22 Jul 2014 17:28
The World Trust Fund
Audited Annual Report March 31st, 2014
The full Annual Report and Accounts can be accessed via the following website: www.theworldtrustfund.com
Financial Highlights for the year ended March 31st, 2014
US$ | £ | |
Increase in Net Asset Value per share | Basic: 10.1% | Basic: 0.3% |
Diluted: 10.7% | Diluted: 0.9% | |
Increase in MSCI AC World Index | 16.6% | 6.2% |
Increase in MSCI AC World Index (ex US) | 12.3% | 2.3% |
Net Asset Value per share | Basic: 4.28 | Basic: 2.57 |
as at March 31st, 2014 | Diluted: 4.16 | Diluted: 2.49 |
Increase in Share Price | 8.2% | -1.4% |
Share Price as at | ||
March 31st, 2014 | 3.60 | 2.16 |
Total Net Assets as at | ||
March 31st, 2014 | 170.5m | 102.3m |
Discount to Net Asset Value as at | ||
March 31st, 2014 | -13.4% | -13.4% |
Investment Objective
The Fund seeks to achieve long-term capital appreciation by investing primarily in companies whose shares trade at a discount to the underlying net asset value. The Fund measures its performance against the MSCI AC World Index. The fund invests in a diversified portfolio of investment companies, including closed-end funds, investment trusts, holding companies and similarly traded companies, thereby spreading investment risk and reducing stock specific risk.
Investment Policy
Asset Allocation
The Fund invests in closed-end funds, investment trusts, holding companies and other similarly traded companies whose shares are listed or traded on international exchanges and are generally at a discount to their underlying net asset value. The Fund seeks actively to encourage boards and management teams to take steps to enhance shareholder value and seeks to take a constructive and active role to help reduce the discount at which the shares of the underlying companies trade.
Risk Diversification
The Fund seeks to provide broad exposure to the markets through holding a diversified portfolio of closed-end investment companies, including investment trusts, holding companies and entities with comparable structures.
Gearing and Hedging
The Fund may use gearing (the ability to borrow), and the level of gearing may vary from time to time. The Board has authorised the Manager to use gearing up to 15% of the Fund's Net Asset Value. In future the Board may determine to increase the amount of gearing that the Manager is authorised to use to an amount not to exceed 25% of the Fund's Net Asset Value. Shareholders should note that gearing increases the scale of any profits or losses.
The Fund is permitted to seek to hedge long positions by selling short stock indices, stocks, and shares of exchange traded funds or closed-end funds up to 100% of the Fund's Net Asset Value. The Fund may also hedge its currency exposure against the US Dollar. Shareholders should note that the use of such techniques involves risks, including the risk of complete loss of value of any short position.
Chairman's Statement
Introduction
I am pleased to present the annual report for The World Trust Fund for the year ended March 31st, 2014. The Fund's diluted net asset value at year-end of $4.16 represents an increase of 10.5% on the previous year-end close of $3.76.
You will read in the manager's report that strong performance in the U.S., Europe and Japan combined with relatively poor performance in emerging markets, where the Fund has a significant level of investment, resulted in under-performance relative to the benchmark, The MSCI All Country World Index. It is important to note that, with the Board's approval, the Fund is invested in a concentrated high-conviction portfolio. In addition, the portfolio is not managed with the objective of closely following benchmark weightings. This means that at any specific point in time, the country holdings in the portfolio may differ significantly from those of the benchmark, resulting in under or over-performance relative to the benchmark, neither of which may be instructive in evaluating the performance of the Fund. In the year under review the benchmark increased by 16.6%.
The Fund has engaged in several corporate actions during this past year as well as the preceding three years, designed either to manage the level of discount at which the Fund's shares trade to net asset value, or to increase the asset base of the Fund, and I refer to each in greater detail below.
Discount control
Since May 2010 when the Board first adopted a formal discount control mechanism, the Fund has repurchased a total of 30.6 million shares at a cost of $105.3 million. This includes $49.8 million for market buybacks and $55.5 million by way of tender offers in both 2013 and 2014. While repurchases and tender offers have had some short-term impact on the discount, the discount has tended towards a market level of comparable funds in the global growth sector, a reflection primarily of the Fund's liquidity and demand for the shares. In addition, as a result of the discount control measures, the total net asset value of the Fund has now fallen to approximately £100 million.
The Board has devoted considerable time over several years evaluating the efficacy of the Fund's discount control measures. It has considered the impact on the discount of the buy-backs and tender offers, the decrease in the asset level of the Fund as a result of the repurchases and the likely impact on the discount of continuing a discount control mechanism with actions based on specific tests applied at specific times. In addition as previously stated, because of the concentrated high-conviction nature of the portfolio and the fact that it is not managed with an intent to correlate to a benchmark, specific benchmark-relative performance trigger levels are therefore of questionable value. The Board has also had concerns for some time about missing attractive market opportunities at times of widening discounts.
The Board has therefore decided to continue with its policy of seeking annual authority to acquire up to 14.99% of its shares through market purchases although any proposals for future tender offers will be at the discretion of the Board which will take into account factors such as the level of discount at which the Fund has traded the performance of the Fund and the views of shareholders. To that end, the Board will continue to have conversations from time-to-time with shareholders on the effectiveness of the discount control measures. It should also be noted that The World Trust Fund is one of the few funds in the global growth sector to have an annual continuation vote, thereby providing shareholders with the opportunity to vote on the future of the Fund each year.
Exercise of warrants
With regard to increasing the asset base of the Fund, I am pleased to report that the Fund received proceeds of $27.4 million on the final subscription date of March 31st, 2014. This followed proceeds of $9.7 million received on the March 31st, 2013 subscription date bringing the total proceeds from the warrant, issued by way of a bonus issue in 2011, to $37.1 million. The Board from time to time will consider whether additional warrant offers would be in the best interests of the Fund and shareholders.
Payment of dividends
Although the Fund's primary investment objective is to achieve long term-capital appreciation, the income the Fund receives from its investments has usually covered the Fund's operating costs (excluding performance fees). While dividend yields of comparable funds in the global growth sector tend to be relatively small, the Fund is among a very small minority of funds which pay no dividend at all. Indeed, we have been asked on a number of occasions why the Fund does not pay a dividend.
The Board therefore has resolved, for the first time in the Fund's history, to commence the payment of a dividend of substantially all of the investment income, net of the Fund's operating costs (excluding performance fees). Any undistributed net investment income will be added to reserves and may be used to smooth future divided payments. It is expected that the first dividend will be declared at the time of the announcement of the results for the six months ending September 30th, 2014 with dividends being paid thereafter semi-annually, in January and August. It is important to note that the implementation of this policy will have no effect on the manager's mandate with respect to managing the portfolio.
Appointment of Edison Investment Research
In an effort to improve liquidity, the Board has appointed Edison Investment Research to develop a program to help expand awareness of the Fund, particularly among private client brokers and similar potential investors. It is expected that Edison's initiatives will be complementary to the work of the Fund's stockbroker, Westhouse Securities, as part of our efforts to increase awareness of the Fund and promote activity in the Fund's shares.
Benchmark
An additional issue that the Board has considered is the appropriateness of the current benchmark by which the Fund's performance is measured. As referred to above, the Fund is not managed with an intention to have a close correlation to either the current benchmark, the MSCI All Country World Index, or indeed to any benchmark. As an illustration, for a number of years the Fund has invested a substantial proportion of its assets in emerging markets, a small component of the current benchmark, and a relatively small proportion in the U.S, a very significant component of the benchmark. Over short periods the Fund's performance may differ very significantly from the benchmark although we would still expect the Fund to outperform over the long term.
The Fund last changed its benchmark in 2010 when it moved from the MSCI World Index (which had no emerging markets weighting) to the MSCI All Country World Index. While there is no index that can provide a highly correlated benchmark for the Fund, the Board considers that the MSCI All World ex U.S. would be a more appropriate reference index. As a result we are introducing the use of the MSCI All World ex U.S. as an additional reference index. You will see in this report our results compared to both our stated benchmark and this new reference index. Over the next year the Board will consider whether the official benchmark should be changed to reflect better the results of the Fund on a comparative basis.
Board Changes
Our longtime colleague on the Board and founder of the Fund, Alex Zagoreos, will be retiring at the Annual General Meeting this year. In addition to creating the initial design of the discount asset management strategy used by the Fund and being the portfolio manager of the Fund for many years, Alex has been an active member of the Board bringing a great depth of knowledge of markets and companies to our discussions. His contributions have been invaluable and his concerns for the shareholders have always been foremost in his observations and recommendations. We will miss Alex as a Board member and are happy that he has agreed to serve as Special Adviser to the Board which will allow us the opportunity to continue to have his good counsel and advice.
I am very pleased to advise you that the Board has nominated Tony C. Morrongiello for election as a Director at the Fund's Annual General Meeting in August. Tony brings a wealth of knowledge and experience in investment matters and a summary of his experience is set out in the Corporate Governance section of the Annual Report on page 25. We believe he will make an important contribution to the Board and look forward to him participating in our deliberations.
Outlook
We are optimistic about the future of the Fund and believe that it will continue to create value for investors. As always I welcome any correspondence from shareholders.
Philip R. McLoughlin
Chairman
July 22nd, 2014
Investment Review for the year ended March 31st, 2014
Manager's Review
Market Overview
Through the period under review, central banks continued to print money through policies of low interest rates and quantitative easing (QE) mechanisms. While such accommodative monetary policy is now partially being scaled down in the United States, it is seemingly increasing in Europe and Japan. The US market moved to new highs, followed by Europe, and Japan had one of the biggest rallies in years in the first half of the year. On the other hand, emerging markets, where the World Trust Fund is significantly overweight, fell during the period, resulting in the largest performance gap between emerging markets and developed markets in 10 years.
Despite increased geopolitical tension following events in the Ukraine, Egypt, Syria, Thailand, and disputes between China and its neighbours in the Far East, emerging markets continue to be the sector where we see attractive discounts, value, and the greatest promise.
Performance
For the 12-month period ended March 31st, 2014, the Fund's diluted NAV gained 10.5%, compared with a return of 16.6% rise of the MSCI All Country World Index, in US Dollar terms. The World Trust Fund share price, as traded on the London Stock Exchange, was up 8.1%. Significant contributing factors to the Fund's performance are as follows:
Regional Allocations and Stock Selections
The Fund was underweight in the developed markets, and had significant investments in emerging markets. Of the developed-market investments, the Fund was less than 15% invested in the United States, on average, compared to the benchmark US weighting of over 48%. As the US market soared over 30% in 2013, and emerging markets fell, this asset allocation hurt the Fund's relative returns. However, as an offset good stock selection, in general, helped performance. The Fund's investments in developed Europe and in diversified global and global emerging-market investment companies outperformed.
Corporate Action and Governance Initiatives
A number of our holdings have gone through corporate actions, all of which we see as positive and beneficial to the Fund.
World Trust Fund Performance (Annualised)*
Share Data to March 31st, 2014 | |||||
6 Months | 1 Year | 3 Years | 5 Years | 10 Years | |
Share Price (in £)* | -1.6% | -1.4% | 3.2% | 15.7% | 6.0% |
Diluted NAV (in £)* | 0.8% | 0.9% | 4.4% | 15.2% | 5.3% |
Share Price (in US$)** | 1.3% | 8.2% | 4.5% | 19.3% | 4.9% |
Diluted NAV (in US$) | 4.1% | 10.7% | 5.7% | 18.7% | 4.5% |
Undiluted NAV (in £) | 1.8% | 0.3% | 5.4% | 15.8% | 5.8% |
Undiluted NAV (in US$) | 4.8% | 10.1% | 6.8% | 19.4% | 4.8% |
* Annualised.
** Shown in US Dollars and converted using Foreign Exchange rate used by the Administrator.
World Trust Fund Share Price, NAV & Discount
Mar 31st, | Sep 30th, | Mar 31st, | |
2014 | 2013 | 2013 | |
Share Price (in £) | £2.16 | £2.20 | £2.19 |
Share Price (in US$) | $3.60 | $3.55 | $3.33 |
NAV Undiluted (in US$) | $4.28 | $4.09 | $3.89 |
NAV Diluted (in US$) | $4.16 | $3.99 | $3.76 |
NAV Undiluted (in £) | £2.57 | £2.52 | £2.56 |
NAV Diluted (in £) | £2.49 | £2.47 | £2.47 |
Discount to NAV | -13.4% | -11.0% | -11.3% |
Portfolio Review
The Fund is actively managed and concentrated in 35 holdings in the long portfolio, reflecting those where we have higher conviction, with the top 10 holdings representing over 50% of the Fund's assets.
% | |
Top 10 holdings as at March 31st, 2014 | Portfolio |
Eurazeo | 7.0% |
JPMorgan European Smaller | 6.6% |
General American Investors | 6.2% |
First Pacific Co. | 6.1% |
Citic Securities | 5.5% |
BB Biotech | 4.9% |
Tri-Continental | 4.3% |
JPMorgan Emerging Markets | 4.1% |
JP Morgan Japanese Investment Trust Plc | 3.8% |
Jardine Strategic | 3.6% |
Total | 52.1% |
Top 5 Contributors to Returns (NAV)
Company | Average PortfolioWeight (%) | Total Return(%) | Contribution to Return(%) |
Eurazeo | 5.6 | 89.7 | 3.8 |
JPMorgan European Smaller | 5.8 | 59.1 | 2.8 |
BB Biotech | 4.4 | 62.7 | 2.2 |
RCM Technology | 3.1 | 54.2 | 1.3 |
General American Investors | 6.2 | 19.6 | 1.2 |
Eurazeo was the largest contributor to returns. During the year it made five acquisitions and six disposals, restructured Europcar and Ellis, and went public with Moncler, an IPO the industry called the Grand Prix deal of the year. JP Morgan European Smaller, investing primarily in continental Europe, benefited from the European recovery and solid stock picking, as well as a tender offer and share buybacks. BB Biotech continues to be one of our best performers, helped by industry consolidations and new drug launches. RCM Technology rode the technology share recovery, with stellar returns from investments such as Google, Facebook, and Microsoft. General American, a long-term performer, continued to shine, with buybacks adding to shareholder returns.
Top 5 Detractors to Returns (NAV)
Company | Average PortfolioWeight (%) | Total Return(%) | Contribution to Return(%) |
First Pacific Co. | 7.6 | -23.8 | -2.3 |
Haci Omer Sabanci Holding | 1.6 | -34.8 | -0.7 |
China Everbright | 3.0 | -17.7 | -0.6 |
Jardine Strategic | 3.7 | -8.7 | -0.4 |
China Merchants China Direct | 2.7 | -10.7 | -0.3 |
First Pacific's discount dramatically widened to nearly 40%, amid investor concerns about geopolitical, regulatory, and currency risks. Similarly, Sabanci was hurt by Turkey's political uncertainty about Prime Minister Tayyip Erdogan's leadership and reported bribery scandals. China Everbright's brokerage business was hurt by a trading accident and regulatory fines, amid general investor pessimism about China. Jardine Strategic was negatively affected by investor concerns about commodity prices and macro uncertainty. China Merchants China Direct's discount is over 50%, with underlying shares trading at historic undervaluations.
Geographic Diversification
The Fund's most significant allocation remains Asia excluding Japan, on both an absolute and relative terms, driven by the Fund manager's view that underlying equity market valuations are attractive and the discounts compelling in this region. Conversely, the large underweight position in North America is reflective of the Fund manager's view that underlying equity market valuations and company discounts are relatively less attractive.
An illustration of the geographic allocation of the underlying holdings of the portfolio companies in which the Fund has invested on March 31st, 2014 can be found on page 11 of the Annual Report and Accounts.
Top Five Country Weights as of March 31 2014Country | World Trust FundPortfolio (%) | MSCI All Country World Index (%) |
United States | 13.7 | 49.0 |
Japan | 9.5 | 7.3 |
United Kingdom | 8.0 | 7.8 |
China | 7.4 | 2.0 |
France | 5.4 | 3.8 |
Regional and country allocations are the result of our bottom-up stock selection process, which is focused on identifying companies that trade at compelling discounts and owning assets that are undervalued. The above figures are the net exposure after allowing for portfolio hedging.
Emerging Markets
The Fund's investment process focuses on discounts, underlying valuation, and catalysts.
Discounts in Emerging Markets
We believe discounts in emerging markets today are more compelling than those in developed markets. Our emerging markets investments trade at a weighted average discount of 26.3%, including 31.9% in China where the market is trading at a six-year low, versus a weighted average discount of 14.4% in developed markets. We hasten to note that not all emerging markets are attractive to us. Latin America is one region in which the Fund does not have a direct investment, as we are not finding compelling discounts nor do we believe the underlying valuations are attractive.
The table below presents some discount highlights:
Region of Focus | Ending Portfolio Weight (%) | Weighted Average Discount (%) |
EM Asia | 17.2 | -34.0 |
EM Europe | 2.3 | -22.3 |
Latin America | NA | NA |
Global EM | 8.1 | -11.1 |
Total/Average Emerging Markets | 27.6 | -26.3 |
Asia/Pacific | 14.1 | -18.3 |
Developed Europe | 25.7 | -12.2 |
North America | 10.7 | -14.4 |
Total/Average Developed | 50.6 | -14.4 |
Global | 21.8 | -12.2 |
* Data is exclusive of cash and short positions and investments in the process of liquidating
Valuations in Emerging Markets
Emerging markets have outperformed developed markets over the last ten years, but underperformed dramatically for the last three years. This recent underperformance has occurred despite higher productivity (Return on Equity, ROE) from emerging market companies as compared to developed markets. In Emerging Markets we are finding higher productivity and lower valuations and believe this is an opportunity.
As of March 31st, 2014, emerging-market equities were trading at 11.7 times trailing earnings, lower than their long-term average, and compared favourably to developed markets' price-to-earnings ratio of 16 times. All other valuation measures, such as price-to-book and price-to-earnings-growth ratios, put emerging markets at compellingly low positions, while return-on-equity, a measure of corporate profitability, is higher with emerging markets than developed markets. The current valuation in emerging markets is also substantially lower than its long-term average.
The underperformance in emerging markets is in sharp contrast to their higher corporate earnings and improving macroeconomic fundamentals. The charts on Page 15 of the Annual Report and Accounts highlight the growing wealth in emerging markets, as well as the continued flows into emerging markets assets. Emerging markets are now on par with developed economies with respect to their share of global wealth, which is a substantial move since 1980 when emerging markets only represented 31% of global wealth. Approximately US$350 billion have flowed into emerging-market-focused investments since 2003. We believe emerging markets should outperform going forward, and fund flows should return, reflective of good performance. In our view, these flows can provide substantial upward pressure on share prices in emerging markets.
The macro environment continues to be quite positive in emerging markets, another aspect for which we believe global investors are not rewarding emerging equities. The charts on page 16 of the Annual Report and Accounts highlight the strong fiscal characteristics in the emerging markets, as well as the conservative debt levels demonstrated that the regions look stronger than most developed markets on both measures. External debt spreads are supported by strong fundamentals, as emerging-market countries generally have much lower fiscal deficits than developed markets. Additionally, debt-to-GDP ratios exhibit long-term stability.
The Fund today has approximately 30% invested in emerging markets. Importantly, we are investing in these markets at some of the most attractive discounts we have seen in a long time. For instance, the Fund's investments in China trade at an average discount of 31.9%, with holdings such as China Merchants China Direct Investments at a discount of 65%. The Fund's exposure to the Philippines and Indonesia comes mainly from its investment in First Pacific, which trades at a discount of 37.5%. In Turkey, the Fund's investment in Haci Omer Sabanci currently trades at a discount of 31.5%.
Corporate Action and Restructuring
Over the 12-month period, a significant number of the Fund's holdings announced or completed corporate action and restructuring measures aimed at reducing discounts and enhancing shareholder value. These include closed-end fund tender offers, restructuring of investment programs and investment manager changes. Several companies recorded more than one event during the period. Listed below are some examples:
• Tender Offers: 6 holdings conducted tender offers, with some conducting more than one over the period.
- Swiss Helvetia (SWZ) tendered 15% of shares at 95% of NAV. The Fund received payment on 24% of its shares, as not all SWZ shareholders participated. Additionally, in April 2014, SWZ announced a proposed change of investment manager from Hottinger to Schroder Investment Management.
- Morgan Stanley Asia Pacific Fund (APF) conducted tender offers of 5% of shares (at 98% of NAV) and 20% of outstanding shares (at 98.5% of NAV), whereby the Fund received payment on 5% and 30% of its shares, respectively, as not all APF shareholders participated. The 20% tender offer was prompted by a change to the investment mandate to Asia excluding Japan.
- Central Europe, Russia & Turkey Fund (CEE) conducted two tender offers of 5% (both at 98% of NAV). The Fund received payment on 7% and 8% of its shares, respectively, as not all CEE shareholders participated.
- JPMorgan European Smaller (JESC.LN) conducted a tender offer for 5% of shares (at 97% of NAV).
- Advance Developing Markets (ADMF.LN) conducted a tender offer for 10% of shares (at 99% of NAV).
- Hong Kong listed China Merchants China Direct (133.HK) conducted a tender offer, its first ever, for 5% of shares (at 90% of NAV). The tender price was more than 70% above its then market price.
• Liquidations: Tau Capital returned 30% of NAV to shareholders as part of a liquidation.
Hedging and Leverage
Given the almost 20% discount at which our underlying investments are trading, the rapid run-up of the U.S. and European markets, and the volatile geopolitical situation, we consider it prudent to place some hedges. Hedging is a powerful tool available to the Fund (details are laid out in the Investment Policy section), and the following are the hedge (short) positions as of March 31st, 2014.
Investments | Percentage of NAV (%) |
iShare Emerging Markets ETF | 5.2 |
Vanguard Europe ETF | 4.5 |
S&P 500 Index ETF | 4.4 |
iShare Germany ETF | 2.0 |
Market Vectors Russia ETF | 0.5 |
Gabelli Multimedia Fund | 0.3 |
H&Q Life Sciences Fund | 0.2 |
As of March 31st, 2014 the fund had no leverage.
World Trust Fund Discounts
The Fund's discount widened to 13.4%, from 11.3%, over the period, and traded at an average discount of 11.3%. During the period, the discount ranged from a high of 14.2%, to a low of 8.5%.
In April 2013, the Board authorized a tender offer for 15% of the outstanding shares, in an effort to reduce discounts. Another tender offer of 15% was completed in July 2014 in accordance with the Board's discount control policy. In addition, the Fund has an annual continuation vote, one of a very few funds in the investment company sector willing to let shareholders decide its fate every year.
Meanwhile, the Board continues to actively monitor the discount, and will use all available tools at its disposal to mitigate the volatility of the discount.
The Fund's underlying investments reflected an average internal discount of 19.8%, which, together with the 13.4% discount at which the Fund's shares traded at March 31st, 2014, represents $1.43 worth of assets for every $1 dollar invested.
Outlook
The geopolitical and macro uncertainty around the globe is unprecedented in recent years, and has created worldwide volatility in equity markets. The Fund's investment philosophy thrives in such an environment, as opportunities are plenty. Emerging markets currently present some of the best long term investment opportunities, but we see discounts emerging in the US, and attractive opportunities in Europe and especially in Japan and we will seek to take advantage of these. Today, the Fund's long only holdings trade on an average discount of 19.8%. This wide discount is a compelling entry point for long term investors seeking access to the global equity markets that we believe are attractively valued.
Kun Deng, CFA
Lazard Asset Management LLC
Manager
July 22nd, 2014
Directors
Philip R. McLoughlin (Chairman)*
Duncan Budge*†
James Cave *††
Howard Myles**†
Alexander E. Zagoreos
* Member of the Audit Committee
** Chairman of the Audit Committee
† Member of the Nominations Committee
†† Chairman of the Nominations Committee
Biographies of the Directors are shown on pages 19 to 20 of the Annual Reports and Accounts.
Directors' Report
The Directors present their Report and the audited financial statements of The World Trust Fund (the "Fund") for the year ended March 31st, 2014.
Status
The Fund is an investment company with limited liability organised as a 'société anonyme' under the laws of the Grand Duchy of Luxembourg and is governed by part II of the Luxembourg law of December 17th, 2010 on Collective Investment Undertakings.
The Fund was incorporated in Luxembourg on June 20th, 1991 for an unlimited duration. The Fund's Articles of Incorporation (the "Articles") have been published in the 'Mémorial C, Recueil des Sociétés et Associations' and they have been filed with the Registrar of the Luxembourg District Court, where copies thereof may be obtained.
The Fund's shares are listed on the premium segment of the Official List of the UK Listing Authority and traded on the main market of the London Stock Exchange. Accordingly the Fund is subject to the requirements of the UK Listing Authority's Rules.
The Fund's Investment Objective and Investment Policy are stated above.
Performance measurement using Key Performance Indicators
At each Board meeting and in their review of the Half-Yearly and Annual Reports, the Directors consider a number of performance measures to assess the Fund's results and evaluate the performance of the Manager. The Key Performance Indicators used for this purpose are established industry measures and are outlined below:
Net Asset Value ("NAV") and Share Price: The NAV and Share Price of the Fund are included in the Financial Highlights above and recent NAV and Share price performance is illustrated in the chart on page 2 of the Annual Report and Accounts.
The Ongoing Charges percentage is monitored by the Board and was 1.47% during the year as disclosed in Note 19.
Discount to NAV: The historic discount to NAV statistics are shown in the Manager's Review above.
Portfolio analysis
A detailed review of how the Fund's assets have been invested is contained in the Manager's Review above.
A list of the top 10 holdings of the Fund is shown above.
Information on corporate actions and restructuring undertaken by companies in the portfolio during the year is provided above.
Principal risks and uncertainties
Investment & Strategy
The Fund may underperform its benchmark as a result of poor stock selection or as a result of the Fund or portfolio investments being geared in a falling market.
All Board meetings are attended by the Manager, where reports on portfolio performance and strategy are provided. The Fund invests in a diversified portfolio of closed-end investment companies, including investment trusts and holding companies, thereby spreading investment risk and reducing stock specific risk. The Board reviews the performance of the Manager on a regular basis.
Manager
Lazard Asset Management LLC has been the Manager of the Fund since its launch in 1991. Should the current Manager not be in a position to continue its management of the Fund, performance, liquidity and Shareholder confidence may be impacted.
Lazard Asset Management LLC is a diversified, global investment platform with over 250 investment personnel worldwide and funds under management of US$ 167.5 billion in Discounted Asset Strategies. The Board is kept informed of succession planning at the Manager and is made aware of any changes in key personnel.
Gearing
The use of gearing increases the possibilities for profit and the risk of loss. In addition, the level of interest rates in effect at the times of such borrowings will affect the operating results of the Fund.
The Board monitors and discusses the appropriate level of gearing at each meeting. The Fund's policy on gearing is disclosed above.
Discount volatility
Discounts can fluctuate significantly both in absolute terms and relative to companies in the Fund's peer group.
The Board actively seeks, when appropriate, to manage the discount of the Fund and is responsible for overseeing Share buybacks which may help to reduce the discount and/or discount volatility.
The Board believes it is desirable that the Company's Shares do not trade at a significant discount to net asset value and that, in normal market conditions, the Shares should trade at a price which on average represents a discount of less than 10% to the diluted net asset value. The Board will review the average discount on a regular bases and where, in the opinion of the Board and taking into account factors such as market conditions and the discounts of comparable funds, the Company's discount is higher than desired, the Board will consider what action to take. Such action may include Share buy backs and/or tender offers. Any future proposals for tender offers will be at the discretion of the Board and in exercising such discretion the Board will take into account factors such as the level of discount at which the Fund has traded, the performance of the Fund and the views of Shareholders.
Reputational
Failure to keep current and potential investors informed of the Fund's performance and development could result in fewer Shares being traded in the Fund on a daily basis, a reduction in Share price and also lower investor confidence.
The Manager and Broker have been instructed by the Board to maintain frequent communication with current Shareholders and potential investors. The Fund makes announcements through a Regulatory Information Service in accordance with the requirements of the UK Listing Authority Rules and copies of all announcements are uploaded on to the Fund's website, www.theworldtrustfund.com.
Related party transactions
Related party transactions and Directors' interests in contracts and agreements are disclosed in Notes 15 and 16 to the financial statements.
Management arrangements
Throughout the year under review, investment management services were provided by Lazard Asset Management LLC. The Manager was appointed on July 1st, 1991. Under the terms of the management agreement either party may terminate the agreement by giving three months' prior written notice. Pursuant to this agreement, the Manager is entitled to an annual management fee of 0.75% of the value of the net assets of the Fund, payable quarterly in arrears. In addition, there is an annual performance fee calculated over a two year period. Further information is disclosed in Note 3 to the financial statements.
Corporate Social Responsibility
The Fund does not have any employees and the Board is comprised solely of non-executive Directors. In carrying out its activities and in relationships with suppliers and stakeholders, the Fund aims to conduct itself responsibly, ethically and fairly.
Substantial share interests
The substantial interests in Shares of the Fund disclosed or known to the Board are shown in Note 17 to the financial statements.
Going Concern
After due consideration of the balance sheet and activities of the Fund and the Fund's assets, liabilities, commitments and financial resources, the Directors have concluded that the Fund has adequate resources to continue in operational existence for the foreseeable future. For this reason, they have adopted the going concern basis in preparing the financial statements.
On behalf of the Board
Philip R. McLoughlin
Chairman
July 22nd, 2014
The full Annual Report and Financial Statements contain the following statements regarding responsibility for the Annual Report and Financial Statements.
Directors' Responsibility Statement
The Directors are responsible for preparing this report and the financial statements in accordance with applicable law and regulations.
Directors are required to prepare financial statements for each financial year. The financial statements are required by law to give a true and fair view of the state of affairs of the Fund and the financial performance and cash flows of the Fund for that period.
In preparing those financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
• state whether applicable regulations have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Fund will continue in business.
The Directors are responsible for keeping adequate accounting records which disclose with reasonable accuracy at any time the financial position of the Fund and to enable them to ensure that the financial statements comply with the applicable law.
The Directors are also responsible for ensuring that the Directors' report and other information in the annual report is prepared in accordance with applicable law and regulations. They also have responsibility for safeguarding the assets of the Fund and for taking such steps as are reasonably open to them to prevent and detect fraud and other irregularities. The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Fund.
The Directors confirm that, to the best of their knowledge:
• the financial statements, which have been prepared in accordance with the applicable set of accounting standards (being the legal and regulatory requirements in Luxembourg relating to investment funds) give a true and fair view of the assets, liabilities, financial position and profit or loss of the Fund as at March 31st, 2014 and for the financial year then ended; and
• the Annual Report includes a fair review of the development and performance of the business and the position of the Fund, together with a description of the principal risks and uncertainties that it faces.
The Directors confirm that, so far as they are each aware, there is no relevant audit information of which the Fund's Auditor is unaware; and each Director has taken all the steps that ought to have been taken as a Director to make himself aware of any relevant audit information and to establish that the Fund's Auditor is aware of that information.
On behalf of the Board
Philip R. McLoughlin
Chairman
July 22nd, 2014
Non-Statutory Accounts
The financial information set out below does not constitute the Fund's statutory accounts for the period ended March 31st, 2014 but is derived from those accounts. The Réviseur d'entreprises agréé has reported on those accounts and their report can be found on page 35 of the Fund's full Annual Report and Accounts at www.theworldtrust.com
Statement of Net Assets (in US$)
March 31st, 2014 | March 31st, 2013 | |
Assets | ||
Securities portfolio at market value (Cost: US$ 130,516,790) | 169,513,471 | 182,071,762 |
Cash | 35 | 22 |
Receivable from broker in respect of securities sold short (see note 14). | 46,139,553 | - |
Income receivable on portfolio | 156,481 | 147,673 |
Total assets | 215,809,540 | 182,219,457 |
Liabilities | ||
Securities sold short at market value (cost US$ 41,292,250) | 43,173,901 | - |
Loan payable (see Note 20) | - | 11,415,000 |
Payable on purchases of investments | 1,501,476 | - |
Other payable on short positions and bank liabilities | 167,279 | 30,261 |
Accrued expenses | 484,366 | 469,493 |
Total liabilities | 45,327,022 | 11,914,754 |
Net Assets at the End of the Year | 170,482,518 | 170,304,703 |
Number of Shares outstanding (see Note 6) | 39,814,308 | 43,830,187 |
Net Asset Value per Share in US$ (see Note 1) | 4.28 | 3.89 |
Equivalent Net Asset Value per Share in £ (see Note 1) | 2.57 | 2.56 |
Diluted Net Asset Value per Share in US$ | 4.16 | 3.76 |
Equivalent Diluted Net Asset Value per Share in £ | 2.49 | 2.47 |
Philip R. McLoughlin | Howard Myles |
Chairman | Director |
* Diluted NAV is calculated after taking into account any outstand warrants, which are assumed to be exercised by the Shareholders.
The accompanying notes are an integral part of the financial statements.
Shareholders' Equity (in US$)
March 31st, 2014 | March 31st, 2013 | |
Capital and Reserves | ||
Original Capital: 93,317,380 Shares at US$0.2 (See Note 6) | 18,663,476 | 18,663,476 |
Share Premium | 70,220,782 | 70,220,782 |
Legal Reserve (see Note 7) | 1,866,348 | 1,866,348 |
Profit brought forward | 167,052,457 | 159,158,142 |
Cost of 10,211,277 Shares held in Treasury (See Note 6) | (31,694,484) | (31,694,484) |
Cost of 3,013,575 Warrants issued (see Note 6) | 9,733,847 | 10,985 |
Cost of 46,305,370 Shares cancelled (see Note 6) | (98,431,279) | (72,145,032) |
Repurchase of 1,334,756 Warrants (issued 1991) | (8,631,613) | (8,631,613) |
Total Capital and Reserves | 128,779,534 | 137,448,604 |
Net Investment Income | 2,985,670 | 2,392,675 |
Net realised gain | 1,602,695 | 5,501,640 |
Unrealised appreciation on securities | 37,115,030 | 24,960,577 |
Unrealised appreciation/depreciation on foreign exchange | (411) | 1,207 |
Total Shareholders' Equity | 170,482,518 | 170,304,703 |
Statement of Operations (in US$)
March 31st, 2014 | March 31st, 2013 | |
Income | ||
Dividends, net (including return of capital) | 5,424,826 | 4,794,379 |
Other income | 22,094 | - |
Total income | 5,466,920 | 4,794,379 |
Expenses | ||
Management fees (see Note 3) | 1,291,578 | 1,254,009 |
Directors' fees and expenses (see Note 10) | 317,336 | 344,021 |
Custodian fees (see Note 9) | 166,737 | 142,741 |
Professional fees (see Note 8) | 158,442 | 161,068 |
Company Secretarial fees and expenses (see Note 11) | 154,888 | 123,913 |
Central administration costs | 113,859 | 107,963 |
Taxe d'abonnement (see Note 4) | 85,375 | 85,167 |
Interest paid | 27,975 | 58,682 |
Other expenses | 145,060 | 124,140 |
Total expenses | 2,461,250 | 2,401,704 |
Net Investment Income | 2,985,670 | 2,392,675 |
Net Realised Gain/(Loss) | ||
- on securities | 1,552,828 | 5,910,957 |
- on forward foreign exchange contracts | 13,303 | (39,457) |
- on foreign exchange | 36,564 | (369,860) |
Total Net Realised Gain | 1,602,695 | 5,501,640 |
Change in Unrealised Gain/(Loss) | ||
- on securities | 12,154,453 | 13,146,038 |
- on foreign exchange | (1,618) | (163) |
Total Change in Unrealised Gain/(Loss) | 12,152,835 | 13,145,875 |
Result of Operations* | 16,471,200 | 21,040,190 |
* Result of Operations is the sum of Net Investment Income, Total Net Realised Gain/(Loss) and Total Change in Unrealised Gain/(Loss).
Statement of Changes in Net Assets (in US$)
Year Ended | Year Ended | |
March 31st, 2014 | March 31st, 2013 | |
Net Assets at the Beginning of the Year | 170,304,703 | 167,280,872 |
Net investment income | 2,985,670 | 2,392,675 |
Net realised gain on securities | 1,552,828 | 5,910,957 |
Net realised gain/(loss) on forward foreign exchange contracts | 13,303 | (39,457) |
Net realised gain/(loss) on foreign exchange | 36,564 | (369,860) |
Total net realised gain | 1,602,695 | 5,501,640 |
Change in unrealised gain/(loss) on securities | 12,154,453 | 13,146,038 |
Change in unrealised gain/(loss) on foreign exchange | (1,618) | (163) |
Total change in unrealised gain/(loss) | 12,152,835 | 13,145,875 |
Subscriptions of Shares | 9,719,852 | 10,982 |
Redemptions of Shares | (25,952,064) | (18,027,341) |
Tender offer expenses | (331,173) | - |
Repurchase and Issue of Shares (includes tender offer expenses) | (16,563,385) | (18,016,359) |
Net Assets at the End of the Year | 170,482,518 | 170,304,703 |
Statistical Information about the Fund (in US$)
March 31st, 2014 | March 31st, 2013 | March 31st, 2012 | |
Total Net Assets | 170,482,518 | 170,304,703 | 167,280,872 |
Net Asset Value per Share in US$ (see Note 1) | 4.28 | 3.89 | 3.40 |
Equivalent Net Asset Value per Share in £ (see Note 1) | 2.57 | 2.56 | 2.13 |
Statement of Changes in Shares Outstanding
For the Year Ended March 31st, 2014 (see Note 6) | |
Number of Shares Outstanding at the Beginning of the Year | 43,830,187 |
Number of Shares Issued | 3,010,174 |
Number of Shares Repurchased (see Note 5) | (7,026,053) |
Number of Shares Outstanding at the End of the Year | 39,814,308 |
Statement of Investments and Other Net Assets March 31st, 2014
Description | Number | Acquisition | Market | Currency | % of total |
of Shares | cost | value | net assets | ||
(US$) | (US$) | (US$) | |||
Investments in Securities | |||||
Transferable Securities admitted to an Official Stock Exchange Listing | |||||
Securities Held Long | |||||
Eurazeo | 133,450 | 3,997,893 | 11,990,523 | EUR | 7.03 |
JPMorgan European Smaller Companies Trust Plc | 558,698 | 5,015,678 | 11,177,201 | £ | 6.56 |
General American Investors Company Inc. | 298,831 | 8,488,160 | 10,257,816 | US$ | 6.17 |
First Pacific Company Ltd | 10,501,600 | 6,664,455 | 10,425,104 | HKD | 6.12 |
CITIC Securities Company Ltd | 4,534,500 | 9,277,537 | 9,447,240 | HKD | 5.54 |
BB Biotech AG | 47,539 | 4,085,051 | 8,340,364 | CHF | 4.89 |
Tri-Continental Corp. | 367,710 | 5,815,254 | 7,383,617 | US$ | 4.33 |
JPMorgan Emerging Markets Investment Trust Plc | 775,993 | 3,019,335 | 6,953,621 | £ | 4.08 |
JPMorgan Japanese Investment Trust Plc | 1,817,651 | 5,759,017 | 6,439,381 | £ | 3.78 |
Jardine Strategic Holdings Ltd | 168,935 | 5,089,741 | 6,058,009 | US$ | 3.55 |
Swiss Helvetia Fund Inc. | 378,103 | 5,226,494 | 5,437,121 | US$ | 3.19 |
RCM Technology Trust Plc | 608,607 | 1,954,947 | 5,316,710 | £ | 3.12 |
The Henderson Smaller Companies Investment Trust Plc | 525,417 | 2,809,129 | 5,045,466 | £ | 2.96 |
Invesco Perpetual UK Smaller Companies Investment Trust Plc | 845,122 | 2,997,461 | 4,663,609 | £ | 2.74 |
JPMorgan Japan Smaller Companies Trust Plc | 1,464,903 | 7,961,979 | 4,493,672 | £ | 2.64 |
Investor AB | 123,409 | 2,520,172 | 4,465,551 | SEK | 2.62 |
Herald Investment Trust Plc | 378,070 | 2,869,501 | 4,386,884 | £ | 2.57 |
Prospect Japan Fund Ltd | 3,776,192 | 4,402,948 | 4,087,728 | US$ | 2.40 |
International Biotechnology Trust Plc | 870,418 | 2,155,399 | 4,070,385 | £ | 2.39 |
BlackRock World Mining Trust Plc | 484,845 | 3,936,538 | 3,741,664 | £ | 2.19 |
China Merchants China Direct Investments Ltd | 3,033,439 | 6,752,891 | 3,707,471 | HKD | 2.17 |
Advance Developing Markets Fund Plc | 496,301 | 1,269,960 | 3,342,730 | £ | 1.96 |
British Empire Securities and General Trust | 408,579 | 3,048,815 | 3,317,262 | £ | 1.95 |
Aberdeen Emerging Markets Smaller Company Opportunities Fund Inc. | 246,398 | 3,315,709 | 3,279,557 | US$ | 1.92 |
China Everbright Ltd | 2,536,000 | 2,755,865 | 3,256,438 | HKD | 1.91 |
F&C Private Equity Trust Plc | 711,279 | 2,505,495 | 2,715,502 | £ | 1.59 |
Morgan Stanley Asia Pacific Fund Inc. | 147,356 | 1,848,128 | 2,487,369 | US$ | 1.46 |
Clough Global Opportunities Fund | 194,124 | 2,050,267 | 2,471,199 | US$ | 1.45 |
Haci Omer Sabanci Holding AS | 541,026 | 2,705,325 | 2,098,666 | TRY | 1.23 |
Fidelity China Special Situations Plc | 1,040,302 | 1,699,151 | 1,800,245 | £ | 1.06 |
Central Europe Russia and Turkey Fund Inc. | 64,265 | 2,673,744 | 1,687,599 | US$ | 0.99 |
North Atlantic Smaller Companies Investment Trust Plc | 32,100 | 542,468 | 912,440 | £ | 0.54 |
HarbourVest Global Private Equity Ltd | 67,927 | 734,492 | 757,386 | US$ | 0.44 |
Impax Environmental Markets Plc | 88,701 | 224,087 | 228,841 | £ | 0.13 |
Tau Capital Plc | 283,266 | 283,266 | 37,533 | US$ | 0.02 |
126,456,352 | 166,551,904 | 97.69 | |||
Securities Sold Short | |||||
Market Vectors Russia ETF | (35,800) | (751,300) | (858,484) | US$ | (0.50) |
iShares MSCI Germany ETF | (225,300) | (6,720,550) | (7,063,155) | US$ | (4.14) |
Vanguard FTSE Europe ETF | (145,100) | (8,440,614) | (8,553,645) | US$ | (5.02) |
SPDR S&P 500 ETF Trust | (45,900) | (8,524,369) | (8,585,136) | US$ | (5.04) |
iShares MSCI Emerging Markets ETF | (441,900) | (16,855,417) | (18,113,481) | US$ | (10.62) |
(41,292,250) | (43,173,901) | (25.32) | |||
85,164,102 | 123,378,003 | 72.37 | |||
Other Transferable Securities | |||||
Money Market Instrument | |||||
State Street Institutional Investment Trust | 2,961,566 | 2,961,566 | 2,961,567 | US$ | 1.74 |
Companies in Liquidation* | |||||
Dexion Equity Alternative Ltd1 | 1,004,992 | - | - | £ | 0.00 |
Advnace UK Trust Plc | 275,518 | - | - | £ | 0.00 |
Italy Fund Inc. | 195,906 | - | - | US$ | 0.00 |
Trans Balkan Investments Ltd | 61,400 | 1,098,872 | - | £ | 0.00 |
Total Investments in Securities | 89,224,540 | 126,339,570 | 74.10 | ||
Other Net Assets/Liabilities** | 44,142,948 | 25.90 | |||
Net Assets at the end of the year | 170,482,518 | 100.00 | |||
Currency Exposure of Portfolio | |||||||||
Pound Sterling (£) | 68,605,613 | 54.30 | |||||||
Hong Kong Dollar (HKD) | 26,836,253 | 21.24 | |||||||
European Euro (EUR) | 11,990,523 | 9.49 | |||||||
Swiss Francs (CHF) | 8,340,364 | 6.60 | |||||||
Swedish Krona (SEK) | 4,465,551 | 3.54 | |||||||
United States Dollar (US$) | 4,002,600 | 3.17 | |||||||
Turkish Lira (TRY) | 2,098,666 | 1.66 | |||||||
Total | 126,339,570 | 100.00 | |||||||
*Shares in liquidation and held at zero values where the cost has been reduced to nil as a result of distribution, unless otherwise advised by the liquidator. ** Other net assets/Liabilities are denominated in US$. (1) Security is in liquidation; the acquisition costs of the security have been reduced by the amount of the interim liquidation payments received by the Fund; (US$1,612,860). |
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Notes to the Financial Statements
Note 1 - General
The World Trust Fund (the "Fund") is an investment company with limited liability organised as a société anonyme under the laws of the Grand Duchy of Luxembourg and is governed by part II of the Luxembourg law of December 17th, 2010 on Collective Investment Undertakings.
The Fund was incorporated in Luxembourg on June 20th, 1991 for an unlimited duration. The Fund's Articles of Incorporation (the "Articles") have been published in the 'Mémorial C, Recueil des Sociétés et Associations'.
The Fund's primary investment objective is to achieve long-term capital appreciation, primarily through investments in closed-end funds, investment trusts, holding companies, and other similarly traded companies whose shares are listed or traded on international exchanges, and generally at a discount to net asset value.
The currency in which the Fund's Shares are traded was changed from US$ to £ on October 30th, 2009.
The equivalent Net Asset Value (''NAV'') per Share in £ represents the NAV per Share in US$ converted with the exchange rate at March 31st, 2014 (Note 2).
Note 2 - Significant Accounting Policies
a) Presentation of Accounts
The financial statements are presented in conformity with the legal and regulatory requirements in Luxembourg relating to investments funds. The Fund keeps its books and records in US$.
b) Valuation
1) The NAV per Share is calculated in accordance with Article 22 of the Articles on each Valuation Date (as defined in the Articles).
The NAV per Share is determined by dividing the Net Assets of the Fund, being the value of its assets less liabilities, by the number of Shares then in issue.
2) In calculating the NAV per Share, income and expenditure are treated as accruing from day to day and the Articles provide, inter alia, that:
(i) securities which are quoted or dealt in on any stock exchange or other regulated market are valued at the settlement or closing price on the last full business day on which such exchange or market is open for trading preceding the applicable Valuation Date;
(ii) if securities are quoted, listed, traded or dealt on more than one stock exchange or regulated market, the
Board of Directors (the "Board") may select for the purposes of valuation the stock exchange or regulated market which they consider provides the fairest criterion of value for the relevant securities; and
(iii) if securities are not quoted or dealt on any stock exchange or regulated market or if, with respect to securities quoted or dealt on any stock exchange or dealt on any regulated market, the price as determined pursuant to paragraph (i) above is not representative of the fair market value of the relevant securities, the value of such securities will be determined by reference to their reasonably foreseeable sales price determined prudently and in good faith.
3) Purchases of securities are recorded at cost. Realised gains or losses on securities sold are computed on an average cost basis.
4) The value of cash in hand or on deposit, bills and notes payable on presentation, accounts due, prepaid expenses and dividends and interest declared and fallen due but not yet received generally consists of the nominal value of such assets. However, in the event that it seems improbable that such value can be realised, the value is determined by deducting a sum which the Board considers appropriate to reflect the realisable value of such asset.
The value of any cash on hand or on deposit, bills and demand notes and accounts receivable, prepaid expenses, cash dividends and interest declared or accrued as aforesaid and not yet received shall be deemed to be the full amount thereof, unless in any case the same is unlikely to be paid or received in full, in which case the value thereof shall be arrived at after making such discount as the Fund may consider appropriate in such case to reflect the true value thereof.
5) Foreign currencies: monetary assets and liabilities denominated in foreign currencies in the Statement of Net Assets are translated into US$ at the rates of exchange ruling at the end of the year. Transactions in foreign currencies are recorded in US$ based on the exchange rates applicable at the date of the transactions.
The following significant exchange rates have been applied for the conversion as of March 31st, 2014:
US$ | |||
1 | CHF | Swiss Francs | 1.131157740 |
1 | EUR | Euro | 1.377649565 |
1 | £ | Pound Sterling | 1.667150140 |
1 | HKD | Hong Kong Dollar | 0.128924128 |
1 | KRW | South Korean Won | 0.000939452 |
1 | SEK | Swedish Krona | 0.154504581 |
1 | TRY | Turkish Lira | 0.467355237 |
c) Income Recognition
Interest and dividend income is recorded on an accrual basis, net of any withholding taxes in the relevant country.
Note 3 - Management and Performance Related Fees
The Manager is entitled to receive a fee at the rate of 0.75% per annum calculated each quarter on the basis of the daily NAV per Share during the relevant quarter and paid quarterly.
At each fiscal year end, the appreciation over the previous two year period of the Fund against the Benchmark with net reinvested dividends is calculated and converted into a per annum rate. If the rate of appreciation of the Fund so calculated (the "Actual Rate") exceeds by more than 5% the rate of appreciation of the Benchmark so calculated (the "Reference Rate"), the Manager shall be entitled to a performance related fee at the rate of:
(i) 5% of the amount by which the NAV per Share has exceeded by 5% or more, but by less than 10%, and
(ii) 10% of the amount by which the NAV per Share has exceeded by 10% or more, but by less than 15%, and
(iii) 15% of the amount by which the NAV per Share has exceeded by 15% or more, but by less than 20%, and
(iv) 20% of the amount by which the NAV per Share has exceeded by 20% or more;
(in each case) per annum the compound growth rate of the Benchmark during the two preceding years, provided that the growth of the Benchmark during such period is positive.
For the year ended March 31st, 2014, there was no performance fee payable by the Fund.
Out of its fees, the Manager will pay its own expenses and those of any investment advisers retained by it.
Note 4 - Taxes
As a Luxembourg investment company, under present laws the Fund is not subject to income taxes in Luxembourg. Irrecoverable taxes may be withheld at the source on dividends and interest received on investment securities.
According to the law of December 17th, 2010, the Fund is subject to Luxembourg subscription duty ("taxe d'abonnement") at the rate of 0.05% per annum of its Net Assets, such tax being payable quarterly on the basis of the Total Net Assets of the Fund at the end of the relevant quarter.
However, the value of investments in other investment companies already subject to Luxembourg subscription duty is no longer subject to this tax.
Note 5 - Repurchases of Shares
During the year ended March 31st 2014, the Fund made the below repurchase of shares through its Tender Offer, and all shares repurchased were duly cancelled.
Date | Shares | Price per Share |
£ | ||
August 12th, 2013 | 7,026,053 | 2.3848 |
7,026,053 | ||
Note 6 - Capital
The Fund has authorised Share capital of US$ 30,000,000 represented by 150,000,000 Shares of a par value of US$ 0.2 each.
The initial subscribed capital amounted to US$ 45,000 and was represented by 45,000 Units (each Unit consists of five Shares and one Warrant).
All Shares have been fully paid in cash of US$ 45,000 together with total issue premiums of US$ 180,000.
On September 27th, 1991, the Board decided to increase the capital to US$ 17,777,490 by the issue of 8,888,745 additional Shares and 1,773,249 additional Warrants attached thereto, against payment in cash of a total of US$ 17,732,490 and a total Share premium of US$ 66,496,838. This increase was approved by notarial deed dated October 18th, 1991.
The Warrant holders could exercise their subscription rights in any of the years 1996 to 2001 inclusive. Each Warrant gave the right to subscribe to one Share at a price of US$ 10.
By a resolution of the meeting of the Board dated June 6th, 2002, the Board decided to increase the capital by creation of 442,993 new Shares of US$ 2 each, with a Share premium of US$ 3,543,944. All the 442,993 Shares were entirely subscribed and fully paid in cash, so that the amount of US$ 4,429,930 was received by the Fund.
The balance of the Warrants were converted into Shares in accordance with the prospectus.
The Fund is required by Luxembourg law to transfer 5% of its yearly net profits to a non distributable legal reserve until such reserve amounts to 10% of the Fund's nominal Share capital. This reserve is not available for dividend distribution.
At an Extraordinary General Meeting ("EGM") of the Fund held on June 27th, 2008, the Fund was granted the authority to make market purchases of up to 10% of its issued Share capital. Three further resolutions were proposed at this EGM, but since the requisite quorum was not obtained, a second EGM was held on July 31st, 2008, at which the following resolutions were proposed and duly passed:
1. reducing the Fund's Share capital by cancelling the 3,170,003 Ordinary Shares held in Treasury and amending the Articles of Association ("Articles") accordingly;
2. amending Article 20 of the Articles in order to comply with the Listing Rules and the price at which Ordinary Shares may be bought back by the Fund; and
3. amending the Articles in order to reflect a number of updates to the Luxembourg law of August 10th, 1915 concerning commercial companies.
On July 16th, 2008 and August 22nd, 2008 the Fund purchased for cancellation 90,000 and 50,000 Ordinary Shares respectively.
At an EGM of the Fund held on February 2nd, 2010, the following resolutions were proposed and unanimously passed:
1. subdivision of the Share capital of the Fund so that Shareholders receive 10 New Ordinary Shares of nominal value US$ 0.2 each in exchange for each existing Share;
2. amending Article 20 of the Articles to reflect the amendments of the Luxembourg law of August 10th, 1915 concerning commercial companies in relation to share buy backs; and
3. granting the Board authority to repurchase up to 14.99% of the Fund's issued Share capital, provided that certain conditions are met.
From February 3rd, 2010, following the subdivision, the Fund's Share capital amounted to 60,217,350 Ordinary Shares.
On August 31st, 2011 the Share capital of the Fund was reduced, by a resolution at the EGM, cancelling 6,179,287 Shares held in Treasury.
On September 9th, 2011 the Fund issued 10,807,612 Warrants by way of a bonus issue to Shareholder, on a one for five basis.
Each Warrant confers the right, exercisable by notice to the Fund which may be given semi-annually on the last business day in March and September between March 2012 and March 2014, inclusive, to subscribe, on the relevant date, for one Share of the Fund at a Subscription Price of US$ 3.23 (if exercised on the Subscription Dates up to and including the last business day in March 2013) and US$ 3.51 (if exercised on the Subscription Dates in September 2013 and March 2014).
On April 11th, 2012, following the exercise of Warrants, the Board approved the issue and allotment of 2,701 Ordinary Shares, which were listed and admitted to trading on the London Stock Exchange on April 18th, 2012.
On October 12th, 2012, following the exercise of Warrants, the Board approved the issue and allotment of 700 Ordinary Shares, which were listed and admitted to trading on the London Stock Exchange on October 18th, 2012.
On April 4th, 2013, following the exercise of Warrants, the Board approved the issue and allotment of 3,010,174 Ordinary Shares, which were listed and admitted to trading on the London Stock Exchange on April 11th, 2013.
On August 2nd, 2013, shareholders approved a tender offer of up to 15 % of the Fund's shares in issue at a 2% discount to diluted net asset value per share (less the costs and expenses of the tender offer). Accordingly, on August 12th, 2013 the Fund repurchased a total of 7,026,053 ordinary shares at a tender price of 238.4841 pence per share and these shares were cancelled.
As at March 31st, 2014 the Fund's issued Share capital consisted of 50,025,585 Ordinary Shares, of which 39,814,308 Ordinary Shares were with voting rights and 10,211,277 Ordinary Shares held in Treasury without voting rights.
The issued Share capital as at the date of this Report was 50,678,372. Refer to Note 22 for further information.
Note 7 - Legal Reserve
In accordance with Luxembourg requirements, at least 5% of the annual net profit must be transferred to a legal reserve. This requirement is satisfied when the reserve is equal to 10% of issued Share capital.
The legal reserve is not available for distribution.
Note 8 - Professional Fees
For the year ended March 31st, 2014, the professional fees of US$ 158,442 were incurred principally due to the following:
• legal fees paid to Stephenson Harwood, Elvinger Hoss and Prussen, Wilmer Hale and Schulte Roth & Zabel LLP;
• retainer fees paid to Westhouse Securities;
• audit fees paid to Deloitte Audit.
Note 9 - Custodian Fees
The Custodian receives, under the terms of the Custodian Agreement, fees for its services at rates to be agreed from time to time between the Fund and the Custodian in accordance with Luxembourg practice.
Note 10 - Directors' Fees and Expenses
Each of the Directors is paid a fee for his services at such a rate as the Board had determined provided that the aggregate of such fees shall not exceed US$ 500,000 per annum (pursuant to the resolution of the Annual General Meeting held on August 20th, 2013) or such higher amount as may from time to time be determined by the Shareholders in General Meeting.
The Directors may also be paid all reasonable travelling, hotel and other expenses properly incurred by them in the course of their duties relating to the Fund.
The fees paid to each Director for the year ended March 31st, 2014 were as follows:
Duncan Budge | £25,000 |
James Cave | £25,000 |
Philip R. McLoughlin | £35,000 |
Howard Myles | £30,000 |
Alexander E. Zagoreos | £25,000 |
Note 11 - Company Secretarial Fees and Expenses
For the year ended March 31st, 2014, the company Secretarial fees and expenses of US$ 154,888 include charges related to the maintenance of the Fund's website as well as for administration of the Fund's Depository Interest Register.
Note 12 - Commitments
Occasionally, the Fund will hedge its currency exposure against the US$. This will be done in expectation of the US$ strengthening against other currencies, and only for hedging purposes.
As of the date of the report, the Fund was not engaged in any forward exchange contracts or currency options.
Note 13 - Securities Lending
As of the date of the report, the Fund had no securities lending facility in place.
Note 14 - Short Positions
During the year short sales of exchange traded funds were executed and the market value of the short sales of exchange traded funds at March 31st, 2014 amounted to US$ 43,173,901. The Fund has fully collateralised with the Broker these short positions through a cash payment amounted to US$ 46,139,553 at March 31st, 2014.
Note 15 - Beneficial Interests of the Directors and Related Parties in the Share Capital
As of the date of the report, the beneficial interests of the Directors and related parties in the Share capital and newly issued Warrants of the Fund are the following:
Beneficial | |
Shares | |
Directors | |
Philip R. McLoughlin (Chairman) | 37,000 |
Duncan Budge | - |
James Cave | - |
Howard Myles | - |
Alexander E. Zagoreos | 577,750 |
Manager | |
Kun Deng, CFA | 243,240 |
Note 16 - Directors' Interest in Significant Contracts
Alexander E. Zagoreos is a Senior Advisor to Lazard Asset Management LLC.
Note 17 - Substantial Shareholding
As of the date of the report, the Board had been informed of the following interests in the Shares of the Fund:
Shares | Percentage of Issued Capital (excluding treasury shares) - FCA Denominator 1 | Percentage of Issued Capital (including treasury shares) - Luxembourg Denominator 2 | Date of announcement | |
City of London Investment Management Co. Ltd | 8,927,033 | 18.76% | 15.44% | Tuesday 3rd June, 2014 |
1607 Capital Partners LLC | 8,432,529 | 17.71% | 14.58% | Friday 14th February, 2014 |
Lazard Asset Management LLC | 8,796,005 | 21.73% | 17.35% | Friday 11th July 2014 |
(1) Percentage based on voting rights of 47,608,345 for announcements before 2nd July 2014, the date of completion of the tender offer, and 40,467,095 for announcements after 2nd July 2014.
(2) Percentage based on total Shares in issue of 57,819,622 (including 10,211,277 Shares held in Treasury) for announcements before 2nd July 2014 and 50,678,372 (including 10,211,277 Shares held in Treasury) for announcements after 2nd July 2014.
All issued Shares of the Fund are on deposit with a registered clearing house and, accordingly, with the exception of those Shareholdings of which the Board has been notified, the Board is not in a position to state the exact size of any Shareholdings in the Fund.
Note 18- Changes of the Investment Portfolio
The changes in the investment portfolio during the period of the report are available at the registered office of the Fund without any charge.
Note 19 - Ongoing Charges
For the year ended March 31st, 2014 the Ongoing Charges were calculated using the following formula:
Annualised Ongoing Charges / Average net assets undiluted X 100 = Ongoing Charges % where:
• the annualised ongoing charges contain the management fees, professional fees, directors' fees and expenses, custodian fees, company secretarial fees and expenses, central administration costs and other expenses (printing, postage, annual fees);
• the average net assets undiluted represent the arithmetic mean of the total net assets over the year; and
• taxe d'abonnement, interest paid and other expenses are not included in the ongoing charges.
Ongoing Charges 1.47%
Note 20 - Line of Credit Advanced
The Fund has an unsecured US$ 25 million Line of Credit Agreement (the "Agreement") with Citibank, N.A. Interest on borrowings is payable at the Federal Funds rate plus 1.25%, on an annualised basis. Under the Agreement, the Fund has agreed to pay a 0.10% per annum facility fee.
As of March 31st, 2014, the Fund had no borrowings under the Agreement.
Note 21 - Transaction Costs
During the year ended March 31st, 2014 the Fund has incurred transaction costs of US$ 99,326, which are composed of brokerage costs.
Note 22 - Subsequent Events
On April 2nd, 2014 the fund announced that on the final exercise date of March 31st, 2014, holders of Warrants exercised their right to subscribe for a total of 5,309,128 Ordinary Shares of US$ 0.20 each at US$ 3.51 per Ordinary Share. A trustee was appointed in relation to the outstanding Warrants and following the exercise of rights by the trustee, 2,484,909 Ordinary Shares were sold at a price of 213p per Ordinary Share. The Board therefore approved the issue and allotment of 7,794,037 Ordinary Shares, which were listed and admitted to trading on the London Stock Exchange on April 7th, 2014.
The Fund has no Warrants remaining in issue.
On April 2nd, 2014, the Fund announced that the average discount over the financial year ended March 31st, 2014 was in excess of 10% and the Fund had underperformed the benchmark by more than 1% per annum and that a tender offer for up to 15% of the Fund's share capital would be made. A circular was mailed to shareholders on June 2nd, 2014 setting out the terms of the tender offer which were approved at an Extraordinary General meeting held on June 25th, 2014. On July 2nd 2014, the Fund announced that a total of 7,141,250 Ordinary Shares were repurchased and cancelled at a price of 241.5528p per Ordinary Share.
Following the above subsequent events the Fund's issued Ordinary Shares capital consists of 50,678,372 Ordinary Shares with voting rights (including 10,211,277 Ordinary Shares which are held in Treasury without voting rights).
Annual General Meeting
The Company's Annual General Meeting will be held August 19th, 2014 at 3.00p.m. at the registered office of the Company at 49, avenue J.F. Kennedy, L-1855 Luxembourg.
National Storage Mechanism
A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.hemscott.com/nsm.do
ENDS
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.