director will be discussed and approved by the Board. The Board will determine whether an external search consultancy or open advertising is used in the appointments of non-executive Directors in the future.

Remuneration Committee

In view of its non-executive and independent nature, the Board considers that it is not appropriate for there to be a Remuneration Committee as anticipated by the UK Code because this function is carried out as part of the regular Board business. A Remuneration Report prepared by the Board is contained in the Directors’ Remuneration Report. Directors’ remuneration is considered on an annual basis.

Environmental Policy

Due to the Company’s listing on AIM, the Company is required to disclose its Environmental Policy, but this is not applicable due to the nature of its operations.

Internal Controls

The Board is ultimately responsible for establishing and maintaining the Company’s system of internal controls and for maintaining and reviewing its effectiveness. The Company’s risk matrix continues to be the basis of the Company’s risk management process in establishing the Company’s system of internal financial and reporting controls. The risk matrix is prepared and maintained by the Board which initially identifies the risks facing the Company and then collectively assesses the likelihood of each risk, the impact of those risks, and the strength of the controls operating over each risk. The Company’s system of internal controls is designed to manage rather than to eliminate the risk of failure to achieve the Company’s objectives and by their nature can only provide reasonable and not absolute assurance against misstatement and loss. These controls aim to ensure that: assets of the Company are safeguarded; proper accounting records are maintained; and the financial information for publication is reliable.

The UK Code requires Directors to conduct at least annually a review of the Company’s system of internal controls, covering all controls, including financial, operational, compliance, and risk management. The Board has evaluated the Company’s systems of internal controls. In particular, it has prepared a process for identifying and evaluating the significant risks affecting the Company and the policies by which these risks are managed. The process has resulted in a low to medium risk assessment. 

The Board has delegated the management of the Company’s investment portfolio, administration, registrar and corporate secretarial functions, which includes the independent calculation of the Company’s NAV and the production of the audited Annual Report and Financial Statements. Whilst the Board delegates these functions, it remains responsible for the functions it delegates and for the systems of internal control. Formal contractual agreements have been put in place between the Company and providers of these services. On an on-going basis, Board reports are provided at each quarterly Board Meeting from the Investment Manager, Administrator, Registrar, Company Secretary and a representative from the Investment Manager is asked to attend these meetings.

In common with most investment companies, the Company does not have an internal audit function. All of the Company’s management functions are delegated to the Investment Manager, Administrator, Registrar and Company Secretary which have their own internal audit and risk assessment functions.

The Company’s risk exposure and the effectiveness of its risk management and internal control systems are reviewed by the Audit Committee at its meetings and annually by the Board. The Board believes that the Company has adequate and effective systems in place to identify, mitigate, and manage the risks to which it is exposed.

Principal Risks and Uncertainties

In respect to the Company’s system of internal controls and reviewing its effectiveness, the Directors:

• are satisfied that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency, or liquidity; and

• have reviewed the effectiveness of the risk management and internal control systems, including material financial, operational, and compliance controls (including those relating to the financial reporting process) and no significant failings or weaknesses were identified. 

The principal risks and uncertainties which have been identified and the steps which are taken by the Board to mitigate them are as follows:

Investment Risks

The Company is exposed to the risk that its portfolio fails to perform in line with its investment objective and policy if markets move adversely or if the Investment Manager fails to comply with the investment policy. The Board reviews reports from the Investment Manager at the quarterly Board Meetings, with a focus on the performance of the portfolio in line with its investment policy. The Administrator is responsible for ensuring that all transactions are in accordance with the investment restrictions.

Operational Risks

The Company is exposed to the risk arising from any failures of systems and controls in the operations of the Investment Manager, Administrator, and the Custodian. The Board and its Committees regularly review reports from the Investment Manager and the Administrator on their internal controls. The Administrator will report to the Investment Manager any valuation issues which will be brought to the Board for final approval as required.

Accounting, Legal and Regulatory Risks

The Company is exposed to the risk that it may fail to maintain accurate accounting records, fail to comply with requirements of its Admission Document, and fail to meet listing obligations. The accounting records prepared by the Administrator are reviewed by the Investment Manager. The Administrator, Broker, and Investment Manager provide regular updates to the Board on compliance with the Admission Document and changes in regulation.

Discount Management

The Company is exposed to Shareholder dissatisfaction through inability to manage the share price discount to NAV. The Board and its Broker monitor share price discount (and premium) continuously and has engaged in share buy backs from time to time to help minimise any such discount. The Board believes that it has access to sufficiently liquid assets to help manage share price discount. The Company’s discount management programme is described within Note 18.

Liquidity of Investments

The Korean preferred shares typically purchased by the Company generally have smaller market capitalisations and lower levels of liquidity than their common share counterparts. These factors, among others, may result in more volatile price changes in the Company’s assets as compared to the Korean stock market or other more liquid asset classes. This volatility could cause the NAV to go up or down dramatically.

In order to realise its investments, the Company will likely need to sell its holdings in the secondary market, which could prove difficult if adequate liquidity does not exist at the time, and could result in the values received by the Company being significantly less than their holding values. The liquidity of the market for preferred shares may vary materially over time. There can be no guarantee that a liquid market for the Company’s assets will exist or that the Company’s assets can be sold at prices similar to the published NAV. Illiquidity could also make it difficult or costly for the Company to purchase securities, and this could result in the Company holding more cash than anticipated. Furthermore, it is possible that South Korea could impose currency-exchange or capital controls on foreign investors, making it difficult or impossible for the Company to repatriate funds. The Investment Manager considers the liquidity of secondary trading in assessing and managing the liquidity of the Company’s investments. The Board reviews the Company’s resources and obligations on a regular basis with a view to ensuring that sufficiently liquid assets are held for the expected day to day operations of the Company. However, if the Company were required to liquidate a substantial portion of its assets at a single time, it is likely that the market impact of the necessary sale transactions would impact the value of the portfolio materially. 

Fraud Risk

The Company is exposed to fraud risk. The Audit Committee continues to monitor the fraud, bribery, and corruption policies of the Company. The Board receives an annual confirmation from all service providers that there have been no instances of fraud or bribery.

Financial Risks

The financial risks, including market, credit and liquidity risks faced by the Company are set out in Note 20 of the Financial Statements. These risks and the controls in place to reduce the risks are reviewed at the quarterly Board Meetings.

Shareholder Engagement

The Directors welcome Shareholders’ views and places great importance on communication with its Shareholders. Shareholders wishing to meet with the Chairman and other Board members should contact the Company’s Administrator.

The Investment Manager and Broker maintain a regular dialogue with institutional Shareholders, the feedback from which is reported to the Board.

The Company’s AGM provides a forum for Shareholders to meet and discuss issues of the Company and provides Shareholders with the opportunity to vote on the resolutions as specified in the Notice of AGM. The Notice of AGM and the results are released to the London Stock Exchange in the form of an announcement.

In addition, the Company maintains a website which contains comprehensive information, including links to regulatory announcements, share price information, financial reports, investment objective, and investor contacts.

Auditor

The Auditor, KPMG Channel Islands Limited, has indicated their willingness to continue in office. Accordingly, a resolution for their reappointment will be proposed at the forthcoming AGM.

Statement of Directors’ Responsibilities

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

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law they are required to prepare the Financial Statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and applicable law.

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

- select suitable accounting policies and then apply them consistently; 

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

- state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements;

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

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

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

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

The Directors confirm that they have complied with the above requirements in preparing the Annual Report and Financial Statements and that to their best knowledge and belief:

- the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company; and 

- the Directors’ report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

We consider the Annual Report and accounts, taken as a whole, are fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

The Board of Directors confirms that, throughout the period covered by the Financial Statements, the Company complied with the GFSC code through its compliance with the UK Code.

Disclosure of Information to the Auditor

The Directors who hold office at the date of approval of this Directors’ Report confirm that, so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware, and that each Director has taken all the steps 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.

Signed on behalf of the Board by:

Norman Crighton23 April 2018

Stephen Coe23 April 2018

Directors’ Remuneration Report

Introduction

An ordinary resolution for the approval of the Directors’ Remuneration Report will be put to the Shareholders at the AGM to be held on 26 July 2018.

Remuneration Policy

All Directors are non-executive and a Remuneration Committee has not been established. The Board as a whole considers matters relating to the Directors’ remuneration. No advice or services were provided by any external person in respect of its consideration of the Directors’ remuneration.

The Company’s policy is that the fees payable to the Directors should reflect the time spent by the Directors on the Company’s affairs and the responsibilities borne by the Directors and be sufficient to attract, retain, and motivate Directors of a quality required to run the Company successfully. The Chairman of the Board is paid a higher fee in recognition of his additional responsibilities, as is the Chairman of the Audit Committee. The policy is to review fee rates periodically, although such a review will not necessarily result in any changes to the rates, and account is taken of fees paid to directors of comparable companies. The Directors of the Company are remunerated for their services at such a rate as the Directors determine provided that the aggregate amount of such fees does not exceed £200,000 per annum.

There are no long term incentive schemes provided by the Company and no performance fees are paid to Directors.

None of the Directors have a service contract with the Company, but each of the Directors is appointed by a letter of appointment which sets out the main terms of their appointment. Directors hold office until they retire by rotation or cease to be a Director in accordance with the Articles of Incorporation, by operation of law, or until they resign.

During the Board Meeting held on 5 December 2016, the Board agreed that Directors’ fees, along with all fees associated with the Company, would be reviewed post Realisation Opportunity in May 2017.

Following this review, during a meeting in held in July 2017, it was noted that the Directors’ fees had not been increased since the launch of the Company and were out of line with the current market. The Directors’ fees were increased to comprise of £30,000 payable to Mr Crighton as Chairman of the Board, £27,500 to Mr Coe as Chairman of the Audit Committee and £24,000 to Mr King.

Remuneration

Directors are remunerated in the form of fees, payable quarterly in arrears, to the Director personally. No Director has been paid additional remuneration outside their normal Directors’ fees and expenses.

As at 31 December 2017, Directors fees were: £30,000 payable to Mr Crighton as Chairman of the Board, £27,500 to Mr Coe as Chairman of the Audit Committee and £24,000 to Mr King. The Directors fees were increased with effect from 1 July 2017.

Signed on behalf of the Board by:

Norman Crighton23 April 2018

Stephen Coe23 April 2018

Audit Committee Report

Dear Shareholders,

We present the Audit Committee’s Report for 2017, setting out the responsibilities of the Audit Committee and its key activities in 2017.

The Audit Committee has reviewed the Company’s financial reporting, significant areas of judgement and estimation within the Company’s Financial Statements, the independence and effectiveness of the External Auditor and the internal control and risk management systems of the Company’s service providers. The Audit Committee considered whether the Annual Report and Financial Statements are fair, balanced, and understandable, and whether they provided the necessary information for Shareholders to assess the Company’s performance, business model and strategy before recommending them to the Board for approval. In order to assist the Audit Committee in discharging these responsibilities, regular reports are received from the Investment Manager, Administrator and External Auditor. Following its review of the independence and effectiveness of the Company’s External Auditor, the Audit Committee has recommended to the Board that KPMG Channel Islands Limited be reappointed as Auditor, which the Board has submitted for approval to the Company’s Shareholders.

A member of the Audit Committee will continue to be available at each AGM to respond to any Shareholder questions on the activities of the Audit Committee.

Responsibilities

The Audit Committee reviews and recommends the approval of the Financial Statements of the Company to the Board and is the forum through which the External Auditor reports to the Board of Directors. The External Auditor and the Audit Committee will meet together without representatives of either the Administrator or Investment Manager being present if either considers this to be necessary.

The role of the Audit Committee includes:

• monitoring the integrity of the published Financial Statements of the Company;

• reviewing and reporting to the Board on the significant issues, judgements and estimates made in the preparation of the Company’s published Financial Statements;

• monitoring and reviewing the quality and effectiveness of the External Auditor and their independence;

• considering and making recommendations to the Board on the appointment, reappointment, replacement and remuneration to the Company’s External Auditor;

• reviewing the Company’s procedures for prevention, detection and reporting of fraud, bribery and corruption; and

• monitoring and reviewing the internal control and risk management systems of the service providers.

The Audit Committee’s full terms of reference can be obtained by contacting the Company’s Secretary or on the Company’s website, www.weisskoreaopportunityfund.com.

Key Activities of the Audit Committee

The following sections discuss the assessments made by the Audit Committee during the year:

Financial Reporting

The Audit Committee’s review of the Annual Report and Audited Financial Statements focused on the following significant area:

Valuation of Investments

The Company’s financial investments had a fair value of £154,236,177 as at 31 December 2017 and represent the majority of the net assets of the Company. The majority of the investments are listed and traded, and the valuation is by reference to the fair value measurement required by IFRS. The Audit Committee considered the fair value of the investments held by the Company as at 31 December 2017 to be reasonable from a review of the information provided by the Investment Manager and Administrator. All prices have been confirmed by the Administrator to independent pricing sources as at 31 December 2017.

The Investment Manager and Administrator confirmed to the Audit Committee that they were not aware of any material misstatements including matters relating to the Financial Statements’ presentation, nor were they aware of any fraud or bribery relating to the Company’s activities. Furthermore, the External Auditor reported to the Audit Committee that no material misstatements were found in the course of their work.

Following a review of the presentations and reports from the Administrator and consulting where necessary with the External Auditor, the Audit Committee is satisfied that the Financial Statements appropriately address the critical judgements and key estimates made in the preparation of the Financial Statements (both in respect to the amounts reported and the disclosures). The Audit Committee is also satisfied that the significant assumptions used for determining the value of assets and liabilities have been appropriately scrutinised and challenged and are sufficiently robust.

Risk Management

The Audit Committee continued to consider the process for managing the risk of the Company and its service providers. Risk management procedures for the Company, as detailed in the Company’s risk assessment matrix, were reviewed and approved by the Audit Committee and a full review took place post-Realisation Opportunity in November 2017. Following the review, minor amendments were made regarding timing of dividends and the inclusion of hedging and its associated risks.

Fraud, Bribery and Corruption

The Audit Committee continues to monitor the fraud, bribery, and corruption policies of the Company. The Board receives a confirmation from all service providers that there have been no instances of fraud or bribery.

The External Auditor

Independence, Objectivity and Fees

The independence and objectivity of the External Auditor are reviewed by the Audit Committee, which also reviews the terms under which the External Auditor is appointed to perform non-audit services. The Audit Committee has established pre-approval policies and procedures for the engagement of the Auditor to provide audit and assurance services.

The External Auditor may not provide a service which:

• places them in a position to audit their own work;

• creates a mutuality of interest;

• results in the External Auditor developing close relationships with service providers of the Company;

• results in the External Auditor functioning as a manager or employee of the Company; and

• puts the External Auditor in the role of advocate of the Company.

As a general rule, the Company does not utilise the External Auditor for internal audit purposes, secondments, or valuation advice. Services such as tax compliance, tax structuring, private letter rulings, accounting advice, quarterly reviews and disclosure advice are normally permitted but will be pre-approved by the Audit Committee.

The following table summarises the remuneration payable to KPMG Channel Islands Limited and to other KPMG member firms for audit and non-audit services:

The Audit Committee does not consider KPMG Channel Islands Limited’s independence to be under threat. In making this assessment, the Audit Committee has concluded that the non-audit fees do not relate to prohibited services. In approving the non-audit services, the Audit Committee considered the safeguards put in place by KPMG Channel Islands Limited to reduce the threats to independence and objectivity to an acceptable level.

KPMG Channel Islands Limited has been the External Auditor from the date of the initial listing on the London Stock Exchange. The UK Code introduced a recommendation that the external audit be put out to tender every ten years. The Audit Committee has noted this and will develop a plan for tendering at the appropriate time.

The Audit Committee has examined the scope and results of the audit, its cost effectiveness and the independence and objectivity of the External Auditor, with particular regard to non-audit fees, and considers KPMG Channel Islands Limited, as External Auditor, to be independent of the Company.

Performance and Effectiveness

During the year, when considering the effectiveness of the External Auditor, the Audit Committee has taken into account the following factors:

• The audit plan presented to it before the audit;

• The post audit report including variations from the original plan;

• Changes in audit personnel;

• The External Auditor’s report on independence; and

• Feedback from both the Investment Manager and Administrator.

Further to the above, at the conclusion of the 2017 audit fieldwork, the Audit Committee performed specific evaluation of the performance of the External Auditor through discussion with the Administrator and Investment Manager, as well as the audit team itself.

There were no significant adverse findings from this evaluation.

Reappointment of External Auditor

Consequent to this review process, the Audit Committee has recommended to the Board that a resolution be put to the 2018 AGM for the reappointment of KPMG Channel Islands Limited as External Auditor. The Board has accepted this recommendation.

Internal Control and Risk Management Systems

After consultation with the Investment Manager, Administrator, and External Auditor, the Audit Committee has considered the impact of the risk of the override of controls by its service providers, the Investment Manager, and Administrator.

The Audit Committee reviews externally prepared assessments of the control environment in place at the Administrator, with the Administrator providing a Service Organisation Controls Report on a bi-annual basis. The Audit Committee noted that the Management and Engagement Committee received a self-assessment from the Investment Manager and no issues were identified in this. Additionally, representatives of the portfolio managers meet with the Board of Directors annually to discuss and review the controls in place at the Investment Manager. No significant failings or weaknesses were identified in these reviews.

The Audit Committee has also reviewed the need for an internal audit function. The Audit Committee has decided that the systems and procedures employed by the Investment Manager and the Administrator’s internal audit function provide sufficient assurance that a sound system of internal control, which safeguards the Company’s assets, is maintained. An internal audit function specific to the Company is therefore considered unnecessary.

In finalising the Financial Statements for recommendation to the Board for approval, the Audit Committee is satisfied that, taken as a whole, the Annual Report and Financial Statements are fair, balanced, and understandable. The Board has accepted this approval.

For any questions on the activities of the Audit Committee not addressed in the foregoing, a member of the Audit Committee remains available to attend each AGM to respond to such questions.

The Audit Committee Report was approved by the Board on 23 April 2018 and signed on behalf of the Audit Committee by:

Stephen CoeChairman, Audit Committee23 April 2018

Independent Auditor’s Report

To the Members of Weiss Korea Opportunity Fund Ltd.

Our opinion is unmodified

We have audited the financial statements (the “Financial Statements”) of Weiss Korea Opportunity Fund Ltd. (the “Company”), which comprise the statement of financial position as at 31 December 2017, the statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying Financial Statements:

- give a true and fair view of the financial position of the Company as at 31 December 2017, and of the Company’s financial performance and the Company’s cash flows for the year then ended;

- are prepared in accordance with International Financial Reporting Standards as adopted by the EU (“IFRS”); and

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

Basis for Opinion

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

Key Audit Matters: our assessment of the risks of material misstatement

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

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

Materiality for the Financial Statements as a whole was set at £4,362,000, determined with reference to the benchmark of net assets of £161,264,280 of which it represents approximately 3% (2016: 3%).

We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding £218,000, in addition to other identified misstatements that warranted reporting on qualitative grounds. 

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

We have nothing to report on going concern

We are required to report to you if we have anything material to add or draw attention to in relation to the directors’ statement in note 2c to the Financial Statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Company’s use of that basis for a period of at least twelve months from the date of approval of the Financial Statements. We have nothing to report in this respect.

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

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

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

Disclosures of principal risks and longer-term viability

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

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

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

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

Corporate governance disclosures

We are required to report to you if:

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

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

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

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

- the Company has not kept proper accounting records; or

- the Financial Statements are not in agreement with the accounting records; or

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

Respective responsibilities

Directors’ responsibilities

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

Auditor’s responsibilities 

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

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

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

This report is made solely to the Company’s members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, 2008 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.

KPMG Channel Islands LimitedChartered Accountants, Guernsey23 April 2018

Statement of Financial Position

The notes form an integral part of these Financial Statements.

The Financial Statements were approved and authorised for issue by the Board of Directors on 23 April 2018.

Norman CrightonChairman

Stephen CoeDirector

Statement of Comprehensive Income

All items derive from continuing activities.

The notes form an integral part of these Financial Statements.

Statement of Changes in Equity

The notes form an integral part of these Financial Statements.

Statement of Cash Flows

The notes form an integral part of these Financial Statements.

Notes to the Financial Statements

1. General information

The Company was incorporated with limited liability in Guernsey, as a closed-ended investment company on 12 April 2013. The Company’s Shares were admitted to trading on AIM of the LSE on 14 May 2013.

The Company’s investment objective and policy is set out in the Summary Information.

The Investment Manager of the Company is Weiss Asset Management LP.

At the AGM held on 27 July 2016, the Board approved the adoption of the new Articles of Incorporation in accordance with Section 42(1) of the Companies (Guernsey) Law, 2008 (the “Law”).

2. Significant accounting policies

a) Statement of compliance

The Annual Report and Audited Financial Statements of the Company for the year ended 31 December 2017 have been prepared in accordance with IFRS adopted by the European Union and the AIM Rules of the London Stock Exchange. They give a true and fair view and are in compliance with the Law.

b) Basis of preparation

The Financial Statements are prepared in pounds sterling (£), which is the Company’s functional and presentational currency. They are prepared on a historical cost basis modified to include financial assets at fair value through profit or loss.

c) Going concern

In March 2017 and in accordance with the Company’s Articles of Association and Prospectus, the Company offered all Shareholders the right to elect to realise some or all of the value of their ordinary shares (the “Realisation Opportunity”), less applicable costs and expenses, on or prior to the fourth anniversary of Admission, being 15 May 2017 (the “Realisation Date”). See Note 18 for further details.

On 20 March 2017, the Company announced that pursuant to the Realisation Opportunity, Shareholders who were on the register as at the record date may elect, during the election period, to redesignate all or part (provided that such part be rounded up to the nearest whole Ordinary Share) of their Ordinary Shares as Realisation Shares.

As the Realisation Opportunity did not result in the NAV of the continuing Ordinary Shares being less than £50 million at the close of business on the last Business Day before the Reorganisation Date, the Directors did not propose an ordinary resolution for the winding up of the Company.

The Directors believe that, having considered the Company’s investment objective (see Summary Information) and financial risk management (see Note 20 to the Financial Statements) and in view of the liquidity of investments, the income deriving from those investments and its holding in cash and cash equivalents, the Company has adequate financial resources and suitable management arrangements in place to continue as a going concern for at least twelve months from the date of approval of the Annual Financial Statements.

d) Standards, amendments and interpretations not yet effective

At the date of approval of these Financial Statements, the following standards and interpretations have not been applied in these Financial Statements, but were in issue and not yet effective.

IFRS 9 ‘Financial Instruments’ is effective for annual reporting periods beginning on or after 1 January 2018 with early adoption permitted, and amends IAS 39 ‘Financial Instruments – Recognition and measurement.’ IFRS 9 specifies how an entity should classify and measure financial assets, including some hybrid contracts. IFRS 9 requires all financial assets to be classified on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. This classification includes financial assets initially measured at fair value (plus, in the case of a financial asset not at fair value through profit or loss, particular transaction costs) subsequently measured at amortised costs or fair value. These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of IAS 39. They apply a consistent approach to classifying financial assets and replace the numerous categories of financial assets in IAS 39, each of which had its own classification criteria.

They also result in one impairment method, replacing the numerous impairment methods in IAS 39 that arise from different classifications.

IFRS 15 ‘Revenue from Contracts with Customers’ is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 ‘Revenue’.

The Company currently recognises dividend income under IAS 18. The Company does not anticipate any impact on its recognition of dividend income under IFRS 15 as the standard only outlines the treatment of revenue from customer contracts.

The Board anticipates that the adoption of these standards and interpretations in a future period will not have a material impact on the Financial Statements of the Company. Based on its assessment on the new IFRS 9 requirements, the Company does not believe that the new classification requirements will have a material impact on its accounting for trade receivables, financial assets at fair value through profit or loss and other derivative financial instruments. Financial assets currently measured at fair value through profit or loss or at amortised cost will continue to be measured as such.

e) Financial instruments

i) Classification

Financial assets are classified into the following categories: financial assets at fair value through profit or loss and loans and receivables.

The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Financial liabilities are classified as either financial liabilities at fair value through profit or loss or other financial liabilities.

ii) Recognition and measurement

Financial assets at fair value through profit or loss (“investments”)

Financial assets and derivatives are recognised in the Company’s Statement of Financial Position when the Company becomes a party to the contractual provisions of the instrument.

Purchases and sales of investments are recognised on the trade date (the date on which the Company commits to purchase or sell the investment). Investments purchased are initially recorded at fair value, being the consideration given and excluding transaction or other dealing costs associated with the investment.

Subsequent to initial recognition, investments are measured at fair value. Gains and losses arising from changes in the fair value of investments and gains and losses on investments that are sold are recognised through profit

or loss in the Statement of Comprehensive Income within net changes in fair value of financial assets at fair value through profit or loss.

Financial assets at fair value through profit or loss (“derivatives: credit default swaps”)

Subsequent to initial recognition at fair value, credit default swaps are measured at fair value through profit and loss.

The fair value of the credit default swaps are based on traded prices. The valuation of the credit default swaps' fair value means fluctuations will be reflected in the net changes in fair value of derivative instruments.

Derivatives are presented in the Statement of Financial Position as financial assets when their fair value is positive and as financial liabilities when their fair value is negative.

Other financial instruments

Other financial instruments, including other receivables and other payables are measured at amortised cost (less impairment in the case of assets). The carrying amounts as shown in the Statement of Financial Position approximate the fair values due to the short term nature of these financial instruments.

iii) Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Investments traded in active markets are valued at the latest available bid prices ruling at midnight, Greenwich Mean Time (“GMT”), on the reporting date. The Directors are of the opinion that the bid-market prices are the best estimate of fair value. Gains and losses arising from changes in the fair value of financial assets at fair value through profit and loss are shown as net gains or losses on financial assets through profit or loss in Note 12 and are recognised in the Statement of Comprehensive Income in the period in which they arise. Gains and losses arising from changes in the fair value of derivative financial instruments are shown as net gains or losses on financial derivatives through profit or loss in Note 16 and are recognised in the Statement of Comprehensive Income in the period in which they arise.

iv) Derecognition of financial instruments

A financial asset is derecognised when: (a) the rights to receive cash flows from the asset have expired, (b) the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass through arrangement”; or (c) the Company has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

On derecognition of a financial asset, the difference between the carrying amount of the asset using the average cost method and the consideration received (including any new asset obtained, less any new liability assumed) is recognised in profit or loss.

A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expired.

f) Net changes in fair value of financial assets at fair value through profit or loss

Net changes in fair value of financial assets at fair value through profit or loss includes all realised and unrealised fair value changes and foreign exchange differences, but excludes dividend income.

g) Income

Dividend income from equity investments is recognised through profit or loss in the Statement of Comprehensive Income when the relevant investment is quoted ex-dividend.

h) Expenses

All expenses are accounted for on an accruals basis. Expenses incurred on the acquisition of financial assets at fair value through profit or loss and management fees are charged to the Statement of Comprehensive Income.

i) Cash and cash equivalents

Cash comprises cash in hand and demand deposits. Cash equivalents, which can include bank overdrafts and margin accounts, are short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant changes in value. Cash, deposits with banks, and bank overdrafts are stated at their principal amount.

j) Share capital

Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of these Shares are shown in equity as a deduction, net of tax, from the proceeds and disclosed in the Statement of Changes in Equity.

k) Foreign currency translations

Functional and presentation currency

The Financial Statements of the Company are presented in the currency of the primary economic environment in which the Company operates (its “functional currency”). The Directors have considered the currency in which the original capital was raised, distributions will be made, and ultimately the currency in which capital would be returned in a liquidation.

On the Statement of Financial Position date, the Directors believe that pounds sterling best represents the functional currency of the Company. For the purpose of the Financial Statements, the results and financial position of the Company are expressed in pounds sterling, which is the presentational currency of the Company. Monetary assets and liabilities, denominated in foreign currencies, are translated into pounds sterling at the exchange rate at the reporting date. Non-monetary assets denominated in foreign currencies that are measured at fair value are translated in pounds sterling at the exchange rate at the date on which the fair value was determined. Realised and unrealised gains or losses on currency translation are recognised in the Statement of Comprehensive Income. Foreign currency differences relating to investments at fair value through profit or loss are included within net changes in fair value of financial assets at fair value through profit or loss.

l) Treasury shares

Where the Company purchases its own share capital, the consideration paid, which includes any directly attributable costs, is deducted through share capital. The difference between the total consideration and the total nominal value of all shares purchased is recognised through other reserves, which is a distributable reserve.

When such Shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is recognised as an increase in equity and the resulting surplus or deficit on the transaction is transferred to or from other reserves.

Where the Company cancels treasury shares, no further adjustment is required to the share capital account at the time of cancellation. Shares held in treasury are excluded from calculations when determining NAV per share and earnings per share.

m) Operating segments

The Board has considered the requirements of IFRS 8 ‘Operating Segments’ and is of the view that the Company is engaged in a single segment of business, being an investment strategy tied to listed preferred shares issued by companies incorporated in South Korea. The Board, as a whole, has been determined as constituting the chief operating decision maker of the Company.

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 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 these Audited Financial Statements.

The Board of Directors is charged with setting the Company’s investment strategy in accordance with the investment policy. They have delegated the day to day implementation of this strategy to the Company’s Investment Manager but retain responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions. The investment decisions of the Investment Manager are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board. The Investment Manager has 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 Manager 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 Manager.

The Board therefore retains full responsibility as to the major decisions made on an on-going basis. The Investment Manager will always act under the terms of the Admission Document which cannot be significantly changed without the approval of the Board of Directors and where necessary, Shareholders.

m) Other receivables

Other receivables are amounts due in the ordinary course of business. Other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.

n) Other payables

Other payables are obligations to pay for services that have been acquired in the ordinary course of business. Other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

o) Due from and due to brokers

Amounts due from and due to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the Statement of Financial Position date, respectively.

p) Dividend distribution

Dividend distribution to the Company’s Shareholders is recognised as a liability in the Company’s Financial Statements and disclosed in the Statement of Changes in Equity in the period in which the dividends are proposed and approved by the Board.

q) Taxation

The Company has been granted Exempt Status under the terms of The Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its liability is an annual fee of £1,200 (2016: £1,200). 

The amounts disclosed as taxation in the Statement of Comprehensive Income relate solely to withholding tax levied in South Korea on distributions from South Korean companies at an offshore rate of 22%.

r) Other reserves

Total comprehensive income for the year is transferred to Other Reserves.

3. Dividends to Shareholders

Dividends, if any, will be paid annually each year. An annual dividend of 3.3262 pence per share (£3,123,626) was approved on 4 May 2017 and paid on 2 June 2017, in respect of the year ended 31 December 2016.

An annual dividend of 2.2416 pence per share (£2,183,536) was approved on 2 June 2016 and paid on 28 June 2016, in respect of the year ended 31 December 2015.

4. Significant accounting judgements, estimates and assumptions

The preparation of the Financial Statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense, and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

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

Judgements

In the process of applying the Company’s accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the Annual Financial Statements:

Functional currency

As disclosed in Note 2k, the Company’s functional currency is the pound sterling. Pound sterling is the currency in which the original capital was raised, distributions will be made and ultimately the currency in which capital would be returned in a liquidation.

5. Basic and diluted earnings per share

The basic and diluted earnings per share for the Company has been calculated based on the total comprehensive income for the year of £39,558,714 (for the year ended 31 December 2016: £17,535,937) and the weighted average number of Ordinary Shares in issue during the year of 90,657,042 (for the year ended 31 December 2016: 97,414,942).

6. Net asset value per ordinary share

The net asset value of each Share of £1.9115 (as at 31 December 2016: £1.5027) is determined by dividing the net assets of the Company attributed to the Ordinary Shares of £161,264,280 (as at 31 December 2016: £146,374,699) by the number of ordinary shares in issue at 31 December 2017 of 84,364,981 (as at 31 December 2016: 97,409,750 ordinary shares in issue).

7. Net changes in fair value on financial assets at fair value through profit or loss

8. Net changes in fair value on derivative financial instruments at fair value through profit or loss

9. Other income

10. Operating expenses

* Fees of £6,125 (31 December 2016: £3,750) were paid to the Auditor, KPMG Channel Islands Limited, in respect of tax services provided in the year to 31 December 2017.

11. Operating segments

Information on realised gains and losses derived from sales of investments are disclosed in Note 7 of the Financial Statements. The Company is domiciled in Guernsey. Substantially all of the Company’s income is from its investment in listed preferred shares issued by companies incorporated in South Korea.

The Company has no assets classified as non-current assets. The Company is likely to have a high degree of portfolio concentration as South Korean preferred shares are concentrated with a small number of issuers.

The Company also has a diversified Shareholder base. As at 31 December, registered Shareholders that have notified the market of their holding in the Company via an announcement to the LSE, were as follows:

12. Financial assets at fair value through profit or loss

Financial assets are valued at the bid-market prices ruling as at the close of business at the Statement of Financial Position date, net of any accrued interest which is included in the Statement of Financial Position as an income related item. The Directors are of the opinion that the bid-market prices are the best estimate of fair value in accordance with the requirements of IFRS 13 ‘Fair Value Measurement.’ Movements in fair value are included in the Statement of Comprehensive Income.

13. Cash and cash equivalents

Cash at bank earns interest at floating rates based on daily bank deposit rates. The carrying value of cash at bank approximates the fair values due to the short term nature.

14. Margin account

The margin account represents a margin deposit of collateral held by Credit Suisse Securities (USA) LLC in relation to the credit default swaps. The carrying value of the margin account approximates the fair values due to the short term nature.

15. Other receivables

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

16. Derivative financial instruments

The following are the composition of the Company’s derivative financial instruments at year end:

17. Other payables

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

18. Share capital

The share capital of the Company consists of an unlimited number of ordinary shares of no par value.

Ordinary shares

The Company has a single class of Ordinary Shares, which were issued by means of an initial public offering on 14 May 2013, at 100 pence per Share.

The rights attached to the Ordinary Shares are as follows:

a) The holders of Ordinary Shares shall confer the right to all dividends in accordance with the Articles of Incorporation of the Company.

b) The capital and surplus assets of the Company remaining after payment of all creditors shall, on winding-up or on a return (other than by way of purchase or redemption of own Ordinary Shares) be divided amongst the Shareholders on the basis of the capital attributable to the Ordinary Shares at the date of winding up or other return of capital.

c) Shareholders present in person or by proxy or (being a corporation) present by a duly authorised representative at a general meeting have, on a show of hands, one vote and, on a poll, one vote for every Share.

d) On 20 March 2017, being 56 days before the fourth anniversary of admission to AIM, the Company published a circular, pursuant to the Realisation Opportunity, entitling the Shareholders to serve a written notice during the election period (a “Realisation Election”) requesting that all or a part of their Ordinary Shares be redesignated to Realisation Shares, subject to the aggregate NAV of the continuing Ordinary Shares on the last business day before the Reorganisation Date being not less than £50 million. Realisation Notices, once validly given, were irrevocable unless the Board agreed otherwise. Because Shareholders elected to participate in the Realisation Opportunity, the Company’s portfolio was divided into two pools: the Continuation Pool; and the Realisation Pool. If one or more Realisation Elections were duly made and the aggregate NAV of the continuing Ordinary Shares on the last business day before the Realisation Date was less than £50 million, the Directors could have proposed an ordinary resolution for winding up of the Company and could have pursued a liquidation of the Company instead of splitting the Portfolio into the Continuation Pool and the Realisation Pool.

Share buy back and cancellation

During the year ended 31 December 2017, the Company purchased 5,000,000 of its own Shares (31 December 2016: 100,000) at a consideration of £8,137,189 (31 December 2016: £120,480) under the share buy back authority originally granted to the Company in 2014. These shares have been subsequently cancelled.

Following the share buy backs, the Company has 84,364,981 Ordinary Shares in issue as of 31 December 2017 (as at 31 December 2016: 97,409,750).

At the AGM held on 19 July 2017, Shareholders approved the authority of the Company to buy back up to 40% of the issued Ordinary Shares to facilitate the Company’s discount management. Any Ordinary Shares bought back may be cancelled or held in treasury.

19. Related party transactions and material agreements

Related party transactions

a) Directors’ remuneration and expenses

During the year ended 31 December 2017, directors’ fees of £73,294 (31 December 2016: £68,000) were charged to the Company and £14,375 remained payable at the year-end (as at 31 December 2016: £Nil). For additional information refer to the Directors’ Remuneration Report.

Additionally, £8,956 was charged to the assets of the Realisation pool up until its closure.

b) Shares held by related parties

The Directors’ Interests are set out in the Report of the Directors.

The Investment Manager is principally owned by Dr. Andrew Weiss and certain members of the Investment Manager’s senior management team.

As at 31 December 2017, Dr. Andrew Weiss and his immediate family members held an interest in 6,486,888 Ordinary Shares (as at 31 December 2016: 6,510,888 Ordinary Shares) representing 7.69 per cent. (as at 31 December 2016: 6.68 per cent.) of the issued share capital of the Company.

As at 31 December 2017, employees of the Investment Manager, their respective immediate family members or entities controlled by them or their immediate family members held an interest in 2,718,333 Ordinary Shares (as at 31 December 2016: 2,718,733) representing 3.22 per cent. (as at 31 December 2016: 2.79 per cent.) of the issued share capital of the Company. 

Material agreements

c) Investment management fee

The Company’s Investment Manager is Weiss Asset Management LP. In consideration for its services provided by the Investment Manager under the Investment Management Agreement dated 8 May 2013, the Investment Manager is entitled to an annual management fee of 1.5% of the Company’s NAV accrued daily and payable within 14 days after each month end. The management fee is subject to a minimum annual amount of £1 (one) million per annum for the first 48 months following Admission. The Investment Manager is also entitled to reimbursement of certain expenses incurred by it in connection with its duties.

The Investment Management Agreement will continue in force until terminated by the Investment Manager or the Company giving to the other party thereto not less than 12 months’ notice in writing, such notice not to expire prior to the fourth anniversary of Admission other than in limited circumstances. During the Management and Engagement Committee meeting held on 5 December 2016, the Directors agreed that the Investment Management Agreement would be reviewed following the Realisation Opportunity in May 2017. During the Management Engagement Committee meeting held on 14 November 2017, it was agreed that the current fee agreement was fitting.

For the year ended 31 December 2017, investment management fees and charges of £2,301,814 (for the year ended 31 December 2016: £2,060,184) were charged to the Company and £188,494 (as at 31 December 2016: £337,375) remained payable at the year-end.

Additionally, £36,677 was charged to the assets of the Realisation pool up until its closure.

20. Financial risk management

The Company’s objective in managing risk is the creation and protection of Shareholder value. Risk is inherent in the Company’s activities, but it is managed through an on-going process of identification, measurement and monitoring.

The Company’s financial instruments include investments designated at fair value through profit or loss and cash and cash equivalents.

The main risks arising from the Company’s financial instruments are market risk, foreign currency risk, interest rate risk, credit risk and liquidity risk. The techniques and instruments utilised for the purposes of efficient portfolio management are those which are reasonably believed by the Board to be economically appropriate to the efficient management of the Company.

Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Company’s activities expose it primarily to the market risks of changes in market prices, interest rates and foreign currency exchange rates. The Company’s investments are heavily concentrated in South Korean securities. As the Company’s investments are heavily concentrated in South Korean securities, the Company has entered into certain portfolio hedge positions which are intended to provide some level of protection against potential adverse geopolitical and macroeconomic conditions in South Korea.

Market price risk

The Company’s NAV is sensitive to movements in market prices. As at 31 December 2017, if market prices had been 5% higher or 5% lower with all other variables held constant, then the increase/decrease in NAV would have been £7,664,045 (as at 31 December 2016: £7,097,830). Actual trading results may differ from the above sensitivity analysis and those differences may be material.

Were there to be a major change in the political or economic environment in South Korea, the movement in market prices may be significantly and materially higher than the above. Refer to the Investment Manager’s Report for a discussion of potential political and economic changes.

Foreign currency risk

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

The Company does not hedge its exposure to foreign currency (predominantly Korean won (KRW)) and NAV per share will fluctuate with movements in foreign exchange rates.

As at 31 December 2017, the Company held the following assets and liabilities in foreign currencies:

Amounts in the above table are based on the carrying value of monetary assets and liabilities.

The table below summarises the sensitivity of the Company’s monetary and non-monetary assets and liabilities to changes in foreign exchange movements at 31 December 2017.

Interest rate risk

The Company holds limited cash and margin balances in interest-bearing accounts of £6,838,342 as at 31 December 2017 (as at 31 December 2016: £2,240,481) and does not invest in interest-bearing securities and instruments. Accordingly, interest rate risk is considered very low.

The tables below summarise the Company’s exposure to interest rate risk as of 31 December 2017:

The tables below summarise the Company’s exposure to interest rate risk as of 31 December 2016:

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. Credit risk is limited to the carrying value of financial assets at 31 December 2017 as follows:

The Company is exposed to material credit risk in respect of cash and cash equivalents. The credit risk from cash and cash equivalents is mitigated as the majority of cash is placed with Northern Trust (Guernsey) Limited (“NTGL”). NTGL is a wholly owned subsidiary of The Northern Trust Corporation (“TNTC”). TNTC is publicly traded and a constituent of the S&P 500. As at 31 December 2017, TNTC had a credit rating of A+ (as at 31 December 2016: A+) from Standard & Poor’s and A2 (as at 31 December 2016: A2) from Moody’s. The margin account is held with Credit Suisse Securities (USA) LLC, a subsidiary of Credit Suisse (USA), Inc (“CS”). As at 31 December 2017 CS had a credit rating of A from Standard & Poor’s and A1 from Moody’s.

Liquidity risk

Liquidity risk is the risk that the Company may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous.

The Company’s investments are relatively liquid and the Company holds sufficient cash balances (or liquid investments) to meet its obligations as they fall due. The Board reviews its resources and obligations on a regular basis to ensure sufficient liquid assets are held.

As at 31 December 2017, the Company had no significant financial liabilities other than payables arising directly from investing activity.

Capital risk management

The fair value of the Company’s financial assets and liabilities approximate their carrying amounts at the reporting date.

The Company’s objective when managing capital is to maintain an optimal capital structure, in order to reduce the cost of capital. The Company may borrow capital, but as at 31 December 2017 there were no borrowings (as at 31 December 2016: £Nil).

The gearing ratio below is calculated as total liabilities divided by total equity.

The Board considers the above gearing ratio to be adequate, since total borrowings refer only to amounts due to brokers, derivative liabilities and other payables.

Share buy backs

The Directors have general Shareholder authority to purchase in the market up to 40 per cent. of the Ordinary Shares in issue from time to time following Admission. The Directors intend to seek annual renewal of this authority from Shareholders at each general meeting of the Company.

Pursuant to this authority, and subject to Guernsey law and discretion of the Directors, the Company may repurchase Ordinary Shares in the market on an on-going basis at a discount to NAV with a view to increasing the NAV per Ordinary Share and assisting in controlling the discount to NAV per Ordinary Share in relation to the price at which such Ordinary Shares may be trading.

Purchases by the Company will be made only at prices below the estimated prevailing NAV per Ordinary Share based on the last Published NAV but taking account of movements in investments, stock markets, and currencies, in consultation with the Investment Manager and at prices where the Directors believe such purchases will result in an increase in the NAV per Ordinary Share of the remaining Ordinary Shares.

The Directors will consider repurchasing Ordinary Shares when the price per Ordinary Share plus the pro forma cost to the Company per Share repurchased is less than 95 per cent. of the NAV per Ordinary Share. The pro forma cost per Share should include any brokerage commission payable and costs of realising portfolio securities to fund the purchase. The Directors may, at their discretion, also consider repurchasing Ordinary Shares at a smaller discount to NAV per Ordinary Share, provided that such purchase would be accretive to NAV per Ordinary Share for any continuing Shareholders.

Realisation Opportunity

On 20 March 2017, the Company announced that pursuant to the Realisation Opportunity, shareholders who were on the register as at the record date could elect to re-designate all or part of their Ordinary Shares (provided that such part be rounded up to the nearest whole Ordinary Share) as Realisation Shares during the election period, subject to the aggregate NAV of the continuing Ordinary Shares at the close of business on the last Business Day before the Realisation Date being not less than £50 million. The Ordinary Shares held by the Shareholders who elected for Realisation were redesignated as Realisation Shares and the Portfolio was split into two separate and distinct Pools, the Continuation Pool (comprising the assets attributable to the continuing Ordinary Shares) and the Realisation Pool (comprising the assets attributable to the Realisation Shares).

With effect from the Realisation Date, the assets in the Realisation Pool were managed in accordance with an orderly realisation programme with the aim of making progressive returns of cash as soon as practicable, to those Shareholders who had elected to receive Realisation Shares. Ordinary Shares held by Shareholders who did not submit a valid and complete election in accordance with the Articles during the Election Period retained their Ordinary Shares.

The creation and subsequent redemption of the Realisation Shares resulted in the redemption of 8,044,769 Shares at a value of £14,473,302.

Unless it has already been determined that the Company will be wound-up, every two years after the Realisation Date, the Directors will propose further realisation opportunities for Shareholders who have not previously elected to realise their Ordinary Shares using a similar mechanism to that described above.

If the weighted average discount on the Portfolio is less than 25 per cent. over any 90 day period, then the Directors shall propose an ordinary resolution for the winding up of the Company. If one or more Realisation Elections are duly made and the NAV of the continuing Ordinary Shares at the close of business on the last Business Day before the Reorganisation Date is less than £50 million, the Directors may propose an ordinary resolution for the winding up of the Company and may pursue a liquidation of the Company instead of splitting the Portfolio into the Continuation Pool and the Realisation Pool.

21. Fair value measurement

IFRS 13 ‘Fair Value Measurement’ requires the Company to establish a fair value hierarchy that prioritises the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy under IFRS 13 ‘Fair Value Measurement’ are set as follows:

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

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

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

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety.

If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement requires judgement, considering factors specific to the asset or liability.

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

The following table presents the Company’s financial assets and liabilities by level within the valuation hierarchy as of 31 December 2017:

The Company recognises transfers between levels of the fair value hierarchy as of the end of the reporting year during which the transfer has occurred. During the year ended 31 December 2017 financial assets of £3,908,155 were transferred from Level 1 to Level 2 (for the year ended 31 December 2016: £Nil).

Investments whose values are based on quoted market prices in active markets, and are therefore classified within Level 1, include Korean preference shares, exchange traded funds, and exchange traded options.

The Company holds investments in derivative financial instruments which are classified as Level 2 within the fair value hierarchy. These consist of Credit Default Swaps with a fair value of (£1,059,716) (as at 31 December 2016: £Nil).

As at 31 December 2017 Level 2 financial derivative assets of £59,253 were held (as at 31 December 2016: £Nil).

22. NAV reconciliation

The Company announces its NAV, based on bid value, to the LSE after each weekly and month end valuation point. The following is a reconciliation of the NAV per Share attributable to redeemable participating preference Shareholders as presented in these Financial Statements, using IFRS to the NAV per Share reported to the LSE:

The published NAV per Share of £1.8836 (as at 31 December 2016: £1.4744) is different from the accounting NAV per Share of £1.9115 (as at 31 December 2016: £1.5027) due to the adjustments noted above.

23. Subsequent events

These Financial Statements were approved for issuance by the Board on 23 April 2018. Subsequent events have been evaluated until this date.

As at the date of this Report, the Company has 84,364,981 ordinary shares in issue.

No further subsequent events have occurred.