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 2021
Weiss Korea Opportunity Fund Ltd. (the "Company") has today, released its
Annual Financial Report for the year ended 31 December 2021. The Report will
shortly be available for inspection via the
Company's website www.weisskoreaopportunityfund.com.
For further information, please contact:
Singer Capital Markets Limited
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
Company Overview
Investment Objective and Dividend Policy
Weiss Korea Opportunity Fund's ("WKOF" or the "Company") 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 ("Korean") companies. Specifically, the
Company invests primarily in listed preference shares issued by companies
incorporated in Korea, which in many cases trade at a discount to the
corresponding common shares of the same companies. Since the Company's
Admission to the Alternative Investment Market ("AIM"), Weiss Asset Management
LP ("WAM" or the "Investment Manager") has assembled a portfolio of Korean
preference 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.
Performance Summary - at 31 December 2021
As at As at
31 December 31 December
2021 2020
£ £
Total Net Assets1 166,541,145 203,124,953
NAV per share2 2.40 2.48
Mid-Market Share price 2.47 2.38
Financial Highlights - statistics as at 31
December 2021
As at Since inception
31 December
2021
NAV Return3,4 (1.40%) 184.70%
Benchmark Return6,7 (6.10%) 84.60%
As at As at
31 December 31 December
2021 2020
Portfolio Discount* 52.16% 49.00%
Share Price Premium/Discount8 2.79% (2.80%)
Fund Dividend Yield9 2.12% 1.66%
Average Trailing 12-Month P/E Ratio of Preference 6.1x 9.9x
Shares Held10
P/B Ratio of Preference Shares Held11 0.46 0.55
Annualised Total Expense Ratio12 1.80% 1.81%
* The portfolio discount represents the discount of WKOF's actual NAV to the
value of what the NAV would be if WKOF held the respective common shares of
issuers rather than preference shares on a one-to-one basis.
Weiss Asset Management
Weiss Asset Management is an investment management firm headquartered in
Boston, MA registered with the U.S. Securities and Exchange Commission as an
investment adviser. In addition to WKOF, WAM manages multiple investment
vehicles, including private hedge funds, an institutional separate account and
other opportunity funds.
The firm was founded by Dr. Andrew Weiss, an academic economist, who launched
his first fund in 1991.
WAM employs deep fundamental and statistical analysis to find undervalued
securities globally, and seeks to maximize risk-adjusted returns for its
investor base that includes charitable foundations, pension plans, endowments,
hospitals, government entities and private investors.
WAM has been investing in the Korean market for over 20 years. Over this time,
the firm has built out a dedicated night desk of 6 employees focused on trading
its Asian strategies, as well as strong relationships with a number of Korean
brokers.
The firm has 80+ employees and assets under management of approximately £2.1
billion.
Andrew Weiss
Founder and Chief Executive Officer
Andrew is the Founder and Chief Executive Officer of WAM. Andrew received his
Ph.D. in Economics from Stanford University, was elected a fellow of the
Econometric Society in 1989, and is currently Professor Emeritus of Economics
at Boston University.
Andrew's academic research interests have included markets with imperfect
information, macroeconomics, development economics, and labour economics. He
ranks in the top 1% of published economists by citations, and his co-authored
paper "Credit Rationing in Markets with Imperfect Information" with Joseph
Stiglitz was prominently featured in the Nobel Prize committee statement for
Stiglitz's 2001 Nobel Prize Award.
Andrew began his career as Assistant Professor at Columbia University and as a
Research Economist in the Mathematics Center at Bell Laboratories. He has
lectured at numerous major universities and international organizations and is
the author of numerous articles published in professional journals.
Andrew began managing the predecessor to WAM's existing domestic hedge fund in
1991, and founded WAM in 2003. Andrew and WAM's strategies have been featured
in articles in Forbes, Time, and Outstanding Investor Digest, as well as
newspaper articles in the U.S. and Europe.
Additionally, Andrew is a member of the Advisory Board of the University of
California Center for Effective Global Action, the Advisory Board for the
Center for Development Economics at Williams College and the Council on Foreign
Relations. Andrew and his wife Bonnie are the founders of Child Relief
International, a foundation dedicated to fighting poverty in less developed
countries. Andrew is also a board member of the WAM Foundation, a non-profit
focused on maximizing the alleviation of suffering worldwide.
Jack Hsiao
Managing Director
Jack joined WAM in February 2008; he is a Managing Director and a member of the
Investment Committee. Prior to that, Jack interned at WAM from 2006-2008 while
performing his undergraduate studies. Jack works from Boston and oversees all
strategies in Asia including investments across preference shares, holding
companies, bonds, distressed, value equities and other instruments. After
graduating Valedictorian from his high school, Jack received his Bachelor
degree in Economics from Harvard.
Ethan Lim
Portfolio Manager
Ethan joined WAM in June 2015; he is a Portfolio Manager at the firm and is
primarily responsible for managing the firm's investments in Korea, while
overseeing the Asia team and other strategies during Asia hours. Prior to
joining Weiss, Ethan interned at Goldman Sachs's Seoul office. Ethan graduated
from Seoul National University, where he received a BS in Mechanical and
Aerospace Engineering and a BA in Economics, and completed his Master's degree
in Financial Engineering at Columbia University.
Korean preference shares
Many of the largest companies in the Korean market issue preference shares in
addition to their common shares. These preference shares are equity shares that
receive the same dividend per share as the voting common shares plus an
additional percentage of the preference shares' par value per share. In return
for this higher dividend, preference shares are non-voting in normal
circumstances, although they do have voting rights in certain situations. Many
of these preference shares trade at less than half the price of the
corresponding common shares despite receiving a slightly higher dividend amount
as the common shares and, therefore, provide preference shareholders with
relatively higher yields than the corresponding common shares.
The majority of Korean preference shares were issued in the mid-1990s, when the
Korean government pressured chaebols (family-owned Korean conglomerates) to
raise equity and reduce debt within their capital structures. By issuing
non-voting shares, the founders of the Korean companies were able to raise
equity capital without diluting their voting control. The additional payment as
a percentage of par value which preference shares paid out to investors, albeit
nominal today, was sufficiently large relative to the dividends in the 1990s to
attract investors. Today, there are 123 Korean preference shares outstanding
with an aggregate market capitalization of approximately £50 billion.13
Although preference shares typically do not have voting rights, an economic or
financial model that values equity on the discounted value of future cash flows
would imply that the preference shares of these companies should be trading at
roughly the same price as the corresponding common shares. Further, preference
shares are not associated with over-priced speculative companies; rather, many
of the leading companies in the Korean economy have preference shares
outstanding today.
Continued corporate governance improvements, increased dividend payouts and
investor activism such as that experienced over the past several years could
continue to serve as catalysts for preference share discounts narrowing. The
Company invests in a portfolio of discounted Korean preference shares,
including Korean market heavyweights such as Hyundai Motor Co, LG Chem Ltd., LG
Electronics Inc and AmorePacific Corp.
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 preference 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.
Preference 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").
From time to time, the Company purchases certain credit default swaps on the
sovereign debt of South Korea and put options on iShares MSCI South Korea ETF
("EWY") 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 2021 (2020: Nil). Please see additional information about the nature
of these hedges in the Investment Manager's Report within.
Investment Process
The Investment Manager monitors the discounts and yields on the universe of
Korean preference shares as well as events or catalysts that could affect
preference share discounts leading to material price changes.
Multiple criteria are used to rank and calculate the returns for each
preference share, including but not limited to:
* The discount that the preference share is trading at relative to its common
share
* Expected dividend yield
* Future catalysts or events
* Management quality
* Fundamentals of the company
* Market impact from entering and exiting our position
We expect to remain close to fully invested as long as the opportunity set
remains attractive.
Top 10 Holdings
1. HYUNDAI MOTOR COMPANY, 2ND PFD.
13.4% OF WKOF NAV*DISCOUNT TO COMMON SHARE: -52%
Hyundai Motor Company is Korea's leading car manufacturer, producing and
selling more than 3.8 million units globally in over 200 countries in 202114.
Hyundai was ranked a top 5 global automotive maker by market share in 202115
Hyundai plans on increasing its presence in the electric vehicle market, while
targeting to sell over 4.3 million units in 2022.
2. LG CHEM LTD., PFD.
10.5% OF WKOF NAVDISCOUNT TO COMMON SHARE: -53%
Korea's largest chemical company by market capitalization, LG Chem
manufacturers and sells petrochemical products and advanced materials,
including plastics and EV batteries16. Its EV battery business and subsidiary,
LG Energy Solution is the second-largest EV battery maker in the world17. In
2021, LG Chem generated over $37bn in revenue globally.
3. AMOREPACIFIC CORP., PFD
7.7% OF WKOF NAVDISCOUNT TO COMMON SHARE: -56%
Amorepacific Corp develops beauty and cosmetic products while operating over 30
brands, including Etude and Laneige18. Amorepacific's portfolio of products
ranges from perfume to dental care, including a premium tea brand.
4. LG ELECTRONICS INC., PFD.
7.5% OF WKOF NAVDISCOUNT TO COMMON SHARE: -53%
LG Electronics is a household brand in home appliances, with various product
lines including washing machines, televisions, refrigerators, and smart phones.
According to market research firm Omdia, the company ranked second globally in
terms of TV market share, capturing 18.5% of global TV sales19. LG Electronics
has 128 sites focused on manufacturing, R&D, and distribution of their
products20.
5. SK CHEMICALS CO., LTD., NEW PREF
6.0% OF WKOF NAVDISCOUNT TO COMMON SHARE: -40%
SK Chemicals focuses on the production of environmentally friendly materials
and life science products. Green chemicals include bio-based material used in
the production of polyurethane, as well as amorphous resin for containers and
home appliances. Its life science segment spans treatments for the common cold
to asthma treatments21. SK Chemicals also owns majority stake in Korea's
largest vaccine maker by market capitalization22.
6. HANWHA CORPORATION 3RD PFD.
5.8% OF WKOF NAVDISCOUNT TO COMMON SHARE: -49%
Hanwha Corporation specializes in producing and trading chemicals, aerospace &
defense products, and energy products. It also deals in the construction and
financial services industry. As a Fortune Global 500 company, Hanwha is also
the holding company of Hanwha group which owns majority stake in Korea's second
largest life insurance company by assets and Hanwha Solutions, a leading
domestic manufacturer of solar cell panels. Hanwha Corporation's network
includes 469 offices worldwide23.
7. SOLUS ADVANCED MATERIALS, CO., LTD., 1ST PFD.
5.6% OF WKOF NAVDISCOUNT TO COMMON SHARE: -75%
Solus Advanced Materials is a major Korean manufacturer of copper foil, which
has significant applications in communication equipment and circuit boards.
Solus Advanced Materials' business lines also include the specialised
production of battery copper foil and OLED materials24. In 2022, Solus began
supplying battery copper foil to Tesla, a leading electric vehicle
manufacturer25.
8. CJ CHEILJEDANG CORP, PFD.
5.5% OF WKOF NAVDISCOUNT TO COMMON SHARE: -54%
CJ CheilJedang is a leading food company in Korea, focused on processing food
ingredients into groceries such as refined sugar, flour, and processed meats.
The company also operates a number of food brands that specialize in home meal
replacements and snacks, including names like Bibigo and Petitzel. CJ
CheilJedang also operates in the bio industry, and produces plant-based protein
and amino acids26.
9. MIRAE ASSET DAEWOO CO., LTD., 2ND PFD.
5.4% OF WKOF NAVDISCOUNT TO COMMON SHARE: -46%
Mirae Asset Daewoo is a South Korean financial services firm offering
securities trading, equity underwriting, investment banking services, and
wealth/asset management. One of the top 5 securities brokerage in Korea, Mirae
Asset conducts business globally, including the United States, Canada, United
Kingdom, and China27.
10. LG HOUSEHOLD & HEALTH CARE LTD., PFD.
5.0% OF WKOF NAVDISCOUNT TO COMMON SHARE: -44%
LG Household & Health Care operates within a number of industries, spanning
from cleaning products to beauty care. Beginning with an acquisition of
Coca-Cola's Korea bottling operation in 2007, LG Household & Health Care also
established a beverage business segment, which now includes the distribution of
tea, coffee, and juices28.
* WKOF also invests in Hyundai Motor Company, 3rd Pfd., bringing WKOF's total
exposure to Hyundai Motor Company to 15.4% of WKOF's NAV. For more detail,
please see "Portfolio Holdings" below.
Portfolio Holdings
% of WKOF Current
NAV
Name Ticker MV (GBP) Pref Discount
55
Hyundai Motor Company, 2nd 005387 KS 22,395,367 13.4 52%
Pfd.
LG Chem Ltd., Pfd. 051915 KS 17,563,571 10.5 53%
Amorepacific Corp., Pfd. 090435 KS 12,817,974 7.7 56%
LG Electronics Inc., Pfd. 066575 KS 12,562,229 7.5 53%
SK Chemicals Co., Ltd., 28513K KS 9,943,724 6.0 40%
New-Pref.
Hanwha Corporation 3rd Pfd. 00088K KS 9,699,581 5.8 49%
Solus Advanced Materials, 33637K KS 9,334,589 5.6 75%
Co., Ltd., 1st Pfd
CJ CheilJedang Corp, Pfd. 097955 KS 9,101,406 5.5 54%
Mirae Asset Daewoo Co., 00680K KS 8,967,252 5.4 46%
Ltd., 2P
LG Household & Health Care 051905 KS 8,409,908 5.0 44%
Ltd., Pfd.
Doosan Fuel Cell Co., Ltd., 33626K KS 8,036,379 4.8 70%
1P
CJ Corporation, 1st Pfd. 001045 KS 3,981,963 2.4 35%
Hyundai Motor Company, 3rd 005389 KS 3,259,867 2.0 55%
Pfd.
Amorepacific Group, 1st Pfd. 002795 KS 3,216,148 1.9 62%
Kolon Industries, Inc., Pfd. 120115 KS 2,735,626 1.6 52%
Samsung SDI Co., Ltd., Pfd. 006405 KS 2,712,894 1.6 47%
S-Oil Corporation, Pfd. 010955 KS 2,443,710 1.5 36%
Samsung Electro-Mechanics 009155 KS 2,428,459 1.5 47%
Co., Ltd., Pfd.
DL E&C Co., Ltd., Pref 37550K KS 2,074,280 1.2 41%
Samsung Fire & Marine 000815 KS 1,832,416 1.1 21%
Insurance Co., Ltd., Pfd.
LG Hausys, Ltd., Pfd. 108675 KS 1,751,788 1.1 54%
Daelim Industrial Co., Ltd., 000215 KS 1,452,234 0.9 39%
Pfd.
CJ Corp-Convert Pref 00104K KS 1,064,138 0.6 15%
Amorepacific Group - Conv Pfd 00279K KS 485,565 0.3 24%
Nexen Tire Corporation, Pfd. 002355 KS 286,507 0.2 52%
Lotte Chilsung Beverage Co., 005305 KS 263,043 0.2 48%
Ltd., Pfd.
Hite Jinro Co., Ltd., Pfd. 000087 KS 211,878 0.1 37%
LG Corp, Pfd. 003555 KS 175,381 0.1 21%
SK Innovation Co., Ltd., Pfd. 096775 KS 104,871 0.1 41%
Korea Investment Holdings 071055 KS 78,087 0.0 19%
Co., Ltd., Pfd.
Samsung Electronics Co., 005935 KS 70,712 0.0 9%
Ltd., Pfd.
Kumho Petro Chemical Co., 011785 KS 49,276 0.0 36%
Ltd., Pfd.
Namyang Dairy Products Co., 003925 KS 44,771 0.0 51%
Ltd., Pfd.
GS Holdings, Pfd. 078935 KS 33,928 0.0 10%
Samyang Holdings Corp., Pfd. 000075 KS 10,145 0.0 30%
Sebang Co., Ltd., 1st Pfd. 004365 KS 6,993 0.0 40%
Other Net Assets and 4.4
Liabilities29 6,934,485
100.0%
166,541,145
Chairman's Review
For the year ended 31 December 2021
We are pleased to provide the 2021 Annual Report on the Company. The
performance of the Company in 2021 has been overshadowed by subsequent events
in Ukraine. I am sure that the Board, the Investment Manager, our Shareholders
and all of the people involved with WKOF were shocked by the Russian aggression
and support the actions of the international community, aimed at bringing the
occupation to an end as quickly as possible. The investment mandate of WKOF is
very specific and none of our investments were directly affected. However, the
international sanctions are influencing global trade, and the consequences of
that are currently unknown. We will keep Shareholders informed of any material
changes to the portfolio through the usual channels.
During the period from 1 January 2021 to 31 December 2021 (the "Period"), the
Company's net asset value fell by -1.4%, including reinvested dividends30 in
Pounds Sterling ("GBP"). Since the admission of the Company to AIM in May 2013,
the net asset value has increased by 184.7% including reinvested dividends
compared to the Korea Index returns of 84.6%,31 an annualised outperformance of
the index of 11.6%. A report from the Investment Manager is included in this
Annual Report. The Company outperformed the reference MSCI Korea 25/50 Net
Total Return Index, which fell by -6.1% in GBP.32 The reasons for the Company's
outperformance against the Korea Index in 2021 are set forth in the Investment
Manager's report, so I will not address them here. The Korean equity market did
poorly in 2021, due to continued supply chain disruptions, a weakening currency
and broader concerns about the resilience of Chinese and US demand for Korean
exports given rising inflation.
On the other hand, the Korean economy enjoyed robust growth during the year, as
GDP grew by 4.0% and exports grew at their fastest pace in 11 years. 33 The
continued success of Korea's economy, however, will depend on its ability to
continue exporting large amounts of goods to China and importing reasonably
priced commodities both for domestic consumption and for manufacturing the
goods that it exports. With Russia's invasion of Ukraine, an event rightly
condemned around the world, both of these outcomes are significantly more
uncertain today than they were on 31 December. Russia's war could result in
damage to China's economy if China's trading partners begin to sanction Chinese
companies; this would negatively impact Korean exports. Russian sanctions have
already exacerbated the effects of inflation on global commodity prices, so
this too is a net negative for companies in Korea, and elsewhere.
The Board and the Investment Manager are closely monitoring developments and
evaluating how existing and potential sanctions may impact the Company's
portfolio.
The Board declared an interim dividend of 5.2311 pence per Share, ex-dividend
date 10 May 2021, to distribute the income received by the Company in respect
of the year ended 31 December 2020. This dividend was paid to all Shareholders
on 4 June 2021.
Based on the fact that the assets currently held by the Company consist mainly
of securities that are readily realisable, whilst the Board acknowledges that
the liquidity of these assets needs to be managed, the Board believes 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.
The Board is authorised to repurchase up to 40% of the Company's outstanding
Ordinary Shares in issue as at 24 July 202134. Since Admission almost six years
ago, and as at the date of this document, the Company has repurchased, at a
discount to NAV, 13,190,250 Ordinary Shares of the original 105,000,000
Ordinary Shares issued at Admission. On 27 January 2021, the Company purchased
600,000 Ordinary shares, the only buy-back in 2021. The Board also has in place
standing instructions with the Company's broker, Singer Capital Markets Limited
("Broker" or "Singer"), for the repurchase of the Company's Shares during
closed periods when the Board is not permitted to give individual instructions;
such closed periods typically occur around the preparation of the Annual and
Half Yearly Financial Reports. The Board intends to continue to aggressively
repurchase Shares if the Company's Shares are trading at a significant discount
to net asset value. We will continue to keep Shareholders informed of any share
repurchases through public announcements.
During the year, one of the Company's founding shareholders from 2013
restructured their business and sold their 16% holding in the Company. The
process was managed by Singer and the stock was within a 5% discount to the
prevailing NAV with a mix of new and existing shareholders. We would like to
welcome these new Shareholders to the Company, as well as thank those existing
shareholders who bought additional shares. The Board and the Investment Manager
believe that the opportunity offered by Korean preference shares is as
attractive as it has been since launch. We would hope that the next ten years
provide the same opportunities for the Company to outperform the index.
If any of the new shareholders wish to speak with the Board then please contact
Singer Capital Markets Limited and we will be happy to answer any questions you
may have.
ESG Issues
It is not in WKOF's Investment Policy to use ESG metrics in stock selection but
to invest in undervalued or mispriced Korean preference shares. This doctrine
has served Shareholders well over the life of the Company and the Board expects
this approach will continue for the foreseeable future. However, it is
noteworthy that the Company's Investment Manager has established the WAM
Foundation ("the Foundation"), a private foundation with the goal of
alleviating human suffering in the most cost-effective ways. The Foundation is
committed to evaluating the philanthropic programmes that it funds with the
rigour and rationality that it applies in managing the Company's portfolio. In
2021, the Investment Manager donated 10% of its profits to the Foundation and
expects to make similar contributions annually. During the year the Foundation
provided grants to meet needs such as COVID relief, primary healthcare services
and healthcare research initiatives with a focus on impoverished countries. The
Investment Manager's employees are involved with the Foundation as they conduct
diligence on grant opportunities, analyse the impact relative to costs of
initiatives, and participate in matching programs.
Other Initiatives
As well as now publishing NAVs on a daily basis, Shareholders will also have
noticed the distinct improvements to the Annual Report. This is part of the
Board's initiative to broaden the shareholder base and better market the
exceptional performance the Company has achieved since launch in 2013.
Broadening the shareholder base will spread fixed costs and improve liquidity
in the secondary market. Camarco, our public relations partner, has also been
working to improve the profile of the Company, which has resulted in
discussions with the Investment Manager about Korean preference shares
appearing on CNBC and in the Daily Mail.
The Board is also in discussions with the Company Broker to explore the
benefits and costs of moving the Company from its listing on AIM to the Main
Board of the London Stock Exchange. We will keep Shareholders informed through
the usual channels.
As the Company approaches its tenth anniversary, following corporate governance
best practices, the directors will perform an orderly handover of the
custodianship of your assets to new directors. This process began with the
replacement of Steve Coe with Gill Morris in the autumn.
The Board would once again like to thank Steve for his work and contribution to
the Company since its IPO and welcome Gill to the Company. As Rob King has
indicated he would like to step down from the Board in the next few months, a
replacement director for Rob King will be sought and appointed in due course.
The Board is also considering the appointment of a director with greater Korean
experience to help maximise value for shareholders. This would take the Board
to four directors, but the added breadth of experience will be necessary as the
Company enters its second decade. In order to make the transition of the new
board as seamless as possible, one of these new directors will be appointed
Chair, as my ten years' service approaches in 2023. It would be poor corporate
governance for me to say that we are seeking a new chair, as that appointment
will be made by the new directors from the refreshed Board. Any changes to the
Board will be notified to the market.
Finally I would like to thank new and existing shareholders for their support
over the last twelve months. If there are any questions for the Board please do
not hesitate to contact me through the Company broker, Singer Capital Markets
Limited.
Norman Crighton
Chairman
Investment Manager's Report
For the year ended 31 December 2021
In 2021, WKOF's Net Asset Value ("NAV") in pounds Sterling ("GBP") declined
-1.4%, including reinvested dividends, 36 outperforming the reference MSCI
South Korea 25/50 Net Total Return Index ("the Korea Index"), 37 which
decreased -6.1% in GBP. The NAV performance from inception through 31 December
2021, including reinvested dividends, was 184.7%, compared to a return of 84.6%
for the Korea Index over the same period.
2021 3 years 5 years Since inception
WKOF -1.4% 75.4% 81.5% 184.7%
MSCI South Korea -6.1% 33.6% 50.1% 84.6%
25/50 Net Total
Return Index
WKOF Excess 4.7% 41.8% 31.4% 100.1%
Performance
Source: Bloomberg as of 31 December 2021. Inception Date: 14 May 2013. WKOF
returns are NAV per share.
WKOF Performance Attribution
At year-end, WKOF held a portfolio of 37 South Korean preference shares. As a
reminder, the economic rights of these preference shares are the same or
slightly better than the corresponding common shares, but the preference shares
often trade at substantial discounts to the common shares. The returns of the
Company are generally driven by five primary factors: the discounts of the
preference shares it holds narrowing or widening relative to their
corresponding common shares; the performance of the Korean equity market
generally; the performance of the common shares of the same companies of which
the Company owns preference shares relative to the performance of the Korean
equity market; excess dividend yields of the preference shares; and currency
fluctuation, fees, and other expenses. The following table provides the
attribution of these five factors to the Company's performance for 2021.
Return Source 2021 Since inception
Discount Narrowing of Preference 8.3% 76.2%
Shares Owned
Excess Dividend Yield of 2.0% 17.3%
Preference Shares Owned38
MSCI South Korea Index -6.1% 84.6%
WKOF Common Share Excess -3.7% 13.1%
Performance vs Index
Impact of Currency/ Fees/ Other -1.9% -6.5%
-1.4% 184.7%
Source: Bloomberg and Weiss Asset Management, LP (data as of 31 December 2021)
The majority of WKOF's out-performance from its inception in May 2013 against
the Korea Index is from the narrowing of preference share discounts relative to
their corresponding common shares. This was the primary investment thesis when
the Company was formed and remains so today. The excess dividend yield which
was the second part of our core thesis was the second largest contributor to
our outperformance versus the index. It is worth noting that the common shares
of the companies whose preference shares we have owned have also out-performed
the index over the life of the fund. We believe this out-performance
demonstrates that we do not have a negative selection bias of the companies we
are investing in. We are focused on returns since inception, because we believe
that there is too much idiosyncratic noise in measures of one-year results for
that data to be generalisable.
Review of the Korean Macro Environment
Two recent global events appear likely to have negative short-term effects on
the Korean economy: the increase in commodity prices and the risk of a
recession in China due to the combined risks of a resurgence of COVID in China
and Hong Kong and/or a crash in property markets in China. Conversely, the
large increase in wages and high inflation as measured by the producer price
index for domestic goods in the U.S., as well as the excess demand for motor
vehicles and some other durables, could lead to rising demand from the U.S.
partially replacing falls in demand from China.
Although South Korea imports relatively little from Russia (only around $10
billion per year), Korea imports substantial amounts of petroleum products and
coal (25% of Korea's imports are petroleum products).39 All of these have
increased dramatically in price. Since the main competitors of Korean
manufacturers are also importers of fossil fuels, the price changes are not
directly affecting their competitive advantage. However, there are adverse
indirect effects. For example, the higher prices that Korea is paying for
domestic consumption of fossil fuels are effectively transfers from Korea to
the fossil fuel producing countries.
Regarding COVID in China and Hong Kong: exports to China and Hong Kong are a
combined 33% of Korea's exports40.Continuing lockdowns in China are likely to
hurt demand for Korean products that are used as components for manufactured
goods. Because of concerns about global supply chains, manufacturers in the
U.S. and Europe may be less likely than in the past to use imports from Korea;
cutbacks on imports from China that incorporate Korean components will also
have an adverse effect. These lockdowns in China are also likely to result in
falls in demand in China and, thus, affect Korean manufacturers that sell
directly to Chinese consumers such as AmorePacific or Hyundai Motors.
In addition, the Chinese residential real estate market is going through a
significant price crash. Apartments were bought as speculations; now that
prices are falling there is no natural support level. Prices could be
artificially supported by the government, but it is not clear that the
government would wish to bail out speculators.
Chinese local municipalities funded themselves through sales of land, so the
collapse in the demand for land to build housing will have knock-on effects.
For many years, observers of the Chinese market have remarked about the many
empty apartments in second tier cities and predicted a crisis. The usual quip
seems to hold: prices stay irrational for longer than you expect and fall
faster than you would expect. The Chinese government could address this problem
by relaxing the residency (Hukou) requirement for living in second tier cities
that are undergoing the largest falls in real estate prices, but we would not
rely on that occurring.
While these developments are very concerning, the Korean economy continues to
have great strengths. In the short run, the March 2022 election of Yoon as
President is somewhat positive for Korean equities. The Korean media is
presenting him as being both pro-business and pro-shareholder. Korea's fiscal
position is very strong, and its debt to GDP ratio is one of the lowest of any
developed economy. South Korea is better positioned to address the threat of a
recession through fiscal stimulus than any other advanced economy of which we
are aware. However, the split of party control with a conservative as President
and the opposition controlling the legislature may lead to paralysis in fiscal
policy. Regarding monetary policy, we would not presume to guess how the Korean
Central Bank will respond to stagflation and details of the response matter.
In the medium-term, the high skill levels of South Korean graduates and the
embedded technological skills in Korean companies continue to provide an
impetus for longer-term macro-economic growth. Eventually, difficulties may
arise from the aging of the population, but it would seem that in the
foreseeable future that these are likely to be offset by increases in the
productivity of the workers resulting from a continuing rise in average
education levels.
Although we have not commented on events in Ukraine, and, while Korea does
minimal trade with Russia or Ukraine, we recognise that spillover effects of an
expanded war could have huge effects on all of us. It could affect decisions
taken by North Korea or China. Additionally, the consequences of a nuclear war
would make our concerns about economics seem trivial. We do not purport to be
experts on geo-politics and will not waste your time with our opinions. We
would note that the self-described experts have been consistently wrong in
their forecasts of events in Ukraine. Furthermore, circumstances in Ukraine are
changing so quickly that any views we might express are likely to be quickly
outdated. However, although we are not writing about Ukraine, events there
could have far greater impact than anything we have written.
Looking Back:
Korea's economy expanded at 4.0% for 2021, its fastest pace in 11 years, due in
large part to a record year-over-year increase in exports. Categories such as
semiconductor chips (+29%), petrochemicals (+55%) and automobiles (+24%) were
all prime contributors.41 South Korea is now the fourth largest economy in Asia
and 10th largest in the world as measured by nominal Gross Domestic Product. 42
Other positive trends during the year included Gross National Income per
capita surpassing $35,000 for the first time as it grew by 10.4% to $35,168 and
private spending rising 3.6% for the year.43
As an export-driven economy, Korea and its equity markets suffered from several
negative trends in the global economy in 2021. A weaker won (which dropped
8.5%44 against the U.S. dollar in 2021), global supply chain shortages that
delayed timely production and shipment of goods, the spread of COVID-19
variants, and various regulatory and inflation concerns over major trading
partners like China and the U.S. are all persuasive explanations for Korea's
relatively weaker market performance in 2021.
Korea was also one of the first major economies to raise its main policy
interest rate following the start of the pandemic. Similar to other geographic
regions during 2021 and early 2022, inflationary concerns in Korea were and
remain front and centre for investors. Consumer Price Inflation ("CPI") and
Core CPI (which excludes food and energy) were relatively subdued at 2.5% and
1.8%, respectively, for 2021. In January 2022, CPI rose to 3.6% year over
year,45 remaining above the central bank's target for the 10th month in a row.
The Bank of Korea Governor, Lee Ju-yeol, said that he expects inflation to rise
above 3% and average more than 2.5% for 2022 46.
As a result, the Bank of Korea raised interest rates twice in the second half
of 2021 and once in January 2022 from a record low of 0.5% in August 2021 to
1.25% in January 2022. Additional rate hike expectations also exist now owing
to Governor Lee Ju-yeol statement that "The current policy rate remains
accommodative, given economic conditions such as growth and inflation. It is
necessary to further adjust interest rates in the consideration of economic
situations"47.
Like many countries during late 2021 and early 2022, Korea had a surge in COVID
cases due to the Omicron variant. The government responded with the
reinstatement of social distancing rules, a booster vaccine campaign and
expanded quarantines for inbound passengers. While it is too early to comment
on the effectiveness of these policies, Korea's vaccination rate of
approximately 85% as of mid-February is one of the highest in the world.
Update on Korean Preference Shares and the WKOF Portfolio
As exhibited below, Korean equities and the portfolio holdings of WKOF offer
significant valuation discounts relative to other countries' equity markets as
represented by price-to-earnings ratios ("P/E ratios") and price-to-book ratios
("P/B ratios").
Index Name P/E Ratio48 P/B Ratio49 Dividend Yield
Nifty Index (India) 23.1 3.4 1.2%
S&P 500 (U.S.) 22.8 4.9 1.3%
Nikkei 225 (Japan) 17.7 1.9 1.7%
TAIEX (Taiwan) 13.8 2.4 2.6%
FTSE 100 (UK) 12.7 1.9 3.8%
Shanghai Composite 13.4 1.7 2.0%
(China)
Hang Seng Index (HK) 11.8 1.0 2.6%
KOSPI 200 (S. Korea) 10.2 1.1 1.3%
WKOF Portfolio 6.1 0.5 2.56%
Holdings
Source: Bloomberg and Weiss Asset Management, LP (data as at 31 December 2021)
The extreme valuation discounts of WKOF's portfolio holdings relative to other
markets are the result of those holdings being preference shares with large
discounts to their corresponding common shares, and the common shares not being
over-priced relative to other markets. The dividend yields are in line with
other markets largely because Korean companies have historically retained a
larger share of their earnings compared to companies in other countries.
Korean Corporate Governance
Activism in Korea increased during 2021. There were 26 Korean companies subject
to activist demands during the year, which included demands for increased
dividend payouts and changes to board composition. This represents a 160%
year-over-year increase compared to 2020 and 60% more than the previous high in
2018.51 Activism may encourage management to be more shareholder friendly, but
we note that many Korean companies are managed by family owners (chaebols) and
family ownership may create unusual incentives. For example, Korea is one of
the few countries with an inheritance tax that collects large sums of money
relative to national income. This creates an incentive for the founders of the
chaebols and their descendants to keep the share price low as a means of
reducing their inheritance tax liabilities. Over time, the shareholder base of
Korean companies is becoming more diffuse. This broadening of the shareholder
base is itself a function of the inheritance tax which forces sales by the
families of the larger shareholders. The broader shareholder base reduces the
power of the chaebol families. Furthermore, there have been changes in laws and
regulations that dilute the power of the chaebol families. These effects will,
over time, reduce both the incentives and abilities of the chaebol families to
keep share prices low as a means of reducing inheritance tax.
In terms of corporate governance improvement, it was a quiet year. The National
Pension Service ("NPS"), which owns 6.5% of Korean equities,52 was publicly
criticised for its passivity during the National Assembly's audit of state
affairs. During the October 2021 annual audit hearing, a congressman urged NPS
to more actively exercise the Stewardship Code, a set of corporate governance
guidelines formally established in Korea in 2016, and another congressman
highlighted that the internal stewardship committee within NPS lacks
decision-making power. In response, the Chairman of NPS promised that his
organisation would make adequate changes to reflect these criticisms. We are
hopeful this public focus and pressure will make NPS a more active voice for
continued improvement in Korean corporate governance.
Another important question for WKOF is whether Korean companies will continue
to increase their dividend payout ratios. If a company with preference shares
trading at a discount were to increase its dividend (on both common and
preference shares), the preference shares would benefit in multiple ways.
First, because the preference shares trade at a discount to the common shares,
they would receive an amplified version of any dividend increase (and an
amplified version of any decrease as well). For a simple mathematical example,
if the dividend yield of a common share increases from 1% to 2%, for a
preference share trading at a 50% discount, that would result in the preference
share yield increasing from 2% to 4%. Second, we have found that the preference
shares of companies that pay higher dividends generally trade at a narrower
discount relative to the company's common shares, holding other factors fixed.
We believe the valuations of the holdings within WKOF appear attractive on a
prospective basis. The portfolio discount of the Company's holdings is 52.16%,
similar to the discount of the Company's holdings when we first launched it in
2013. This translates into an extraordinarily cheap 6.1x price-to-earnings
ratio.
Commentary on recent North Korean military activity
We are observing growing tensions in the region over North Korea's recent
streak of missile tests. According to South Korea's Joint Chief of Staff
statement on 5 March 2022, North Korea has already conducted nine ballistic
missile tests this year-to-date. The most recent two launches were notable as
they likely represent an end to North Korea's moratorium on intercontinental
ballistic missile ("ICBM") tests which was announced after the 2018 North
Korea-United States summit. North Korea has not been reported firing ICBMs that
are capable of striking U.S. cities since 2018. On 10 March, the U.S. has
"concluded that these launches involved a new ICBM system"53 according to the
U.S. Department of Defense spokesperson. North Korea's recent military threat
has already led to sanctions by the United States government,54 while both the
incoming conservative president Yoon and liberal runner-up Lee immediately
denounced the series of missiles tests to be unacceptable threats.
WKOF's portfolio discount ,55 at the end of 2021, was 52.16%. We continue to
believe that a wider portfolio discount is generally consistent with a
portfolio with higher expected returns and are enthusiastic about the fact that
the discount is similar to where it was when we decided to launch WKOF in 2013.
Since 2018 we have more actively managed the portfolio toward larger discount
Korean preference shares, consistent with our view on the most attractive
portfolio. While a large discount does not guarantee strong future performance,
we do believe it allows us to invest in securities which offer a significant
margin of safety coupled with the potential for outsized returns from discount
narrowing.
The Company's annual portfolio turnover ratio for 2021 is approximately 0.46,
reflecting opportunistic trading around discount moves as we actively manage
the portfolio.56 Additionally, the narrowing of preference share discounts
relative to the common shares was the largest contributor to the
out-performance of WKOF against the MSCI Korea Index in 2021.rtfolio with
higher
Hedging
WKOF pursues its 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 iShares MSCI South Korea ETF ("EWY") from time
to time: securities that we believe would generate high returns if WKOF
experienced geopolitical disaster without introducing material new risks into
the portfolio. 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 2021. 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 Annual Cost Price Paid as % Expiration Duration
Swaps on South Value to (USD) of Notional Date (Years)
Korean (USD) Expiration Value (per
Sovereign Debt (USD) 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 Contracts Held Strike Total Cost to Purchase Expiration
on EWY57 Price (USD) Expiration (USD) Date Date
2,000 $78 $504,069 18 June 21 January
2021 2022
Total Cost $504,069
Concluding Remarks
There is currently a high degree of uncertainty in the global economy. Imports
of commodities from and exports to China are each a large percentage of the GDP
of South Korea. As such, the rise in commodity prices and increased chance of
an economic slump in China creates serious risks for South Korea. It is very
hard to quantify these risks. We are not experts on geo-politics. Nor are we
experts on the effects of the COVID virus on Chinese demand for imports from
South Korea or sales of Hyundai cars that are manufactured in China.
The fiscal position of South Korea is very strong and the preference shares in
the WKOF portfolio are very cheap. This, combined with the potential for
preference share discounts to narrow from continued activist pressure and
improvement in corporate governance, make us long-term believers in the merits
of an investment in WKOF. As such, WAM management and its related entities own
more than 11% of issued capital in WKOF.
Thank you for your trust, and we look forward to providing you with updates in
the future.
Weiss Asset Management LP
28 April 2022
Directors
For the year ended 31 December 2021
The Company has three non-executive Directors, all of whom are considered
independent of the Investment Manager.
Norman Crighton (aged 55)
Norman Crighton is an experienced public company director having served on the
boards of eight closed-end funds and one operating company. Presently, Norman
is also Non-Executive Chair of AVI Japan Opportunity Trust plc, RM
Infrastructure Income plc and Harmony Energy Income Trust plc. Norman has
extensive fund experience having previously been Head of Closed-end Funds at
Jefferies International and Investment Manager at Metage Capital Ltd.
leveraging his 31 years of experience in investment trusts. His career in
investment banking at major houses covered research, sales, market making and
proprietary trading, servicing blue-chip international institutional clients
over 15 years. His work in many countries trading closed-end funds also
included restructuring funds and well as several IPOs. As a fund manager,
Norman managed portfolios of closed-end funds on a hedged and unhedged basis
covering developed and emerging markets. Following on from his long-term
promotion of best corporate governance practice, Norman has more recently been
focussing on expanding his work into Environmental and Social issues. His work
in the investment trust industry is backed up with a master's degree from the
University of Exeter in Finance and Investment. Norman is British and resident
in the United Kingdom. Norman was appointed to the Board in 2013.
Robert Paul King (aged 58)
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.
Gillian Yvonne Morris (aged 58)
Gill is Chair of the Audit Committee. Gill is also a non-executive director and
Chair of the Audit Committee at The International Stock Exchange, and a panel
member of the States of Guernsey Financial Scrutiny Panel and the Guernsey Tax
Tribunal. She also runs her own consultancy and coaching business. Gill
qualified as a Chartered Accountant with the Institute of Chartered Accountants
of England & Wales in 1988 and a Chartered Tax Advisor with the Chartered
Institute of Taxation in 1994. Gill started her career in 1985 as a tax advisor
at Touche Ross & Co in London. She worked with Touche Ross & Co and KPMG in
Australia before returning to Guernsey with KPMG. Gill moved into industry in
1994 joining Specsavers Optical Group as their tax manager and during her time
with the Group was promoted to Director of Tax and Treasury. As part of her
role, she was a director of Specsavers Finance (Guernsey) Limited. She
ultimately served as Director of Risk and Government Affairs until 2020. Gill
has also held other government roles in Guernsey since 2012, including as a Non
States member of the Public Accounts and the Scrutiny Management Committees and
a panel member of The Trade Policy Advisory Panel. Gill is British and resident
in Guernsey.
Report of the Directors
For the year ended 31 December 2021
The Directors of the Company present their Annual Report and Audited Financial
Statements for the year ended 31 December 2021.
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, 2020, 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 preference shares. The full investment objective and investment policy
are detailed in the Annual Report.
Going Concern
The Company has continued in existence following the third Realisation
Opportunity and will continue to operate as a going concern unless a resolution
to wind up the company is made. Every two years after the Realisation Date, the
Directors will propose further realisation opportunities for Shareholders who
have not previously elected to realise all of their Ordinary Shares using a
similar mechanism used in the previously announced Realisation Opportunity. The
next Realisation Opportunity will take place during May 2023.
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 2024
(the "Viability Period").
On 15 March 2021, 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 11,710,750 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 common 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
shareholders appropriately and meet its liabilities as they fall due over the
three year period to December 2024.
The Board, however, remain conscious that, should either:
a. the aggregate Net Asset Value of the continuing Ordinary Shares at the
close of business on the last Business Day before the next Realisation
Date, (this being May 2023) be less than £50 million; or
b. the mean Weighted Average Discount on the Portfolio is less than 25% 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
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 2024.
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 2021 are set out in the Statement of
Comprehensive Income. An annual dividend of 5.2311 pence per Share (£4,238,124)
was approved on 4 May 2021 and paid on 4 June 2021 in respect of the year ended
31 December 2020. 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.
The Board expects to declare an interim dividend on 12 May 2022 with a record
date on 20 May 2022 for the year ended 31 December 2021 based on dividends
received primarily from investments in South Korean preference 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 Summary Information.
Directors' Interests
The Directors who held office at 31 December 2021 and up to the date of this
Report held the following numbers of Ordinary Shares beneficially:
As at 31 December 2021 As at 31 December 2020
Ordinary % of issued Ordinary % of issued
Shares share Shares share
capital capital
Norman Crighton 20,000 0.03% 20,000 0.02%
Robert King 15,000 0.02% 15,000 0.02%
Gillian Morris 3,934 0.01% - 0.00%
Stephen Coe N/A - 10,000 0.01%
Gillian Yvonne Morris was appointed to the Board on 13 August 2021. Stephen Coe
resigned from the Board on 30 September 2021. There have been no other 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 2021
% of issued
Shareholders Country Shares share
capital
City of London Investment Mgt UK 17,725,681 21.88%
Co
Degroof Petercam Asset Mgt Belgium 10,125,000 12.50%
Merrill Lynch, Pierce, Fenner & USA 7,000,000 8.64%
Smith
Dr Andrew M Weiss USA 5,316,888 6.56%
JBF Capital USA 3,177,500 3.92%
1607 Capital Partners UK 2,928,519 3.61%
Mount Capital UK 2,534,000 3.13%
At 7 April 2022, JBF Capital. increased their holding to 4,144,300 shares,
representing 5.98% of issued share capital.
There have been no other significant changes to the substantial shareholdings
at 25 April 2022.
As at 31 December 2020
% of issued
Shareholders Country Shares share capital
City of London Investment UK 21,015,092 25.75%
Mgt Co
Aberdeen Standard Investments (Aberdeen) UK 12,878,100 15.78%
DegroofPetercam Asset Mgt Belgium 10,125,000 12.41%
Merrill Lynch, Pierce, Fenner & Smith USA 7,000,000 8.58%
Dr Andrew M Weiss USA 6,486,888 7.95%
Mount Capital UK 4,279,000 5.24%
EdenTree Investment Mgt UK 3,770,000 4.62%
Ruffer UK 3,500,000 4.29%
CG Asset Mgt UK 2,660,000 3.26%
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 2021 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.
The Company became a member of the Association of Investment Companies (the
"AIC") in February 2021. As at the date of these Financial statements the Board
were yet to formally resolve to adopt the AIC Code.
Role of the Board
The Board is the Company's governing body and has overall responsibility for
maximising the Company's success by directing and supervising the affairs of
the business and meeting the appropriate interests of Shareholders and relevant
stakeholders, while enhancing the value of the Company and also ensuring
protection of investors. A summary of the Board's responsibilities is as
follows:
* statutory obligations and public disclosure;
* strategic matters and financial reporting;
* risk assessment and management including reporting compliance, governance,
monitoring, and control; and
* other matters having a material effect on the Company.
The Board's responsibilities for the Annual Report are set out in the Statement
of Directors' Responsibilities.
Although the Company is domiciled in Guernsey, the Board has considered the
requirements of Section 172 of the Companies Act 2006 in the UK. Section 172 of
the Companies Act requires that the Directors of the Company act in the way
they consider, in good faith, is most likely to promote the success of the
Company for the benefit of all stakeholders, including suppliers, customers and
shareholders. The Board has engaged external companies to undertake the
investment management, administrative, and custodial activities of the Company.
Documented contractual arrangements are in place with these companies which
define the areas where the Board has delegated responsibility to them.
The Board needs to ensure that the Annual Report and Financial Statements,
taken as a whole, are fair, balanced, and understandable and provide the
information necessary for Shareholders to assess the Company's performance,
business model, and strategy.
In seeking to achieve this, the Directors have set out the Company's investment
objective and investment policy, have explained how the Board and its delegated
committees operate, have explained how the Directors review the risk
environment within which the Company operates, and have set appropriate risk
controls. Furthermore, throughout the Annual Report and Financial Statements,
the Board has sought to provide further information to enable Shareholders to
better understand the Company's business and financial performance.
Composition and Independence of the Board
The Board currently comprises three non-executive Directors, all of whom are
considered independent of the Investment Manager. The Directors of the Company
are listed on the Corporate Information section on Summary Information and
Corporate Information.
The Chairman is Mr Crighton. 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, by video conference
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 Gillian
Meetings Crighton King Coe# Yvonne
held
Morris*
Quarterly Board 4 4 4 2 1
Meetings
Audit Committee 2 2 2 2 1
Meetings
Management Engagement Committee 1 1 1 - 1
Meetings
Ad-hoc Board Meetings 8 5 8 4 3
#Stephen Coe resigned on 30 September 2021
*Gillian Yvonne Morris was appointed on 13 August 2021
Board Diversity
The Board considers the composition of the Board on an on-going basis.
Composition, Succession and Evaluation
The Board of Directors and its Committees are currently considered to be
adequately composed in order to be able to discharge their duties effectively,
however when considering new appointments in the future, the Board will ensure
that a diverse group of candidates is considered in accordance with its
Diversity Policy and that appointments are made against set objective criteria.
The Board members have been briefed about their ongoing responsibilities as
Directors as part of each individual Director's induction process and the Board
receives ongoing guidance in this regard on an "as needed" bases from the
Company Secretary and legal advisers.
The composition of the Board, together with its performance and approach to
succession planning is considered annually at the time of the Board's annual
performance appraisal.
The performance of the Board, its committees and individual Directors
(including the Chairman) is evaluated annually through a self-assessment
process coordinated by the Administrator which then circulates the findings.
The Board will consider the need for, and the benefits of, having this process
externally facilitated by an independent third party from time to time. The
last such third party evaluation took place on 18 November 2021 where it was
concluded that the Board was working effectively.
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% 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% 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 Mrs Morris. 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 Directors section sets out the number of Audit
Committee Meetings held during the year ended 31 December 2021 and the number
of such meetings attended by each Audit Committee member.
A report of the Audit Committee detailing responsibilities and activities is
presented below.
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 Mrs Morris. 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 18 November
2021, 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 2021, Directors' fees were: £30,000 payable to Mr Crighton as
Chairman of the Board, £27,500 to Mrs Morris as Chair of the Audit Committee,
and £24,000 to Mr King. Mr Coe's fees were prorated to 30 September 2021, being
his date of resignation.
For the year ended For the year ended
31 December 2021 31 December 2020
£ £
Norman Crighton 30,000 30,000
Stephen Coe 20,625 27,500
Robert King 24,000 24,000
Gillian Yvonne Morris 11,553 N/A
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 below.
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 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.
Geopolitical risks
At the time of signing these financial statements, there is an increased level
of global uncertainty associated with the conflict in Ukraine. The long-term
impacts of the Ukraine conflict are not yet known but are likely to result in
increased market and economic volatility, which may in turn have an impact on
the Company.
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 monitored the development of the pandemic and 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 and
easing of restrictions in relation to the pandemic, there remains continued
uncertainty such that predicting any future 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 preference 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 preference 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
28 April 2022
Gillian Morris
Director
28 April 2022
Directors' Remuneration Report
For the year ended 31 December 2021
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 21 July 2022.
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 2021, Directors' fees were: £30,000 payable to Mr Crighton as
Chairman of the Board, £27,500 to Mrs Morris as Chairman of the Audit
Committee, and £24,000 to Mr King. Mr Coe's fees were prorated to the 30
September 2021, being the date of his resignation.
The Board has agreed to increase Directors' fees effective 1 January 2022 to £
35,000 payable to Mr Crighton as Chairman of the Board, £32,500 to Mrs Morris
as Chairman of the Audit Committee, and £30,000 to Mr King.
For the year ended For the year ended
31 December 2021 31 December 2020
£ £
Norman Crighton 30,000 30,000
Stephen Coe 20,625 27,500
Robert King 24,000 24,000
Gillian Yvonne Morris 11,553 N/A
Signed on behalf of the Board by:
Norman Crighton
Chairman
28 April 2022
Gillian Morris
Director
28 April 2022
Audit Committee Report
For the year ended 31 December 2021
Dear Shareholders,
Below, we present the Audit Committee's Report for 2021, setting out the
responsibilities of the Audit Committee and its key activities in 2021.
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 £159,614,094 as at 31
December 2021 and represent the 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 2021 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 2021.
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 18 November 2021. 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 2021 31 December 2020
KPMG Channel Islands Limited £ £
Annual audit 39,000 34,255
KPMG LLP
Tax fees (UK Reporting Fund Status) 5,750 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 2021, 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 2021 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 ## April 2022 and
signed on behalf of the Audit Committee by:
Gillian Morris
Chairman, Audit Committee
28 April 2022
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 2021, 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 2021, 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 the FRC Ethical Standard as applied to listed entities. We believe
that the audit evidence we have obtained is a sufficient and appropriate basis
for our opinion.
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. In arriving
at our audit opinion above, the key audit matter was as follows (unchanged from
2020):
The risk Our response
Valuation of financial Basis: Our audit procedures
assets at fair value through As at 31 December 2021 the included but were not
profit or loss Company had invested 96% of limited to:
("Investments") its net assets in listed
£159,614,094; (2020: £ preference shares and other Control Evaluation:
193,058,894) 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.
The Company's listed Valuation procedures
investments are valued based including use of a KPMG
on bid-market prices at the Specialist:
close of business of the We have used our own
relevant stock exchange on valuation specialist to
the reporting date obtained independently price
from third party pricing investments to a third party
providers. data source and assessed the
trading volumes behind such
prices.
Risk:
The valuation of the Assessing disclosures:
Company's investments, given We also considered the
they represent the majority Company's investment
of the Company's net assets valuation policies and their
as at 31 December 2021, is a application as described in
significant area of our note 2f to the Financial
audit. Statements for compliance
with IFRS in addition to the
adequacy of disclosures in
notes 12 and 21
Our application of materiality and an overview of the scope of our audit
Materiality for the financial statements as a whole was set at £3,330,000,
determined with reference to a benchmark of net assets of £166,541,145, of
which it represents approximately 2.0% (2020: 2.0%).
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 £2,497,000 (2020: £2,403,000). 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 £166,000, 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
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. They have also concluded that there are no material uncertainties
that could have cast significant doubt over its ability to continue as a going
concern for at least a year from the date of approval of the financial
statements (the "going concern period").
In our evaluation of the directors' conclusions, we considered the inherent
risks to the Company's business model and analysed how those risks might affect
the Company's financial resources or ability to continue operations over the
going concern period. The risk that we considered most likely to affect the
Company's financial resources or ability to continue operations over this
period was availability of capital to meet operating costs and other financial
commitments.
We considered whether this risk could plausibly affect the liquidity in the
going concern period by comparing severe, but plausible downside scenarios that
could arise from this risk against the level of available financial resources
indicated by the Company's financial forecasts.
We considered whether the going concern disclosure in note 2c to the financial
statements gives a full and accurate description of the directors' assessment
of going concern.
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;
* we have not identified, and concur with the directors' assessment that
there is not, a material uncertainty related to events or conditions that,
individually or collectively, may cast significant doubt on the Company's
ability to continue as a going concern for the going concern period; 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 with no material uncertainties that
may cast significant doubt over the Company's use of that basis for the
going concern period.
However, as we cannot predict all future events or conditions and as subsequent
events may result in outcomes that are inconsistent with judgements that were
reasonable at the time they were made, the above conclusions are not a
guarantee that the Company will continue in operation.
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 any 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 sector
experience and through discussion with management (as required by auditing
standards), and from inspection of the Company's regulatory and legal
correspondence, if any, 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 (Report of the
Directors) 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 risks disclosures describing these risks and
explaining how they are being managed or mitigated;
* the directors' explanation in the Viability Statement (Report of the
Directors) 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
28 April 2022
Statement of Financial Position
As at 31 December 2021
As at As at
31 December 31 December
2021 2020
Notes £ £
Assets
Financial assets at fair value through 12,21 159,614,094 193,058,894
profit or loss
Derivative financial assets 16 221,639 62,951
Other receivables 15 3,881,815 3,857,730
Cash and cash equivalents 13 3,091,245 5,972,867
Margin account 14 1,381,413 2,095,974
Due from broker 20 696 2,989,619
Total assets 168,190,902 208,038,035
Liabilities
Derivative financial liabilities 16 984,227 1,588,314
Due to broker 20 263,091 2,711,434
Other payables 17 402,439 613,334
Total liabilities 1,649,757 4,913,082
Net assets 166,541,145 203,124,953
Represented by:
Shareholders' equity and
reserves
Share capital 18 33,986,846 68,124,035
Other reserves 132,554,299 135,000,918
Total shareholders' equity 166,541,145 203,124,953
Net assets per share 6 2.4029 2.4887
The Notes form an integral part of these Financial Statements.
The Financial Statements were approved and authorised for issue by the Board of
Directors on 28 April 2022.
Norman Crighton
Chairman
Gillian Morris
Director
Statement of Comprehensive Income
For the year ended 31 December 2021
For the For the For the For the
year ended year ended year ended year ended
31 December 31 December 31 December 31 December
2021 2021 2021 2020
Income Capital Total
Notes £ £ £ £
Income
Net changes in fair value of 7 - 2,349,820 2,349,820 77,306,072
financial assets at fair value
through profit or loss
Net changes in fair value of 8 - 403,489 403,489 2,025,301
derivative financial instruments
through profit or loss
Net foreign currency losses 7 (124,374) (300,596) (424,970) (138,785)
Dividend income 9 5,586,806 - 5,586,806 5,522,132
Bank interest income 9 - - - 3,302
Total income 5,462,432 2,452,713 7,915,145 84,718,022
Expenses
Operating expenses 10 (670,777) (4,220,467) (4,891,244) (4,139,030)
Total operating expenses (670,777) (4,220,467) (4,891,244) (4,139,030)
Profit for the year before dividend 4,791,655 (1,767,754) 3,023,901 80,578,992
withholding tax
Dividend withholding tax 2v (1,232,396) - (1,232,396) (1,214,868)
Profit for the year after 3,559,259 (1,767,754) 1,791,505 79,364,124
dividend withholding tax
Profit and total comprehensive 3,559,259 (1,767,754) 1,791,505 79,364,124
income for the year
Basic and diluted earnings per 5 0.0484 (0.0240) 0.0244 0.9724
Share
All items derive from continuing activities.
Presentation of the Statement of Comprehensive income has been spilt into
income and capital for current year results following the Company's admission
to the AIC. Expenses as detailed in Note 2k have been allocated to capital in
order maintain revenue reserves.
The Notes form an integral part of these Financial Statements.
Statement of Changes in Equity
For the year ended 31 December 2021
Share Other
capital reserves Total
Notes £ £ £
Balance at 1 January 2021 68,124,035 135,000,918 203,124,953
Total comprehensive income for the - 1,791,505 1,791,505
year
Transactions with Shareholders,
recorded directly in equity
Purchase of own Shares for 18e (1,719,433) - (1,719,433)
cancellation
Purchase of Realisation Shares 18 (32,417,756) - (32,417,756)
Distributions paid 3 - (4,238,124) (4,238,124)
Balance at 31 December 2021 33,986,846 132,554,299 166,541,145
For the year ended 31 December 2020
Balance at 1 January 2020 68,124,035 58,864,697 126,988,732
Total comprehensive income for the - 79,364,124 79,364,124
year
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
The Notes form an integral part of these Financial Statements.
Statement of Cash Flows
For the year ended 31 December 2021
For the year For the year
ended ended
31 December 31 December
2021 2020
Notes £ £
Cash flows from operating activities
Profit for the year 1,791,505 79,364,124
Adjustments for:
Net change in fair value of financial assets held 7 (2,349,820) (77,306,072)
at fair value through profit or loss
Net foreign currency losses 424,970 138,785
Net change in fair value of derivative financial 8 (403,489) (2,025,301)
instruments held at fair value through profit or
loss
Increase in receivables* 15 (620) -
(Decrease)/increase in other payables 17 (210,895) 107,272
Dividend income 9 (4,354,411) (5,522,132)
Dividend received 4,330,946 4,110,191
Net cash used in operating activities (771,814) (1,133,133)
Cash flows from investing activities
Purchase of financial assets at fair value (104,226,201) (106,564,186)
through profit or loss
Opening of derivative financial instruments 724,897 1,457,636
Proceeds from the sale of financial assets at 140,561,400 108,387,167
fair value through profit or loss
Closure of derivative financial instruments (1,084,182) 1,422,226
Decrease/(Increase) in margin account 14 714,561 (660,224)
Net cash generated from investing activities 36,690,475 4,042,619
Cash flows from financing activities
Purchase of own Shares for cancellation (1,719,433) -
Purchase of Realisation Shares (32,417,756) -
Distributions paid 3 (4,238,124) (3,227,903)
Net cash used in financing activities (38,375,313) (3,227,903)
Net decrease in cash and cash equivalents (2,456,652) (318,417)
Effect of foreign exchange rate fluctuations (424,970) (138,785)
Cash and cash equivalents at the beginning of the 5,972,867 6,430,069
year
Cash and cash equivalents at the end of the year 3,091,245 5,972,867
The Notes form an integral part of these Financial Statements.
*Increase in receivables excludes dividends receivable, see Note 15.
Notes to the Financial Statements
For the year ended 31 December 2021
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, 2021 (the "Law").
2. Significant accounting policies
a) Statement of compliance
The Financial Statements of the Company for the year ended 31 December 2021
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. For future reporting periods it is the
intention of the Board to fully adopt the AIC Statement of Recommended Practice
("SORP") where this is consistent with the requirements of IFRS and in
compliance with the Companies (Guernsey) Law, 2021.
b) Basis of preparation
The Financial Statements are prepared in pounds sterling (£), which is the
Company's functional and presentational currency. They are prepared on a
historical cost basis modified to include financial assets at fair value
through profit or loss.
c) Going concern
The Company has continued in existence following the third Realisation
Opportunity and will continue to operate as a going concern unless a
determination to wind up the Company is made. Given this, the Directors will
propose further realisation opportunities for Shareholders who have not
previously elected to realise all of their Ordinary Shares. Such opportunities
will be made using a similar mechanism to previously announced Realisation
Opportunities. The next Realisation Opportunity will take place during May
2023. The Board and the Investment Manager believe the investment policy
continues to be valid. See note 18 for further details of 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.
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.
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 2022, 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.
· IFRS 17 Insurance Contracts (Effective 1 January 2023)
· Definition of Accounting Estimates (Amendments to IAS 8) (Effective 1
January 2023)
· Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice
Statement 2)
(Effective 1 January 2023)
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 2021, and have been
adopted in preparing these financial statements.
· Interest Rate Benchmark Reform - Phase 2 - Amendments to IFRS 9, IAS 39,
IFRS 7, IFRS 4
and IFRS 16.
The adoption of these standards has not had a material impact 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 on financial
instruments, but excludes dividend income.
h) Net changes in fair value of derivative financial instruments through
profit or loss
Net changes in fair value of derivative financial instruments includes all
realised and unrealised fair value changes on derivative contracts.
i) 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.
j) Expenses
All expenses are accounted for on an accruals basis and are recognised in
profit or loss. Expenses are charged to the capital reserve where a connection
with the maintenance or enhancement of the value of the investments can be
demonstrated.
k) Statement of Comprehensive Income: Income and Capital allocation
In accordance with the requirements of the SORP, items in the statement of
comprehensive income have been allocated between revenue and capital. Net
movements in financial assets and derivative financial instruments are charged
to the capital reserve. Dividend income and withholding tax are allocated to
revenue reserves. 90% of the Company's management fee costs are charged to the
capital reserve in line with the Board's expected long-term split of returns
between income and capital gains from the investment portfolio. Transaction
costs, derivative expense and professional fees have been wholly attributed to
the capital reserve. Other costs are allocated to the revenue reserve. Foreign
exchange differences relating to investments are taken to the capital reserve.
Realised and unrealised foreign exchange differences on non-capital assets or
liabilities are taken to revenue reserves in the Statement of Comprehensive
Income in the period in which they arise.
l) 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.
m) 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.
n) 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.
o) 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.
p) 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.
q) 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 preference 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.
r) 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.
s) 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.
t) 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.
u) 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.
v) 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 (2020: £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%.
w) 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
5.2311 pence per Share (£4,238,124) was approved on 4 May 2021 and paid on
4 June 2021 in respect of the year ended 31 December 2020. 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.
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 2o, 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 total basic and diluted income per Ordinary Share of £0.0244 (31 December
2020: profit per Share of £0.9724) for the Company has been calculated based on
the total profit after tax for the year of £1,791,505 (for the year ended 31
December 2020: £79,364,124 profit) and the weighted average number of Ordinary
Shares in issue during the year of 73,584,938 (for the year ended
31 December 2020: 81,617,828).
Income and capital earnings and losses for the year end 31 December 2021 have
both been calculated on the weighted average number of Ordinary Shares in issue
during the year of 73,584,938.
6. Net asset value per Ordinary Share
The NAV of each Share of £2.4029 (as at 31 December 2020: £2.4887) is
determined by dividing the net assets of the Company attributed to the Ordinary
Shares of £166,541,145 (as at 31 December 2020: £203,124,953) by the number of
Ordinary Shares in issue at 31 December 2021 of 69,307,078 (as at 31 December
2020: 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 year For the year
ended ended
31 December 2021 31 December 2020
£ £
Realised gain on investments 51,837,460 42,172,340
Realised loss on investments (4,809,298) (8,611,912)
Net movement in net unrealised (loss)/gain on (44,678,342) 43,745,644
investments
Net changes in fair value on financial assets at fair 2,349,820 77,306,072
value through profit or loss
Net realised loss on foreign currency (461,460) (56,701)
Net movement in unrealised exchange gain/(loss) on 160,864 (82,084)
foreign currency
Net changes in fair value on financial assets at fair 2,049,224 77,167,287
value through profit or loss including foreign currency
movement
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
2021 2020
£ £
Net realised (loss)/gain on (262,783) 1,273,739
options
Net realised gain on credit default swaps 923,664 1,035,797
Movement in unrealised gain 63,008 49,304
on options
Movement in unrealised loss on credit (320,400) (333,539)
default swaps
Net changes in fair value on financial
derivatives at fair value through profit or 403,489 2,025,301
loss
9. Other income
For the year For the year
ended ended
31 December 31 December
2021 2020
£ £
Dividend 5,586,806 5,522,132
income
Bank - 3,302
interest
income
Total Other 5,586,806 5,525,434
Income
10. Operating expenses
For the year
ended
31 December
2021
£
Expenses allocated to capital:
Investment Management fee (Note 19c) 2,639,826
Professional fees 179,021
Transaction costs¹ 666,440
Derivative expense¹ 735,180
Total expenses allocated to capital: 4,220,467
Expenses allocated to income:
Investment Management fee (Note 19c) 293,314
Custodian fees 88,039
Audit fees 39,000
Administration and Secretarial fees 119,623
Directors' fees (Note 19a) 86,178
Tax services -
Bank interest 2,236
Sundry expenses 42,387
Total expenses 670,777
allocated to income:
Total Operating Expenses 4,891,244
For the year
ended
31 December
2020
Investment Management fee (Note 19c) 2,144,761
Professional fees 84,588
Transaction costs¹ 771,526
Derivative expense¹ 802,134
Custodian fees 64,988
Audit fees 34,255
Administration and Secretarial fees 102,268
Directors' fees (Note 19a) 81,500
Tax services 9,750
Sundry 43,260
expenses
Total Operating Expenses 4,139,030
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 preference shares issued by companies incorporated in South Korea.
The Company is likely to have a high degree of portfolio concentration as South
Korean preference 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
2021 2020
£ £
Cost of investments at beginning of the 137,878,681 106,419,418
year
Purchases of investments in the year 101,777,858 109,275,618
Disposal of investments in the year (137,572,478) (111,376,783)
Net realised gains on investments in the 47,028,162 33,560,428
year
Cost of investments held at end of the 149,112,223 137,878,681
year
Unrealised gain on investments 10,501,871 55,180,213
Financial assets at fair value through 159,614,094 193,058,894
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
2021 2020
£ £
Cash at bank 3,091,245 5,972,867
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
2021 2020
£ £
Margin account 1,381,413 2,095,974
The margin account for 2021 represents a margin deposit of collateral held by
Credit Suisse International and Goldman Sachs & Co. LLC in relation to the
credit default swaps. The margin account for 2020 represents a margin deposit
of collateral held by Credit Suisse International and Credit Suisse Securities
(USA) LLC. 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
2021 2020
£ £
Dividends receivable 3,879,404 3,855,939
Prepaid expenses 2,411 1,791
Total Other 3,881,815 3,857,730
Receivables
The Directors consider that the carrying amount of receivables approximate
their fair value.
Dividend receivable are presented net of withholding tax of £1,094,190 (2020: £
1,087,572).
16. Derivative financial instruments
As at As at
31 December 31 December
2021 2020
£ £
Cost of derivatives at beginning of the (1,745,063) (1,174,737)
year
Opening of derivatives in (724,897) (1,457,636)
the year
Closure of derivatives in 1,084,182 (1,422,226)
the year
Realised gain on closure of derivatives 660,881 2,309,536
in the year
Net cost of derivatives held at end of (724,897) (1,745,063)
the year
Unrealised gain on derivative financial (37,691) 219,700
instruments at fair value through profit or
loss
Net fair value on derivative financial (762,588) (1,525,363)
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
2021 2020
Assets Liabilities Assets Liabilities
Derivatives held for £ £ £ £
trading:
Options 221,639 - 62,951 -
Credit default swaps - (984,227) - (1,588,314)
Total 221,639 (984,227) 62,951 (1,588,314)
Credit Default Price Paid
Swaps on South as % of
Korean Sovereign Notional Total Cost Notional
Debt Value to Annual cost Value (per Expiration Duration
(USD) Expiration (USD) annum) Date (Years)
(USD)
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
Credit Default Swaps on South Notional Value Expiration Date Total Duration
Korean Sovereign Debt (USD) (Years)
5 year CDS $20m 2023 5.0
3 year CDS $80m 2023 3.0
Number of Put Option Contracts Strike Price Total Cost to Purchase Date Expiration
Held on EWY (USD) Expiration Date
(USD)
2,000 $78 $504,069 18 June 2021 21 January
2022
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 2021 (2020: 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
2021 2020
£ £
Investment management fees payable (Note 214,941 456,843
19c)
Administration fee 36,518 24,027
payable
Custody fee payable 11,038 8,355
Co-sec and Listing fee payable 6,162 6,319
Audit fees payable 38,641 27,738
Directors' fees - -
payable
Other payables 95,139 90,052
Total Other Payables 402,439 613,334
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
2021 2020
Authorised
Unlimited Ordinary Shares at no par value - -
Issued at no par
value
69,307,078 (2020: 81,617,828) unlimited Ordinary Shares at - -
no par value
Reconciliation of number of Shares
As at As at
31 December 31 December
2021 2020
No. of No. of
Shares Shares
Ordinary Shares at the beginning of the 81,617,828 81,617,828
year
Purchase of own Shares for cancellation (600,000) -
Purchase of Realisation Shares (11,710,750) -
Total Ordinary Shares in issue at the end 69,307,078 81,617,828
of the year
Treasury Shares
2021 2020
Shares Shares
Treasury Shares at the beginning of the - -
year
Redesignation of Realisation Shares (Note 11,437,662 -
18e)
Total Shares at the end of the year 11,437,662 -
The Company has 69,307,078 Ordinary Shares in issue as at 31 December 2021 (as
at 31 December 2020: 81,617,828) and 11,437,662 Ordinary Shares held in
Treasury as at 31 December 2021 (as at 31 December 2020: Nil).
Share capital account
As at As at
31 December 31 December
2021 2020
£ £
Share capital at the beginning of 68,124,035 68,124,035
the year
Purchase of own Shares for (1,719,433) -
cancellation
Purchase of Realisation Shares (32,417,756) -
Total Share capital at the end of 33,986,846 68,124,035
the 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 elected to
participate in the Realisation Opportunity, the Company's portfolio was divided
into two pools: the Continuation Pool; and the Realisation Pool.
e) On 14 May 2021, 11,710,750 Ordinary Shares, which represented 14.5% of
the Company's issued Ordinary Share capital were redesignated as Realisation
Shares.
On 23 June 2021, the Company announced that it had made good progress with the
sale of assets in the Realisation Pool and would commence with the first
compulsory redemption of 8,979,885 Realisation shares representing
approximately 76.7%. of Realisation Shares in issue. The First Redemption was
effected pro-rata to holdings of Realisation Shares on the register at the
close of business on 22 June 2021. The First Redemption price was 278.4 pence
per Realisation Share, equivalent to the unaudited Net Asset Value per
Realisation Share as at 31 May 2021.
The Company made good progress with the sale of the remaining assets in the
Realisation Pool and on 7 September 2021 announced a second compulsory
redemption of 2,457,780 Realisation shares representing approximately 90% of
Realisation Shares. The Second Redemption was effected in the same manner as
the First Redemption at a price of 275.55 pence per Realisation Share,
equivalent to the Net Asset Value per Realisation Share as at 31 August 2021,
and with a record date of 6 September 2021.
On the 21 December 2022 the Company announced the final compulsory redemption
of the final 273,085 Realisation Shares. The Final Redemption price was 266.39
pence per Realisation Share, equivalent to the unaudited Net Asset Value per
Realisation Share as at 17 December 2021.
All Realisation Shares that were redeemed have been re-designated as Ordinary
Shares and held in Treasury.
Share buyback and cancellation
During the year ended 31 December 2021, the Company purchased 600,000 shares
(2020: Nil) of its own Shares at a consideration of £1,719,433 (31 December
2020: £Nil) under its general buyback authority originally granted to the
Company in 2014.
The Company has 69,307,078 Ordinary Shares in issue as at 31 December 2021 (as
at 31 December 2020: 81,617,828).
At the AGM held on 22 July 2021, Shareholders approved the authority of the
Company to buy back up to 40% 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 2021, Directors' fees of £86,169 (31 December
2020: £81,500) were charged to the Company of which £Nil remained payable at
the year-end (as at 31 December 2020: £Nil). For additional information refer
to the Directors' Remuneration Report.
b) Shares held by related parties
The Directors who held office at 31 December 2021 and up to the date of this
Report held the following numbers of Ordinary Shares beneficially:
As at 31 December 2021 As at 31 December 2020
Ordinary % of issued Ordinary % of issued
Shares share capital Shares share capital
Norman Crighton 20,000 0.03% 20,000 0.02%
Robert King 15,000 0.02% 15,000 0.02%
Gillian Morris 3,934 0.01% - 0.00%
Stephen Coe N/A - 10,000 0.01%
Gillian Yvonne Morris was appointed to the Board on 13 August 2021. Stephen Coe
resigned from the Board on 30 September 2021. There have been no other 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.
On December 23, 2021, Dr. Andrew Weiss, donated 1,170,000 Ordinary shares in
the Company to a public charity 'Donor-Advised Fund' ("DAF"). While Dr. Weiss
will retain influence over the investment direction of his portion of the
assets in the DAF, he has relinquished full control over the shares donated to
the charity. As at 31 December 2021, Dr Andrew Weiss, his immediate family
members, and the DAF held an interest in 6,486,888 Ordinary Shares (as at 31
December 2020: 6,486,888), representing 9.36% (as at 31 December 2020: 7.95%.)
of the issued share capital of the Company.
As at 31 December 2021, 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
2020: 2,844,333) representing 4.10%. (as at 31 December 2020: 3.48%.) of the
issued share capital of the Company.
Material agreements
c) Investment management fee
The Company's Investment Manager is Weiss Asset Management LP. In consideration
for its services provided by the Investment Manager under the IMA dated 8 May
2013, the Investment Manager is entitled to an annual management fee of 1.5% 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 2021, investment management fees and charges of
£2,933,140 (for the year ended 31 December 2020: £2,144,761) were charged to
the Company and £214,941 (as at 31 December 2020: £456,843) 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
2021, if market prices had been 5% higher or 5% lower with all other variables
held constant, then the increase/decrease in NAV would have been £7,980,705 (as
at 31 December 2020: £9,652,945). 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 2021, the Company held the following assets and liabilities
in foreign currencies:
As at As at
31 December 31 December
2021 2020
Amounts in Sterling KRW USD KRW USD
Assets
Monetary assets 5,625,277 2,563,319 204,611,271 3,006,461
Total 5,625,277 2,563,319 204,611,271 3,006,461
Liabilities
Monetary liabilities (263,091) (984,227) (2,711,434) (1,588,314)
Total (263,091) (984,227) (2,711,434) (1,588,314)
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 2021.
Reasonable As at Reasonable As at
possible 31 December possible 31 December
shift in 2021 shift in 2020
rate rate
2021 £ 2020 £
Currency
KRW
Monetary assets +/- 5% 281,264 +/- 5% 10,230,564
Monetary liabilities +/- 5% (13,155) +/- 5% (135,572)
US Dollars
Monetary assets +/- 5% (49,211) +/- 5% -79,416
'Monetary liabilities +/- 5% 128,166 +/- 5% 150,323
Interest rate risk
The Company holds limited cash and margin balances in interest-bearing accounts
of £4,472,658 as at 31 December 2021 (as at 31 December 2020: £8,068,837) 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 2021:
Total
As at
Floating Fixed Non-Interest 31 December
rate rate bearing 2021
£ £ £ £
Financial Assets
Investments designated at
fair value
through profit or loss - - 159,614,094 159,614,094
Derivative financial assets - - 221,639 221,639
Other receivables - - 3,881,815 3,881,815
Cash and cash equivalents 3,091,245 - - 3,091,245
Margin account 1,381,413 - - 1,381,413
Due from broker - - 696 696
Total 4,472,658 - 163,718,244 168,190,902
Total
As at
Floating Fixed Non-Interest 31 December
rate rate bearing 2021
£ £ £ £
Financial Liabilities
Derivative financial - - (984,227) (984,227)
liabilities
Due to broker - - (263,091) (263,091)
Other payables - - (402,439) (402,439)
Total - - (1,649,757) (1,649,757)
The table below summarises 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)
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 2021 as follows:
As at As at
31 December 31 December
2021 2020
£ £
Financial assets at fair value 159,614,094 193,058,894
through profit or loss
Derivative financial assets 221,639 62,951
Other receivables 3,881,815 3,857,730
Cash and cash equivalents 3,091,245 5,972,867
Margin account 1,381,413 2,095,974
Due from broker 696 2,989,619
Total 168,190,902 208,038,035
As at As at
31 December 31 December
Credit Rating 2021 2020
Agency
£ £
Credit Suisse Securities (USA) LLC, a Standard & N/A A+
subsidiary of Credit Suisse (USA), Inc ("CS") Poor's
Moody's N/A A1
Goldman Sachs & Co. LLC is a wholly-owned Standard & A+ N/A
subsidiary of The Goldman Sachs Group, Inc. Poor's
Moody's Unavailable N/A
Northern Trust (Guernsey) Limited which is a Standard & A+ A+
wholly owned subsidiary of The Northern Trust Poor's
Corporation ("TNTC")
Moody's A2 A+
The main concentration of credit risk to which the Company is exposed arises
from the Company's investments in listed preference shares issued by companies
incorporated in South Korea, which in most 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 Goldman Sachs & Co.LLC a
wholly-owned
subsidiary of The Goldman Sachs Group, Inc.
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
amounts 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 2021, 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 2021
£ £ £ £
Derivative financial (984,227) - - (984,227)
liabilities
Due to broker (263,091) - - (263,091)
Other payables (402,439) - - (402,439)
Total (1,649,757) - - (1,649,757)
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)
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 2021 there were no borrowings (as at 31 December
2020: £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
2021 2020
£ £
Total assets 168,190,902 208,038,035
Less: Total liabilities (1,649,757) (4,913,082)
Net Asset Value 166,541,145 203,124,953
Gearing Ratio 0.99% 2.42%
Share buybacks
The Directors have general Shareholder authority to purchase in the market up
to 40%. 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%. 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 were on the register as at the record could
elect, during the Election Period, to redesignate all or part (provided that
such part be rounded up to the nearest whole Ordinary Share) of their Ordinary
Shares as Realisation Shares, subject to the aggregate NAV of the continuing
Ordinary Shares at the close of business on the last Business Day before the
Realisation Date being not less than £50 million. The Ordinary Shares held by
the Shareholders who elected for Realisation, were redesignated as Realisation
Shares and the Portfolio was split into two separate and distinct Pools, namely
the Continuation Pool (comprising the assets attributable to the continuing
Ordinary Shares) and the Realisation Pool (comprising the assets attributable
to the Realisation Shares).
With effect from the Realisation Date, the assets in the Realisation Pool were
managed in accordance with an orderly realisation programme with the aim of
making progressive returns of cash, as soon as practicable, to those
Shareholders who elected to receive Realisation Shares. Ordinary Shares held by
Shareholders who did not submit a valid and complete election in accordance
with the Articles during the Election Period remained as Ordinary Shares.
The creation and subsequent redemption of the Realisation Shares resulted in
the redemption of 11,710,750 Shares at a value of £32,417,756.
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% 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 2021, financial assets of £Nil were
transferred from Level 1 to Level 2 (for the year ended 31 December 2020: £
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 (£984,227) (as at 31 December 2020: (£
1,588,314)). The Company also holds investments in derivative financial
instruments which are classified as Level 1 within the fair value hierarchy.
These consist of options with a fair value of £221,639 (as at 31 December 2020:
£62,951).
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 2021:
Total
As at
31 December
Level 1 Level 2 Level 3 2021
£ £ £ £
Financial assets/(liabilities) at
fair value through
profit or loss:
Korean preference shares 166,541,145 - - 166,541,145
Financial derivative assets 221,639 - - 221,639
Financial derivative - (984,227) - (984,227)
liabilities
Total net assets 166,762,784 (984,227) - 165,778,557
Total
As at
31 December
Level 1 Level 2 Level 3 2020
£ £ £ £
Financial assets/(liabilities) at
fair value through
profit or loss:
Korean preference 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
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 2021 As at 31 December 2020
NAV per NAV per
Participating Participating
NAV Share NAV Share
£ £ £ £
Net Asset Value reported to 162,661,741 2.3470 199,269,014 2.4415
the LSE
Adjustment for dividend 3,879,404 0.0560 3,855,939 0.0472
income
Net Assets Attributable to 166,541,145 2.4030 203,124,953 2.4887
Shareholders per Financial
Statements
The published NAV per Share of £2.3470 (as at 31 December 2020: £2.4415) is
different from the accounting NAV per Share of £2.4030 (as at 31 December 2020:
£2.4887) due to the adjustments noted above.
23. Subsequent events
These Financial Statements were approved for issuance by the Board on 28 April
2022. Subsequent events have been evaluated until this date.
The Board has agreed to increase Directors' fees effective 1 January 2022 to £
35,000 payable to Mr Crighton as Chairman of the Board, £32,500 to Mrs Morris
as Chairman of the Audit Committee, and £30,000 to Mr King.
On 7 January 2022, the remaining 273,088 Realisation Shares were re-designated
as Ordinary Shares and held in Treasury.
From 4 April 2022, the frequency of the NAV announcements will change from
being published weekly and at the month end to being published daily on
business days (in London).
At the time of signing these Financial Statements, there is an increased level
of global uncertainty associated with the conflict in Ukraine. The long-term
impacts of the Ukraine conflict are not yet known but are likely to result in
increased market and economic volatility, which may in turn have an impact on
the Company.
Shareholder Information
AIFMD Disclosures
The Company's Alternative Investment Fund Manager is Weiss Asset Management LP
(the "AIFM").
Under the Alternative Investment Fund Managers Regulations 2013 (the "UK AIFM
Regulations") and the FCA's Investment Funds sourcebook ("FUND"), the Company
is a non-UK Alternative Investment Fund ("AIF") and the AIFM is an
"above-threshold non-UK AIFM".
Accordingly, the AIFM has obligations pursuant to the UK AIFM Regulations and
FUND to make certain disclosures to investors before they invest in the
Company. These are set out in the AIFM's Supplemental Disclosure to the
Admission Document dated May 2013 which can be found on the Company's website
www.weisskoreaopportunityfund.com. The AIFM confirms that, apart from changes
to the latest net asset value of the Company, there have been no material
changes to this information in the year ended 31 December 2021.
The AIFM is also required to make certain disclosures as to the remuneration it
pays to its employees. The portion of the total amount of remuneration paid by
the AIFM to its 83 employees attributable to the Company for the financial year
ended 31 December 2021 was £562,911, consisting of £279,266 fixed and £283,645
variable remuneration. The aggregate amount of remuneration for the 8 employees
and/or members constituting senior management and those employees whose actions
have a material impact on the risk profile of the Company was £336,382.
Realisation Opportunity
In accordance with the Company's Articles of Incorporation and its Admission
Document, the Company offers all Shareholders the right to elect to realise
some or all of the value of their Ordinary Shares (the "Realisation
Opportunity"), less applicable costs and expenses, on or prior to the fourth
anniversary of Company's admission to AIM and, unless it has already been
determined that the Company be wound-up, every two years thereafter, the most
recent being 14 May 2021 (the "Realisation Date").
On 15 March 2021, the Company announced that pursuant to the Realisation
Opportunity, Shareholders who were on the register as at the record date, 19
March 2021, could 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 commenced
on 14 April 2021 and closed on 7 May 2021. Elections were received from
shareholders totalling of 11,710,750 Ordinary Shares, representing 14.5% of the
Company's issued share capital.
Following the Realisation Date, the Ordinary Shares held by the Shareholders
who elected for Realisation were redesignated as Realisation Shares and the
Portfolio was split into two separate and distinct Pools, namely the
Continuation Pool (comprising the assets attributable to the continuing
Ordinary Shares) and the Realisation Pool (comprising the assets attributable
to the Realisation Shares).
On 23 June 2021, the Company announced that it had made good progress with the
sale of assets in the Realisation Pool and would commence with the first
compulsory redemption of Realisation shares representing approximately 76.7%.
of Realisation Shares in issue (the "First Redemption"). The First Redemption
was effected pro-rata to holdings of Realisation Shares on the register at the
close of business on 22 June 2021. The First Redemption price was 278.4 pence
per Realisation Share, equivalent to the unaudited Net Asset Value per
Realisation Share as at 31 May 2021.
The Company made good progress with the sale of the remaining assets in the
Realisation Pool and on 7 September 2021 announced a second compulsory
redemption of Realisation Shares representing approximately 90% of Realisation
Shares (the "Second Redemption"). The Second Redemption was effected in the
same manner as the First Redemption at a price of 275.55 pence per Realisation
Share, equivalent to the Net Asset Value per Realisation Share as at 31 August
2021, and with a record date of 6 September 2021.
On 21 December 2021 the Company announced the final compulsory redemption of
all Realisation Shares (the "Final Redemption"). The Final Redemption price was
266.39 pence per Realisation Share, equivalent to the unaudited Net Asset Value
per Realisation Share as at 17 December 2021.
Share Buybacks
In addition to the Realisation Opportunity, the Company has authority to
repurchase on the open market up to 40% of its outstanding Ordinary Shares.
During the year ended 31 December 2021, the Company purchased 600,000 shares
(2020: Nil) of its own Shares at a consideration of £1,719,433 (31 December
2020: £Nil) under its general buyback authority. For additional information on
Share Buybacks refer to Note 18.
Net Asset Value
Northern Trust International Fund Administration Services (Guernsey) Limited
(the "Administrator") is responsible for calculating the Net Asset Value
("NAV") per Share of the Company. Since 4 April 2022, the unaudited NAV per
Ordinary Share is calculated on a daily 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.
Endnotes
Endnotes
1,2,3 The NAV published in this annual report and audited financial statement
will include dividends receivable as part of the NAV. Please refer to the
Admission Document for more information regarding the announcement and payment
of Korean dividends.
4,7,30,31,32,36 For WKOF, this return includes all dividends paid to WKOF's
Shareholders and assumes that these dividends were reinvested in WKOF's Shares
at the next date for which WKOF reports a NAV, at the NAV for that date. 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. iShares MSCI Korea UCITS ETF also assumes reinvestment of
dividends.
5 Since inception of Weiss Korea Opportunity Fund on 14 May 2013. The WKOF
return since inception is calculated on the basis of the Net Asset Value per
Ordinary Share and not on the price of WKOF shares on AIM. The value of WKOF
NAV per share performance since inception represents a total return, inclusive
of all dividends paid to WKOF shareholders since inception. The NAV per share
may differ from the price at which shares of WKOF may be purchased or sold on
AIM, and performance of NAV per share during any specific period may therefore
not be reflective of the returns an investor would receive by investing in
shares of WKOF during such period. For WKOF, this return includes all dividends
paid to WKOF's Shareholders and assumes that these dividends were reinvested in
WKOF's Shares at the next date for which WKOF reports a NAV, at the NAV for
that date.
6,37 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.
8 If the share price of an investment company is lower than the NAV per share,
the shares are said to be trading at a discount. The size of the discount is
calculated by subtracting the share price from the NAV per share and is usually
expressed as a percentage of the NAV per share. If the share price is higher
than the NAV per share, the shares are said to be trading at a premium.
9 Calculated as the dividend per share over the last 12-months divided by the
share price as of the date of this report.
10,48 The Average Trailing 12-Month P/E Ratio of Preference Shares Held is
based on the consolidated diluted earnings per share over the trailing 12-
month period as reported by Bloomberg, and is calculated as the total market
value of WKOF's preference share portfolio on the report date divided by the
total earnings allocable to WKOF based on WKOF's holdings on the report date.
Investments with negative reported earnings are excluded.
11,49 P/B Ratio of Preference Shares Held is calculated as the weighted average
price to book ratio of all preference shares held at 31 December 2021.
12 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.
13 Bloomberg; Data as of 31 December 2021
14 Hyundai Motor Company. "Hyundai Motor Reports 2021 Global Sales and 2022
Goals." HYUNDAI MOTORS, Hyundai Motor Company, 3 Jan. 2022, https://
www.hyundai.com/worldwide/en/company/newsroom/
hyundai-motor-reports-2021-global-sales-and-2022-goals-0000016776.
15 Carlier, Mathilde. "Automobile Market Share Worldwide 2018." Statista, 8
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17 Ulrich, Lawrence. "The Top 10 EV Battery Makers." IEEE Spectrum, IEEE
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about-us.html.
19 "Samsung Tops Global TV Market for 16th Straight Year." FlatpanelsHD, https:
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20 "LG." LG USA, https://www.lg.com/us.
21 SK Chemicals, https://www.skchemicals.com/en/products/GC_brand.aspx.
22 "Respiratory System." SK Chemicals, https://www.skchemicals.com/en/ls/
product_list.aspx?category=ETC&subclass=Respiratory+system.
23 "Hanwha." Hanwha.com, https://www.hanwha.com/en.html.
24 Overview." Solus Advanced Materials, https://www.solusadvancedmaterials.com/
en/intro/intro/.
25 Korea's Solus Supplies Battery Copper Foil to Tesla." KED Global, KED
Global, 16 Feb. 2022, https://www.kedglobal.com/[exclusive]-battery-materials/
newsView/ked202202160014.
26 "Business Overview." Cj Cheiljedang, https://www.cj.co.kr/en/about/business/
overview.
27 "Korea's 5 Top Brokerages to Join near $1 Bn Pretax Income Club This Year."
Pulse, https://pulsenews.co.kr/view.php?sc=30800028&year=2021&no=
965468.
28 Williams, Jane. "LG Household to Buy Coca-Cola Amatil Korea Unit." Reuters,
Thomson Reuters, 6 July 2007, https://www.reuters.com/article/us-amatil-korea/
lg-household-to-buy-coca-cola-amatil-korea-unit-idUSSEO7736020070706.
29 Please see page 66 for the Statement of Financial Position
33 https://www.cnbc.com/2022/01/25/
south-koreas-gdp-growth-hit-11-year-high-in-2021-as-exports-boom.html#::text=
South%20Korea's%20economy%20expanded%20at,as%20demand%20for%20exports%20soared.
34 On 24 July 2021 the Company had 69,307,078 share outstanding
35 https://www.cnbc.com/2022/01/25/
south-koreas-gdp-growth-hit-11-year-high-in-2021-as-exports-boom.html#::text=
South%20Korea's%20economy%20expanded%20at,as%20demand%20for%20exports%20soared.
38 Performance of "Common Share Selection Excess Return" is calculated as the
return of a portfolio of common shares issued by the same issuers as the
preference shares WKOF has owned, as if a hypothetical investor bought or sold
an equal quantity of those common shares on the same days that WKOF purchased
or sold its preference share investments.
39 South Korea Imports by Country", https://tradingeconomics.com/south-korea/
imports-by-country
40 South Korea Imports by Country", https://tradingeconomics.com/south-korea/
imports-by-country
41 2021 (annual, December) Import and Export Trends, Ministry of Trade Industry
and Energy
42 International Monetary Fund. https://www.imf.org/external/datamapper/
NGDPD@WEO/OEMDC/ADVEC/WEOWORLD
43 2021 (annual, December) Import and Export Trends, Ministry of Trade Industry
and Energy
44 Bloomberg. KRW-USD X-rate Currency.
45 https://www.korea.kr/news/policyNewsView.do?newsId=148898686
46 "South Korea's Inflation Stays High, Bolstering Case for Rate Hike."
MarketWatch, MarketWatch, 4 Feb. 2022, https://www.marketwatch.com/story/
south-korea-inflation-stays-high-bolstering-rate-hike-case-update-271643935004.
47 "Bok Restores Interest Rates to Pre-Pandemic Level." KED Global, KED Global,
14 Jan. 2022, https://www.kedglobal.com/central_banking/newsView/
ked202201140015.
50 Activist Insights. https://www.activistinsight.com/
51 Activist Insights. https://www.activistinsight.com/
52 Bloomberg, National Pension Service as of 31 December 2021
53 Borgen, J & McCurry, J (2022, March 10). 'Serious Escalation': US Believes
North Korea Testing Intercontinental Missile. The Guardian. https://
www.theguardian.com/world/2022/mar/10/
us-north-korea-icbm-missile-serious-escalation
54 Kim, H (2022, March 11). US rolls out more sanctions after North Korea
missile tests. The Associated Press. https://apnews.com/article/
space-launches-technology-business-united-nations-north-korea-b70d8af96336ee0b19fcde6ced5faa83
55 The portfolio discount represents the discount of WKOF's actual net asset
value ("NAV") to the value of what the NAV would be if WKOF held the respective
common shares of issuers rather than preference shares on a one-to-one basis.
56 Portfolio turnover is calculated as: (Purchase of Investments + Sale of
Investments) / (2 * Average monthly NAV). The portfolio turnover ratio may be
higher than normal due to purchase and sale of investments related to the
Realisation Opportunity. See Note 12 for detail.
57,58 iShares MSCI South Korea ETF, U.S. ticker EWY
END
(END) Dow Jones Newswires
May 03, 2022 02:00 ET (06:00 GMT)
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