TIDMWKOF
WEISS KOREA OPPORTUNITY FUND LTD.
LEI 213800GXKGJVWN3BF511
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
The following replaces the RNS 'Annual Financial Report' announcement released
on 30 April 2020 at 07:00
The statement in the Report of the Directors: "The Board expects to declare an
interim dividend on 1 May 2020 with a record date on 11 May 2020 for the year
ended 31 December 2019 based on dividends received primarily from investments
in South Korean preferred shares." has been replaced to read: "The Board
expects to declare an interim dividend on 13 May 2020 with a record date on 22
May 2020 for the year ended 31 December 2019 based on dividends received
primarily from investments in South Korean preferred shares."
The change has been marked with an asterisk. All other information remains
unchanged. The updated version of the announcement is below:
ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2019
Weiss Korea Opportunity Fund Ltd. (the "Company") has today, released its
Annual Financial Report for the year ended 31 December 2019. The Report will
shortly be available for inspection via the
Company's website www.weisskoreaopportunityfund.com.
For further information, please contact:
N+1 Singer
James Maxwell - Nominated Adviser +44 20 7496 3000
James Waterlow - Sales
Northern Trust International Fund
Administration Services (Guernsey)
Limited +44 1481 745385
Samuel Walden
Summary Information
The Company
Weiss Korea Opportunity Fund Ltd. ("WKOF" or the "Company") was incorporated
with limited liability in Guernsey, as a closed-ended investment company on 12
April 2013. The Company's Shares were admitted to trading on the Alternative
Investment Market ("AIM") of the London Stock Exchange (the "LSE") on
14 May 2013.
The Company is managed by Weiss Asset Management LP (the "Investment Manager"),
a Boston-based investment management company registered with the Securities and
Exchange Commission in the United States of America.
Investment Objective and Dividend Policy
The Company's investment objective is to provide Shareholders with an
attractive return on their investment, predominantly through long-term capital
appreciation. The Company is geographically focussed on South Korean companies.
Specifically, the Company invests primarily in listed preferred shares issued
by companies incorporated in South Korea, which in many cases trade at a
discount to the corresponding common shares of the same companies. Since the
Company's Admission to AIM, the Investment Manager has assembled a portfolio of
South Korean preferred shares that it believes are undervalued and could
appreciate based on the criteria that it selects. The Company may, in
accordance with its investment policy, also invest some portion of its assets
in other securities, including exchange-traded funds, futures contracts,
options, swaps and derivatives related to Korean equities, and cash and cash
equivalents. The Company does not have any concentration limits.
The Company intends to return to Shareholders all dividends received, net of
withholding tax, on an annual basis.
Investment Policy
The Company is geographically focused on South Korean companies. Some of the
considerations that affect the Investment Manager's choice of securities to buy
and sell may include the discount at which a preferred share is trading
relative to its respective common share, its dividend yield, its liquidity, and
the weighting of its common share (if any) in the MSCI Korea 25/50 Net Total
Return Index (the "Korea Index"), among other factors. Not all of these factors
will necessarily be satisfied for particular investments. The Investment
Manager does not generally make decisions based on corporate fundamentals or
its view of the commercial prospects of an issuer. Preferred shares are
selected by the Investment Manager at its sole discretion, subject to the
overall control of the board of directors of the Company (the "Board").
The Company purchased certain credit default swaps on the sovereign debt of
South Korea and put options on iShares MSCI South Korea as general market and
portfolio hedges, but generally did not hedge its exposure to interest rates or
foreign currencies during the year ended 31 December 2019 (2018: Nil). Please
see additional information about the nature of these hedges in the Investment
Manager's Report within.
Realisation Opportunity
In accordance with the Company's Articles of Incorporation and its Admission
Document, the Company offered all Shareholders the right to elect to realise
some or all of the value of their Ordinary Shares (the "Realisation
Opportunity"), less applicable costs and expenses, on or prior to the fourth
anniversary of Company's admission to AIM and, unless it has already been
determined that the Company be wound-up, every two years thereafter, the most
recent being 15 May 2019 (the "Realisation Date") and the next Realisation Date
taking place in May 2021. See Note 18 for further details.
On 20 March 2019, the Company announced that pursuant to the Realisation
Opportunity, Shareholders who were on the register as at the record date could
elect, during the Election Period, to redesignate all or part of their Ordinary
Shares as Realisation Shares. The Election Period commenced on 15 April 2019
and closed on 8 May 2019. Elections were received from shareholders totalling
of 2,747,153 Ordinary Shares, representing 3.3 per cent of the Company's issued
share capital.
Following the Realisation Date, the Ordinary Shares held by the Shareholders
who elected for Realisation were redesignated as Realisation Shares and the
Portfolio was split into two separate and distinct Pools, namely the
Continuation Pool (comprising the assets attributable to the continuing
Ordinary Shares) and the Realisation Pool (comprising the assets attributable
to the Realisation Shares).
Share Buybacks
In addition to the Realisation Opportunity, the Company has authority to
repurchase on the open market up to 40 percent of its outstanding Ordinary
Shares. During the year ended 31 December 2019, the Company purchased none
(2018: Nil) of its own Shares at a consideration of GBPNil (31 December 2018: GBP
Nil) under its general buyback authority.
For additional information on Share buybacks refer to Note 18.
Shareholder Information
Northern Trust International Fund Administration Services (Guernsey) Limited
(the "Administrator") is responsible for calculating the Net Asset Value
("NAV") per Share of the Company. The unaudited NAV per Ordinary Share is
calculated on a weekly basis and at the month end by the Administrator, and is
announced by a Regulatory News Service and is available through the Company's
website www.weisskoreaopportunityfund.com.
Company financial highlights and performance summary for the year ended 31
December 2019
As at As at
31 December 2019 31 December 2018
GBP GBP
Total Net Assets 126,988,732 126,489,595
NAV per share 1.5559 1.4993
Basic and diluted earnings/(loss) per 0.0960 (0.3780)
share
Mid-Market Share price 1.50 1.47
Premium/(discount) to NAV* (3.6%) (2.0%)
As at close of business on 21 April 2020, the latest published NAV per Share
had decreased to GBP1.4055 (as at 24 April 2020) and the Share price stood at GBP
1.27.
*The amount by which the market value exceeds or is less than the face value of
a stock.
Total expense ratio
The annualised total expense ratio for the year ended 31 December 2019 was 1.85
per cent (31 December 2018: 1.89 per cent). The annualised total expense ratio
includes charges paid to the Investment Manager and other expenses divided by
the average NAV for the year. See Note 10 for details of such expenses.
Chairman's Review
Year to 31 December 2019
We are pleased to provide the 2019 Annual Report on the Company. During the
period from
31 December 2018 to 31 December 2019 (the "Period"), the Company's NAV
increased by 6.7 per cent, [1] outperforming the reference MSCI Korea 25/50 Net
Total Return Index (the "Korea Index"), which increased 4.8 per cent in pounds
sterling. Since the admission of the Company to AIM in May 2013, the NAV has
increased by 73.4 per cent including reinvested dividends, [2] or 72.4 per cent
assuming dividends are not reinvested in the Company, compared to the Korea
Index returns of 44.3 per cent [3]. A report from the Investment Manager
follows.
As described in the circular to Shareholders published on 20 March 2019, the
Company made available its second Realisation Opportunity enabling Shareholders
to elect to realise all, or a part, of their shareholding.[4] Realisation
opportunities are now scheduled to occur every two years on or about the
anniversary of the Company's listing. We are pleased to offer this feature to
our investors, and proud to note that it has been copied elsewhere in the
market as a model of good corporate governance.
The Directors declared a dividend of 4.1195 pence Sterling per share,
Ex-Dividend Date 9 May 2019, to distribute the income received by the Company
in respect of the year ended 31 December 2018. This dividend was paid to all
Shareholders on 31 May 2019 regardless of any election made under the
Realisation Opportunity.
In addition to the Realisation Opportunity, the Company has an active share
repurchase program as part of its discount management strategy. As the Company
traded at a narrow discount or premium to NAV during the first half of 2019,
there were no share repurchases during the Period. The Board is authorised to
repurchase up to 40 per cent of the Company's outstanding Ordinary Shares in
issue as at 25 July 2019.[5] Since Admission almost six years ago, and as at
the date of this document, the Company has repurchased, at a discount to NAV,
12,590,250 Ordinary Shares of the original 105,000,000 Ordinary Shares issued
at Admission. The Board also has in place standing instructions with the
Company's broker, N+1 Singer Advisory LLP, for the repurchase of the Company's
Shares during closed periods when the Board is not permitted to give individual
instructions; such closed periods typically occur around the preparation of the
Annual and Half Yearly Financial Reports. The Board intends to continue to
aggressively repurchase Shares if the Company's shares are trading at a
significant discount to NAV. We will continue to keep Shareholders informed of
any share repurchases through public announcements.
In early March the spread of COVID-19 in South Korea was exponential and
alarming. The country quickly recorded several thousand cases and the largest
outbreak outside of China. Currently, nearly 11,000 cases and 250 deaths have
been reported. At the same time, the rate of new infections has substantially
declined over that period, from a high of over 800 per day at the end of
February to less than 20 per day at the end of April. It appears, at this time,
that the government's swiftly implemented containment policies, that included
mass testing within infection cluster areas, have been effective at abating the
spread of the virus. That being said, significant uncertainty about containment
remains, and there will likely be a substantial disruption to both the supply
and demand side of the Korean economy.
If you would like to speak with the Investment Manager or learn about potential
opportunities to meet with them, please contact the Company's broker, N+1
Singer. I would like to thank Shareholders for their support and look forward
to the continued success of the Company in the future.
Finally, I would like to congratulate Dr Andrew Weiss for the extraordinary
recognition his charitable work received in 2019. It is not widely known, but
for many years Andrew has been making charitable donations through his own
foundation to improve the lives of poor people in poor countries, and one
aspect of that has been to fund development research through the Weiss Fund for
Research in Development Economics. As you would expect, the charity prides
itself on its efficiency and making every dollar count. His work has achieved
unusual recognition. The joint winners of the 2019 Nobel Prize for Economics,
Abhijit Banerjee, Esther Duflo, and Michael Kremer, decided to donate their
prize money of almost $1m to the Weiss Fund. [6] Congratulations to Andrew and
his wife Bonnie for their efforts and contributions over many years.
Norman Crighton
Chairman
28 April 2020
[1] This return includes the annual cash dividend paid to the Company's
Shareholders but does not assume such dividends are reinvested.
[2] This return includes all dividends paid to the Company's Shareholders and
assumes that these dividends were reinvested in WKOF shares at the next date
for which the Company reports a NAV, at the NAV for that date.
[3] MSCI total return indices are calculated as if any dividends paid by
constituents are reinvested at their respective closing prices on the ex-date
of the distribution.
[4] On 8 May 2019, the Election Period for the Realisation Opportunity closed;
valid elections were received from Shareholders totalling 2,747,153 Ordinary
Shares, representing approximately 3.3 per cent. of the Company's issued share
capital. On 15 May 2019, these electing Ordinary Shares were redesignated as
Realisation Shares, and on 18 June 2019 a full cash redemption was paid out to
holders of Realisation Shares, and the shares were cancelled. None of the
Directors and personnel associated with the Investment Manager participated in
the Realisation Opportunity in respect of all, or any part of, their respective
shareholdings. Indeed, certain personnel associated with the Investment Manager
acquired additional shares during the Period.
[5] On 25 July 2019, the Company had 81,617,828 Ordinary Shares in issue.
[6] Further information can be found in a press release here: https://
economics.harvard.edu/news/
2019-economics-laureates-donate-nobel-prize-money-invest-next-generation-development
Investment Manager's Report
For the year ended 31 December 2019
Performance
In 2019, the Company's NAV gained 6.7 per cent, outperforming the reference
MSCI South Korea Index [1] (GBP) ("the Index"), which returned 4.8 per cent in
pounds sterling. From its inception in May 2013, the Company has significantly
outperformed the Korean market. The total return to an investor in the Company
since inception was 73.4 per cent [2] including reinvested dividends, or 72.4
per cent assuming dividends are not reinvested in the Company, compared to
returns of 45.4 per cent for the Korea Index over the same period.
The outperformance against the Index for 2019 was largely due to discount
narrowing of preferred shares owned, which contributed 4.9 per cent of the 6.7
per cent NAV performance as described in the table below. The Company generally
had less favourable weightings to positive and negative performing sectors than
the Index. In other words, a portfolio composed of the corresponding common
shares of equal market value to the preference shares the Company owns would
have underperformed the index by 3.7 per cent. However, the largest detractor
from performance, as measured in GBP Sterling, was GBP's 7.2 per cent
appreciation against the Korean Won ("KRW") over the year. The Company
generally does not hedge currencies.
Return Attribution Component Trailing 12 month Attribution
MSCI South Korea Index (KRW) [3] 12.9%
WKOF Common Shares vs Korea Index (KRW) [4] -3.7%
Discount Narrowing of Preferred Shares Owned 4.9%
Excess Dividend Yield of Preferred Shares Owned [5] 0.7%
Currency (KRW vs. GBP) -7.2%
Fees & Expenses -1.9%
Other 1.0%
NAV Performance 6.7%
Korea as an Investment
The broader Korean equity market rebounded in 2019 following a dismal 2018.
However, no export reliant economy was spared its share of fallout from the
US-China trade war during the year, and South Korea suffered more than most.
Sales to the US and China account for approximately 40 per cent of Korea's
export value, and by year-end, total South Korean exports had fallen by 10.3
per cent, year over year. Heightened tensions between Korea and Japan over war
reparations, and Japanese restrictions on Korean exports, resulted in yet more
bad news for Korean trade. Toward year end, tensions decreased on both fronts.
In November, Korea reversed a threat made earlier in the year to terminate the
military intelligence sharing pact between the two countries, followed in
December by Japan partially reversing recently levied export restrictions on
raw materials crucial for semiconductor production to Korea. Despite the global
easing of trade tensions, we remain cautious about future developments in this
space.
In addition to the potential for further political vicissitudes, demand for
semiconductors and memory technology is changing. Approximately three quarters
of the world's market share for Dynamic Random Access Memory ("DRAM") chips is
held by two Korean manufacturers - Samsung Electronics and SK Hynix - while
semiconductors comprise approximately 20 per cent of South Korea's exports by
value. 2017 and 2018 were particularly good years for the semiconductor and
memory industry, resulting from a pricing "supercycle" driven by increased
demand and lagging supply for DRAM and NAND memory. Much of this excess demand
subsided in the second half of 2018 and 2019, as new capacity caught up and
prices mean reverted. In turn, overseas sales of semiconductors declined by
nearly 18 per cent year over year from 2018.
Where does this leave us? From a valuation perspective, South Korea looks cheap
in absolute and relative value terms. Valuations for South Korean companies
continue to lag global peers. As of 31 December 2019 the price-to-book ratio
for the KOSPI 200 was 0.9x, while the MSCI All-Country World Index's price to
book ratio is approximately 2.4x. For an investor in the Company, which has a
portfolio of preferred shares with a weighted average discount of 42.6 per cent
to common shares, the implied price to book ratio of the portfolio is a mere
0.4x (for a portfolio of preferred shares comprised of the corresponding common
shares owned by the Company the price to book ratio was 0.8x). We continue to
believe that preferred shares offer an excellent risk/reward investment
opportunity that is levered both to the fundamentals of the South Korean
economy and improved corporate governance over time.
COVID-19
It is difficult for us to predict the full effects of COVID-19 at this time.
Clearly, COVID-19 hurts both global aggregate demand and aggregate supply, and
we are keeping a close eye on the virus developments in Korea, as well as its
impacts to the supply chain of our portfolio investments. On the other hand,
the recent decline in oil prices should generally benefit South Korea, a large
importer of oil and liquid natural gas, and many Korean industries utilize oil
as a raw material. It remains to be seen which one of these effects (COVID-19
vs lower oil prices) will dominate over the long term, and admittedly, we would
not place high confidence in our estimates of the macro picture three months
from now. There is considerable uncertainty whether the global pandemic can be
contained and stabilized during the upcoming summer months.
Increased Shareholder Engagement
We have continuously maintained that corporate governance improvements tend to
carry a general pattern of "two steps forward, one step back." True to this
idiom, in 2019, we observed clear improvements in corporate governance
standards in Korea, as well as disappointments. It's noteworthy that Korea's
Stewardship Code ("the Code") that sets forth "Principles on the Stewardship
Responsibilities of Institutional Investors" continues to garner signatories
from domestic and foreign asset managers, expanding from 100 signatories in
July 2019 to 124 at the time of writing. One area where Korea has improved
significantly since the establishment of the Code is in shareholder engagement.
Both large institutional investors such the National Pension Service ("NPS")
and small asset managers have been more determined to publicly challenge
management policies deemed detrimental to shareholder value. Post the adoption
of the Code there has been an increased proxy vote dissent rate amongst local
and foreign asset managers from 2.8 per cent to 5.4 per cent.
As described more fully in the Semi-annual report, NPS engagement with company
management has yielded mixed results, but it has certainly become more
frequent. NPS asked LG Electronics to increase its dividend payout ratio, and
during 2019 the company announced an 87 per cent increase to its dividend
payout; NPS voted against the re-election of the Korean Air Lines chairman, the
first time NPS has voted against the re-election of a Chaebol head, and the
Chairman was removed. NPS also pressured Namyang Dairy Products Co Ltd
("Namyang") to install a dividend committee after also pushing the company to
increase its dividend payout ratio - ultimately NPS was rebuffed by Namyang. On
the other hand, NPS' support for Hyundai Motor Co's dividend proposals over
those of Elliott Management was disappointing, but not unexpected (as both
major proxy advisory firms ISS and Glass Lewis, also recommended voting in
favor of the company's proposals).
Separately, no less than 8 domestic and foreign asset managers this year have
been pressuring their portfolio companies for change and improved governance.
The increased number of shareholder engagements with Korean companies
reinforces our view that corporate governance in Korea continues to improve
over time. We reiterate our belief that long run improved corporate governance
will not only lead to the narrowing of the discount of securities in the
portfolio, but also add value to the common shares underlying the portfolio's
preferred shares. At the same time, we don't expect drastic changes to
corporate governance overnight, and we anticipate short term setbacks, as seen
in cases where shareholder engagement did not lead to a material change in
dividends or capital allocation.
Regulatory Changes
From a regulatory perspective, the Korean Financial Services Commission ("FSC")
announced that mandatory corporate governance disclosures would be required
annually for companies with assets greater than 2 trillion KRW (and expected to
be required for all companies by 2021). Such disclosure will provide
shareholders with greater transparency into the shareholder base, composition
of management, the board, internal committees within the board, outside
directors and detail the appointment of the audit committee and external
auditor - in turn this information will be disclosed to the public.
The FSC is also cognizant of the need to clarify standards of engagement for
passive funds. Currently, any investor with an ownership percentage greater
than 5 per cent of a listed company must announce whether it would like to
exercise management control ("active") or simply seek investment returns
("passive"). The stated investment purpose affects the required type,
formality, and frequency of mandatory shareholder reporting, and investors that
declare an active stake are subject to more stringent reporting
responsibilities. For example, active investors holding more than 10 per cent
of a company are subject to a short-swing profits disgorgement for sales made
within sixth months of their stock acquisition.
In a development that reflects U.S. regulatory reporting standards, the FSC is
contemplating creating a new investment purpose category to explicitly allow
passive investors to engage with management without declaring an investment to
be "active." The new investment purpose category would be suitable for
institutional investors who have no intention of obtaining management control,
but want to pursue active shareholder activities, such as proposals regarding
dividend payouts. In a similar vein, the FSC is considering abolishing the
above-mentioned short swing profit rule for 10 per cent holders in order to
encourage more management engagement amongst pension funds. We believe this
development would be a meaningful step forward for shareholder rights and
should increase the pressure on companies to raise their dividend payouts,
which in turn would be a particular benefit to investors holding preferred
shares at a discount to the corresponding common shares.
New Preferred Share Issuances
Following CJ Corp's issuance of a new convertible preferred share in late 2018,
Amorepacific Group conducted a similar issue in 2019. In both cases the new
preferred shares convert into the corresponding common share in ten years'
time.
The CJ preferred share issue carried similar economic and legal rights as a
typical preferred share in Korea, as well as the right to receive the common
share dividend plus two percent of par value. These new CJ preferred shares
listed on the Korean Stock Exchange in August on the back of a bonus issue,
initially trading at a discount of around 30 per cent to common shares. In the
case of Amorepacific Group ("Amorepacific") it was a pre-emptive rights
offering, providing existing shareholders the right to subscribe to a new issue
of preferred shares convertible into common shares of Amorepacific in ten
years.
The convertibility clause makes these decidedly different from the majority of
the existing preferred share universe. We suspect that the discounts for these
convertible preferred shares will likely widen out during times of market
stress when the onshore cost of capital increases, potentially giving us
opportunities to invest at attractive long-term levels.
Discounts
The Company's preferred share portfolio weighted average discount narrowed from
43.3 per cent to 42.6 per cent during the year. However, investors should not
take the year on year change in portfolio discount as a representative measure
of the discount movements of the Korean preferred share universe because the
Company's portfolio is neither static nor is it an index of the preferred share
universe. The portfolio year on year change in discount incorporates
significant factors such as active management and rebalancing of the portfolio.
For example, unwinding holdings trading at narrow discounts and reinvesting
cash into securities at wider discounts would, all else being equal, lead to a
widening of the portfolio discount. In fact, despite the modest change of the
portfolio's weighted average discount year on year, discount narrowing of
preferred shares owned accounted for approximately 4.9 per cent out of the 6.7
per cent total return for 2019.
Dividends
The Manager was pleased to observe that the dividend payout ratio for the KOSPI
200, as reported on
31 December 2019, was 35 per cent. This is the highest dividend payout ratio on
record for Korea (available data from Bloomberg begins in 2002), a substantial
increase on the value reported on the prior year end of
21 per cent, and nearly three times the payout ratio in 2013 when the Company
began trading. We believe the increased focus on dividend payouts is a positive
catalyst for the portfolio as Korean preferred share discounts have been
correlated with the size of the common share dividend yield.
Hedging
The Company pursues its investment strategy with a portfolio that is generally
long only. However, as described more fully in the 2018 year-end report,
because of political tensions in Northeast Asia, the Board approved a hedging
strategy in September 2017. The purpose of the hedging strategy is to reduce
exposure to extreme events that would be catastrophic to the Company.
Importantly, the Company has limited its use of hedging instruments to
purchases of credit default swaps and/or put options when deemed cost
effective: securities that we believe would generate high returns in an
economic disaster, without introducing material new risks into the portfolio or
exacerbating existing risks. These catastrophe hedges are not intended to make
money. We expect that the Company's hedges will lose money most of the time -
as with any insurance policy.
The table below provides details about the hedges as of 31 December 2019. Note
that outside of the general market and portfolio hedges described herein, the
Company has generally not hedged interest rates or currencies.
Number of Option Strike Price Total Cost to Purchase Date Expiration
Contracts Held on EWY (USD) Expiration (USD) Date
4,000 $49 $366,155 18 October 2019 17 April 2020
Total Cost $366,155
*Each Option Contract gives the right to sell 100 shares at the Strike Price.
Credit Default Notional Value Total Cost to Annual Price Paid as Expiration Duration
Swaps on South (USD) Expiration Cost (USD) % of Notional Date (Years)
Korean (USD) Value (per
Sovereign Debt annum)
5 yr CDS $20m $457,151 $91,430 45bps 2023 5.0
2 yr CDS $80m $382,619 $191,309 23bps 2020 2.0
Total Cost $839,770 $282,739
Conclusion
Markets have a short memory. Results are often measured on a quarter by quarter
or year by year basis. This short-term mindset tends to open up investment
opportunities for longer term investors, as informational trends can be
obfuscated by short term volatility. For an investor who observes Korean
corporate governance only through the lens of occasional media coverage, they
will miss the significant lengths in which the market has improved compared to
5 or 10 years ago. While we cannot predict the future, our expectation is that
this trend will continue, and South Korea in the year 2025 will similarly have
made cumulative improvements to corporate governance and investor protections.
Korean preferred shares, in our opinion, provide unique and difficult to
replicate upside exposure to this return factor. We continue to believe that
the ability to invest in large-cap, multinational companies at around 50 cents
on the dollar and double the dividend yield remains an attractive investment
opportunity.
Weiss Asset Management LP
28 April 2020
[1] SCI Korea 25/50 Net Total Return Index denominated in GBP. MSCI total
return indices are calculated as if any dividends paid by constituents are
reinvested at their respective closing prices on the ex date of the
distribution. WKOF's performance figures include such distributions, but the
distributions are not assumed to be reinvested in WKOF when calculating WKOF's
performance.
[2] Note that this return includes all dividends paid to the Company's
Shareholders and assumes that these dividends were reinvested in WKOF shares at
the next date for which the Company reports a NAV, at the NAV for that date.
[3] MSCI Korea 25/50 Net Total Return Index denominated in KRW.
[4] WKOF Common Shares vs Korea Index (KRW) is calculated as the return of a
portfolio of common shares issued by the same issuers as the preferred shares
WKOF has owned, as if a hypothetical investor bought or sold an equal quantity
of those common shares on the same days that WKOF purchased or sold its
preferred share investments.
[5] Excess dividend yield of preferred shares owned relative to a portfolio of
the respective common shares.
Directors
For the year ended 31 December 2019
The Company has three non-executive Directors, all of whom are considered
independent of the Investment Manager and details are set out below.
Norman Crighton (aged 53)
Mr Crighton is Chairman of the Company. He is also a non-executive chairman of
RM Secured Direct Lending plc and AVI Japan Opportunity Trust. Norman was,
until May 2011, an investment manager at Metage Capital Limited where he was
responsible for the management of a portfolio of closed-ended funds and has
almost three decades of experience in closed-ended funds having led teams at
Olliff and Partners, LCF Edmond de Rothschild, Merrill Lynch, Jefferies
International Limited and latterly Metage Capital Limited. His experience
covers analysis and research as well as sales and corporate finance. Norman is
British and resident in the United Kingdom. Norman was appointed to the Board
in 2013.
Stephen Charles Coe (aged 54)
Stephen is Chairman of the Audit Committee. He is also a director (and Chairman
of the Audit Committee) of Leaf Clean Energy Company and Merian Chrysalis
Investment Company. He has been involved with offshore investment funds and
managers since 1990 with significant exposure to property, debt, emerging
markets, and private equity investments.
He qualified as a Chartered Accountant with Price Waterhouse Bristol in 1990
and remained in audit practice, specialising in financial services, until 1997.
From 1997 to 2003 he was a director of the Bachmann Group of fiduciary
companies and Managing Director of Bachmann Fund Administration Limited, a
specialist third party fund administration company. From 2003 to 2006 Stephen
was a director with Investec in Guernsey and Managing Director of Investec
Trust (Guernsey) Limited and Investec Administration Services Limited. He
became self-employed in August 2006 providing services to financial services
clients. Stephen is British and resident in Guernsey. Stephen was appointed to
the Board in 2013.
Robert Paul King (aged 56)
Rob is a non-executive director for a number of open and closed-ended
investment funds including Tufton Oceanic Assets Limited (chairman), Chenavari
Capital Solutions Limited (chairman), and CIP Merchant Capital Limited. Before
becoming an independent non-executive director in 2011, he was a director of
Cannon Asset Management Limited and their associated companies. Prior to this
he was a director of Northern Trust International Fund Administration Services
(Guernsey) Limited (formerly Guernsey International Fund Managers Limited)
where he had worked from 1990 to 2007. He has been in the offshore finance
industry since 1986 specialising in administration and structuring of offshore
open and closed-ended investment funds. Rob is British and resident in
Guernsey. Rob was appointed to the Board in 2013.
Report of the Directors
For the year ended 31 December 2019
The Directors of the Company present their Annual Report and Audited Financial
Statements for the year ended 31 December 2019.
Principal Activity
The Company was incorporated with limited liability in Guernsey on 12 April
2013 as a company limited by shares and as an authorised closed-ended
investment company. The Company's Shares were admitted to trading on the AIM of
the LSE on 14 May 2013. As an existing closed-ended fund, the Company is deemed
to be granted an authorised declaration in accordance with Section 8 of the
Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended and Rule
6.02 of the Authorised Closed Ended Investment Schemes Rules 2008 on the same
date as the Company obtained consent under the Control of Borrowing (Bailiwick
of Guernsey) Ordinance 1959 to 1989.
Investment Objective and Investment Policy
The investment objective and investment policy of the Company is to provide
Shareholders with an attractive return on their investment, predominantly
though long-term capital appreciation, by investing primarily in listed South
Korean preferred shares. The full investment objective and investment policy
are detailed on Summary Information of the Annual Report.
Going Concern
Given that the Company has continued in existence following the second
Realisation Opportunity and will continue to operate as a going concern unless
a determination to wind up the Company is made, every two years after the
Realisation Date, the Directors will propose further realisation opportunities
for Shareholders who have not previously elected to realise all of their
Ordinary Shares using a similar mechanism used in the previously announced
Realisation Opportunity. The next Realisation Opportunity will take place
during
May 2021.
Based on the fact that the assets currently held by the Company consist mainly
of securities that are readily realisable, whilst the Directors acknowledge
that the liquidity of these assets needs to be managed, the Directors believe
that the Company has adequate financial resources to meet its liabilities as
they fall due for at least twelve months from the date of this report, and that
it is appropriate for the Financial Statements to be prepared on a going
concern basis.
Viability Statement
In accordance the UK Corporate Governance Code (July 2018) (the "UK Code"),
published by the Financial Reporting Council in 2018, the Board has assessed
the prospects of the Company over the three year period to 31 December 2022
(the "Viability Period").
On 20 March 2019, the Company announced to offer all Shareholders the right to
elect, during the Election Period, to realise some or all of the value of their
Ordinary Shares, less applicable costs and expenses, on or prior to the
Realisation Date. Shareholders representing a total of 2,747,153 shares elected
to participate in the realisation.
The Board and the Investment Manager believe that the investment opportunity
provided by the Company remains compelling, but the viability of the Company is
clearly contingent on the investment opportunity remaining in place, a matter
which the Board monitors on an on-going basis. As the South Korean preference
shares held by the Company trade at a discount compared with ordinary shares
for the same companies, the Company remains attractive to long term investors
over the Viability Period.
The Board has been monitoring the development of the pandemic and has
considered the impact it has had to date and assessing the impact it may have
in the future. Despite the impact on the Company's share performance, there
remains continued uncertainty on its development and scale such that predicting
the impact with any certainty remains challenging. The Board will continue to
assess the position.
The Board's assessment of the Company over the Viability Period has been made
with reference to the Company's current financial position and prospects, the
Company's strategy, and risk appetite, having considered the Company's
principal risks and uncertainties detailed below. The Board has also considered
the Company's likely cash flows and the liquidity of its portfolio.
It is noted that the Company currently has no gearing, though borrowing is
permitted under its constitution. In the event that the Company did consider
taking on debt, the Board would carefully assess the Company's ability to meet
the debt obligations as they become due.
It is possible to imagine a number of scenarios, such as war, pandemic or
political events, which could severely impact the liquidity of the Company's
investments.
The Board has assumed that the regulatory and fiscal regimes under which the
Company operates will continue in broadly the same form during the Viability
Period. The Board speaks with its Broker and legal advisers on a regular basis
to understand issues impacting the Company's regulatory and fiscal structure.
The Board have carried out a robust assessment of the risks outlined below and
they confirm they have a reasonable expectation that the Company will be able
to continue in operation to serve shareholder appropriately and meet its
liabilities as they fall due over the three year period to December 2022.
The Board however remain conscious that, should either:
(a) the aggregate Net Asset Value of the continuing Ordinary Shares at the
close of business on the last Business Day before the next Realisation Date,
(this being May 2021) be less than GBP50 million; or
(b) the mean Weighted Average Discount on the Portfolio is less than 25 per
cent. Over any 90 day period,
the Board will need to reassess the Company's position and may propose an
ordinary resolution for the winding up of the Company.
Notice period of Investment Manager
The Board has assumed that the Investment Manager will remain in place during
the Viability Period; however, the Board acknowledges the risk of the
Investment Manager serving a twelve month notice period under the Investment
Management Agreement ("IMA"). To mitigate this risk, the Board meets and
communicates regularly with the Investment Manager to review its performance
and the Board's relationship with the Investment Manager.
Failure of the Custodian to carry out its obligations to the Company
The Company's assets are held in accounts maintained by the Company's
Custodian. Failure by the Custodian to carry out its obligations to the Company
in accordance with the terms of the Custodian Agreement could have an impact on
the viability of the Company. To mitigate this risk, the Board regularly
receives reports from the Custodian, and through the Management and Engagement
Committee, monitors the relationship with the Custodian.
Loss of license or listing
The Board has assumed that the Company will retain its regulatory status and
listing throughout the Viability Period. The Company Secretary, Administrator,
and Broker report to the Board at least quarterly on regulatory matters and
confirm compliance with listing and other regulatory requirements.
Failure to implement and poor execution of the investment strategy
The Company maintains an investment policy as discussed on Summary Information.
The policy states that the Company must invest primarily in listed South Korean
preference shares, and also states that investments in other types of
securities are allowed as long as the investments track South Korean companies
or the South Korean market as a whole. Failure to implement the investment
strategy or poor execution by the Investment Manager would have an effect on
the viability of the Company. The Board ensures that the policy is being
implemented in the quarterly Board Meetings, where the Investment Manager
presents reports to the Board detailing the current portfolio and investment
performance.
The risks specifically associated with the South Korean economic and political
climate are discussed on the Investment Manager's Report.
Based on the Company's processes for monitoring operating costs, the Share
price discount, the Investment Manager's compliance with the investment
objective, asset allocation, the portfolio risk profile, liquidity risk, and
the robust assessment of the principal risks and uncertainties facing the
Company, the Board has concluded that there is a reasonable expectation that
the Company will be able to continue in operation and meet its liabilities as
they fall due over the Viability Period to 31 December 2022.
International Tax Reporting
For purposes of the US Foreign Accounts Tax Compliance Act, the Company
registered with the US Internal Revenue Service ("IRS") as a Guernsey reporting
Foreign Financial Institution ("FFI") in November 2014, received a Global
Intermediary Identification Number (2A7KNV.99999.SL.831), and can be found on
the IRS FFI list.
The Common Reporting Standard ("CRS") is a global standard for the automatic
exchange of financial account information developed by the Organisation for
Economic Co-operation and Development ("OECD"), which has been adopted by
Guernsey and which came into effect on 1 January 2016.
The Board takes the necessary actions to ensure that the Company is compliant
with Guernsey regulations and guidance in this regard.
Results and Dividends
The results for the year ended 31 December 2019 are set out in the Statement of
Comprehensive Income. An annual dividend of 4.1195 pence per Share (GBP3,475,416)
was approved on 1 May 2019 and paid on
31 May 2019 in respect of the year ended 31 December 2018. An annual dividend
of 3.4155 pence per Share (GBP2,881,486) was approved on 8 June 2018 and paid on
13 July 2018 in respect of the year ended
31 December 2017.
*The Board expects to declare an interim dividend on 13 May 2020 with a record
date on 22 May 2020 for the year ended 31 December 2019 based on dividends
received primarily from investments in South Korean preferred shares.
Shareholder Information
Further Shareholder information can be found in the Summary Information.
Investment Management
The Investment Manager of the Company is Weiss Asset Management LP, a Delaware
limited partnership formed on 10 June 2003 (the "Investment Manager"). The key
terms of the IMA and specifically the fee charged by the Investment Manager are
set out in Note 19 of the Financial Statements. The Board believes that the
investment management fee is competitive with other investment companies with
similar investment mandates.
The Board reviews, on an on-going basis, the performance of the Investment
Manager and considers whether the investment strategy utilised is likely to
achieve the Company's investment objective.
Having considered the portfolio performance and investment strategy, the Board
has unanimously agreed that the interests of the Shareholders as a whole are
best served by the continuing appointment of the Investment Manager on the
terms agreed.
Directors
The details of the Directors of the Company during the year and at the date of
this Report are set out on Directors section.
Directors' Interests
The Directors who held office at 31 December 2019 and up to the date of this
Report held the following numbers of Ordinary Shares beneficially:
As at 31 December 2019 As at 31 December 2018
Ordinary % of issued Ordinary % of issued
Shares share Shares share
capital capital
Norman Crighton 20,000 0.02% 20,000 0.02%
Stephen Coe 10,000 0.01% 10,000 0.01%
Robert King 15,000 0.02% 15,000 0.02%
There have been no changes in the interests of the above Directors during the
year.
Substantial Interests
Disclosure and Transparency Rules ("DTRs") are now comprised in the Financial
Conduct Authority handbook. Section 5, the only section of the DTRs which
applies to AIM-listed companies, requires substantial Shareholders to make
relevant holding notifications to the Company. The Company must then
disseminate this information to the wider market. Details of major Shareholders
in the Company are shown below.
As at 31 December 2019
% of issued
Shareholders Shares share
capital
Standard Life Aberdeen 13,058,100 16.00%
Ruffer LLP 11,500,000 14.09%
Banque Degroof Luxembourg 10,125,000 12.41%
City of London Investment Management Co. 8,723,893 10.69%
Merrill Lynch Pierce 7,000,000 8.58%
Fenner & Smith
Andrew M. Weiss 6,486,888 7.95%
Lepercq de Neuflize Asset 5,746,077 7.04%
Management
EdenTree Investment 5,170,000 6.33%
Management
Mount Capital 4,279,000 5.24%
At the date of signing, 28 April 2020, City of London Investment Management Co.
have increased their holding to 20,796,520 shares, representing 25.48 per cent
of issued share capital and Lepercq de Neuflize Asset Management have fully
redeemed their holding of 5,746,077 shares.
There have been no other notifications of significant changes to the
substantial shareholdings at 28 April 2020.
As at 31 December 2018
% of issued
Shareholders Shares share
capital
Standard Life Aberdeen 13,148,100 15.58%
Ruffer LLP 11,500,000 13.63%
Banque Degroof Luxembourg 10,125,000 12.00%
Mount Capital 8,000,000 9.48%
Merrill Lynch Pierce Fenner & Smith 7,000,000 8.30%
Andrew M. Weiss 6,486,888 7.69%
City of London Investment 6,022,626 7.14%
Management Co.
Lepercq de Neuflize Asset 5,746,077 6.81%
Management
EdenTree Investment Management 5,170,000 6.13%
Corporate Governance
The Company does not have a Main Market Listing on the LSE, and as such, the
Company is not required to comply with the UK Code as issued by the Financial
Reporting Council. However, the Board is committed to high standards of
corporate governance and has implemented a framework for corporate governance
which it considers to be appropriate for an investment company in order to
comply with the main principles of the UK Code. By complying with the main
principles of the UK Code, the Company is deemed to comply with the Code of
Corporate Governance (the "GFSC Code") issued by the Guernsey Financial
Services Commission.
The Board has considered the principles and recommendations of the UK Code, and
considers that reporting against the UK Code will provide better information to
Shareholders. To ensure on-going compliance with these principles, the Board
receives a report from the Company Secretary at each quarterly meeting,
identifying how the Company is in compliance and identifying any changes that
might be necessary.
The Board considers that it has maintained procedures during the year ended 31
December 2019 and up to the date of this Report to ensure that it complies with
the UK Code, except as explained elsewhere in this Annual Report and Financial
Statements.
Role of the Board
The Board is the Company's governing body and has overall responsibility for
maximising the Company's success by directing and supervising the affairs of
the business and meeting the appropriate interests of Shareholders and relevant
stakeholders, while enhancing the value of the Company and also ensuring
protection of investors. A summary of the Board's responsibilities is as
follows:
* statutory obligations and public disclosure;
* strategic matters and financial reporting;
* risk assessment and management including reporting compliance, governance,
monitoring, and control; and
* other matters having a material effect on the Company.
The Board's responsibilities for the Annual Report are set out in the Statement
of Directors' Responsibilities.
Although the Company is domiciled in Guernsey, the Board has considered the
requirements of Section 172 of the Companies Act 2006 in the UK. Section 172 of
the Companies Act requires that the Directors of the Company act in the way
they consider, in good faith, is most likely to promote the success of the
Company for the benefit of all stakeholders, including suppliers, customers and
shareholders. The Board has engaged external companies to undertake the
investment management, administrative, and custodial activities of the Company.
Documented contractual arrangements are in place with these companies which
define the areas where the Board has delegated responsibility to them.
The Board needs to ensure that the Annual Report and Financial Statements,
taken as a whole, are fair, balanced, and understandable and provide the
information necessary for Shareholders to assess the Company's performance,
business model, and strategy.
In seeking to achieve this, the Directors have set out the Company's investment
objective and investment policy, have explained how the Board and its delegated
committees operate, have explained how the Directors review the risk
environment within which the Company operates, and have set appropriate risk
controls. Furthermore, throughout the Annual Report and Financial Statements,
the Board has sought to provide further information to enable Shareholders to
better understand the Company's business and financial performance.
Composition and Independence of the Board
The Board currently comprises three non-executive Directors, all of whom are
considered independent of the Investment Manager. The Directors of the Company
are listed on the Directors section.
The Chairman is Mr Crighton. Biographies for Mr Crighton and all other
Directors appear on the Directors section. In considering the independence of
the Chairman, the Board has taken note of the provisions of the UK Code
relating to independence, and has determined that Mr Crighton is an Independent
Director.
The Board believes it has a good balance of skills and experience to ensure it
operates effectively. The Chairman is responsible for leadership of the Board
and ensuring its effectiveness.
As the Chairman is an Independent Director, no appointment of a Senior
Independent Director has been made. The Company has no employees and therefore
there is no requirement for a Chief Executive or a whistleblowing policy.
The Company holds a minimum of four Board Meetings per year to discuss general
management, structure, finance, corporate governance, marketing, risk
management, compliance, asset allocation and gearing, contracts, and
performance. The quarterly Board Meetings are the principal source of regular
information for the Board, enabling it to determine policy and to monitor
performance, compliance, and controls. These meetings are supplemented by
communication and discussions throughout the year.
A representative of the Investment Manager, Administrator, and Company
Secretary may attend each Board Meeting either in person or by telephone, thus
enabling the Board to fully discuss and review the Company's operations and
performance. Each Director has direct access to the Investment Manager and
Company Secretary and may, at the expense of the Company, seek independent
professional advice on any matter.
The UK Corporate Governance Code limits the tenure of a Board member to nine
years, with additional explanations to be provided should the nine year
recommendation be exceeded. No Director has reached this length of service at
the date of these Financial Statements.
Attendance at the Board and other Committee Meetings during the year was as
follows:
Number of Norman Robert Stephen
Meetings Crighton King Coe
held
Quarterly Board 4 4 4 4
Meetings
Audit Committee 3 3 3 3
Meetings
Management Engagement Committee 1 1 1 1
Meetings
Ad-hoc Board Meetings 5 3 4 2
Board Diversity
The Board considers the composition of the Board on an on-going basis.
Re-election
The Articles of Incorporation provide that one-third of the Directors retire by
a voluntary rotation basis at each Annual General Meeting ("AGM"). However, in
order to meet the highest standards of corporate governance, the Directors have
agreed to stand for election annually.
The Directors may at any time appoint any person to be a Director either to
fill a casual vacancy or as an addition to the existing Directors. Any Director
so appointed shall hold office only until, and shall be eligible for
re-election at, the next AGM following their appointment, but shall not be
taken into account in determining the Directors or the number of Directors who
are to retire by a voluntary rotation basis at that meeting if it is an AGM.
Although the Company looks at not retaining the Chairman of the Board in the
post beyond nine years from date of first appointment on the Board, the Board
have not set such a formal policy in place since the Company shareholders
decide, on an annual basis, whether or not to support the continuation of the
Chairman.
Board Performance
The Board undertakes an evaluation of its own performance and that of
individual Directors on an annual basis. In order to review its effectiveness,
the Board carries out a process of formal self-appraisal. The Board considers
how it functions as a whole and also reviews the individual performance of its
members. This process is conducted by the respective Chairman reviewing each
members' performance, contributions, and commitment to the Company by verbal
discussion.
The Board considers it has a breadth of experience relevant to the Company, and
the Directors believe that any changes to the Board's composition can be
managed without undue disruption.
In accordance with the UK Code, when 20 per cent or more of Shareholder votes
have been cast against a Board recommendation for a resolution, the Company
should explain, when announcing voting results, what actions it intends to take
to consult Shareholders in order to understand the reasons behind the result.
An update on the views received from shareholders and actions taken should be
published no later than six months after the Shareholder meeting. The Board
should then provide a final summary in the annual report and, if applicable, in
the explanatory notes to resolutions at the next shareholder meeting, on what
impact the feedback has had on the decisions the Board has taken and any
actions or resolutions now proposed. During the year, no resolution recommended
by the Board received more than 20 per cent of votes against it.
Committees of the Board
The Board has established an Audit Committee and a Management and Engagement
Committee. All Terms of Reference for both Committees are available from the
Company Secretary upon request or on the Company's website,
www.weisskoreaopportunityfund.com.
Audit Committee
The Company has established an Audit Committee with formally delegated duties
and responsibilities within written terms of reference. The Audit Committee is
chaired by Mr Coe. The Audit Committee's other members are Mr Crighton and Mr
King. The Audit Committee meets formally at least twice a year. Due to the
small size of the Board, the Board considers it appropriate that all Directors
should be members of the Audit Committee.
Appointment to the Audit Committee is for a period of up to three years, which
may be extended for two further three year periods.
The table on Corporate Governance section of the Director's Report sets out the
number of Audit Committee Meetings held during the year ended 31 December 2019
and the number of such meetings attended by each Audit Committee member.
A report of the Audit Committee detailing responsibilities and activities is
presented on the Audit Committee Report
Management and Engagement Committee
The Company has established a Management and Engagement Committee with formally
delegated duties and responsibilities within written terms of reference. The
Management and Engagement Committee is chaired by Mr King. The Management and
Engagement Committee's other members are Mr Crighton and Mr Coe. The Management
and Engagement Committee meets formally once a year.
The principal duties of the Management and Engagement Committee are to review
the performance of and contractual arrangements with the Investment Manager and
all other service providers to the Company (other than the External Auditor).
During the Management and Engagement Committee meeting held on 14 November
2019, the quality of the services provided by the Investment Manager as well as
the other service providers was reviewed. The Management and Engagement
Committee also reviewed the fees of all other service providers (other than the
External Auditor).
As at 31 December 2019, Directors' fees were: GBP30,000 payable to Mr Crighton as
Chairman of the Board, GBP27,500 to Mr Coe as Chairman of the Audit Committee,
and GBP24,000 to Mr King.
For the year ended For the year ended
31 December 2019 31 December 2018
GBP GBP
Norman Crighton 30,000 30,000
Stephen Coe 27,500 27,500
Robert King 24,000 24,000
Nomination Committee
The Board does not have a separate Nomination Committee. The Board as a whole
fulfils the function of a Nomination Committee. Any proposal for a new Director
will be discussed and approved by the Board. The Board will determine whether
an external search consultancy or open advertising is used in the appointments
of non-executive Directors in the future.
Remuneration Committee
In view of its non-executive and independent nature, the Board considers that
it is not appropriate for there to be a Remuneration Committee as anticipated
by the UK Code because this function is carried out as part of the regular
Board business. A Remuneration Report prepared by the Board is contained within
the Director's Remuneration Report. Directors' remuneration is considered on an
annual basis.
Environmental, Social and Governance Matters
As an investment company, WKOF's own direct environmental impact is minimal.
Other than short flights of approximately 160 miles made by the Chairman to
attend quarterly board meetings, the Company has no greenhouse gas emissions to
report from its operations, nor does it have responsibility for any other
emissions producing sources under the Companies Act 2006 (Strategic Reporting
and Directors' Reports) Regulations 2013 or the Companies (Directors' Report)
and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.
The Company's operations are delegated to third party service providers, and
the Company has no employees. The Board seeks assurances, at least annually,
from its main counterparties that they comply with the provisions of the UK
Modern Slavery Act 2015 and maintain adequate safeguards in keeping with the
provisions of the Bribery Act 2010 and Criminal Finances Act 2017.
The Board and Weiss Asset Management LP "WAM" recognise that governance issues
have an effect on its investee companies. The Board supports WAM in its belief
that good corporate governance will help deliver long term Shareholder value.
Since inception of the Company, improved corporate governance has been one of
the main drivers of value, as some Korean companies have improved the
efficiency of their balance sheets by buying back preference shares and
improving dividend payouts. The Board and WAM will continue to support these
changes in its investee companies and expect these governance improvements to
continue in Korea.
Internal Controls
The Board is ultimately responsible for establishing and maintaining the
Company's system of internal controls and for maintaining and reviewing the
system's effectiveness. The Company's risk matrix continues to be the basis of
the Company's risk management process in establishing the Company's system of
internal financial and reporting controls. The risk matrix is prepared and
maintained by the Board, which initially identifies the risks facing the
Company and then collectively assesses the likelihood of each risk, the impact
of those risks, and the strength of the controls operating over each risk. The
Company's system of internal controls is designed to manage rather than to
eliminate the risk of failure to achieve the Company's objectives, and by the
internal controls' nature, can only provide reasonable and not absolute
assurance against misstatement and loss. These controls aim to ensure that:
assets of the Company are safeguarded; proper accounting records are
maintained; and the financial information for publication is reliable.
The UK Code requires Directors to conduct at least annually a review of the
Company's system of internal controls, covering all controls including
financial, operational, compliance, and risk management. The Board has
evaluated the Company's system of internal controls. In particular, it has
prepared a process for identifying and evaluating the significant risks
affecting the Company and the policies by which these risks are managed. The
process has resulted in a low to medium risk assessment.
The Board has delegated the management of the Company's investment portfolio,
administration, registrar, and corporate secretarial functions, which includes
the independent calculation of the Company's NAV and the production of the
audited Annual Report and Financial Statements. Whilst the Board delegates
these functions, it remains responsible for the functions it delegates and for
the systems of internal control. Formal contractual agreements have been put in
place between the Company and providers of these services. On an on-going
basis, Board reports are provided at each quarterly Board Meeting from the
Investment Manager, Administrator, Registrar, and Company Secretary, and a
representative from the Investment Manager is asked to attend these meetings.
In common with most investment companies, the Company does not have an internal
audit function. All of the Company's management functions are delegated to the
Investment Manager, Administrator, Registrar, and Company Secretary, which have
their own internal audit and/or risk assessment functions.
The Company's risk exposure and the effectiveness of its risk management and
internal control systems are reviewed by the Audit Committee at its meetings
and annually by the Board. The Board believes that the Company has adequate and
effective systems in place to identify, mitigate, and manage the risks to which
it is exposed.
Emerging Risks
In order to recognise any new risks that may impact the Company and to ensure
that appropriate controls are in place to manage those risks, the Audit
Committee undertakes a regular review of the Company's Risk Matrix. This review
took place on three occasions during the year.
COVID-19
The Board has been monitoring the development of the pandemic and has
considered the impact it has had to date and assessing the impact it may have
in the future. Despite the impact on the Company's share performance, there
remains continued uncertainty on its development and scale such that predicting
the impact with any certainty remains challenging. The Board will continue to
assess the position.
Principal Risks and Uncertainties
In respect to the Company's system of internal controls and reviewing its
effectiveness, the Directors:
* are satisfied that they have carried out a robust assessment of the
principal risks facing the Company, including those that would threaten its
business model, future performance, solvency, or liquidity; and
* have reviewed the effectiveness of the risk management and internal control
systems, including material financial, operational, and compliance controls
(including those relating to the financial reporting process) and no
significant failings or weaknesses were identified.
The principal risks and uncertainties which have been identified and the steps
which are taken by the Board to mitigate them are as follows:
Investment Risks
The Company is exposed to the risk that its portfolio fails to perform in line
with its investment objective and policy if markets move adversely or if the
Investment Manager fails to comply with the investment policy. The Board
reviews reports from the Investment Manager at the quarterly Board Meetings,
with a focus on the performance of the portfolio in line with its investment
policy. The Administrator is responsible for ensuring that all transactions are
in accordance with the investment restrictions.
Operational Risks
The Company is exposed to the risk arising from any failures of systems and
controls in the operations of the Investment Manager, Administrator, and the
Custodian. The Board and its Committees regularly review reports from the
Investment Manager and the Administrator on their internal controls. The
Administrator will report to the Investment Manager any valuation issues which
will be brought to the Board for final approval as required.
Accounting, Legal and Regulatory Risks
The Company is exposed to the risk that it may fail to maintain accurate
accounting records, fail to comply with requirements of its Admission Document,
and fail to meet listing obligations. The accounting records prepared by the
Administrator are reviewed by the Investment Manager. The Administrator,
Broker, and Investment Manager provide regular updates to the Board on
compliance with the Admission Document and changes in regulation.
Discount Management
The Company is exposed to Shareholder dissatisfaction through inability to
manage the Share price discount to NAV. The Board and its Broker monitor the
Share price discount (or premium) continuously and have engaged in Share
buybacks from time to time to help minimise any such discount. The Board
believes that it has access to sufficiently liquid assets to help manage the
Share price discount. The Company's discount management programme is described
within Note 18.
Liquidity of Investments
The Korean preferred shares typically purchased by the Company generally have
smaller market capitalisations and lower levels of liquidity than their common
share counterparts. These factors, among others, may result in more volatile
price changes in the Company's assets as compared to the South Korean stock
market or other more liquid asset classes. This volatility could cause the NAV
to go up or down dramatically.
In order to realise its investments, the Company will likely need to sell its
holdings in the secondary market, which could prove difficult if adequate
liquidity does not exist at the time, and could result in the values received
by the Company being significantly less than their holding values. The
liquidity of the market for preferred shares may vary materially over time.
There can be no guarantee that a liquid market for the Company's assets will
exist or that the Company's assets can be sold at prices similar to the
published NAV. Illiquidity could also make it difficult or costly for the
Company to purchase securities, and this could result in the Company holding
more cash than anticipated. Furthermore, it is possible that South Korea could
impose currency-exchange or capital controls on foreign investors, making it
difficult or impossible for the Company to repatriate funds. The Investment
Manager considers the liquidity of secondary trading in assessing and managing
the liquidity of the Company's investments. The Board reviews the Company's
resources and obligations on a regular basis with a view to ensuring that
sufficiently liquid assets are held for the expected day to day operations of
the Company. However, if the Company were required to liquidate a substantial
portion of its assets at a single time, it is likely that the market impact of
the necessary sale transactions would impact the value of the portfolio
materially.
Fraud Risk
The Company is exposed to fraud risk. The Audit Committee continues to monitor
the fraud, bribery, and corruption policies of the Company. The Board receives
an annual confirmation from all service providers that there have been no
instances of fraud or bribery.
Financial Risks
The financial risks, including market, credit, and liquidity risks, faced by
the Company are set out in Note 20 of the Financial Statements. These risks and
the controls in place to reduce the risks are reviewed at the quarterly Board
Meetings.
Coronavirus Risk("COIVD-19")
The Board has been in contact with its principal service providers to determine
that their operations remain effective during the time of the pandemic. To date
there has been no discernible impact on the operations of the Company.
Shareholder Engagement
The Directors welcome Shareholders' views and place great importance on
communication with the Company's Shareholders. Shareholders wishing to meet
with the Chairman and other Board members should contact the Company's
Administrator.
The Investment Manager and Broker maintain a regular dialogue with
institutional Shareholders, the feedback from which is reported to the Board.
The Company's AGM provides a forum for Shareholders to meet and discuss issues
of the Company and provides Shareholders with the opportunity to vote on the
resolutions as specified in the Notice of AGM. The Notice of AGM and the
results are released to the London Stock Exchange in the form of an
announcement.
In addition, the Company maintains a website which contains comprehensive
information, including links to regulatory announcements, Share price
information, financial reports, investment objective, and investor contacts.
Auditor
The Auditor, KPMG Channel Islands Limited, has indicated their willingness to
continue in office. Accordingly, a resolution for their reappointment will be
proposed at the forthcoming AGM.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each
financial year. Under that law they have elected to prepare the Financial
Statements in accordance with International Financial Reporting Standards
("IFRS") as adopted by the European Union and applicable law.
Under Company law the Directors must not approve the Financial Statements
unless they are satisfied that the Financial Statements give a true and fair
view of the state of affairs of the Company and of its profit or loss for that
period. In preparing these Financial Statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable, relevant, and reliable;
* state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the Financial
Statements;
* assess the Company's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern; and
* use the going concern basis of accounting unless they either intend to
liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
The Directors are responsible for keeping proper accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable the Directors to ensure that the Financial Statements comply with the
Companies (Guernsey) Law, 2008. They are responsible for such internal control
as they determine is necessary to enable the preparation of Financial
Statements that are free from material misstatement, whether due to fraud or
error, and have general responsibility for taking such steps as are reasonably
open to them to safeguard the assets of the Company and to prevent and detect
fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in Guernsey governing the preparation and dissemination of
Financial Statements may differ from legislation in other jurisdictions.
The Directors confirm that they have complied with the above requirements in
preparing the Annual Report and Financial Statements and that to their best
knowledge and belief:
* the Financial Statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position, and profit or loss of the Company; and
* the Directors' Report includes a fair review of the development and
performance of the business and the position of the issuer, together with a
description of the principal risks and uncertainties that they face.
We consider the Annual Report and Financial Statements, taken as a whole, to be
fair, balanced, and understandable and provides the information necessary for
Shareholders to assess the Company's position and performance, business model,
and strategy.
The Board of Directors confirms that, throughout the period covered by the
Financial Statements, the Company complied with the GFSC Code through its
compliance with the UK Code.
Disclosure of Information to the Auditor
The Directors who hold office at the date of approval of this Directors' Report
confirm that, so far as they are aware, there is no relevant audit information
of which the Company's auditor is unaware, and that each Director has taken all
the steps he ought to have taken as a Director to make himself aware of any
relevant audit information and to establish that the Company's auditor is aware
of that information.
Signed on behalf of the Board by:
Norman Crighton
Chairman
28 April 2020
Stephen Coe
Director
28 April 2020
Directors' Remuneration Report
For the year ended 31 December 2019
Introduction
An ordinary resolution for the approval of the Directors' Remuneration Report
will be put to the Shareholders at the AGM to be held on 24 July 2020.
Remuneration Policy
All Directors are non-executive and a Remuneration Committee has not been
established. The Board as a whole considers matters relating to the Directors'
remuneration. No advice or services were provided by any external person in
respect of the Board's consideration of the Directors' remuneration.
The Company's policy is that the fees payable to the Directors should reflect
the time spent by the Directors on the Company's affairs and the
responsibilities borne by the Directors, and be sufficient to attract, retain,
and motivate Directors of a quality required to run the Company successfully.
The Chairman of the Board is paid a higher fee in recognition of his additional
responsibilities, as is the Chairman of the Audit Committee. The policy is to
review fee rates periodically, although such a review will not necessarily
result in any changes to the rates, and account is taken of fees paid to
directors of comparable companies. The Directors of the Company are remunerated
for their services at such a rate as the Directors determine, provided that the
aggregate amount of such fees does not exceed GBP150,000 per annum.
There are no long term incentive schemes provided by the Company and no
performance fees are paid to Directors.
None of the Directors have a service contract with the Company, but each of the
Directors is appointed by a letter of appointment which sets out the main terms
of their appointment. Directors hold office until they retire by rotation or
cease to be a Director in accordance with the Articles of Incorporation, by
operation of law, or until they resign.
Remuneration
Directors are remunerated in the form of fees, payable quarterly in arrears, to
the Director personally. No Director has been paid additional remuneration
outside their normal Directors' fees and expenses.
As at 31 December 2019, Directors' fees were: GBP30,000 payable to Mr Crighton as
Chairman of the Board, GBP27,500 to Mr Coe as Chairman of the Audit Committee,
and GBP24,000 to Mr King.
For the year ended For the year ended
31 December 2019 31 December 2018
GBP GBP
Norman Crighton 30,000 30,000
Stephen Coe 27,500 27,500
Robert King 24,000 24,000
Signed on behalf of the Board by:
Norman Crighton
Chairman
28 April 2020
Stephen Coe
Director
28 April 2020
Audit Committee Report
For the year ended 31 December 2019
Dear Shareholders,
We present the Audit Committee's Report for 2019, setting out the
responsibilities of the Audit Committee and its key activities in 2019.
The Audit Committee has reviewed the Company's financial reporting, significant
areas of judgement and estimation within the Company's Financial Statements,
the independence and effectiveness of the External Auditor, and the internal
control and risk management systems of the Company's service providers. The
Audit Committee considered whether the Annual Report and Financial Statements
are fair, balanced, and understandable, and whether they provided the necessary
information for Shareholders to assess the Company's performance, business
model, and strategy before recommending them to the Board for approval. In
order to assist the Audit Committee in discharging these responsibilities,
regular reports are received from the Investment Manager, Administrator, and
External Auditor. Following its review of the independence and effectiveness of
the Company's External Auditor, the Audit Committee has recommended to the
Board that KPMG Channel Islands Limited be reappointed as Auditor, which the
Board has submitted for approval to the Company's Shareholders.
A member of the Audit Committee will continue to be available at each AGM to
respond to any Shareholder questions on the activities of the Audit Committee.
Responsibilities
The Audit Committee reviews and recommends the approval of the Financial
Statements of the Company to the Board and is the forum through which the
External Auditor reports to the Board of Directors. The External Auditor and
the Audit Committee will meet together without representatives of either the
Administrator or Investment Manager being present if either considers this to
be necessary.
The role of the Audit Committee includes:
* monitoring the integrity of the published Financial Statements of the
Company;
* reviewing and reporting to the Board on the significant issues, judgements,
and estimates made in the preparation of the Company's published Financial
Statements;
* monitoring and reviewing the quality and effectiveness of the External
Auditor and their independence;
* considering and making recommendations to the Board on the appointment,
reappointment, replacement, and remuneration to the Company's External
Auditor;
* reviewing the Company's procedures for prevention, detection and reporting
of fraud, bribery, and corruption; and
* monitoring and reviewing the internal control and risk management systems
of the service providers.
The Audit Committee's full terms of reference can be obtained by contacting the
Company's Secretary or on the Company's website,
www.weisskoreaopportunityfund.com.
Key Activities of the Audit Committee
The following sections discuss the assessments made by the Audit Committee
during the year:
Financial Reporting
The Audit Committee's review of the Annual Report and Audited Financial
Statements focused on the following significant areas:
Valuation of Investments
The Company's financial investments had a fair value of GBP117,853,987 as at 31
December 2019 and represent the vast majority of the net assets of the Company.
The vast majority of the investments are listed and traded, and the valuation
is by reference to the fair value measurement required by IFRS. The Audit
Committee considered the fair value of the investments held by the Company as
at 31 December 2019 to be reasonable from a review of the information provided
by the Investment Manager and Administrator. All prices have been confirmed by
the Administrator to independent pricing sources as at 31 December 2019.
The Investment Manager and Administrator confirmed to the Audit Committee that
they were not aware of any material misstatements including matters relating to
the Financial Statements' presentation, nor were they aware of any fraud or
bribery relating to the Company's activities. Furthermore, the External Auditor
reported to the Audit Committee that no material misstatements were found in
the course of their work.
Following a review of the presentations and reports from the Administrator and
consulting where necessary with the External Auditor, the Audit Committee is
satisfied that the Financial Statements appropriately address the critical
judgements and key estimates made in the preparation of the Financial
Statements (both in respect to the amounts reported and the disclosures). The
Audit Committee is also satisfied that the significant assumptions used for
determining the value of assets and liabilities have been appropriately
scrutinised and challenged and are sufficiently robust.
Risk Management
The Audit Committee continued to consider the process for managing the risk of
the Company and its service providers. Risk management procedures for the
Company, as detailed in the Company's risk assessment matrix, were reviewed and
approved by the Audit Committee. A review of the risk matrix took place during
the Audit Committee meeting of the 14 November 2019. Following the review,
minor amendments were made.
Fraud, Bribery and Corruption
The Audit Committee continues to monitor the fraud, bribery, and corruption
policies of the Company. The Board receives a confirmation from all service
providers that there have been no instances of fraud or bribery.
The External Auditor
Independence, Objectivity and Fees
The independence and objectivity of the External Auditor are reviewed by the
Audit Committee, which also reviews the terms under which the External Auditor
is appointed to perform non-audit services. The Audit Committee has established
pre-approval policies and procedures for the engagement of the External Auditor
to provide audit and assurance services.
The External Auditor may not provide a service which:
* places them in a position to audit their own work;
* creates a mutuality of interest;
* results in the External Auditor developing close relationships with service
providers of the Company, in respect of services to the Company;
* results in the External Auditor functioning as a manager or employee of the
Company; and
* puts the External Auditor in the role of advocate of the Company.
As a general rule, the Company does not utilise the External Auditor for
internal audit purposes, secondments, or valuation advice. Services such as tax
compliance, tax structuring, private letter rulings, accounting advice,
quarterly reviews, and disclosure advice are normally permitted but will be
pre-approved by the Audit Committee.
The following table summarises the remuneration payable to KPMG Channel Islands
Limited and to other KPMG member firms for audit and non-audit services:
For the year ended For the year ended
31 December 2019 31 December 2018
KPMG Channel Islands Limited GBP GBP
Annual audit 32,000 28,300
KPMG LLP
Tax fees (UK Reporting Fund Status) 9,750 5,000
The Audit Committee does not consider KPMG Channel Islands Limited's
independence to be under threat. In making this assessment, the Audit Committee
has concluded that the non-audit fees, disclosed above, do not relate to
prohibited services. In approving the non-audit services, the Audit Committee
considered the safeguards put in place by KPMG Channel Islands Limited to
reduce the threats to independence and objectivity to an acceptable level.
For the year ended 31 December 2019 the Company has engaged KPMG LLP to provide
tax services, a separate entity to KPMG Channel Islands Limited.
KPMG Channel Islands Limited has been the External Auditor from the date of the
initial listing on the London Stock Exchange. The UK Code introduced a
recommendation that the external audit be put out to tender every ten years.
The Audit Committee has noted this and will develop a plan for tendering at the
appropriate time.
The Audit Committee has examined the scope and results of the audit, its cost
effectiveness, and the independence and objectivity of the External Auditor,
with particular regard to non-audit fees, and considers KPMG Channel Islands
Limited, as External Auditor, to be independent of the Company.
Performance and Effectiveness
During the year, when considering the effectiveness of the External Auditor,
the Audit Committee has taken into account the following factors:
* The audit plan presented to it before the audit;
* Changes in audit personnel;
* The post audit report including variations from the original plan, if any;
* The External Auditor's report on independence; and
* Feedback from both the Investment Manager and Administrator.
Further to the above, at the conclusion of the 2019 audit fieldwork, the Audit
Committee performed specific evaluation of the performance of the External
Auditor through discussion with the Administrator and Investment Manager, as
well as the audit team itself.
There were no significant adverse findings from this evaluation.
Reappointment of External Auditor
Consequent to this review process, the Audit Committee has recommended to the
Board that a resolution be put to the 2020 AGM for the reappointment of KPMG
Channel Islands Limited as External Auditor. The Board has accepted this
recommendation.
Internal Control and Risk Management Systems
After consultation with the Investment Manager, Administrator, and External
Auditor, the Audit Committee has considered the impact of the risk of the
override of controls by its service providers, the Investment Manager, and
Administrator.
The Audit Committee reviews externally prepared assessments of the control
environment in place at the Administrator, with the Administrator providing a
Service Organisation Controls Report on a bi-annual basis. The Audit Committee
noted that the Management and Engagement Committee received a self-assessment
from the Investment Manager and no issues were identified in this.
Additionally, representatives of the Investment Manager meet with the Board of
Directors annually to discuss and review the controls in place at the
Investment Manager. No significant failings or weaknesses were identified in
these reviews.
The Audit Committee has also reviewed the need for an internal audit function.
The Audit Committee has decided that the systems and procedures employed by the
Investment Manager, as well as the Administrator's internal audit function
provide sufficient assurance that a sound system of internal control, which
safeguards the Company's assets, is maintained. An internal audit function
specific to the Company is therefore considered unnecessary.
In finalising the Financial Statements for recommendation to the Board for
approval, the Audit Committee is satisfied that, taken as a whole, the Annual
Report and Financial Statements are fair, balanced, and understandable. The
Board has accepted this approval.
For any questions on the activities of the Audit Committee not addressed in the
foregoing, a member of the Audit Committee remains available to attend each AGM
to respond to such questions.
The Audit Committee Report was approved by the Board on 28 April 2020 and
signed on behalf of the Audit Committee by:
Stephen Coe
Chairman, Audit Committee
28 April 2020
Independent Auditor's Report
To the Members of Weiss Korea Opportunity Fund Ltd.
Our opinion is unmodified
We have audited the financial statements of Weiss Korea Opportunity Fund Ltd.
(the "Company"), which comprise the statement of financial position as at 31
December 2019, the statements of comprehensive income, changes in equity and
cash flows for the year then ended, and notes, comprising significant
accounting policies and other explanatory information.
In our opinion, the accompanying financial statements:
* give a true and fair view of the financial position of the Company as at 31
December 2019, and of the Company's financial performance and cash flows
for the year then ended;
* are prepared in accordance with International Financial Reporting Standards
as adopted by the EU ("IFRS"); and
* comply with the Companies (Guernsey) Law, 2008.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) ("ISAs (UK)") and applicable law. Our responsibilities are described
below. We have fulfilled our ethical responsibilities under, and are
independent of the Company in accordance with, UK ethical requirements
including FRC Ethical Standards, as applied to listed entities. We believe that
the audit evidence we have obtained is a sufficient and appropriate basis for
our opinion.
Key audit matters: our assessment of the risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of
most significance in the audit of the financial statements and include the most
significant assessed risks of material misstatement (whether or not due to
fraud) identified by us, including those which had the greatest effect on: the
overall audit strategy; the allocation of resources in the audit; and directing
the efforts of the engagement team. These matters were addressed in the context
of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters. In
arriving at our audit opinion above, the key audit matter was as follows
(unchanged from 2018):
The risk Our response
Valuation of financial Basis: Our audit procedures
assets at fair value through As at 31 December 2019 the included but were not
profit or loss Company had invested 92.8% of limited to:
("Investments") its net assets in listed
preferred shares and other Control Evaluation:
GBP117,853,987; (2018: GBP financial instruments issued We evaluated the design,
120,312,836) by companies incorporated and implementation and operating
listed in South Korea, which effectiveness of the
Refer to the Audit Committee in certain cases may trade at relevant controls over the
Report, note 2f accounting a discount to the valuation of investments.
policy and notes 12 and 21 corresponding common shares
disclosures. of the same companies. Valuation procedures
including use of a KPMG
The Company's listed Specialist:
investments are valued based We have used our own
on bid-market prices at the valuation specialist to
close of business of the independently price
relevant stock exchange on investments to a third party
the reporting date obtained data source and assessed the
from third party pricing trading volumes behind such
providers. prices.
Risk: Assessing disclosures:
The valuation of the We also considered the
Company's investments, given Company's investment
they represent the majority valuation policies and their
of the Company's net assets application as described in
as at 31 December 2019, is a note 2f to the financial
significant area of our statements for compliance
audit. with IFRS in addition to the
adequacy of disclosures in
notes 12 and 21.
Our application of materiality and an overview of the scope of our audit
Materiality for the financial statements as a whole was set at GBP2,427,000,
determined with reference to a benchmark of net assets of GBP124,544,734, of
which it represents approximately 2.0% (2018: 3.0%).
We reported to the Audit Committee any corrected or uncorrected identified
misstatements exceeding GBP121,000, in addition to other identified misstatements
that warranted reporting on qualitative grounds.
Our audit of the Company was undertaken to the materiality level specified
above, which has informed our identification of significant risks of material
misstatement and the associated audit procedures performed in those areas as
detailed above.
We have nothing to report on going concern
We are required to report to you if we have anything material to add or draw
attention to in relation to the directors' statement in note 2(c) to the
financial statements on the use of the going concern basis of accounting with
no material uncertainties that may cast significant doubt over the Company's
use of that basis for a period of at least twelve months from the date of
approval of the financial statements. We have nothing to report in this
respect.
Other information
The directors are responsible for the other information. The other information
comprises the information included in the annual report but does not include
the financial statements and our auditor's report thereon. Our opinion on the
financial statements does not cover the other information and we do not express
an audit opinion or any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is
to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial 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 in this regard.
Disclosures of emerging and principal risks and longer term viability
Based on the knowledge we acquired during our financial statements audit, we
have nothing material to add or draw attention to in relation to:
* the directors' confirmation within the Viability Statement that they have
carried out a robust assessment of the emerging and principal risks facing
the Company, including those that would threaten its business model, future
performance, solvency or liquidity;
* the Principal Risks disclosures describing these risks and explaining how
they are being managed or mitigated;
* the directors' explanation in the Viability Statement as to how they have
assessed the prospects of the Company, over what period they have done so
and why they consider that period to be appropriate, and their statement as
to whether they have a reasonable expectation that the Company will be able
to continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Corporate governance disclosures
We are required to report to you if:
* we have identified material inconsistencies between the knowledge we
acquired during our financial statements audit and the directors' statement
that they consider that the annual report and financial statements taken as
a whole is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy; or
* the section of the annual report describing the work of the Audit Committee
does not appropriately address matters communicated by us to the Audit
Committee.
We have nothing to report to you in these respects.
We have nothing to report on other matters on which we are required to report
by exception
We have nothing to report in respect of the following matters where the
Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:
* the Company has not kept proper accounting records; or
* the financial statements are not in agreement with the accounting records;
or
* we have not received all the information and explanations, which to the
best of our knowledge and belief are necessary for the purpose of our
audit.
Respective responsibilities
Directors' responsibilities
As explained more fully in the Report of the Directors, the directors are
responsible for: the preparation of the financial statements including being
satisfied that they give a true and fair view; such internal control as they
determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error; assessing
the Company's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern; and using the going concern basis
of accounting unless they either intend to liquidate the Company or to cease
operations, or have no realistic alternative but to do so.
Auditor's responsibilities
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue our opinion in an auditor's report. Reasonable assurance
is a high level of assurance, but does not guarantee that an audit conducted in
accordance with ISAs (UK) will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered material
if, individually or in aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the FRC's website
at www.frc.org.uk/auditorsresponsibilities
The purpose of this report and restrictions on its use by persons other than
the Company's members as a body
This report is made solely to the Company's members, as a body, in accordance
with section 262 of the Companies (Guernsey) Law, 2008. Our audit work has
been undertaken so that we might state to the Company's members those matters
we are required to state to them in an auditor's report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's members, as a
body, for our audit work, for this report, or for the opinions we have formed.
KPMG Channel Islands Limited
Chartered Accountants
Guernsey
29 April 2020
Statement of Financial Position
As at 31 December 2019
As at As at
31 December 31 December
2019 2018
Notes GBP GBP
Assets
Current assets
Financial assets at fair value through 12,21 117,853,987 120,312,836
profit or loss
Derivative financial assets 16,21 33,218 1,706,418
Other receivables 15 2,445,789 2,636,504
Cash and cash equivalents 13 6,430,069 1,304,537
Margin account 14 1,435,750 2,252,688
Total assets 128,198,813 128,212,983
Liabilities
Current liabilities
Derivative financial liabilities 16,21 704,019 1,209,227
Other payables 17 506,062 514,161
Total liabilities 1,210,081 1,723,388
Net assets 126,988,732 126,489,595
Represented by:
Shareholders' equity and
reserves
Share capital 18 68,124,035 72,080,642
Other reserves 2t 58,864,697 54,408,953
Total shareholders' equity 126,988,732 126,489,595
Net assets per share 6 1.5559 1.4993
The Notes form an integral part of these Financial Statements.
The Financial Statements were approved and authorised for issue by the Board of
Directors on 28 April 2020.
Norman Crighton
Chairman
Stephen Coe
Director
Statement of Comprehensive Income
For the year ended 31 December 2019
For the year ended For the year ended
31 December 2019 31 December 2018
Notes GBP GBP
Income
Net changes in fair value of 7 8,105,875 (32,710,234)
financial assets at fair value
through profit or loss
Net changes in fair value of 8 123,038 607,612
derivative financial instruments
through profit or loss
Net foreign currency (losses)/gains 7 (496,260) 164,874
Other income 9 4,325,414 4,437,519
Total income/(loss) 12,058,067 (27,500,229)
Expenses
Operating expenses 10 (3,161,724) (3,418,829)
Total operating expenses (3,161,724) (3,418,829)
Profit/(loss) for the year before tax 8,896,343 (30,919,058)
Withholding tax 2s (965,183) (974,141)
Profit/(loss) for the year 7,931,160 (31,893,199)
after tax
Profit/(loss) and total comprehensive 7,931,160 (31,893,199)
income/(loss) for the year
Basic and diluted earnings/(loss) per 5 0.0960 (0.3780)
Share
All items derive from continuing activities.
The Notes form an integral part of these Financial Statements.
Statement of Changes in Equity
For the year ended 31 December 2019
Share Other
capital reserves Total
Notes GBP GBP GBP
Balance at 1 January 2019 72,080,642 54,408,953 126,489,595
Total comprehensive income for the year - 7,931,160 7,931,160
Transactions with Shareholders, recorded
directly in equity
Redemption of Realisation Shares 18 (3,956,607) - (3,956,607)
Distributions paid 3 - (3,475,416) (3,475,416)
Balance at 31 December 2019 68,124,035 58,864,697 126,988,732
For the year ended 31 December 2018
Balance at 1 January 2018 72,080,642 89,183,638 161,264,280
Total comprehensive loss for the year - (31,893,199) (31,893,199)
Transactions with Shareholders, recorded
directly in equity
Distributions paid 3 - (2,881,486) (2,881,486)
Balance at 31 December 2018 72,080,642 54,408,953 126,489,595
The Notes form an integral part of these Financial Statements.
Statement of Cash Flows
For the year ended 31 December 2019
For the year For the year ended
ended
31 December 2019 31 December 2018
Notes GBP GBP
Cash flows from operating activities
Profit/(loss) for the year 7,931,160 (31,893,199)
Adjustments for:
Net change in fair value of financial 7 (7,609,615) 32,545,360
assets held at fair value through
profit or loss
Net change in fair value of derivative 8 (123,038) (1,399,458)
financial instruments held at fair
value through profit or loss
Net change in NAV of Realisation (41,049) -
Shares
Realised loss on closure of - 791,846
derivatives in the year
Effect of foreign exchange rate (496,260) 164,874
fluctuations
Decrease/(increase) in debtors 15 190,715 (273,396)
(Decrease)/increase in creditors 17 (8,099) 143,938
Net cash (used in)/generated from (156,186) 79,965
operating activities
Cash flows from investing activities
Purchase of financial assets at fair (8,239,027) (23,512,302)
value through profit or loss
Open of derivative financial (593,087) (967,526)
instruments
Proceeds from the sale of financial 18,803,752 23,877,567
assets at fair value through profit or
loss
Closure of derivative financial 1,884,115 122,665
instruments
Decrease in margin account 816,938 1,156,352
Net cash generated from investing 12,672,691 676,756
activities
Cash flows from financing activities
Redemption of Realisation Shares (3,915,557) -
Distributions paid 3 (3,475,416) (2,881,486)
Net cash used in financing activities (7,390,973) (2,881,486)
Net increase/(decrease) in cash and 5,125,532 (2,124,765)
cash equivalents
Cash and cash equivalents at the 1,304,537 3,429,302
beginning of the year
Cash and cash equivalents at the end 6,430,069 1,304,537
of the year
The Notes form an integral part of these Financial Statements.
Notes to the Financial Statements
For the year ended 31 December 2019
1. General information
The Company was incorporated with limited liability in Guernsey, as a
closed-ended investment company on 12 April 2013. The Company's Shares were
admitted to trading on AIM of the LSE on 14 May 2013.
The Investment Manager of the Company is Weiss Asset Management LP.
At the AGM held on 27 July 2016, the Board approved the adoption of the new
Articles of Incorporation in accordance with Section 42(1) of the Companies
(Guernsey) Law, 2008 (the "Law").
2. Significant accounting policies
a) Statement of compliance
The Financial Statements of the Company for the year ended 31 December 2019
have been prepared in accordance with IFRS adopted by the European Union and
the AIM Rules of the London Stock Exchange. They give a true and fair view and
are in compliance with the Law.
b) Basis of preparation
The Financial Statements are prepared in pounds sterling (GBP), which is the
Company's functional and presentational currency. They are prepared on a
historical cost basis modified to include financial assets at fair value
through profit or loss.
c) Going concern
The Company has continued in existence following the second Realisation
Opportunity and will continue to operate as a going concern unless a
determination to wind up the Company is made. Given this, the Directors will
propose further realisation opportunities for Shareholders who have not
previously elected to realise all of their Ordinary Shares. Such opportunities
will be made using a similar mechanism to previously announced Realisation
Opportunities. The next Realisation Opportunity will take place during May
2021.
Based on the fact that the assets currently held by the Company consist mainly
of securities that are readily realisable, whilst the Directors acknowledge
that the liquidity of these assets needs to be managed, the Directors believe
that the Company has adequate financial resources to meet its liabilities as
they fall due for at least twelve months from the date of this report, and that
it is appropriate for the Financial Statements to be prepared on a going
concern basis.
d) Standards, amendments and interpretations not yet effective
A number of new standards, amendments to standards and interpretations are
effective for annual periods beginning after 1 January 2020, and have not been
early adopted in preparing these financial statements. None of these are
expected to have a material effect on the financial statements of the Company.
e) Standards, amendments and interpretations effective during the year
There are no new standards effective in the current year which impact the
Company.
f) Financial instruments
i) Classification
Financial assets are classified into the following categories: financial assets
at fair value through profit or loss and amortised cost.
The classification depends on the business model in which a financial asset is
managed and its contractual cash flows.
Financial liabilities are classified as either financial liabilities at fair
value through profit or loss or other financial liabilities at amortised cost.
ii) Recognition and measurement
Financial assets at fair value through profit or loss ("investments")
Financial assets and derivatives are recognised in the Company's Statement of
Financial Position when the Company becomes a party to the contractual
provisions of the instrument.
Purchases and sales of investments are recognised on the trade date (the date
on which the Company commits to purchase or sell the investment). Investments
purchased are initially recorded at fair value, being the consideration given
and excluding transaction or other dealing costs associated with the
investment.
Subsequent to initial recognition, investments are measured at fair value.
Gains and losses arising from changes in the fair value of investments and
gains and losses on investments that are sold are recognised through profit
or loss in the Statement of Comprehensive Income within net changes in fair
value of financial assets at fair value through profit or loss.
Financial assets at fair value through profit or loss ("derivatives: credit
default swaps and options")
Subsequent to initial recognition at fair value, credit default swaps and
options are measured at fair value through profit and loss.
The fair values of the credit default swaps and options are based on traded
prices. The valuation of the credit default swaps' and options' fair values
means fluctuations will be reflected in the net changes in fair value of
derivative instruments.
Derivatives are presented in the Statement of Financial Position as financial
assets when their fair value is positive and as financial liabilities when
their fair value is negative.
Other financial instruments
For other financial instruments, including other receivables and other
payables, the carrying amounts as shown in the Statement of Financial Position
approximate the fair values due to the short term nature of these financial
instruments.
iii) Fair Value Measurement
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. Investments traded in active markets are valued at the
latest available bid prices ruling at midnight, Greenwich Mean Time ("GMT"), on
the reporting date. The Directors are of the opinion that the bid-market prices
are the best estimate of fair value. Gains and losses arising from changes in
the fair value of financial assets and financial liabilities at fair value
through profit and loss are shown as net gains or losses on financial assets
through profit or loss in Note 12 and are recognised in the Statement of
Comprehensive Income in the period in which they arise. Gains and losses
arising from changes in the fair value of derivative financial instruments are
shown as net gains or losses on financial derivatives through profit or loss in
Note 16 and are recognised in the Statement of Comprehensive Income in the
period in which they arise.
iv) Derecognition of financial instruments
A financial asset is derecognised when: (a) the rights to receive cash flows
from the asset have expired; (b) the Company retains the right to receive cash
flows from the asset, but has assumed an obligation to pay them in full without
material delay to a third party under a "pass through arrangement"; or (c) the
Company has transferred substantially all the risks and rewards of the asset,
or has neither transferred nor retained substantially all the risks and rewards
of the asset, but has transferred control of the asset.
On derecognition of a financial asset, the difference between the carrying
amount of the asset using the average cost method and the consideration
received (including any new asset obtained, less any new liability assumed) is
recognised in profit or loss.
A financial liability is derecognised when the obligation under the liability
is discharged, cancelled, or expired.
f) Net changes in fair value of financial assets at fair value through profit
or loss
Net changes in fair value of financial assets at fair value through profit or
loss includes all realised and unrealised fair value changes and foreign
exchange differences, but excludes dividend income.
g) Income
Dividend income from equity investments is recognised through profit or loss in
the Statement of Comprehensive Income when the relevant investment is quoted
ex-dividend.
h) Expenses
All expenses are accounted for on an accruals basis. Expenses incurred on the
acquisition of financial assets at fair value through profit or loss and
management fees are charged to the Statement of Comprehensive Income.
i) Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash equivalents, which can
include bank overdrafts and margin accounts, are short term, highly liquid
investments that are readily convertible to known amounts of cash and which are
subject to insignificant changes in value. Cash, deposits with banks, and bank
overdrafts are stated at their principal amount.
j) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of these Shares are shown in equity as a deduction,
net of tax, from the proceeds and disclosed in the Statement of Changes in
Equity.
k) Foreign currency translations
Functional and presentation currency
The Financial Statements of the Company are presented in the currency of the
primary economic environment in which the Company operates (its "functional
currency"). The Directors have considered the currency in which the original
capital was raised, distributions will be made, and ultimately the currency in
which capital would be returned in a liquidation.
On the Statement of Financial Position date, the Directors believe that pounds
sterling best represents the functional currency of the Company. For the
purpose of the Financial Statements, the results and financial position of the
Company are expressed in pounds sterling, which is the presentational currency
of the Company. Monetary assets and liabilities, denominated in foreign
currencies, are translated into pounds sterling at the exchange rate at the
reporting date. Non-monetary assets denominated in foreign currencies that are
measured at fair value are translated in pounds sterling at the exchange rate
at the date on which the fair value was determined. Realised and unrealised
gains or losses on currency translation are recognised in the Statement of
Comprehensive Income. Foreign currency differences relating to investments at
fair value through profit or loss are included within net changes in fair value
of financial assets at fair value through profit or loss.
l) Treasury shares
Where the Company purchases its own share capital, the consideration paid,
which includes any directly attributable costs, is deducted through share
capital. The difference between the total consideration and the total nominal
value of all Shares purchased is recognised through other reserves, which is a
distributable reserve.
If such Shares are subsequently sold or reissued, any consideration received,
net of any directly attributable incremental transaction costs and the related
income tax effects, is recognised as an increase in equity and the resulting
surplus or deficit on the transaction is transferred to or from other reserves.
Where the Company cancels treasury shares, no further adjustment is required to
the share capital account at the time of cancellation. Shares held in treasury
are excluded from calculations when determining NAV per Share and earnings per
Share.
m) Operating segments
The Board has considered the requirements of IFRS 8 'Operating Segments' and is
of the view that the Company is engaged in a single segment of business, being
an investment strategy tied to listed preferred shares issued by companies
incorporated in South Korea. The Board, as a whole, has been determined as
constituting the chief operating decision maker of the Company.
The key measure of performance used by the Board to assess the Company's
performance and to allocate resources is the total return on the Company's NAV,
as calculated under IFRS, and therefore no reconciliation is required between
the measure of profit or loss used by the Board and that contained in these
Audited Financial Statements.
The Board of Directors is charged with setting the Company's investment
strategy in accordance with the investment policy. They have delegated the day
to day implementation of this strategy to the Company's Investment Manager but
retain responsibility to ensure that adequate resources of the Company are
directed in accordance with their decisions. The investment decisions of the
Investment Manager are reviewed on a regular basis to ensure compliance with
the policies and legal responsibilities of the Board. The Investment Manager
has been given full authority to act on behalf of the Company, including the
authority to purchase and sell securities and other investments on behalf of
the Company and to carry out other actions as appropriate to give effect
thereto.
Whilst the Investment Manager may make the investment decisions on a day to day
basis regarding the allocation of funds to different investments, any changes
to the investment strategy or major allocation decisions have to be approved by
the Board, even though they may be proposed by the Investment Manager.
The Board therefore retains full responsibility as to the major decisions made
on an on-going basis. The Investment Manager will always act under the terms of
the Admission Document which cannot be significantly changed without the
approval of the Board of Directors and where necessary, Shareholders.
o) Other receivables
Other receivables are amounts due in the ordinary course of business. Other
receivables are recognised initially at fair value and subsequently measured at
amortised cost using the effective interest method, less provision for
impairment.
p) Other payables
Other payables are obligations to pay for services that have been acquired in
the ordinary course of business. Other payables are recognised initially at
fair value and subsequently measured at amortised cost using the effective
interest method.
q) Due from and due to brokers
Amounts due from and due to brokers represent receivables for securities sold
and payables for securities purchased that have been contracted for but not yet
settled or delivered on the Statement of Financial Position date, respectively.
r) Dividend distribution
Dividend distribution to the Company's Shareholders is recognised as a
liability in the Company's Financial Statements and disclosed in the Statement
of Changes in Equity in the period in which the dividends are proposed and
approved by the Board.
s) Taxation
The Company has been granted Exempt Status under the terms of The Income Tax
(Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its
liability is an annual fee of GBP1,200 (2018: GBP1,200).
The amounts disclosed as taxation in the Statement of Comprehensive Income
relate solely to withholding tax levied in South Korea on distributions from
South Korean companies at an offshore rate of 22 per cent.
t) Other reserves
Total comprehensive income for the year is transferred to Other Reserves.
3. Dividends to Shareholders
Dividends, if any, will be paid annually each year. An annual dividend of
4.1195 pence per Share (GBP3,475,416) was approved on 1 May 2019 and paid on
31 May 2019 in respect of the year ended 31 December 2018.
An annual dividend of 3.4155 pence per Share (GBP2,881,486) was approved on 8
June 2018 and paid on 13 July 2018 in respect of the year ended 31 December
2017.
4. Significant accounting judgements, estimates and assumptions
The preparation of the Financial Statements in conformity with IFRS requires
management to make judgements, estimates, and assumptions that affect the
application of policies and the reported amounts of assets and liabilities,
income and expense, and the accompanying disclosures. Uncertainty about these
assumptions and estimates could result in outcomes that require a material
adjustment to the carrying amount of assets or liabilities affected in future
periods.
The estimates and underlying assumptions are reviewed on an on-going basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of revision and future periods if the revision affects both current and future
periods.
Judgements
In the process of applying the Company's accounting policies, management has
made the following judgements, which have the most significant effect on the
amounts recognised in the Annual Financial Statements:
Functional currency
As disclosed in Note 2l, the Company's functional currency is the pound
sterling. Pound sterling is the currency in which the original capital was
raised, distributions will be made, and ultimately the currency in which
capital would be returned in a liquidation.
5. Basic and diluted loss/earnings per Share
The basic and diluted earnings per Share of GBP0.0960 (31 December 2018: loss per
Share of GBP0.3780) for the Company has been calculated based on the total
comprehensive profit for the year of GBP7,931,160 (for the year ended 31 December
2018: GBP31,893,199 loss) and the weighted average number of Ordinary Shares in
issue during the year of 82,633,898 (for the year ended 31 December 2018:
84,364,981).
6. Net asset value per Ordinary Share
The NAV of each Share of GBP1.5559 (as at 31 December 2018: GBP1.4993) is
determined by dividing the net assets of the Company attributed to the Ordinary
Shares of GBP126,988,732 (as at 31 December 2018: GBP126,489,595) by the number of
Ordinary Shares in issue at 31 December 2019 of 81,617,828 (as at 31 December
2018: 84,364,981 Ordinary Shares in issue).
7. Net changes in fair value on financial assets at fair value through profit
or loss
For the year ended For the year
ended
31 December 2019 31 December 2018
GBP GBP
Realised gain on 6,830,858 4,905,671
investments
Realised loss on foreign currency (232,536) (32,938)
Movement in unrealised gain/(loss) on 1,275,017 (37,615,905)
investments
Movement in unrealised exchange (loss)/gain on (263,724) 197,812
foreign currency
Net changes in fair value on financial assets 7,609,615 (32,545,360)
at fair value through profit or loss
8. Net changes in fair value on derivative financial instruments at fair
value through profit or loss
For the year ended For the year
ended
31 December 2019 31 December 2018
GBP GBP
Realised gain/(loss) on 668,601 (226,513)
options
Realised loss on credit default swaps - (565,333)
Movement in unrealised (loss)/gain on (1,050,771) 923,716
options
Movement in unrealised gain/(loss) on 505,208 475,742
credit default swaps
Net changes in fair value on financial
derivatives at fair value through profit 123,038 607,612
or loss
9. Other income
For the year For the year
ended ended
31 December 2019 31 December 2018
GBP GBP
Dividend 4,325,414 4,437,519
income
10. Operating expenses
For the year For the year
ended ended
31 December 31 December
2019 2018
GBP GBP
Investment Management fee (Note 19c) 1,860,960 2,108,383
Custodian fees 46,965 60,401
Audit fees 33,788 28,300
Administration and Secretarial fees 98,314 99,315
Directors' fees (Note 19a) 81,500 81,500
Tax services 9,750 5,000
Professional fees 68,137 154,485
Transaction costs¹ 103,063 136,536
Sundry expenses 96,632 116,260
Derivative 762,615 628,649
expense¹
Total 3,161,724 3,418,829
Operating
Expenses
1. Excluded from the TER calculation.
11. Operating segments
Information on realised gains and losses derived from sales of investments is
disclosed in Note 7 of the Financial Statements. The Company is domiciled in
Guernsey. Substantially all of the Company's income is from its investment in
listed preferred shares issued by companies incorporated in South Korea.
The Company has no assets classified as non-current assets. The Company is
likely to have a high degree of portfolio concentration as South Korean
preferred shares are concentrated with a small number of issuers.
12. Financial assets at fair value through profit or loss
As at As at
31 December 2019 31 December 2018
GBP GBP
Cost of investments at beginning of the 110,153,284 106,460,720
year
Purchases of investments in the year 8,239,027 20,717,121
Disposal of investments in the year (18,803,751) (21,930,228)
Realised gain on disposal of investments 6,830,858 4,905,671
in the year
Cost of investments held at end of the 106,419,418 110,153,284
year
Unrealised gain on investments 11,434,569 10,159,552
Financial assets at fair value through 117,853,987 120,312,836
profit or loss
Financial assets are valued at the bid-market prices ruling as at the close of
business at the Statement of Financial Position date, net of any accrued
interest which is included in the Statement of Financial Position as an income
related item. The Directors are of the opinion that the bid-market prices are
the best estimate of fair value in accordance with the requirements of IFRS 13
'Fair Value Measurement'. Movements in fair value are included in the Statement
of Comprehensive Income.
13. Cash and cash equivalents
As at As at
31 December 2019 31 December 2018
GBP GBP
Cash at bank 6,430,069 1,304,537
Cash at bank earns interest at floating rates based on daily bank deposit
rates. The carrying value of cash at bank approximates the fair values due to
the short term nature.
14. Margin account
As at As at
31 December 2019 31 December 2018
GBP GBP
Margin account 1,435,750 2,252,688
The margin account represents a margin deposit of collateral held by Credit
Suisse Securities (USA) LLC in relation to the credit default swaps. The
carrying value of the margin account approximates the fair values due to the
short term nature.
15. Other receivables
As at As at
31 December 31 December
2019 2018
GBP GBP
Dividends receivable 2,443,998 2,632,690
Prepaid expenses 1,791 3,814
Total Other 2,445,789 2,636,504
Receivables
The Directors consider that the carrying amount of receivables approximate
their fair value.
Dividends are presented net of withholding tax of GBP689,333 (2018: GBP742,554).
16. Derivative financial instruments
As at As at
31 December 2019 31 December 2018
GBP GBP
Cost of derivatives at beginning of the year (552,309) (605,324)
Open of derivatives in the 593,087 967,526
year
Closure of derivatives in the (1,884,116) (122,665)
year
Realised gain/(loss) on closure of derivatives 668,601 (791,846)
in the year
Net cost of derivatives held at end of the (1,174,737) (552,309)
year
Net changes in fair value on derivative 503,936 1,049,500
financial instruments at fair value through
profit or loss
Net fair value on derivative financial (670,801) 497,191
instruments at fair value through profit or loss
The following are the composition of the Company's derivative financial
instruments at year end:
As at As at
31 December 2019 31 December 2018
Assets Liabilities Assets Liabilities
Derivatives held for GBP GBP GBP GBP
trading:
Options 33,218 - 1,706,418 -
Credit default swaps - (704,019) - (1,209,227)
Total 33,218 (704,019) 1,706,418 (1,209,227)
17. Other payables
As at As at
31 December 2019 31 December 2018
GBP GBP
Investment management fees payable (Note 310,841 316,144
19c)
Administration fee 34,876 18,138
payable
Custody fee payable 3,900 15,993
Co-sec and Listing fee payable 12,499 2,561
Audit fees payable 33,000 22,800
Other payables 110,946 138,525
Total Other Payables 506,062 514,161
The Directors consider that the carrying amount of payables approximate their
fair value.
18. Share capital
The share capital of the Company consists of an unlimited number of Ordinary
Shares of no par value.
As at As at
31 December 2019 31 December 2018
Authorised
Unlimited Ordinary Shares at no par - -
value
Issued at no par
value
81,617,828 (2018: 84,364,981) unlimited - -
Ordinary Shares at no par value
Reconciliation of number of Shares
As at As at
31 December 2019 31 December 2018
No. of Shares No. of Shares
Ordinary Shares at the beginning of the 84,364,981 84,364,981
year
Purchase of Realisation Shares (2,747,153) -
Total Ordinary Shares in issue at the 81,617,828 84,364,981
end of the year
Share capital
account
As at As at
31 December 2019 31 December 2018
GBP GBP
Share capital at the beginning of the 72,080,642 72,080,642
year
Purchase of Realisation Shares (3,956,607) -
Total Share capital at the end of the 68,124,035 72,080,642
year
Ordinary Shares
The Company has a single class of Ordinary Shares, which were issued by means
of an initial public offering on 14 May 2013, at 100 pence per Share.
The rights attached to the Ordinary Shares are as follows:
a) The holders of Ordinary Shares shall confer the right to all dividends in
accordance with the Articles of Incorporation of the Company.
b) The capital and surplus assets of the Company remaining after payment of
all creditors shall, on winding-up or on a return (other than by way of
purchase or redemption of own Ordinary Shares) be divided amongst the
Shareholders on the basis of the capital attributable to the Ordinary Shares at
the date of winding up or other return of capital.
c) Shareholders present in person or by proxy or (being a corporation) present
by a duly authorised representative at a general meeting have, on a show of
hands, one vote and, on a poll, one vote for every Share.
d) On 20 March 2019, being 46 days before the Subsequent Realisation Date, the
Company published a circular pursuant to the Realisation Opportunity, entitling
the Shareholders to serve a written notice during the election period (a
"Realisation Election") requesting that all or a part of their Ordinary Shares
be re-designated to Realisation Shares, subject to the aggregate NAV of the
continuing Ordinary Shares on the last business day before the Reorganisation
Date being not less than GBP50 million. As Shareholders elected to participate in
the Realisation Opportunity, the Company's portfolio was divided into two
pools: the Continuation Pool; and the Realisation Pool.
e) On 15 May 2019, 2,747,153 Ordinary Shares, which represented 3.3 per cent
of the Company's issued Ordinary Share capital were redesignated as Realisation
Shares. On the 7 June 2019 the Board approved the compulsory redemption of the
Realisation Shares in issue. The redemption price was 142.53 pence per
Realisation Share, being the net assets of the Realisation Pool of GBP3,915,557,
divided by the number of outstanding Realisation Shares in issue, being
2,747,153 Realisation Shares. The redemption proceeds were paid to the
Realisation Shareholders on 18 June 2019, after which the Realisation Shares
were cancelled and were no longer in issue.
Share buyback and cancellation
During the year ended 31 December 2019, the Company purchased Nil of its own
Shares (31 December 2018: Nil) at a consideration of GBPNil (31 December 2018: GBP
Nil) under the Share buyback authority originally granted to the Company in
2014.
The Company has 81,617,828 Ordinary Shares in issue as at 31 December 2019 (as
at 31 December 2018: 84,364,981).
At the AGM held on 25 July 2019, Shareholders approved the authority of the
Company to buy back up to 40 per cent of the issued Ordinary Shares to
facilitate the Company's discount management. Any Ordinary Shares bought back
may be cancelled or held in treasury.
19. Related party transactions and material agreements
Related party transactions
a) Directors' remuneration and expenses
During the year ended 31 December 2019, Directors' fees of GBP81,500 (31 December
2018: GBP81,500) were charged to the Company and GBPNil remained payable at the
year-end (as at 31 December 2018: GBPNil). For additional information refer to
the Directors' Remuneration Report.
b) Shares held by related parties
The Directors' Interests are set out in the Report of the Directors.
The Investment Manager is principally owned by Dr Andrew Weiss and certain
members of the Investment Manager's senior management team.
As at 31 December 2019, Dr Andrew Weiss and his immediate family members held
an interest in 6,486,888 Ordinary Shares (as at 31 December 2018: 6,486,888)
representing 7.95 per cent. (as at 31 December 2018: 7.69 per cent.) of the
issued share capital of the Company.
As at 31 December 2019, employees of the Investment Manager, their respective
immediate family members or entities controlled by them or their immediate
family members held an interest in 2,844,333 Ordinary Shares (as at 31 December
2018: 2,718,333) representing 3.48 per cent. (as at 31 December 2018: 3.22 per
cent.) of the issued share capital of the Company.
Material agreements
c) Investment management fee
The Company's Investment Manager is Weiss Asset Management LP. In consideration
for its services provided by the Investment Manager under the IMA dated 8 May
2013, the Investment Manager is entitled to an annual management fee of 1.5 per
cent of the Company's NAV accrued daily and payable within 14 days after each
month end. The Investment Manager is also entitled to reimbursement of certain
expenses incurred by it in connection with its duties.
The IMA will continue in force until terminated by the Investment Manager or
the Company, giving to the other party thereto not less than 12 months' notice
in writing.
For the year ended 31 December 2019, investment management fees and charges of
GBP1,860,960 (for the year ended 31 December 2018: GBP2,108,383) were charged to
the Company and GBP310,841 (as at 31 December 2018: GBP316,144) remained payable at
the year-end.
Additionally, investment management fees of GBP5,630 were charged to the
Realisation pool up until its closure.
20. Financial risk management
The Company's objective in managing risk is the creation and protection of
Shareholder value. Risk is inherent in the Company's activities, but it is
managed through an on-going process of identification, measurement, and
monitoring.
The main risks arising from the Company's financial instruments are market
risk, foreign currency risk, interest rate risk, credit risk, and liquidity
risk. The techniques and instruments utilised for the purposes of efficient
portfolio management are those which are reasonably believed by the Board to be
economically appropriate to the efficient management of the Company.
Market risk
Market risk is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices. The Company's
activities expose it primarily to the market risks of changes in market prices,
interest rates, and foreign currency exchange rates. The Company's investments
are heavily concentrated in South Korean securities. As the Company's
investments are heavily concentrated in South Korean securities, the Company
has entered into certain portfolio hedge positions which are intended to
provide some level of protection against potential adverse geopolitical and
macroeconomic conditions in South Korea.
Market price risk
The Company's NAV is sensitive to movements in market prices. As at 31 December
2019, if market prices had been 5 per cent higher or 5 per cent lower with all
other variables held constant, then the increase/decrease in NAV would have
been GBP5,892,699 (as at 31 December 2018: GBP6,039,161). Actual trading results
may differ from the above sensitivity analysis and those differences may be
material.
Were there to be a major change in the political or economic environment in
South Korea, the movement in market prices may be significantly and materially
higher than the above. Refer to Investment Manager's Report for a discussion of
potential political and economic changes.
Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates.
The Company does not hedge its exposure to foreign currency (predominantly
Korean won (KRW)) and NAV per Share will fluctuate with movements in foreign
exchange rates.
As at 31 December 2019, the Company held the following assets and liabilities
in foreign currencies:
As at As at
31 December 2019 31 December 2018
Amounts in Sterling KRW USD KRW USD
Assets
Monetary assets 7,942,503 1,717,106 3,402,192 2,611,598
Non-monetary assets 117,853,986 33,218 120,312,836 1,706,418
125,796,489 1,750,324 123,715,028 4,318,016
Liabilities
Non-monetary liabilities - (704,019) - (1,209,227)
Total - (704,019) - (1,209,227)
Amounts in the above table are based on the carrying value of monetary assets
and liabilities.
The table below summarises the sensitivity of the Company's monetary and
non-monetary assets and liabilities to changes in foreign exchange movements at
31 December 2019.
Reasonable As at Reasonable As at
possible 31 December possible 31 December
shift in 2019 shift in 2018
rate rate
2019 GBP 2018 GBP
Currency
KRW
Monetary assets +/- 5% 397,125 +/- 5% 170,110
Non-monetary assets +/- 5% 5,892,699 +/- 5% 6,015,642
US Dollars
Monetary assets +/- 5% 85,855 +/- 5% 130,580
Non-monetary assets +/- 5% 1,661 +/- 5% 85,321
Non-monetary liabilities +/- 5% (35,201) +/- 5% (60,461)
Interest rate risk
The Company holds limited cash and margin balances in interest-bearing accounts
of GBP7,865,819 as at
31 December 2019 (as at 31 December 2018: GBP3,557,225) and does not invest in
interest-bearing securities and instruments. Accordingly, interest rate risk is
considered very low.
The tables below summarise the Company's exposure to interest rate risk as of
31 December 2019:
Total
Floating Fixed Non-Interest As at
rate rate bearing 31 December 2019
GBP GBP GBP GBP
Financial Assets
Investments designated at
fair value
through profit or loss - - 117,853,987 117,853,987
Derivative financial assets - - 33,218 33,218
Other receivables - - 2,445,789 2,445,789
Cash and cash equivalents 6,430,069 - - 6,430,069
Margin account 1,435,750 - - 1,435,750
Total 7,865,819 - 120,332,994 128,198,813
Total
Floating Fixed Non-Interest As at
rate rate bearing 31 December 2019
GBP GBP GBP GBP
Financial Liabilities
Derivative financial - - 704,019 704,019
liabilities
Other payables - - 506,062 506,062
Total - - 1,210,081 1,210,081
The tables below summarise the Company's exposure to interest rate risk as of
31 December 2018:
Total
Floating Fixed Non-Interest As at
rate rate bearing 31 December 2019
GBP GBP GBP GBP
Financial Assets
Investments designated at
fair value
through profit or loss - - 120,312,836 120,312,836
Derivative financial assets - - 1,706,418 1,706,418
Other receivables - - 2,636,504 2,636,504
Cash and cash equivalents 1,304,537 - - 1,304,537
Margin account 2,252,688 - - 2,252,688
Total 3,557,225 - 124,655,758 128,212,983
Total
Floating Fixed Non-Interest As at
rate rate bearing 31 December 2018
GBP GBP GBP GBP
Financial Liabilities
Derivative financial - - 1,209,227 1,209,227
liabilities
Other payables - - 514,161 514,161
Total - - 1,723,388 1,723,388
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Company.
Credit risk is limited to the carrying value of financial assets at
31 December 2019 as follows:
As at As at
31 December 2019 31 December 2018
GBP GBP
Other receivables 2,445,789 2,636,504
Cash and cash equivalents 6,430,069 1,304,537
Margin account 1,435,750 2,252,688
Total 10,311,608 6,193,729
The Company is exposed to material credit risk in respect of cash and cash
equivalents. The credit risk from cash and cash equivalents is mitigated as
cash is placed within a margin account held with Credit Suisse Securities (USA)
LLC, a subsidiary of Credit Suisse (USA), Inc ("CS"). As at 31 December 2019,
CS had a credit rating of A+ (as at 31 December 2018: A) from Standard & Poor's
and A1 (as at 31 December 2018: A1) from Moody's. Other cash and cash
equivalents are held with Northern Trust (Guernsey) Limited which is a wholly
owned subsidiary of The Northern Trust Corporation ("TNTC"). TNTC is publicly
traded and a constituent of the S&P 500. As at 31 December 2019, TNTC had a
credit rating of A+ (as at 31 December 2018: A+) from Standard & Poor's and A2
(as at 31 December 2018: A2) from Moody's.
Liquidity risk
Liquidity risk is the risk that the Company may not be able to generate
sufficient cash resources to settle its obligations in full as they fall due or
can only do so on terms that are materially disadvantageous.
The Company's investments are relatively liquid and the Company holds
sufficient cash balances (or liquid investments) to meet its obligations as
they fall due. The Board reviews its resources and obligations on a regular
basis to ensure sufficient liquid assets are held.
As at 31 December 2019, the Company had no significant financial liabilities
other than payables arising directly from investing activity:
Total
Less than 1 As at
month 1-3 months 3-12 months 31 December 2019
GBP GBP GBP GBP
Derivative financial 704,019 - - 704,019
liabilities
Other payables 506,062 - - 506,062
Total 1,210,081 - - 1,210,081
Total
Less than 1 As at
month 1-3 months 3-12 months 31 December 2018
GBP GBP GBP GBP
Derivative financial 1,209,227 - - 1,209,227
liabilities
Other payables 514,161 - - 514,161
Total 1,723,388 - - 1,723,388
Capital risk management
The fair value of the Company's financial assets and liabilities approximate
their carrying amounts at the reporting date.
The Company's objective when managing capital is to maintain an optimal capital
structure in order to reduce the cost of capital. The Company may borrow
capital, but as at 31 December 2019 there were no borrowings (as at 31 December
2018: GBPNil).
The gearing ratio below is calculated as total liabilities divided by total
equity.
As at As at
31 December 2019 31 December 2018
GBP GBP
Total assets 128,198,813 128,212,983
Less: Total liabilities (1,210,081) (1,723,388)
Net Asset Value 126,988,732 126,489,595
Gearing Ratio 0.95% 1.36%
The Board considers the above gearing ratio to be adequate, since total
borrowings refer only to amounts due to brokers, derivative liabilities, and
other payables.
Share buybacks
The Directors have general Shareholder authority to purchase in the market up
to 40 per cent. of the Ordinary Shares in issue from time to time following
Admission. The Directors intend to seek annual renewal of this authority from
Shareholders at each general meeting of the Company.
Pursuant to this authority, and subject to Guernsey law and discretion of the
Directors, the Company may repurchase Ordinary Shares in the market on an
on-going basis at a discount to NAV with a view to increasing the NAV per
Ordinary Share and assisting in controlling the discount to NAV per Ordinary
Share in relation to the price at which such Ordinary Shares may be trading.
Purchases by the Company will be made only at prices below the estimated
prevailing NAV per Ordinary Share based on the last published NAV but taking
account of movements in investments, stock markets, and currencies, in
consultation with the Investment Manager and at prices where the Directors
believe such purchases will result in an increase in the NAV per Ordinary Share
of the remaining Ordinary Shares.
The Directors will consider repurchasing Ordinary Shares when the price per
Ordinary Share plus the pro forma cost to the Company per Share repurchased is
less than 95 per cent. of the NAV per Ordinary Share. The pro forma cost per
Share should include any brokerage commission payable and costs of realising
portfolio securities to fund the purchase. The Directors may, at their
discretion, also consider repurchasing Ordinary Shares at a smaller discount to
NAV per Ordinary Share, provided that such purchase would be accretive to NAV
per Ordinary Share for any continuing Shareholders.
Realisation Opportunity
On 20 March 2019, the Company announced that pursuant to the Realisation
Opportunity, Shareholders who are on the register as at the record date may
elect, during the Election Period, to redesignate all or part (provided that
such part be rounded up to the nearest whole Ordinary Share) of their Ordinary
Shares as Realisation Shares, subject to the aggregate NAV of the continuing
Ordinary Shares at the close of business on the last Business Day before the
Realisation Date being not less than GBP50 million. The Ordinary Shares held by
the Shareholders who elected for Realisation were redesignated as Realisation
Shares and the Portfolio was split into two separate and distinct Pools, namely
the Continuation Pool (comprising the assets attributable to the continuing
Ordinary Shares) and the Realisation Pool (comprising the assets attributable
to the Realisation Shares).
With effect from the Realisation Date, the assets in the Realisation Pool were
managed in accordance with an orderly realisation programme with the aim of
making progressive returns of cash, as soon as practicable, to those
Shareholders who elected to receive Realisation Shares. Ordinary Shares held by
Shareholders who did not submit a valid and complete election in accordance
with the Articles during the Election Period remained as Ordinary Shares.
The creation and subsequent redemption of the Realisation Shares resulted in
the redemption of 2,747,153 Shares at a value of GBP3,956,607.
Unless it has already been determined that the Company will be wound-up, every
two years after the Realisation Date, the Directors will propose further
realisation opportunities for Shareholders who have not previously elected to
realise their Ordinary Shares using a similar mechanism to that described
above.
If the weighted average discount on the Portfolio is less than 25 per cent over
any 90-day period, then the Directors shall propose an ordinary resolution for
the winding up of the Company. If one or more Realisation Elections are duly
made and the NAV of the continuing Ordinary Shares at the close of business on
the last Business Day before the Reorganisation Date is less than GBP50 million,
the Directors may propose an ordinary resolution for the winding up of the
Company and may pursue a liquidation of the Company instead of splitting the
Portfolio into the Continuation Pool and the Realisation Pool.
21. Fair value measurement
IFRS 13 'Fair Value Measurement' requires the Company to establish a fair value
hierarchy that prioritises the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements).
The three levels of the fair value hierarchy under IFRS 13 'Fair Value
Measurement' are set as follows:
* Level 1 Quoted prices (unadjusted) in active markets for identical assets
or liabilities;
* Level 2 Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability either directly (that is, as prices)
or indirectly (that is, derived from prices); and
* Level 3 Inputs for the asset or liability that are not based on observable
market data (that is, unobservable inputs).
The level in the fair value hierarchy within which the fair value measurement
is categorised in its entirety is determined on the basis of the lowest level
input that is significant to the fair value measurement. For this purpose, the
significance of an input is assessed against the fair value measurement in its
entirety.
If a fair value measurement uses observable inputs that require significant
adjustment based on unobservable inputs, that measurement is a Level 3
measurement. Assessing the significance of a particular input to the fair value
measurement requires judgement, considering factors specific to the asset or
liability.
The determination of what constitutes 'observable' requires significant
judgement by the Company. The Company considers observable data to be that
market data that is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary, and provided by independent sources
that are actively involved in the relevant market.
The following table presents the Company's financial assets and liabilities by
level within the valuation hierarchy as of 31 December 2019:
Total
As at
Level 1 Level 2 Level 3 31 December
2019
GBP GBP GBP GBP
Financial assets/(liabilities) at
fair value through
profit or loss:
Korean preferred shares 117,853,988 - - 117,853,988
Financial derivative 33,218 - - 33,218
assets
Financial derivative - (704,019) - (704,019)
liabilities
Total net assets 117,887,206 (704,019) - 117,183,187
Total
As at
Level 1 Level 2 Level 3 31 December
2018
GBP GBP GBP GBP
Financial assets/(liabilities) at
fair value through
profit or loss:
Korean preferred shares 120,312,836 - - 120,312,836
Financial derivative 1,706,418 - - 1,706,418
assets
Financial derivative - (1,209,227) - (1,209,227)
liabilities
Total net assets 122,019,254 (1,209,227) - 120,810,027
The Company recognises transfers between levels of the fair value hierarchy as
of the end of the reporting year during which the transfers have occurred.
During the year ended 31 December 2019, financial assets of GBPNil were
transferred from Level 1 to Level 2 (for the year ended 31 December 2018: GBP
Nil).
Investments whose values are based on quoted market prices in active markets,
and are therefore classified within Level 1, include Korean preference shares
and exchange traded options.
The Company holds investments in derivative financial instruments which are
classified as Level 2 within the fair value hierarchy. These consist of credit
default swaps with a fair value of (GBP704,019)
(as at 31 December 2018: (GBP1,209,227)).
The following tables analyse within the fair value hierarchy the Company's
assets and liabilities not measured at fair value at 31 December 2019 and 31
December 2018 but for which fair value is disclosed.
Total
As at
31 December 2019
Assets Level 1 Level 2 Level 3 GBP
Cash and cash equivalents 6,430,069 - - 6,430,069
Margin account 1,435,750 - - 1,435,750
Other receivables 2,443,998 1,791 - 2,445,789
Total 10,309,817 1,791 - 10,311,608
Liabilities
Other payables - 506,062 - 506,062
Total - 506,062 - 506,062
Total
As at
31 December 2018
Assets Level 1 Level 2 Level 3 GBP
Cash and cash equivalents 1,304,537 - - 1,304,537
Margin account 2,252,688 - - 2,252,688
Other receivables 2,632,690 3,814 - 2,636,504
Total 6,189,915 3,814 - 6,193,729
Liabilities
Other payables - 514,161 - 514,161
Total - 514,161 - 514,161
The assets and liabilities included in the above table are carried at amortised
cost; their carrying values are a reasonable approximation of fair value.
Cash and cash equivalents include cash in hand and deposits held with banks.
Amounts due to brokers and other payables represent the contractual amounts and
obligations due by the Company for settlement of trades and expenses. Amounts
due from brokers and other receivables represent the contractual amounts and
rights due to the Company for settlement of trades and income.
22. NAV reconciliation
The Company announces its NAV to the LSE after each weekly and month end
valuation point. The following is a reconciliation of the NAV per Share
attributable to participating Shareholders as presented in these Financial
Statements, using IFRS to the NAV per Share reported to the LSE:
As at 31 December 2019 As at 31 December 2018
NAV per NAV per
Participating Participating
NAV Share NAV Share
GBP GBP GBP GBP
Net Asset Value reported to 124,536,322 1.5258 123,860,752 1.4682
the LSE
Adjustment to accruals and 8,412 0.0001 (3,847) -
cash
Adjustment for dividend 2,443,998 0.0300 2,632,690 0.0312
income
Net Assets Attributable to 126,988,732 1.5559 126,489,595 1.4994
Shareholders per Financial
Statements
The published NAV per Share of GBP1.5258 (as at 31 December 2018: GBP1.4682) is
different from the accounting NAV per Share of GBP1.5559 (as at 31 December 2018:
GBP1.4993) due to the adjustments noted above.
23. Subsequent events
These Financial Statements were approved for issuance by the Board on 28 April
2020. Subsequent events have been evaluated until this date.
Since the start of 2020, the outbreak of COVID-19 has adversely impacted global
commercial activities and financial markets. The rapid development and fluidity
of this situation precludes any prediction as to its ultimate impact, which may
have a continued adverse impact on economic and market conditions and may
trigger a period of global economic slowdown. The Company, consistent with
other in the industry, does not believe there is any impact to the financial
statements as of 31 December 2019 as a result of this subsequent event. No
additional events or transactions require further disclosure.
As at 21 April 2020, the published NAV per share was GBP1.4055. This represents a
drop of 7.88 per cent from the 31 December 2019 published NAV per share, which
movement was mostly attributable to the impact of COVID-19 on the global
markets.
END
(END) Dow Jones Newswires
May 05, 2020 08:18 ET (12:18 GMT)
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