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The Diverse Income Trust Plc - Annual Financial Report

THE DIVERSE INCOME TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2018

The Directors present the Annual Financial Report of The Diverse Income Trust plc (the “Company” or “Diverse”) for the year ended 31 May 2018. The full Annual Report and Accounts can be accessed via the Company’s website, www.mitongroup.com/dit, or by contacting the Company Secretary on 01392 477500.

STRATEGIC REPORT

RESULTS FOR THE YEAR TO 31 MAY 2018

3.40p of ordinary dividends for the year The three interim dividends and the proposed final dividend for the year amount to 3.40p, compared with 3.00p in the previous year, an increase of 13.3%. The Company has also recommended a special dividend of 0.23p per share.

Revenue reserves increased to £16.6m Revenue reserves of the Group increased to £16.6m over the year. The reserves of the Company are available to be used to smooth the dividend distributions to shareholders in future years. 

Total return to shareholders of 5.2% This includes the increase in net asset value (“NAV”), plus the dividends paid during the year. After dividend payments, the NAV per share rose from 103.43p to 105.09p over the year. This compares with an increase in the FTSE All-Share Index of 6.5% over the year to 31 May 2018.

SUMMARY OF RESULTS

At 31 May 2018    At 31 May 2017    Change   
NAV per ordinary share 105.09p  103.43p   1.6%
Ordinary share price (mid) 107.00p  102.50p   4.4%
Premium/(discount) to NAV* 1.82%  (0.90)%
Revenue return per ordinary share 3.84p  4.02p  
Ordinary dividends per ordinary share paid/declared
3.40p 

3.00p  

13.3%
Special dividend per ordinary share declared
0.23p 

0.40p  
Total dividends per ordinary share paid/declared
3.63p 

3.40p  
Ongoing charges (further details below) 1.13% 1.15% 

* Alternative performance measure. Details provided in the Glossary below.

CHAIRMAN’S STATEMENT

Year to 31 May 2018
This Report covers the seventh year of the Company, the year ending 31 May 2018.

Capital appreciation
A decade of ultra-low interest rates and Quantitative Easing has driven excellent asset returns. However, the enthusiasm for Quantitative Easing has ebbed over recent quarters and now the opposite policy, Quantitative Tightening, is being introduced in the US. Even so, the ongoing momentum within growth company share prices, often listed on the AIM exchange, has remained in place over the year to May, with the FTSE AIM All-Share Index rising 9.1%. Elsewhere, market returns were more modest, with the FTSE All-Share Index up only 2.6% over the year to May 2018 and the FTSE SmallCap Index (excluding Investment Trusts) up just 2.4%. In comparison, the NAV of the Company appreciated by 1.6% over the year, which is somewhat better than most other UK equity income funds.

Dividends
Over the period under review, the Company’s holdings have continued to report good growth in regular dividends. However, in contrast to the previous year, fewer companies have announced one-off special dividends over the year. The Company’s revenue per share has eased back very slightly, obscuring the underlying growth of ordinary dividend receipts for the year to May 2018. The underlying trend is reflected in the three interim dividends paid by the Company this year, which have grown to 2.4p per share, up from 2.2p last year. The Board is recommending an increased final dividend of 1.0p, up from 0.8p last year, so the overall ordinary dividend for the year will amount to 3.4p, an increase of 13.3%.

Over the seven years since issue, the Company has built up revenue reserves of £16.6m, which can smooth dividend payments to shareholders should the Company’s revenue suffer a temporary setback. This reserve now equates with the cost of the annual dividend paid by the Company, and the Board therefore recommended a special dividend for shareholders of 0.4p last year, reflecting the abnormally large one-off dividend receipts received during the year to May 2017. There have been fewer one-off dividends received this year, but even so the Board is recommending a special dividend once again of 0.23p.

Returns since issue
Whilst many mainstream market indices continued to reach new highs over the last twelve months, the best returns over the longer term have often come from smaller quoted companies. Between April 2011 (when the Company was first listed) and May 2018, the FTSE All-Share Index has appreciated by 72.8%, whereas the FTSE SmallCap Index (excluding Investment Trusts) has increased by 133.3%. Furthermore, despite some spectacular returns by some AIM-listed growth stocks over the last few years, the FTSE AIM All-Share Index overall is up just 27.4% since April 2011. Collectively, the varying returns on these comparative indices underline the scope for active stock selection to generate premium returns within the context of our long-term strategy. The NAV of the Company, and the dividends it has paid, has generated a total return of 165.5% over the same period.

Board refreshment
It is considered good governance for non-executive Directors to step down from boards at their ninth anniversary, if not before, as beyond this date there is a perception that they may become less independent. With this in mind, the Board has sought to introduce new Directors well before the ninth year of the Company, so that Board refreshment occurs on a gradual basis. The Board appointed Calum Thomson as a Director of the Company during 2016 and is currently seeking to recruit a new Director to be appointed later in 2018. As part of that process, one of the current Directors will step down from the Board, so the overall complement of Directors will remain unchanged.

Investment policy
At the forthcoming AGM, the Board will be seeking shareholder approval to an amendment to the Company’s investment policy to allow the Manager to increase the minimum and maximum number of securities that may be held in the portfolio to between 100 and 180 holdings. The Board believes that this change will allow the Manager greater flexibility to buy and sell stocks over a longer period of time and invest in more opportunities amongst the smallest companies in the portfolio, whilst diversifying risk.

Outlook
A wide-ranging investment universe draws upon a more diversified source of dividends. This has helped the Company to both grow its dividend and build a significant revenue reserve over the last seven years.

Going forward, the underlying prospects for dividend growth appear more constrained. Few economies have regained their past growth rates, in spite of the ultra-low interest rates following the Global Financial Crisis in 2008. This may explain why dividend cover, a measure of the margin of safety of future dividends, has fallen to relatively low levels over the last decade. Furthermore, the governmental consensus around globalisation is now coming to an end as the political agenda has changed, and all the while the recovery of the US dollar is starting to sap the easy liquidity of markets.

For investors, this is a time when it is important to be sure footed. During unsettled periods in the past, it has often been the greater vibrancy of the smallest quoted companies that has delivered some of the best returns. The Company’s strategy has the advantage of selecting the best from the full universe of listed companies and industry sectors. Therefore, we continue to believe that Diverse remains well positioned, in spite of the changing economic and market dynamics.

Annual General Meeting
I look forward to seeing shareholders at the AGM, which will be held on Wednesday, 10 October 2018 at 11.30am at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH.

You will find enclosed with the Annual Report a letter asking if you would prefer to receive future annual and half-yearly Reports and other communications from the Company in electronic form rather than in printed form. Further details regarding this are set out in the Directors’ Report in the full Annual Report. I encourage all shareholders to consider the proposal.

Michael Wrobel
Chairman
2 August 2018
 

INVESTMENT MANAGER’S REPORT

Who are Miton?
We believe Miton is an agile fund manager. We hope this comes through in our investment thinking, which we believe gives greater consideration to the risk of market trends evolving in future. This is important at all times, but following Brexit, when market trends may indeed be changing more significantly, the willingness to anticipate major changes in markets could be particularly relevant.

Over recent years, the global slowdown has led to many companies finding it harder to grow. In addition, some commentators suggest that the UK may be more vulnerable to a recession after the election of a minority government and the UK’s withdrawal from the EU. The Diverse strategy has a wider investment universe, which we believe puts the Company in a better position to generate ongoing dividend growth. We believe that it is the success in identifying stocks that were able to fund dividend growth that has been a key driver of the Company’s strong performance since issue.

Overall, we believe that fund strategies like that of Diverse come about not only as a result of independent thought, but also greater attention to the management of risk. We believe it is the combination of both that can be a key driver of premium long-term returns for clients.

How is risk managed?
All fund managers are mindful of the degree of risk that their portfolios carry on behalf of clients. However, within Miton, we seek to ensure our fund managers’ convictions are especially closely matched to the assembled risks within the portfolio.

One way we do this is by asking our fund managers to carry out their own analysis on the companies. This means they have a fuller understanding of the areas where the analysis may be particularly sensitive or potentially vulnerable and it avoids the risks associated with second guessing the level of conviction of analysts’ opinions.

Ultimately, our aim is to ensure that the level of the fund managers' conviction is fully reflected in the stance of the Diverse portfolio.

How is the portfolio constructed?
Clear investment thinking also leads to good portfolio construction.

  • For example, funds like Diverse do not use traditional benchmarks since portfolio construction based on market relatives can add extra market risk. It can also impede the managers’ ability to optimise the risk/return ratio of the whole portfolio on an absolute basis, which can be especially relevant in uncertain markets.
  • Portfolio resilience deserves plenty of attention, because limiting the downside can enhance the scope for maximising fund returns over the long term.

The consequence of these factors is that the positioning of portfolios within funds like the Company may be sometimes rather different from most others. This places an extra requirement on us to be especially clear in explaining the reasoning for the differences.

Who are the managers?  
Miton Group plc is an independent fund management Company listed on the AIM exchange.

The day-to-day management of the Company’s portfolio is carried out by Gervais Williams and Martin Turner, who have decades of experience researching many of the smallest UK quoted stocks.

Gervais Williams
Gervais joined Miton in March 2011 and is Senior Executive Director of the group. He has been an equity portfolio manager since 1985, including 17 years as Head of UK Smaller Companies and Irish Equities at Gartmore. He was Fund Manager of the Year 2014 according to What Investment? He is a board member of the Investment Association, Chairman of the Quoted Companies Alliance and also a member of the AIM Advisory Council.

Martin Turner
Martin joined Miton in May 2011. Martin and Gervais have had a close working relationship since 2004, and their complementary expertise and skills led to their backing of a series of successful companies. Martin qualified as a Chartered Accountant with Arthur Anderson, and has extensive experience at Rothschild, Merrill Lynch and Collins Stewart, where as Head of Small/Mid Cap Equities his role covered their research, sales and trading activities.

Gervais and Martin are part of a team of four Miton fund managers principally researching UK-quoted stocks, with each manager having a record of delivering premium returns. They are a close-knit and agile team, open-minded in their thinking. This is important at all times, but at the current time of changing political and economic dynamics, this aspect is likely to be particularly relevant.

How should progress be measured?
Throughout the period of globalisation, equity market returns have been so good for so long that it has become customary for funds to measure their progress by close comparison to the performance of the mainstream indices. One side effect has been that the sector representation of most of the most popular UK equity portfolios has narrowed to reflect the limited sector representation of the mainstream indices.

However, with the changing political and economic agenda, we at Miton believe that it is in clients’ interests to widen the opportunity set going forward. Therefore, most Miton strategies in the UK are relatively wide ranging.

Although it is conventional for the returns of Diverse to be set in the context of the returns of comparative indices, we believe the ultimate source of sustained return will be the ability of the portfolio holdings to sustain productivity improvements and dividend growth.

How is the investment strategy implemented?
We believe that companies generating productivity improvements with attractive risk/reward ratios are well placed to deliver premium returns.

Turnover growth – Although some companies can succeed in growing their profits without turnover growth, in general, sustainable long-term growth comes from those that grow their turnover. This can be via an innovative new service or through introducing a superior product. Even in times of economic stagnation, this type of improvement can generate ongoing turnover growth.

Sustained margins – Extra turnover growth may not lead to additional corporate cashflow if profit margins decline. The best kinds of productivity improvement should reduce the cost of goods, as well as justify a better market price. Alongside this, we are looking for companies that have the potential to sustain their profit margins through outstanding customer service. This may be especially important should profit margins come under sustained pressure in the future.

Management of risk – All investment carries risks, but often companies managing the fastest growth are obliged to take the greatest risks. In general, we find that many companies can generate attractive returns for investors through growing at a less hectic pace, and therefore can do so with less downside risk.

Better balance sheets – Given the exceptionally low interest rates over the last decade, many corporates have taken on extra debt. However, these liabilities can constrain the opportunities of the company, particularly should they become due at a time of economic setback.

We prefer to invest in companies with net cash balances or those with modest debt relative to the headroom on the facility. Those with under-geared balance sheets can take greater advantage of any economic setback to improve their market position disproportionately, whereas those fully drawn on their facilities tend to have fewer options.

Low entry valuations – The upside potential on an investment is often greater when the valuation on entry is modest. In general, we favour stocks where the overall market capitalisation reflects some of the problems of the past in preference to those that are already reflecting some of the excitement about the future.

With few institutional investors, or indeed sell side analysts, actively researching the smallest quoted companies in the UK, there are plenty of quoted companies with, what we believe, are low entry valuations.

MiFID II and Key Information Document
The vast majority of stockbroker notes detailing the anticipated profits of small and microcaps are funded by the quoted business itself. Therefore, the cost of independent external research for the Company tends to be modest. Last year it amounted to 0.02% of the NAV.

MiFID II, which was introduced on 3 January 2018, is a new regulation that differentiates the cost of external research from the portfolio transactions. Information in respect of the Company’s external research costs now needs to be highlighted in greater detail and approved by the Board ahead of expenditure. The Company’s budget for the whole of 2018 remains very modest, with the cost marginally below that expended during 2017.

The Key Information Document (“KID”) is a new schedule that projects the Company’s costs and returns over the coming years. The Company’s KID is available on the Company’s website at www.mitongroup.com/dit.

How has the Company performed over the year?
UK inflation rose after sterling devalued in the wake of the UK Referendum in June 2016. This has suppressed consumer expenditure because UK wage growth has continued to disappoint. However, in spite of challenges within these sectors, many other domestic stocks have outperformed, as have many microcaps.

Over the year to May 2018, the FTSE SmallCap (excluding Investment Trusts) Index generated a total return of 5.6% when both capital gain and dividend income is included, whereas the  comparative total return on the FTSE AIM All-Share Index was 10.5%. In contrast, the total return of the FTSE All-Share Index was 6.5%.

The Company’s NAV rose 1.6% over the 12 months to May 2018 and when dividend income is included, the total return on the Company was 5.2%.

During the first half of the year, the Company’s portfolio lagged the market rise, because growth stocks performed strongly and other stocks remained overlooked. In the second half of the year, the equity markets were more unsettled and, interestingly, microcaps have enjoyed a period of outperformance. In particular, many of the Company’s holdings tended to perform well in this period, and the Company therefore outperformed.

During the year, risk was diversified further through investing in four Icelandic stocks. This economy suffered more than most during the financial crisis, and led to the adoption of more prudent policies than others that enhanced diversification. Generally, stock specific risk in the portfolio remains very well diversified with over 140 holdings across a wide range of industry sectors.

Strong contributors in the year included Zotefoams, K3 Capital and Burford Capital, helped by buoyant trading. There were disappointments at Accrol, where a position has currently been retained for recovery potential, and UP Global Sourcing, which has been exited. The largest detractor was the Put option as the value decayed over the period.

How has the Company performed since issue?
The Company now has a seven year record and its performance over that period has been outlined in some detail in the full Annual Report. These figures, together with the returns on the year under review are shown on the bar chart in the full Annual Report.

The wider investment universe of the Diverse strategy ensures that the Company should be in a better position to sustain dividend growth. We believe that it is the premium growth of Diverse’s dividend income that has been a key driver of the Company’s strong performance since issue.

With Brexit imminent, what impact might it have on the holdings in the Company?
At this stage, the Government plans that the Brexit/EU agreement will be effected via a transitional arrangement, where the UK border with the EU continues with customs arrangements largely unchanged until the end of 2020. If this proves to be the case, we believe there would be very little adverse impact on the Diverse portfolio prior to the end of 2020, and maybe beyond.

Over the longer term, a KPMG report on the non-tariff barriers in the EU estimated that wider border checks may cost between 0.4% and 1.9% of the value of traded goods. HMRC expects the longer-term EU border costs to be about 1%, although some others estimate it could be higher. Overall, it is assumed that there will be some additional cost for some of the stocks in the portfolio at the time of an orderly withdrawal from the EU, but these are not expected to greatly reduce the overall returns of the Company.

There is a chance that the current political process becomes derailed prior to the end of March 2019, and the UK exits the EU without a transitional arrangement. The abrupt imposition of a national border between the UK and the EU countries would add much greater costs to cross-border trade if this were to occur immediately. In addition, it is likely that the passage of goods could be delayed, possibly for weeks. Both of these factors could significantly adversely affect the profitability of a number of the holdings within the portfolio.

Ultimately, the new border will operate in the same way that UK businesses trade with countries outside the EU, with costs eventually around those cited above. It is worth noting that a number of companies in the portfolio have little or no EU trade and thus will be largely unaffected. Others have subsidiaries that will still be in the ongoing EU, so they may find ways of delivering their EU goods and services through these operations. We will continue to monitor events and adjust the portfolio holdings to mitigate any potential downside, as well as remaining alert to the possibility that a few businesses may have some added advantages when the EU border changes are introduced.

What about the future?
Over the last three decades, many of the most popular funds sought to outperform the mainstream benchmarks. Generally, most narrowed their investment universe to mid and larger companies to better meet this objective, and institutional interest in small and microcaps therefore died away. In this context, it is noteworthy that microcap stocks showed a degree of resilience during February 2018 when equity markets became more volatile. This was not because their share prices were ignored during a busy period – many small and microcap share prices were marked down with others during the early part of that month. Rather, it was that many of the smallest stocks attracted renewed market interest after their share prices fell back, and hence they tended to recover quicker than others.

Interestingly, this renewed interest in small and microcaps over recent quarters has occurred alongside a period when monetary conditions have been tightened. The EU has commenced a scaling back of its policy of Quantitative Easing (“QE”) over the last few quarters, whilst the US is progressively increasing interest rates and has initiated Quantitative Tightening, a reversal of QE. Their combined effect has reduced financial liquidity within the international exchanges and led to extra market volatility.

The changing market attitude implies that a growing number of investors are now showing renewed interest in the vibrant and agile, over those within mainstream benchmarks. Importantly, this new preference resembles the pattern that existed prior to globalisation, and contrasts with that of the last three decades. When the Company was launched, it was anticipated that this would lead to a renewed interest in multicap income strategies. Although the strong returns of growth stocks may have grabbed much of the media attention over recent years, we remain confident that the advantages of the Company’s strategy will persist. Therefore, we believe the Company continues to be well placed to deliver premium returns going forward.

Gervais Williams and Martin Turner
Miton Asset Management Limited
2 August 2018
 

PORTFOLIO INFORMATION AS AT 31 MAY 2018


Rank

Company
Sector & main
activity
Valuation
£’000
% of net
assets
Yield¹
1 Charles Taylor Industrials 8,775 2.2 3.7 
2 Zotefoams Basic Materials 8,181 2.0 1.1 
3 Stobart Industrials 7,129 1.7 8.1 
4 SafeCharge International2 Industrials 6,812 1.7 5.2 
5 Amino Technologies2 Technology 5,792 1.4 3.3 
6 Mucklow (A&J) Financials 5,741 1.4 4.0 
7 Randall & Quilter2 Financials 5,538 1.4
8 K3 Capital2 Financials 5,163 1.3 2.3 
9 Diversified Gas & Oil2 Oil & Gas 4,732 1.2 4.1 
10 CML Microsystems Technology 4,730 1.2 1.5 
Top 10 investments 62,593 15.5
11 Rio Tinto Basic Materials 4,707 1.2 5.0 
12 BP Oil & Gas 4,678 1.2 5.2 
13 Sainsbury (J) Consumer Services 4,564 1.1 3.2 
14 Smurfit Kappa Industrials 4,556 1.1 2.5 
15 Morses Club2 Financials 4,496 1.1 4.7 
16 Royal Dutch Shell ‘A’ Oil & Gas 4,433 1.1 5.4 
17 Polyus GDR Basic Materials 4,407 1.1 6.9 
18 Smith (DS) Industrials 4,367 1.1 2.8 
19 Legal & General Financials 4,349 1.1 5.7 
20 BHP Billiton Basic Materials 4,306 1.1 4.9 
Top 20 investments 107,456 26.7
21 Aviva Financials 4,254 1.1 5.4
22 Savannah Petroleum2 Oil & Gas 4,246 1.1 -
23 Phoenix Financials 4,232 1.1 6.5
24 Rosenblatt2 Industrials 4,217 1.0 -
25 Equinor Oil & Gas 4,203 1.0 3.5
26 Personal2 Financials 4,196 1.0 4.9
27 Burford Capital2 Financials 4,191 1.0 0.5
28 esure Financials 4,164 1.0 5.3
29 IG Design2 Consumer Goods 4,068 1.0 1.4
30 Treatt Basic Materials 4,065 1.0 1.0
Top 30 investments 149,292 37.0
31 Park2 Financials 4,053 1.0 3.9
32 Strix2 Industrials 4,052 1.0 2.0
33 Direct Line Insurance Financials 4,012 1.0 5.7
34 AIB Financials 3,980 1.0 2.6
35 Inspired Energy2 Industrials 3,879 1.0 3.1
36 Anglo Pacific Basic Materials 3,848 1.0 4.5
37 Total Oil & Gas 3,845 1.0 4.9
38 Morrison (WM) Supermarkets Consumer Services 3,798 0.9 2.5
39 Vátryggingafélag Islands Financials 3,764 0.9 4.7
40 Highland Gold Mining2 Basic Materials 3,748 0.9 6.9
Top 40 investments 188,271 46.7
Balance held in 95 equity investments 183,960 45.6
Total equity investments 372,231 92.3
600 Group 8% Convertible Loan Notes 14/02/2020 (unlisted) 2,506 0.6
Active Energy 8% Loan Notes 2022 (unlisted) 1,646 0.4
Sirius Minerals Finance 8.5% Convertible Loan Notes 28/11/2023 (USD)
1,619

0.4
Intercede Group 8% Secured Convertible Loan Notes 29/12/2021 (unlisted)
1,550

0.4
Hurricane Energy 7.5% Convertible SNR 24/07/2022 (USD) 1,290 0.3
St. Modwen Properties 6.25% 07/11/2019 Bonds 840 0.2
Aggregated Micro Power 8% Secured Convertible Loan Notes 30/03/2021 (unlisted)
664

0.2
Sigmaroc 6% Unsecured Convertible Loan Notes 04/01/2022 (unlisted)
321

0.1
Fixed interest investments 10,436 2.6
Total investments 382,667 94.9
Listed Put option
            FTSE 100 – September 2019 6,500 Put 4,378 1.1
Other net assets 15,970 4.0
Net assets 403,015 100.0

¹ Source: Thomson Reuters. Based on historical yields and therefore not representative of future yields.
² AIM/NEX listed.

A copy of the full portfolio of investments as at 31 May 2018 is available on the Company’s website, www.mitongroup.com/dit.

Invested portfolio capital by sector

%
Financials 25.9
Industrials 20.2
Consumer Services 13.3
Basic Materials 11.0
Oil & Gas 7.6
Consumer Goods 6.2
Technology 4.9
Telecommunications 3.3
Cash and Fixed Interest 2.7
Utilities 1.8
Other 1.7
Health Care 1.4
100.0

Invested portfolio capital by Index or Exchange

%
FTSE 100 Index 19.2
FTSE 250 Index 11.1
FTSE SmallCap Index 15.4
FTSE Fledgling Index 3.0
AIM/NEX Exchanges 35.0
International Equities 4.1
Other 9.5
Cash and Fixed Interest 2.7
100.0

Portfolio investment income received in the year by Index or Exchange

%
FTSE 100 Index 23.0
FTSE 250 Index 15.8
FTSE SmallCap Index 13.6
FTSE Fledgling Index 3.1
AIM/NEX Exchanges 29.6
International Equities 2.8
Other 7.8
Cash and Fixed Interest 4.3
100.0

Illustration by sector of the potential annual income for the year to 31 May 2019¹

%
Financials 29.1
Industrials 19.8
Consumer Services 13.9
Basic Materials 11.3
Oil & Gas 5.9
Telecommunications 5.2
Cash and Fixed Interest 4.6
Consumer Goods 4.3
Technology 2.6
Utilities 1.9
Other 1.0
Health Care 0.4
100.0

1 Annual income based upon the potential projected income receipts from portfolio holdings if the portfolio as at 31 May 2018 remained as presented.
Source: Thomson Reuters.

A Summary of the Total Costs Involved in Managing Diverse

Investment trusts differ from some other forms of collective funds in that they are set up as independent corporations with their operations overseen by a board that is separate from and independent of the fund management group that manages the capital. In addition, they are listed, with their shares traded on an approved exchange – which, in our case, is the LSE.

Running costs are deducted from the total assets of the Company on a pro-forma basis so the NAV published each day is expressed after costs. The figures below are the costs paid by the Company over the year under review and are expressed as a percentage of the average asset value of the Company over the year.

2018  2017 
Fund management fees1 0.95  0.96 
Administration costs, including Company Secretarial fees 0.03  0.03 
Directors/Auditor/Depositary/Registrar/Custodian and Stockbroker fees 0.10  0.10 
All other direct costs, including VAT on the fees above, plus marketing, legal, printing, insurance and bank charges
0.05 

0.06 
Ongoing charges 1.13  1.15 

In addition, the Company also pays transaction charges that are levied when shares are bought or sold in the portfolio. These are dealing commissions paid to stockbrokers and stamp duty, a Government tax paid on transactions (which is zero when dealing on the AIM/NEX exchanges).

Costs paid in dealing commissions 0.06  0.05 
Stamp duty, a Government tax on transactions 0.04  0.06 
Overall costs including charges on transactions2 1.23  1.26 

The annual costs can be compared to the overall returns generated by the Company in the year. The total return on ordinary activities after taxation includes capital appreciation of the portfolio and amounted to 26.4% as a proportion of the total return after tax (2017: 73.8%), and the proportion of the total return after taxation derived from revenue amounted to 73.5% (2017: 26.2%). In the year under review, the overall costs therefore amounted to 1.23% compared with a total return before costs of 6.5% (2017: 17.7%), and 5.2% (2017: 16.4%) after all costs had been deducted.

Given that stock markets fluctuate over the years, the running costs of the Company should perhaps be considered in the context of the average annual returns generated by the Company. The overall costs during the year to 31 May 2018 of 1.23% can be compared to an average annual return (after the deduction of costs) of 18.3% (2017: 17.5%) per annum since issue.

1Fund management fees are tiered and calculated based on the share price, so may vary in each year.

2 Transactions conducted by the Company also involve some loss of value due to the dealing spread in stock exchange prices. Spreads range from less than 1% in the most actively traded large cap stocks to more than 3% in the smallest, most infrequently traded stocks. The exact loss of value is difficult to determine precisely, but is normally less than half of the dealing spread at the time of the transaction. In a large percentage of the transactions, especially in the smallest stocks, the stock is passed through from sizeable seller to sizeable buyer on a ‘put through’ basis with potentially no loss of value through the spread. During the year under review, this cost is believed to be very modest in comparison to the NAV.
 

Investment Objective
The Company’s investment objective is to provide shareholders with an attractive and growing level of dividends coupled with capital growth over the long term.

Investment Policy
The Company invests primarily in UK quoted or traded companies with a wide range of market capitalisations, but a long-term bias toward small and mid cap equities. The Company may also invest in large cap companies, including FTSE 100 constituents, where it is believed that this may increase shareholder value.

The Manager adopts a stock specific approach in managing the Company’s portfolio and therefore sector weightings are of secondary consideration. As a result of this approach, the Company’s portfolio does not track any benchmark index.

The Company may utilise derivative instruments including index-linked notes, contracts for differences, covered options and other equity-related derivative instruments for efficient portfolio management, gearing and investment purposes. Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Company’s direct investments, as described below. The Company will not enter into uncovered short positions.

Risk Diversification
Portfolio risk is mitigated by investing in a diversified spread of investments. Investments in any one company shall not, at the time of acquisition, exceed 15% of the value of the Company’s investment portfolio. Typically it is expected that the Company will hold a portfolio of between 80 and 160 securities*, predominantly most of which will represent no more than 1.5% of the value of the Company’s investment portfolio as at the time of acquisition.

The Company will not invest more than 10% of its gross assets, at the time of acquisition, in other listed closed-ended investment funds, whether managed by the Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds. In addition to this restriction, the Directors have further determined that no more than 15% of the Company’s gross assets will, at the time of acquisition, be invested in other listed closed-ended investment funds (including investment trusts) notwithstanding whether or not such funds have stated policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.

Unquoted Investments
The Company may invest in unquoted companies from time to time subject to prior Board approval. Investments in unquoted companies in aggregate will not exceed 5% of the value of the Company’s investment portfolio as at the time of investment.

Borrowing and Gearing Policy
The Board considers that long-term capital growth can be enhanced by the use of gearing which may be through bank borrowings and the use of derivative instruments such as contracts for differences. The Company may borrow (through bank facilities and derivative instruments) up to 15% of NAV (calculated at the time of borrowing).

The Board oversees the level of gearing in the Company, and reviews the position with the Manager on a regular basis.

In the event of a breach of the investment policy set out above and the investment and gearing restrictions set out therein, the Manager shall inform the Board upon becoming aware of the same and if the Board considers the breach to be material, notification will be made to the LSE.

No material change will be made to the investment policy without the approval of shareholders by ordinary resolution.

* A resolution is being put to shareholders at the forthcoming AGM which, if approved, will increase the minimum and maximum expected size of the portfolio to between 100 and 180 securities.
 

BUSINESS MODEL

Diverse was launched on 28 April 2011. It is registered in England as a public limited company and is an investment company in accordance with the provisions of Sections 832 and 833 of the Companies Act 2006.

The principal activity of the Company is to carry on business as an investment trust. The Company intends at all times to conduct its affairs so as to enable it to qualify as an investment trust for the purposes of Sections 1158/1159 of the Corporation Tax Act 2010 (“S1158/1159”). The Directors do not envisage any change in this activity in the foreseeable future.

The Company has been granted approval from HM Revenue & Customs (“HMRC”) as an investment trust under S1158/1159 and will continue to be treated as an investment trust company, subject to there being no serious breaches of the conditions for approval.

The principal conditions that must be met for continuing approval by HMRC as an investment trust are that the Company’s business should consist of “investing in shares, land or other assets with the aim of spreading investment risk and giving members of the company the benefit of the results” and the Company may only retain 15% of its investment income without distributing it as dividend payments. The Company must also not be a close company. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 May 2018 so as to be able to continue to qualify as an investment trust.

The Company’s status as an investment trust allows it to obtain an exemption from paying taxes on the profits made from the sale of its investments and all other net capital gains.

The Company has a wholly-owned subsidiary, DIT Income Services Limited. The purpose of the subsidiary is to invest in shorter-term holdings, where the gains after corporation tax can be passed up to the parent company by way of dividends, thus improving the position of the Company’s revenue account.

Investment Policy
The Company’s full investment policy set out above contains information on the policies which the Company follows relating to asset allocation, risk diversification and gearing, and includes maximum exposures, where relevant.

The Company invests primarily in quoted or traded UK companies with a wide range of market capitalisations but a long-term bias toward small and mid cap equities with a view to achieving the Company’s investment objective.

The Manager adopts a stock-specific approach in managing the Company’s portfolio and therefore sector weightings will be of secondary consideration. As a result of this approach, the Company’s portfolio will not track any benchmark index.

As highlighted in the Chairman’s Statement above, the Company will be seeking shareholder approval at the forthcoming Annual General Meeting (“AGM”) to change its investment policy by increasing the minimum and maximum number of securities that may be held in the portfolio. The purpose of this change is to make the average number of holdings in the portfolio over recent years nearer to the average of the figures proposed in the policy. If the change is approved by shareholders, it is not expected to precipitate any change to the portfolio at present, but rather it will ensure the Manager has greater flexibility to vary the number of portfolio holdings in future as market conditions change, should this be in the interests of shareholders.

PERFORMANCE AND RISKS

Key Performance Indicators
The Board reviews the Company’s performance by reference to a number of Key Performance Indicators (“KPIs”) and considers that the most relevant KPIs are those that communicate the financial performance and strength of the Company as a whole. The Board and the Manager monitor the following KPIs:

  • NAV performance, relative to the UK Equity Income sector and other comparable investment trusts and open-ended funds and to various UK stock market indices.

The NAV at 31 May 2018 was 105.09p per share (2017: 103.43p). The total return of the Company over the year, including the dividend income from the portfolio, was 5.2%. This compares with its peer group, where the average was a 3.0% increase in total return terms. By comparison, the total return on the FTSE All-Share Index was 6.5% over the year, on the FTSE SmallCap Index (excluding Investment Companies) was 5.6% and on the FTSE AIM All-Share Index was 10.5%.

  • NAV volatility

The Company has an objective to deliver attractive returns whilst having an eye to constraining volatility relative to other similar investment trusts. For the year to 31 May 2018, the Company’s NAV had a volatility of 5.9%1. This compares to the peer group, where the average was 8.4%.

  • Movements in the Company’s share price

The Company’s share price increased by 8.1% over the year on a total return basis, including the 3.55p dividends paid/declared. This compares with its peer group, where the average move was an increase of 3.0%.

  • The discount of the share price in relation to the NAV

The Company has an objective to keep the discount to NAV at a minimum. Over the year to 31 May 2018, the Company has maintained an average discount to NAV of 0.8%.

  • The Company’s dividend growth rate

The Company has an objective to deliver an attractive and growing dividend. The Company has paid/declared four ordinary dividends totalling 3.40p for the year, representing a yield of 3.4% (based on an average share price of 101.57p). In addition, the Company has also declared a special dividend of 0.23p, which, when added to the ordinary dividends, amounts to a yield of 3.6%. The underlying growth rate of the ordinary dividends over the year was 13.3%, which is in line with the previous years. In comparison, over the last year the peer group have grown their dividend at a rate of 6.7%2.

  • Ongoing charges

The ongoing charges for the year to 31 May 2018 amounted to 1.13% (2017: 1.15%) of total assets. A summary of the total costs involved in managing the Company can be found above.

¹ Source: Cenkos Securities
² Average of the other UK Equity Income Trusts that have reported over the previous twelve months.

Dividends
Ordinary dividends totalling 3.40p and a special dividend of 0.23p per ordinary share have been paid, declared or proposed in respect of the year ended 31 May 2018.

First interim dividend: 0.75p paid on 28 February 2018 (29 February 2017: 0.70p)
Second interim dividend: 0.80p paid on 31 May 2018 (31 May 2017: 0.70p)
Third interim dividend: 0.85p payable on 31 August 2018 (31 August 2017: 0.80p)
Final dividend: 1.00p payable on 30 November 2018 (30 November 2017: 0.80p)
Special dividend: 0.23p payable on 30 November 2018 (30 November 2017: 0.40p)

A final dividend of 1.00p per ordinary share and a special dividend of 0.23p per ordinary share have been recommended by the Board. Subject to shareholder approval at the forthcoming AGM, these dividends will be paid together on 30 November 2018 to shareholders on the register at the close of business on 28 September 2018. The ex-dividend date will be 27 September 2018.

Principal Risks and Uncertainties
The Company is exposed to a variety of risks and uncertainties that could cause its asset price or the income from the investment portfolio to reduce, possibly by a sizeable percentage in the most adverse circumstances. The Board, through delegation to the Audit Committee, has undertaken a robust assessment and review of the principal risks facing the Company, together with a review of any new risks which may have arisen during the year, including those that would threaten its business model, future performance, solvency or liquidity. These risks are formalised within the Company’s risk matrix. Information regarding the Company’s internal control and risk management procedures can be found in the Corporate Governance Statement in the full Annual Report. The principal financial risks and the Company’s policies for managing these risks and the policy and practice with regard to financial instruments are summarised in note 19 to the financial statements.

The Board has also identified the following additional risks and uncertainties:

Investment and strategy
Risk: There can be no guarantee that the investment objective of the Company will be achieved.

The Company does not follow any benchmark. Accordingly, the portfolio of investments held by the Company will not mirror the stocks and weightings that constitute any particular index or indices, which may lead to the Company’s shares failing to follow either the direction or extent of any moves in the financial markets generally (which may or may not be to the advantage of shareholders).
Mitigation: The Manager has in place a dedicated investment management process which is designed to maximise the chances of the investment objective being achieved. The Board reviews regular investment and financial reports from the Manager to monitor this.
Smaller companies
Risk: The Company will invest primarily in quoted UK companies with a wide range of market capitalisations but a long-term bias toward small and mid cap equities. Smaller companies can be expected, in comparison to larger companies, to be less mature businesses, have more restricted depth of management and a higher risk profile. In addition, the relatively small market capitalisation of such companies can make the market in their shares illiquid. Prices of individual smaller capitalisation stocks could be more volatile than prices of larger capitalisation stocks and the risk of insolvency of many smaller companies (with the attendant losses to investors) is higher.
Mitigation: The Board looks to mitigate this risk by ensuring the Company holds a spread of investments, achieved through limiting the size of new holdings at the time of investment to typically between 1% and 1.5% of the portfolio. All potential investee companies are researched by the Manager prior to investment.
Sectoral diversification
Risk: The Company is not constrained from weighting to any sector. This may lead to the Company having significant exposure to portfolio companies from certain business sectors from time to time. Greater concentration of investments in any one sector may result in greater volatility in the value of the Company’s investments and consequently its NAV.
Mitigation: The Company seeks to achieve attractive returns by investing in weightings that are different from the overall market, yet also seeks to ensure that individual variances are not so extreme as to leave shareholders at risk of portfolio volatility that is unreasonably poor. Even though there may be significant exposures to a single sector, this will be achieved by holding a number of different stocks in the portfolio.
Dividends
Risk: The Company’s investment objective includes the aim of providing shareholders with an attractive and growing dividend. There is no guarantee that any dividends will be paid in respect of any financial year or period. The ability to pay dividends is dependent on a number of factors, including the level of dividends earned from the portfolio and the net revenue profits available for that purpose.

The redemption of shares pursuant to the redemption facility may also reduce distributable reserves to the extent that the Company is unable to pay dividends.
Mitigation: The Company maintains accounting records and produces forecasts that are designed to reduce the likelihood that the Company will not have sufficient distributable resources to meet its dividend objective.
Share price volatility and liquidity/marketability risk
Risk: The market price of the Company’s shares, like shares in all investment companies, may fluctuate independently of the NAV and thus may not reflect the underlying NAV of the shares. The shares could trade at a discount or premium to NAV at different times, depending on factors such as supply and demand for the shares, market conditions and general investor sentiment.
Mitigation: The Company has in place an annual redemption facility whereby shareholders can voluntarily tender their shares. The Board monitors the relationship between the share price and the NAV. The Company has taken powers to re-purchase shares should there be an imbalance in the supply and demand leading to a discount. The Company has powers to issue shares (only at a premium to NAV) should there be good investment opportunities and the size of the Company had not become too large to continue to meet its objectives.
Gearing
Risk: The Company’s investment strategy may involve the use of gearing to enhance investment returns, which exposes the Company to risks associated with borrowings. Gearing may be generated through the use of options, futures, options on futures, swaps and other synthetic or derivative financial instruments. Such financial instruments inherently contain much greater leverage than a non-margined purchase of the underlying security or instrument.

While the use of borrowings should enhance the total return on the shares where the return on the Company’s underlying assets is rising and exceeds the cost of borrowing, it will have the opposite effect where the return on the Company’s underlying assets is rising at a lower rate than the cost of borrowing or falling, further reducing the total return on the shares.

As a result, the use of borrowings by the Company may increase the volatility of the NAV per share.
Mitigation: The Company has a revolving credit facility in place, as detailed in note 5 to the financial statements. At 31 May 2018, the facility was undrawn.

The Company is limited to a maximum gearing of 15% of the net assets. There was no gearing at 31 May 2018 (2017: nil).
Key man risk
Risk: The Company depends on the diligence, skill, judgement and business contacts of the Manager’s investment professionals and its future success could depend on the continued service of these individuals, in particular Gervais Williams.
Mitigation: The Company may terminate the Management Agreement should Gervais Williams cease to be an employee of the Manager’s group and is not replaced by a person whom the Company considers to be of equal or satisfactory standing within three months of his departure.
Engagement of third party service providers
Risk: The Company has no employees and the Directors have all been appointed on a non-executive basis. Whilst the Company has taken all reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with is obligations, the Company is reliant upon the performance of third party service providers for its executive function.
Mitigation: The Company operates through a series of contractual relationships with its service providers. These contracts, supported by service level agreements where appropriate, set out the terms on which a service is to be provided to the Company. The Board reviews performance of all the service providers both in the Board meetings and in the Management Engagement Committee meetings, where the terms on which the service providers are engaged are also reviewed. The Board also receives assurance or internal controls reports from key service providers. In addition, the contracts provide the Company with protection in the event of failure to perform by a service provider.

SHARE CAPITAL

Share Issues
At the AGM held on 10 October 2017, the Directors were granted authority to allot ordinary shares up to an aggregate nominal amount of £76,697 (being 20% of the issued ordinary share capital) with pre-emption rights applying. Subsequently, at a General Meeting held on 15 November 2017, the Directors were granted authority to allot ordinary shares under the above authority on a non-pre-emptive basis up to an aggregate nominal amount of £38,348 (being 10% of the issued ordinary share capital). No shares have been issued under these authorities. These authorities are due to expire at the Company’s AGM on 10 October 2018 and proposals for their renewal are set out in the full Annual Report.

There are no restrictions concerning the transfer of securities in the Company or on voting rights; no special rights with regard to control attached to securities; no agreements between holders of securities regarding their transfer known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid.

Purchase of Own Shares
At the AGM held on 10 October 2017, the Directors were granted the authority to buy back up to 57,484,737 ordinary shares. No ordinary shares have been bought back under this authority. The authority will expire at the next AGM when a resolution for its renewal will be proposed (see the Directors’ Report in the full Annual Report for further information).

Treasury Shares
Shares bought back by the Company may be held in treasury, from where they could be re-issued at a premium to NAV quickly and cost effectively. This provides the Company with additional flexibility in the management of its capital base. No shares were purchased for, or held in, treasury during the year or since the year end.

Share Redemptions
Valid redemption requests were received under the Company’s redemption facility for the 31 May 2018 Redemption Point in relation to 517,858 ordinary shares, representing 0.14% of the issued share capital. As permitted under the Company’s Articles of Association, these shares were matched with buyers and sold at a calculated Redemption Price of 105.41p per share.

Current Share Capital
As at the year end and the date of this Report, there were 383,487,239 ordinary shares and 50,000 management shares (see note 9 to the financial statements) in issue.

MANAGEMENT, SOCIAL, ENVIRONMENTAL AND DIVERSITY MATTERS

Management Arrangements
The Company appointed Miton Trust Managers Limited (“MTM” or “Manager”) as its Alternative Investment Fund Manager (“AIFM”) with effect from 22 July 2014. MTM has been approved as an AIFM by the UK’s Financial Conduct Authority. Miton Asset Management Limited has been appointed by MTM as Investment Manager to the Company pursuant to a delegation agreement.

The Manager receives a management fee of 1.0% per annum on the adjusted market capitalisation of the Company up to £300m and 0.8% per annum on the average market capitalisation above £300m. The management fee is calculated and payable monthly in arrears.

In addition to the basic management fee, and for so long as a Redemption Pool is in existence, the Manager is entitled to receive from the Company a fee calculated at the rate of one-twelfth of 1.0% per calendar month of the NAV of the Redemption Pool on the last business day of the relevant calendar month.

In accordance with the Directors’ policy on the allocation of expenses between income and capital, in each financial year 75% of the management fee payable is charged to capital and the remaining 25% to revenue.

The management agreement is terminable by either the Manager or the Company giving to the other not less than 12 months’ written notice. The management agreement may be terminated earlier by the Company with immediate effect on the occurrence of certain events, including the liquidation of the Manager or appointment of a receiver or administrative receiver over the whole or any substantial part of the assets or undertaking of the Manager or a material breach by the Manager of the management agreement which is not remedied. The Company may also terminate the management agreement should Gervais Williams cease to be an employee of the Manager’s group and is not replaced by a person whom the Company considers to be of equal or satisfactory standing within three months of his departure.

The Company has given certain market standard indemnities in favour of the Manager in respect of the Manager’s potential losses in carrying on its responsibilities under the management agreement.

The Board appointed Bank of New York Mellon as its Depositary and Custodian under an agreement dated 22 July 2014. The annual fee for depositary services due to Bank of New York Mellon is 0.025% of gross assets, subject to a minimum fee of £15,000 per annum. The Company and the Depositary may terminate the Depositary Agreement with three months’ written notice.

Company secretarial and administrative services are provided by Link Alternative Fund Administrators Limited (formerly Capita Sinclair Henderson Limited), under an agreement dated 7 April 2011. This agreement may be terminated by 12 months’ written notice subject to provisions for earlier termination as provided therein.

Continuing Appointment of the Manager
The Board keeps the performance of the Manager under continual review, and the Management Engagement Committee conducts an annual appraisal of the Manager’s performance, and makes a recommendation to the Board about the continuing appointment of the Manager. As the Manager has delegated the investment management function to the Investment Manager, the performance of the Investment Manager is also regularly reviewed. It is the opinion of the Directors that the continuing appointment of the Manager is in the interests of shareholders as a whole. The reasons for this view are that the Manager has executed the investment strategy according to the Board’s expectations and has demonstrated superior risk-adjusted returns relative to the broader market and the peer group.

The Directors also believe that by paying the management fee calculated on a market capitalisation basis, rather than a percentage of assets basis, the interests of the Manager are more closely aligned with those of shareholders.

Environmental, Human Rights, Employee, Social and Community Issues
Since the Company does not have any employees, the day-to-day management of these areas is delegated to the Manager. As an investment trust, the Company has no direct impact on the community or the environment, and as such has no environmental, human rights, social or community policies.

Environmental, Social and Governance (“ESG”) factors are central to the investment process as misjudgements on these matters can incur major additional costs to the portfolio holdings, as well as undermining their equity return through reputational damage. In company meetings, the Manager routinely questions the corporate management on a variety of topics, such as safety records and the make-up of their board papers, to ensure companies are adhering to best practice. These questions can be quite wide ranging. For example, the Manager has raised issues ranging from the use of antibiotics in livestock, to how individual companies police the working conditions in the overseas plants of their suppliers.

Gender Diversity
The Board of Directors of the Company comprises two female and three male Directors.

The Company’s Diversity Policy acknowledges the benefits of greater diversity, including gender diversity, and the Board remains committed to ensuring that the Company’s Directors bring a wide range of skills, knowledge, experience, backgrounds and perspectives. Details of the Company’s Diversity Policy are set out in the Corporate Governance Statement in the full Annual Report.

The Strategic Report has been approved by the Board of Directors.

On behalf of the Board

Michael Wrobel
Chairman
2 August 2018

Directors
Michael Wrobel – Chairman
Paul Craig
Lucinda Riches – Chair of the Management Engagement Committee
Calum Thomson – Chairman of the Audit Committee
Jane Tufnell – Senior Independent Director

All Directors are non-executive and are independent of the Manager.

Going Concern

The Directors consider that it is appropriate to adopt the going concern basis in preparing the financial statements. After making enquiries, and bearing in mind the nature of the Group’s business and assets, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. In arriving at this conclusion, the Directors have considered the liquidity of the portfolio and the Group’s ability to meet obligations as they fall due for a period of at least 12 months from the date that these financial statements were approved.

Cash flow projections have been reviewed and show that the Group has sufficient funds to meet both its contracted expenditure and its discretionary cash outflows in the form of the dividend policy.

Viability Statement

The Directors have assessed the viability of the Company over a three-year period, taking account of the Company’s position and the risks as set out in the Strategic Report.

The period assessed balances the long-term aims of the Company, the Board’s view that the success of the Company is best assessed over a longer time period and the inherent uncertainty of looking out for too long a period.

As part of its assessment of the viability of the Company, the Board has considered the principal risks and uncertainties and the impact on the Company’s portfolio of a significant fall in UK markets. The Directors do not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place over the period of this assessment.

To provide this assessment, the Board has considered the Company’s financial position and its ability to liquidate its portfolio to meet its expenses or other liabilities as they fall due:

  • The Company invests largely in companies listed and traded on stock exchanges. These are actively traded, and whilst perhaps less liquid than larger quoted companies, the portfolio is well diversified by both number of holdings and industry sector.
  • The expenses of the Company are predictable and modest in comparison with the assets in the portfolio. There are no commitments that would change that position.
  • The Company has an annual redemption facility whereby shareholders may request that their shares are redeemed at NAV. The Board has considered the possibility that shareholders holding a significant percentage of the Company’s shares request redemption. Firstly, the Board has flexibility over the method of redemption so as to avoid disruption to the overall operation of the Company in this situation. Secondly, the Company’s investments comprise readily realisable securities which can be sold to meet funding requirements if necessary. The most significant of the Company’s expenses vary in proportion to the size of the Company.

In addition to considering the principal risks set out above and the financial position of the Company as described above, the Board has also considered the following further factors:

  • the continuing relevance of the Company’s investment objective in the current environment;
  • the level of demand for the Company’s shares and that since launch the Company has been able to issue further shares;
  • the gearing policy of the Company; and
  • that regulation will not increase to such extent that the costs of running the Company become uneconomical.

Accordingly, the Directors have formed the reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three years.

The full Annual Report contains the following statements regarding responsibility for the financial statements.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (“IFRS”) as adopted by the European Union.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with IFRS. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that year.

In preparing the Group financial statements, the Directors are required to:

  • select suitable accounting policies in accordance with IAS 8: ‘Accounting Policies, Changes in Accounting Estimates and Errors’ and then apply them consistently;
  • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
  • provide additional disclosures when compliance with specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;
  • state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and
  • make judgements and estimates that are reasonable and prudent.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations, and for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.

The financial statements are published on the Company’s website, www.mitongroup.com/dit, which is maintained on behalf of the Company by the Manager. Under the Management Agreement, the Manager has agreed to maintain, host, manage and operate the Company’s website and to ensure that it is accurate and up-to-date and operated in accordance with applicable law. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and accordingly, the Auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom covering the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction.

We confirm that to the best of our knowledge:

  • the Group financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company (and the Group as a whole); and
  • this Annual Report includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces.

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

On behalf of the Board

Michael Wrobel
Chairman
2 August 2018
 

NON-STATUTORY ACCOUNTS

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

CONSOLIDATED INCOME STATEMENT

          Year ended
          31 May 2018
    Year ended
    31 May 2017
Note Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Gains on investments held at fair value through profit or loss

12




14,122 


14,122 




56,868 


56,868 
Foreign exchange gains/(losses)

19 

19 


(15)

(15)
Losses on derivatives held at fair value through profit or loss

13




(5,983)


(5,983)




(10,896)


(10,896)
Income 2 16,510  16,510  17,019  17,019 
Management fee 3 (930) (2,788) (3,718) (852) (2,555) (3,407)
Other expenses 4 (723) (723) (734) (734)
Return on ordinary activities before finance costs and taxation

14,857 


5,370 


20,227 


15,433 


43,402 


58,835 
Finance costs 5 (30) (91) (121) (34) (100) (134)
Return on ordinary activities before taxation
14,827 

5,279 

20,106 

15,399 

43,302 

58,701 
Taxation 6 (110) (110)
Return on ordinary activities after taxation
7

14,717 

5,279 

19,996 

15,407 

43,302 

58,709 
pence  pence  pence  pence  pence  pence 
Return per ordinary share
7

3.84 

1.38 

5.22 

4.02 

11.29 

15.31 

The total column of this statement is the Income Statement of the Group prepared in accordance with IFRS, as adopted by the European Union. The supplementary revenue and capital columns are presented in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies (“AIC SORP”).

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.

There is no other comprehensive income, and therefore the return on ordinary activities after tax is also the total comprehensive income.

The notes form part of these financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY




Group



Note

Share 
capital 
£’000 
Share 
premium 
account 
£’000 

Special 
reserve 
£’000 

Capital
reserve
£’000

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2017 434  192,244  45,775  142,644  15,536  396,663 

Total comprehensive income:
Net return for the year 5,279  14,717  19,996 
Transactions with shareholders recorded directly to equity:
Equity dividends paid 8 (13,614) (13,614)
As at 31 May 2018 434  192,244  45,775  147,923 16,639  403,015 

   




Group



Note

Share 
capital 
£’000 
Share
premium
account
£’000

Special
reserve
£’000

Capital
reserve
£’000 

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2016 434  192,244 45,775 99,342  11,250  349,045 

Total comprehensive income:
Net return for the year - - 43,302  15,407  58,709 
Transactions with shareholders recorded directly to equity:
Equity dividends paid 8 - - (11,121) (11,121)
As at 31 May 2017 434  192,244 45,775 142,644  15,536  396,633 

The notes form part of these financial statements.
 

PARENT COMPANY STATEMENT OF CHANGES IN EQUITY




Company



Note

Share 
capital 
£’000 
Share 
premium 
account 
£’000 

Special 
reserve 
£’000 
 
Capital 

reserve 
£’000 

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2017 434  192,244  45,775  142,644  14,828  395,925 

Total comprehensive income:
Net return for the year 5,279  14,581  19,860 
Transactions with shareholders recorded directly to equity:
Equity dividends paid 8 (13,614) (13,614)
As at 31 May 2018 434  192,244  45,775  147,923  15,795  402,171 

   




Company



Note

Share 
capital 
£’000 
Share
premium
account
£’000

Special
reserve
£’000

Capital
reserve
£’000

Revenue 
reserve 
£’000 


Total 
£’000 
As at 1 June 2016 434  192,244 45,775 99,342  10,604  348,399 

Total comprehensive income:
Net return for the year - - 43,302  15,345  58,647 
Transactions with shareholders recorded directly to equity:
Equity dividends paid 8 - - (11,121) (11,121)
As at 31 May 2017 434  192,244 45,775 142,644  14,828  395,925 

The notes form part of these financial statements.
 

CONSOLIDATED AND PARENT COMPANY BALANCE SHEETS



Note
Group 
31 May 2018 
£’000 
Group 
31 May 2017 
£’000 
Company 
31 May 2018 
£’000 
Company 
31 May 2017 
£’000 
Non-current assets:
Investments held at fair value through profit or loss
12

382,667 

384,710 

382,667 

384,710 
Current assets:
Derivative instruments 13 4,378  1,385  4,378  1,385 
Trade and other receivables 16 2,331  3,337  2,331  3,337 
Cash and cash equivalents 16,708  7,628  16,707  7,625 
23,417  12,350  23,416  12,347 

Current liabilities:
Trade and other payables 17 (3,069) (427) (3,912) (1,132)
(3,069) (427) (3,912) (1,132)

Net current assets

20,348 

11,923 

19,504 

11,215 
Total net assets 403,015  396,633  402,171  395,925 

Capital and reserves:
Share capital – ordinary shares 9 384  384  384  384 
Share capital – management shares 9 50  50  50  50 
Share premium account 10 192,244  192,244  192,244  192,244 
Special reserve 10 45,775  45,775  45,775  45,775 
Capital reserve 10 147,923  142,644  147,923  142,644 
Revenue reserve 10 16,639  15,536  15,795  14,828 
Shareholders’ funds 403,015  396,633  402,171  395,925 

pence 

pence 
Net asset value per ordinary share 11 105.09  103.43 

The amount of the Company's return for the financial year is a profit after tax of £19,860,000 (2017: £58,647,000).

These financial statements were approved by the Board of The Diverse Income Trust plc on 2 August 2018 and were signed on its behalf by:

Michael Wrobel
Chairman

Company no.: 7584303

The notes form part of these financial statements.
 

CONSOLIDATED AND PARENT COMPANY CASH FLOW STATEMENTS

Group 
31 May 2018 
£’000 
Group 
31 May 2017 
£’000 
Company 
31 May 2018 
£’000 
Company 
31 May 2017 
£’000 
Operating activities:
Net return before taxation 20,106  58,701  19,970  58,639 
Gains on investments and derivatives held at fair value
through profit or loss

(8,139)

(45,972)

(8,139)

(45,972)
Non operating activities to financing activities 89  170  89  170 
Decrease/(increase) in trade and other receivables 1,006  (1,273) 1,006  (1,273)
Increase/(decrease) in trade and other payables 2,642  (2,914) 2,780  (2,220)
Withholding tax (paid)/recoverable (110) (110)
Net cash inflow from operating activities 15,594  8,720  15,596  9,352 
Investing activities:
Purchase of investments (103,583) (69,452) (103,583) (69,452)
Sale of investments 119,748  80,923  119,748  80,923 
Purchase of derivative instruments (16,450) (7,445) (16,450) (7,445)
Sale of derivative instruments 7,474  3,190  7,474  3,190 
Net cash inflow from investing activities 7,189  7,216  7,189  7,216 
Financing activities:
Revolving loan facility drawdown 15,000  15,000 
Revolving loan facility repayment (15,000) (15,000)
Revolving loan facility arrangement fee paid (63) (63)
Revolving loan facility non-utilisation fee paid (89) (45) (89) (45)
Revolving loan facility interest paid (62) (62)
Equity dividends paid (13,614) (11,121) (13,614) (11,121)
Net cash outflow from financing activities (13,703) (11,291) (13,703) (11,291)
Increase in cash and cash equivalents 9,080  4,645  9,082  5,277 
Reconciliation of net cash flow movements in funds:
Cash and cash equivalents at the start of the year 7,628  2,983  7,625  2,348 
Net cash inflow from cash and cash equivalents 9,080  4,645  9,082  5,277 
Cash at the end of the year 16,708  7,628  16,707  7,625 
Cash and cash equivalents comprise the following:
Cash at bank 16,708  7,628  16,707  7,625 
16,708  7,628  16,707  7,625 
Cash and cash equivalents received/(paid) during the period includes:
Dividend received 11,025  12,091  11,025  12,091 
Investment income and interest received 5,345  5,092  5,209  5,029 
Interest paid (1) (1)

The notes form part of these financial statements.
 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 General Information and Significant Accounting Policies
Diverse is a company incorporated and registered in England and Wales. The principal activity of the Company is that of an investment trust company within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010.

The Group’s annual financial statements for the year ended 31 May 2018 have been prepared in conformity with IFRS as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board (“IASB”), and as applied in accordance with the provisions of the Companies Act 2006. The annual financial statements have also been prepared in accordance with the AIC SORP for the financial statements of investment trust companies and venture capital trusts, except to any extent where it is not consistent with the requirements of IFRS.

Basis of Preparation
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been prepared alongside the Income Statement.

The financial statements are presented in sterling, which is the Group’s functional currency as the UK is the primary environment in which it operates, rounded to the nearest £’000, except where otherwise indicated.

Going Concern
The financial statements have been prepared on a going concern basis as the Directors believe the Group will remain a going concern for the foreseeable future, being a period of at least 12 months from the date that these financial statements were approved, and on the basis that approval as an investment trust company will continue to be met.

The Directors have made an assessment of the Group’s ability to continue as a going concern and are satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern, having taken into account the liquidity of the Group’s investment portfolio and the Group’s financial position in respect of its cash flows, borrowing facilities and investment commitments (of which there are none of significance). Therefore, the consolidated financial statements have been prepared on the going concern basis.

Basis of Consolidation
IFRS 10 sets out the principles for the presentation and preparation of consolidated financial statements and establishes a single control model that applies to all entities.

The Company has made the significant accounting judgement that the Company meets the definition of an investment entity. However, the Company’s wholly-owned subsidiary, DIT Income Services Limited, is an extension of the Company through which it provides services that relate to the investment entity’s investment activities and the subsidiary is not itself an investment entity.  The Group financial statements therefore consolidate the financial statements of the Company and its subsidiary, drawn up to 31 May 2018. The subsidiary is consolidated from the date of acquisition, being the date on which control is obtained, and will continue to be consolidated until the date that such control ceases. Control comprises being exposed, or having rights, to variable returns through its power over the investee. The financial statements of the subsidiary are prepared for the same reporting year as the parent Company, using consistent accounting policies. All inter-company balances and transactions, including unrealised profits arising from them, are eliminated.

As permitted by Section 408 of the Companies Act 2006, the Company has not presented its own Income Statement. The amount of the Company’s return for the financial year dealt with in the financial statements of the Group is a profit after tax of £19,860,000 (2017: £58,647,000).

Segmental Reporting
The Directors are of the opinion that the Group is engaged in a single segment of business, being investment business. The Group primarily invests in companies listed in the UK.

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

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

It is not envisaged that the other standard listed below effective in later financial periods will have a material effect on the financial statements.

International Financial Reporting Standards Effective date
IFRS 2 Share-based payments (amendments) 1 January 2018
IFRS 9 Financial Instruments (IFRS 7 Disclosures) 1 January 2018
IFRS 9 Financial Instruments 1 January 2018
IFRS 15 Revenue from contracts with customers 1 January 2018
IFRS 16 Leases 1 January 2019

Critical Accounting Judgements and Key Sources of Estimation Uncertainty
The preparation of financial statements in conformity with accounting standards requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts in the financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

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

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future period if the revision affects both current and future periods. There were no accounting estimates or judgements that had a significant impact on the financial statements in the current period.

Investments
The Group’s business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Group’s Board of Directors.

Upon initial recognition, the investments held by the Company, except for the investment in the subsidiary, are designated at ‘fair value through profit or loss’. They are included initially at fair value, which is taken to be their cost (excluding expenses incidental to the acquisition, which are written off in the Income Statement and allocated to ‘capital’ at the time of acquisition). When a purchase or sale is made under a contract, the terms of which require delivery within the time-frame of the relevant market, the investments concerned are recognised or derecognised on the trade date. Subsequent to initial recognition, investments are valued at fair value through profit or loss. For listed investments this is deemed to be bid market prices or closing prices for Stock Exchange Electronic Trading Service – quotes and crosses (“SETSqx”).

Changes in fair value of investments are recognised in the Income Statement as a capital item. On disposal, realised gains and losses are also recognised in the Income Statement as capital items.

The investment in the subsidiary company, DIT Income Services Limited, is held at cost (£1) (2017: £1). Investments held as current assets by the subsidiary undertaking are classified as ‘held for trading’ and are at fair value. Dealing profits or losses on these investments are taken to revenue in the Income Statement. There were no investments held by the subsidiary at the year end (2017: none).

All investments for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy in note 12.

Foreign Currency
Transactions denominated in foreign currencies are converted to sterling at the actual exchange rate as at the date of the transaction. Monetary assets and liabilities and non-monetary assets held at fair value denominated in foreign currencies at the year end are reported at the rate of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the capital reserve or the revenue account depending on whether the gain or loss is of a capital or revenue nature.

Financial Instruments
Derivatives, including Index Put options, which are listed investments, are classified as financial instruments at fair value through profit or loss held for trading. They are initially recorded at cost (being the premium paid to purchase the option) and are subsequently valued at fair value at the close of business at the year end and included in current assets/liabilities.

Changes in the fair value of derivative instruments are recognised as they arise in the capital column of the Income Statement.

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

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

Trade Receivables, Trade Payables and Short-term Borrowings
Trade receivables, trade payables and short-term borrowings are measured at amortised cost.

Income
Dividends receivable on quoted equity shares are taken to revenue on an ex-dividend basis. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company’s right to receive payment is established. Fixed returns on non-equity shares are recognised on a time-apportioned basis. Dividends from overseas companies are shown gross of any non-recoverable withholding taxes, which are disclosed separately in the Income Statement.

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

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

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

Expenses and Finance Costs
All expenses are accounted for on an accruals basis. On the basis of the Board’s expected long-term split of total returns in the form of capital and revenue returns of 75% and 25% respectively, the Company charges 75% of its management fee and finance costs to capital. All other administrative expenses are charged through the revenue column in the Income Statement.

Expenses incurred directly in relation to placings and offers for subscription of shares are deducted from equity and charged to the share premium account.

Taxation
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes at the reporting date. Deferred tax assets are only recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of timing differences can be deducted. In line with the recommendations of the AIC SORP, the allocation method used to calculate the tax relief on expenses charged to capital is the “marginal” basis. Under this basis, if taxable income is capable of being offset entirely by expenses charged through the revenue account, then no tax relief is transferred to the capital account.

No taxation liability arises on gains from sales of fixed asset investments by the Company by virtue of its investment trust status. However, the net revenue (excluding UK dividend income) accruing to the Company is liable to corporation tax at the prevailing rates.

Dividends Payable to Shareholders
Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the Statement of Changes in Equity. Dividends declared and approved by the Company after the Balance Sheet date have not been recognised as a liability of the Company at the Balance Sheet date.

Special Reserve
The special reserve was created by a cancellation of the share premium account by order of the High Court in February 2012. Its main purpose is to allow the Company to meet annual redemption requests for ordinary shares. The costs of repurchasing ordinary shares and meeting annual redemption requests, including related stamp duty and transaction costs, are also charged to the special reserve.

Share Capital
The Company classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. The share capital of the Company comprises redeemable ordinary shares (“ordinary shares”), C shares, when in issue, and management shares.

The Company is a closed-ended investment company with an unlimited life. The ordinary shares are not puttable instruments because redemption is conditional upon certain market conditions and/or Board approval. As such, they are not required to be classified as debt under IAS 32 ‘Financial Instruments: Disclosure and Presentation’.

As defined in the Articles of Association, redemption of ordinary shares is at the sole discretion of the Directors, therefore the ordinary shares have been classified as equity.

The issuance, acquisition and resale of ordinary shares are accounted for as equity transactions and no gain or loss is recognised in the Income Statement.

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

  • costs associated with the issue of equity; and
  • premium on the issue of shares.

Capital Reserve
The following are taken to this reserve:

  • gains and losses on the disposal of investments;
  • exchange difference of a capital nature;
  • expenses, together with the related taxation effect, allocated to this reserve in accordance with the above policies; and
  • increase and decrease in the valuation of investments held at the year end.

Revenue Reserve
The revenue reserve represents the surplus accumulated revenue profits and is distributable.
 

2 Income

Year ended 
31 May 2018 
£’000 
Year ended 
31 May 2017 
£’000 
Income from investments:
UK dividends 11,133  11,456 
UK REIT dividend income 270  286 
Unfranked dividend income 4,202  4,433 
UK fixed interest 706  694 
16,311  16,869 
Other income:
Bank deposit interest 17 
Exchange gains 13  14 
Net dealing profit of subsidiary* 136  63 
Underwriting income 33  65 
Total income 16,510  17,019 

* Represents realised trading gains and losses from trading transactions. There are no other expenses/income in respect of the subsidiary.
 

3 Management Fee

Year ended
31 May 2018
Year ended
31 May 2017
Revenue
£’000
Capital
£’000
Total
£’000
 Revenue
£’000
 Capital
£’000 
       Total
£’000
Management fee 930 2,788 3,718 852 2,555 3,407

The basic management fee payable to the AIFM is calculated at the rate of one-twelfth of 1.0% of the adjusted market capitalisation of the Company up to £300m and one-twelfth of 0.8% on the market capitalisation in excess of £300m on the last business day of each calendar month. The basic management fee accrues daily and is payable in arrears in respect of each calendar month. For the purpose of calculating the basic fee, the ‘adjusted market capitalisation’ of the Company is defined as the average daily mid-market price for an ordinary share and C share (when in issue), multiplied by the number of relevant shares in issue, excluding those held by the Company in treasury, on the last business day of the relevant month. In addition, the AIFM is entitled to receive a management fee on any Redemption Pool, as detailed in the Strategic Report above.

At 31 May 2018, an amount of £329,000 (2017: £305,000) was outstanding and due to Miton Trust Managers Limited in respect of management fees.
 

4 Other Expenses

Year ended
31 May 2018
£’000
Year ended
31 May 2017
£’000
Secretarial services 117 114
Auditor’s remuneration for:
Audit of the Group’s financial statements (payable by the Company only)
33

30
Directors’ fees (see the Directors’ Remuneration Report in the full Annual Report)
135

121
Other expenses 438 469
723 734

The audit of the Group's financial statements includes the cost of the audit of DIT Income Services Limited of £2,000 (2017: £2,000), which is paid by the parent company.
 

5 Finance Costs

Year ended
31 May 2018
Year ended
31 May 2017
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Bank debit interest
BNYM £7.5m overdraft facility administration fee





RBS £25m revolving loan facility arrangement fee

16 

21 


10 

14 
RBS £25m revolving loan facility non-utilisation fee
25 

75 

100 

13 

40 

53 
RBS £25m revolving loan facility interest



16 

46 

62 
30  91  121  34  100  134 

The Company entered into a £25m revolving loan facility with The Royal Bank of Scotland (“RBS”) in September 2016. The facility provides the scope in certain circumstances to raise the level of borrowing to £50m. The facility bears interest at the rate of 1.35% over LIBOR on any drawn down balance and a non-utilisation fee of 0.4% on any undrawn balance. The facility may be drawn in sterling or other currencies as approved by the lender. The facility is due for renewal in September 2019.

An arrangement fee of £62,500 has been paid to RBS in the year ended 31 May 2017 and is being amortised over the 3-year period of the facility.

The facility contains covenants which require that net borrowings will not, at any time, exceed 25% of the adjusted net asset value, and the net asset value shall, at all times, be equal to or greater than £210m. If the Company breaches either covenant, then it is required to notify the Bank of any default and the steps being taken to remedy it.

As at 31 May 2018, the facility was undrawn. The Company had drawn down £15m in March 2017, which was repaid in full on 31 May 2017.

This facility replaced the previous uncommitted revolving credit facility agreement with The Bank of New York Mellon (“BNYM”) of £7.5m.
 

6 Taxation

Year ended
31 May 2018
Year ended
31 May 2017
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Overseas tax not recoverable 110  110  23  23 
Overseas tax – reversal of prior year’s tax now recoverable







(31)


-


(31)
Tax cost/(recovery) for the year
110 


110 

(8)


(8)

   

Year ended
31 May 2018
Year ended
31 May 2017
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Return on ordinary activities before taxation
14,827 

5,279 

20,106 

15,399 

43,302 

58,701 
Theoretical tax at UK corporation tax rate of 19% (2017: 19.83%)

2,817 


1,003 


3,820 


3,054 


8,587 


11,641 
Effects of:
- UK dividends that are not taxable
(2,115)


(2,115)

(2,272)


(2,272)
- Overseas dividends that are not taxable
(784)


(784)

(882)


(882)
- Realised dealing gains (12) (12)
- Non-taxable investment gains

(1,550)

(1,550)


(9,113)

(9,113)
- Overseas taxation suffered 110  110  23  23 
- Double tax relief expensed in current period





- Prior year's irrecoverable withholding tax previously expensed







(31)




(31)
- Unrelieved expenses 80  547  627  112  526  638 
Tax (recovery)/charge for the year
110 


110 

(8)


(8)

Factors That May Affect Future Tax Charges
The Company has excess management expenses of £17,083,000 (2017: £13,764,000) that are available to offset future taxable revenue. At 31 May 2018, the Company has not recognised a deferred tax asset of £2,904,000 (2017: £2,340,000), calculated using the standard rate of corporation tax in the UK of 17%, in respect of these accumulated expenses as they will only be recoverable to the extent that there is sufficient future taxable revenue. It is unlikely that the Company will generate sufficient taxable income in the future to utilise these expenses to reduce future tax charges and therefore no deferred tax charge has been recognised.

The income from the subsidiary subject to taxation was £136,000 (2017: £63,000) and was offset against excess management expenses held by the Company using group relief.

In addition, deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company under HMRC rules.
 

7 Return per Share

Ordinary Shares
The return per ordinary share is based on the net profit after taxation of £19,996,000 (2017: £58,709,000) and on 383,487,239 (2017: 383,487,239) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

The return per ordinary share detailed above can be further analysed between revenue and capital as follows:

Year ended
31 May 2018
Year ended
31 May 2017
Revenue Capital Total Revenue Capital Total
Basic & diluted
Net profit (£’000) 14,717 5,279 19,996 15,407 43,302 58,709
Weighted average number of ordinary shares in issue

383,487,239


383,487,239
Return per ordinary share (pence)
3.84

1.38

5.22

4.02

11.29

15.31


8 Dividends per Ordinary Share
Amounts recognised as distributions to equity holders in the year:

Year ended
31 May 2018
Year ended
31 May 2017

£’000
pence
per share

£’000
pence
per share
In respect of the previous period:
Third interim dividend 3,068 0.80 2,876 0.75
Final dividend 3,068 0.80 2,876 0.75
Special dividend 1,534 0.40 - -
In respect of the year under review:
First interim dividend 2,876 0.75 2,684 0.70
Second interim dividend 3,068 0.80 2,685 0.70
Dividends distributed during the year       13,614 3.55 11,121 2.90

The Directors have declared a third interim dividend in respect of the year ended 31 May 2018 of 0.85p per ordinary share payable on 31 August 2018 to all shareholders on the register at close of business on 29 June 2018. A final dividend of 1.00p per ordinary share and a special dividend of 0.23p per ordinary share have also been recommended by the Board. Subject to shareholder approval at the forthcoming AGM, these dividends will be payable on 30 November 2018 to shareholders on the register at close of business on 28 September 2018. The ex-dividend date will be 27 September 2018.

The total dividends payable in respect of the financial year for the purposes of the income retention test for Section 1158 of the Corporation Tax Act 2010 are set out below.

Year ended
  31 May 2018 

£’000 
Year ended
31 May 2017
£’000
Revenue available for distribution by way of dividends for the year 14,582  15,345 
First interim dividend 0.75p (2017: 0.70p) per ordinary share (2,876) (2,684)
Second interim dividend 0.80p (2017: 0.70p) per ordinary share (3,068) (2,685)
Declared third interim dividend 0.85p (2017: 0.80p) per ordinary share (3,260) (3,068)
Proposed final dividend of 1.00p (2017: 0.80p) per ordinary share (3,835) (3,068)
Proposed special dividend of 0.23p (2017: 0.40p) per ordinary share (882) (1,534)
Estimated revenue reserve retained for the year 661  2,306 


9 Called-Up Share Capital

31 May 2018  31 May 2017 
number  £’000  number  £’000 
Ordinary shares of 0.1p each
Opening balance 383,487,239  384  383,487,239  384 
Issue of ordinary shares
Cancellation of ordinary shares



383,487,239  384  383,487,239  384 

The rights and restrictions attached to shares, together with the capital structure of the Company, are set out in the full Annual Report.

Redemption of Ordinary Shares
The Company, which is a closed-ended investment company with an unlimited life, has a redemption facility through which shareholders are entitled to request the redemption of all or part of their holding of ordinary shares on an annual basis on 31 May in each year. As set out in the Articles of Association, the Board may, at its absolute discretion, elect not to operate the annual redemption facility in whole or in part. Accordingly, the ordinary shares have been classified as equity.

The Company had received redemption requests for 517,858 ordinary shares in respect of the 31 May 2018 Redemption Point. All of these shares were matched with buyers at a calculated Redemption Price of 105.41 pence per share. Following this and at the date of this Report, the issued share capital and voting rights remain unchanged at 383,487,239 ordinary shares.

Details of the redemption facility are set out in the full Annual Report.

Management Shares
The 50,000 management shares with a nominal value of £1 each were allotted to Miton Group plc on 30 March 2011, the parent company of the Manager. The management shares are non-voting and non-redeemable and, upon a winding-up or on a return of capital of the Company, shall only receive the fixed amount of capital paid up on such shares and shall confer no right to any surplus capital or assets of the Company.

As at 31 May 2018, £12,500 had been paid up (2017: £12,500). The balance is payable on demand.
 

10 Reserves




2018
    Share 
premium 
 account 
    £’000 

Special
reserve
£’000
  Capital  reserve 
realised 
     £’000  
Capital 
reserve 
unrealised 
         £’000 

Revenue  reserve 
      £’000 
Opening balance 192,244  45,775 45,891  96,753  15,536 
Net gain on realisation of investments

-

40,948 


Exchange gains on settlements and currency accounts

-

19 


Unrealised net decrease in value of investments

-


(26,826)

Movement in value of derivative instruments

-

(9,167)

3,184 

Management fees/finance costs charged to capital

-

(2,879)


Equity dividends paid - (13,614)
Revenue return on ordinary activities after tax

-



14,717 
Closing balance 192,244  45,775 74,812  73,111  16,639 

   




2017
Share
premium
account
£’000

Special
reserve
£’000
Capital  reserve 
realised 
£’000 
Capital 
reserve 
unrealised 
£’000 

Revenue 
reserve 
£’000 
Opening balance 192,244 45,775 35,160  64,182  11,250 
Net gain on realisation of investments
-

-

21,707 


Exchange losses on settlements and currency accounts
-

-

(15)


Unrealised net increase in value of investments
-

-


35,161 

Movement in value of derivative instruments
-

-

(8,306)

(2,590)

Management fees/finance costs charged to capital
-

-

(2,655)


Equity dividends paid - - (11,121)
Revenue return on ordinary activities after tax
-

-



15,407 
Closing balance 192,244 45,775 45,891  96,753  15,536 

The distributable reserves of the Company are £136,383,000 (2017: £106,495,000).

At a General Meeting of the Company held on 6 April 2011, a resolution was passed approving the cancellation of the Company’s share premium account.

The Court subsequently confirmed this cancellation on 22 February 2012 and an amount of £48,558,000 was transferred from the Company’s share premium account to its special reserve. This amount can be treated as a distributable reserve for all purposes permitted by the Companies Act 2006 (as amended), and will enhance substantially the ability of the Company to meet annual redemption requests and to buy-back its own shares either into treasury or for cancellation.
 

11 Net Asset Value per Ordinary Share
The net asset value per ordinary share and the net asset values attributable at the year end were as follows:

Net asset value
per share
31 May 2018
pence
Net assets
attributable
31 May 2018
£’000
Net asset value
per share
31 May 2017
pence
Net assets
attributable
31 May 2017
£’000
Ordinary shares
- Basic and diluted

105.09

403,015

103.43

396,633

Net asset value per ordinary share is based on net assets at the year end and 383,487,239 ordinary shares (2017: 383,487,239), being the number of ordinary shares in issue at the year end.

The net asset value of £1 (2017: £1) per management share is based on net assets at the year end of £50,000 (2017: £50,000) and 50,000 (2017: 50,000) management shares. The shareholders have no right to any surplus capital or assets of the Company.
 

12 Investments


Group and Company
31 May 2018
£’000
31 May 2017
£’000
Investment portfolio summary:
Opening book cost 281,897 271,661
Opening investment holding gains 102,813 67,652
Total investments designated at fair value 384,710 339,313

   


Group and Company
31 May 2018 
£’000 
31 May 2017 
£’000 
Analysis of investment portfolio movements
Opening valuation 384,710  339,313 
Movements in the period:
Purchases at cost 103,583  69,452 
Sales - proceeds (119,748) (80,923)
          - gains on sales 40,948  21,707 
Movement in investment holding gains (26,826) 35,161 
Closing valuation 382,667  384,710 
Closing book cost 306,680  281,897 
Closing investment holding gains 75,987  102,813 
Total closing investments designated at fair value 382,667  384,710 

   

Year ended
31 May 2018
£’000
Year ended
31 May 2017
£’000
Transaction costs:
Costs on acquisitions 254 272
Costs on disposals 157 118
411 390

   

Year ended 
31 May 2018 
£’000 
Year ended 
31 May 2017 
£’000 
Analysis of capital gains/(losses)
Realised gains on sales 40,948  21,707
Movement in unrealised gains/(losses) (26,826) 35,161
14,122  56,868

Fair Value Hierarchy
Financial assets of the Group are carried in the Balance Sheet at their fair value or approximation of fair value. The fair value is the amount at which the asset could be sold in an ordinary transaction between market participants, at the measurement date, other than a forced or liquidation sale. The Group measures fair values using the following hierarchy that reflects the significance of the inputs used in making the measurements.

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

Level 1 – Valued using quoted prices, unadjusted in active markets for identical assets and liabilities.

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

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

Assessing the significance of a particular input requires judgement, considering factors specific to the asset or liability.

The table below sets out the fair value measurement of financial assets and liabilities in accordance with the fair value hierarchy.

Financial assets at fair value through profit or loss at 31 May 2018 Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Equity investments 372,077 127 27 372,231
Derivative contracts 4,378 - - 4,378
Fixed interest bearing securities 3,749 2,310 4,377 10,436
380,204 2,437 4,404 387,045
Financial assets at fair value through profit or loss at 31 May 2017 Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Equity investments 375,779 - - 375,779
Derivative contracts 1,385 - - 1,385
Fixed interest bearing securities 2,515 - 6,416 8,931
379,679 - 6,416 386,095

At 31 May 2018, all the Company’s financial assets at fair value through profit or loss (including the listed Put option) are included in Level 1 with the exception of the Loan Notes in 600 Group, Gable Holdings, Intercede, Sigmaroc and McBride B Shares, which are all classified as Level 3 investments (2017: same with the exception of the Intercede, Sigmaroc and Active Energy Loan Notes).

There are 3 Level 2 investments as at 31 May 2018 (2017: none) with the values calculated using observable inputs. The values are determined as follows: Accrol Group at the placing price of 15p; Active Energy 8% Loan Notes and Aggregated MicroPower 8% Loan Notes, at an intrinsic value above cost, allowing for the conversion value of the underlying, actively traded, equity bid price.

The transfer from Level 3 to Level 2 of £2,039,000 (2017: nil) is due to the holdings in Active Energy 8% Loan Notes and Aggregated MicroPower 8% Loan Notes now being calculated based on the intrinsic conversion value, as set out above.

Valuation Process for Level 3 Investments
Investments classified within Level 3 have significant unobservable inputs. Level 3 investments can typically include unlisted equity and corporate debt securities and over the counter (“OTC”) derivative instruments. As observable prices are not available for these securities, the Group has used valuation techniques to derive the fair value using recognised valuation methodologies including discounted cash flow modelling where relevant.

The Level 3 investments held by the Company currently consist of fixed interest bearing securities valued by the Manager with valuation confirmations provided to the Board on a regular basis. The equity securities of the issuing company of the Level 3 investments held are or have been publicly listed and, therefore, detailed public information is available to substantiate the future prospects of the issuing company. This information includes reported results, commentary on current trading and third party research. The values for each individual Level 3 investment are determined as follows:

  • at a value based on an intrinsic value above cost, allowing for the conversion value of underlying, activity traded bid price where applicable but where the unlisted convertible debt conversion value was not greater than par value (being ‘out of the money’) then held at par value being an approximation of fair value (600 Group, Intercede, Sigmorac); and
  • the expected cash receivable from the confirmed realisation value of a share disposal (McBride B Shares).

Reviewing these cash flows will take account of the exchange rate where applicable and the timeframe. There are no other significant unobservable inputs with the measurement of its fair value at year end and there have been no changes in valuation techniques during the year. The investments are valued by the valuation techniques using inputs as set out above. Given the nature of the inputs described above it is not possible to complete a meaningful sensitivity analysis of the level 3 investment portfolio.

The following table summarises the Company’s Level 3 investments that were accounted for at fair value in the year ended 31 May 2018.

Year ended 
31 May 2018 
Level 3 
£’000 
Year ended 
31 May 2017 
Level 3 
£’000 
Opening fair value investments 6,416  3,926 
Purchase at cost 27  3,299 
Sale proceeds - (1,495)
Transfer from Level 3 to Level 2 (2,039)
Movement in investment holding gains
movement in unrealised 686 
Closing fair value of investments 4,404  6,416 

Trading Income
The Company’s subsidiary completes trading transactions. The value of assets held by the subsidiary as at 31 May 2018 was £nil (2016: £nil). The difference between the sale and purchase of assets is trading income recognised in the Income Statement.
 

13 Derivative Contracts
Typically, derivative contracts serve as components of the Company’s investment strategy and are utilised primarily to structure and hedge investments, to enhance performance and reduce risk to the Group (the Company does not designate any derivative as a hedging instrument for hedge accounting purposes). The derivative contracts that the Company may hold from time to time or issue include: index-linked notes, contracts for differences, covered options and other equity-related derivative instruments.

Derivatives often reflect, at their inception, only a mutual exchange of promises with little or no transfer of tangible consideration. However, these instruments can involve a high degree of leverage and are very volatile. A relatively small movement in the underlying value of a derivative contract may have a significant impact on the profit and loss and net assets of the Group.

The Company’s investment objective sets limits on investments in derivatives with a high risk profile. The Manager is instructed to closely monitor the Company’s exposure under derivative contracts and any use of the derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Company’s direct investments. The Company will not enter into uncovered short positions.

As at 31 May 2018, the Group has positions in the following type of derivative:

Options
Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period.

The Company purchases either Put or Call options through regulated exchanges and OTC markets. Options purchased by the Company provide the Company with the opportunity to purchase (Call options) or sell (Put options) the underlying asset at an agreed-upon value either on or before the expiration of the option. The Company is exposed to credit risk on purchased options only to the extent of their carrying value, which is their fair value.

During the year, the Company sold the FTSE 100 – March 2018 6,000 Put option, purchased and sold a FTSE 100 – March 2018 6,500 Put option, purchased and sold a FTSE 100 – March 2019 6,500 Put option and purchased a FTSE 100 – September 2019 6,500 Put option. At the Balance Sheet date, the Put option had a fair value of £4,378,000 and a notional portfolio exposure of £162,778,000. Unrealised holding losses of £2,876,000 are detailed in the table below.

During the prior year, the Company sold the FTSE 100 – June 2017 6,000 Put option and purchased a FTSE 100 – March 2018 6,000 Put option. At the Balance Sheet date, the Put option had a fair value of £1,385,000 with a notional portfolio exposure of £141,676,000. Unrealised holding losses of £6,060,000 are detailed in the table below.


Listed Put options at fair value through profit or loss at 31 May 2018
Year ended 
31 May 2018 
£’000 
Year ended 
31 May 2017 
£’000 
Opening book cost 7,445  11,496 
Opening investment holding loss (6,060) (3,470)
Total investments designated at fair value 1,385  8,026 
Analysis of investment portfolio movements
Opening valuation 1,385  8,026 
Movements in the period:
Purchases at cost 16,450  7,445 
Sales – proceeds (7,474) (3,190)
– losses on sales (9,167) (8,306)
Movement in unrealised loss 3,184  (2,590)
Closing fair valuation 4,378  1,385 
Closing book cost 7,254  7,445 
Closing unrealised loss (2,876) (6,060)
Closing fair value 4,378  1,385 

   

At 
31 May 2018 
£’000 
At 
31 May 2017 
£’000 
Analysis of capital losses on options
Realised losses on sales (9,167) (8,306)
Movement in unrealised losses 3,184  (2,590)
(5,983) (10,896)

14 Substantial Share Interests
The Company has notified interests in 3% or more of the voting rights of 22 (2017: 32) investee companies (none of which are closed-end investment funds). The Board does not consider any of the Company’s other equity investments to be individually material in the context of the financial statements.
 

15 Investment in Subsidiary
The Company owns the whole of the issued ordinary share capital (£1) of DIT Income Services Limited, an investment dealing company registered in England and Wales. The subsidiary is held at cost of £1 and has provided loans to the Company amounting to £843,000 at 31 May 2018 (2017: £705,000).

The registered office is Beaufort House, 51 New North Road, Exeter, Devon EX4 4EP.
 

16 Trade and Other Receivables

Group Company
31 May 2018
£’000
31 May 2017
£’000
31 May 2018
£’000
31 May 2017
£’000
Amounts due from brokers
240

1,474

240

1,474
Dividends receivable
1,484

1,376

1,484

1,376
Accrued income 100 100 100 100
Taxation recoverable
396

279

396

279
Prepayments and other debtors
111

108

111

108
2,331 3,337 2,331 3,337


17 Trade and Other Payables

Group Company
31 May 2018
£’000
31 May 2017
£’000
31 May 2018
£’000
31 May 2017
£’000
Amounts due to brokers 2,638 - 2,638 -
Amounts due to subsidiary - - 843 705
Other creditors 431 427 431 427
3,069 427 3,912 1,132

18 Capital Commitments and Contingent Liabilities
At 31 May 2018, there was one outstanding commitment of £40,000 (2017: nil), a call payment to acquire shares in Accrol Group Holdings.
 

19 Analysis of Financial Assets and Liabilities

Investment Objective and Policy
The Group’s investment objective and policy are detailed above.

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

The Group’s financial instruments comprise:

  • shares and debt securities held in accordance with the Group’s investment objective and policies;
  • derivative instruments for efficient portfolio management, gearing and investment purposes;
  • cash, liquid resources and short-term debtors and creditors that arise from its operations; and
  • current asset investments held by its subsidiary.

The risks identified arising from the Group’s financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency risk), liquidity risk and credit and counterparty risk. The Group may enter into derivative contracts to manage risk. The Group has held, sold and taken out listed Put options against the FTSE 100 Index during the year. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies have remained unchanged since the beginning of the accounting year.
 

Market Risk
Market risk arises mainly from uncertainty about future prices of financial instruments used in the Group’s business. It represents the potential loss the Group might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Manager on a regular basis and the Board at quarterly meetings with the Manager.

Market price risk
Market price risk (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.

The Board manages the risks inherent in the investment portfolio by ensuring full and timely reporting of relevant information from the Manager. Investment performance and exposure are reviewed at each Board meeting.

The Group’s exposure to other changes in market prices as at 31 May 2018 on its equity and debt investments and listed Put index option held at fair value through profit or loss was £387,045,000 (2017: £386,095,000).

A 10% increase in the market value of its listed equity investments at 31 May 2018 would have increased net assets attributable to shareholders by £38,705,000 (2017: £38,610,000). An equal change in the opposite direction would have decreased the net assets and net profit available to shareholders by an equal and opposite amount. The analysis is based on closing balances only and is not representative of the year as a whole.

Interest rate risk
Interest rate movements may affect the level of income receivable on cash deposits and payable on its revolving credit facility. The Group’s financial assets and liabilities, excluding short-term debtors and creditors, may include investment in fixed interest securities, such as UK corporate debt stock, whose fair value may be affected by movements in interest rates. The majority of the Group’s financial assets and liabilities, however, are non-interest bearing. As a result, the Group’s financial assets and liabilities are not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. There was limited exposure to interest bearing liabilities during the year ended 31 May 2018 (2017: same).

The possible effects on the fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions.

As detailed above at 31 May 2018 the Company held nine (2017: nine) fixed income securities representing 2.6% of the total investment portfolio (2017: 2.3%).

The interest rate profile of the Group (excluding short-term debtors and creditors) was as follows:





As at 31 May 2018
Weighted
average
interest
rate
%



Floating rate
£’000



Fixed rate
£’000
Assets and liabilities
Fixed interest securities 7.81 - 10,436
Cash at bank - 16,708 -
Bank overdraft - - -
16,708 10,436

   





As at 31 May 2017
Weighted
average
interest
rate
%



Floating  rate 
£’000 



Fixed rate
£’000
Assets and liabilities
Fixed interest securities 7.85 - 8,931
Cash at bank - 7,628 -
Bank overdraft - - -
7,628 8,931

The weighted average interest rate is based on the current yield of each asset, weighted by its market value.

The weighted average fixed interest rate is based on the current yield of each asset, weighted by its current market value. The maturity dates and nominal interest rates on these investments held at fair value through profit or loss are shown in the portfolio information above. The weighted average years to maturity are 3.32 years (2017: 4.20 years).

The floating rate assets and liabilities consist of cash deposits on call earning interest at the prevailing market rates and the bank overdraft, with interest payable at the rate of 2.95% above the prevailing bank base rate (currently 0.50%).

The interest rate risk sensitivity of the Group on its floating rate assets and liabilities is given below:

If interest rates had been 50 basis points higher or lower and all other variables were held constant, the Group’s net assets and profit for the year ended 31 May 2018 would increase/decrease by £84,000 (2017: increase/decrease by £38,000). This is attributable to the Group’s exposure to interest rates on its floating rate cash balances and bank overdraft as at the year ended 31 May 2018, and is not considered by the Directors to be representative for the year as a whole. If there was a fall in interest rates it would potentially impact the Company as above, by turning positive interest to negative interest.

Foreign currency risk
Although the Company’s performance is measured in sterling, a proportion of the Group’s assets may be either denominated in other currencies or are in investments with currency exposure. Any income denominated in a foreign currency is converted into sterling upon receipt. At the Balance Sheet date, all the Group’s assets were denominated in sterling and accordingly the only currency exposure the Group has is through the trading activities of its investee companies.

Liquidity Risk
Liquidity risk is not considered to be significant as the Group’s assets primarily comprise cash and readily realisable securities, which can under normal conditions be sold to meet funding commitments if necessary. They may, however, be difficult to realise in adverse market conditions. The Group can achieve short-term flexibility by the use of its overdraft facility.

The maturity profile of the Group’s financial liabilities of £3,069,000 (2017: £427,000) are all due in one year or less.

Credit and Counterparty Risk
Credit risk is the risk of financial loss to the Group if the contractual party to a financial instrument fails to meet its contractual obligations.

The maximum exposure to credit risk as at 31 May 2018 was £23,417,000 (2017: £12,350,000). The calculation is based on the Group’s credit risk exposure as at 31 May 2018 and this may not be representative for the whole year.

The Group’s listed investments are held on its behalf by Bank of New York Mellon acting as the Group’s custodian. Bankruptcy or insolvency of the custodian may cause the Group’s rights with respect to securities held by the custodian to be delayed. The Board monitors the Group’s risk by reviewing the custodian’s internal controls report.

Where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Group of default.

Investment transactions are carried out with a number of brokers whose creditworthiness is reviewed by the Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Group’s custodian bank ensures that the counterparty to any transaction entered into by the Group has delivered on its obligations before any transfer of cash or securities away from the Group is completed.

Cash is only held at banks that have been identified by the Board as reputable and of high credit quality.

None of the Group’s assets are past due or impaired (2017: same).

Derivatives
The Manager may use derivative instruments in order to ‘hedge’ the market risk of part of the portfolio. The Manager reviews the risks associated with individual investments and, where they believe it appropriate, may use derivatives to mitigate the risk of adverse market (or currency) movements. The Manager discusses regularly the hedging strategy with the Board.

At the year end, there was one derivative contract open (2017: one). The FTSE 100 Put option aims to provide a limited degree of protection from a fall in the value of the FTSE 100 Index and has a strike price of 6,500, and would not materially impact the portfolio returns if a large market movement did occur. No other contracts were entered into during the year (2017: the Group also entered and exited a March 2017 6,000 Put option).

Capital Management Policies
The Company’s capital management objectives are:

  • to ensure that it will be able to continue as a going concern; and
  • to maximise the income and capital return over the long-term to its equity shareholders through an appropriate balance of equity capital and ‘debt’.

As stated in the investment policy, the Company has authority to borrow up to 15% of net asset value through a mixture of bank facilities and certain derivative instruments. There were no borrowings as at 31 May 2018 (2017: £nil). Also, as a public company the minimum share capital is £50,000.

2018   
£’000   
2017   
£’000   
The Company’s capital at 31 May comprised:
Debt:
Bank loan facility/bank overdraft facility -    -   
Equity:
Equity share capital 434    434   
Retained earnings and other reserves 402,581    396,199   
Total shareholders’ funds 403,015    396,633   
Debt as a % of net assets 0.00% 0.00%

The Board, with the assistance of the Manager, monitors and reviews the broad structure of the Company’s capital on an ongoing basis. This review includes:

  • the planned level of gearing, which takes into account the Manager’s view of the market;
  • the need to buy back shares for cancellation or treasury, which takes account of the difference between the net asset value per share and the share price (i.e. the level of share price discount or premium);
  • the need for new issues of equity shares; and
  • the extent to which revenue in excess of that which is required to be distributed should be retained.

The Company’s objectives, policies and processes for managing capital have remained unchanged since its launch.

20 Transactions with the Manager and Related Parties
The amounts paid to the Manager pursuant to the management agreement are disclosed in note 3. Management fees for the year amounted to £3,718,000 (2017: £3,407,000).

As at the year end, the following amounts were outstanding in respect of management fees: £329,000 (2017: £305,000).

Fees paid to the Company’s Directors are disclosed in the Directors' Remuneration Report in the full Annual Report. At the year end, there were no outstanding fees payable to Directors (2017: £nil).

There were no other identifiable related parties at the year end.
 

GLOSSARY

AIC
The Association of Investment Companies.

AIM
The Alternative Investment Market is a sub-market of the London Stock Exchange. It allows smaller companies to float shares with a more flexible regulatory system than applicable to the main market.

Alternative Performance Measure (“APM”)
An APM is a numerical measure of the Company’s current, historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial framework.

Annual General Meeting (“AGM”)
All public companies have an AGM every year, and this is the opportunity for the shareholders to confirm their approval of the annual accounts, the annual dividend and the appointment of the Directors and Auditors. It is also a good time for shareholders to meet the non-executive Directors. The Company’s AGM is on 10 October 2018 at 11.30 am at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH. One of the fund managers will give shareholders a presentation on the current position of the Company’s portfolio and some thoughts on the market outlook.

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




Premium/(Discount) Calculation

31 May
  2018
£’000

31 May  2017
£’000

Closing NAV per share (p)

105.09

103.43

 (a)
Closing share price (p) 107.00      102.50  (b)
Premium/(Discount) (c = ((a – b)/a)) (%) 1.82    (0.90)  (c)

The discount/premium and performance is calculated in accordance with guidelines issued by the AIC. The discount/premium is calculated using the NAVs per share inclusive of accrued income with debt at market value.

Dividend Yield
The annual dividend expressed as a percentage of the mid-market share price.

Financial Conduct Authority (“FCA”)
This regulator oversees the fund management industry, including the operation of the Company.

Financial Reporting Council (“FRC”)
The FRC regulates UK auditors and provides guidance to accountants with the aim of promoting better transparency and integrity in the annual reports of quoted businesses.

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

Growth Stock
A stock where the earnings are expected to grow at an above average rate, leading to a faster than average growing share price. Growth stocks do not usually pay a significant dividend.

International Financial Reporting Standards (“IFRS”)
Generally Accepted Accounting Principles (“GAAP”) are a common set of accounting principles, standards and procedures that companies follow when they compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. This enables the financial results of companies to be determined on a common basis so they are able to be compared.

In the UK, company accounts must be prepared in accordance with applicable company law, this being the Companies Act 2006, which recognises GAAP. International Financial Reporting Standards (“IFRS”) are standards issued by the International Accounting Standards Board (“IASB”), approved for implementation by the European Union to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. These were previously International Accounting Standards (“IAS”) maintained by the IASB. The Company adopted IFRS with the accounting policies of the Company set out in the financial statements.

UK GAAP is the body of accounting standards and other guidance published by the UK’s Financial Reporting Council (“FRC”) known as Financial Reporting Standards (“FRS”) much of which are derived and aligned to IFRS. The recently issued UK FRS have replicated the wording of corresponding IFRS, reducing the differences between the two sets of standards significantly.

The Company uses IFRS that provides a high quality, internationally recognised set of accounting standards that bring transparency, accountability and efficiency to financial markets around the world.

Investment Association (“IA”)
The IA is the trade body that represents UK investment managers. Miton Group plc is a member, and Gervais Williams is on the board.

Key Performance Indicators (“KPIs”)
KPIs are a short list of corporate attributes that are used to assess to general progress of the business and are outlined in the Strategic Report above.

Link Alternative Fund Administrators Limited
Link Alternative Fund Administrators Limited is the Company Secretary for the Company.

Markets in Financial Instruments Directive II (“MIFID II”)
This directive came into effect on 3 January 2018. In the case of Miton Group plc clients, the principal change has been the unbundling of transaction and external research charges paid by the Company, when stock market transactions are carried out. Further details as to how Miton has adopted this directive are set out above within the Manager’s Report.

Net Asset Value per Ordinary Share (“NAV”)
The NAV is shareholders’ funds expressed as an amount per individual share. Shareholders’ funds are the total value of all of the Company’s assets, at their current market value, having deducted all liabilities and prior charges at their par value, or at their asset value as appropriate. The total NAV per share is calculated by dividing the NAV by the number of ordinary shares in issue excluding treasury shares.

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




Ongoing Charges Calculation

31 May 
  2018 
£’000 

31 May  2017 
£’000 

Management fee

3,718 

3,407 
     
   
Other administrative expenses  723  734 
Less one time costs (3) (58)
Total management fee and other administrative expenses
4,438

4,083

(a)
Average net assets in the year 392,925 355,523 (b)
Ongoing charges (c = a/b x 100) (%) 1.13 1.15 (c)

Peer Group
Diverse is part of the AIC’s UK Equity Income Investment Trust sector. The trusts in this universe are defined as trusts whose investment objective is to achieve a total return for shareholders through both capital and dividend growth. Typically, the funds will have a yield on the underlying portfolio ranging between 110% and 175% of that of the FTSE All-Share Index. They will also have at least 80% of their assets in UK listed securities.

Put Option
Put options are most commonly used in the stock market to protect against the decline of the price of a stock below a specified price likened to purchasing a form of financial insurance. An owner of a Put option can collect a financial benefit after an adverse event, with the scale of the benefit proportionate to the setback in the market and the remaining term of the cover. The Company Put option will become more valuable should the market decline.

Senior Independent Director (“SID”)
The SID is a non-executive director who can be contacted by investors to discuss a matter of governance when it concerns the Chairman and the normal practice cannot be followed. The Company's SID is Jane Tufnell.

Tap Issue
A tap issue is a procedure that allows the Company to issue new shares at the current market value when the share price is at a premium to NAV. The Company is authorised to issue up to 10% of its share capital without the need for an open offer. This enables the Company to invest in attractive investment opportunities and to issue new shares on a flexible and cost-effective basis.

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

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




NAV Total Return

31 May
  2018
£’000

31 May
2017
£’000

Closing NAV per share (p)
          105.09       
103.43
   
   
Add back total dividends paid in the year ended 31 May 2018 (2017) (p)
3.55

2.90
Adjusted closing NAV (p)   108.64      106.33     (a)
Opening NAV per share (p) 103.43 91.02 (b)
NAV total return unadjusted (c = ((a-b)/b)) (%)  5.0  16.8  (c)

NAV total return adjusted %*

5.2

16.4

   




Share Price Total Return

31 May
  2018
£’000

31 May
2017
£’000

Closing share price (p)
          107.00       
102.50
   
   
Add back total dividends for the year ended 31 May 2018 (2017) (p)
3.55

2.90
Adjusted closing share price (p) 110.55 105.40     (a)
Opening share price (p) 102.50 93.75 (b)
Share price total return unadjusted
(c = ((a-b)/b)) (%)

7.9

12.4

 (c)

Share price total return adjusted %*

8.1

12.5

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

Volatility
The term volatility relates to how much and how quickly the share price or net asset value of an investment has tended to change in the past. Those with the greatest movement in their share prices are known as having high volatility, whereas those with a narrow range of change are known as having low volatility.

Yield Stock
Yield stocks pay above-average dividends to shareholders. If the dividend grows, and the yield on the share remains constant, the share price will increase. Companies which grow their dividends faster than average are capable of delivering faster share price growth.
 

ANNUAL GENERAL MEETING
The Company’s Annual General Meeting will be held on Wednesday, 10 October 2018 at 11.30am, at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH.
 

NATIONAL STORAGE MECHANISM
A copy of the Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/nsm 
 

ENDS

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

LEI: 2138005QFXYHJM551U45


Source: PR Newswire (August 3, 2018 - 2:00 AM EDT)

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