ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED 30 SEPTEMBER 2022
1
THE COMPANY AT A GLANCE
Purpose
River and Mercantile UK Micro Cap Investment Company Limited (the “Company”) is a closed-ended investment
company. Its purpose is to deliver high and sustainable returns to investors by delivering the investment objective
detailed below.
Investment objective
The Company aims to achieve long term capital growth from investment in a diversied portfolio of UK micro- cap
companies, typically comprising companies with a free oat market capitalisation of less than £100 million at the
time of purchase.
Investment strategy and policy
The Company’s investment strategy is to take advantage of the illiquidity risk premium inherent in UK micro-cap
companies and exploit fully the underlying investment opportunities in that area of the market to deliver high and
sustainable returns to Shareholders, in the form of capital gains.
It is expected that the majority of the Company’s investible universe will comprise companies whose securities are
admitted to trading on the Alternative Investment Market of the London Stock Exchange. While it is intended that
the Company will be fully invested in normal market conditions, the Company may hold cash or similar instruments.
About the Alternative Investment Fund Manager (“AIFM”)
The AIFM
of the Company is Carne Global AIFM Solutions (C.I.) Limited (“Carne” or the AIFM) who is authorised
and regulated by the Jersey Financial Services Commission. The AIFM provides an oversight and risk management
function but delegates portfolio management to River and Mercantile Asset Management LLP (the “Portfolio
Manager”). The AIFM is independent and has no legal ownership connection with the Portfolio Manager.
About the Portfolio Manager
The Portfolio Manager is an active equity manager, specialising in UK and global equity strategies since its launch in
2006. Since 2014, it has been part of River and Mercantile Group Limited (formerly River and Mercantile Group PLC)
(the “Group”). The Group was acquired by AssetCo PLC on 15 June 2022. The Portfolio Manager is authorised and
regulated by the Financial Conduct Authority.
George Ensor, the appointed portfolio manager, has been responsible for the Company’s portfolio since February
2018. Please refer to page 15 for George Ensor’s biography.
Capital redemptions and dividend policy
The Company is committed to achieving long term capital growth and, where possible, returning such growth to
Shareholders throughout the life of the Company. Furthermore, the Board believes that a Net Asset Value (“NAV”)
in the region of £100 million will best position the Company to maximise returns from a portfolio of micro-cap
companies. Accordingly, the Directors operate a Capital Redemption Mechanism under which a portion of the
Company’s share capital is redeemed compulsorily to return the NAV back to around £100 million in order to:
•
enable the Company to exploit fully the underlying investment opportunity and to deliver high and sustainable
returns to Shareholders, principally in the form of capital gains;
•
enable portfolio holdings to have a meaningful impact on the Company’s performance, which might otherwise
be marginal within the context of a larger fund; and
•
ensure that the Company can continually take advantage of the illiquidity risk premium inherent in micro-cap
companies.
The Company does not expect to pay dividends.
Management of your Company
The Board of the Company comprises a majority of independent non-executive Directors with extensive knowledge
of investment matters, the regulatory and legal framework within which the Company operates, as well as the
various roles played by investment companies in Shareholders’ portfolios. The Board provides oversight of the
Company’s activities and ensures that the appropriate nancial resources and controls are in place to deliver the
investment strategy and manage the risks associated with such activities.The Board actively supervises both the
AIFM and the Portfolio Manager in the performance of their respective functions.
2
CONTENTS
Strategic Report
- Financial Highlights and Performance Summary 3
- Chairman’s Statement 5
- Portfolio Manager’s Report 6
- Investment Portfolio 16
- Principal Risks and Uncertainties 17
- Section 172 Statement and Principal Decisions 20
- Executive Summary 23
Board Members 30
Directors’ Report 32
Board and Committees 35
AIFMD Report 40
Report of the Audit Committee 41
Directors’ Statement of Responsibilities 44
Directors’ Remuneration Report 45
Independent Auditor’s Report 47
Statement of Comprehensive Income 53
Statement of Financial Position 54
Statement of Changes in Shareholders’ Equity 55
Statement of Cash Flows 56
Notes to the Financial Statements 57
Useful Information for Shareholders 74
Company Information 76
3
STRATEGIC REPORT
FINANCIAL HIGHLIGHTS AND PERFORMANCE SUMMARY
Key Performance Indicators
Performance for the year ended 30 September 2022
In the year ended 30 September 2022, the NAV total return of the Company underperformed against the Benchmark
index by 21.1%, delivering a NAV total return of (48.03)%, compared to (26.91)% posted by the Benchmark.
NAV and Share price
As at
30 September
2022
As at
30 September
2021
NAV per Ordinary Share
1
£1.7063 £3.2830
Ordinary Share price (bid price)
2
£1.3600 £2.8000
Share price discount to NAV
3
(20.29)% (14.71)%
Period highs and lows
Year ended
30 September
2022
High
Year ended
30 September
2022
Low
Year ended
30 September
2021
High
Year ended
30 September
2021
Low
NAV per Ordinary Share
1
£3.2830 £1.7063 £3.3199 £2.0053
Ordinary Share price (bid price)
2
£2.9000 £1.3600 £3.2400 £1.5700
Performance since inception
NAV total return
4
from inception (net of all fees) was 7.34% on an annualised basis, outperforming the Numis Smaller
Companies plus Alternative Investment Market (“AIM”) (excluding Investment Companies) Index (the “Benchmark”)
total return
5
of 4.58%. Refer to the chart below showing the NAV total return versus the Benchmark from inception:
-20.00%
30.00%
80.00%
130.00%
180.00%
230.00%
280.00%
12/2014
03/2015
06/2015
09/2015
12/2015
03/2016
06/2016
09/2016
12/2016
03/2017
06/2017
09/2017
12/2017
03/2018
06/2018
09/2018
12/2018
03/2019
06/2019
09/2019
12/2019
03/2020
06/2020
09/2020
12/2020
03/2021
06/2021
09/2021
12/2021
03/2022
06/2022
09/2022
NAV total return versus Index total return
Total return per share
Total return per index
4
Capital redemptions
Since inception to 30 September 2022, the Company has exercised its capital redemption mechanism on ve
separate occasions, as detailed below, redeeming a total of 34,609,615 Ordinary Shares and returning a total of
£76,924,351 to Shareholders.
Redemption Date Redemption price per
Ordinary Share
6
Number of Ordinary
Shares Redeemed
Amount returned to
Shareholders
9 June 2017 £1.7217 8,712,240 £14,999,864
1 December 2017 £1.9124 7,843,469 £14,999,850
27 July 2018 £2.1659 5,506,817 £11,927,215
29 January 2021 £2.5335 5,921,631 £15,002,452
7 May 2021 £3.0179 6,625,458 £19,994,970
Please refer to note 12 for full details of the Company’s redemption mechanism, including the conditions required
for the Company to be able to operate the capital redemption mechanism.
Ongoing charges
The ongoing charges reect those expenses which are likely to recur in the foreseeable future and which relate to the
operation of the Company. The ongoing charges are calculated in accordance with the Association of Investment
Companies (“AIC”) methodology and are based on actual costs incurred in the year which are likely to recur in
the foreseeable future. The ongoing charges for the year ended 30 September 2022 were 1.39% (2021: 1.29%)
reecting the decrease in NAV of the Company.
Dividend history
In accordance with the Company’s stated policy, no dividend was declared or paid during the year.
For further detail on Key Performance Indicators, refer to page 25 and the Useful Information for Shareholders
section on pages 74 to 75.
1
– The NAV per Ordinary Share is the value of all the Company’s assets, less any liabilities it has, divided by the total number of Ordinary Shares.
2
– Source: Bloomberg.
3
– As the Company’s Ordinary Shares are traded on the London Stock Exchange’s Main Market, the share price may be higher or lower than the
NAV. The Company’s discount / premium to NAV is the difference between the Ordinary Share price (bid price) and the NAV per Ordinary Share
on the same day. This comparison is expressed as a percentage.
4
– The NAV total return measures how the NAV per Ordinary Share has performed on an annualised basis from the initial issuance of Ordinary
Shares to 30 September 2022, taking into account capital returns. The Board monitors the Company NAV total return against the Numis Smaller
Companies plus Alternative Investment Market (“AIM”) (excluding Investment Companies Index).
5
– Source: Numis Securities Limited.
6
– Excludes the cost of each redemption; amounting to a total of £33,008 across all redemptions.
5
CHAIRMAN’S STATEMENT
The night is often darkest before the dawn………
There can be no doubt that the last year has been an extremely testing time for the portfolio. The economic outlook
remains uncertain: rising ination, combined with spiralling increases in the cost of living and an unstable political
situation, have all impacted on markets. The gloomy economic situation has been particularly tough on UK listed
stocks, and UK small companies in particular.
However, following the fall in the share price and the widening in the discount to NAV, the opportunity for the
portfolio to rebound from here is striking. The Board continues to believe that UK smaller companies offer underlying
value but we recognise that patience is required for this to be realised. We are particularly conscious that relatively
small lot share purchases can have a signicant impact on the share price of the Company and thereby increasing
volatility. Longer term, it remains true that our niche sector continues to deliver some real opportunities in what is
still a very under researched part of the stock market.
The Portfolio Manager has experience of navigating difcult markets and it is worth bearing in mind that in the 6
months post the worst of the COVID-19 lock-downs, the Company’s share price increased by 27.5% between
January 2021 and 31 July 2021, whilst the benchmark increased by just 16.8%. On a more technical note, the
Company does have the distinct advantage during periods of market falls of being a closed ended structure. This
removes any pressure on the portfolio manager to fund redemptions by selling stocks - often the most liquid and
attractive holdings - from the portfolio at the prevailing depressed levels and helps deliver superior returns over the
long term.
The Company targets long-term capital growth and your Board continue to believe that patience during this period
of extreme market dislocation will be rewarded. During these periods the Company’s focus on the micro-cap sector
will typically underperform the wider market. The Board continues to believe however, that over the long run, the
Company’s micro-cap portfolio offers signicant growth opportunities and will outperform its benchmark as indeed
it has since initial public offering (“IPO”). It is perhaps worth reminding ourselves that our Company has returned
more cash to Shareholders than it has raised. To date we have returned £77 million compared to the sum of £70
million raised from Shareholders. This was made possible by the judicious use of the redemption mechanism
which works to return money to Shareholders when the market levels are high and thus such capital gains are
sheltered when stock prices fall. Frustratingly, some of the market data providers are unable to accurately reect our
unique redemption mechanism in their calculations and therefore some of the published return gures signicantly
understate the Company’s actual long term success.
Since my last update, there have been some changes to the Board. I would like to welcome two new faces -
Charlotte Denton and John Blowers - whose appointments are linked to the requirement to refresh the membership
of the Board over nine years. Charlotte has also been appointed Chair of our Audit Committee and I very much look
forward to working with both John and Charlotte in the months and years ahead. Be assured that in the interests of
keeping operating costs down, the Board will revert back to four members in March 2023 when Trudi Clark steps
down following a period of handover.
On behalf of the Board, I would like to thank all our Shareholders for their continued support. We shall ensure that
your Company remains focused on delivering performance for Shareholders by remaining true to our investment
philosophy that has served us well since our inception in 2014.
Andrew Chapman
Chairman
13 December 2022
6
PORTFOLIO MANAGER’S REPORT
We are disappointed with our NAV performance in absolute terms over the last year. We are very aware that we are
custodians of our investors’ savings, and we carry this responsibility rst and foremost. The Company is approaching
its eight-year anniversary and our NAV performance since inception to the end of September 2022 (net of all fees) is
+74.1%, an annualised return of 7.3%. The benchmark has returned +42.1% over the same period, an annualised
return of 4.6%, and the AIM market, as measured by the AIM All-Share, has made a return of just 13.1% or an
annualised return of 1.6%.
Our strong absolute and relative returns since inception – indeed the cash returns we have made to investors over
the last six years exceed the total capital raised – have been premised upon us doing something different; investing
in companies which others would consider un-investable given their liquidity. Where we are successful in identifying
companies that grow revenues and improve protability and cash generation, we expect the opportunity we have
invested in to be recognised by the wider investment community. This process should improve the liquidity and
therefore reduce the liquidity premium and so we benet from a higher rating on higher prots. This approach does
not work throughout the cycle; it prevails when we have improving risk sentiment.
Period Active Return
NAV
Benchmark1 year -48.0% -26.9% -21.1%
3 Years p.a. -3.4% 1.2% -4.6%
5 Years p.a. -1.4% -0.2% -1.2%
Since Inception p.a. 7.3% 4.6% 2.7%
Source: River and Mercantile Asset Management LLP, BNP Paribas, Bloomberg. Performance to 30 September 2022.
Inception is 02 December 2014. *Benchmark: Numis Smaller Companies plus AIM (excluding Investment Companies).
Market backdrop
Ultimately, the key aspect of the last twelve months has been the change in the price of money. The US 10-year
Treasury yield, the de facto risk-free rate, moved from 1.5% at the end of September 2021 to in excess of 4% post
year end in October 2022. The yield, or return, on offer from the US Government has re-priced all other assets. Not
only has the risk-free rate moved higher but other risk premia have also increased given well placed concerns over
economic cyclicality and liquidity, meaning investors are willing to pay less for the same asset than they were a year
ago. Although this is painful whilst rates are moving higher and risk premia are expanding, it is supportive of future
equity returns.
In the last twelve months we have seen, to the despair of retailers: a Christmas resurgence of COVID-19 with the
Omicron variant; a pivot in the consensus view over the persistence of high ination; and a war in Europe which,
apart from the massive human tragedy, has driven extreme volatility in commodity prices and played a role in a cost-
of-living crisis which has seen four consecutive new all-time lows in UK consumer condence. Meanwhile, China
has pursued their zero-COVID-19 policy wreaking havoc on global supply chains with untold numbers of shortages
– from fuel and computer chips to airport workers and second-hand cars. It has been a memorable year for all the
wrong reasons.
One of the reasons that smaller companies are more volatile is that marginal buyers or sellers have a greater impact
on the share price. Smaller companies have historically outperformed because they exhibit higher growth, but the
inuence of lower liquidity and sentiment has meant that realised volatility has been higher. That is the caveat to
investing in smaller companies – investors should be cautious if they are considering investing in illiquid assets
with short time horizons. Our approach, investing through a closed ended investment structure with a redemption
mechanism to return capital only when the assets have grown, is ideal for investing in illiquid assets as it enables us
to invest through the cycle and on a long term basis.
Sentiment towards smaller companies and illiquidity is extremely poor. The chart on the left of the following page
shows the largest peak to trough declines in smaller companies over the last thirty years. One of the reasons that
this Company built such a consistent performance track record in the years after the IPO was that there was an
absence of such adverse risk sentiment. One of the key challenges has been the frequency of periods of high
volatility and share price declines in the last four years. The chart on the right of the following page shows the relative
performance of smaller companies (peak to trough small cap performance relative to peak to trough performance
7
for the UK market as measured by the MSCI UK Index) and you can see that we are in the worst period of relative
smaller companies’ performance in thirty years. This is what we mean when we say that sentiment is extremely poor.
-70
-60
-50
-40
-30
-20
-10
0
1992 1998 2000 - 2003 2007 -2009 2011 2018 2020 2021-2022
-25
-20
-15
-10
-5
0
1992 1998 2018 2020 2021-2022
2000 - 2003 2007 -2009
2011Small cap peak to trough performance over 30 years
%
Small cap peak to trough performance versus MSCI UK
YearYear
%
Source: Bloomberg, MSCI, Numis. Data 16 October 2022.
UK consumer condence is another way of thinking about sentiment as it measures the level of optimism that
consumers feel about the performance of the UK economy over the next twelve months. Again, considering the data
over a long time period, the chart below shows that the reading for September of -49 was a new all-time low. Whilst
we would not attempt to call the bottom of this data series, we have shown in the chart below the three-year return
from the Numis Smaller Companies benchmark (we have shown the one-year return where the three-year return is
not available, as is the case for 2020) from the low point in consumer condence. We think that this illustrates that
markets discount the current optimism – or lack of – and so the opportunity resides in incrementally less negative
news supporting equity returns over the next three years.
UK Consumer Cofidence
-6
0
-5
0
-4
0
-3
0
-2
0
-1
0
0
10
20
1986 1991 1996 2001 2006 2011 2016 2021
UK Consumer Confidence
31/03/1990
3Y NSCI: 30%
30/11/1992
3Y NSCI: 74%
31/07/2008
3Y NSCI: 39%
31/05/2020
1Y NSCI: 56%
31/12/2011
3Y NSCI: 53%
NSCI = Numis Smaller Companies plus AIM (excluding Investment Companies) Index
Source: Bloomberg, MSCI, Numis. Data 30 September 2022
Year
Consumer Confidence
Source: Bloomberg, MSCI, Numis. Data 30 September 2022.
Equity returns over the last year have predominantly been driven by a derating of the multiple that investors are
willing to pay. The chart below shows that from a peak rating of close to 16x in 2021, our benchmark has derated to
less than 9x which is a level that has only been seen in periods of extreme stress over the last fteen years, another
illustration of the currently depressed sentiment towards UK listed smaller companies.
8
2x
4x
6x
8x
10x
12x
14x
16x
18x
20x
22x
May 07 May 09 May 11 May 13 May 15 May 17 May 19 May 21
12m forward PE ratio by AIM & NSC index
12m forward PE ratio by AIM & NSC index12m forward PE ratio by AIM & NSC index
12m forward PE ratio by AIM & NSC index
AIM All
NSC NSC & AIM
Source: Peel Hunt E&S: UK Market Valuations, 17 October 2022.
Sustainability
We have previously explained our approach to integrating sustainability analysis into our fundamental research
process which we believe improves our risk adjusted returns. Our investment philosophy is a multi-factor approach
combining company fundamentals, valuation and momentum. We are looking to invest in companies that have the
P
otential to create shareholder value at attractive
V
aluations with supportive T
iming (“PVT”). It is important that Shareholders understand that this is our primary motivation. We believe that businesses that are managed with the
interest of all stakeholders in mind will compound higher returns for Shareholders over the medium term.
Solid S-PVT considerations and no clear impediment to value creation or share price
performance.
S2
S-PVT improvement required, but evidence this has started and / or engagement potential.
S3
A sustainable leader in its
fi
eld and / or clear benefi
ciary of sustainability trends.S1
S-PVT a clear barrier to value creation, no evidence of improvement and / or low likelihood
of engagement success (including failed attempts).
S4
S-PVT: internal scoring (4 tier system)
Source: River and Mercantile Asset Management LLP.
The portfolio allocation to the four categories that we use to rate the sustainability credentials of our investments is
shown below. We do not have any investments that are rated in our lowest category, S4. We include commentary
below for all rating changes in the period and sustainability ratings for any new investments in the year. We also
include some commentary on positions that have been reviewed in the year, but no change has been made in an
attempt to illustrate our process, which in many ways is more important than the output.
9
22%
70%
8%
0%
S1
S2
S3
S4
Source: River and Mercantile Asset Management LLP. Data to 30 September 2022.
Capital (S3 to S2)
– S3 rated holdings are a focus area for engagement. We have engaged with Capital several times
and in an attempt to improve disclosure around greenhouse gas (“GHG”) emissions and the board composition.
The company announced the appointment of a new non-executive director who is heading up the newly formed
sustainability committee. The recent annual report includes, for the rst time, GHG emissions disclosure and the
company has committed to announce an emissions reduction target this year. Given the progress evidenced against
our prior concerns, we upgraded the rating to S2.
Diversified Energy (S1 to S2)
– we believe that natural gas, which has half the GHG intensity of coal, is a critical
fuel in the transition to a less carbon intensive planet. We cannot just turn off our reliance on fossil fuels. Diversied’s
approach of acquiring operational assets and running them more efciently – on both and emissions and a production
basis – strikes us as a sensible approach and the company does not commit any capital to exploration or drilling.
We reviewed the rating in the period and decided, given the carbon intensity of the business which at 19Kg CO2e/
boe (estimated Kg of carbon dioxide by barrel of oil equivalent of production) is similar to the average for UK North
Sea gas businesses, that a neutral rating was therefore more appropriate.
City Pub Group (S3 at end of period)
– an owner and operator of premium pubs which was originally assigned an
S3 rating given a lack of independence and diversity on the board and an absence of disclosure around stakeholder
interests. The company has made multiple improvements since we invested in 2020 and we have, post the period
end, upgraded our rating to S2. New disclosure includes a commitment to net zero no later than 2040 and the
company will be setting interim targets once a baseline, which requires a year of normalised trading, can be formed.
The company has also improved disclosure on customer welfare, staff training and other human capital aspects
which are relevant to a company in the services industry. Finally, the company has made improvements to the
composition of their board.
1Spatial (new S2)
– is an early-stage software company which enables better decision-making based on accurate
location data. Its customer base consists of organisations which are responsible for maintaining the global critical
infrastructure and where demand is being driven by companies’ and governments’ sustainability agendas – for
example, its products improve the UK’s mapping of its sewage networks, enabling prioritisation of works to prevent
leaks, and it works with various US states to improve safety outcomes via more reliable trafc data. 1Spatial is
committed to reducing its carbon footprint and is in the process of establishing its ESG strategy and sustainability
roadmap. With no material barriers to value creation identied, the position was purchased with an S2 rating.
Strip Tinning (“ST”) (new S1)
– S1 rated given an exciting electric vehicle growth opportunity where ST’s well
established capabilities in exible printed circuit boards has application in connecting battery cells in electric
vehicles (“EV”s). If their technology is successfully adopted, then there is a clear opportunity for the company to
benet from the accelerating shift to EVs.
Renold (new S2)
– whilst we believe that an increasingly environmentally aware marketplace is a commercial
tailwind, we rate Renold, a manufacturer of highly engineered industrial chains, S2. Renold’s product is typically
longer lasting than that of the competition with a lower environmental footprint as it is more energy efcient (less
friction) and has lower or no lubrication requirements. Although there are only a few components to a chain, the
10
group has a lot of innovation and intellectual property tied up in the complex manufacturing process that gives its
chains unique properties in certain applications and is at the crux of its sustainable competitive advantage. The
group is reviewing its energy usage with a view to identifying short and long-term energy reduction opportunities
and setting long-term targets.
IOG (new S2)
– is hopefully a good example of the pragmatism that we employ when we are considering the
sustainability credentials of an investment. IOG is a North Sea gas production business which many investors
would potentially exclude as a fossil fuel producer. We believe that natural gas is a critical element in the pathway
to net zero and within the UK, gas plays a key role as a dispatchable (i.e. fast response) source of power generation
which is a necessity as we increase the share of power in the grid from renewable but intermittent energy sources
like solar and wind. Gas is also critical for domestic heating and relied on by 70% of homes. The UK, like most of
Europe, imports substantial amounts of gas and there is a very clear carbon saving on domestically produced gas
when compared to imported liquied natural gas (“LNG”) or domestically produced coal. IOG is also a very clean
producer of gas – the vast majority of production emissions in the industry come from aring and manned-offshore
platforms, neither of which applies to IOG. IOG therefore has a materially lower scope 1 and 2 carbon footprint than
other North Sea gas producers. Finally, as we would expect as an operator in a highly regulated industry, IOG has
an excellent safety track record.
SigmaRoc (S2)
– is an enabler of infrastructure products in Europe, which was rated an S2 given its active focus on
lowering its carbon emissions and its leadership in developing a ‘green’ product range which includes cement-free
concrete blocks and products with a higher proportion of recycled materials. We reviewed the rating following the
acquisition of Nordkalk, a Nordic aggregates producer with a more carbon intensive footprint due to its quicklime
exposure which represents c20% of the enlarged group. Further to engagement with management, we gained
comfort that: 1) management’s strategy to convert to alternative fuels where possible is well advanced, 2) carbon
capture technology exists today to meet SigmaRoc’s requirements and 3) lime – unlike cement – reabsorbs the
carbon that it emits during the production process over its lifecycle through carbonisation, although this is not
currently recognised by the regulator and reporting frameworks. Recent developments (e.g. outlining its roadmap
to net zero by 2040 and a joint venture with ArcelorMittal) demonstrate the company’s commitment to ESG and
progress relative to peers. As a result, SigmaRoc remains S2 rated.
Supreme (S3)
– in our initial verication work, we identied vaping (c70% of forecast group gross prot) as a
material sustainability risk factor, primarily because of the uncertainty around long-term health effects. However, as
the UK has a tightly regulated vaping market this lowers the risk in terms of the probability and magnitude of adverse
regulatory developments. As a result, we did not see vaping risk as a clear barrier to value creation and Supreme was
initially assigned an S3 rating. At the time, we outlined a clear path to an S2 rating; vaping mix of prot would have
to decline materially as other verticals grow faster and/or evidence would need to emerge showing that there are no
adverse long-term health consequences from vaping. Public Health England recently (September 2022) published
its most comprehensive reduced risk product report which concluded that vaping has a small fraction of the risk of
smoking and inaccurate perceptions of harm need to be addressed. All other things being equal, this would have
been sufcient for an upgrade to an S2 rating (‘no clear impediment to value creation or share price performance’).
However, the report agged that there has been a pickup in youth vaping driven by disposables that come in a wide
range of avours and there is no conclusive evidence that avours play a key role in switching smokers to vaping
(i.e. it’s possible to see a avour ban in the UK, like in the US). On balance, we concluded that there is insufcient
evidence to suggest the vaping risk prole has materially improved to warrant a rating change to S2.
We continue to engage with two of our S3 rated holdings,
Serabi Gold
and Argentex
. With Serabi, we are looking for improved data disclosure on key health and safety and environmental impact KPIs as well as some governance
concerns. We have had a commitment from Argentex that improved disclosure on greenhouse gas emissions will
be made in their next annual report alongside a commitment to net zero. We have also pushed for data to provide
insight into the culture within the business such as employee churn, employee engagement and stock ownership.
Performance attribution
The following is a detailed review of all the positions that made a negative contribution to relative performance of
greater than 0.5% and includes a review of over half the positions we held in the period.
Science in Sport (-2.8ppt relative impact)
– is a leading sports nutrition brand that has delivered high organic
growth in sales and gross prot over the last seven years. The challenge for early-stage growth businesses is
balancing protability with investment for growth but the progress in underlying protability over the last few years
was encouraging. Having experienced a record period for sales in the rst quarter of 2022, a combination of a
slow-down in sales and input cost headwinds have impaired protability which, alongside a now complete capital
11
investment programme, left the company requiring an equity raise at the end of September 2022. The 79% decline
in the share price is extreme and, we believe, fails to reect the strength of the brands. Moreover, the company
is now fully focused on generating cash and has guided that it should be breakeven in 2023 without assuming an
unwind in elevated input prices.
Joules Group (-2.2ppt relative impact)
– was purchased as a Recovery investment case in 2020 as we believed
that margins could return and potentially exceed pre-pandemic levels given both the success of their ecommerce
offer and a reduction in store lease costs. Costs for both transporting product from China to the UK and the cost to
distribute within the UK meant that protability deteriorated rapidly and with that came the expectation of a need for
additional equity and a 97% decline in the share price. What did we get wrong? Firstly we had misplaced conviction in
our belief that margins would continue to improve, and we were too slow to acknowledge the headwinds to margins
and the subsequent funding risk. We exited the position in November 2022 and if we consider our investment in the
company going back to April 2020, the total realised loss is low at 0.3% of our average NAV for the period.
Brand Architekts (-1.2ppt relative impact)
– is a portfolio of beauty brands which now also includes four brands
acquired through the purchase of InnovaDerma. Brand Architekts has struggled with scale following the disposal
of the Swalloweld manufacturing business in 2019 for £35m. The market capitalisation of Brand Architeckts at
the end of September 2022 was c.£9m which is less than their net cash position of £11.3m and, applying the 1.3x
sales multiple that the company paid for InnovaDerma in March, would support a share price many multiples of the
current price. The shares declined 81.5% in the period.
SigmaRoc (-1.2ppt relative impact)
– is a buy and build of UK and European quarries. The shares have de-rated
over the last 12 months on concerns over rising energy prices and energy rationing risks given the location of its
European operations, despite the company demonstrating its ability to pass on cost ination and, where possible,
converting kilns to alternative energy sources. Its recent strong set of interim results reinforces the diversity of its
end markets which, coupled with lower operational gearing than widely perceived, provides downside protection.
We believe the market misses the multiple ways in which management can continue to create value despite a
depressed share price, proven by the recent joint venture with ArcelorMittal and the fact that inorganic growth can
be self-funded post its merger with Nordkalk. With the shares down by more than 60% in the last 12 months with
no downgrades to consensus earnings, we believe the shares are attractively valued and added 0.5% of NAV to the
position in the period.
CMO Group (-1.1ppt relative impact)
– is the largest pure play online building merchant, a large market which
is vulnerable to disruption from online players given the high list price and trade discount model that exists in the
industry. We invested at IPO in July 2021 at a price of 132p, equivalent to a market capitalisation of £93m. The
company has traded relatively well since IPO and has continued to take market share, but expectations have been
downgraded given the impact of higher prices on demand. The share price at the end of September 2022 was 27p,
a decline of 80% versus the IPO price. Recent results show that the company continues to grow organic revenues
and deliver positive free cash ow, as such the share price performance, a decline of 86% in the period, seems
unjustied and we have recently added to our position.
Allergy Therapeutics (-1.1ppt relative impact)
– is a specialty pharmaceutical company focused on research and
development of allergy treatments that deal with the underlying cause, and not just the symptoms, of allergies.
Relative weakness over the period reects earnings below expectations and the long duration nature of the asset
with a lot of potential value sitting in its R&D pipeline. In our view, the prot miss was due to temporary factors
such as factory improvements, product phasing and pandemic related disruption with doctors busy administering
COVID-19 vaccines. The cash cow core European business coupled with a strong balance sheet following a
recent fundraising supports R&D investment in a rich pipeline of both near market and early-stage opportunities.
A successful US market entry, where the company has the potential to be the rst player to launch an ultra-short
course allergy vaccine in the largest allergy market offers signicant upside optionality.
The Ince Group (-1.0ppt relative impact)
– was purchased as a Recovery investment case through a fundraising to
recapitalise the balance sheet following the reverse takeover of Ince by Gordon Dadds. Ultimately, the company did
not raise sufcient capital and between a cyber incident earlier this year and another poor acquisition, the company
required further recapitalisation at which point we exited our position at a signicant loss.
Kooth (-0.9ppt relative impact)
– through their partnership with the NHS, enables access to online mental health
services. 62% of the UK’s 10-25-year-olds are currently eligible for their anonymous services. Kooth’s economic
assessment suggests that every pound spent on early intervention saves the NHS £3.20. Progress in the UK has been
a little slower given the reorganisation within NHS England to 142 Integrated Care Systems, but the proposition and
12
potential remains as it was. The company has secured a large pilot program with the State of Pennsylvania which
could, alongside other opportunities in the US, add to the already signicant growth potential. Having come to the
market at 200p in September 2020, the share price exceeded 400p in September 2021 but declined to 112.5p by
the end of September 2022, a decline of 71.5% in the period. We added 0.3% of NAV to the position in the period.
Supreme (-0.9ppt relative impact)
– the vertically integrated manufacturer and distributor of everyday branded
consumer products warned on prots twice during the period. In April 2022, the company agged higher distribution
costs and raw material (whey) ination impacting their Sports Nutrition business. In July 2022, the company issued
a negative update on their Lighting business driven by retailer overstocking. Following material downgrades to
consensus earnings, Supreme trades on a depressed valuation which we think undervalues a business with a solid
balance sheet position and strong growth potential, particularly in vaping which is the dominant driver of group
earnings.
Aquis Exchange (-0.8ppt relative impact)
– operates the pan-European Aquis equities exchange with a disruptive
subscription pricing model that enables rms to reduce trading costs in adherence with MiFID II best execution
requirements. Whilst the company continues to grow and generate cash, market share gains in trading volumes
have been slower than those delivered over the last few years. Caution towards illiquid early-stage technology
companies has driven a large derating of the shares which declined by 57% in the period.
Mind Gym (-0.8ppt relative impact)
– a provider of behavioural science solutions to corporates that are proven
to deliver business improvements, declined 50% as it missed revenue growth expectations at a time of heavy
investment for growth, citing pandemic related disruption on client decision making. The company is investing to
produce a highly personalised learning experience which is expected to enable corporates to deliver behaviour
change at scale. Combined with strong thematic tailwinds as sustainability issues are high on management agendas,
there is robust support for long-term growth, but it does come at a cost to short-term protability as the business
reinvests prots. The shares trade at a valuation which is well below historic levels and at a signicant discount to
private market transaction multiples for learning and development peers.
Revolution Bars (-0.8ppt relative impact)
– is the operator of 69 bars which we invested in through an equity
fundraise in 2020 and 2021 with the view to an eventual normalisation in trading and protability. The business
returned to protability and strong cash generation in their last nancial year despite curtailed trading over the
peak Christmas and New Year trading period. Whist we recognise the inherent nancial gearing given the leasehold
strategy and negative working capital position, the balance sheet was in a net cash position ahead of the acquisition
of a portfolio of pubs which will bring some diversication to trading. Like many other consumer exposed stocks,
the market value at the end of the period discounts the tough outlook with the shares falling by 57% in the period.
There is however evidence in the nancials that the company is delivering to our Recovery investment case.
Virgin Wines (-0.8ppt relative impact)
– if you were to write a list of attributes for a company not to possess over
the last year, the following would all rank fairly highly: a recent IPO, of an ecommerce business model, with exposure
to the UK consumer. The 75% decline in the shares was not helped by a downgrade to expectations but the current
valuation does not, in our view, recognise a protable business with a net cash balance sheet that has continued to
take market share over the last few years. We added 0.5% of NAV to the position in the period.
DF Capital (-0.8ppt relative impact)
– is a specialist lender of inventory nance for holiday homes, caravans and
commercial vans. It is another example of the current price failing to reect the opportunity. The company is trading
at a large discount to book value whilst delivering excellent growth in their loan book. Ironically, the key challenge
they’ve had in growing the loan book has been loan facilities being paid back too quickly. A short average loan
duration protects the business from a mismatch in assets and liabilities which should support net interest margins.
The business remains well placed to grow and deliver mid-teens return on equity which should support a re-rating.
We added over 0.5% of NAV to the position in the period.
Cake Box (-0.8ppt relative impact)
– was initially impacted by a blog which highlighted several issues (see March
2022 Interim Report for more details) which the company is addressing through investment in internal functions.
Importantly, we cannot see any manipulation of revenue, prots or cash generation in the inaccuracies which points
to poor reporting as opposed to anything more sinister. Whilst the company had delivered strong top line growth
post the pandemic, it is not immune to wider macro challenges. The shares fell further as management downgraded
expectations due to a softer demand environment coupled with cost pressures, specically in raw material and
distribution, which will be passed onto consumers with a lag. Cake Box remains protable and cash generative
with a strong balance sheet, trading on a double-digit free cash ow yield, with a pipeline of new store openings to
support its growth ambitions.
13
Strip Tinning (-0.7ppt relative impact)
– the tier two auto supplier, has seen a material downgrade to expectations
set at its recent (February 2022) IPO. The company revealed that its core glazing business was not the robust cash
generator that we had expected and has since taken action to restore cash generation by focusing on protable
product lines and pricing improvements. The company also announced the loss of an EV battery control system
contract with a leading German original equipment manufacturer (“OEM”). Although disappointing, it is important
to note that the lost contract represents less than 10% of the group’s EV pipeline and the EV growth opportunity
remains intact. The signicant decline in the share price leaves the company trading on less than 1x revenue for
a business with a net cash balance sheet, a trading history of double-digit operating margins and signicant EV
optionality.
RA International (-0.7ppt relative impact)
– provides construction and facilities management services to clients
including the UN and the US Government in remote locations. A strong pipeline of large contracts was expected to
deliver revenue and prot growth but, in part due to the severe challenges in Mozambique where the company had
heavily invested in Total’s Cabo Delgado LNG project, the company has failed to deliver and we exited the position
given the deteriorating strength of the balance sheet and extremely poor liquidity.
IOG (-0.6ppt relative impact)
– see comments in Portfolio Activity.
City Pub Group (-0.6ppt relative impact)
– much has been written around the many headwinds to prots for pubs
including the cost-of-living crisis and ination in food, energy and wages. Whilst certainly not immune, we think the
freehold backing and low nancial leverage leaves the business relatively well placed. It is trading at a 50% discount
to the directors’ valuation of the estate.
Venture Life (-0.5ppt relative impact)
– has had a year of rebuilding condence in their buy and build strategy
following a poor prior year. Evidence to date is positive – the company has recently reported a solid set of interim
results despite no real progress being made by their new Chinese distribution partner which was a key element of
the prior disappointment. Low leverage and an extremely low starting valuation should support equity returns. The
shares fell by 53%, which we expect was the result of Shareholders exiting the register given the low liquidity as the
share price performance is at odds with the fundamentals. We added over 0.6% of NAV to the position in the period.
ActiveOps (-0.5ppt relative impact)
– is an early-stage enterprise software business that has delivered to
expectations but been derated as market sentiment has aggressively moved against long duration growth
businesses. Net cash represents a quarter of the period-end market value of the company and the business has
been free cash ow positive in each of the last ve years. The 57% decline in the share price seems unjustied for a
business with revenues that are almost entirely recurring and a net revenue retention rate that has consistently been
above 100%. We invested an additional 1.2% of NAV in the position during the period.
Serabi Gold (-0.5ppt relative impact)
– a Brazilian gold exploration and production company is progressing with
production, albeit at higher costs, from their existing asset but has been required to prepare an additional impact
study for the recently acquired Coringa asset that they are developing. A combination of lower production, higher
costs and the permitting concerns alongside the weak gold price has seen the shares decline 63% in the period.
Portfolio activity – new positions and exits
The Company’s portfolio activity during the year ended 30 September 2022 is detailed below.
IOG (2.0% position at year end)
– is in the early stages of building a Southern North Sea gas production business.
The acquisition and re-commissioning of the Saturn Banks pipeline is key to the investment case and should enable
the company to bring incremental production online over the next few years with low capital investment and low
operating costs. To put this in context, the business model has been built with a long-term gas price of 45p per
therm which compares to a year-to-date average in excess of 300p. In short, when producing, the company is
generating signicant prots and cashow. However, the ramp up in production has not been without its challenges
and the company has had to reduce production guidance several times this year. Whilst most of the issues are not
insurmountable – a permanent reserve downgrade at their smallest asset the exception – they will take time and
potentially additional capital investment to overcome. The shares have materially underperformed since we initiated
the position and, whilst we have made some small additions to the position, we will look for operational momentum
to improve to de-risk the investment before adding more. The sustainability credentials of the investment, a critical
consideration for us given the sector, have been discussed in the Sustainability section.
Renold (1.9% position at year end)
– is a manufacturer of highly engineered industrial chains typically used
in demanding environments and high-tech applications (e.g. automated warehousing systems, power stations,
14
rollercoaster rides) in a broad range of end markets. It provides a low cost but critical product that affords it pricing
power through the cycle. Sustainability trends are a commercial opportunity as Renold’s product is typically longer
lasting than that of the competition and has a lower environmental footprint as it is more energy efcient (less friction)
and has lower or no lubrication requirements. Management has resolved historic under-investment, previously a
restraint on recovery potential, positioning the business for higher growth, margins, and cash ow generation. There
is evidence of underlying improvement in operating efciency that should enable strong operational leverage when
end markets recover. Balance sheet strength underpins scope for value accretive bolt-on merger and acquisition
(“M&A”) which is key to growth in a market where customers are sticky. This is most recently evidenced by the
value accretive purchase of a Spanish conveyor chain business which operates in a market where Renold is
underrepresented and offers meaningful manufacturing and procurement synergies. We have identied upside risk
to consensus mid-term forecasts and the stock trades on a depressed valuation (<0.5x FY23 EV/sales) presenting
a compelling risk/reward opportunity.
1Spatial (1.2% position at year end)
– we initiated a holding in 1Spatial, the data governance software which
enables the Government, Utilities and Transport sectors to make better decisions based on accurate location data.
The company is having success with its new strategy focused on product standardisation – for example its Next
Gen 911 Emergency Services solution has now been rolled out to eight US states – driving an improved growth
outlook, margin accretion and improving cash generation. We are encouraged by momentum in new contract wins
and recurring revenue growth ahead of expectations, though this has coincided with cost and working capital
investment to support onboarding of larger deals. Trading on 1.5x EV/sales, we believe the current share price offers
asymmetric risk/reward.
Strip Tinning (1.0% position at year end)
– we participated in the IPO of a tier two auto supplier with leading market
share in specialist automotive electrical glazing connectors. The appeal at IPO was a compelling growth opportunity
in both its core glazing business and an emergent EV battery cell connector business. The latter is an enabler of EV
growth which is key to decarbonising the auto sector. We expected high revenue cover and strong gross margins
to be underpinned by patented manufacturing related intellectual property (“IP”) and a +65-year heritage of reliably
supplying leading auto OEMs. We believed glazing growth potential could be augmented by entry into the rear
glazing connector market catalysed by regulatory change, with Strip Tinning providing a differentiated lead-free
solution and the ongoing trend towards increasing functionality being embedded in auto glazing (e.g. autonomous
driving sensors). EV connector growth potential is substantial with a fast-growing sales pipeline, and, at the time
of IPO, there was EV product validation from a high-end German OEM. We believed execution risk was low given
that the manufacturing process for glazing is relevant to the EV opportunity and thought that the IPO valuation
provided us with a margin of safety given the cheap starting valuation for what we believed to be a relatively robust
cash generative core operating business. As detailed above in the attribution section, in addition to external events
outside the company’s control, there have been company specic issues that have compounded the downgrade in
expectations and led to poor relative performance post IPO.
We exited
Ince Group
and RA International
, both have been discussed in the Performance Attribution review. We also took prots in
Instem
and ,
CapitalLitigation Capital
as well as selling down our position in Real Estate
Investors
to a minimum position weight (0.5% of NAV).
Having started the period with a high cash balance given our concerns around excessive sentiment and valuations,
we net invested £8m (compared to net sales of £44m in the prior year) during the year and made gross investments
of just under £19m (compared to £24m in the prior year). The number of new positions, four, (compared to seven
in the prior year), reects capital markers being very depressed but, as we have commented in the Performance
Attribution section, we have made meaningful additions to many of our existing positions as we see fantastic value.
15
Outlook
We are witnessing a period of extreme tightening of global monetary conditions and the majority of developed
economies are not in a position to support demand through scal measures, but it is likely that we are approaching
the end of this tightening cycle. We think there is a sensible checklist to use to become more constructive on
equities in bear markets which includes depressed valuations, negative sentiment, peak interest rate and ination
expectations and a slow down in the rate of deterioration of economic indicators. We are condent that the rst
three of these are in place. We expect there is further downside to earnings expectations but the market has
historically bottomed well ahead of trough earnings. However, we do not believe that the next cycle will mirror the
prior cycle, it seems likely that the cost of capital will be higher which has implications for style and factor returns.
Business with strong fundamentals and sensible valuations are well placed to deliver exceptional returns from here
and we have seen strong recoveries in some share prices already. We are fully invested in a portfolio of companies
that have the potential to deliver strong shareholder value creation but are hugely unloved and undervalued which I
expect will support fantastic shareholder returns.
George Ensor
Portfolio Manager
13 December 2022
Portfolio Manager Biography
George graduated from Bristol University with an Upper Second-Class degree in Chemistry in 2008 before joining
Smith & Williamson Investment Management as a graduate trainee where he worked for ve years as an analyst and
Private Client Investment Manager.
George joined River and Mercantile Asset Management LLP in March 2014 as a UK equity analyst and is currently
Portfolio Manager of the ES R&M UK Listed Smaller Companies Fund and the R&M UK Micro Cap Investment
Company Limited. George is a CFA charter holder.
16
INVESTMENT PORTFOLIO
Investment Portfolio as at 30 September 2022
The Investment Portfolio below details the Company’s holdings as at 30 September 2022, exclusive of cash and
cash equivalents (portfolio weightings are based on mid-prices).
Name Description Weight
Instem Health Care 5.4%
Capital Limited Energy 4.9%
Allergy Therapeutics Health Care 4.9%
ActiveOps Information Technology 4.5%
Litigation Capital Mgmt Financials 3.7%
Mind Gym Industrials 3.5%
Alpha FX Financials 3.5%
Shanta Gold Materials 3.4%
Keystone Law Industrials 3.4%
Sigmaroc Materials 3.1%
Manolete Partners Financials 2.9%
DF Capital Financials 2.9%
LendInvest Financials 2.8%
Venture Life Consumer Staples 2.7%
Diversied Energy Energy 2.7%
Argentex Financials 2.7%
Science In Sport Consumer Staples 2.6%
MaxCyte Health Care 2.6%
Revolution Bars Group Consumer Discretionary 2.4%
Aquis Exchange Financials 2.3%
Flowtech Fluidpower Industrials 2.1%
The City Pub Group Consumer Discretionary 2.1%
IOG Energy 2.0%
Supreme Consumer Discretionary 2.0%
Cake Box Holdings Consumer Staples 2.0%
GetBusy Information Technology 2.0%
Renold Industrials 1.9%
SDX Energy Energy 1.8%
Kooth Health Care 1.7%
Virgin Wines UK Consumer Staples 1.6%
Ten Lifestyle Consumer Discretionary 1.6%
Boku Information Technology 1.5%
1Spatial Information Technology 1.2%
Serabi Gold Materials 1.0%
CMO Group Consumer Discretionary 1.0%
Strip Tinning Information Technology 1.0%
eEnergy Group Utilities 0.9%
Brand Architekts Group Consumer Staples 0.8%
Smoove Consumer Discretionary 0.5%
Real Estate Investors Real Estate 0.5%
Joules Consumer Discretionary 0.2%
Source: River and Mercantile Asset Management LLP
17
PRINCIPAL RISKS AND UNCERTAINTIES
The Board is responsible for the Company’s system of internal control and risk management and has delegated
the responsibility for ensuring the daily monitoring of risk to the AIFM. The Board assesses the robustness of the
risk controls by reviewing, at each quarterly meeting, the risk reports produced by the AIFM, and by assessing the
overall risk prole of the Company including the identication of any emerging risks and uncertainties which are
likely to affect the Company.
The principal risks and emerging risks faced by the Company are summarised below:
Principal Risk Key controls
Investment and liquidity risk
The Company invests in a diversied portfolio of
UK micro-cap companies, typically comprising
companies with a free oat market capitalisation of
less than £100 million at the time of purchase. The
relatively small market capitalisation of micro-cap
companies can make the market in their shares
illiquid. As a result of lower liquidity than securities
on the London Stock Exchange Ofcial List, prices
of micro- cap companies tend to stick at one level,
but can be at risk of sudden jumps in price when
momentum of sentiment is strong enough and
certain pools of investors are forced to liquidate. As
a consequence, the Company may not necessarily
be able to realise its investments within a reasonable
period.
The current high interest rate, an inationary macro-
economic environment and the threat of global
recession, is driving down growth stocks especially,
which adversely affects the underlying value of
the Company’s investment portfolio, leading to an
adverse impact on the Company’s NAV.
Both the liquidity and valuation issues highlighted
above may be totally out of sync with the current
underlying investee company fundamentals. There
can therefore be no guarantee that any realisation of
an investment will be on a basis which necessarily
reects the full potential or underlying performance
of that investment.
Risks within the Portfolio are monitored by the AIFM,
which holds monthly AIFM risk committee meetings with
the Portfolio Manager. The AIFM provides an update of
these AIFM risk committee meetings to the Board on a
quarterly basis and the risks are discussed accordingly.
The Portfolio Manager also undertakes on-going reviews
of the underlying investee companies, particularly those
whose businesses are impacted by the current macro
environment.
18
Principal Risk Key controls
Share price discount
The price of the Company’s shares may trade at a
discount or premium relative to the underlying NAV of
the Ordinary Shares.
There is a risk that Shareholders become dissatised
with a continuing discount to NAV and seek further
action.
The Board continually monitors the Company’s share
price discount or premium to the published NAV and
regularly consults with the Company’s brokers regarding
share trading volumes, signicant buyers and sellers, and
comparative data from the Company’s peer group. In order
to further manage the discount, the Board has employed
the services of a public relations (“PR”) company to
broaden interest in the Company’s Ordinary Shares.
Since its inception the Company has operated the
Redemption Mechanism to return capital to investors
which the Board understands Shareholders are still
supportive of.
Further, the Board considers that in the current
environment, selling portfolio investments at depressed
values in order to raise funds to buy back the Company’s
own shares is not in the best interests of investors and
that the Redemption Mechanism remains the best tool to
manage the discount in the longer term.
Reliance on the Portfolio Manager
The Company is dependent on the expertise of a
small team led by the lead manager, George Ensor, to
evaluate investment opportunities and to implement
the Company’s investment objective and investment
policy.
There is a risk that the Portfolio Manager signicantly
deviates away from fund strategy, leading to
reputational damage and a loss of investor condence
in the Portfolio Manager. There is also a risk of fund
underperformance due to poor investment decision
making.
During the year under review, the Portfolio Manager
was acquired by AssetCo Limited. There is a risk that
changes consequent to the change in ownership may
impact the level of service that the Portfolio Manager
gives to the Company, which in turn may impact the
performance of the Company’s investment portfolio.
The Portfolio Manager has experienced investment
professionals ready and available to step in if required in
the short term, should our lead manager be unavailable,
and would hire a full time, experienced and proven
replacement lead manager, if necessary.
The Board has received assurance from the Portfolio
Manager that the resources dedicated to servicing the
Company will not be impacted by changes following the
Portfolio Manager’s change of ownership. The Board and
the AIFM continue to monitor and review the service and
performance of the Portfolio Manager.
19
Principal Risk Key controls
Cyber-security risk
The increasing incidence of cyber related events and
attacks increase the risk of inappropriate access
to customer or Company data leading to loss of
sensitive information which may result in a material
adverse effect on the Company’s nancial condition,
reputation and investor condence.
The Company’s service providers maintain cyber security
policies. These are reviewed by the AIFM as part of its
oversight responsibilities and reported to the Board on
a quarterly basis, including any breaches of information
security. Service providers perform regular testing of their
cyber security controls to ensure that they remain robust.
The Portfolio Manager performs regular upgrades and
reviews of IT security protection in order to ensure that
the risk of a security breach is low.
Sustainable Investment
The Board sees any failure by the Portfolio Manager
to identify future potential issues within the underlying
portfolio in this area as a key risk which may lead to
the Company’s shares becoming less attractive to
investors.
A failure to adopt a sustainable approach to
environmental and social matters, or a failure
of governance is likely to adversely impact the
Company’s performance.
The Board believes that the adoption by the Portfolio
Manager of a comprehensive sustainable investment
policy, in combination with the development of regular
reporting to the Board, will allow the Company to mitigate
this risk.
The Board is developing a strategy to engage with service
providers across ESG matters more generally.
See pages 25 to 27 for “Our Overall Strategy and Approach
to ESG”.
Emerging risks
Along with other investment companies, the Company faces an increased and emerging risk from the impact of
global economic pressures, which have led to supply chain issues, rising ination and interest rates resulting in an
increased threat of global recession; along with ever increasing geopolitical uncertainty from the Ukraine conict
and a zero-COVID-19 policy in China, which potentially impacts the Company’s investment portfolio and the general
sentiment towards capital markets.
The Company is also aware of the global risk of climate change may have on the underlying investment portfolio and
notes that assessing the impact of climate change on investments is central to the Portfolio Manager’s sustainable
policy.
20
Section 172 Statement and Principal Decisions
Through adopting the AIC Code, the Board acknowledges its duty to comply with section 172 of the UK Companies
Act 2006 to act in a way that promotes the success of the Company for the benet of its members as a whole,
having regard to (amongst other things):
a) consequences of any decision in the long-term;
b) the interests of the Company’s employees;
c) need to foster business relationships with suppliers, customers and others;
d) impact on community and environment;
e) maintaining reputation; and
f) act fairly as between members of the Company.
The Board recognises its key role in promoting the Company’s key purpose of delivering on the investment strategy
and promotes its core values of openness, challenge and respect in its own interactions with all stakeholders.
Information on how the Board has engaged with its stakeholders and promoted the success of the Company,
through the decisions it has taken during the year, whilst having regard to the above, is outlined below. The Company
has no employees.
Stakeholder How the Board engages
Shareholders
The Company would not exist without the capital of its
Shareholders and its ongoing success is dependent on
their continued support. The Board therefore ensures that
multiple lines of communication with Shareholders are
actively promoted. The Annual General Meeting (“AGM”)
ensures a forum in which the views of all Shareholders are
sought by the Board through the resolutions proposed and
it is also an opportunity for Shareholders to question the
members of the Board face to face.
In addition, the Board requires Singer Capital Markets
Advisory LLP as the Company’s corporate broker (the
“Corporate Broker”) to maintain communication with
major Shareholders and report back to the Board at
quarterly meetings on the tenor and substance of such
communication. Since the Company’s inception, the
Board has encouraged both the Corporate Broker and
the Portfolio Manager to meet directly with Shareholders
both for the purposes of communicating the Company’s
strategy and performance as well as to listen to the views of
Shareholders. These views are reported back to the Board
at their regular meetings.
The Board also engages Camarco (Capital Market
Communications Ltd) as the Company’s Public Relations
Adviser to broaden the reach of the Company’s shareholder
engagement to include more retail investors. The Board has
consistently expressed the priority it places on the Corporate
Broker, the Portfolio Manager and the Public Relations
Adviser co-ordinating their efforts on the Board’s behalf
to ensure the widest range of investor views is available to
inform the Board’s deliberations. Furthermore, the Chairman
and other Directors are available to meet with major
Shareholders where such meetings would be welcomed.
The Company provides regular information updates to
Shareholders, including the daily NAV announcement to the
markets and monthly portfolio updates.
21
Stakeholder How the Board engages
Service providers
All key service providers report to the Board at every
quarterly Board meeting, with representatives of the service
providers present to answer questions from Directors.
In accordance with the Company’s culture of openness,
challenge and respect, the Chairman actively encourages
feedback from the Company’s service providers as
appropriate to their eld of expertise. The Board, through its
Management Engagement Committee, also seeks to ensure
that the terms of engagement are commercially equitable
for each service provider, as the success of the Company is
encouraged by forming stable partnerships with successful
and motivated advisers.
The wider community and the environment
The Board is developing its strategy to embed a
responsible and realistic approach to Environmental, Social
and Governance related issues into its engagements
with stakeholders, including how it delivers value to
Shareholders. The Board continues to discuss with the
Portfolio Manager how a responsible sustainable investment
approach integrates with the Company’s overall investment
philosophy and objective which is described in greater
detail in the Portfolio Manager’s Report. The Board intends
to engage with all its service provider stakeholders, so that
it can assess its impact on society and the environment.
Principal decisions
The table below sets out principal decisions taken by the Board during the year which have the greatest impact
on the Company’s long term success. The Board considers the factors outlined under section 172 and the wider
interests of stakeholders as a whole in all decisions it takes on behalf of the Company.
Principal decision Stakeholder interests
Discount management
The Board regularly monitors the level of the discount of the
share price to NAV per Ordinary Share, especially in relation
to its peer group. However, the Board continues to believe
that the Redemption Mechanism providers the most effective
buyback mechanism in the longer term. Notwithstanding
this view, the Board continues to look for effective ways to
improve demand for and liquidity in the Company’s shares.
To that end, the Board has ensured that the Company is
present on Trustnet, one of the best-known places for private
investors and advisers to research potential investments.
22
Principal decision Stakeholder interests
Appointment of John Blowers and Charlotte
Denton as part of the ongoing refreshment of the
Board
The Board decided on two Board appointments during the
year.
Appointment of a Marketing Specialist
Having considered the current balance of skills and expertise
on the Board in conjunction with the needs of the Company,
the Directors wrote a job specication which stipulated that
the successful candidate should have relevant marketing
experience in order to help the Company further achieve its
objective of improving demand for the Company’s shares
from Retail investors.
After an extensive search John Blowers was appointed (see
page 30 for his biography).
Appointment of new Chair of the Audit Committee
Following the retirement of Stephen Coe and the latest
appointment referred to above, the Board decided in line
with the strategy on ESG matters, that the Board should
maintain at least 25% female representation and that a
woman should be appointed to the role of Chair of the Audit
Committee, which the Board also considers to be a senior
Board role for a listed investment company.
Following a successful search, Charlotte Denton was
appointed (see page 31 for her biography).
23
EXECUTIVE SUMMARY
This Executive Summary is designed to provide information about the Company’s operation and results for the
year ended 30 September 2022. It should be read in conjunction with the Chairman’s Statement on page 5 and the
Portfolio Manager’s report on pages 6 to 15 which provides a detailed review of investment activities for the year
and an outlook for the future.
Corporate summary
The Company was incorporated in Guernsey on 2 October 2014, with registered number 59106, as a non-cellular
company with liability limited by shares. The Company is registered by the Guernsey Financial Services Commission
(“GFSC”) as a registered closed-ended collective investment scheme pursuant to the Protection of Investors
(Bailiwick of Guernsey) Law, 2020, as amended, and the Registered Collective Investment Scheme Rules 2021.
The Company’s stated capital is denominated in Sterling and each share carries equal voting rights.
The Company’s Ordinary Shares are listed on the Ofcial List as maintained by the FCA and admitted to trading with
a premium listing on the Main Market of the London Stock Exchange.
Significant events during the year ended 30 September 2022
Board and Committee changes
On 1 August 2022, John Blowers joined the Board as a non-executive Director. Stephen Coe retired from the Board
on 31 August 2022. On 1 September 2022, Charlotte Denton joined the Board as a non-executive Director and was
also appointed as the Chair of the Audit Committee.
Ukraine conflict
The invasion of Ukraine by Russia has had far reaching implications for the global economy and resulted in nancial
volatility. The Company has no direct and material exposure to Russia or Ukraine or to imposed sanctions.
Current economic environment
The current high interest rate, an inationary macro-economic environment and the threat of global recession, has
led to a signicant increase in the cost of living and has driven down the stock market, especially growth stocks.
This has adversely affected the underlying value of the Company’s investment portfolio, which has led to an adverse
impact on the Company’s NAV.
Result of Annual General Meeting held on 2 March 2022
The Board has noted the votes against Resolutions 6 (to re-elect Mr Mark Hodgson as a Director of the Company)
and 7 (re-appointment of auditors).
The Board believes that the votes against Resolution 6 relate to the fact that, as disclosed in the Annual Financial
Report, Mark Hodgson is not considered an independent director because he is a director of the AIFM. The AIFM
is totally unrelated to the Portfolio Manager and the Group. The opinion of the other Directors is that Mark provides
considerable and complementary expertise to the Board, particularly in the area of risk management, in which the
AIFM has a signicant operation. In accordance with the recommendations of the AIC in relation to non-independent
directors, Mark is subject to annual re-election.
The Board believes that the votes against Resolution 7 relates to two factors:
1.
That non-audit services represented 37.6% of audit fees during the year ended 30 September 2021 and
that voting agencies report this as having a potential impact on the independence of the Company’s auditor,
PricewaterhouseCoopers CI LLP (the “Auditor”). The non- audit fees related entirely to the interim review
which is a normal part of the services provided by auditors and can only be performed by a company’s
auditor. The Auditor is also required to conduct the interim review by the International Standard in Review
Engagement 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the
Entity” issued by the International Auditing and Assurance Standards Board. We do not believe that the
concerns over auditor independence are therefore warranted. No other non-audit services were provided
during the year ended 30 September 2021.
24
2.
In late 2020, the International Auditing and Assurance Standards Board produced a consultation entitled,
Fraud and Going Concern and refers to the “expectations gap” in that the public expect more of auditors
than is legally required of them. The Company’s Auditor has not provided a statement on the “expectations
gap” to the Standards Board. The Board has discussed this point with the Auditor and on balance do not
believe this should impact the re-appointment of the Auditor.
Company investment objective
The Company aims to achieve long term capital growth from investments in a diversied portfolio of UK micro-cap
companies, typically comprising companies with a free oat market capitalisation of less than £100 million at the
time of purchase.
Company investment policy
The Company invests in a diversied portfolio of UK micro-cap companies. It is expected that the majority of the
Company’s investible universe will comprise companies whose securities are admitted to trading on AIM.
While it is intended that the Company will be fully invested in normal market conditions, the Company may hold cash
on deposit or invest on a temporary basis in a range of high quality debt securities and cash equivalent instruments.
There is no restriction on the amount of cash or cash equivalent instruments that the Company may hold and there
may be times when it is appropriate for the Company to have a signicant cash position instead of being fully or
near fully invested.
The Company is not benchmark-driven in its asset allocation.
Diversification
The number of holdings in the portfolio will usually range between 30 and 50. The portfolio is expected to be broadly
diversied across sectors and, while there are no specic limits placed on exposure to any sector, the Company will
at all times invest and manage the portfolio in a manner consistent with spreading investment risk.
Investment restrictions
No exposure to any investee company will exceed 10% of NAV at the time of investment.
The Company may from time to time take sizeable positions in portfolio companies. However, in such circumstances,
the Company would not normally intend to hold more than 25% of the capital of a single investee company at the
time of investment.
Although the Company would not normally expect to hold investments in securities that are unquoted, it may do so
from time to time but such investments will be limited in aggregate to 10% of NAV.
The Company may invest in other investment funds, including listed closed-ended investment funds, to gain
investment exposure to UK micro-cap companies but such exposure will be limited, in aggregate, to 10% of NAV
at the time of investment.
Borrowing and gearing policy
The Company does not normally intend to employ gearing but at certain times it may be opportune to do so, for both
investment and working capital purposes. Accordingly, the Company may employ gearing up to a maximum of 20%
of NAV at the time of borrowing. Currently the Company has no gearing or borrowing facilities.
Derivatives
The Company may use derivatives (both long and short) for the purposes of efcient portfolio management only. The
Company will not enter into uncovered short positions.
Further information can be found in the Portfolio Manager’s Report which is incorporated within this Annual Financial
Report on pages 6 to 15 for informational purposes only.
Investment strategy and approach
The Company’s investment strategy is to take advantage of the illiquidity risk premium inherent in UK micro-cap
companies and exploit fully the underlying investment opportunity in the UK micro-cap market to deliver high and
sustainable returns to Shareholders, principally in the form of capital gains in line with the Company investment
objective and policy.
25
The Company pursues its investment strategy through the appointment of the Carne as AIFM, whereby the AIFM
has been given responsibility, subject to the supervision of the Board, for the management of the Company in
accordance with the Company’s investment objective and policy. In conjunction with the Board, the AIFM has
engaged the Portfolio Manager to manage the portfolio. The Company depends on the diligence, skill, judgement
and business contacts of the Portfolio Manager’s investment professionals, in particular George Ensor, in identifying
investment opportunities which are in line with the investment objective and policy of the Company. The Portfolio
Manager attends all Board meetings at which the investment strategy and performance of the Company are
discussed.
Key Performance Indicators (KPIs)
The Directors meet regularly to review performance and risk against a number of key measures.
Returns and NAV total return
The Board reviews and compares, at each meeting, the performance of the portfolio as well as the NAV, income and
share price of the Company. The Directors regard the Company’s NAV total return as being the overall measure of
value delivered to Shareholders over the long term. Total return reects NAV growth of the Company since inception.
The Board is committed to achieving long term capital growth and, where possible, returning such growth to
Shareholders throughout the life of the Company. Furthermore, the Portfolio Manager has advised the Board that it
believes that a NAV of £100 million (at current market levels although this may change over time) would best position
the Company to take advantage of a portfolio of micro-cap companies and the redemption mechanism is in place
to prevent the NAV signicantly exceeding this gure.
NAV, on a total return basis, increased by 7.34% from inception which outperformed the total return posted by the
benchmark index of 4.58%. Please refer to the Financial Highlights and Performance Summary on page 3 for NAV
total return analysis and note 12 for further details regarding the redemption mechanism.
Concentration
The Board reviews the industry and asset diversication of the investment portfolio to ensure that holdings are in line
with the investment restrictions and also to monitor the concentration risk of the investment portfolio.
Refer to note 9 for further details regarding investment limits and risk diversication policies.
As at 30 September 2022, the Company held 41 (2021: 39) investment holdings of which none exceeded 10% of
NAV at the time of investment. A portfolio listing is shown on page 16 which demonstrates the spread of investment
risk in accordance with the investment policy.
Our Overall Strategy and Approach to ESG
The Company is a closed-ended investment entity and so its own direct environmental and social impact is minimal.
The Company does not exclude any types of business from its universe of potential investments, however the
Portfolio Manager does deploy an ESG lens on all potential investments and adopts a rigorous corporate ESG
policy (https://riverandmercantile.com/responsible-investment/). The Company, in common with most investment
companies, relies substantially on outsourced providers, including the Portfolio Manager. We believe therefore our
focus should be centered around governance, ensuring that appropriate ESG policies and a sustainable investing
approach is followed as well as monitoring and measuring our service provides future progress towards ESG
objectives. However, as a Company we also want to ensure we have a positive impact, for example minimising our
own carbon footprint. We recognise that both the Company and our service providers are evolving their approach.
26
The table below details the areas which we intend to focus on during the coming year.
Strategic
Area
What will we do
and how do we
demonstrate and
measure our actions?
The Company Key Service
Providers
The Portfolio
Manager
Environment Climate Change
and Sustainability -
minimising carbon
footprint
Our own carbon footprint
is limited but in 2023 we
intend to focus on two
areas:
Board Members Travel
Meeting in person quarterly
is obviously necessary and
desirable but going forward
the Board will consider
whether:
(a)
one quarterly meeting
a year could be held
virtually; and
(b)
all “ad hoc” meetings
could be held virtually.
Paperless
Communications with
Stakeholders
The Board will encourage
all Shareholders to
receive the Company’s
nancial statements and
other communications in
electronic form.
The Management
Engagement
Committee
(“MEC”) in its
2023 annual
evaluation
questionnaire
will encompass
specic questions
about service
providers plans
to reduce carbon
emissions and
details of a net
zero target date (if
set).
Going forward,
the MEC will ask
for updates on
progress towards
reducing carbon
emissions, this
will be taken into
consideration
when evaluating
each provider.
The Portfolio manager
outlines their S-PVT
internal scoring for
sustainability (see page
8). The Board regularly
receive reports on
how the portfolio is
split between each
category from the
Portfolio Manager.
The Board maintains
a dialogue with the
Portfolio manager
on the portfolio
and we express a
particular interest
on how they are
engaging with those
investments rated as
S4 and S3 under the
Portfolio Manager’s
classication.
The Portfolio Manager
is our principal service
provider and will report
on its own “ESG in
Action” initiative. We
will review its annual
report and progress to
ensure that our own
overall ESG objective
and ambitions are
being met.
Social Community
and Employee
Engagement and
Supporting Ethical
Employment Practices
The Company itself does
not have any employees.
The MEC in its
questionnaire will
request written
assurances that
each service
provider has
policies which
protect the rights
of employees
and has policies
and procedures
in place
which prohibit
discrimination
and encourage
diversity.
The social and
employment impact of
portfolio companies
is an integral part of
the Portfolio Manager
S-PVT scoring for
sustainability. Where
low ratings relate
specically to this area
the Board will maintain
a dialogue with the
Portfolio Manager on
why such holdings
remain in the portfolio.
27
Strategic
Area
What will we do
and how do we
demonstrate and
measure our actions?
The Company Key Service
Providers
The Portfolio
Manager
Governance Ensuring we have
a strong corporate
governance structure
which ensures
adherence to the AIC
Code.
Diversity of the Board
The Board has in previous
annual reports published
its succession plans
which will continue. The
Company is supportive of
diversity in all forms based
on sex, ethnicity, social
background and skill sets.
It is also committed to 25%
female representation and
a senior role being held by
a woman be that the Chair
of the Board or the Chair
of the Audit Committee.
The Board is small and
decided not to appoint
a senior independent
director. The Company
will, in its recruitment of
new directors as part of its
succession plan, take into
consideration the upcoming
proposals from the AIC
on diversity but in such a
small board the Company
considers the diversity of
skill sets and experience
to be of the utmost
importance and of greatest
value to Shareholders.
The MEC through
questionnaires
or on site visits
will ensure that
service providers
have a strong
governance
structure.
The MEC through
questionnaires or on
site visits will ensure
that the Portfolio
Manager has a strong
governance structure.
Governance
With no direct employees
itself, the Company is
committed during 2023 to
improve its oversight of
service providers to ensure
that they have appropriate
ESG policies which align
with the Company’s own
strategy.
The Board will consider
what metrics from our
underlying service
providers on achieving
their ESG goals might
be incorporated into the
Company’s future nancial
statements, recognising
with our outsourced model
the true ESG impact of the
Company.
28
Voting and Engagement
The Directors believe that they have a duciary responsibility to improve the management of companies we invest in
for all stakeholders whilst not compromising our objective of achieving strong nancial returns. The best way to create
wealth for our Shareholders is to be invested in companies that over time optimise their returns to Shareholders. For
companies to achieve this objective, the company should endeavour to ensure the long-term viability of its business,
and to manage effectively its relationships with all stakeholders. The Board delegates responsibility for this objective
to the Portfolio Manager and has approved the Portfolio Manager’s approach to Voting and Engagement, details of
which can be found athttps://riverandmercantile.com/responsible-investment/voting-and-engagement/.
Life of the Company
The Company has no xed life. The Directors shall propose one or more ordinary resolutions at every fth AGM that the
Company continues as a closed-ended investment company (the “Continuation Resolution”). The last Continuation
Resolution was proposed at the AGM on 27 February 2019 and was passed by the Company’s Shareholders. The
next Continuation Resolution will be proposed at the AGM in 2024. In the event that a Continuation Resolution is
not passed, the Directors shall formulate proposals to be put to the Shareholders as soon as is practicable but, in
any event, by no later than six months after the Continuation Resolution is not passed, to reorganise or reconstruct
the Company or for the Company to be wound up with the aim of enabling the Shareholders to realise their holdings
in the Company.
Future strategy
The Board continues to believe that the investment strategy and policy adopted is appropriate for and is capable of
meeting the Company’s purpose and investment objective.
The overall strategy remains unchanged and it is the Board’s assessment that the AIFM and Portfolio Manager’s
resources are appropriate to properly manage the Company’s investment portfolio in the current and anticipated
investment environment.
Please refer to the Portfolio Manager’s Report on pages 6 to 15 for details regarding performance to date of the
investment portfolio and the main trends and factors likely to affect those investments.
Going concern
Under the AIC Code, the Directors are required to satisfy themselves that it is reasonable to assume that the
Company is a going concern and to identify any material uncertainties to the Company’s ability to continue as a
going concern for at least 12 months from the date of approving the nancial statements.
The Board is satised that, at the time of approving the nancial statements, no material uncertainties exist that
may cast signicant doubt concerning the Company’s ability to continue for the foreseeable future, being 12 months
after approval of the nancial statements. In addition, the Company’s holdings of cash and cash equivalents, the
liquidity of investments and the income deriving from those investments, means the Company has adequate
nancial resources to meet its liabilities as they fall due. Therefore, the Board consider it appropriate to adopt the
going concern basis in preparing the nancial statements.
In making this assessment and acknowledging the current economic environment, the Board has considered that
the Company has no borrowings and cash balances of £2,289,617, which are more than sufcient to meet the
annual operating expenses and investment management fees. The Board also considered the continuing impact
of the current macro-economic environment on the Company, which it believes has a minimal risk at this stage
on the going concern of the Company and are therefore condent that it remains appropriate to adopt the going
concern basis. The Board has further considered the macro-economic environment on the long term viability of the
Company, which has been detailed in the statement below.
Viability statement
Under the AIC Code the Board is required to make a ‘viability statement’ which considers the Company’s current
position and principal risks and uncertainties combined with an assessment of the prospects of the Company in
order to be able to state that they have a reasonable expectation that the Company will be able to continue in
operation over the period of their assessment.
The Company is intended to be a long-term investment vehicle with no xed life however, having considered the
inherent limitations of estimating the impact of future political and macro-economic conditions on the Company, the
Directors have decided to assess the viability of the Company over a period of ve years, assuming the Continuation
Resolution is passed at the AGM in 2024.
29
The Company’s prospects are driven by its business model and strategy. As explained on page 1, the Company’s
aim is to achieve long term capital growth from investment in a diversied portfolio of UK micro-cap companies,
typically comprising companies with a free oat market capitalisation of less than £100 million at the time of
purchase. The Board, advised by the Portfolio Manager, believes that the impact on micro-cap companies when the
general economy returns to economic growth is particularly high and therefore based on a ve year time horizon, the
Board would expect rising valuation metrics and enhanced returns. The Board acknowledges that due to the global
economic situation, the value of the Company’s investments are depressed, but draw attention to the fact that the
Company has no gearing and has appropriate cash levels to meet expenditure. The Company’s investments are
held on a recognised stock exchange, the portfolio is well diversied, providing further liquidity if required.
The Board is mindful of the current political and economic environment and continues to monitor its impact on the
Company. In this context, the Board’s central case is that the prospects for economic activity in the UK will remain
such that the investment objective, policy and strategy of the Company will be viable for the foreseeable future
through a period of at least ve years from the balance sheet date.
In making this judgement, the Board has assessed that the main risks to the long term viability of the investment
strategy of the Company are key global and market uncertainties driven by factors external to the Company, which
in turn can impact on the liquidity and NAV of the investment portfolio, and therefore risk the viability of the Company
itself. A simulation has been designed to estimate the impact of these uncertainties on the NAV of the Company at
times of stress based on historical performance data of the Company’s benchmark, using techniques similar to the
sensitivity analysis performed in note 9 – nancial risk management.
Taking account of the Company’s current position and principal risks, the Board has a reasonable expectation
that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of
assessment. Based on the nancial position of the Company and shareholder feedback, the Directors expect the
next Continuation Resolution at the AGM in 2024 to be passed.
The Strategic Report was approved by the Board of Directors on 13 December 2022 and signed on its behalf by:
Andrew Chapman Charlotte Denton
Chairman Audit Committee Chair
30
BOARD MEMBERS
All Directors are non-executive.
CHAIRMAN
Andrew Chapman, (Independent). Appointed 2 October 2014.
Over his career, Andrew has gained experience investing in every major asset class. After beginning as a UK equity
fund manager, Andrew was subsequently appointed as the Deputy Investment Manager for the British Aerospace
Pension Fund. In 1991, he took the position of Investment Manager at United Assurance plc, where Andrew was
responsible for asset allocation and leading a team of in-house fund managers. Andrew later became a director at
Teather & Greenwood Investment Management Limited, before joining Hewitt Associates as a Senior Consultant.
Between 1994 and 2003, Andrew served as a non-executive director of the Hambros Smaller Asian Companies
Investment Trust plc (which subsequently became The Asian Technology Trust plc).
In 2003, Andrew was appointed as the rst in-house Pension Investment Manager for the John Lewis Partnership
Pension Fund, with responsibility for the overall investment strategy as well as the appointment and performance
of 27 external fund managers across all asset classes. He retired from that role in 2012. Thereafter Andrew has
developed a plural portfolio of roles, initially serving as the CIO (part-time) for The Health Foundation. His current
portfolio includes membership of the following advisory committees: the endowment fund for Homerton College
(Cambridge University); Coller Capital Partners; and the Property Charities Fund. Andrew is also a non-executive
director of Steadfast International Limited, Steadfast Long Capital Limited, GT ERISA Fund, and GT Offshore Fund.
Key Relevant Skills
•
44 years investment experience, with an emphasis on equity markets.
•
Extensive experience in selecting and managing external fund managers.
•
A current member of several fund boards.
•
Strong background in governance and risk management.
DIRECTORS
John Blowers, (Independent) – Appointed 1 August 2022
John has been instrumental in the digital revolution in nancial services for 33 years, with a series of key achievements.
He was involved with the UK’s rst digital fund platform at Interactive Investor and went on to design, build and run
several digital investment offerings for AMP, UBS and latterly for FE fundinfo.
His skills revolve around strategic proposition development and has a successful track record in sales & marketing
roles in the investment industry. Over the years, he has held a range of CEO, MD and senior management roles in
both multi-national and start-up businesses and is well-known in the UK investment and nancial media community.
He now runs the strategic advisory rm, AltRetire working for clients including Compare the Platform, Topia and
Trustnet.
Key Relevant Skills
•
Marketing
•
Retail Distribution
•
Product Design
Trudi Clark, (Independent) - Chair of the Remuneration and Nomination Committee and Management
Engagement Committee. Appointed 2 October 2014.
Trudi graduated with a rst class honours degree in business studies and is a qualied Chartered Accountant.
Trudi spent 10 years working in chartered accountancy practices in the UK and Guernsey. In 1991, she joined the
Bank of Bermuda to head their European internal audit function before moving into private banking in 1993.
Between 1995 and 2005, Trudi worked for Schroders (C.I.) Limited, an offshore private bank and investment manager.
She was appointed to the position of banking director in 2000 and managing director in 2003. In 2005, Trudi left
Schroders to establish and run a private family ofce.
31
In July 2009, Trudi established the Guernsey practice of David Rubin & Partners LLP, an internationally known
insolvency and liquidation specialist. Since June 2018 she has been a full time non-executive director.
Trudi holds several non-executive directorships which include the Balanced Commercial Property Trust, NB Private
Equity Partners Limited, The Schiehallion Fund Limited and Taylor Maritime Investments Limited, which are listed on
the London Stock Exchange. She also holds a personal duciary licence issued by the GFSC.
Key Relevant Skills
•
Qualied chartered accountant with extensive nancial experience.
•
Working in nancial services since 1987.
•
Strong background in risk and corporate governance.
•
Experience of several Investment Company Boards.
Charlotte Denton, (Independent) – Chair of the Audit Committee. Appointed 1 September 2022.
Charlotte is currently serving as a Non Executive Director of various entities including the Private Equity General
Partner companies for Cinven and Hitec Vision, Next Energy Investment Management Limited (a solar investment
manager), Buttereld Bank (Guernsey) Limited and the London listed Investment Company Starwood European
Real Estate Finance Limited of which she is Chair of the Audit Committee.
Charlotte has over 25 years’ experience in the global private client wealth management sector, having held senior
positions at Northern Trust in Guernsey, before being seconded to London in 2009. In 2011 she became Managing
Director in London of Northern Trust’s Global Family and Private Investment Ofces Group, a position she held until
joining a London based property development start-up company in 2015. After successfully growing that business
Charlotte returned to the world of private wealth and was appointed as Managing Director and latterly CEO of a
nancial services group until April 2019 when she began her non-executive career.
Charlotte is a Fellow of the Institute of Chartered Accountants and holds a degree in politics from Durham University.
She is also a member of the Society of Trust and Estate Practitioners, a Chartered Director and a fellow of the
Institute of Directors.
Key Relevant skills
•
Investment Oversight
•
Finance
•
Governance
Mark Hodgson. Appointed 2 October 2014.
Mark Hodgson is a Channel Islands fund director based in Jersey, with considerable experience in the administration
of Channel Islands funds. He has a broad fund expertise covering a wide range of differing asset classes, including
real estate, infrastructure, credit and private equity.
Mark joined Carne in April 2014. He has over 25 years of nancial services experience, with an extensive banking
background. Mark spent over 20 years with HSBC Global Bank where he gained in depth knowledge of credit,
nancial markets and complex Real Estate structures. Prior to moving to Jersey, Mark was Regional Director for
HSBC Invoice Finance (UK) running their receivables nance business.
Mark moved to Jersey in 2006 to Head up HSBC’s Commercial Centre having full operational responsibility for credit
and lending within the jurisdiction. In 2008 he moved to Capita Fiduciary Group as Managing Director Offshore
Registration (a regulated role) with responsibility for Jersey, Guernsey and the Isle of Man. Mark also took on the
responsibility as managing director of Capita Financial Administrators (Jersey) Limited (regulated role) together with
directorship appointments of regulated and unregulated funds boards.
Mark sits on a number of very high-prole real estate boards including: Kennedy Wilson Investment Management
Limited, Aviva Jersey Investors Jersey Unit Trust Management Ltd and LaSalle Investment Management (Jersey)
Ltd. He has a broad range of funds experience covering a range of debt and credit fund.
Key Relevant skills
•
27 years nancial services experience, 17 years of being the member of various boards
•
Extensive fund risk management experience across multiple asset classes
•
A strong background in board governance
32
DIRECTORS’ REPORT
The Directors present their report and the audited nancial statements for the year ended 30 September 2022. The
results for the year are set out in these accounts.
Dividend Policy
Details of the Company’s capital redemptions and dividend policy are shown on page 1. The Company does not
expect to pay dividends and no dividends have been declared or paid during the year (30 September 2021: none).
Share Capital
As at 30 September 2022, the Company had 33,897,954 Ordinary Shares (30 September 2021: 33,897,954) in issue.
Borrowing limits
The Directors may, if they feel it is in the best interests of the Company, borrow funds up to a maximum of 20% of
NAV at the time of borrowing. No borrowing facility is currently in place.
Acquisition of own shares
To assist the Company in addressing any imbalance between the supply of and demand for Ordinary Shares and
thereby assist in controlling the discount to NAV at which the Ordinary Shares may be trading, on 2 March 2022 the
Company renewed general authority to purchase in the market up to 14.99% of the Ordinary Shares in issue as at
2 March 2022. This authority expires on the date of the 2023 AGM. The Company did not purchase any shares in
the market during the year.
The Directors will seek a renewal of this authority from Shareholders at the Company’s AGM on 1 March 2023.
Directors’ shareholdings
The Directors who held ofce at the year end and their interests in the Ordinary Shares of the Company as at 30
September 2022 were as follows:
Director Ordinary Shares held
John Blowers 1,772
Andrew Chapman 15,009
Trudi Clark 8,353
Charlotte Denton -
Mark Hodgson 7,721
For further details on Ordinary Shares held by Directors refer to note 6.
Shareholders’ interests
As at 30 September 2022, the following Shareholders had an interest in the Company’s issued share capital of more
than 5%.
Percentage of total voting rights (%)
West Yorkshire PF 9.81
Hargreaves Lansdown Asset Management
1
9.56
River and Mercantile Asset Management LLP 9.15
Evelyn Partners Investment Management LLP 8.59
Investec Wealth & Investment Ltd 8.36
Interactive Investor Services Ltd
1
6.19
CG Asset Management 5.17
1
– These are investment platforms and do not control the voting rights.
Between 1 October 2022 and 13 December 2022 the Company received no additional notications.
33
Independent Auditor
The Auditor indicated its willingness to continue in ofce as auditor and a resolution proposing their re-appointment
and to authorise the Directors to determine their remuneration will be proposed at the forthcoming AGM.
Matters Reserved for the Board
The Directors have adopted a set of reserved powers, which establish the key purpose of the Board and detail its
major duties. These duties cover the following areas of responsibility:
•
statutory obligations and public disclosure;
•
approval of the investment policy;
•
strategic matters and nancial reporting;
•
Board composition and accountability to Shareholders;
•
risk assessment and management, including reporting, compliance, monitoring, governance and control;
•
responsible for nancial statements; and
•
other matters having material effects on the Company.
These reserved powers of the Board have been adopted by the Directors to demonstrate clearly the importance
with which the Board takes its duciary responsibilities and as an ongoing means of measuring and monitoring the
effectiveness of its actions.
The Portfolio Manager has the delegated power to make investment decisions on behalf of the Company within the
framework of the investment objective and investment policy. The Board exerts oversight of the decisions of the
Portfolio Manager both through the AIFM and by direct reporting at quarterly Board meetings. The Portfolio Manager
provides written reports to the Board and a representative of the Portfolio Manager is present at every quarterly
Board meeting to present the report and answer questions from the Board. In addition, the AIFM provides regular
risk reporting on the Company’s investment portfolio and the Portfolio Manager at each quarterly Board meeting.
Voting policy on portfolio investments
The Portfolio Manager, in the absence of explicit instructions from the Board, is empowered to exercise discretion
in the use of the Company’s voting rights. All shareholdings are voted at all Company meetings where practicable in
accordance with corporate governance policies, which seek to maximise shareholder value by constructive use of
votes at company meetings and by endeavouring to use the Company’s inuence as an investor with a principled
approach to corporate governance.
Disclosures required under LR 9.8.4R
The Financial Conduct Authority’s Listing Rule 9.8.4R requires that the Company includes certain information
relating to arrangements made between a controlling shareholder and the Company, waivers of Directors’ fees, and
long-term incentive schemes in force. The Directors conrm that there are no disclosures to be made in this regard.
Events after the Reporting Date
On 5 October 2022, the Board approved an increase in the annual basic Director fees of 2.5% effective from 1
January 2022.
Disclosure of Information to the Auditor
Each of the Directors who were members of the Board at the time of approving this Report conrms that:
•
to the best of their knowledge and belief, there is no information relevant to the preparation of their report of
which the Auditor was unaware; and
•
they have taken all steps a Director might reasonably be expected to have taken to be aware of relevant audit
information and to establish that the Auditor was aware of that information.
Fair, balanced and understandable
In assessing the overall fairness, balance and understandability of the Annual Financial Report the Board has
performed a comprehensive review to ensure consistency and overall balance.
Corporate Governance Statement
Introduction
The Company has a premium listing on the London Stock Exchange and is therefore required to report on how
the principles of the UK Corporate Governance Code (the “UK Code”) have been applied. Being an investment
company, a number of the provisions of the UK Code are not applicable as the Company has no executive Directors
or internal operations.
34
The Board has considered the principles and provisions of the AIC Code. The AIC Code addresses all the principles
and provisions set out in the UK Code, as well as setting out additional provisions on issues that are of specic
relevance to the Company.
The Board considers that reporting against the principles and provisions of the AIC Code, which has been endorsed
by the Financial Reporting Council and the GFSC, provides more relevant information to stakeholders. The AIC
Code is available on the AIC website www.theaic.co.uk. It includes an explanation of how the AIC Code adapts the
principles and provisions set out in the UK Code to make them relevant to investment companies.
The Company has complied with all the principles and provisions of the AIC Code during the year ended 30
September 2022, with the exception to appoint a senior independent director. It was decided not to appoint a senior
independent director given the small size of the Board and because all Directors have different qualities and areas of
expertise on which they lead. Any concerns can be conveyed to the Chairman, or another Director if Shareholders
do not wish to raise concerns with the Chairman.
Set out below is where stakeholders can nd further information within the Annual Financial Report about how the
Company has complied with the various Principles and Provisions of the AIC Code.
Page
1. Board Leadership and Purpose
Purpose 1
Strategy 1
Values and culture 35
Shareholder Engagement 20
Stakeholder Engagement 21
2. Division of Responsibilities
Director Independence 35
Board meetings 37
Relationship with the Portfolio Manager 38
Management Engagement Committee 36
3. Composition, Succession and Evaluation
Remuneration and Nomination Committee 36 - 37
Director re-election 35
Board evaluation 36 - 37
4. Audit, Risk and Internal Control
Audit Committee 36
Emerging and principal risks 17 - 19
Risk management and internal control systems 41 - 42
Going concern statement 28
Viability statement 28 - 29
5. Remuneration
Directors’ Remuneration Report 45 - 46
The Directors’ Report was approved by the Board of Directors on 13 December 2022 and signed on its behalf by:
Andrew Chapman
Chairman
35
BOARD AND COMMITTEES
Values and Culture
Since its inception the Board of Directors of the Company has upheld the values on which it was founded. The
Directors recognise the purpose of the Company to deliver high and sustainable returns to Shareholders. Delivery of
the investment objective has been achieved throughout its history through both investment capability and long held
values of diversication, innovation, adaptation and integrity.
These values are underpinned by the culture the Board demonstrates in the way in which the Directors interact
with each other and with the Company’s service providers. In particular, openness, challenge and respect are
encouraged as key to developing and implementing the strategies that will deliver the Company’s objective.
The Board
Andrew Chapman, Trudi Clark and Mark Hodgson were appointed as Directors on 2 October 2014. Stephen Coe was
appointed on 1 January 2021 as an independent non-executive Director and was the Chair of the Audit Committee
from 1 October 2021 until his retirement from the Board on 31 August 2022. John Blowers was appointed to
the Board on 1 August 2022 and Charlotte Denton was appointed to the Board on 1 September 2022. As at 30
September 2022, the Directors are:
•
Andrew Chapman (Independent non-executive Chairman).
•
John Blowers (Independent non-executive Director).
•
Trudi Clark (Independent non-executive Director, Chair of the Remuneration and Nomination Committee and
Management Engagement Committee).
•
Charlotte Denton (Independent non-executive Director, Chair of the Audit Committee).
•
Mark Hodgson (Non-executive Director).
The Board is chaired by Andrew Chapman, who is independent of the AIFM and the Portfolio Manager and has been
since the time of his appointment. The Chairman is responsible for the leadership of the Board and for ensuring its
effectiveness in fullling its role.
The Chairman and all Directors are considered independent of the Portfolio Manager. Mark Hodgson, who
is independent of the Portfolio Manager, is the Managing Director of the AIFM and is therefore not regarded as
independent.
The opinion of the other Directors is that Mark Hodgson provides considerable and complementary expertise to the
Board, particularly in the area of risk management, in which the AIFM has a signicant presence.
The Board reviews the independence of all Directors annually.
Directors have agreed letters of appointment with the Company. No Director has a service contract with the Company
and Directors’ appointments may be terminated at any time by one month’s written notice with no compensation
payable at termination upon leaving ofce for whatever reason.
Directors’ re-election
As required by the AIC Code, all Directors stand for re-election by Shareholders annually, the next occasion being
at the AGM to be held on 1 March 2023.
Please refer to pages 30 and 31 for biographies of each Director which demonstrates their professional knowledge
and breadth of investment, accounting, banking and professional experience. The Board considers that there is a
balance of skills and experience within the Board and each of the Directors contributes effectively.
Board diversity
The Board is currently made up of two female Directors and three male Directors. Following the retirement of Trudi
Clark at the 2023 AGM, the Board will consist of one female Director and three male Directors. The Board has due
regard for the benets of experience and diversity in its membership, including gender, and strives to achieve the
right balance of individuals who have the knowledge and skillset to maximise Shareholder return while mitigating
the risk exposure of the Company.
36
The Board supports the recommendations of the Davies Report and believes in and values the importance of diversity,
including gender, to the effective functioning of the Board. The Board is committed to 25% female representation
and a senior role being held by a woman be that the Chair of the Board or the Chair of the Audit Committee.
Number of Board
Members
Percentage
of the Board
Number of
Senior Positions
Men
3 60% 1
Women
2 40% 1
Tenure policy
The Board has adopted a policy on the tenure of its independent Directors that aligns with the AIC Code of Corporate
Governance and none of the four independent Directors, including the Chairman of the Board will serve for more than
nine years. The Board has thus adopted a staged succession plan that maintains a balance between the strength
added through continuity and experience as well as the benets of new members bringing fresh perspectives. The
Board will continue to assess annually each Board members independence.
The Board considers that boards of investment companies are more likely to benet from a long association with a
company in that they will experience a number of investment cycles.
Committees
The Board has established three committees, the Audit Committee, the Management Engagement Committee
and the Remuneration and Nomination Committee. All the independent Directors, namely Andrew Chapman, Trudi
Clark, John Blowers (appointed on 1 August 2022) and Charlotte Denton (appointed on 1 September 2022) have
been appointed to all Committees.
Each committee operates within clearly dened terms of reference and duties. The terms of reference for each
Committee have been approved by the Board and are available in full on the Company’s website, https://microcap.
riverandmercantile.com.
Audit Committee
The Audit Committee membership comprises all of the Directors with the exception of Mark Hodgson and has
been chaired by Charlotte Denton from 1 September 2022. Stephen Coe acted as the Chair of the Audit Committee
from his appointment on 1 October 2021 until his retirement from the Board on 31 August 2022. The Chairman of
the Board is a member of the Audit Committee. His membership of the Audit Committee is considered appropriate
given his extensive knowledge of the nancial services industry and the size of the Board.
The report on the role and activities of this Committee and its relationship with the external auditors is set out in the
Report of the Audit Committee on page 41.
Management Engagement Committee
Trudi Clark is the Chair of the Management Engagement Committee.
The Management Engagement Committee carries out its review of the Company’s advisers through consideration
of a number of objective and subjective criteria and through a review of the terms and conditions of the advisers’
appointments with the aim of evaluating performance, identifying any weaknesses and ensuring value for money
for the Company’s Shareholders. In December 2021 the Management Engagement Committee formally reviewed
the performance of the Portfolio Manager and other key service providers to the Company. During this review,
no material weaknesses were identied. The next review will be held in December 2022 after the approval of the
Annual Financial Report and nancial statements. Overall the Management Engagement Committee conrmed its
satisfaction with the services and advice received.
Remuneration and Nomination Committee
Trudi Clark is the Chair of the Remuneration and Nomination Committee.
Board and Committee evaluation
The Remuneration and Nomination Committee performs an annual internal evaluation of the Board, its Committees
and each Director, this was last undertaken in March 2022. With the appointment of John Blowers and Charlotte
Denton to the Board and the retirement of Stephen Coe, a further evaluation of the Board and the Committees will
be held in early 2023.
37
The Chair and Members of the Committee reviewed and discussed investment matters, strategy, Shareholder value,
governance, and the process and style of Board meetings. In addition, the Committee reviewed the performance of
the Chairman in his role and evaluated all the Directors’ personal contributions. It was concluded that all Directors
had a good understanding of the investments and markets and felt well prepared and able to participate fully at
Board meetings. It was agreed that Board meetings were effective and all relevant topics were fully discussed, with
the Board having a good range of skills and competency. The Directors conrmed that they have devoted sufcient
time, as considered necessary, to the matters of the Company.
Succession plan
The Board’s succession plan seeks to ensure that no independent non-executive Director serves on the Board for
longer than nine years and that the Board is well balanced and refreshed from time to time by the appointment of
new directors with the skills and experience necessary to replace those lost by Directors’ retirements and to meet
future requirements.
The Remuneration and Nomination Committee is committed to ensuring that any vacancies arising are lled by the
most qualied candidates who have complementary skills or who possess the skills and experience which ll any
gaps in the Board’s knowledge or experience.
In accordance with the succession plan, the Remuneration and Nomination Committee engaged the board member
hiring specialist, Nurole, to identify a suitably qualied and experienced director to join the Board. This process led
to the appointment of John Blowers on 1 August 2022.
Following the retirement of Stephen Coe on 31 August 2022, Charlotte Denton was appointed on 1 September 2022
as the Board agreed that she had the necessary expertise and capacity to take on the role of Chair of the Audit
Committee. No third party was engaged to advise in the process.
All Directors as at 30 September 2022, with the exception of John Blowers and Charlotte Denton, have served on
the Board since the launch of the Company.
Board meetings
The Board meets regularly throughout the year and a representative of the AIFM and the Portfolio Manager is in
attendance at all times when the Board meets to review the performance of the Company’s investments.
The Portfolio Manager and AIFM together with the Company Secretary ensure that all Directors receive, in a timely
manner, all relevant management, regulatory and nancial information relating to the Company and its portfolio
of investments. The Chairman encourages open debate to foster a supportive and co-operative approach for all
participants.
The Board applies its primary focus on the following:
-
investment performance, ensuring that investment objectives and strategy of the Company are met;
-
ensuring investment holdings are in line with the Company’s investment restrictions;
-
review and monitoring nancial risk management, operating cash ows and budgets of the Company; and
-
review and monitoring of the key risks to which the Company is exposed as set out in the Strategic Report.
At each relevant meeting the Board undertakes reviews of key investment and nancial data, transactions and
performance comparisons, share price and NAV performance, marketing and Shareholder communication strategies,
peer group information and industry issues.
The Board considers the Company’s investment objectives, their continuing relevance and whether the investment
policy continues to meet those Company’s investment objectives. The Board believes that the overall strategy of
the Company remains appropriate.
38
Attendance at scheduled meetings of the Board and its committees
Board Audit
Committee
Management
Engagement
Committee
Remuneration
and
Nomination
Committee
Number of meetings during the year ended
30 September 2022 4 2 1 2
John Blowers
1
- - - -
Andrew Chapman 4 2 1 2
Stephen Coe
2
4 2 1 2
Trudi Clark 4 2 1 2
Charlotte Denton
3
- - - -
Mark Hodgson 4 n/a n/a n/a
1
– John Blowers was appointed as a Director with effect from 1 August 2022. No Board or Committee meetings were held in August or
September 2022.
2
– Stephen Coe retired as a Director and Chair of the Audit Committee with effect from 31 August 2022.
3
– Charlotte Denton was appointed as a Director and Chair of the Audit Committee with effect from 1 September 2022. No Board or Committee
meetings were held in September 2022.
Service providers
The AIFM has delegated portfolio management of the Company’s investment portfolio to the Portfolio Manager. The
Board actively and continuously supervises both the AIFM and the Portfolio Manager in the performance of their
respective functions.
The Company has appointed BNP Paribas S.A., Guernsey Branch (the “Administrator”) to provide administration,
custodian and company secretarial services.
Each of these contracts was entered into after full and proper consideration by the Board of the quality and cost
of services offered, including the control systems in operation in so far as they relate to the affairs of the Company.
The Board receives and considers reports regularly from both the Portfolio Manager and the AIFM, with ad hoc
reports and information supplied to the Board as required. The Portfolio Manager complies with the Company
investment limits and risk diversication policies and has systems in place to monitor cash ow and the liquidity
risk of the Company. The AIFM, Portfolio Manager and the Administrator also ensure that all Directors receive, in a
timely manner, all relevant management, regulatory and nancial information. Representatives of the AIFM, Portfolio
Manager and Administrator attend each Board meeting as required, enabling the Directors to probe further on
matters of concern.
The Directors have access to the advice and service of the corporate Company Secretary through its appointed
representative who is responsible to the Board for ensuring that Board procedures are followed and that applicable
rules and regulations are complied with. The Board, the AIFM, Portfolio Manager and the Administrator operate in
a supportive, co-operative and open environment and the Board will actively and continuously supervise both the
AIFM, Portfolio Manager and Administrator in the performance of their respective functions.
Performance of the Portfolio Manager
The Board reviews on an ongoing basis the performance of the Portfolio Manager and considers whether the
investment strategy adopted is likely to achieve the Company’s investment objective.
Having formally appraised the performance, investment strategy and resources of the Portfolio Manager, the
Board has unanimously agreed that the interests of the Shareholders as a whole are best served by the continuing
appointment of the Portfolio Manager on the terms agreed.
The Board believes that the portfolio management fees are competitive with other investment companies with similar
investment mandates. The key terms of the Investment Management agreement and the portfolio management fee
charged by the Portfolio Manager are set out in note 4.
39
Shareholder communications
The main method of communication with Shareholders is through the Half-Yearly and Annual Financial Report which
aims to give Shareholders a clear and transparent understanding of the Company’s objectives, strategy and results.
This information is supplemented by the publication of the daily NAVs of the Company’s Ordinary Shares on the
London Stock Exchange via a Regulatory Information Service.
The Company’s website, https://riverandmercantile.com/funds/rm-uk-micro-cap-investment-company, is regularly
updated with monthly factsheets and provides further information about the Company, including the Company’s
nancial reports and announcements. The maintenance and integrity of the Company website is the responsibility
of the Directors, which has been delegated to the Portfolio Manager; the work carried out by the auditors does not
involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that
may have occurred to the nancial statements since they were initially presented on the website. Legislation in
Guernsey governing the preparation and dissemination of nancial statements may differ from legislation in other
jurisdictions.
Information published on the internet is accessible in many countries with different legal requirements relating to
the preparation and dissemination of nancial statements and users of the Company’s website are responsible for
informing themselves of how the requirements in their own countries may differ from those of Guernsey.
The Board believes that the AGM provides an appropriate forum for investors to communicate with the Board, and
encourages participation. The AGM will be attended by members of the Board. There is an opportunity for individual
Shareholders to question the Directors at the AGM. The Directors welcome the views of all Shareholders and place
considerable importance upon them.
In addition to the AGM and the monthly publication of factsheets, the Board requires its Corporate Broker to maintain
regular contact with Shareholders, to co-ordinate and facilitate meetings between Shareholders and the Portfolio
Manager and to report back to the Board the views of investors expressed at those meetings. The Chairman is
always willing to meet with Shareholders to discuss any questions or issues they might have about the Company.
The Board have additionally committed to uprating the information on the Company by contracting with Trustnet,
one of the UK’s premier fund data companies, serving the private investor and professional adviser markets. The live
share price and discount information is provided, plus ratings, historic performance data and fund manager proles.
This information can be found here: https://www.trustnet.com/factsheets/T/KZFC/river-and-mercantile-uk-micro-
cap-red-ord-npv.
Other communications
All substantive communications regarding any major corporate issues are discussed by the Board taking into
account representations from the AIFM, Portfolio Manager, the Auditor, legal advisers, Corporate Brokers and the
Company Secretary.
40
AIFMD REPORT
Alternative Investment Fund Manager Directive (“AIFMD”)
The Company (which is a non-EU AIF for the purposes of the AIFM Directive and related regimes in EEA member
states) has appointed the AIFM. The AIFM is authorised by the Jersey Financial Services Commission to act as an
AIFM on behalf of alternative investment funds (“AIFs”) in accordance with the Financial Services (Jersey) Law 1998.
The Company is registered with the GFSC, being the Company’s competent regulatory authority, as a non-EU
Alternative Investment Fund (“AIF”), and the AIFM has registered with the UK Financial Conduct Authority, under
their relevant national private placement regime.
The AIFM has delegated portfolio management of the Company’s investment portfolio to the Portfolio Manager and
the Board actively and continuously supervises both the AIFM and the Portfolio Manager in the performance of their
respective functions.
As the Company and the AIFM are Non-EU domiciled no depositary has been appointed in line with AIFMD. However,
BNP Paribas S.A., Guernsey Branch has been appointed to act as custodian.
The current risk profile of the Company and the risk management systems employed by the AIFM to manage
those risks
Information relating to the current risk prole of the Company and the risk management systems employed by the
AIFM to manage those risks, as required under paragraph 4(c) of Article 23 of the AIFMD, is set out in note 9 –
Financial Risk Management. Please refer to pages 17 to 19 for the Board’s assessment of the principal risks and
uncertainties facing the Company.
Leverage
The Company may employ gearing up to a maximum of 20% of NAV at the time of borrowing. The actual level of
gearing at 30 September 2022 was nil%.
Material changes to information
Article 23 of AIFMD requires certain information to be made available to investors before they invest and requires
material changes to this information to be disclosed in the annual report. There have been no material changes to
the information requiring disclosure.
AIFM remuneration
The total fee paid to the AIFM by the Company for the year ended 30 September 2022 is disclosed in note 5.
The AIFM is not subject to the provisions of Article 13 of the AIFMD, which require the AIFM to adopt remuneration
policies and practices in line with the principles detailed in Annex II of the Directive. However, in accordance with
Article 22 of the AIFM Directive and Article 107 of the AIFM Regulations, the AIFM must make certain disclosures in
respect of the remuneration paid to its staff.
The AIFM has identied nine staff as falling within the scope of the disclosure requirements (the “Identied Staff”).
These Identied Staff are senior management, named as Designated Persons of the AIFM’s managerial functions
and members of the board of directors of the AIFM. All Identied Staff of the AIFM are employees of the Carne
Group and as such receive no separate remuneration for their role within the AIFM. Instead they are remunerated as
employees of other Carne group companies, with a combination of xed and variable discretionary remuneration,
where the latter is assessed on the basis of their overall individual contribution in their role, with reference to both
nancial and non-nancial criteria and not directly linked to the performance of the staff of specic business units
or targets reached. The annualised remuneration amount paid to all of the Identied Staff of the AIFM in respect of
their work for the AIF for the 12 month period to 31 March 2022 was £33,626 (31 March 2021: £42,777 ). There was
no variable component to this remuneration and none of the AIFM’s Identied Staff is able to materially impact the
risk prole of the Company. The AIFM manages other AIFs and has no staff other than the Identied Staff.
41
REPORT OF THE AUDIT COMMITTEE
Report of the Audit Committee
The Board has appointed an Audit Committee which operates within clearly dened Terms of Reference, which are
available on the Company’s website.
The Audit Committee includes all of the Directors with the exception of Mark Hodgson, who attends at the invitation
of the Audit Committee but does not actively participate in the meetings. From 1 October 2021 to 31 August 2022,
Stephen Coe was the Chair of the Audit Committee. Charlotte Denton was appointed Chair of the Audit Committee
with effect from 1 September 2022; she is independent of the AIFM and Portfolio Manager as are all the other
Directors that comprise the committee. All of the Audit Committee’s members have recent and relevant nancial
and industry experience and the Chair of the Audit Committee is a Chartered Accountant. The Audit Committee as
a whole has competence relevant to the sector in which the Company operates. Biographical information pertaining
to the members of the Audit Committee can be found in the section of this Annual Financial Report entitled, “Board
Members” on pages 30 and 31.
Role of the Committee
The Audit Committee assists the Board in carrying out its responsibilities in relation to nancial reporting requirements,
risk management and the assessment of internal nancial and operating controls. It also manages the Company’s
relationship with the external auditor.
The Audit Committee’s main functions are:
-
to review and monitor the integrity, fairness and balance of the nancial statements of the Company
including its Half-Yearly Report and Annual Financial Report to Shareholders and any formal announcements
regarding its nancial performance, together with any signicant nancial reporting issues and areas of
judgement contained within them;
-
to advise the Board on whether the Annual Financial Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary for Shareholders to assess the Company’s
performance, position, business model and strategy;
-
to review the adequacy and effectiveness of the Company’s nancial reporting and internal control policies
and procedures with respect to the Company’s record keeping, asset management and operations for the
identication, assessment and reporting of risks;
-
to consider and make recommendations to the Board, to be put to Shareholders for approval at the AGM, in
relation to the appointment, re-appointment and removal and the provisions of non-audit services of the
external auditor and to negotiate their remuneration and terms of engagement on audit and non-audit
work;
-
to meet regularly with the external auditor in order to review their proposed audit program and remit of work
and the subsequent Audit Report and to assess the effectiveness of the audit process; any issues
arising from the audit with respect to accounting or internal controls systems and the level of fees paid in
respect of audit and non-audit work; and
-
to annually assess the external auditor’s independence, objectivity, effectiveness, resources and expertise.
Internal controls and risk management systems
The Board is responsible for ensuring that suitable systems of risk management and internal control are implemented,
including systems that include nancial controls to address nancial risks, by the third-party service providers and
keeping these systems under review to ensure their continuing adequacy.
The Directors have reviewed the BNP Paribas ISAE 3402 report (on the description of controls placed in operation,
their design and operating effectiveness for the period from 1 April 2021 to 31 March 2022) on Fund Administration
and the corresponding Bridging Letter up to 30 September 2022, and are pleased to note that no signicant issues
were identied.
In accordance with the FRC’s Internal Control: Guidance on Risk Management, Internal Control and Related Financial
and Business Reporting, and the FRC’s Guidance on Audit Committees, the Board conrms that there is an on-
going process for identifying, evaluating and managing the signicant internal control risks faced by the Company.
As the Company does not have any employees it does not have a “whistle blowing” policy in place, however the
Board has reviewed the whistleblowing procedures of the Portfolio Manager with no issues noted. The Company
delegates its main administrative functions to third-party providers who report on their policies and procedures to
the Board.
42
The Board believes that as the Company delegates its day-to-day administrative operations to third-parties (which
are monitored by the Board), it does not require an internal audit function.
The Audit Committee met on two occasions in the year under review and the members’ attendance record can be
found on page 38 of this Annual Report.
Significant risks in relation to the financial statements
The Audit Committee views the valuation of the Company’s investments as a signicant risk.
There is a risk that the AIM listed investments are not valued appropriately in accordance with the requirements set
out in IFRS 13 due to the nature of the AIM market and the listed stocks not being highly liquid, or heavily traded.
The Audit Committee reviews the regular reports from the Portfolio Manager and Administrator regarding the
valuation of the investments and the Board reviews the NAV of the Company, together with the value and trading
volumes of investments on a regular basis. The Committee also considered the implications of the COVID-19
pandemic, the Ukraine conict and the current political and economic environment, on both the valuation and
liquidity of the investment portfolio and concluded that it remained appropriate to estimate the fair value of the
Company’s nancial assets based on quoted prices (refer to note 2.3(c) for further details).
In addition to the above, the AIFM holds monthly risk committee meetings, where the Company’s risk measurement
framework is discussed, including market risk, credit risk, counterparty risk, operational risk and liquidity risk, in
reference to the investment portfolio and the Company performance thereof. On a quarterly basis, the AIFM provides
an update to the Board and is also asked to attend Audit Committee meetings by the Chair of the Audit Committee
to assist the Audit Committee in evaluating the appropriateness and robustness of the valuation methodology
applied to the investment portfolio.
External audit process
The Auditor were reappointed on 2 March 2022. The Audit Committee has direct access to the Company’s external
auditor and provides a forum through which the external auditor reports to the Board. Representatives of the Auditor
attend meetings of the Audit Committee at least twice each year.
The Audit Committee met with the Auditor prior to the commencement of the audit and agreed an audit plan that
would adopt a risk based approach. The Audit Committee and the Auditor agreed that audit procedures would be
performed over the title to and the existence of the Company’s investments and the procedures in place at the
Administrator and the Portfolio Manager in respect of the valuation of the Company’s investment portfolio would be
understood and evaluated.
Upon completion of the audit, the Audit Committee discussed with the Auditor the effectiveness of the audit and
considered the Auditor’s independence from the Company since their appointment and throughout the audit process.
The signicant risks regarding both fraud risk - management override of controls and valuation of the investment
portfolio, were tracked through the period and the Audit Committee challenged the work performed by the Auditor
to test management override of controls and in addition the audit work undertaken in respect of valuations of
investments held.
The Audit Committee was satised that during the audit of the annual report and nancial statements for the year
ended 30 September 2022, there had been appropriate focus and challenge on the signicant and other key areas
of audit risk and the Committee assessed the quality of the audit process to be good.
During the year ended 30 September 2022, in addition to the audit services in respect to the audit of the Company’s
Annual Financial Report, the Auditor provided non-audit services in respect of the review of the Company’s Half-
Year Report for the period ended 31 March 2022. No other non-audit services were provided during the year ended
30 September 2022.
To safeguard the objectivity and independence of the external auditor from becoming compromised, the Committee
has a formal policy governing the engagement of the external auditor to provide non-audit services. The external
auditor and the Directors have agreed that all non-audit services require the pre-approval of the Audit Committee
prior to commencing any work. Fees for non-audit services will be tabled annually so that the Audit Committee can
consider the impact on the Auditor’s objectivity.
43
The fees for the audit services were: £57,000 for the audit for the year ended 30 September 2022 and the fees for
non-audit services were £21,500 for the review of the Company’s Half-Yearly Report for the period ended 31 March
2022.
The Audit Committee has discussed the report provided by the Auditor and the Audit Committee is satised as to
the independence of the Auditor.
The Committee has reviewed the Auditor’s independence policies and procedures and considers that they are t
for purpose.
Appointment and independence
The Audit Committee considers the reappointment of the Auditor, including the rotation of the audit engagement
leader, and assesses their independence on an annual basis. The external auditor is required to rotate the engagement
leader responsible for the Company’s audit every ve years. Evgeniya Litvintseva took over as engagement leader
during the year ended 30 September 2022 and this is the rst year she has overseen the audit of the Company.
The Committee reviews the objectivity and effectiveness of the audit process on an annual basis and considers
whether the Company should put the audit engagement out to tender. Having considered the need to tender the
position for the current year, the Committee has provided the Board with its recommendation to the Shareholders
on the reappointment of the Auditor as external auditor for the year ending 30 September 2023.
Accordingly, a resolution proposing the reappointment of the Auditor will be put to the Shareholders at the 2023
AGM. It is the Audit Committee’s intention to put the Company’s audit out to tender in early 2023. There are no
contractual obligations restricting the Audit Committee’s choice of external auditor and we do not indemnify our
external auditor.
The Committee will seek to adopt best practice guidance in conducting audit tenders, as issued by the FRC and
other governing bodies as applicable.
This Report of the Audit Committee was approved by the Board of Directors on 13 December 2022 and signed on
its behalf by:
Charlotte Denton
Audit Committee Chair
44
DIRECTORS’ STATEMENT OF RESPONSIBILITIES
The Directors are responsible for preparing nancial statements in accordance with The Companies (Guernsey) Law,
2008, as amended (“Companies Law”) and International Financial Reporting Standards (“IFRS”).
Companies Law requires the Directors to prepare nancial statements for each nancial year which give a true and
fair view of the state of affairs of the Company and of the prot or loss for the year.
In preparing those nancial statements, the Directors are required to:
•
select suitable accounting policies and apply them consistently;
•
make judgements and estimates that are reasonable and prudent;
•
state whether applicable accounting standards have been followed, subject to any material departures disclosed
and explained in the nancial statements;
•
assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern; and
•
use the going concern basis of accounting unless they either intend to liquidate the Company or to cease
operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at
any time the nancial position of the Company and to enable them to ensure that the nancial statements comply
with Companies Law. The Directors are also responsible for safeguarding the assets of the Company and hence for
taking reasonable steps for the prevention and detection of fraud and other irregularities.
In accordance with DTR 4.1.12, the Directors conrm to the best of their knowledge that:
•
the nancial statements, which have been prepared in accordance with IFRS, give a true and fair view of the
assets, liabilities, nancial position and prot of the Company; and
•
•
the Strategic Report includes a fair review of the development and performance of the business and the position
of the Company, together with a description of the principal risks and uncertainties that it faces.
The Annual Financial Report and nancial statements, taken as a whole, are fair, balanced and understandable
and provide the information necessary for Shareholders to assess the Company’s performance, position, business
model and strategy.
Andrew Chapman Charlotte Denton
Chairman Audit Committee Chair
13 December 2022 13 December 2022
45
DIRECTORS’ REMUNERATION REPORT
This report describes how the Board has applied the principles of the AIC Code relating to Directors’ remuneration.
An ordinary resolution to approve the Directors’ remuneration report will be proposed at the AGM on 1 March 2023.
Table of Directors Remuneration
The fees payable to directors are set for each calendar year in accordance with the policy set out below.
Director Role Annual Fee to 31
December 2021*
Annual Fee effective
1 January 2022 (approved
post year-end)*
Andrew Chapman Chairman £42,000 £43,050
Mark Hodgson Non-executive Director £27,000 £27,675
Trudi Clark
(due to retire 1 March 2023) Non-executive Director £27,000 £27,675
Stephen Coe
(retired 31 August 2022)
Chair of the Audit
Committee £32,000 £32,800
Charlotte Denton
(appointed 1 September 2022)
Chair of the Audit
Committee - £32,800
John Blowers
(appointed 1 August 2022) Non-executive Director - £27,675
* On 5 October 2022, the Board approved an increase in the annual basic Director fees of 2.5% effective from 1 January 2022.
No other remuneration or compensation was paid or is payable by the Company during the year to any of the
Directors and there has been no change to the Company’s remuneration policy as detailed below during the course
of the year.
No Director is entitled to receive any remuneration which is performance-related.
Remuneration policy
The determination of the Directors’ fees is a matter for the Remuneration and Nomination Committee. The
Remuneration and Nomination Committee considers the remuneration policy annually to ensure that it remains
appropriately positioned. Members of this Committee will review the fees paid to the boards of Directors of similar
companies. Each Director recuses themselves from participating in decisions relating to his or her own remuneration.
The Company’s policy is for the Directors to be remunerated in the form of fees, payable quarterly in arrears. No
Director has any entitlement to a pension, and the Company has not awarded any share options or long-term
performance incentives to any of the Directors.
Directors are authorised to claim reasonable expenses from the Company in relation to the performance of their
duties.
The Company’s policy is that the fees payable to the Directors should reect the time spent by the Board on the
Company’s affairs and the responsibilities borne by the Directors and should be sufcient to enable high calibre
candidates to be recruited. The policy is for the Chairman of the Board and Chair of the Audit Committee to be
paid a higher fee than the other Directors in recognition of their more onerous roles and more time spent. The
Remuneration and Nomination Committee may recommend the amendments to the level of remuneration paid
within the limits of the Company’s Articles of Incorporation.
In 2020, the Remuneration Committee recommended that Directors remuneration be increased annually by a
percentage equal to the Retail Prices Index, subject to a maximum annual increase of 2.5%. At its meeting on 5
October 2022, the Remuneration Committee recommended that the rst such increase of 2.5% be implemented
and backdated to 1 January 2022.
The Company’s Articles of Incorporation limits the aggregate fees payable to the Board of Directors to a total of
£165,000 per annum.
46
Advisers to the Remuneration and Nomination Committee
The Board has not sought the advice or services by any outside person, at this time, in respect of its consideration
of the Directors’ remuneration, although the Board reviews Directors’ compensation in line with market trends.
Ensuring Directors fees remain in line with the market is important during this period of Board refreshment to ensure
that the Company continues to attract the most talented individuals.
Trudi Clark
Remuneration and Nomination Committee Chair
13 December 2022
47
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF RIVER AND MERCANTILE UK MICRO CAP
INVESTMENT COMPANY LIMITED
Report on the audit of the financial statements
Our opinion
In our opinion, the nancial statements give a true and fair view of the nancial position of River and Mercantile UK
Micro Cap Investment Company Limited (the “company”) as at 30 September 2022, and of its nancial performance
and its cash ows for the year then ended in accordance with International Financial Reporting Standards and have
been properly prepared in accordance with the requirements of The Companies (Guernsey) Law, 2008.
What we have audited
The company’s nancial statements comprise:
•
the statement of nancial position as at 30 September 2022;
•
the statement of comprehensive income for the year then ended;
•
the statement of changes in shareholders’ equity for the year then ended;
•
the statement of cash ows for the year then ended; and
•
the notes to the nancial statements, which include signicant accounting policies and other explanatory
information.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under
those standards are further described in the
Auditor’s responsibilities for the audit of the financial statements
section
of our report.
We believe that the audit evidence we have obtained is sufcient and appropriate to provide a basis for our opinion.
Independence
We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the
nancial statements of the company, as required by the Crown Dependencies’ Audit Rules and Guidance. We have
fullled our other ethical responsibilities in accordance with these requirements.
Our audit approach
Overview
Audit scope
•
The company is a closed-ended investment company, incorporated in Guernsey, whose ordinary shares are
admitted to trading with a premium listing on the Main Market of the London Stock Exchange.
•
We conducted our audit of the nancial statements in Guernsey, using information provided by BNP Paribas S.A.
Guernsey branch (the “Administrator”), River and Mercantile Asset Management LLP (the “Portfolio Manager”)
and Carne Global AIFM Solutions (C.I.) Limited (the “Alternative Investment Fund Manager”) all to whom the
board of directors has delegated the provision of certain functions.
•
We tailored the scope of our audit taking into account the types of investments within the company, the
accounting processes and controls, and the industry in which the company operates.
Key audit matters
•
Valuation of Financial Assets designated at fair value through prot or loss (“Investments”).
Materiality
•
Overall materiality: £0.6 million (2021: £1.1 million) based on 1% of net assets.
•
Performance materiality: £0.4 million.
48
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the
nancial statements. In particular, we considered where the directors made subjective judgements; for example,
in respect of signicant accounting estimates that involved making assumptions and considering future events
that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal
controls, including among other matters, consideration of whether there was evidence of bias that represented a
risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most signicance in our audit of the
nancial statements of the current period and include the most signicant assessed risks of material misstatement
(whether or not due to fraud) identied by the auditors, including those which had the greatest effect on: the overall
audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These
matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our
audit of the nancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters.
This is not a complete list of all risks identied by our audit.
Key audit matter How our audit addressed the key audit matter
Valuation of Financial Assets designated at fair value
through profit or loss (“Investments”)
Investments of £56.027 million (note 8) held at fair
value through prot or loss (note 2.3) consist mainly of
equities in companies whose securities are admitted
to trading on the AIM.
Investments are the main driver for the company’s
performance and are considered to be a key area
of focus for members of the company. There is a
risk that the AIM listed investments are not valued
appropriately in accordance with the requirement set
out in IFRS 13 for the price to be quoted in an active
market in order to be an appropriate measure of fair
value, and we therefore consider this to be a key
audit matter.
IFRS 13 denes an active market as a market in which
transactions for the asset take place with sufcient
frequency and volume to provide pricing information
on an ongoing basis.
We assessed the accounting policy for the Investments,
as set out in note 2.3, for compliance with IFRS.
We understood and evaluated the internal control
environment in place at the Administrator over the
valuation of the investment portfolio and the production
of the net asset value for the company. We also
discussed the asset selection and monitoring process
with the Portfolio Manager.
We tested the valuation of the Investments by
independently agreeing 100% of the prices used in
the valuation to a third-party pricing provider and
recalculated the total valuation as at 30 September
2022.
We independently obtained and analysed each security’s
trading volumes for the 12 months of the nancial year
ended 30 September 2022. We compared that with
the trading volume of the last 12 months ended 30
September 2021. For securities identied as having low
trading volumes, relative to the company’s holdings,
further trading volume analysis post 30 September 2022
was also performed. Our analysis showed that some
level of trading occurred at or near the quoted year-
end prices during the two-week post year end period
indicating evidence of an active market and that the
quoted prices at the period end were therefore indicative
of fair value.
We independently obtained the custody conrmation
for the Investments and reconciled to the company’s
accounting records, without exception.
We have nothing to report to those charged with
governance in respect of the above procedures.
49
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the
nancial statements as a whole, taking into account the structure of the company, the accounting processes and
controls, and the industry in which the company operates.
Materiality
The scope of our audit was inuenced by our application of materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the
nature, timing and extent of our audit procedures on the individual nancial statement line items and disclosures and
in evaluating the effect of misstatements, both individually and in aggregate on the nancial statements as a whole.
Based on our professional judgement, we determined materiality for the nancial statements as a whole as follows:
Overall materiality
£0.6 million (2021: £1.1 million)
How we determined it
1% of net assets
Rationale for benchmark applied
We believe that net assets is the most appropriate benchmark because this
is the key metric of interest to members of the company. It is also a generally
accepted measure used for companies in this industry.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds overall materiality. Specically, we use performance materiality
in determining the scope of our audit and the nature and extent of our testing of account balances, classes of
transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% of
overall materiality, amounting to £0.4 million (2021: £0.8 million) for the company’s nancial statements.
In determining the performance materiality, we considered a number of factors – the history of misstatements, risk
assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the lower end
of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identied during our audit above
£28,900 (2021: £55,640) as well as misstatements below that amount that, in our view, warranted reporting for
qualitative reasons.
Reporting on other information
The other information comprises all the information included in the Annual Financial Report (the “Annual Report”)
but does not include the nancial statements and our auditor’s report thereon. The directors are responsible for the
other information.
Our opinion on the nancial statements does not cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the nancial statements, our responsibility is to read the other information and, in
doing so, consider whether the other information is materially inconsistent with the nancial statements or our
knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have
performed, we conclude that there is a material misstatement of this other information, we are required to report that
fact. We have nothing to report based on these responsibilities.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Directors’
Statement of Responsibilities, the dir
ectors
are responsible for the
preparation of the nancial statements that give a true and fair view in accordance with International Financial
Reporting Standards, the requirements of Guernsey law and for such internal control as the directors
determine is
necessary to enable the preparation of nancial statements that are free from material misstatement, whether due
to fraud or error.
50
In preparing the nancial statements, the directors are responsible for assessing the company’s ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the nancial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in aggregate, they could reasonably be expected to inuence the economic
decisions of users taken on the basis of these nancial statements.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using
data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than
testing complete populations. We will often seek to target particular items for testing based on their size or risk
characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population
from which the sample is selected.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional
scepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the nancial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufcient and
appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
•
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
company’s internal control.
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by the directors.
•
Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may
cast signicant doubt on the company’s ability to continue as a going concern over a period of at least twelve
months from the date of approval of the nancial statements. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditor’s report to the related disclosures in the nancial statements
or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor’s report. However, future events or conditions may cause the company to
cease to continue as a going concern.
•
Evaluate the overall presentation, structure and content of the nancial statements, including the disclosures,
and whether the nancial statements represent the underlying transactions and events in a manner that achieves
fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and signicant audit ndings, including any signicant deciencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of
most signicance in the audit of the nancial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about
the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be expected to outweigh the public
interest benets of such communication.
51
Use of this report
This report, including the opinions, has been prepared for and only for the members as a body in accordance with
Section 262 of The Companies (Guernsey) Law, 2008
and for no other purpose. We do not, in giving these opinions,
accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed by our prior consent in writing.
Report on other legal and regulatory requirements
Company Law exception reporting
Under The Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion:
•
we have not received all the information and explanations we require for our audit;
•
proper accounting records have not been kept; or
•
the nancial statements are not in agreement with the accounting records.
We have no exceptions to report arising from this responsibility.
Corporate governance statement
The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability
and that part of the corporate governance statement relating to the company’s compliance with the provisions of
the UK Corporate Governance Code specied for our review. Our additional responsibilities with respect to the
corporate governance statement as other information are described in the Reporting on other information section
of this report.
The company has reported compliance against the 2019 AIC Code of Corporate Governance (the “Code”) which
has been endorsed by the UK Financial Reporting Council as being consistent with the UK Corporate Governance
Code for the purposes of meeting the company’s obligations, as an investment company, under the Listing Rules
of the FCA.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the
corporate governance statement is materially consistent with the nancial statements and our knowledge obtained
during the audit, and we have nothing material to add or draw attention to in relation to:
•
The directors’ conrmation that they have carried out a robust assessment of the emerging and principal risks;
•
The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify
emerging risks and an explanation of how these are being managed or mitigated;
•
The directors’ statement in the nancial statements about whether they considered it appropriate to adopt the
going concern basis of accounting in preparing them, and their identication of any material uncertainties to the
company’s ability to continue to do so over a period of at least twelve months from the date of approval of the
nancial statements;
•
The directors’ explanation as to their assessment of the company’s prospects, the period this assessment
covers and why the period is appropriate; and
•
The directors’ statement as to whether they have a reasonable expectation that the company will be able to
continue in operation and meet its liabilities as they fall due over the period of its assessment, including any
related disclosures drawing attention to any necessary qualications or assumptions.
Our review of the
directors’ statement
regarding the longer-term viability of the
company
was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting
their statements; checking that the statements are in alignment with the relevant provisions of the
UK Corporate
Governance Code (the “Code”)
; and considering whether the statement is consistent with the nancial statements
and our knowledge and understanding of the
company
and its environment obtained in the course of the audit.52
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following
elements of the corporate governance statement is materially consistent with the nancial statements and our
knowledge obtained during the audit:
•
The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and
understandable, and provides the information necessary for the members to assess the company’s position,
performance, business model and strategy;
•
The section of the Annual Report that describes the review of effectiveness of risk management and internal
control systems; and
•
The section describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the
company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code
specied under the Listing Rules for review by the auditors.
Evgeniya Litvintseva
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants Recognised Auditor
Guernsey, Channel Islands
13 December 2022
53
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2022
Year ended
30 September
2022
Year ended
30 September
2021
Notes
£ £
Income
Investment income 3 847,006 957,075
Net (loss)/gain on nancial assets designated at fair value
through prot or loss 8 (54,004,763) 53,254,632
Total income (53,157,757) 54,211,707
Expenses
Portfolio performance fees recovery/(expense) 4 897,281 (2,068,808)
Portfolio management fees 4 (630,785) (830,989)
Operating expenses 5 (589,580) (636,367)
Foreign exchange gains 34,015 4,840
Total expenses (289,069) (3,531,324)
(Loss)/profit before taxation (53,446,826) 50,680,383
Taxation - -
(Loss)/profit after taxation and total comprehensive (loss)/income (53,446,826) 50,680,383
Basic and diluted (loss)/earnings per Ordinary Share 1.2700
13
(1.5767)The Company has no items of other comprehensive income, and therefore the loss after taxation for the year is also
the total comprehensive loss.
All items in the above statement are derived from continuing operations. No operations were acquired or discontinued
during the year.
The notes on pages 57 to 73 form an integral part of these nancial statements.
54
STATEMENT OF FINANCIAL POSITION
As at 30 September 2022
30 September
2022
30 September
2021
Notes
£ £
Non-current assets
Financial assets designated at fair value through prot or loss 8 56,027,223 102,125,227
Current assets
Cash and cash equivalents 2,289,617 10,156,557
Other receivables and prepayments 7 92,681 78,385
Total current assets 2,382,298 10,234,942
Total assets 58,409,521 112,360,169
Current liabilities
Trade payables – securities purchased awaiting settlement (433,561) -
Other payables and accruals 10 (136,219) (1,073,602)
Total current liabilities (569,780) (1,073,602)
Total liabilities (569,780) (1,073,602)
Net assets 57,839,741 111,286,567
Capital and reserves
Stated capital 12 - -
Share premium 12 - -
Retained earnings 57,839,741 111,286,567
Equity Shareholders’ funds 57,839,741 111,286,567
The nancial statements on pages 53 to 73 were approved and authorised for issue by the Board of Directors on 13
December 2022 and signed on its behalf by:
Andrew Chapman Charlotte Denton
Chairman Audit Committee Chair
The notes on pages 57 to 73 form an integral part of these nancial statements.
55
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the year ended 30 September 2022
Stated
capital
Share
premium
Retained
earnings Total
£ £ £ £
Opening equity Shareholders’ funds at
1 October 2021 - - 111,286,567 111,286,567
Total comprehensive loss for the year - - (53,446,826) (53,446,826)
Closing equity Shareholders’ funds at
30 September 2022 - - 57,839,741 57,839,741
For the year ended 30 September 2021
Stated
capital
Share
premium
Retained
earnings Total
£ £ £ £
Opening equity Shareholders’ funds at
1 October 2020 - 28,391,852 67,221,061 95,612,913
Total comprehensive income for the year - - 50,680,383 50,680,383
Transactions with owners,
recorded directly in equity
Redemption of ordinary shares - (28,382,545) (6,614,877) (34,997,422)
Ordinary share redemption costs - (9,307) - (9,307)
Closing equity Shareholders’ funds at
30 September 2021 - - 111,286,567 111,286,567
The notes on pages 57 to 73 form an integral part of these nancial statements.
56
STATEMENT OF CASH FLOWS
For the year ended 30 September 2022
Year ended
30 September
2022
Year ended
30 September
2021
Notes
£ £
Cash flow from operating activities
(Loss)/prot after taxation and total comprehensive (loss)/income (53,446,826) 50,680,383
Adjustments to reconcile prot after taxation to net cash ows:
–
Realised loss/(gain) on nancial assets designated at fair value
through prot or loss 8 1,352,009 (32,981,316)
–
Unrealised loss/(gain) on nancial assets designated at fair value
through prot or loss 8 52,652,754 (20,273,316)
Purchase of nancial assets designated at fair value through prot
or loss
1
8 (18,456,591) (23,635,734)
Proceeds from sale of nancial assets designated at fair value
through prot or loss 8 10,983,393 67,668,843
Changes in working capital
Increase in other receivables and prepayments 7 (14,296) (5,302)
Decrease in other payables 10 (937,383) (220,182)
Net cash generated (used in)/from operating activities (7,866,940) 41,233,376
Cash flows from financing activities
Redemption of ordinary shares 12 - (34,997,422)
Ordinary share redemption costs paid 12 - (9,307)
Net cash used in financing activities
- (35,006,729)
Net (decrease)/increase in cash and cash equivalents in the year
(7,866,940) 6,226,647
Cash and cash equivalents at the beginning of the year 10,156,557 3,929,910
Cash and cash equivalents at the end of the year 2,289,617 10,156,557
1
– Payables outstanding at 30 September 2022 relating to purchases of nancial assets designated at fair value through prot amounted to
£433,561 (30 September 2021: £ nil).
The notes on pages 57 to 73 form an integral part of these nancial statements.
57
NOTES TO THE FINANCIAL STATEMENTS
1. General information
The Company was incorporated as a non-cellular company with liability limited by shares in Guernsey under The
Companies (Guernsey) Law, 2008 (the “Companies Law”) on 2 October 2014. It listed its Ordinary Shares on the
Premium Segment of the Ofcial List as maintained by the FCA and was admitted to trading on the Main Market of
the London Stock Exchange on 2 December 2014.
The Company has been registered by the GFSC as a registered closed-ended collective investment scheme
pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 2020, and the Registered Collective Investment
Scheme Rules 2021. The Company registered number is 59106.
The Company’s registered address is BNP Paribas House, St Julian’s Avenue, St Peter Port, Guernsey, GY1 1WA.
2. Accounting policies
The principal accounting policies applied in the preparation of these nancial statements are set out below. These
policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of preparation
a) Statement of Compliance
The nancial statements have been prepared in accordance with the Companies Law and with International
Financial Reporting Standards (“IFRS”) which comprise standards and interpretations approved by the International
Accounting Standards Board (“IASB”), and interpretations issued by the IFRS Interpretations Committee (“IFRIC”)
as approved by the International Accounting Standards Committee (“IASC”) which remain in effect. The nancial
statements give a true and fair view of the Company’s affairs and comply with the requirements of the Companies
Law.
The nancial statements have been prepared under a going concern basis. The Directors are satised that, at the
time of approving the nancial statements, no material uncertainties exist that may cast signicant doubt concerning
the Company’s ability to continue for the foreseeable future. The Directors consider it appropriate to adopt the going
concern basis in preparing the nancial statements.
b) Basis of measurement
These nancial statements have been prepared on a historical cost basis adjusted to take account of the revaluation
of nancial assets designated at fair value through prot or loss.
c) Functional and presentation currency
The Company’s functional currency is Pound Sterling, which is the currency of the primary economic environment
in which it operates. The Company’s performance is evaluated and its liquidity is managed in Pound Sterling.
Pound Sterling is therefore considered as the currency that most faithfully represents the economic effects of the
underlying transactions, events and conditions. The nancial statements are presented in Pound Sterling.
d) Critical accounting assumptions, estimates and judgements
The preparation of the nancial statements in conformity with IFRS, requires the Company to make judgements,
estimates and assumptions that affect items reported in the Statement of Financial Position and Statement of
Comprehensive Income and the disclosure of contingent assets and liabilities at the date of the nancial statements.
It also requires management to exercise its judgement in the process of applying the Company’s accounting policies.
Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to
the carrying amount of assets or liabilities affected in future periods.
The Directors have used their judgement to determine that the functional currency is Pound Sterling (refer to note
2.1 (c) above) and that all nancial assets designated at fair value through prot or loss are traded within an active
market (note 2.3(c) below).
The Directors have determined that an active market exists for the Company’s nancial assets based on the
frequency and volume of transactions of each asset. As all the Company’s nancial assets are quoted securities
which are traded in active markets as at 30 September 2022, in the opinion of the Directors, the quoted price for the
nancial assets as at 30 September 2022 is representative of fair value.
58
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. Accounting policies (continued)
2.1 Basis of preparation (continued)
e) New standards, amendments and interpretations
Standards and amendments to existing standards that became effective during the year are detailed below.
Interest Rate Benchmark Reform – Phase 2: Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16
The amendments to the above standards are effective for period beginning on or after 1 January 2021 and provide
temporary reliefs, which address the nancial reporting effects when an interbank offered rate is replaced with an
alternative nearly risk-free interest rate. As the Company does not hold any instruments that reference interbank
offered rates, these amendments had no impact on the annual report and audited nancial statements.
During the year, a number of other amendments and interpretations became applicable for the current reporting
period, which are not relevant to the Company’s operations.
f) Standards, amendments and interpretations issued but not yet effective
Detailed below are new standards, amendments and interpretations to existing standards that have been issued,
but are not yet effective. They are not relevant to the Company’s operations and have not been early adopted by
the Company:
Effective for periods beginning on or after
IFRS 17 – Insurance contracts 1 January 2023
IAS 8 - Accounting Policies, Changes in Accounting Estimates and
Errors - amendments regarding the denition of accounting estimates 1 January 2023
The Board has undertaken an assessment of the impact of IFRS 17 on the audited nancial statements and
concluded that there will be no material impact as the Company does not have any insurance contracts.
The IAS 8 amendments introduce a new denition for accounting estimates: clarifying that they are monetary
amounts in the nancial statements that are subject to measurement uncertainty. The amendments also clarify the
relationship between accounting policies and accounting estimates by specifying that a Company develops an
accounting estimate to achieve the objective set out by an accounting policy. The denition of accounting policies
remains unchanged. The Directors do not believe that the application of this amendment will have a material impact
on the audited nancial statements.
2.2 Foreign currency translations
Foreign exchange gains and losses resulting from the settlement of transactions in foreign currencies and from the
translation of monetary assets and liabilities at year end exchange rates to Pound Sterling are recognised in the
Statement of Comprehensive Income as foreign exchange gains.
Non-monetary items such as nancial assets designated at fair value through prot or loss measured at fair value
in a foreign currency, are translated using exchange rates at the Statement of Financial Position date when the fair
value was determined. Effects of exchange rate changes on non-monetary items measured at fair value on a foreign
currency are recorded as part of the fair value gain or loss.
As at 30 September 2022, all nancial assets designated at fair value through prot or loss are held in Pound Sterling.
2.3 Financial instruments
Financial Assets
a) Classification
The Company classies its investments in equity securities as nancial assets designated at fair value through prot
or loss as they are held for investment purposes. These nancial assets are managed, and their performance is
evaluated on a fair value basis in accordance with the Company’s documented investment strategy. The Company’s
policy requires the Portfolio Manager and the Board of Directors to evaluate the information about these nancial
assets on a fair value basis together with other related nancial information. Furthermore, these nancial assets do
not possess contractual cash ows.
59
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. Accounting policies (continued)
2.3 Financial instruments (continued)
Financial Assets (continued)
a) Classification continued)
Financial assets also include cash and cash equivalents as well as trade receivables and other receivables which
are classied at amortised cost using the effective interest rate method.
b) Recognition, measurement and derecognition
Purchases and sales of investments are recognised on the trade date – the date on which the Company commits to
purchase or sell the investment. Financial assets designated at fair value through prot or loss are measured initially
at fair value. Transaction costs are expensed as incurred and movements in fair value are recorded in the Statement
of Comprehensive Income. Subsequent to initial recognition, all nancial assets designated at fair value through
prot or loss are measured at fair value.
Cash and cash equivalents, trade receivables, other receivables and prepayments are classied at amortised cost.
These nancial assets are initially recognised at fair value plus transaction costs and subsequently measured at
amortised cost.
Financial assets are derecognised when the rights to receive cash ows from the investments have expired or the
Company has transferred substantially all risks and rewards of ownership.
c) Fair value estimation
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
As at 30 September 2022, the Company held investments in a diversied portfolio of UK micro-cap companies,
typically comprising companies with a free oat market capitalisation of less than £100 million at the time of purchase,
whose securities are admitted to trading on AIM or the main market of the London Stock Exchange. Investments are
valued at fair value, which are quoted bid prices for investments traded in active markets.
d) Valuation process
The Directors are in ongoing communications with the Portfolio Manager and hold meetings on a timely basis to
discuss performance of the investment portfolio and the valuation methodology and in addition review monthly
investment performance reports.
The Directors analyse the investment portfolio in terms of both investment mix and fair value hierarchy and consider
the impact of general credit conditions and/or events that occur in the global corporate environments which may
impact the economic conditions in the UK and ultimately on the valuation of the investment portfolio.
Financial liabilities
a) Classification
Securities purchased awaiting settlement represent payables for investments that have been contracted for but
not yet settled or delivered on 30 September 2022. Financial liabilities include amounts due to brokers and other
payables which are held at amortised cost using the effective interest rate method.
b) Recognition, measurement and derecognition
Financial liabilities are recognised initially at fair value, net of transaction costs incurred and are subsequently carried
at amortised cost using the effective interest rate method. Financial liabilities are derecognised when the obligation
specied in the contract is discharged, cancelled or expires.
60
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. Accounting policies (continued)
2.4 Investment income
Dividends receivable on equity shares are recognised as revenue for the period on an ex-dividend basis and net
of withholding taxes, as the withholding taxes are deducted at source and are not a tax on prots. Interest income
and expenses are recognised in the Statement of Comprehensive Income using the effective interest rate method.
2.5 Expenses
Expenses are recognised on an accruals basis and are recognised in the Statement of Comprehensive Income.
2.6 Cash and cash equivalents
Cash includes cash at bank. Cash equivalents are short term, highly liquid investments with original maturities of
three months or less that are readily convertible to known amounts of cash and are subject to an insignicant risk
of changes in value.
2.7 Trade receivables and trade payables
Trade receivables and payables represent securities sold and securities purchased, respectively, that have been
contracted for but not yet settled or delivered on the Statement of Financial Position date.
These amounts are recognised initially at fair value and subsequently measured at amortised cost. At each period
end, the Company measures the loss allowance on trade receivables at an amount equal to the lifetime expected
credit losses if the credit risk has increased signicantly since initial recognition. If, the credit risk has not increased
signicantly since initial recognition, the Company will measure the loss allowance at an amount equal to 12-month
expected credit losses.
Signicant nancial difculties of the broker, probability that the broker will enter bankruptcy or nancial reorganisation
and default in payments are all considered indicators that a loss allowance may be required. A signicant increase in
credit risk is dened by the Directors as any contractual payment which is more than 30 days past due.
2.8 Segmental reporting
The Directors view the operations of the Company as one operating segment, being investment in UK micro-
cap companies. All signicant operating decisions are based upon analysis of the Company’s investments as one
segment. The nancial results from this segment are equivalent to the nancial results of the Company as a whole,
which are evaluated regularly by the chief operating decision-maker (the Board with insight from the Portfolio
Manager).
2.9 Contingent liabilities and provisions
A contingent liability is a possible obligation depending on whether some uncertain future event occurs; or a present
obligation but payment is not probable or the amount cannot be measured reliably. A provision is recognised when:
-
the Company has a present legal or constructive obligation as a result of past events;
-
it is probable that an outow of resources will be required to settle the obligation; and
-
the amount has been reliably estimated.
2.10 Taxation
The Company has applied for and been granted exemption from liability to income tax in Guernsey under the
Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 as amended by the Director of Income Tax in Guernsey
for the current period. Exemption must be applied for annually and will be granted, subject to the payment of an
annual fee, which is currently xed at £1,200 per applicant, provided the Company qualies under the applicable
legislation for exemption.
It is the intention of the Directors to conduct the affairs of the Company so as to ensure that it continues to qualify
for exempt company status for the purposes of Guernsey taxation.
61
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. Accounting policies (continued)
2.11 Stated capital
Ordinary Shares are classied as equity in accordance with IAS 32 – “Financial Instruments: Presentation” as
these instruments include no contractual obligation to deliver cash and the Company is not obligated to apply the
redemption mechanism.
Costs directly attributable to the issue of new Ordinary Shares and redemption of existing Ordinary Shares are
shown in equity as a deduction from the proceeds.
Please refer to note 12 for details regarding the redemption mechanism of Ordinary Shares.
2.12 Capital risk management
The Board denes capital as nancial resources available to the Company. The Company’s capital as at 30 September
2022 comprises its retained earnings at a total of £57,839,741 (2021: £111,286,567).
The Company’s objectives when managing capital are to:
-
safeguard the Company’s ability to continue as a going concern;
-
provide returns for Shareholders; and
-
maintain an optimal capital structure to minimise the cost of capital.
The Board monitors the capital adequacy of the Company on an on-going basis and all three of the Company’s
objectives regarding capital management have been met. The Company has no imposed capital requirements.
3. Investment income
Year ended
30 September
2022
Year ended
30 September
2021
£ £
Dividend income
1
836,749 957,075
Bank interest 10,257 -
Total investment income 847,006 957,075
1
– Net of withholding taxes of £66,616 (2021: £108,374).
4. Portfolio management and performance fees
On 3 November 2014, the Company signed an Investment Management agreement with the AIFM and the
Portfolio Manager, whereby the AIFM delegated to the Portfolio Manager overall responsibility for the discretionary
management of the Company assets in accordance with the Company’s investment objective and policy.
The AIFM or the Portfolio Manager may voluntarily terminate the Investment Management agreement by providing
six months’ notice in writing. The AIFM’s power to terminate the appointment of the Portfolio Manager under
the Investment Management agreement may only be exercised under the direction of the Board and the AIFM
has agreed to comply with the instructions of the Board as regards to any proposed termination of the Portfolio
Manager’s appointment.
Under the agreement, the Portfolio Manager is entitled to receive a base fee and performance fee. The Portfolio
Manager base fee is payable monthly in arrears at a rate of one-twelfth of 0.75% of NAV. During the year ended 30
September 2022, the Company incurred management fees expense of £630,785 (30 September 2021: £830,989).
A performance fee equal to 15% of the amount by which the Company’s NAV outperforms the total return on the
benchmark (being Numis Smaller Companies plus AIM (excluding Investment Companies) total return index) over a
performance period will be payable to the Portfolio Manager upon a redemption.
62
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
4. Portfolio management and performance fees (continued)
The performance period is the period between two redemptions, being the rst business day after the calculation
date, (referable to the earlier redemption (opening date)), and the end day of the calculation date (referable to the
later redemption (closing date)). The rst opening date was the date of admission and in circumstances in which
a performance fee may be payable upon termination of this Agreement, the nal closing date shall be the date in
which the agreement is terminated. The calculation date is the date determined by the Board for the calculation of
the price to be paid on any particular exercise of the redemption mechanism.
The performance fee is only paid when the Company implements the redemption mechanism as detailed in note 12.
During the year ended 30 September 2022, the Company recognised the reversal of the performance fees accrued
as at 30 September 2021 of £897,281 (30 September 2021: the Company recognised performance fees expense
of £2,068,808). As at 30 September 2022, no performance fees were accrued (30 September 2021: £897,281) as
the Company’s NAV total return performed unfavourably against the benchmark during the performance period and
no performance fees were paid as there were no redemptions during the period (30 September 2021: £2,217,955).
Refer to the Financial Highlights and Performance Summary for details of the Company’s previous redemptions on
page 4.
5. Operating expenses Year ended
30 September
2022
Year ended
30 September
2021
£ £
Administration fees 129,545 159,282
Directors’ fees 134,199 144,387
AIFM fees 58,000 58,098
Audit fees 57,000 50,436
Transaction fees 23,121 55,208
Broker fees 39,889 36,667
Custody fees 16,588 24,321
Non-audit fees 21,500 19,070
Registrar fees 21,056 14,624
Legal and professional fees 11,275 4,791
Sundry expenses 77,407 69,483
Total operating expenses 589,580 636,367
Non-audit fees
Non-audit fees incurred during the year ended 30 September 2022 relating to interim review services amounted to
£21,500 (30 September 2021: £19,070). Non-audit fees payable as at 30 September 2022 were £nil (30 September
2021: £nil).
AIFM fee
On 21 October 2014, the Company signed an AIFM agreement, which was subsequently amended on 1 September
2020. The AIFM is entitled to an annual xed fee of £58,000 per annum.
The annual xed fee is paid quarterly in arrears. There were no AIFM fees payable as at 30 September 2022 (30
September 2021: £nil). The AIFM agreement can be terminated by either the Company or the AIFM by giving the
other not less than ninety days’ written notice or on immediate notice on the occurrence of certain “cause” events.
Custody fee
On 21 October 2014, the Company signed a Global Custody Agreement with the AIFM and the Administrator,
whereby the Company appointed the Administrator to carry out custodian services. In its role as custodian, the
Administrator is entitled to a fee payable by the Company on a transaction by transaction and ad-valorem fee basis.
Custody fees payable as at 30 September 2022 were £708 (30 September 2021: £1,212).
63
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
5. Operating expenses (continued)
Registrar fee
The Company’s registrar is Computershare Investor Services (Guernsey) Limited. The registrar is entitled to an
annual maintenance fee plus disbursements.
Administration fee
On 21 October 2014, the Company signed an agreement with the Administrator to provide administrative,
compliance oversight and company secretarial services to the Company. Under the administration agreement, the
Administrator is entitled to a minimum annual xed fee paid monthly in arrears. Ad hoc other administration services
are chargeable on a time cost basis. In addition, the Company will reimburse the Administrator for any out of pocket
expenses. Administration fees payable as at 30 September 2022 were £7,083 (30 September 2021: £9,319).
Broker fee
Singer Capital Markets Advisory LLP (“Singer”) provide corporate stockbroker and nancial adviser services to the
Company, as the Company’s sole broker. Singer is entitled to a fee payable by the Company of £40,000 per annum
payable quarterly in advance. There were no broker fees payable as at 30 September 2022 (30 September 2021:
£nil).
In addition, Singer was entitled to a one-off bonus fee contingent upon the average daily discount over the three
months to 31 December 2021. The bonus would have been payable to Singer only if the Company’s average daily
discount was no greater than 8% during this period; with a maximum bonus payable to Singer of £11,800 per
annum, should the Company’s shares be trading at a premium during this period, reduced accordingly if the average
daily discount lies between 8% and 0% during this period. There were no bonus fees incurred or payable as at 30
September 2022 (30 September 2021: £nil).
6. Directors’ fees and interests
Directors fees are listed in the Directors’ Remuneration Report on page 45.
Directors’ fees payable as at 30 September 2022 were £31,109 (30 September 2021: £37,052). No pension
contributions were payable in respect of the Directors. Directors’ fees were increased post year end, refer to note
16 for further details.
The Directors held the following number of Ordinary Shares in the Company:
Director Ordinary Shares held
30 September 2022 30 September 2021
Andrew Chapman 15,009 15,009
Trudi Clark 8,353 8,353
Mark Hodgson 7,721 7,721
Stephen Coe
1
n/a 4,000
Charlotte Denton
2
- n/a
John Blowers
3
1,772 n/a
1
– Stephen Coe retired as a Director on 31 August 2022
.
2
– Charlotte Denton was appointed as a Director on 1 September 2022.
3
– John Blowers was appointed as a Director on 1 August 2022.
64
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
7. Other receivables 30 September
2022
30 September
2021
£ £
Dividend receivable 78,450 71,144
Prepayments 7,348 6,777
Interest and other receivable 6,883 464
Total other receivables 92,681 78,385
The Directors believe that these balances are fully recoverable and therefore have not recognised any loss allowance
on 12-month expected credit losses.
8. Financial assets designated at fair value through profit or loss
30 September
2022
30 September
2021
£ £
Financial assets designated at fair value through profit or loss 56,027,223 102,125,227
The Company has invested in a portfolio of UK micro-cap companies in line with its investment strategy. These
investments are comprised of companies whose securities are admitted to trading on the AIM, with a free oat
market capitalisation of less than £100 million at the time of purchase.
Fair value hierarchy
IFRS 13 ‘Fair Value Measurement’ requires an analysis of investments valued at fair value based on the reliability and
signicance of information used to measure their fair value.
The Company categorises its nancial assets according to the following fair value hierarchy detailed in IFRS 13 that
reects the signicance of the inputs used in determining their fair values:
Level 1:
Quoted market price (unadjusted) in an active market for an identical instrument.
Level 2:
Valuation techniques based on observable inputs, either directly (i.e., as prices) or indirectly (i.e., derived
from prices). This category includes instruments valued using: quoted market prices in active markets for similar
instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or
other valuation techniques where all signicant inputs are directly or indirectly observable from market data.
Level 3:
Valuation techniques using signicant unobservable inputs. This category includes all instruments where
the valuation technique includes inputs not based on observable data and the unobservable variable inputs have a
signicant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted
prices for similar instruments where signicant unobservable adjustments or assumptions are required to reect
differences between the instruments.
30 September 2022
Level 1 Level 2 Level 3 Total
Financial assets £ £ £ £
Financial assets designated at fair value
through prot or loss 56,027,223 - - 56,027,223
30 September 2021
Level 1 Level 2 Level 3 Total
Financial assets £ £ £ £
Financial assets designated at fair value
through prot or loss 102,125,227 - - 102,125,227
65
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
8. Financial assets designated at fair value through profit or loss (continued)
Financial assets designated at fair value through profit or loss reconciliation
The following table shows a reconciliation of all movements in the fair value of nancial assets categorised within
Level 1 to 3 between the beginning and the end of the reporting period:
30 September 2022 Level 1 Level 2 Level 3 Total
£ £ £ £
Opening valuation 102,125,227 - - 102,125,227
Purchases during the year 18,890,152 - - 18,890,152
Sales - proceeds during the year (10,983,393) - - (10,983,393)
Realised loss on nancial assets designated
at fair value through prot or loss
1
Unrealised loss on nancial assets
designated at fair value through prot or loss
2
(52,652,754) - - (52,652,754)
Closing valuation 56,027,223 - - 56,027,223
Total net loss on nancial assets for the year
ended 30 September 2022 (54,004,763) - - (54,004,763)
During the year ended 30 September 2022, there were no reclassications between levels of the fair value hierarchy.
30 September 2021 Level 1 Level 2 Level 3 Total
£ £ £ £
Opening valuation 92,934,986 - - 92,934,986
Purchases during the year 23,530,789 - - 23,530,789
Sales - proceeds during the year (67,595,180) - - (67,595,180)
Realised gain on nancial assets designated
at fair value through prot or loss
3
Unrealised gain on nancial assets
designated at fair value through prot or loss
4
20,273,316 - - 20,273,316
Closing valuation 102,125,227 - - 102,125,227
Total net gain on nancial assets for the year
ended 30 September 2021 53,254,632 - - 53,254,632
During the year ended 30 September 2021, there were no reclassications between levels of the fair value hierarchy.
Please refer to note 2.3 for valuation methodology of nancial assets designated at fair value through prot or loss.
As at 30 September 2022, none of the investments held are deemed to be illiquid in nature and on this basis are not
subject to any special arrangements.
1
– Realised loss on nancial assets designated at fair value through prot or loss is made up of £3,109,290 gain and £(4,461,299) loss.
2
– Unrealised loss on nancial assets designated at fair value through prot or loss is made up of £1,738,932 gain and £(54,391,686) loss.
3
– Realised gain on nancial assets designated at fair value through prot or loss is made up of £37,042,565 gain and £(4,061,250) loss.
4
– Unrealised gain on nancial assets designated at fair value through prot or loss is made up of £34,324,776 gain and £(14,051,460) loss.
66
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. Financial risk management
The Company’s activities expose it to a variety of nancial risks; market risk (including price risk, interest rate risk
and foreign currency risk), credit risk and liquidity risk.
9.1 Market risk
a) Price risk
Price risk is the risk that the Company’s performance will be adversely affected by changes in the markets in which
it invests.
As at 30 September 2022, the Company held investments in a diversied portfolio of UK micro-cap companies,
comprising companies with a free oat market capitalisation of less than £100 million at the time of purchase. The
relatively small market capitalisation of micro-cap companies can make the market in their shares illiquid. Therefore
prices of UK micro-cap companies are often more volatile than prices of larger capitalisation stocks, and even small
cap companies.
While the Company does not include any specic limits placed on exposures to any industry sector, the Company
does have investment limits and risk diversication policies in place to mitigate market and concentration risk.
Investments limits in place include:
•
the number of holdings in the investment portfolio will usually range from 30 to 50.
•
no exposure in any investee company will exceed 10% of NAV at the time of the investment.
However, any signicant event which affects a specic industry sector in which the investment portfolio has a
signicant holding could materially and adversely affect the performance of the Company. To mitigate market risk,
the Board and Portfolio Manager actively monitor market prices throughout the nancial period and meet regularly
in order to consider investment strategy.
Please refer below for sensitivity analysis on the impact on the Statement of Comprehensive Income and NAV of the
Company, if the fair value of the investments designated at fair value through prot or loss at the year end increased
or decreased by 25% (2021: 15%):
30 September 2022 Increase by
25%
Decrease by
25%
£ £ £
Financial assets
Financial assets designated at fair
value through prot or loss 56,027,223 14,006,806 (14,006,806)
30 September 2021 Increase by
15%
Decrease by
15%
£ £ £
Financial assets
Financial assets designated at fair
value through prot or loss 102,125,227 15,318,784 (15,318,784)
The Directors consider a 25% (2021: 15%) movement to be reasonable given their assessment of the volatility of
the AIM market during the year ended 30 September 2022. The above calculations are based on the investment
valuation at the Statement of Financial Position date and are not representative of the period as a whole, and may
not be reective of future market conditions.
67
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. Financial risk management (continued)
9.1 Market risk (continued)
b) Interest rate risk
Interest rate risk is the risk that the fair value of nancial instruments and related income from cash and cash
equivalents will uctuate due to changes in market interest rates.
The majority of the Company’s interest rate exposure arises on the level of income receivable on cash deposits.
Financial assets designated at fair value through prot or loss are equity investments and therefore the valuation of
these investments and income receivable is not directly exposed to interest rate risk.The Company has not had any
borrowings during the year (30 September 2021: £nil). The table below details the Company’s exposure to interest
rate risks:
30 September 2022 Interest bearing
(*)
Non-interest
bearing
Total
£ £ £
Assets
Financial assets designated at fair
value through prot or loss - 56,027,223 56,027,223
Cash and cash equivalents 2,289,617 - 2,289,617
Other receivables (excluding prepayments) - 85,333 85,333
Total assets 2,289,617 56,112,556 58,402,173
Liabilities
Trade payables – securities purchased
awaiting settlement
- (433,561) (433,561)
Other payables - (136,219) (136,219)
Total liabilities - (569,780) (569,780)
Total interest sensitivity gap 2,289,617 55,542,776 57,832,393
*
– oating rate and due within 1 month
30 September 2021 Interest bearing
(*)
Non-interest
bearing
Total
£ £ £
Assets
Financial assets designated at fair
value through prot or loss - 102,125,227 102,125,227
Cash and cash equivalents 10,156,557 - 10,156,557
Other receivables (excluding prepayments) - 71,608 71,608
Total assets 10,156,557 102,196,835 112,353,392
Liabilities
Other payables - (1,073,602) (1,073,602)
Total liabilities - (1,073,602) (1,073,602)
Total interest sensitivity gap 10,156,557 101,123,233 111,279,790
*
– oating rate and due within 1 month
68
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. Financial risk management (continued)
9.1 Market risk (continued)
b) Interest rate risk (continued)
Interest rate sensitivity analysis
If interest rates had changed by 100 basis points (“BP”) (30 September 2021: 50 BP), considered to be a reasonable
illustration based on observation of current market conditions, with all other variables remaining constant, the effect
on the net prot for the year would be as detailed below:
30 September
2022
30 September
2021
£ £
Increase of 100 BP (30 September 2021: 50 BP) 22,896 50,783
Decrease of 100 BP (30 September 2021: 50 BP) (22,896) (50,783)
c) Foreign currency risk
Foreign currency risk is the risk that the values of the Company’s assets and liabilities are adversely affected by
changes in the values of foreign currencies by reference to the Company’s functional currency, being Pound Sterling.
The Company has not been exposed to any material foreign currency risk during the year.
During the year ended 30 September 2022 and 30 September 2021, all transactions were in Pound Sterling, with
the exception of several dividend income and cash transactions which were in USD. Although the Company does
not pursue a policy of hedging such currencies back to Pound Sterling, it may do so from time to time, depending
on market conditions. During the year ended 30 September 2022, the Company did not enter into (30 September
2021: nil) currency purchase spot contracts to mitigate the foreign currency exposure.
As at 30 September 2022, USD cash in the sum of $37,346 (30 September 2021: $126,524) was held and income
receivable was $52,000 (30 September 2021: $49,200). Any reasonable change in foreign exchange rates will have
an immaterial impact and therefore no sensitivity analysis has been provided.
9.2 Credit risk
Credit risk is the risk that a counterparty to a nancial instrument will fail to discharge an obligation or commitment
that it has entered into with the Company. The Board of Directors has in place monitoring procedures in respect of
counterparty risk which is reviewed on an ongoing basis.
The Company’s credit risk is attributable to its cash and cash equivalents, trade receivables – securities sold awaiting
settlement and other receivables.
At the reporting date, the Company’s nancial assets exposed to credit risk amounted to the following:
30 September
2022
30 September
2021
£ £
Cash and cash equivalents 2,289,617 10,156,557
Other receivables (excluding prepayments) 85,333 71,608
Total assets 2,374,950 10,228,165
All cash is placed with BNP Paribas S.A., Guernsey Branch.
BNP Paribas S.A., Guernsey Branch is publicly traded with a credit rating of A+ (2021: A+) from Standard & Poor’s.
Credit risk of cash and custodian is mitigated by the Company’s policy to only undertake signicant transactions
with leading commercial counterparties.
69
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. Financial risk management (continued)
9.2 Credit risk (continued)
All transactions in listed securities are settled for upon delivery using approved brokers. The risk of default is
considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is
made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to
meet its obligation.
The nancial assets designated at fair value through prot or loss are held by BNP Paribas S.A., Guernsey Branch,
the Company’s custodian, in a segregated account. In the event of bankruptcy or insolvency of the Administrator, in
its role as the Company’s custodian, the Company’s rights with respect to the securities held by the custodian may
be delayed or limited. The Company did not participate in stock lending during the year.
The Company measures credit risk and expected credit losses using probability of default, exposure at default and
loss given default. Management consider both historical analysis and forward looking information in determining
any expected credit loss. At 30 September 2022 and 30 September 2021, management consider the probability of
default to be close to zero as the counterparties have a strong capacity to meet their contractual obligations in the
near term. As a result, no loss allowance has been recognised based on 12-month expected credit losses as any
such impairment would be wholly insignicant to the Company.
9.3 Liquidity risk
Liquidity risk is the risk that the Company will encounter difculties in realising assets or otherwise raising funds to
meet nancial commitments as and when these fall due for payment. Liquidity risk is monitored on an ongoing basis
by the Board of Directors and Portfolio Manager to ensure that the Company maintains sufcient working capital
in cash or near cash form to be able to meet the Company’s ongoing requirements to pay accounts payable and
accrued expenses.
In addition, the Company’s liquidity management policy involves projecting cash ows and considering the level of
liquid assets necessary to ensure the Company remains a going concern. The Company’s investments all comprise
of investments in companies whose securities are admitted to trading on AIM. The Company would expect to be
able to liquidate a sufcient number of investments within 7 days or less in the event cash was required to cover
expenses.
The tables below show the residual contractual maturity of the nancial liabilities:
Maturity analysis of financial liabilities
30 September 2022 Less than 3
months
3 to 12
months
More than 1
year Total
£ £ £ £
Financial liabilities
Trade payables – securities
purchased awaiting settlement (433,561) - - (433,561)
Other payables and accruals (136,219) - - (136,219)
Total undiscounted financial liabilities
(569,780) - - (569,780)
30 September 2021 Less than 3
months
3 to 12
months
More than 1
year Total
£ £ £ £
Financial liabilities
Other payables and accruals
1
(176,321) (897,281) - (1,073,602)
Total undiscounted financial liabilities
(176,321) (897,281) - (1,073,602)
1
– Included in other payables is a performance fee payable of £897,281. Please refer to note 4 for further details regarding calculation of
performance fee.
70
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. Financial risk management (continued)
9.3 Liquidity risk (continued)
In accordance with Article 23(4) (a) and (b) of AIFMD Directive, the AIFM has assessed that the nancial assets
designated at fair value through prot or loss held by the Company are not deemed to be illiquid in nature, and as
such, are not subject to any special liquidity arrangements and that the AIF has no new arrangements in place for
managing liquidity.
10. Other payables and accruals 30 September
2022
30 September
2021
£ £
Portfolio performance fees (note 4) - 897,281
Portfolio management fees 35,677 69,197
Audit fees 57,000 50,779
Directors
’
fees 31,109 37,052
Administration fees 10,000 12,236
Registrar fees 1,000 1,000
Custody fees 708 1,212
Sundry expenses 725 4,845
Total other payables and accruals 136,219 1,073,602
11. Contingent liabilities and commitments
As at 30 September 2022, the Company had no contingent liabilities or commitments (30 September 2021: nil).
12. Stated capital and share premium
Authorised
The authorised share capital of the Company is represented by an unlimited number of redeemable Ordinary Shares
at no par value.
Allotted, called up and fully-paid
Ordinary Shares Number of
shares
Stated
capital
£
Share
premium
£
Total issued share capital as at 1 October 2021 33,897,954 - -
Ordinary Shares redeemed during the year - - -
Total issued share capital as at 30 September 2022 33,897,954 - -
Number of
shares
Stated
capital
£
Share
premium
£
Total issued share capital as at 1 October 2020 46,445,043 - 28,391,852
Ordinary Shares redeemed during the year (12,547,089) - (28,382,545)
Ordinary Shares redemption costs - - (9,307)
Total issued share capital as at 30 September 2021 33,897,954 - -
Each holder of Ordinary Shares is entitled to attend and vote at all general meetings that are held by the Company.
Each holder is also entitled to receive payment of a dividend should the Company declare such a dividend payment.
Any dividends payable by the Company will be distributed to the holders of the Company’s Ordinary Shares, and
on the winding-up of the Company or other return of capital (other than by way of a repurchase or redemption of
shares in accordance with the provisions of the Articles and the Companies Law), the Company’s surplus assets,
after payment of all creditors, will be distributed among the holders of the Company’s Ordinary Shares.
71
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
12. Stated capital and share premium (continued)
The Board anticipates that returns to Shareholders will be made through the Company’s redemption mechanism
and therefore does not expect that the Company will pay any dividends.
No dividends have been declared or paid during the year (30 September 2021: nil).
Issuance of Ordinary Shares
No Ordinary Shares were issued during the year ended 30 September 2022 (30 September 2021: nil Ordinary Shares
issued).
Redemption mechanism
As the Company has been established as a closed-ended collective investment scheme, there is no right or
entitlement attaching to the Ordinary Shares that allows them to be redeemed or repurchased by the Company at
the option of the Shareholder.
The redemption mechanism allows the Board to redeem any number of shares at the prevailing NAV per share at the
calculation date, (being the date determined by the Board for the calculation of the price to be paid on any particular
exercise of the redemption mechanism), less the cost of redemption. This right will only be exercised in specic
circumstances and for the purpose of returning capital growth.
Accordingly, assuming that the NAV exceeds £100 million, the Directors intend to operate the redemption mechanism
to return the NAV back to around £100 million in order to:
•
enable the Company to exploit fully the underlying investment opportunity and to deliver high and sustainable
returns to Shareholders, principally in the form of capital gains;
•
enable portfolio holdings to have a meaningful impact on the Company’s performance, which might otherwise
be marginal within the context of a larger fund; and
•
ensure that the Company can continually take advantage of the illiquidity risk premium inherent in micro-cap
companies.
The Directors are not obliged to operate the redemption mechanism and will not do so if:
•
calculation and publication of the NAV has been suspended; or
•
the Directors are unable to make the solvency statement required by Guernsey law; or
•
other circumstances exist that the Board believes make the operation of the redemption mechanism undesirable
or impracticable.
Redemptions will, subject to compliance with all applicable law and regulation, be carried out pro rata to a
Shareholder’s holding of Ordinary Shares, but all redemptions will normally be subject to a de minimis value to be
returned of approximately £10 million (before costs). The Company will not redeem fractions of shares.
Redemptions will be recognised against the reserves of The Company. The share premium reserve is and has
historically been used to recognise The Company’s share redemptions. Any redemptions over and above this
reserve will be recognised against retained earnings.
The price at which any Ordinary Shares are redeemed under the redemption mechanism will be calculated by
reference to unaudited NAV calculations. To the extent that any redemption takes place at a time when the Ordinary
Shares are trading at a signicant premium to the prevailing unaudited NAV, Shareholders may receive an amount
in respect of their redeemed Ordinary Shares that is materially below the market value of those shares prior to
redemption.
In order to facilitate any redemptions, the Company may be required to dispose of assets within the investment
portfolio. There is no certainty of the price that can be achieved on such sales and any sale price could be materially
different from the carrying value of those assets. Consequently, the value received in respect of redeemed Ordinary
Shares may be adversely affected where the Company is not able to realise assets at their carrying values. In
addition, during any period when the Company is undertaking investment portfolio realisations, it may hold the sale
proceeds (which could, in aggregate, be a material amount) in cash, which could impact the Company’s returns,
until the redemption is implemented and the cash is distributed to Shareholders.
72
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
12. Stated capital and share premium (continued)
Redemption mechanism (continued)
Investors should note that the redemption mechanism has a specic and limited purpose, and no expectation or
reliance should be placed on the redemption mechanism being operated on any one or more occasions or as to
the proportion of Ordinary Shares that may be redeemed or as to the price at which they will be redeemed. The
redemption mechanism may also lead to a more concentrated and less liquid portfolio, which may adversely affect
the Company’s performance and value.
In the absence of the availability of the redemption mechanism, Shareholders wishing to realise their investment in
the Company will be required to dispose of their shares on the stock market. Accordingly, Shareholders’ ability to
realise their investment at any particular price and/or time may be dependent on the existence of a liquid market in
the shares.
13. Basic and diluted (loss)/earnings per Ordinary Share
Year ended
30 September
2022
Year ended
30 September
2021
£ £
Total comprehensive (loss)/income for the year (53,446,826) 50,680,393
Weighted average number of Ordinary Shares during the year 33,897,954 39,905,041
Basic and diluted earnings per Ordinary Share (1.5767) 1.2700
14. NAV per Ordinary share
30 September
2022
30 September
2021
£ £
NAV
57,839,741 111,286,567
Number of Ordinary Shares at year end 33,897,954 33,897,954
NAV per Ordinary Share 1.7063 3.2830
15. Related party disclosure
The AIFM
The AIFM is a related party and is entitled to an annual xed fee as disclosed in note 5. Mark Hodgson is the
Managing Director of the AIFM.
The Portfolio Manager
The Portfolio Manager is a related party and is entitled to management and performance fees as disclosed in note 4.
The Portfolio Manager and George Ensor held the following voting rights in the Company:
30 September 2022 30 September 2021
Portfolio Manager 3,100,230 3,000,230
George Ensor 60,041 43,791
The Directors
The Directors are entitled to remuneration for their services and also hold Ordinary Shares in the Company as
disclosed in note 6.
All transactions between these related parties and the Company were conducted on terms equivalent to those
prevailing in an arm’s length transaction.
73
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
16. Material events after the Statement of Financial Position date
There were no events which occurred subsequent to the year end until the date of approval of the annual nancial
statements, which would have a material impact on the annual nancial statements of the Company as at 30
September 2022.
On 5 October 2022, the Board approved an increase in the annual basic Director fees of 2.5% effective from 1
January 2022.
17. Controlling party
In the Directors’ opinion, the Company has no ultimate controlling party.
74
USEFUL INFORMATION FOR SHAREHOLDERS
Alternative performance measures disclosure
In accordance with the European Securities and Markets Authority Guidelines on Alternative Performance Measures
(“APMs”) the Board has considered what APMs are included in the Annual Financial Report and nancial statements
which require further clarication. APMs are dened as a nancial measure of historical or future nancial performance,
nancial position, or cash ows, other than a nancial measure dened or specied in the applicable nancial
reporting framework. The Audit Committee reviewed the overall presentation of APMs, which remains consistent
with the prior year, with the exception of the removal of the historic Ordinary Share price to NAV discount/premium
infographic. The Ordinary Share price discount performance metric has been presented for the nancial year and
comparative period. The Audit Committee is satised that no APMs were given undue prominence in the Company’s
Annual Financial Report and nancial statements. APMs included in the nancial statements, which are unaudited
and outside the scope of IFRS, are deemed to be as follows:
Performance since inception
The NAV total return measures how the NAV per Ordinary Share has performed over a period of time, taking into
account of capital returns. The Company quotes NAV total return as a percentage change from the beginning of
the nancial year or initial issuance of Ordinary Shares to 30 September 2022. The Company has not declared a
dividend since inception.
The Board monitors the Company NAV total return against the Numis Smaller Companies plus Alternative Investment
Market (“AIM”) (excluding Investment Companies) Index.
Please refer to page 3 for NAV total return vs Index total return analysis.
NAV to market price discount / premium
The NAV per share is the value of all the Company’s assets, less any payables it has, divided by the total number of
Ordinary Shares. However, because the Company’s Ordinary Shares are traded on the London Stock Exchange’s
Main Market, the share price may be higher or lower than the NAV. The difference is known as a discount or premium.
The Company’s discount / premium to NAV is calculated by expressing the difference between the Ordinary Share
price (bid price)
1
and the NAV per share on the same day compared to the NAV per share on the same day.
At 30 September 2022, the Company’s Ordinary Shares traded at £1.3600 (2021: £2.8000), reecting a discount of
(20.29)% (2021: discount of (14.71)%) to the NAV per Ordinary Share of £1.7063 (2021: £3.2830).
Ongoing charges
The ongoing charges ratio for the year ended 30 September 2022 was 1.39% (2021: 1.29%). The AIC’s methodology
for calculating an ongoing charges gure is based on annualised ongoing charges of £1,197,244 (2021: £1,412,148)
divided by average NAV in the period of £86,321,192 (2021: £109,661,967).
Calculating ongoing charges
The ongoing charges are based on actual costs incurred in the year excluding any non-recurring fees in accordance
with the AIC methodology. Expense items have been excluded in the calculation of the ongoing charges gure when
they are not deemed to meet the following AIC denition:
“Ongoing charges are those expenses of a type which are likely to recur in the foreseeable future, whether charged
to capital or revenue, and which relate to the operation of the investment company as a collective fund, excluding
the costs of acquisition/disposal of investments, financing charges and gains/losses arising on investments. Ongoing
charges are based on costs incurred in the year as being the best estimate of future costs.”
1
– Source: Bloomberg
75
USEFUL INFORMATION FOR SHAREHOLDERS (CONTINUED)
Ongoing charges (continued)
Please refer below for ongoing charges reconciliation for the years ended 30 September 2022 and 30 September
2021:
30 September
2022
£
30 September
2021
£
Total expenses for the year: 289,069 3,531,324
Expenses excluded from the calculation of ongoing charges
gures, in accordance with AIC’s methodology:
Portfolio Performance fees recovery/(expense) 897,281 (2,068,808)
Transaction fees (23,121) (55,208)
Foreign exchange gains 34,015 4,840
Total ongoing charges for the year 1,197,244 1,412,148
Calculating an average NAV
The AIC’s methodology for calculating average NAV for the purposes of the ongoing charges gure is to use the
average of NAV at each NAV calculation date. On this basis the average NAV gure has been calculated using the
daily NAVs over the years ended 30 September 2022 and 30 September 2021.
76
COMPANY INFORMATION
Board members
Andrew Chapman
(Chairman)
Trudi Clark
(Chair of the Remuneration and Nomination
Committee and Management Engagement Committee)
Mark Hodgson
John Blowers
Appointed 1 August 2022
Charlotte Denton
(Chair of the Audit Committee)
Appointed 1 September 2022
Stephen Coe
(Chair of the Audit Committee)
Retired from the Board on 31 August 2022
Advocates to the Company (as to Guernsey law)
Carey Olsen
P.O. Box 98
Carey House
Les Banques
St Peter Port
Guernsey
GY1 4BZ
Registered Office
BNP Paribas House
St Julian’s Avenue
St Peter Port
Guernsey
GY1 1WA
Custodian
BNP Paribas S.A., Guernsey Branch
1
BNP Paribas House
St Julian’s Avenue
St Peter Port
Guernsey
GY1 1WA
Portfolio Manager
River and Mercantile Asset Management LLP
30 Coleman Street
London
EC2R 5AL
Independent Auditor
PricewaterhouseCoopers CI LLP
PO Box 321
Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey
GY1 4ND
Manager
Carne Global AIFM Solutions (C.I.) Limited
Channel House
Green Street
St Helier
Jersey
JE2 4UH
Administrator and Company Secretary
BNP Paribas S.A., Guernsey Branch
1
BNP Paribas House
St Julian’s Avenue
St Peter Port
Guernsey
GY1 1WA
Corporate Broker
Singer Capital Markets Advisory LLP
One Bartholomew Lane
London
EC2N 2AX
Registrar
Computershare Investor Services (Guernsey) Limited
1
st
Floor, Tudor House
Le Bordage
St Peter Port
Guernsey
GY1 1DB
Solicitors to the Company (as to English law)
CMS Cameron McKenna Nabarro Olswang LLP
Cannon Place
78 Cannon Street
London
EC4N 6AF
1
– BNP Paribas S.A., Guernsey Branch is regulated by the GFSC.
