TIDMWKOF
WEISS KOREA OPPORTUNITY FUND LTD.
LEI 213800GXKGJVWN3BF511
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2020
Weiss Korea Opportunity Fund Ltd. (the "Company") has today, released its
Annual Financial Report for the year ended 31 December 2020. 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/ Justin McKeegan - Nominated +44 20 7496 3000
Adviser
James Waterlow - Sales
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 focused 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 2020 (2019: 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 shall offer 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, being
14 May 2021 (the "Realisation Date"). See Note 18 for further details.
On 15 March 2021, 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 of their Ordinary
Shares as Realisation Shares (provided that any part is rounded up to the
nearest whole Ordinary Share). The Election Period commences on 14 April
2021and closes on 7 May 2021.
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 have elected
for Realisation will be designated as Realisation Shares and the Portfolio will
be 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). 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 Realisation 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.
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 2020, the Company purchased none
(2019: Nil) of its own Shares at a consideration of £Nil (31 December 2019: £
Nil) under its general buyback authority. After the year end, the Company
bought back 600,000 shares on 27 January 2021.
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 2020 and 2019
As at As at
31 December 31 December
2020 2019
£ £
Total Net Assets 203,124,953 126,988,732
NAV per share 2.4887 1.5559
Basic and diluted earnings per 0.9724 0.0960
share
Mid-Market Share price 2.38 1.50
Discount to NAV* (4.4%) (3.6%)
As at close of business on 9 April 2021, the latest published NAV per Share had
increased to £2.6916 (as at 6 April 2021) and the Share price stood at £2.59.
*The amount, expressed as a percentage, by which the market value exceeds or is
less than the net asset value of a stock.
Total expense ratio
The annualised total expense ratio for the year ended 31 December 2020 was 1.81
per cent (31 December 2019: 1.85 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 2020
The Board of directors of WKOF ("the Board") is pleased to provide the 2020
Annual Report on the Company. During the period from 31 December 2019 to 31
December 2020 (the "Period"), the Company's net asset value increased by 63.7
per cent,1 outperforming the reference MSCI Korea 25/50 Net Total Return Index
(the "Korea Index"), which gained 36.4 per cent in pounds sterling. Since the
admission of the WKOF to AIM in May 2013, the net asset value has increased by
189.4 per cent including reinvested dividends,2, compared to the Korea Index
returns of 97.1 per cent.3 A report from the Investment Manager follows.
The outperformance continued after the Period end, and as at the 31 March 2021
(the latest date prior to the publication of this report) the NAV was 262.82
pence per share, a gain of 7.10% since the year end and an outperformance of
the Korea Index by 5.1%.
Reporting such outperformance to you seems incongruous in the middle of a
pandemic. 2020 was a difficult year for everyone, not least the people of South
Korea who suffered a total of 61,769 cases of infection and 917 deaths from
COVID-19. However, given a population of 52 million, South Korea did a very
good job at containing the virus in 2020.
The outperformance of Korean equity markets was driven by a number of factors;
in addition to the relatively controlled pandemic, a series of large economic
stimulus packages deployed by the South Korean government and surging demand
from Korean retail investors for domestic stocks pushed markets upwards. In my
semi-annual letter I described a remarkable rebound from March lows. It
continued with the KOSPI rallying a further 42% during the second half of the
year.
WKOF is long the Korean equity market; this was a good year to be so. As
detailed in the following Investment Managers Report, additional gains were
mostly due to overweight positions in Korean companies whose common shares
outperformed, as well as the narrowing of discounts of Korean preference shares
held and the dividends received from portfolio companies.
As I reported to investors in 2018, WKOF intends to pursue a strategy of
rebalancing the portfolio towards Korean preference shares trading at wider
discounts. This continues to be the strategy and elevated volatility and
trading volumes during the year presented opportunities for WKOF to actively
trade around discount moves. WKOF's 'Portfolio Discount' was over 49% at
year-end. That is the widest discount WKOF has held since 2013, and the Board
believes WKOF is well positioned for further outperformance.
WKOF has an active share repurchase program as part of its discount management
strategy. During the Period, the Board considered buying back shares on
numerous occasions when the discount to NAV appeared to be wide. However, the
Korean stock market was so volatile that it was very difficult to ensure that
the discount quoted was achievable when realising part of the portfolio to fund
buybacks. With the stock market moving 5% to 10% each day, I hope that
shareholders can understand the difficulties the Board and the Investment
Manager had during that difficult period.
The Board is authorised to repurchase up to 40 per cent of WKOF's outstanding
Ordinary Shares in issue as at 31 March 2021.4 Since Admission almost eight
years ago, and as at 31 March 2021, WKOF has repurchased, at a discount to NAV,
13,190,250 Ordinary Shares of the original 105,000,000 Ordinary Shares issued
at Admission. The Board also has in place standing instructions with WKOF's
broker, N+1 Singer Advisory LLP, for the repurchase of WKOF'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 WKOF's shares are trading at a significant discount to net
asset value. We will continue to keep Shareholders informed of any share
repurchases through public announcements.
In accordance with WKOF's Admission Document, adhering to the highest standards
of corporate governance and providing our Shareholders with the greatest
flexibility of almost any listed closed-end fund in the UK, WKOF offers
Shareholders the regular opportunity to elect to realise all, or a part, of
their shareholding in WKOF (the "Realisation Opportunity") once every two
years, on the anniversary of WKOF's admission date. A circular with full
details of the upcoming Realisation Opportunity was published on 03 March 2021.
If any Shareholders elect for realisation, then on the Realisation Date, WKOF's
current portfolio will be divided into two pools: a Continuation Pool and a
Realisation Pool. The Realisation Pool will be managed in accordance with an
orderly realisation with the aim of making progressive returns of cash to
holders of Realisation Shares. Given the performance of WKOF, not just recently
but over its entire life, the discount protection measures WKOF has had in
place since IPO, the potential to outperform going forward as well as many
other measures mentioned below, the Board expects demand for this feature to be
limited.
With WKOF approaching its 8th anniversary and having achieved such impressive
results, the Board and the Investment Manager are working on a number of
initiatives to broaden the shareholder base, increase liquidity for all
shareholders and make WKOF more attractive to a wider audience. With the
Portfolio Discount currently standing at around 48% we believe that there is
still significant potential for the portfolio to outperform in both absolute
and relative terms. In February 2021 WKOF joined the Association of Investment
Companies ("the AIC") to give more people access to information on WKOF.
Changes were also made to allow retail investors the ability to buy and sell
shares of WKOF on various platforms such as Hargreaves Lansdown and Interactive
Investor. Changes have also been made to the monthly reports and website, and
this evolution will continue throughout 2021. In addition, WKOF has appointed
Camarco to raise our profile in the press, which has already resulted in
increased press coverage for WKOF. Please watch out for additional articles in
the future. The Board and WAM continue to work on a number of other initiatives
which will be announced in the coming weeks and months.
Since the Company launched 8 years ago, corporate governance has been of the
utmost importance to the Board and the Investment Manager. Aligning the
interests of Shareholders and the Investment Manager, protecting Shareholders
from value destruction through a wide discount, and allowing Shareholders the
ability to exit every two years are all features at the core of our philosophy.
Similarly improving corporate governance across the corporate landscape in
Korea, as well as within Korean companies, is the main driving force behind the
past and future returns of the Company. The G of ESG, Environment, Social and
Governance, has therefore clearly been of prime importance since launch. The E
and S factors will never have the same prominence given that the Company's
investment objective is to invest in preferred shares which have limited voting
rights. However, there is no doubt that factors represented by the letters ESG
will be playing an increasingly crucial role in all decision making, whether
operational or investment, for corporates and individuals alike.
Going forward, the Board would like to turn its attention to the E and S
factors, ensuring that your Company remains at the vanguard of putting these
criteria at the core of what we do. WKOF, like every other investment trust
with no premises and no employees, can have a limited direct effect on E and S
issues. However, your Board believes that you as Shareholders, our most
important stakeholders, expect more from us as Directors. Therefore, with your
backing, we would like to take an increasingly proactive approach and start a
discussion with our counterparties on their ESG mitigation strategies. We will
start by asking all of WKOF counterparties - the investment manager, broker,
administrator, legal team, accountants and others, two questions:
(1) What ESG policies are implemented within your own organisation? and
(2) What ESG policies do you expect your stakeholders to follow?
The responses are likely to range from the very straightforward, "We recycle
paper in the office" or "We buy electricity from renewable sources", to the
more nuanced; "We use carbon offsets to mitigate business air travel made on
behalf of our clients", which might lead us to ask, "How do you calculate the
most efficient offset program?" We might ask our Shareholders what additional
cost they would be willing to incur to ensure WKOF's stakeholders
adopt improved ESG measures, if indeed there are additional costs? The
information collected will form the basis of a full understanding of these
priorities within the investment trust community.
We would also like to approach some of our major shareholders to canvass their
views on the importance of ESG issues, including what they see as best practice
in the industry, and ask for their input on how WKOF can become an industry
leader in the closed-end funds sector on these issues.
Although participation will be entirely voluntary, we hope for a high level of
engagement. Your Board will review the results, share them with the respondents
and with refinements over time, develop them into a comprehensive Investment
Trust ESG Policy. We are very excited to be launching this initiative and hope
to have the first set of responses to share with you in the next Interim Report
in six months' time.
If you would like to speak with the Investment Manager or learn about potential
opportunities to meet with them, please contact WKOF's broker, N+1 Singer. I
would like to thank Shareholders for their support and look forward to the
continued success of WKOF in the future.
Norman Crighton
Chairman
9 April 2021
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 31 March 2021, the Company had 81,017,828 Ordinary Shares in issue.
Investment Manager's Report
For the year ended 31 December 2020
Performance
In 2020 WKOF's Net Asset Value ("NAV") in pounds Sterling ("GBP") gained 63.7%
including reinvested dividends[5] outperforming the reference MSCI South Korea
25/50 Index ("the Korea Index"),[6] which increased 36.4% in GBP. The NAV
performance from inception through 31 December 2020, including reinvested
dividends, was 189.4%, compared to with returns of 97.1% for the Korea Index
over the same period.
Review of WKOF history and prospects
WKOF has been investing in Korean Preference Shares since its inception nearly
eight years ago. At this point it seems appropriate to review WKOF's
performance during that period.
From the inception of WKOF in May 2013 to the end of February 2021, the NAV is
up 202.7% including reinvested dividends. By comparison the Korea Index is up
96.9% over the same period and the KOSPI 200 Index is up 73.1%. WKOF's
outperformance can be attributed to a combination of factors: having invested
in companies whose ordinary shares outperformed the indices and/or their
preference shares outperforming their ordinary shares,[7] as well as the
enhanced dividend yield from the discounts at which the preference shares in
WKOF's portfolio trade. The increase in the dispersion of discounts allowed
WKOF to realize profits from a narrowing in the discounts of some preference
shares in its portfolio, and to reinvest the proceeds into preference shares
trading at wider discounts. The net effect is that as of the end of February
2021, WKOF's Portfolio Discount was 46.2%. Looking back since the end of 2013,
this is somewhat wider than average. Changes in the dispersion of discounts and
other related issues are discussed at greater length toward the end of the next
section.
Because we have never been faced with meaningful redemption requests, we have
been able to choose preference shares without excessive regard for their
liquidity. The preference shares that trade at the largest discounts to their
underlying ordinary shares tend to be relatively illiquid, so changes in the
portfolio tend to be opportunistic-we seek to avoid large transaction costs
when reallocating the portfolio to more favorable positions.
A major consideration in our choice of preference shares to own is their
discount to the corresponding ordinary shares. Preference shares receive the
same dividends as the ordinary shares plus what is usually a small extra fixed
payment. They have limited voting rights: generally, they only can vote on
issues that directly affect the preference shares. We believe that in the
Korean context those limited voting rights should not substantially decrease
the value of preference shares, and certainly should not decrease them by more
than 50%-the discounts at which preference shares often trade.
Of course, that logic assumes that the ordinary shares, by being more liquid
and more widely covered, more closely reflect the fundamental value of the
company than do the preference shares. Our default assumption is that the price
of the ordinary shares better reflects the underlying value of the company than
does the price of the preference shares. We are cognizant of the risk that
preference shares may be overvalued even when trading at large discounts to
their underlying ordinary; we therefore take measures of fundamental value into
account when making investment decisions on behalf of WKOF.
To see the importance of the discount, consider a company whose preference
shares are trading at a 60% discount, and suppose the preference shares were to
go to a 20% discount, which I would argue would still make them substantially
underpriced relative to the ordinary shares. For this hypothetical trade to
lose money the ordinary shares would have to lose more than 50% of their value.
To see this, suppose the ordinary share was initially trading at 100,000 KRW,
and the preference shares were trading at 40,000 KRW. When the ordinary shares
fall 50% they would trade at 50,000 KRW and if the preference shares were then
to trade at a 20% discount, which is what I had hypothesized, the price of the
preference shares would be unchanged at 40,000 KRW.
Of course, this exercise is purely hypothetical. The preference shares could
conceivably go from trading at a 60% discount to trading at an 80% or 90%
discount to the ordinary shares. And it is certainly possible that the ordinary
shares could lose more than 50% of their value. Thus, this example should be
taken as purely illustrative and not as indicative of an actual trade. However,
it does seem reasonable to assume that over long periods of time, preference
shares that are trading at large discounts to their ordinary shares will trade
closer to the price of the ordinary shares.
The composition of the portfolio has changed over the years as WKOF has
accumulated positions in preference shares that we believe offer the best
values while reducing positions that we believe offered less attractive
returns. This buying and selling has generally increased the fraction of
illiquid, heavily discounted preference shares in the portfolio that take a
longer time period to accumulate. As an investor in WKOF I am personally quite
pleased with the opportunity to invest in favorably priced but less liquid
positions that I could not otherwise access in a timely fashion.
In the process of selling less attractive securities and buying more attractive
ones WKOF often buys the Samsung Kodex 200 ETF as a means of maintaining market
exposure for the interim between when it has sold preference shares and when it
has fully invested the proceeds of such sales. In some cases, WKOF also will
sell preference shares in the portfolio as a means of financing purchases of
other preference shares with better prospects.
The opportunities to profitably trade in and out of preference shares is a
function of the dispersion of discounts. These opportunities currently appear
more favorable than has been often been the case. Over the course of the last
12 months, we saw a greater dispersion of discounts within the universe of
preferred shares that we follow.[8] It is not clear if this is a 2020 anomaly
or a new discount range that will persist.
The increased volatility, greater discount dispersion and share price rallies
provided the Fund with more opportunities to actively trade the portfolio than
prior years since launch. As a result the Fund's portfolio turnover was
elevated. The Fund purchased approximately 109 million GBP and sold
approximately 111 million GBP over an average monthly NAV of 174 million GBP.
See Note 12 for purchase and disposal information.
We are acutely aware that buying shares solely based on discounts exposes WKOF
to the risk that the discount is driven by the ordinary shares having become
overpriced. While the discount offers a margin of safety, buying heavily
discounted preference shares is not a guaranteed way to make money, nor is
trading on changes in discounts. When ordinary shares are sufficiently
overpriced, the corresponding preference shares may be overpriced even if they
are trading at less than half the price of the ordinary shares. However, the
risk of buying an overpriced security would seem mitigated by the discount,
especially when we believe the discount is being driven by differences in
liquidity or market psychology rather than distinctions in the economic
entitlements between ordinary and preference shares.
The discounts of preference shares also affect relative dividend yields and
future dividend yields. For instance, a preference share trading at a 40%
discount to the corresponding ordinary share has a dividend yield that is 67%
greater. This difference in yields should lead to a narrowing of the discounts.
If the payout ratios of Korean stocks continues to increase and to converge to
the payout ratios of other markets, the effect of the differences in yield of
the preference and ordinary shares should become a greater factor affecting the
convergence of prices. Currently the payout ratio of Korean companies is lower
than in comparable markets. It has been increasing rapidly. If it were to
converge to other comparable countries the dividend yield would almost double
which would likely cause the prices of the preference shares to converge to
those of the ordinary shares as the advantage of the price discount of
preference shares would be more striking and the preference shares would become
attractive to yield seeking investors.
Dividend Payout and Yield Cross-Country Comparison, as of 28 February 2021
Index Name Dividend Payout Dividend Yield
KOSPI 200 (South Korea) 42% 2.1%
Nikkei 225 (Japan) 43% 1.4%
TAIEX (Taiwan) 58% 2.6%
Euro Stoxx 50 (Europe) 93% 2.1%
S&P 500 (US) 76% 1.5%
In evaluating our decision process for choosing preference shares in which to
invest, we have used historical data to test hypotheses concerning what factors
affect market prices. Our conjectures were consistent with the historical data,
and we use those empirical results to guide our investment choices.
Of course, in some periods WKOF will underperform. We are not trying to predict
market sentiment. If market sentiment favors or disfavors some sectors for
reasons that are unrelated to their fundamentals WKOF will miss out on those
moves. Our approach is to find mispriced securities and to rely on markets to
eventually correct these mis-pricings. These market forces may take years to
manifest themselves in prices, which is why we would urge investors not to
extrapolate from WKOF's outperformance in the past year, but rather to focus on
the fundamentals of the Korean stock market, and of the portfolio we have been
able to assemble over the past seven years.
Korean Market Valuation
Although Korea is one of the best performing markets over the last 12 months,
based on the standard metrics of CAPE, P/E, and price to book value, it does
not seem overvalued relative to other comparable markets. The table below
compares the South Korean stock market to comparable markets: Taiwan, Japan
(Nikkei); as well as to the U.S. (S&P 500). The Korean, Japanese and Taiwanese
economies are all exposed to fluctuations in the global demand for manufactured
goods. A significant fraction of the Korean and Taiwanese economies are
sensitive to trade with China. We included the U.S. for comparison because it
is by far the largest equity market in the world.[9] We also included the Euro
Stoxx 50 as many of these companies have international exposure.
Index Comparison, as of 28 February 2021[10]
Index Name CAPE P/E Ratio[11] P/B Ratio
KOSPI 200 (South Korea) 19.0 18.9 1.2
Nikkei 225 (Japan) 33.2 27.0 2.1
TAIEX (Taiwan) 25.3 20.5 2.3
Euro Stoxx 50 (Europe) 22.4 23.5 2.0
S&P 500 (US) 31.2 27.0 4.2
One possible explanation for why Korean ordinary shares are undervalued based
on these metrics relative to that of other countries could be the geopolitical
risk associated with North Korea. The increased military capability of North
Korea might deter the U.S. from coming the assistance of South Korea should
there be open warfare. The prices of CDSs on Korea are sufficiently low that
WKOF partially hedges this geopolitical risk by buying sovereign CDS on Korea.
As you are probably aware, many markets have experienced very large price
increases over the past seven years. These price increases have occurred in
spite of the devastation of the pandemic. While there seem to be pockets of
highly overvalued securities, it is not obvious that equity markets as a whole
are fundamentally overvalued. If we discount future earnings by the risk-free
rate, negative real interest rates make it almost impossible to conclude much
of anything about valuations. We surely don't want to place more weight on
future losses than present losses. If we discount future profits at the real
risk-free rates, then if the firm's profits persist long enough the present
discounted value of those profits would get extraordinarily high. This is a
consequence of the effect of negative (or exceptionally low) risk free interest
rates on the value today of any future profits that accrue far in the future.
I'm uncomfortable using negative real interest rates to justify equity prices.
On the other hand, at current interest rates companies can stay in business
longer, so their option value is greater, and the lower interest rates improve
their cash flows. Overall, I'm far more comfortable investing in non-faddish
equities than in bonds at current prices.
Macroeconomic Impact of COVID-19
South Korea first reported confirmed cases of COVID-19 in late January 2020,
with the daily number of new cases first peaking at over 600 in early March
2020. The authorities rapidly implemented a strategy to help abate the spread
of the virus based on widespread testing, aggressive contact tracing, prompt
isolation of suspected infections, and treatment at no cost to the individual.
Along with voluntary social distancing, this approach slowed infections,
allowed most businesses to remain open, and brought new cases near zero during
the summer.[12] However, infections climbed into year-end despite tighter
restrictions, with the daily number of new cases peaking at over 1,000 in late
December before falling to below 500 by mid-January. In 2020 a total of 61,769
cases and 917 deaths were reported in South Korea. But compared to the U.S.,
Europe and other virus hot spots, Korea's infection rates are still quite low.
As of January 22, 2021, Korea had one of the lowest death tolls due to COVID-19
since the start of the pandemic at 26 per million population. By comparison,
the COVID-19 death toll per million was approximately 39 in Japan, 36 in
Australia, 607 in Germany, 1,040 in Switzerland, 1,240 in the U.S., and 1,400
in the U.K. These results for Korea are particularly impressive given the age
of its population - South Korea's median age is 43.7, which compares with a
median age in the U.S. of 38.3 and a median age in the U.K. of 40.5.
At the time of writing, South Korea had secured 106 million vaccine doses from
four drug makers and COVAX, the WHO's vaccine-sharing scheme. This will allow
for coverage of 56 million people, more than its 51.6 million population, and
the government is close to striking a sixth deal to purchase another 10 million
doses from drug maker Novavax.[13] However, the government's timeline-which
calls for vaccinations to begin in February and targets 36 million people
vaccinated by September-appears unlikely to succeed at its expected pace.[14]
Health authorities acknowledge there are major hurdles but said the vaccine
rollout would move at a pace allowing South Korea to benefit from lessons
learned from rollout programmes in other countries. In the end, South Korea may
complete its vaccination efforts as fast or faster than many other nations, but
it remains to be seen if this wait-and-see approach is a luxury Korea can
afford.
South Korea has also taken an aggressive approach to support households and
businesses during the pandemic. At the time of writing, the government has
deployed three stimulus packages amounting to 222 billion USD targeting
vulnerable industries, small and mid-size enterprises and the self-employed.
Together with the public health response, this appears to have been effective.
Real GDP in Korea for 2020 declined by just 1%,[15] compared with falls of 3.4%
in the U.S., 7.2% in the Euro Area and 10% in the U.K.[16]
Korea's export-based economy, however, still faces significant uncertainty.
Weaker global demand resulted in total exports falling by 5.4% in 2020.[17]
Countering the broader decline, outbound shipments of chips increased by 5.6%
year over year in 2020 to reach 99.1 billion USD -the second highest after
126.7 billion USD in 2018 - and exports to China climbed 3.3% in over the same
period to reach 12.7 billion USD. In addition, bilateral free trade agreements
were signed in 2020, most recently with Indonesia, Israel, and the U.K. Growing
diversification of South Korea's trading partners will increase its resilience
over time, but ultimately, the success of Korea's vaccine rollout and the
buoyancy of demand from its largest trading partners, China and the U.S., will
likely dictate the rate of economic recovery from here.
Hedging
We pursue our investment strategy with a portfolio that is generally long only.
However, as described more fully in WKOF's Annual Report and Audited Financial
Statements for the year ended 31 December 2017, because of political tensions
in Northeast Asia, the Board approved a hedging strategy in September 2017 that
was intended to reduce exposure to extreme events that would be catastrophic to
its Shareholders' investments in WKOF. As a result, WKOF has limited its use of
hedging instruments to purchases of credit default swaps (CDS) and put options
on the South Korean index: securities that we expect to generate high returns
without introducing material new risks into the portfolio if WKOF experienced a
geopolitical disaster. These catastrophe hedges are not expected to make money
in most states of the world. We expect that, as with any insurance policy,
WKOF's hedges will lose money most of the time. The tables below provide
details about the hedges as of 31 December 2020. Note that outside of the
general market and portfolio hedges described herein, WKOF has generally not
hedged interest rates or currencies.
Credit Default Notional Total Cost to Annual Price Paid as Expiration Duration
Swaps on South Value Expiration Cost (USD) % of Notional Date (Years)
Korean Sovereign (USD) (USD) Value (per 18
Debt annum)
5 year CDS $20m $457,151 $91,430 45bps 2023 5.0
3 year CDS $80m $431,216 $143,739 18bps 2023 3.0
Total Cost $888,367 $235,169
Number of Put Option Strike Total Cost to Purchase Date Expiration
Contracts Held on EWY Price (USD) Expiration (USD) Date
2,000 $62 $331,499 13 November 2020 16 April 2021
86 $55 $15,570 25 August 2020 15 January
2021
Total Cost $347,069
Concluding Remarks
We are pleased with the fund's 2020 performance and the current portfolio
construction. Being invested in Korean preferred shares at a discount offers a
very attractive margin of safety amidst the uncertainty. As of end-February
2021, the portfolio discount was 46%, which is among the larger portfolio
discounts since WKOF launched in 2013. At current discounts, the distribution
of potential returns remains highly asymmetric relative to common share
returns.
Andrew Weiss
Weiss Asset Management LP
17 April 2021
5 This return includes all dividends paid to the Company's Shareholders and
assumes that these dividends were reinvested in the Company's Shares at the
next date for which the Company reports a NAV, at the NAV for that date.
6 MSCI 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.
7 The choice of companies is to some extent is outside of our control, since
not all Korean companies have preference shares. In particular, any companies
listed after 1998 are unlikely to have preference shares, so they are excluded
from WKOF's investable universe.
8 There are some preference shares that consistently trade at premia due in
large part to their fixed dividend which causes a high yield-they are typically
exceptionally illiquid and the fixed dividend is significant because the price
has fallen over the past 20+ years so the free float is generally too small for
those securities to be tradeable.
9 We excluded the U.K. due to the perceived negative effects of Brexit on
future earnings of U.K. companies. which has caused very serious under
performance of U.K. equities relative to global peers since the Brexit
referendum passed in June 23, 2016. Over that period the FTSE underperformed
global markets by over 50%.
10 CAPE, or Cyclically Adjusted Price to Earnings is the current price divided
by ten year average inflation-adjusted earnings. Data from Bloomberg, accessed
March 30, 2021.
11 Index Positive Price/Earnings, Bloomberg.
12 "Emerging COVID-19 success story: South Korea learned the lessons of MERS",
Oxford University's Our World in Data project, June 30, 2020, https://
ourworldindata.org/covid-exemplar-south-korea
13 "[News Analysis] Is Korea prepared for vaccine rollout?", The Korea Herald,
January 12, 2021, http://www01.koreaherald.com/view.php?ud=20210112000955
14 "Doctors cast doubt on South Korea's COVID-19 herd immunity goal," CNA
Insider, January 19, 2021, https://www.channelnewsasia.com/news/asia/
covid-19-doctors-cast-doubt-south-korea-herd-immunity-goal-13993354
15 "Korea's economy shrinks 1% in 2020," The Korea Herald, January 26, 2021,
http://www.koreaherald.com/view.php?ud=20210126000924
16 "World Economic Outlook Update," International Monetary Fund (IMF), January
26, 2021, https://www.imf.org/en/Publications/WEO/Issues/2021/01/26/
2021-world-economic-outlook-update
17 "S. Korea's exports fall 5.4% in 2020 on COVID-19 fallout," The Korea
Herald, January 1, 2021, http://www.koreaherald.com/view.php?ud=20210101000037
Directors
For the year ended 31 December 2020
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 54)
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
over 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 55)
Stephen is Chairman of the Audit Committee. He is also Chair of the Audit
Committee for Chrysalis Investment Company Limited. 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 57)
Rob is a non-executive director for a number of open and closed-ended
investment funds including Tufton Oceanic Assets 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 2020
The Directors of the Company present their Annual Report and Audited Financial
Statements for the year ended 31 December 2020.
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
through long-term capital appreciation, by investing primarily in listed South
Korean preferred shares. The full investment objective and investment policy
are detailed in the Summary of Information of the Annual Report.
Going Concern
In accordance with the Company's Articles of Association and its Admission
Document, the Company shall offer 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, being
14 May 2021 (the "Realisation Date").
On 15 March 2021, 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. The Election Period shall commence on 14 April
2021 and closes at 1pm, 7 May 2021.
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 have elected
for Realisation will be redesignated as Realisation Shares and the Portfolio
will be 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). 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.
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 2023
(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 continued to monitor the developments of the pandemic, consider
the impact it has had to date and continue to assess 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 principal risks and
uncertainties 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 2023.
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 14 May 2021) be less than £50 million; or
(b) the mean Weighted Average Discount on the Portfolio is less than 25 per
cent.
(c) 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 in the Summary of
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 in 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 2023.
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 2020 are set out in the Statement of
Comprehensive Income. An annual dividend of 3.9549 pence per Share (£3,227,903)
was approved on 13 May 2020 and paid on 12 June 2020 in respect of the year
ended 31 December 2019. 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.
The Board expects to declare an interim dividend on 28 April 2021 with a record
date on 11 May 2021 for the year ended 31 December 2020 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 in the Directors information page.
Directors' Interests
The Directors who held office at 31 December 2020 and up to the date of this
Report held the following numbers of Ordinary Shares beneficially:
As at 31 December 2020 As at 31 December 2019
Ordinary % of issued Ordinary % of issued
Shares share Shares share
capital capital
Norman Crighton 20,000 0.02% 20,000 0.02%
Stephen Coe 10,000 0.01% 10,000 0.01%
Robert King 15,000 0.02% 15,000 0.02%
There have been no changes in the interests of the above Directors during the
year.
Substantial Interests
Disclosure and Transparency Rules ("DTRs") are now comprised in the Financial
Conduct Authority handbook. Section 5, the only section of the DTRs which
applies to AIM-listed companies, requires substantial Shareholders to make
relevant holding notifications to the Company. The Company must then
disseminate this information to the wider market. Details of major Shareholders
in the Company are shown below.
As at 31 December 2020
% of issued
Shareholders Shares share
capital
City of London Investment Mgt 21,015,092 25.75%
Co (London)
Aberdeen Standard Investments (Aberdeen) 12,878,100 15.78%
(London)
Degroof Petercam Asset Mgt 10,125,000 12.41%
(Brussels)
Merrill Lynch, Pierce, Fenner & 7,000,000 8.58%
Smith (New York)
Mr Andrew M Weiss (USA) 6,486,888 7.95%
Mount Capital (London) 4,279,000 5.24%
EdenTree Investment Mgt 3,770,000 4.62%
(London)
Ruffer (London) 3,500,000 4.29%
CG Asset Mgt (London) 2,660,000 3.26%
Atlis LLC (USA) 1,311,810 1.61%
At 31 March 2021, City of London Investment Management Co. have decreased their
holding to 20,987,331 shares, representing 25.90 per cent of issued share
capital.
There have been no other notifications of significant changes to the
substantial shareholdings at 31 March 2021.
As at 31 December 2019
% of issued
Shareholders Shares share
capital
Standard Life Aberdeen 13,058,100 16.00%
Ruffer LLP 11,500,000 14.09%
Banque Degroof Luxembourg 10,125,000 12.41%
City of London Investment Management Co. 8,723,893 10.69%
Merrill Lynch Pierce 7,000,000 8.58%
Fenner & Smith
Andrew M. Weiss 6,486,888 7.95%
Lepercq de Neuflize Asset 5,746,077 7.04%
Management
EdenTree Investment 5,170,000 6.33%
Management
Mount Capital 4,279,000 5.24%
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 2020 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 in the Directors information page.
The Chairman is Mr Crighton. Biographies for Mr Crighton and all other
Directors appear on Directors. 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 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 3 2 3 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 in the Report of the Directors sets out the number of Audit Committee
Meetings held during the year ended 31 December 2020 and the number of such
meetings attended by each Audit Committee member.
A report of the Audit Committee detailing responsibilities and activities is
presented in 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 12 November
2020, 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 2020, 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 2020 31 December 2019
£ £
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 in the
Directors' 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, when travel restrictions allow, 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 and
subsequent recovery, 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 ("COVID-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 Independent 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 Independent 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 independent 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
independent auditor is aware of that information.
Signed on behalf of the Board by:
Norman Crighton
Chairman
9 April 2021
Stephen Coe
Director
9 April 2021
Directors' Remuneration Report
For the year ended 31 December 2020
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 22 July 2021.
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 2020, 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 2020 31 December 2019
£ £
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
9 April 2021
Stephen Coe
Director
9 April 2021
Audit Committee Report
For the year ended 31 December 2020
Dear Shareholders,
On the following pages, we present the Audit Committee's Report for 2020,
setting out the responsibilities of the Audit Committee and its key activities
in 2020.
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 £193,058,894 as at 31
December 2020 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 2020 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 2020.
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 12 November 2020. 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 2020 31 December 2019
(Audited) (Audited)
KPMG Channel Islands Limited £ £
Annual audit 35,500 32,700
KPMG LLP
Tax fees (UK Reporting Fund Status) 9,750 9,750
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 2020, 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 2020 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 2021 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 9 April 2021 and signed
on behalf of the Audit Committee by:
Stephen Coe
Chairman, Audit Committee
9 April 2021
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 2020, 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 2020, 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.
Material uncertainty relating to going concern
The risk Our response
Going Concern Disclosure quality Our audit procedures
Refer to Report of the The financial statements included but were not
Directors. explain how the directors limited to:
We draw attention to Note 2c have formed a judgement that
to the financial statements, it is appropriate to adopt Realisation Opportunity:
which indicates that in the going concern basis of We considered the risk that
accordance with the Company's preparation for the Company. the outcome of the
Articles of Association and That judgement is based on Realisation Opportunity
its Admission Document to the an evaluation of the could affect the Company for
Alternative Investment Market inherent risks to the at least a year from the
("AIM") of the London Stock Company's business model and date of approval of the
Exchange, the Company shall how those risks might affect financial statements (the
offer all shareholders the the Company's financial "going concern period") by
right to elect to realise resources or ability to considering outcomes of
some or all of the value of continue operations over a previous realisation
their Ordinary Shares, less period of at least a year opportunities held by the
applicable costs and from the date of approval of Company, inspecting
expenses, on or prior to the the financial statements, in summaries of meetings held
fourth anniversary of the particular in relation to by the directors, inquiring
Company's AIM admission and the Realisation Opportunity. with the investment manager
every two years thereafter, The risk for our audit is as to their assessment of
the most recent being 15 May whether or not those risks the likelihood of uptake of
2019 and a forthcoming are such that they amounted the Realisation Opportunity,
opportunity being on 14 May to a material uncertainty and considering key
2021 ("the Realisation that may cast significant financial metrics including
Opportunity). Subject to the doubt about the ability to the performance of the
aggregate net asset value of continue as a going Company's share price
the continuing Ordinary concern. If so, that fact against relevant market
Shares falling below the is required to be disclosed indices.
viable threshold disclosed in (as has been done) and, Assessing disclosures:
note 2c to the financial along with a description of We considered whether the
statements, the directors may the circumstances, is a key going concern disclosure in
propose an ordinary financial statement note 2 (c) to the financial
resolution for the winding up disclosure. statements gives a full and
of the Company. accurate description of the
directors' assessment of
This condition constitutes a going concern, including the
material uncertainty that may identified risks and
cast doubt about the dependencies.
Company's ability to continue
as a going concern.
Our opinion is not modified
in respect of this matter.
Other 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. Going
concern is a significant key audit matter and is described in the 'Material
uncertainty relating to going concern' section of our report. In arriving at
our audit opinion above, the other key audit matter was as follows (unchanged
from 2019):
The risk Our response
Valuation of financial Basis: Our audit procedures
assets at fair value through As at 31 December 2020 the included but were not
profit or loss Company had invested 95% of limited to:
("Investments") its net assets in listed
£193,058,894; (2019: £ preferred shares and other Control Evaluation:
117,853,987) financial instruments issued We evaluated the design,
Refer to the Audit Committee by companies incorporated and implementation and operating
Report, note 2f accounting listed in South Korea, which effectiveness of the
policy and notes 12 and 21 in certain cases may trade at relevant controls over the
disclosures a discount to the valuation of investments.
corresponding common shares
of the same companies. Valuation procedures
including use of a KPMG
The Company's listed Specialist:
investments are valued based We have used our own
on bid-market prices at the valuation specialist to
close of business of the independently price
relevant stock exchange on investments to a third party
the reporting date obtained data source and assessed the
from third party pricing trading volumes behind such
providers. prices.
Assessing disclosures:
Risk: We also considered the
The valuation of the Company's investment
Company's investments, given valuation policies and their
they represent the majority application as described in
of the Company's net assets note 2f to the Financial
as at 31 December 2020, is a Statements for compliance
significant area of our with IFRS in addition to the
audit. 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 £3,204,000,
determined with reference to a benchmark of net assets of £203,124,953, of
which it represents approximately 1.6% (2020: 2%).
In line with our audit methodology, our procedures on individual account
balances and disclosures were performed to a lower threshold, performance
materiality, so as to reduce to an acceptable level the risk that individually
immaterial misstatements in individual account balances add up to a material
amount across the financial statements as a whole. Performance materiality for
the Company was set at 75% (2020: 75%) of materiality for the financial
statements as a whole, which equates to £2,403,000 (2019: £1,820,000). We
applied this percentage in our determination of performance materiality because
we did not identify any factors indicating an elevated level of risk
We reported to the Audit Committee any corrected or uncorrected identified
misstatements exceeding £160,000, 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.
Going concern basis of preparation
The directors have prepared the financial statements on the going concern basis
as they do not intend to liquidate the Company or to cease its operations, and
as they have concluded that the Company's financial position means that this is
realistic over the going concern period. As stated in the 'material uncertainty
relating to going concern' section of our report, they have also concluded that
there is a material uncertainty relating to going concern.
An explanation of how we evaluated the directors' assessment is set out in the
'material uncertainty relating to going concern' section of our report.
Our conclusions based on this work:
* · we consider that the directors' use of the going concern basis of
accounting in the preparation of the financial statements is appropriate;
and
* · we have nothing material to add or draw attention to in relation to
the directors' statement in the notes to the financial statements on the
use of the going concern basis of accounting, and their identification
therein of a material uncertainty over the Company's use of that basis for
the going concern period.
Fraud and breaches of laws and regulations - ability to detect
Identifying and responding to risks of material misstatement due to fraud
To identify risks of material misstatement due to fraud ("fraud risks") we
assessed events or conditions that could indicate an incentive or pressure to
commit fraud or provide an opportunity to commit fraud. Our risk assessment
procedures included:
* · enquiring of management as to the Company's policies and procedures to
prevent and detect fraud as well as enquiring whether management have
knowledge of any actual, suspected or alleged fraud;
* · reading minutes of meetings of those charged with governance; and
* · using analytical procedures to identify any unusual or unexpected
relationships.
As required by auditing standards, we perform procedures to address the risk of
management override of controls, in particular the risk that management may be
in a position to make inappropriate accounting entries. On this audit we do not
believe there is a fraud risk related to revenue recognition because the
Company's revenue streams are simple in nature with respect to accounting
policy choice, and are easily verifiable to external data sources or agreements
with little or no requirement for estimation from management. We did not
identify any additional fraud risks.
We performed procedures including
* · Identifying journal entries and other adjustments to test based on
risk criteria and comparing the identified entries to supporting
documentation; and
* · incorporating an element of unpredictability in our audit procedures.
Identifying and responding to risks of material misstatement due to
non-compliance with laws and regulations
We identified areas of laws and regulations that could reasonably be expected
to have a material effect on the financial statements from our general
commercial and sector experience and through discussion with management (as
required by auditing standards), and from inspection of the Company's
regulatory and legal correspondence, and discussed with management the policies
and procedures regarding compliance with laws and regulations. As the Company
is regulated, our assessment of risks involved gaining an understanding of the
control environment including the entity's procedures for complying with
regulatory requirements.
The Company is subject to laws and regulations that directly affect the
financial statements including financial reporting legislation and taxation
legislation and we assessed the extent of compliance with these laws and
regulations as part of our procedures on the related financial statement items.
The Company is subject to other laws and regulations where the consequences of
non-compliance could have a material effect on amounts or disclosures in the
financial statements, for instance through the imposition of fines or
litigation or impacts on the Company's ability to operate. We identified
financial services regulation as being the area most likely to have such an
effect, recognising the regulated nature of the Company's activities and its
legal form. Auditing standards limit the required audit procedures to identify
non-compliance with these laws and regulations to enquiry of management and
inspection of regulatory and legal correspondence, if any. Therefore if a
breach of operational regulations is not disclosed to us or evident from
relevant correspondence, an audit will not detect that breach.
Context of the ability of the audit to detect fraud or breaches of law or
regulation
Owing to the inherent limitations of an audit, there is an unavoidable risk
that we may not have detected some material misstatements in the financial
statements, even though we have properly planned and performed our audit in
accordance with auditing standards. For example, the further removed
non-compliance with laws and regulations is from the events and transactions
reflected in the financial statements, the less likely the inherently limited
procedures required by auditing standards would identify it.
In addition, as with any audit, there remains a higher risk of non-detection of
fraud, as this may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal controls. Our audit procedures
are designed to detect material misstatement. We are not responsible for
preventing non-compliance or fraud and cannot be expected to detect
non-compliance with all laws and regulations.
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
We are required to perform procedures to identify whether there is a material
inconsistency between the directors' disclosures in respect of emerging and
principal risks and the viability statement, and the financial statements
and our audit knowledge. 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 emerging and principal 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 perform procedures to identify whether there is a material
inconsistency between the directors' corporate governance disclosures and the
financial statements and our audit knowledge.
Based on those procedures, we have concluded that each of the following is
materially consistent with the financial statements and our audit knowledge:
* · 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;
* · the section of the annual report describing the work of the Audit
Committee, including the significant issues that the audit committee
considered in relation to the financial statements, and how these issues
were addressed; and
* · the section of the annual report that describes the review of the
effectiveness of the Company's risk management and internal control
systems.
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 their statement set out 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
April 2021
Statement of Financial Position
As at 31 December 2020
As at As at
31 December 31 December
2020 2019
Notes £ £
Assets
Financial assets at fair value through 12,21 193,058,894 117,853,987
profit or loss
Derivative financial assets 16 62,951 33,218
Other receivables 15 3,857,730 2,445,789
Cash and cash equivalents 13 5,972,867 6,430,069
Margin account 14 2,095,974 1,435,750
Due from broker 2r 2,989,619 -
Total assets 208,038,035 128,198,813
Liabilities
Derivative financial liabilities 16 1,588,314 704,019
Due to broker 2r 2,711,434 -
Other payables 17 613,334 506,062
Total liabilities 4,913,082 1,210,081
Net assets 203,124,953 126,988,732
Represented by:
Shareholders' equity and
reserves
Share capital 18 68,124,035 68,124,035
Other reserves 2u 135,000,918 58,864,697
Total shareholders' equity 203,124,953 126,988,732
Net assets per share 6 2.4887 1.5559
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 9 April 2021.
Norman Crighton
Chairman
Stephen Coe
Director
Statement of Comprehensive Income
For the year ended 31 December 2020
For the For the
year ended year ended
31 December 31 December
2020 2019
Notes £ £
Income
Net changes in fair value of financial assets 7 77,306,072 8,105,875
at fair value through profit or loss
through profit or loss
Net changes in fair value of derivative 8 2,025,301 123,038
financial
instruments through profit or loss
Net foreign currency losses 7 (138,785) (496,260)
Dividend income 9 5,522,132 4,318,917
Bank interest income 9 3,302 6,497
Total income 84,718,022 12,058,067
Expenses
Operating expenses 10 (4,139,030) (3,161,724)
Total operating expenses (4,139,030) (3,161,724)
Profit for the year before tax 80,578,992 8,896,343
Withholding tax 2t (1,214,868) (965,183)
Profit for the year after 79,364,124 7,931,160
tax
Profit and total 79,364,124 7,931,160
comprehensive income for
the year
Basic and diluted earnings per Share 5 0.9724 0.0960
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 2020
For the year ended 31 December 2020
Share Other
capital reserves Total
Notes £ £ £
Balance at 1 January 2020 68,124,035 58,864,697 126,988,732
Total comprehensive income for the year - 79,364,124 79,364,124
Transactions with Shareholders, recorded directly in equity
Distributions paid 3 - (3,227,903) (3,227,903)
Balance at 31 December 2020 68,124,035 135,000,918 203,124,953
For the year ended 31 December 2019
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
The Notes form an integral part of these Financial Statements.
Statement of Cash Flows
For the year ended 31 December 2020
For the year For the year
ended ended
31 December 31 December
2020 2019
Notes £ £
Cash flows from operating activities
Profit for the year 79,364,124 7,931,160
Adjustments for:
Net change in fair value of financial 7 (77,167,287) (7,609,615)
assets held at fair value through
profit or loss
Net change in fair value of derivative 8 (2,025,301) (123,038)
financial instruments held at fair
value through profit or loss
Net change in NAV of Realisation - (41,049)
Shares
Dividend received 4,110,191 4,507,609
Effect of foreign exchange rate (138,785) (496,260)
fluctuations
Decrease in receivables* 15 - 2,023
Increase/(decrease) in other payables 17 107,272 (8,099)
Dividend income 9 (5,522,132) (4,318,917)
Net cash used in operating activities (1,271,918) (156,186)
Cash flows from investing activities
Purchase of financial assets at fair value (106,564,186) (8,239,027)
through profit or loss
Open of derivative financial 1,457,636 (593,087)
instruments
Proceeds from the sale of financial 108,387,167 18,803,752
assets at fair value through profit or
loss
Closure of derivative financial 1,422,226 1,884,115
instruments
(Increase)/decrease in margin account (660,224) 816,938
Net cash generated from investing 4,042,619 12,672,691
activities
Cash flows from financing activities
Redemption of Realisation Shares - (3,915,557)
Distributions paid 3 (3,227,903) (3,475,416)
Net cash used in financing activities (3,227,903) (7,390,973)
Net (decrease)/increase in cash and cash (457,202) 5,125,532
equivalents
Cash and cash equivalents at the beginning 6,430,069 1,304,537
of the year
Cash and cash equivalents at the end of the 5,972,867 6,430,069
year
The Notes form an integral part of these Financial Statements.
*Decrease in receivables excludes dividends receivable, see note 15.
Notes to the Financial Statements
For the year ended 31 December 2020
1. General information
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 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 2020
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 Board reviews the liquidity of the Portfolio quarterly and is satisfied
that positions are sufficiently liquid to meet current and future obligations.
The Board notes the forthcoming Realisation Opportunity and is again satisfied
that realisation requests can be made from liquidating investments. The Board
will review the level of assets following the Realisation Date to determine
whether the Company retains the ability continue as a going concern (based
primarily on asset size). The Board and the Investment Manager believe the
investment thesis continues to be valid.
The Board has no control over market movements arising from the COVID-19
pandemic. During the last 12 months the Company has been able to operate
without interruption with service providers working effectively at remote
locations.
In accordance with the Company's Articles of Association and its Admission
Document, the Company shall offer 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 next
such opportunity being 14 May 2021 (the "Realisation Date").
On 15 March 2021, 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. The Election Period shall commence on 14 April
2021 and closes at 1pm, 7 May 2021.
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 have elected
for Realisation will be redesignated as Realisation Shares and the Portfolio
will be 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). 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.
Currently, the Board does not know the number of Shareholders (or related
Shares) who will take up the Realisation Opportunity. Based on the material
uncertainty of the offer and the fact that the assets of 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 in the foreseeable future and 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, given that the
Board believes the Company will continue in existence post the Realisation
Opportunity.
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 2021, 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
A number of new standards, amendments to standards and interpretations are
effective for annual periods beginning after 1 January 2020, and have not been
adopted in preparing these financial statements. None of these are expected to
have a material effect on the financial statements of 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.
g) 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.
h) Other 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.
i) 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.
j) Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash equivalents include bank
overdrafts. Cash equivalents 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.
k) Margin accounts
Margin accounts represent deposits with sub-custodian, transferred as
collateral against open derivative contracts. The Company's investment into
traded derivative instruments requires the need to post and maintain margin
accounts with set limits with the aim of minimising counterparty risk
associated with these derivative instruments. Margin account balances are
stated at their principal amount.
l) 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.
m) 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 reporting 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.
n) 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.
o) 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 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.
p) 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.
q) 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.
r) 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.
s) 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.
t) 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 (2019: £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.
u) Other reserves
Total comprehensive income for the year is transferred to Other Reserves. Other
reserves are made up of operating gains/losses and not all reserves are
distributable.
3. Dividends to Shareholders
Dividends, if any, will be paid annually each year. An annual dividend of
3.9549 pence per Share (£3,227,903) was approved on 13 May 2020 and paid on 12
June 2020 in respect of the year ended 31 December 2019.
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.
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 £0.9724 (31 December 2019: profit
per Share of £0.0960) for the Company has been calculated based on the total
profit after tax for the year of £79,364,124 (for the year ended 31 December
2019: £7,931,160 profit) and the weighted average number of Ordinary Shares in
issue during the year of 81,617,828 (for the year ended 31 December 2019:
82,633,898).
6. Net asset value per Ordinary Share
The NAV of each Share of £2.4887 (as at 31 December 2019: £1.5559) is
determined by dividing the net assets of the Company attributed to the Ordinary
Shares of £203,124,953 (as at 31 December 2019: £126,988,732) by the number of
Ordinary Shares in issue at 31 December 2020 of 81,617,828 (as at 31 December
2019: 81,617,828 Ordinary Shares in issue).
7. Net changes in fair value on financial assets at fair value through profit
or loss
For the For the
year ended year ended
31 December 31 December
2020 2019
£ £
Net realised gain on investments 42,172,340 8,389,633
Net realised loss on investments (8,611,912) (1,558,775)
Net realised loss on foreign currency (56,701) (232,536)
Movement in unrealised gain on investments 43,745,644 3,743,905
Movement in unrealised loss on investments - (2,468,888)
Movement in unrealised exchange loss on foreign (82,084) (263,724)
currency
Net changes in fair value on financial assets at 77,167,287 7,609,615
fair value through profit or loss including
foreign currency movement
Net foreign 138,785 496,260
currency losses
Net changes in fair value on financial assets at 77,306,072 8,105,875
fair value through profit or loss
8. Net changes in fair value on derivative financial instruments at fair
value through profit or loss
For the year For the year
ended ended
31 December 31 December
2020 2019
£ £
Net realised gain on options 1,273,739 668,601
Net realised gain on credit default swaps 1,035,797 -
Movement in unrealised gain/(loss) on options 49,304 (1,050,771)
Movement in unrealised (loss)/gain on credit (333,539) 505,208
default swaps
Net changes in fair value on financial
derivatives at fair value through profit or 2,025,301 123,038
loss
9. Other income
For the year For the year
ended ended
31 December 31 December
2020 2019
£ £
Dividend 5,522,132 4,318,917
income
Bank interest 3,302 6,497
income
10. Operating expenses
For the year For the year
ended ended
31 December 2020 31 December 2019
£ £
Investment Management fee (Note 19c) 2,144,761 1,860,960
Custodian fees 64,988 46,965
Audit fees 34,255 33,788
Administration and Secretarial fees 102,268 98,314
Directors' fees (Note 19a) 81,500 81,500
Tax services 9,750 9,750
Professional fees 84,588 68,137
Transaction costs¹ 771,526 103,063
Sundry expenses 43,260 96,632
Derivative expense¹ 802,134 762,615
Total Operating 4,139,030 3,161,724
Expenses
1. Excluded from the Total Expense Ratio (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 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 31 December
2020 2019
£ £
Cost of investments at beginning of the 106,419,418 110,153,284
year
Purchases of investments in the year 109,275,618 8,239,027
Disposal of investments in the year (111,376,783) (18,803,751)
Proceeds from disposal of investments in 33,560,428 6,830,858
the year
Cost of investments held at end of the 137,878,681 106,419,418
year
Unrealised gain on investments 55,180,213 11,434,569
Financial assets at fair value through 193,058,894 117,853,987
profit or loss
Financial assets are valued at the bid-market prices ruling as at the close of
business at the Statement of Financial Position date, net of any accrued
interest which is included in the Statement of Financial Position as an income
related item. The Directors are of the opinion that the bid-market prices are
the best estimate of fair value in accordance with the requirements of IFRS 13
'Fair Value Measurement'. Movements in fair value are included in the Statement
of Comprehensive Income.
13. Cash and cash equivalents
As at As at
31 December 31 December
2020 2019
£ £
Cash at bank 5,972,867 6,430,069
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 31 December
2020 2019
£ £
Margin account 2,095,974 1,435,750
The margin account represents a margin deposit of collateral held by Credit
Suisse Securities (USA) LLC in relation to the credit default swaps. The
carrying value of the margin account approximates the fair values due to the
short term nature.
15. Other receivables
As at As at
31 December 31 December
2020 2019
£ £
Dividends receivable 3,855,939 2,443,998
Prepaid expenses 1,791 1,791
Total Other 3,857,730 2,445,789
Receivables
The Directors consider that the carrying amount of receivables approximate
their fair value.
Dividends are presented net of withholding tax of £1,087,572 (2019: £689,333).
16. Derivative financial instruments
As at As at
31 December 31 December
2020 2019
£ £
Cost of derivatives at beginning of the (1,174,737) (552,309)
year
Open of derivatives in the (1,457,636) 593,087
year
Closure of derivatives in the (1,422,226) (1,884,116)
year
Realised gain on closure of derivatives in 2,309,536 668,601
the year
Net cost of derivatives held at end of the (1,745,063) (1,174,737)
year
Unrealised gain on derivative financial 219,700 503,936
instruments at fair value through profit or
loss
Net fair value on derivative financial (1,525,363) (670,801)
instruments at fair value through profit or
loss
The following are the composition of the Company's derivative financial
instruments at year end:
As at As at
31 December 31 December
2020 2019
Assets Liabilities Assets Liabilities
Derivatives held for £ £ £ £
trading:
Options 62,951 - 33,218 -
Credit default swaps - (1,588,314) - (704,019)
Total 62,951 (1,588,314) 33,218 (704,019)
Credit Default Swaps on Notional Value Expiration Date Total Duration
South Korean Sovereign Debt (USD) (Years)
5 year CDS $20m 2023 5.0
3 year CDS $80m 2023 3.0
Number of Put Option Strike Price Purchase Date Expiration
Contracts Held on EWY (USD) Date
2,000 $62 13 November 2020 16 April 2021
86 $55 25 August 2020 15 January
2021
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 2020 (2019: Nil).
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. The Company's
purchases of credit default swaps and put options as described in this Note 16
reflect its belief that such securities will provide the foregoing protection
without introducing material new risks into the Company's portfolio.
17. Other payables
As at As at
31 December 31 December
2020 2019
£ £
Investment management fees payable (Note 456,843 310,841
19c)
Administration fee 24,027 34,876
payable
Custody fee payable 8,355 3,900
Co-sec and Listing fee payable 6,319 12,499
Audit fees payable 27,738 33,000
Other payables 90,052 110,946
Total Other Payables 613,334 506,062
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 31 December
2020 2019
Authorised
Unlimited Ordinary Shares at no par value - -
Issued at no par
value
81,617,828 (2019: 81,617,828) unlimited Ordinary Shares at no par -
value -
Reconciliation of number of Shares
As at As at
31 December 31 December
2020 2019
No. of Shares No. of Shares
Ordinary Shares at the beginning of the 81,617,828 84,364,981
year
Purchase of Realisation Shares - (2,747,153)
Total Ordinary Shares in issue at the end of the 81,617,828 81,617,828
year
Share capital account
As at As at
31 December 31 December
2020 2019
£ £
Share capital at the beginning of the 68,124,035 72,080,642
year
Purchase of Realisation Shares - (3,956,607)
Total Share capital at the end of the 68,124,035 68,124,035
year
Ordinary Shares
The Company has a single class of Ordinary Shares, which were issued by means
of an initial public offering on 14 May 2013, at 100 pence per Share.
The rights attached to the Ordinary Shares are as follows:
a) The holders of Ordinary Shares shall confer the right to all dividends in
accordance with the Articles of Incorporation of the Company.
b) The capital and surplus assets of the Company remaining after payment of
all creditors shall, on winding-up or on a return (other than by way of
purchase or redemption of own Ordinary Shares) be divided amongst the
Shareholders on the basis of the capital attributable to the Ordinary Shares at
the date of winding up or other return of capital.
c) Shareholders present in person or by proxy or (being a corporation)
present by a duly authorised representative at a general meeting have, on a
show of hands, one vote and, on a poll, one vote for every Share.
d) On 15 March 2021, being 61 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 elect to participate in
the Realisation Opportunity, the Company's portfolio will be divided into two
pools: the Continuation Pool; and the Realisation Pool. Further information
regarding the Realisation Opportunity is set forth in Note 20.
Share buyback and cancellation
During the year ended 31 December 2020, the Company purchased Nil of its own
Shares (31 December 2019: Nil) at a consideration of £Nil (31 December 2019: £
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 2020 (as
at 31 December 2019: 81,617,828).
At the AGM held on 23 July 2020, 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 2020, Directors' fees of £81,500 (31 December
2019: £81,500) were charged to the Company and £Nil remained payable at the
year-end (as at 31 December 2019: £Nil). For additional information refer to
the Directors' Remuneration Report in the Directors' Report.
b) Shares held by related parties
The Directors who held office at 31 December 2020 and up to the date of this
Report held the following numbers of Ordinary Shares beneficially:
As at 31 December 2020 As at 31 December 2019
Ordinary % of issued Ordinary % of issued
Shares share Shares share
capital capital
Norman Crighton 20,000 0.02% 20,000 0.02%
Stephen Coe 10,000 0.01% 10,000 0.01%
Robert King 15,000 0.02% 15,000 0.02%
There have been no changes in the interests of the above Directors during the
year.
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 2020, Dr Andrew Weiss and his immediate family members held
an interest in 6,486,888 Ordinary Shares (as at 31 December 2019: 6,486,888)
representing 7.95 per cent. (as at 31 December 2019: 7.95 per cent.) of the
issued share capital of the Company.
As at 31 December 2020, 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
2019: 2,844,333) representing 3.48 per cent. (as at 31 December 2019: 3.48 per
cent.) of the issued share capital of the Company.
Material agreements
a) 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 2020, investment management fees and charges of
£2,144,761 (for the year ended 31 December 2019: £1,860,960) were charged to
the Company and £456,843 (as at 31 December 2019: £310,841) remained payable at
the year-end.
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.
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.
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
2020, 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 £9,652,945 (as at 31 December 2019: £5,892,699). 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 the 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 2020, the Company held the following assets and liabilities
in foreign currencies:
As at As at
31 December 31 December
2020 2019
Amounts in Sterling KRW USD KRW USD
Assets
Monetary assets 204,611,271 3,006,461 125,796,489 1,750,324
Total 204,611,271 3,006,461 125,796,489 1,750,324
Liabilities
Monetary liabilities (2,711,434) (1,588,314) - (704,019)
Total (2,711,434) (1,588,314) - (704,019)
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 2020.
Reasonable As at Reasonable As at
possible 31 December possible 31 December
shift in 2020 shift in 2019
rate rate
2020 £ 2019 £
Currency
KRW
Monetary assets +/- 5% 10,230,564 +/- 5% 6,289,824
Monetary liabilities +/- 5% (135,572) +/- 5% -
US Dollars
Monetary assets +/- 5% 150,323 +/- 5% 52,315
Interest rate risk
The Company holds limited cash and margin balances in interest-bearing accounts
of £8,068,837 as at 31 December 2020 (as at 31 December 2019: £7,865,819) 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 2020:
Total
As at
Floating Fixed Non-Interest 31 December
rate rate bearing 2020
£ £ £ £
Financial Assets
Investments designated at
fair value
through profit or loss - - 193,058,894 193,058,894
Derivative financial assets - - 62,951 62,951
Other receivables - - 3,857,730 3,857,730
Cash and cash equivalents 5,972,867 - - 5,972,867
Margin account 2,095,974 - - 2,095,974
Due from broker - - 2,989,619 2,989,619
Total 8,068,841 - 199,969,194 208,038,035
Total
As at
Floating Fixed Non-Interest 31 December
rate rate bearing 2020
£ £ £ £
Financial Liabilities
Due to broker - - 2,711,434 2,711,434
Derivative financial - - 1,588,314 1,588,314
liabilities
Other payables - - 613,334 613,334
Total - - 4,913,082 4,913,082
The table below summarises the Company's exposure to interest rate risk as of
31 December 2019:
Total
As at
Floating Fixed Non-Interest 31 December
rate rate bearing 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
As at
Floating Fixed Non-Interest 31 December
rate rate bearing 2019
£ £ £ £
Financial Liabilities
Derivative financial - - 704,019 704,019
liabilities
Other payables - - 506,062 506,062
Total - - 1,210,081 1,210,081
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 2020 as follows:
As at As at
31 December 31 December
2020 2019
£ £
Financial assets at fair value through profit or 193,058,894 117,853,987
loss
Derivative financial assets 62,951 33,218
Other receivables 3,857,730 2,445,789
Cash and cash equivalents 5,972,867 6,430,069
Margin account 2,095,974 1,435,750
Due from broker 2,989,619 -
Total 208,038,035 128,198,813
As at As at
31 December 31 December
Credit Rating 2020 2019
Agency
£ £
Credit Suisse Securities (USA) LLC, a Standard & A+ A+
subsidiary of Credit Suisse (USA), Inc Poor's
("CS")
Moody's A1 A1
Northern Trust (Guernsey) Limited which is a Standard & A+ A2
wholly owned subsidiary of The Northern Poor's
Trust Corporation ("TNTC")
Moody's A+ A2
The main concentration of credit risk to which the Company is exposed arises
from the Company's investments 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. There is also counterparty
risk on these instruments as they are held with Northern Trust (Guernsey)
Limited as custodian to the Fund. Credit risk also arises from the other
receivables which represent dividends receivable on some of these equity
investments.
The Company is also exposed to counterparty credit risk on credit default
swaps, options, cash and cash equivalents, amounts due from brokers and other
receivable balances. The credit risk from cash and cash equivalents is managed
as cash is placed within a margin account held with Credit Suisse Securities
(USA) LLC, a subsidiary of Credit Suisse (USA), Inc ("CS").
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. Due from broker
relate to trades awaiting settlement.
All transactions in listed securities are settled/paid for upon delivery using
approved brokers. Given the relatively short settlement period, and the high
credit quality of the brokers used, the risk here is considered to be minimal.
The Company's policy is to minimise its exposure to counterparties with
perceived higher risk of default by dealing with counterparties with a high
credit rating as shown in the table above.
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. Further details relating to the Board
assessment of liquidity risk relating to the upcoming Realisation Opportunity
is included in note 2c.
As at 31 December 2020, the Company had no significant financial liabilities
other than payables arising directly from investing activity:
Total
As at
Less than 1 31 December
month 1-3 months 3-12 months 2020
£ £ £ £
Derivative financial 1,588,314 - - 1,588,314
liabilities
Due to broker 2,711,434 - - 2,711,434
Other payables 613,334 - - 613,334
Total 4,913,082 - - 4,913,082
Total
As at
Less than 1 31 December
month 1-3 months 3-12 months 2019
£ £ £ £
Derivative financial 704,019 - - 704,019
liabilities
Other payables 506,062 - - 506,062
Total 1,210,081 - - 1,210,081
Capital risk management
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 2020 there were no borrowings (as at 31 December
2019: £Nil). The Board considers the below gearing ratio to be adequate, since
total borrowings refer only to amounts due to brokers, derivative liabilities,
and other payables.
The gearing ratio below is calculated as total liabilities divided by total
equity.
As at As at
31 December 31 December
2020 2019
£ £
Total assets 208,038,035 128,198,813
Less: Total liabilities (4,913,082) (1,210,081)
Net Asset Value 203,124,953 126,988,732
Gearing Ratio 2.42% 0.95%
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 15 March 2021, 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 elect for Realisation, if any, will be redesignated as
Realisation Shares and the Portfolio will be 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 will
be 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 elect to receive Realisation Shares, if any. Ordinary Shares
held by Shareholders who do not submit a valid and complete election in
accordance with the Articles during the Election Period will remain as Ordinary
Shares.
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 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 2020, financial assets of £Nil were
transferred from Level 1 to Level 2 (for the year ended 31 December 2019: £
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 (£1,588,314) (as at 31 December 2019: (£
704,019)).
The fair value of credit default swaps is determined by estimating future
default probabilities using market standard models. The principal input into
the model is the credit curve. Credit spreads are observed directly from broker
data or third party vendors. The significant model inputs are observable in the
marketplace or set in the contract.
The following tables presents the Company's financial assets and liabilities by
level within the valuation hierarchy as of 31 December 2020:
Total
As at
31 December
Level 1 Level 2 Level 2020
3
£ £ £ £
Financial assets/(liabilities)
at fair value through
profit or loss:
Korean preferred shares 193,058,894 - - 193,058,894
Financial derivative assets 62,951 - - 62,951
Financial derivative - (1,588,314) - (1,588,314)
liabilities
Total net assets 193,121,845 (1,588,314) - 191,533,531
Total
As at
31 December
Level 1 Level 2 Level 2019
3
£ £ £ £
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 - (704,019) - (704,019)
liabilities
Total net assets 117,887,206 (704,019) - 117,183,187
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 2020 As at 31 December 2019
NAV per NAV per
Participating Participating
NAV Share NAV Share
£ £ £ £
Net Asset Value reported to 199,269,014 2.4415 124,536,322 1.5258
the LSE
Adjustment to accruals and - - 8,412 0.0001
cash
Adjustment for dividend income 3,855,939 0.0472 2,443,998 0.0300
Net Assets Attributable to 203,124,953 2.4887 126,988,732 1.5559
Shareholders per Financial
Statements
The published NAV per Share of £2.4415 (as at 31 December 2019: £1.5258) is
different from the accounting NAV per Share of £2.4887 (as at 31 December 2019:
£1.5559) due to the adjustments noted above.
23. Subsequent events
These Financial Statements were approved for issuance by the Board on 9 April
2021. Subsequent events have been evaluated until this date.
Purchase of shares - on 27th January the Company bought back 600,000 shares at
a price of 286.00p per share in accordance with the authority granted to it by
shareholders at its 2020 Annual General Meeting. The purchased shares will be
cancelled. Following this purchase, the Company has 81,017,828 ordinary shares
in issue.
On 15 March 2021, being 61 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 elect to participate in
the Realisation Opportunity, the Company's portfolio will be divided into two
pools: the Continuation Pool; and the Realisation Pool. Further information in
respect of the Realisation Opportunity is set forth in Note 20.
END
(END) Dow Jones Newswires
April 12, 2021 02:00 ET (06:00 GMT)
Weiss Korea Opportunity (LSE:WKOF)
Gráfica de Acción Histórica
De Mar 2024 a Abr 2024
Weiss Korea Opportunity (LSE:WKOF)
Gráfica de Acción Histórica
De Abr 2023 a Abr 2024
