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 YEAR ENDED 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
James Waterlow – Sales |
+44 20 7496 3000 |
Northern Trust International Fund Administration
Services (Guernsey) Limited
Samuel Walden |
+44 1481 745385 |
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 £Nil
(31 December 2018: £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
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As
at |
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As
at |
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31
December 2019 |
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31
December 2018 |
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£ |
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£ |
Total Net Assets |
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126,988,732 |
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126,489,595 |
NAV per share |
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1.5559 |
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1.4993 |
Basic and
diluted earnings/(loss) per share |
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0.0960 |
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(0.3780) |
Mid-Market Share
price |
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1.50 |
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1.47 |
Premium/(discount) to
NAV* |
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(3.6%) |
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(2.0%) |
As at close of business on 21 April
2020, the latest published NAV per Share had decreased to
£1.4055 (as at 24 April 2020) and the Share price stood at
£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
Contracts Held on EWY |
Strike Price
(USD) |
Total Cost to
Expiration (USD) |
Purchase Date |
Expiration 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 Swaps
on South Korean Sovereign Debt |
Notional Value
(USD) |
Total Cost to
Expiration (USD) |
Annual Cost (USD) |
Price Paid as % of
Notional Value (per annum) |
Expiration Date |
Duration (Years) |
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 £50 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 (£3,475,416) 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 (£2,881,486)
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
capital |
|
Shares |
|
share
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
Fenner & Smith |
|
|
|
7,000,000 |
|
8.58% |
Andrew M. Weiss |
|
|
|
6,486,888 |
|
7.95% |
Lepercq de Neuflize
Asset Management |
|
|
|
5,746,077 |
|
7.04% |
EdenTree Investment
Management |
|
|
|
5,170,000 |
|
6.33% |
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 Management Co. |
|
|
|
6,022,626 |
|
7.14% |
Lepercq de Neuflize
Asset Management |
|
|
|
5,746,077 |
|
6.81% |
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 held |
|
Crighton |
|
King |
|
Coe |
Quarterly Board
Meetings |
|
4 |
|
4 |
|
4 |
|
4 |
Audit Committee
Meetings |
|
3 |
|
3 |
|
3 |
|
3 |
Management
Engagement Committee Meetings |
1 |
|
1 |
|
1 |
|
1 |
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: £30,000 payable to Mr Crighton as Chairman of the Board,
£27,500 to Mr Coe as Chairman of the Audit Committee, and £24,000
to Mr King.
|
|
For the year ended |
|
For the year ended |
|
|
31 December 2019 |
|
31 December 2018 |
|
|
|
|
£ |
|
|
|
£ |
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 £150,000 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: £30,000 payable to Mr Crighton as Chairman of the Board,
£27,500 to Mr Coe as Chairman of the Audit Committee, and £24,000
to Mr King.
|
|
For the year ended |
|
For the year ended |
|
|
31 December 2019 |
|
31 December 2018 |
|
|
|
|
£ |
|
|
|
£ |
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
£117,853,987 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 |
|
£ |
|
|
|
£ |
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
assets at fair value through profit or loss (“Investments”)
£117,853,987; (2018: £120,312,836)
Refer to the Audit Committee Report, note 2f accounting policy
and notes 12 and 21 disclosures.
|
Basis:
As at 31 December 2019 the Company had invested 92.8% of its net
assets in listed preferred shares and other financial instruments
issued by companies incorporated and listed in South Korea, which
in certain cases may trade at a discount to the corresponding
common shares of the same companies.
The Company’s listed investments are valued based on bid-market
prices at the close of business of the relevant stock exchange on
the reporting date obtained from third party pricing providers.
Risk:
The valuation of the Company’s investments, given they represent
the majority of the Company’s net assets as at 31 December 2019, is
a significant area of our audit. |
Our audit procedures
included but were not limited to:
Control Evaluation:
We evaluated the design, implementation and operating effectiveness
of the relevant controls over the valuation of investments.
Valuation procedures including use of a KPMG Specialist:
We have used our own valuation specialist to independently price
investments to a third party data source and assessed the trading
volumes behind such prices.
Assessing disclosures:
We also considered the Company’s investment valuation policies and
their application as described in note 2f to the financial
statements for compliance 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
£2,427,000, determined with reference to a benchmark of net assets
of £124,544,734, of which it represents approximately 2.0% (2018:
3.0%).
We reported to the Audit Committee any corrected or uncorrected
identified misstatements exceeding £121,000, 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 |
£ |
|
£ |
Assets |
|
|
|
|
|
|
|
|
Current
assets |
|
|
|
|
|
|
|
Financial
assets at fair value through profit or loss |
|
12,21 |
117,853,987 |
|
120,312,836 |
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 |
£ |
|
£ |
Income |
|
|
|
|
|
|
|
Net
changes in fair value of financial assets at fair value
through profit or loss |
|
7 |
8,105,875 |
|
(32,710,234) |
Net
changes in fair value of derivative financial instruments through
profit or loss |
|
8 |
123,038 |
|
607,612 |
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 after tax |
|
|
|
|
|
7,931,160 |
|
(31,893,199) |
Profit/(loss) and
total comprehensive income/(loss) for the year |
|
|
7,931,160 |
|
(31,893,199) |
Basic
and diluted earnings/(loss) per Share |
5 |
0.0960 |
|
(0.3780) |
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 |
£ |
£ |
£ |
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 ended |
|
For
the year ended |
|
|
31
December 2019 |
|
31
December 2018 |
|
Notes |
£ |
|
£ |
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 assets held at fair value through profit or
loss |
7 |
(7,609,615) |
|
32,545,360 |
Net change in fair
value of derivative financial instruments held at fair value
through profit or loss |
8 |
(123,038) |
|
(1,399,458) |
Net change in NAV of
Realisation Shares |
|
(41,049) |
|
- |
Realised loss on
closure of derivatives in the year |
|
- |
|
791,846 |
Effect of foreign
exchange rate fluctuations |
|
(496,260) |
|
164,874 |
Decrease/(increase) in
debtors |
15 |
190,715 |
|
(273,396) |
(Decrease)/increase in
creditors |
17 |
(8,099) |
|
143,938 |
Net cash (used
in)/generated from operating activities |
|
(156,186) |
|
79,965 |
|
|
|
|
|
Cash flows from
investing activities |
|
|
|
|
Purchase of financial
assets at fair value through profit or loss |
|
(8,239,027) |
|
(23,512,302) |
Open of derivative
financial instruments |
|
(593,087) |
|
(967,526) |
Proceeds from the sale
of financial assets at fair value through profit or loss |
|
18,803,752 |
|
23,877,567 |
Closure of derivative
financial instruments |
|
1,884,115 |
|
122,665 |
Decrease in margin
account |
|
816,938 |
|
1,156,352 |
Net cash generated
from investing activities |
|
12,672,691 |
|
676,756 |
|
|
|
|
|
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 cash equivalents |
|
5,125,532 |
|
(2,124,765) |
Cash and cash
equivalents at the beginning of the year |
|
1,304,537 |
|
3,429,302 |
Cash and cash
equivalents at the end of the year |
|
6,430,069 |
|
1,304,537 |
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 (£),
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 £1,200 (2018:
£1,200).
The amounts disclosed as taxation in the Statement of
Comprehensive Income relate solely to withholding tax levied in
South Korea on distributions from
South Korean companies at an offshore rate of 22 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
(£3,475,416) 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 (£2,881,486) 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 £0.0960
(31 December 2018: loss per Share of
£0.3780) for the Company has been calculated based on the total
comprehensive profit for the year of £7,931,160 (for the year ended
31 December 2018: £31,893,199 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 £1.5559 (as at 31 December 2018: £1.4993) is determined by
dividing the net assets of the Company attributed to the Ordinary
Shares of £126,988,732 (as at 31 December 2018: £126,489,595)
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 |
|
|
|
|
|
|
£ |
|
£ |
Realised
gain on investments |
|
|
|
6,830,858 |
|
4,905,671 |
Realised
loss on foreign currency |
|
|
(232,536) |
|
(32,938) |
Movement
in unrealised gain/(loss) on investments |
|
|
1,275,017 |
|
(37,615,905) |
Movement
in unrealised exchange (loss)/gain on foreign currency |
(263,724) |
|
197,812 |
Net
changes in fair value on financial assets at fair value through
profit or loss |
|
7,609,615 |
|
(32,545,360) |
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 |
|
|
|
|
|
£ |
|
£ |
Realised gain/(loss)
on options |
|
|
|
|
668,601 |
|
(226,513) |
Realised
loss on credit default swaps |
|
|
|
- |
|
(565,333) |
Movement
in unrealised (loss)/gain on options |
|
|
|
(1,050,771) |
|
923,716 |
Movement
in unrealised gain/(loss) on credit default swaps |
|
|
505,208 |
|
475,742 |
Net changes in fair value on financial derivatives at fair
value through profit or loss |
|
|
|
|
|
|
|
123,038 |
|
607,612 |
9. Other income
|
|
|
|
|
|
For
the year ended |
|
For
the year ended |
|
|
|
|
|
|
31
December 2019 |
|
31
December 2018 |
|
|
|
|
|
|
£ |
|
£ |
Dividend income |
|
|
|
|
|
4,325,414 |
|
4,437,519 |
10. Operating expenses
|
|
|
|
|
|
For
the year ended |
|
For
the year ended |
|
|
|
|
|
|
31
December 2019 |
|
31
December 2018 |
|
|
|
|
|
|
£ |
|
£ |
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
expense¹ |
|
|
|
|
|
762,615 |
|
628,649 |
Total Operating
Expenses |
|
|
|
|
|
3,161,724 |
|
3,418,829 |
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 |
|
|
|
|
£ |
|
£ |
Cost of
investments at beginning of the year |
|
|
110,153,284 |
|
106,460,720 |
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 in the year |
|
|
6,830,858 |
|
4,905,671 |
Cost of
investments held at end of the year |
|
|
106,419,418 |
|
110,153,284 |
Unrealised
gain on investments |
|
|
11,434,569 |
|
10,159,552 |
Financial
assets at fair value through profit or loss |
|
|
117,853,987 |
|
120,312,836 |
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 |
|
|
|
|
£ |
|
£ |
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 |
|
|
|
|
£ |
|
£ |
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 2019 |
|
31
December 2018 |
|
|
|
|
£ |
|
£ |
Dividends
receivable |
|
|
|
2,443,998 |
|
2,632,690 |
Prepaid expenses |
|
|
|
1,791 |
|
3,814 |
Total Other
Receivables |
|
|
|
2,445,789 |
|
2,636,504 |
The Directors consider that the carrying amount of receivables
approximate their fair value.
Dividends are presented net of withholding tax of £689,333
(2018: £742,554).
16. Derivative financial
instruments
|
|
|
|
As
at |
|
As
at |
|
|
|
|
31
December 2019 |
|
31
December 2018 |
|
|
|
|
£ |
|
£ |
Cost of
derivatives at beginning of the year |
|
|
(552,309) |
|
(605,324) |
Open of derivatives in
the year |
|
|
|
593,087 |
|
967,526 |
Closure of derivatives
in the year |
|
|
|
(1,884,116) |
|
(122,665) |
Realised
gain/(loss) on closure of derivatives in the year |
|
|
668,601 |
|
(791,846) |
Net cost
of derivatives held at end of the year |
|
|
(1,174,737) |
|
(552,309) |
Net
changes in fair value on derivative financial instruments at fair
value through profit or loss |
|
503,936 |
|
1,049,500 |
Net fair
value on derivative financial instruments at fair value through
profit or loss |
|
(670,801) |
|
497,191 |
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
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 |
|
|
|
|
£ |
|
£ |
Investment
management fees payable (Note 19c) |
|
|
310,841 |
|
316,144 |
Administration fee
payable |
|
|
|
34,876 |
|
18,138 |
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 year |
|
|
84,364,981 |
|
84,364,981 |
Purchase
of Realisation Shares |
|
|
(2,747,153) |
|
- |
Total
Ordinary Shares in issue at the end of the year |
|
|
81,617,828 |
|
84,364,981 |
|
|
|
|
|
|
|
Share capital
account |
|
|
|
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
31
December 2019 |
|
31
December 2018 |
|
|
|
|
£ |
|
£ |
Share
capital at the beginning of the year |
|
|
72,080,642 |
|
72,080,642 |
Purchase
of Realisation Shares |
|
|
(3,956,607) |
|
- |
Total
Share capital at the end of the year |
|
|
68,124,035 |
|
72,080,642 |
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 £50 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 £3,915,557, 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 £Nil (31 December
2018: £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 £81,500 (31
December 2018: £81,500) were charged to the Company and £Nil
remained payable at the year-end (as at 31
December 2018: £Nil). 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 £1,860,960
(for the year ended 31 December 2018:
£2,108,383) were charged to the Company and £310,841 (as at
31 December 2018: £316,144) remained
payable at the year-end.
Additionally, investment management fees of £5,630 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 £5,892,699 (as at 31 December
2018: £6,039,161). 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 rate |
2019 |
shift
in rate |
2018 |
|
|
2019 |
£ |
2018 |
£ |
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 £7,865,819 as at
31 December 2019 (as at 31 December 2018: £3,557,225) 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 |
|
|
£ |
£ |
£ |
£ |
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 |
|
|
£ |
£ |
£ |
£ |
Financial
Liabilities |
|
|
|
|
|
Derivative financial
liabilities |
|
- |
- |
704,019 |
704,019 |
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 |
|
|
£ |
£ |
£ |
£ |
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 |
|
|
£ |
£ |
£ |
£ |
Financial
Liabilities |
|
|
|
|
|
Derivative financial
liabilities |
|
- |
- |
1,209,227 |
1,209,227 |
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 |
|
|
|
|
£ |
£ |
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 |
|
|
£ |
£ |
£ |
£ |
|
|
|
|
|
|
Derivative financial
liabilities |
|
704,019 |
- |
- |
704,019 |
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 |
|
|
£ |
£ |
£ |
£ |
|
|
|
|
|
|
Derivative financial
liabilities |
|
1,209,227 |
- |
- |
1,209,227 |
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: £Nil).
The gearing ratio below is calculated as total liabilities
divided by total equity.
|
|
|
|
As
at |
As
at |
|
|
|
|
31
December 2019 |
31
December 2018 |
|
|
|
|
£ |
£ |
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 £50 million. The Ordinary
Shares held by the Shareholders who elected for Realisation were
redesignated as Realisation Shares and the Portfolio was split into
two separate and distinct Pools, 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
£3,956,607.
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 £50
million, the Directors may propose an ordinary resolution for the
winding up of the Company and may pursue a liquidation of the
Company instead of splitting the Portfolio into the Continuation
Pool and the Realisation Pool.
21. Fair value measurement
IFRS 13 ‘Fair Value Measurement’ requires the Company to
establish a fair value hierarchy that prioritises the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements).
The three levels of the fair value hierarchy under IFRS 13 ‘Fair
Value Measurement’ are set as follows:
- Level 1 Quoted prices (unadjusted) in active markets for
identical assets or liabilities;
- Level 2 Inputs other than quoted prices included within Level 1
that are observable for the asset or liability either directly
(that is, as prices) or indirectly (that is, derived from prices);
and
- Level 3 Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs).
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement. For this purpose, the significance of an input
is assessed against the fair value measurement in its entirety.
If a fair value measurement uses observable inputs that require
significant adjustment based on unobservable inputs, that
measurement is a Level 3 measurement. Assessing the significance of
a particular input to the fair value measurement requires
judgement, considering factors specific to the asset or
liability.
The determination of what constitutes ‘observable’ requires
significant judgement by the Company. The Company considers
observable data to be that market data that is readily available,
regularly distributed or updated, reliable and verifiable, not
proprietary, and provided by independent sources that are actively
involved in the relevant market.
The following table presents the Company’s financial assets and
liabilities by level within the valuation hierarchy as of
31 December 2019:
|
|
|
|
|
Total |
|
|
|
|
|
As
at |
|
|
Level
1 |
Level
2 |
Level
3 |
31
December 2019 |
|
|
£ |
£ |
£ |
£ |
Financial
assets/(liabilities) at fair value through |
|
|
|
|
profit or loss: |
|
|
|
|
|
Korean preferred shares |
|
117,853,988 |
- |
- |
117,853,988 |
Financial derivative assets |
|
33,218 |
- |
- |
33,218 |
Financial derivative liabilities |
|
- |
(704,019) |
- |
(704,019) |
Total net assets |
|
117,887,206 |
(704,019) |
- |
117,183,187 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
As
at |
|
|
Level
1 |
Level
2 |
Level
3 |
31
December 2018 |
|
|
£ |
£ |
£ |
£ |
Financial
assets/(liabilities) at fair value through |
|
|
|
|
profit or loss: |
|
|
|
|
|
Korean preferred shares |
|
120,312,836 |
- |
- |
120,312,836 |
Financial derivative assets |
|
1,706,418 |
- |
- |
1,706,418 |
Financial derivative liabilities |
|
- |
(1,209,227) |
- |
(1,209,227) |
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 £Nil were transferred from Level 1 to
Level 2 (for the year ended 31 December
2018: £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 (£704,019)
(as at 31 December 2018: (£1,209,227)).
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 |
£ |
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 |
£ |
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 |
|
|
£ |
£ |
£ |
£ |
Net Asset Value
reported to the LSE |
|
124,536,322 |
1.5258 |
123,860,752 |
1.4682 |
Adjustment to accruals
and cash |
|
8,412 |
0.0001 |
(3,847) |
- |
Adjustment for
dividend income |
|
2,443,998 |
0.0300 |
2,632,690 |
0.0312 |
Net Assets
Attributable to Shareholders per Financial Statements |
|
126,988,732 |
1.5559 |
126,489,595 |
1.4994 |
|
|
|
|
|
|
The published NAV per Share of £1.5258 (as at 31 December 2018: £1.4682) is different from the
accounting NAV per Share of £1.5559 (as at 31 December 2018: £1.4993) 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 £1.4055. 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.