TIDMWKOF
WEISS KOREA OPPORTUNITY FUND LTD.
LEI 213800GXKGJVWN3BF511
(Classified Regulated Information, under DTR 6 Annex 1 section 1.2)
HALF-YEARLY FINANCIAL REPORT
FOR THE PERIODED 30 JUNE 2020
Weiss Korea Opportunity Fund Ltd. (the "Company") has today, released its
Half-Yearly Financial Report for the period ended 30 June 2020. The Report will
shortly be available for inspection via the
Company's website www.weisskoreaopportunityfund.com.
For further information, please contact:
N+1 Singer
James Maxwell/Justin McKeegan - Nominated +44 20 7496 3000
Adviser
James Waterlow - Sales
Northern Trust International Fund
Administration Services (Guernsey) Limited
Samuel Walden +44 1481 745385
Summary Information
The Company
Weiss Korea Opportunity Fund Ltd. ("WKOF" or the "Company") was incorporated
with limited liability in Guernsey, as a closed-ended investment company on 12
April 2013. The Company's Shares were admitted to trading on the Alternative
Investment Market ("AIM") of the London Stock Exchange (the "LSE") on
14 May 2013.
The Company is managed by Weiss Asset Management LP (the "Investment Manager"),
a Boston-based investment management company registered as an investment
adviser with the Securities and Exchange Commission in the United States of
America.
Investment Objective and Dividend Policy
The Company's investment objective is to provide Shareholders with an
attractive return on their investment, predominantly through long-term capital
appreciation. The Company is geographically focussed on South Korean companies.
Specifically, the Company invests primarily in listed preferred shares issued
by companies incorporated in South Korea, which in many cases trade at a
discount to the corresponding common shares of the same companies. Since the
Company's Admission to AIM, the Investment Manager has assembled a portfolio of
South Korean preferred shares that it believes are undervalued and could
appreciate based on the criteria that it selects. The Company may, in
accordance with its investment policy, also invest some portion of its assets
in other securities, including exchange-traded funds, futures contracts,
options, swaps and derivatives related to Korean equities, and cash and cash
equivalents. The Company does not have any concentration limits.
The Company intends to return to Shareholders all dividends received, net of
withholding tax, on an annual basis.
Investment Policy
The Company is geographically focused on South Korean companies. Some of the
considerations that affect the Investment Manager's choice of securities to buy
and sell may include the discount at which a preferred share is trading
relative to its respective common share, its dividend yield, its liquidity, and
the weighting of its common share (if any) in the MSCI Korea 25/50 Net Total
Return Index (the "Korea Index"), among other factors. Not all of these factors
will necessarily be satisfied for particular investments. The Investment
Manager does not generally make decisions based on corporate fundamentals or
its view of the commercial prospects of an issuer. Preferred shares are
selected by the Investment Manager at its sole discretion, subject to the
overall control of the board of directors of the Company (the "Board").
The Company purchased certain credit default swaps on the sovereign debt of
South Korea and put options on iShares MSCI South Korea as general market and
portfolio hedges, but generally did not hedge its exposure to interest rates or
foreign currencies during the period ended 30 June 2020 (2019: Nil). Please see
additional information about the nature of these hedges in the Investment
Manager's Report within.
Realisation Opportunity
In accordance with the Company's Articles of Incorporation and its Admission
Document, the Company offered all Shareholders the right to elect to realise
some or all of the value of their Ordinary Shares (the "Realisation
Opportunity"), less applicable costs and expenses, on or prior to the fourth
anniversary of Company's admission to AIM and, unless it has already been
determined that the Company be wound-up, every two years thereafter, the most
recent being 15 May 2019 (the "Realisation Date") and the next Realisation Date
taking place in May 2021.
Share Buybacks
In addition to the Realisation Opportunity, the Company has authority to
repurchase on the open market up to 40 percent of its outstanding Ordinary
Shares. During the period ended 30 June 2020, the Company purchased none (2019:
Nil) of its own Shares at a consideration of GBPNil (31 December 2019: GBPNil)
under its general buyback authority.
Shareholder Information
Northern Trust International Fund Administration Services (Guernsey) Limited
(the "Administrator") is responsible for calculating the Net Asset Value
("NAV") per Share of the Company. The unaudited NAV per Ordinary Share is
calculated on a weekly basis and at the month end by the Administrator, and is
announced by a Regulatory News Service and is available through the Company's
website www.weisskoreaopportunityfund.com.
Company financial highlights and performance summary for the period ended 30
June 2020
As at As at
30 June 2020 31 December 2019
GBP GBP
Total Net Assets 138,078,901 126,988,732
NAV per share 1.6918 1.5559
Basic and diluted earnings per 0.1754 0.0960
share
Mid-Market Share price 1.63 1.50
Discount to NAV* (3.7%) (3.6%)
As at close of business on 02 September 2020, the latest published NAV per
Share had increased to GBP1.8708 (as at 01 September 2020) and the Share price
stood at GBP1.86.
*The amount by which the market value exceeds or is less than the face value of
a stock.
Total Expense Ratio
The annualised total expense ratio for the period ended 30 June 2020 was 1.87
per cent (31 December 2019: 1.85 per cent). The annualised total expense ratio
includes charges paid to the Investment Manager and other expenses divided by
the average NAV for the period.
Chairman's Review
For the period ended 30 June 2020
We are pleased to provide the 2020 Half Yearly Report on the Company. During
the period from 31 December 2019 to 30 June 2020 (the "Period"), the Company's
net asset value increased by 11.3 per cent including reinvested dividends1 (the
return was also 11.3 per cent assuming dividends were not reinvested)2
outperforming the reference MSCI Korea 25/50 Net Total Return Index (the "Korea
Index"), which decreased 1.7 per cent in Pounds Sterling ("GBP"). Since the
admission of the Company to AIM in May 2013, the net asset value has increased
by 96.7 per cent including reinvested dividends1 (or 93.4 per cent assuming
dividends are not reinvested in the Company)2, compared to the Korea Index
returns of 42.9 per cent3. A report from the Investment Manager follows.
The Directors declared a dividend of 3.9549 pence per Share, ex-dividend date
21 May 2020, to distribute the income received by the Company in respect of the
year ended 31 December 2019. This dividend was paid to all Shareholders on 12
June 2020.
In my prior letter I commented on the rise of COVID-19, and the disruption and
uncertainty the virus would likely introduce to the Korean economy. Compared to
many, the Korean government and people have done a good job of containing the
virus. However, South Korea entered a technical recession at the end of Q2 and
cluster-based virus outbreaks continue to emerge. Until a vaccine is found, and
is effectively distributed, we anticipate continued COVID-19 disruption to the
South Korean economy and financial markets.
During the Period Korean equity markets fell by approximately 35 per cent then
staged a remarkable rebound from the mid-March lows. Trading volumes and
volatility were at levels not seen by the Company since its inception. I'm
particularly pleased to able to report meaningful outperformance against the
reference index during the first half of the year and credit the Investment
Manager's active management of the portfolio during this highly volatile
period.
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 Company has an active share repurchase program as part of its discount
management strategy. During the Period, the Board considered buying back Shares
on numerous occasions when the discount to NAV appeared to be wide. However,
the Korean stock market was so volatile that it was very difficult to ensure
that the discount quoted was achievable when realising part of the portfolio to
fund buybacks. With the stock market moving 5 per cent to 10 per cent each day,
I hope that Shareholders can understand the difficulties the Board and the
Investment Manager faced during that difficult period.
The Board is authorised to repurchase up to 40 per cent of the Company's
outstanding Ordinary Shares in issue as at 24 July 20204. Since Admission
almost six years ago, and as at the date of this document, the Company has
repurchased, at a discount to NAV, 12,590,250 Ordinary Shares of the original
105,000,000 Ordinary Shares issued at Admission. The Board also has in place
standing instructions with the Company's broker, N+1 Singer Advisory LLP
("Broker" or "N+1 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.
If you would like to speak with the Investment Manager or learn about potential
opportunities to meet with them, please contact N+1 Singer. I would like to
thank Shareholders for their support and look forward to the continued success
of the Company in the future.
Norman Crighton
Chairman
03 September 2020
1 This return includes all dividends paid to the Company's Shareholders and
assumes that these dividends were reinvested in the Company's Shares at the
next date for which the Company reports a NAV, at the NAV for that date.
2 This return includes the annual cash dividend paid to the Company's
Shareholders but does not assume such dividends are reinvested..
3 MSCI total return indices are calculated as if any dividends paid by
constituents are reinvested at their respective closing prices on the ex-date
of the distribution.
4 On 24 July 2020, the Company had 81,617,828 Ordinary Shares in issue.
Investment Manager's Report
For the period ended 30 June 2020
Performance
In the first half of 2020, WKOF's NAV in Pounds Sterling ("GBP") gained 11.3
per cent, including reinvested dividends5 (the return was also 11.3 per cent
assuming dividends are not reinvested in WKOF)6 outperforming the reference
MSCI South Korea Index ("the Korea Index")7, which decreased 1.7 per cent when
converted to GBP. From its inception in May 2013, WKOF has significantly
outperformed the Korean market. The total return to an investor in WKOF since
inception was 96.7 per cent including reinvested dividends5 (or 93.4 per cent
assuming dividends are not reinvested in WKOF),6 compared to returns of 42.9
per cent for the Korea Index over the same period.
The outperformance against the Korea Index during the first half of 2020 was
largely due to discount narrowing of preference shares owned, which contributed
9.6 per cent of the 11.3 per cent NAV performance as described in the table
below.
Return Attribution Component Year to June 30, 2020 Attribution
MSCI South Korea Index (KRW)8 -4.6%
WKOF Common Shares vs Korea Index 3.8%
(KRW)9
Discount Narrowing of Preference 9.6%
Shares Owned
Excess Dividend Yield of Preference 0.0%
Shares Owned10
Currency (KRW vs. GBP) 3.0%
Fees & Expenses -1.0%
Other 0.5%
NAV Performance in GBP 11.3%
Macroeconomic Impact of COVID-19
The major theme for the first half of 2020 was the emergence of the COVID-19
virus from Wuhan, China, and the resulting global pandemic. The economic impact
of COVID-19, quarantine measures and government intervention around the world
led to a tumultuous first half of the year across markets. We stated in our
2019 Investment Manager's Report that it would be difficult for us to predict
the full effects of the virus on the global economy, much less how equity
markets would react to new information about infection rates, government
stimulus, and the likelihood and timing of a vaccine.
Despite South Korea recording one of the highest numbers of cumulative COVID-19
cases in early March, the South Korean government's containment policies, based
on a test, trace and isolate strategy, appear to have been relatively effective
at abating the spread of the virus.11 Government tactics have included
establishing testing facilities at gas stations across the country and forming
teams of contact tracers who are empowered to access credit card and mobile
phone records for confirmed cases-typically within minutes. Perhaps due to
these government policies and compliance by the South Korean population, South
Korea has so far avoided the worst consequences of the pandemic without
incurring the massive budget deficits we've seen in the U.S. and Western
Europe. GDP in South Korea for the second quarter showed a year-on-year fall of
3 per cent compared with falls of 9.5 per cent in the U.S., 15 per cent in the
Euro area and 21.7 per cent in the U.K.12. As of August 24, South Korea had one
of the lowest per capita death tolls due to COVID-19 at 6.03 per million
population. By comparison, the COVID-19 death toll in Japan was 9.33, 19.69 in
Australia, 110.67 in Germany, 198.62 in Switzerland, 534.15 in the USA, and
610.27 in the U.K. As of the same date, South Korea reported a seven-day
rolling average of 0.01 deaths per million people. This compares with a
seven-day rolling average for the U.S. of 2.91 and 0.13 for the United Kingdom.
These results for South Korea are particularly impressive given the age of its
population-South Korea's median age is 43.7, which compares with a median age
in the USA of 38.3 and a median age in the U.K. of 40.5.
Macroeconomists have proposed several models to estimate the speed of eventual
economic recovery and the forms that equity market rebounds might take in a
post COVID-19 world. The broader Korean index experienced a "V"-shaped rebound
during the second quarter of 2020, with the closing price of the KOSPI 200
index on June 30 a mere 3.5 per cent lower than the closing price on January 2
of this year. To illustrate the velocity of the market drawdown and recovery,
the peak-to-trough change for the first half of 2020 for the KOSPI 200 was 35
per cent, and that drawdown had been almost fully recovered by June 30. As of
August 24 the KOSPI was up 6.0 per cent for the year. This has been one of the
strongest performing markets so far in 2020.
The Korean economy, however, still faces significant uncertainty due to the
likely lasting impacts of the pandemic on global aggregate demand and aggregate
supply. Weak global demand from Korea's main trading partners resulted in total
exports falling by approximately 11 per cent year-on-year to end June.13 A
recovery in exports to China and resilience in the semiconductor sector helped
avoid a steeper decline. Ultimately, the success of South Korea's containment
of COVID-19 and the strength of demand from its largest trading partners, China
and the US, will likely determine the speed of economic recovery.
In the meantime, the South Korean government has aggressively expanded its
stimulus spending by implementing broad measures including emergency cash
handouts to all South Korean households and longer term investments like the
"Korean Green New Deal" described below.
We believe that our competitive advantage is in investing into inefficiencies
caused by preference share discounts, not in timing macroeconomic trends.
Consequently, while our trading strategy is premised on a narrowing of
preference share discounts rather than on any specific macroeconomic condition,
the rapid rebound of the broader index was a welcome sight, as preference
shares are equity investments in Korean companies and the discounts are
partially driven by the companies' earnings and dividend payout ratios.
Portfolio Activity
One interesting observation during the first half of 2020 was a lack of
crowdedness in WKOF's investments. During the middle of March, the most violent
drawdowns largely occurred in less liquid asset classes. Despite preference
shares generally having lower liquidity than the corresponding ordinary shares,
we did not observe a corresponding general widening of discounts in the
preference shares owned by WKOF.
During and after March, preference share trading volumes and the volatility of
discounts of preference shares in WKOF's portfolio substantially increased.
This was most visible in certain illiquid securities, but also occurred in
larger capitalization preference shares. The increased volatility provided WKOF
with exceptional trading opportunities and resulted in rebalancing within the
top ten positions as WKOF continued to reallocate monies to those preference
shares that offered the best opportunities. In the past, this entailed
substantially reducing WKOF's exposure to Hyundai Motors. In the first half of
2020 WKOF reduced its weighting in Samsung Electronics, its largest holding,
from 22 per cent to 12 per cent. WKOF did this because the expected returns
from holding other preference shares were substantially higher than from
holding Samsung Electronics, whose preference share discount narrowed, at one
point reaching the tightest level since 1994.
Another theme we observed in the first half of 2020 was the ongoing
international focus on developing green energy resources and combating climate
change. For example, the European Union proposed to allocate 30 per cent of its
750 billion euro COVID-19 response stimulus to climate action and building a
sustainable green future. Similarly, the South Korean government has made the
"Korean Green New Deal" an important part of its 2020 economic policy, focusing
on green energy, electric vehicles, and contactless/digital payments. While the
specific details of this policy have not been formally announced, the market
expects government subsidies and investments into eco-friendly industries. As a
result, companies involved in the production of lithium-ion batteries,
renewable energy, and electric vehicles rallied strongly following the
announcement.
Selling activity has resulted in WKOF holding a larger Samsung Kodex 200 ETF
position than has been typical, as proceeds from sales were partially invested
into the ETF. We anticipate, considering the heightened volatility of current
market conditions, opportunistically reallocating from the ETF into wider
discount preference shares over the second half of the year.
Hedging
WKOF's portfolio is generally long only. However, as described more fully in
WKOF's Annual Report and Audited Financial Statements for the year ended 31
December 2019, because of political tensions in Northeast Asia, the Board
approved a hedging strategy in September 2017 intended to reduce exposure to
extreme events that would be catastrophic to its Shareholders' investments in
WKOF. As a result, WKOF has purchased credit default swaps when deemed cost
effective. These are securities that we believe would generate high returns
without introducing material new risks into the portfolio or exacerbating
existing risks if WKOF experienced an East Asian geo-political disaster. These
catastrophe hedges are not intended to make money. We expect that WKOF's hedges
will lose money most of the time - as with any insurance policy. The table
below provides details about the hedges as of 30 June 2020. Note that outside
of the general market and portfolio hedges described herein, WKOF has generally
not hedged interest rates or currencies.
Credit Default Notional Total Cost to Annual Price Paid as Expiration Duration
Swaps on South Value Expiration Cost (USD) per cent of Date (Years)
Korean Sovereign (USD) (USD) Notional Value
Debt (per annum)
5 yr CDS $20m $457,151 $91,430 45bps 2023 5.0
3 yr CDS $80m $431,216 $143,739 18bps 2023 3.0
Total Cost $888,367 $235,169
Conclusion
Financial markets, as well as life in general, were profoundly impacted by the
emergence of COVID-19 during the first half of 2020. As nations and companies
re-evaluate their priorities in light of the pandemic, some themes that have
been beneficial to WKOF, such as corporate governance reforms, will likely be
temporarily de-prioritized. At the same time, uncertainty and price volatility
may provide WKOF with exceptional trading and investment opportunities.
Weiss Asset Management LP
03 September 2020
5 This return includes all dividends paid to the Company's Shareholders and
assumes that these dividends were reinvested in the Company's Shares at the
next date for which the Company reports a NAV, at the NAV for that date.
6 This return includes the annual cash dividend paid to the Company's
Shareholders but does not assume such dividends are reinvested.
7 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 MSCI Korea 25/50 Net Total Return Index denominated in KRW
9 WKOF Common Shares vs Korea Index (KRW) is calculated as the return of a
portfolio of common shares issued by the same issuers as the preference shares
the Company has owned, as if a hypothetical investor bought or sold an equal
quantity of those common shares on the same days that the Company purchased or
sold its preference share investments.
10 Excess dividend yield of preference shares owned relative to a portfolio of
the respective common shares. In Korea dividends are typically paid to the
entities who owned shares at the end of December, although the dividend amounts
are not declared until the next year, so while we received dividend income in
the first half of the year, those dividends were generally attributed to the
performance during the last half of 2019. The annual and semi-annual financials
include dividends with a record date prior to the end of the reporting period,
even if they had not been paid or even announced prior to the end of the
reporting period. In contrast, the weekly and monthly NAV announcements
published by the Company only include dividends upon receipt, with an
additional note stating the amount of announced but as yet unpaid dividends.
11 "Emerging COVID-19 success story: South Korea learned the lessons of MERS",
Oxford University's Our World in Data project, June 30, 2020, https://
ourworldindata.org/covid-exemplar-south-korea
12 Data from Haver Analytics, as reported in The Economist
13 "Korea's June exports decrease 10.9 per cent to 39.2 billion, show signs of
improvement" South Korea Ministry of Trade, Industry and Energy, July 1 2020,
https://english.motie.go.kr/en/pc/pressreleases/bbs/bbsView.do?bbs_seq_n=787&
bbs_cd_n=2¤tPage=1&search_key_n=&search_val_v=&cate_n=
Statement of Principal and Emerging Risks and Uncertainties
For the period ended 30 June 2020
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.
COVID-19
The Board continues to monitor the impact of the COVID-19 outbreak and the
impact that COVID-19 will continue to have on the future of the Company and the
performance of the Portfolio. Notwithstanding the impact the outbreak has
already had on the Company's share price and NAV performance, there remains
continued uncertainty as to the consequences of the COVID-19 outbreak on the
economy in general.
From an operational perspective, the Company uses a number of service providers
who have established, documented and regularly test their Business Resiliency
Policies to cover various possible scenarios whereby staff cannot be present at
the designated office and conduct business as usual. Since the COVID-19
pandemic outbreak, service providers have deployed these alternative working
policies to ensure continued business service.
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 the requirements of its Admission
Document and fail to meet its 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.
Liquidity of Investments
The Korean preferred shares typically purchased by the Company generally have
smaller market capitalisations and lower levels of liquidity than their common
share counterparts. These factors, among others, may result in more volatile
price changes in the Company's assets as compared to the South Korean stock
market or other more liquid asset classes. This volatility could cause the NAV
to go up or down dramatically.
Going Concern
The Company has continued in existence following the second Realisation
Opportunity and will continue to operate as a going concern unless a
determination to wind up the Company is made. Given this, the Directors will
propose further realisation opportunities for Shareholders who have not
previously elected to realise all of their Ordinary Shares. Such opportunities
will be made using a similar mechanism to previously announced Realisation
Opportunities. The next Realisation Opportunity will take place during May
2021.
Based on the fact that the assets currently held by the Company consist mainly
of securities that are readily realisable, whilst the Directors acknowledge
that the liquidity of these assets needs to be managed, the Directors believe
that the Company has adequate financial resources to meet its liabilities as
they fall due for at least twelve months from the date of this report and that
it is appropriate for the Unaudited Half-Yearly Financial Report to be prepared
on a going concern basis.
Directors
For the period ended 30 June 2020
The Company has three non-executive Directors, all of whom are considered
independent of the Investment Manager and details are set out below.
Norman Crighton (aged 54)
Mr Crighton is Chairman of the Company. He is also a non-executive chairman of
RM Secured Direct Lending plc and AVI Japan Opportunity Trust. Norman was,
until May 2011, an investment manager at Metage Capital Limited where he was
responsible for the management of a portfolio of closed-ended funds and has
almost three decades of experience in closed-ended funds having led teams at
Olliff and Partners, LCF Edmond de Rothschild, Merrill Lynch, Jefferies
International Limited and latterly Metage Capital Limited. His experience
covers analysis and research as well as sales and corporate finance. Norman is
British and resident in the United Kingdom. Norman was appointed to the Board
in 2013.
Stephen Charles Coe (aged 54)
Stephen is Chairman of the Audit Committee. He is also a director (and Chairman
of the Audit Committee) of Leaf Clean Energy Company and Merian Chrysalis
Investment Company. He has been involved with offshore investment funds and
managers since 1990 with significant exposure to property, debt, emerging
markets, and private equity investments.
He qualified as a Chartered Accountant with Price Waterhouse Bristol in 1990
and remained in audit practice, specialising in financial services, until 1997.
From 1997 to 2003 he was a director of the Bachmann Group of fiduciary
companies and Managing Director of Bachmann Fund Administration Limited, a
specialist third party fund administration company. From 2003 to 2006 Stephen
was a director with Investec in Guernsey and Managing Director of Investec
Trust (Guernsey) Limited and Investec Administration Services Limited. He
became self-employed in August 2006 providing services to financial services
clients. Stephen is British and resident in Guernsey. Stephen was appointed to
the Board in 2013.
Robert Paul King (aged 57)
Rob is a non-executive director for a number of open and closed-ended
investment funds including Tufton Oceanic Assets Limited (chairman), Chenavari
Capital Solutions Limited (chairman), and CIP Merchant Capital Limited. Before
becoming an independent non-executive director in 2011, he was a director of
Cannon Asset Management Limited and their associated companies. Prior to this
he was a director of Northern Trust International Fund Administration Services
(Guernsey) Limited (formerly Guernsey International Fund Managers Limited)
where he had worked from 1990 to 2007. He has been in the offshore finance
industry since 1986 specialising in administration and structuring of offshore
open and closed-ended investment funds. Rob is British and resident in
Guernsey. Rob was appointed to the Board in 2013.
Directors' Responsibility Statement
For the period ended 30 June 2020
The Directors are responsible for preparing the Unaudited Half-Yearly Financial
Report (the "Condensed Financial Statements"), which have not been audited by
an independent auditor, and confirm that to the best of their knowledge:
· these Condensed Financial Statements have been prepared in accordance
with International Financial Reporting Standards ("IFRS") and in accordance
with International Accounting Standard 34 "Interim Financial Reporting" issued
by the European Union and the AIM Rules of the LSE;
· these Condensed Financial Statements include a fair review of important
events that have occurred during the period and their impact on the Condensed
Financial Statements, together with a description of the principal risks and
uncertainties of the Company for the remaining six months of the financial
period as detailed in the Investment Manager's Report; and
· these Condensed Financial Statements include a fair review of related
party transactions that have taken place during the six month period which have
had a material effect on the financial position or performance of the Company,
together with disclosure of any changes in related party transactions in the
last Annual Report and Audited Financial Statements which have had a material
effect on the financial position of the Company in the current period.
The Directors confirm that the Condensed Financial Statements comply with the
above requirements.
On behalf of the Board,
Norman Crighton
Chairman
03 September 2020
Robert King
Director
03 September 2020
Condensed Statement of Financial Position
As at As at
30 June 31 December
2020 2019
(Unaudited) (Audited)
Notes GBP GBP
Assets
Current assets
Financial assets at fair value through 8 133,970,854 117,853,987
profit or loss
Derivative financial assets 9 - 33,218
Other receivables 119,262 2,445,789
Cash and cash equivalents 3,143,083 6,430,069
Margin account 3,204,448 1,435,750
Total assets 140,437,647 128,198,813
Liabilities
Current liabilities
Derivative financial 9 2,023,106 704,019
liabilities
Other payables 335,640 506,062
Total liabilities 2,358,746 1,210,081
Net assets 138,078,901 126,988,732
Represented by:
Shareholders' equity and
reserves
Share capital 10 68,124,035 68,124,035
Other reserves 69,954,866 58,864,697
Total shareholders' equity 138,078,901 126,988,732
Net assets per share 7 1.6918 1.5559
The Notes form an integral part of these Condensed Financial Statements.
The Condensed Financial Statements were approved and authorised for issue by
the Board of Directors on
03 September 2020.
Norman Crighton
Chairman
Robert King
Director
Condensed Statement of Comprehensive Income
For the period For the period
ended ended
30 June 2020 30 June 2019
(Unaudited) (Unaudited)
Note GBP GBP
Income
Net changes in fair value of financial assets 14,222,572 11,651,316
at fair value through profit or loss through profit
or loss
Net changes in fair value of derivative financial 1,581,263 206,014
instruments through profit or loss
Net foreign currency gains/(losses) 53,624 (137,822)
Other income 509,844 711,676
Total income 16,367,303 12,431,184
Expenses
Operating expenses (1,937,790) (1,554,650)
Total operating expenses (1,937,790) (1,554,650)
Profit for the period before 14,429,513 10,876,534
tax
Withholding tax (111,440) (156,739)
Profit for the period after 14,318,073 10,719,795
tax
Profit and total comprehensive income for the period 14,318,073 10,719,795
Basic and diluted earnings per Share 6 0.1754 0.1281
All items derive from continuing activities.
The Notes form an integral part of these Condensed Financial Statements.
Condensed Statement of Changes in Equity
Share Other
capital reserves Total
Notes GBP GBP GBP
Balance at 1 January 2020 68,124,035 58,864,697 126,988,732
Total comprehensive income for the period - 14,318,073 14,318,073
Transactions with Shareholders, recorded
directly in equity
Distributions paid 4 - (3,227,904) (3,227,904)
Balance at 30 June 2020 68,124,035 69,954,866 138,078,901
For the period ended 30 June 2019
(Unaudited)
Balance at 1 January 2019 72,080,642 54,408,953 126,489,595
Total comprehensive loss for the period - 10,719,795 10,719,795
Transactions with Shareholders, recorded
directly in equity
Redemption of Realisation Shares 10 (3,956,607) - (3,956,607)
Distributions paid 4 - (3,475,415) (3,475,415)
Balance at 30 June 2019 68,124,035 61,653,333 129,777,368
The Notes form an integral part of these Condensed Financial Statements.
Condensed Statement of Cash Flows
For the period For the period
ended ended
30 June 2020 30 June 2019
(Unaudited) (Unaudited)
Notes GBP GBP
Cash flows from operating activities
Profit for the period 14,318,073 10,719,795
Adjustments for:
Net change in fair value of financial assets held (14,276,196) (11,651,318)
at
fair value through profit or loss
Net change in fair value of derivative financial (1,581,263) (206,014)
instruments held at fair value through profit or
loss
Net change in NAV of Realisation Shares - (41,089)
Effect of foreign exchange rate 53,624 -
fluctuations
Decrease in debtors* 2,326,527 2,292,859
Increase in creditors (170,422) (211,529)
Net cash generated from operating 670,343 902,704
activities
Cash flows from investing activities
Purchase of financial assets at fair value (50,381,604) (2,085,317)
through profit or loss
Open of derivative financial instruments 1,720,421 (310,732)
Proceeds from the sale of financial assets 8 48,487,308 10,321,790
at fair value through profit or loss
Closure of derivative financial 1,213,148 1,884,115
instruments
(Increase)/decrease in margin account (1,768,698) 364,430
Net cash (used in)/generated from (729,425) 10,174,286
investing activities
Cash flows from financing activities
Redemption of Realisation Shares - (3,915,517)
Distributions paid 4 (3,227,904) (3,475,415)
Net cash used in financing activities (3,227,904) (7,390,932)
Net (decrease)/increase in cash and cash (3,286,986) 3,686,058
equivalents
Cash and cash equivalents at the beginning 6,430,069 1,304,537
of the period
Cash and cash equivalents at the end of 3,143,083 4,990,595
the period
The Notes form an integral part of these Condensed Financial Statements.
*Decrease in debtors includes dividends receivable.
Notes to the Unaudited Condensed Financial Statements
For the period ended 30 June 2020
1. General information
The Company was incorporated with limited liability in Guernsey, as a
closed-ended investment company on
12 April 2013. The Company's Shares were admitted to trading on AIM of the LSE
on 14 May 2013.
The Investment Manager of the Company is Weiss Asset Management LP.
At the AGM held on 27 July 2016, the Board approved the adoption of the new
Articles of Incorporation in accordance with Section 42(1) of the Companies
(Guernsey) Law, 2008 (the "Law").
2. Significant accounting policies
a) Statement of compliance
The Condensed Financial Statements of the Company for the period ended 30 June
2020 have been prepared in accordance with IFRS adopted by the European Union
and the AIM Rules of the London Stock Exchange. They give a true and fair view
and are in compliance with the Law.
b) Basis of preparation
The Condensed Financial Statements are prepared in Pounds Sterling (GBP), which
is the Company's functional and presentational currency. They are prepared on a
historical cost basis modified to include financial assets at fair value
through profit or loss.
The Condensed Financial Statements, covering the period from 1 January to 30
June 2020, are not audited.
The accounting policies adopted are consistent with those used in the Annual
Report and Audited Financial Statements for the year ended 31 December 2019.
The Condensed Financial Statements do not include all the information and
disclosures required in the Annual Report and Audited Financial Statements and
should be read in conjunction with the Annual Report and Audited Financial
Statements for the year ended 31 December 2019. The Auditor's Report contained
within the Annual Report and Audited Financial Statements provided an
unmodified opinion.
The preparation of the Condensed Financial Statements requires management to
make estimates and assumptions that affect the reported amounts of revenues,
expenses, assets, and liabilities at the date of these Condensed Financial
Statements. If in the future such estimates and assumptions, which are based on
management's best judgement at the date of the Condensed Financial Statements,
deviate from the actual circumstances, the original estimates and assumptions
will be modified as appropriate in the period in which the circumstances
change.
c) Going concern
The Company has continued in existence following the second Realisation
Opportunity and will continue to operate as a going concern unless a
determination to wind up the Company is made. Given this, the Directors will
propose further realisation opportunities for Shareholders who have not
previously elected to realise all of their Ordinary Shares. Such opportunities
will be made using a similar mechanism to previously announced Realisation
Opportunities. The next Realisation Opportunity will take place during May
2021.
Based on the fact that the assets currently held by the Company consist mainly
of securities that are readily realisable, whilst the Directors acknowledge
that the liquidity of these assets needs to be managed, the Directors believe
that the Company has adequate financial resources to meet its liabilities as
they fall due for at least twelve months from the date of this report, and that
it is appropriate for the Condensed Financial Statements to be prepared on a
going concern basis.
3. Taxation
The Company has been granted Exempt Status under the terms of The Income Tax
(Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its
liability is an annual fee of GBP1,200 (2019: GBP1,200).
The amounts disclosed as taxation in the Condensed Statement of Comprehensive
Income relate solely to withholding tax levied in South Korea on distributions
from South Korean companies at an offshore rate of 22 per cent.
4. Dividends to Shareholders
Dividends, if any, will be paid annually each year. An annual dividend of
3.9549 pence per Share (GBP3,227,904) was approved on 13 May 2020 and paid on
12 June 2020 in respect of the year ended 31 December 2019.
An annual dividend of 4.1195 pence per Share (GBP3,475,415) was approved on 1 May
2019 and paid on 31 May 2019 in respect of the year ended 31 December 2018.
5. Significant accounting judgements, estimates and assumptions
The preparation of the Condensed 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 significant judgements, estimates, and assumptions made by
management when applying the Company's accounting policies, as well as the key
sources of estimation uncertainty, were the same for these Condensed Financial
Statements as those that applied to the Annual Report and Audited Financial
Statements for the year ended 31 December 2019.
6. Basic and diluted earnings per Share
The basic and diluted earnings per Share for the Company has been calculated
based on the total comprehensive gain for the period of GBP14,318,073 (period
ended 30 June 2019: GBP10,719,795) and the weighted average number of Ordinary
Shares in issue during the period of 81,617,828 (period ended 30 June 2019:
83,666,809).
7. Net Asset Value per Ordinary Share
The NAV of each Share of GBP1.6918 (as at 31 December 2019: GBP1.5559) is
determined by dividing the net assets of the Company attributed to the Ordinary
Shares of GBP138,078,091 (as at 31 December 2019: GBP126,988,732) by the number of
Ordinary Shares in issue at 30 June 2020 of 81,617,828 (as at 31 December 2019:
81,617,828 Ordinary Shares in issue).
8. Financial assets at fair value through profit or loss
As at As at
30 June 31 December
2020 2019
GBP GBP
Cost of investments at beginning of the 106,419,418 110,153,284
period/year
Purchases of investments in the period/ 50,381,602 8,239,027
year
Disposal of investments in the period/year (48,487,307) (18,803,751)
Realised gain on disposal of investments in the 19,802,055 6,830,858
period/year
Cost of investments held at end of the 128,115,768 106,419,418
period/year
Unrealised gain on investments 5,855,086 11,434,569
Financial assets at fair value through 133,970,854 117,853,987
profit or loss
9. Derivative financial instruments at fair value through profit or loss
As at As at
30 June 31 December
2020 2019
GBP GBP
Cost of derivatives at beginning of the (1,174,737) (552,309)
period/year
Open of derivatives in the period/year (1,720,421) 593,087
Closure of derivatives in the period/year (1,213,146) (1,884,116)
Realised gain/(loss) on closure of derivatives in 2,100,459 668,601
the period/year
Net cost of derivatives held at end of the (2,007,845) (1,174,737)
period/year
Net changes in fair value on derivative financial (15,261) 503,936
instruments at fair value through profit or loss
Net fair value on derivative financial instruments (2,023,106) (670,801)
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
30 June 31 December
2020 2019
Assets Liabilities Assets Liabilities
Derivatives held for GBP GBP GBP GBP
trading:
Options - - 33,218 -
Credit default swaps - (2,023,106) - (704,019)
Total - (2,023,106) 33,218 (704,019)
10. Share capital
The share capital of the Company consists of an unlimited number of Ordinary
Shares of no par value.
As at As at
30 June 31 December
2020 2019
Authorised
Unlimited Ordinary Shares at no par value - -
Issued at no par
value
81,617,828 (2019: 81,617,828) unlimited Ordinary Shares at - -
no par value
Reconciliation of number of Shares
As at As at
30 June 31 December
2020 2019
No. of No. of
Shares Shares
Ordinary Shares at the beginning of the 81,617,828 84,364,981
period/year
Purchase of Realisation Shares - (2,747,153)
Total Ordinary Shares in issue at the end of the 81,617,828 81,617,828
period/year
Share capital account
As at As at
30 June 31 December
2020 2019
GBP GBP
Share capital at the beginning of the 68,124,035 72,080,642
period/year
Purchase of Realisation Shares - (3,956,607)
Total Share capital at the end of the 68,124,035 68,124,035
period/year
Ordinary Shares
The Company has a single class of Ordinary Shares, which were issued by means
of an initial public offering on 14 May 2013, at 100 pence per Share.
The rights attached to the Ordinary Shares are as follows:
a) The holders of Ordinary Shares shall confer the right to all dividends in
accordance with the Articles of Incorporation of the Company.
b) The capital and surplus assets of the Company remaining after payment of
all creditors shall, on winding-up or on a return (other than by way of
purchase or redemption of own Ordinary Shares) be divided amongst the
Shareholders on the basis of the capital attributable to the Ordinary Shares at
the date of winding up or other return of capital.
c) Shareholders present in person or by proxy or (being a corporation)
present by a duly authorised representative at a general meeting have, on a
show of hands, one vote and, on a poll, one vote for every Share.
d) On 20 March 2019, being 46 days before the Subsequent Realisation Date, the
Company published a circular pursuant to the Realisation Opportunity, entitling
the Shareholders to serve a written notice during the election period (a
"Realisation Election") requesting that all or a part of their Ordinary Shares
be re-designated to Realisation Shares, subject to the aggregate NAV of the
continuing Ordinary Shares on the last business day before the Reorganisation
Date being not less than GBP50 million. As Shareholders elected to participate in
the Realisation Opportunity, the Company's portfolio was divided into two
pools: the Continuation Pool; and the Realisation Pool.
e) On 15 May 2019, 2,747,153 Ordinary Shares, which represented 3.3 per cent
of the Company's issued Ordinary Share capital were redesignated as Realisation
Shares. On the 7 June 2019 the Board approved the compulsory redemption of the
Realisation Shares in issue. The redemption price was 142.53 pence per
Realisation Share, being the net assets of the Realisation Pool of GBP3,915,557,
divided by the number of outstanding Realisation Shares in issue, being
2,747,153 Realisation Shares. The redemption proceeds were paid to the
Realisation Shareholders on 18 June 2019, after which the Realisation Shares
were cancelled and were no longer in issue.
Share buyback and cancellation
During the period ended 30 June 2020 and throughout 2019, the Company did not
purchase any of its own Ordinary Shares under the Share buyback authority
originally granted to the Company in 2014.
At the AGM held on 23 July 2020, Shareholders approved the authority of the
Company to buy back up to 40 per cent of the issued Ordinary Shares to
facilitate the Company's discount management. Any Ordinary Shares bought back
may be cancelled or held in treasury.
11. Related party transactions and material agreements
Related party transactions
a) Directors' remuneration and expenses
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine provided that the aggregate amount of such fees does
not exceed GBP150,000 per annum.
The annual Directors' fees comprise GBP30,000 payable to Mr Crighton as the
Chairman, GBP27,500 to Mr Coe as Chairman of the Audit Committee and GBP24,000 to
Mr King.
During the period ended 30 June 2020, Directors' fees of GBP40,750 (period ended
30 June 2019: GBP40,750) were charged to the Company and GBPNil remained payable at
the end of the period (as at 31 December 2019: GBPNil).
b) Shares held by related parties
The Directors who held office at 30 June 2020 and up to the date of this Report
held the following number of
Ordinary Shares beneficially:
As at 30 June 2020 As at 31 December 2019
Ordinary % of issued Ordinary % of issued
Shares share Shares share
capital capital
Norman Crighton 20,000 0.02% 20,000 0.02%
Stephen Coe 10,000 0.01% 10,000 0.01%
Robert King 15,000 0.02% 15,000 0.02%
The Investment Manager is principally owned by Dr Andrew Weiss and certain
members of the Investment Manager's senior management team.
As at 30 June 2020, Dr Andrew Weiss and his immediate family members held an
interest in 6,486,888 Ordinary Shares (as at 31 December 2019: 6,486,888)
representing 7.95 per cent. (as at 31 December 2019: 7.95 per cent.) of the
issued share capital of the Company.
As at 30 June 2020, employees and partners of the Investment Manager other than
Dr Andrew Weiss, their respective immediate family members or entities
controlled by them or their immediate family members held an interest in
2,844,333 Ordinary Shares (as at 31 December 2019: 2,844,333) representing 3.48
per cent (as at 31 December 2019: 3.48 per cent.) of the issued share capital
of the Company.
c) Investment management fee
The Company's Investment Manager is Weiss Asset Management LP. In consideration
for its services provided by the Investment Manager under the IMA dated 8 May
2013, the Investment Manager is entitled to an annual management fee of 1.5 per
cent of the Company's NAV accrued daily and payable within 14 days after each
month end. The Investment Manager is also entitled to reimbursement of certain
expenses incurred by it in connection with its duties.
The IMA will continue in force until terminated by the Investment Manager or
the Company, giving to the other party thereto not less than 12 months' notice
in writing.
For the period ended 30 June 2020, investment management fees and charges of GBP
907,692 (for the period ended 30 June 2019: GBP935,306) were charged to the
Company and GBP176,829 (as at 31 December 2019: GBP310,841) remained payable at the
period end.
12. Financial risk management
IFRS 13 'Fair Value Measurement' requires the Company to establish a fair value
hierarchy that prioritises the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements).
The three levels of the fair value hierarchy under IFRS 13 'Fair Value
Measurement' are set as follows:
· Level 1 Quoted prices (unadjusted) in active markets for identical
assets or liabilities;
· Level 2 Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability either directly (that is, as prices) or
indirectly (that is, derived from prices); and
· Level 3 Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs).
The level in the fair value hierarchy within which the fair value measurement
is categorised in its entirety is determined on the basis of the lowest level
input that is significant to the fair value measurement. For this purpose, the
significance of an input is assessed against the fair value measurement in its
entirety.
If a fair value measurement uses observable inputs that require significant
adjustment based on unobservable inputs, that measurement is a Level 3
measurement. Assessing the significance of a particular input to the fair value
measurement requires judgement, considering factors specific to the asset or
liability.
The determination of what constitutes 'observable' requires significant
judgement by the Company. The Company considers observable data to be that
market data that is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary, and provided by independent sources
that are actively involved in the relevant market.
The following table presents the Company's financial assets and liabilities by
level within the valuation hierarchy as of 30 June 2020:
Total
As at
30 June
Level 1 Level 2 Level 3 2020
GBP GBP GBP GBP
Financial assets/
(liabilities) at fair value
through
profit or loss:
Korean preferred 119,138,494 - - 119,138,494
shares
Exchange traded funds 14,832,360 - - 14,832,360
Financial derivative - (2,023,106) - (2,023,106)
liabilities
Total net assets 133,970,854 (2,023,106) - 131,947,748
Total
As at
31 December
Level 1 Level 2 Level 3 2019
GBP GBP GBP GBP
Financial assets/
(liabilities) at fair value
through
profit or loss:
Korean preferred 114,486,850 - - 114,486,850
shares
Exchange traded funds 3,367,138 - - 3,367,138
Financial derivative 33,218 - - 33,218
assets
Financial derivative - (704,019) - (704,019)
liabilities
Total net assets 117,887,206 (704,019) - 117,183,187
The Company recognises transfers between levels of the fair value hierarchy as
of the end of the reporting period during which the transfers have occurred.
During the period ended 30 June 2020, financial assets of GBPNil were transferred
from Level 2 to Level 1 (for the year ended 31 December 2019: GBPNil).
Investments whose values are based on quoted market prices in active markets,
and are therefore classified within Level 1, include Korean preference shares,
exchange traded funds, 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 (GBP2,023,106) (as at 31 December 2019: (GBP
704,019).
As at 30 June 2020, Level 1 financial derivative assets of GBPNil were held (as
at 31 December 2019: GBP33,218).
13. 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 Condensed
Financial Statements, using IFRS to the NAV per Share reported to the LSE:
As at 30 June 2020 As at 31 December 2019
NAV per NAV per
Participating Participating
NAV Share NAV Share
GBP GBP GBP GBP
Net Asset Value reported to the 137,976,556 1.6905 124,536,322 1.5258
LSE
Adjustment to accruals and cash (6,203) (0.0001) 8,412 0.0001
Adjustment for dividend income 108,548 0.0014 2,443,998 0.0300
Net Assets Attributable to 138,078,901 1.6918 126,988,732 1.5559
Shareholders per Financial
Statements
The published NAV per Share of GBP1.6905 (as at 31 December 2019: GBP1.5258) is
different from the accounting NAV per Share of GBP1.6918 (as at 31 December 2019:
GBP1.5559) due to the adjustments noted above.
14. Subsequent events
These Condensed Financial Statements were approved for issuance by the Board on
03 September 2020. Subsequent events have been evaluated until this date.
Since the start of 2020, the outbreak of COVID-19 has adversely impacted global
commercial activities and financial markets. The rapid development and fluidity
of this situation precludes any prediction as to its ultimate impact, which may
have a continued adverse impact on economic and market conditions and may
trigger a period of global economic slowdown. The Company, consistent with
other in the industry, does not believe there is any impact to the financial
statements as of 30 June 2020 as a result of this subsequent event. No
additional events or transactions require further disclosure.
END
(END) Dow Jones Newswires
September 04, 2020 02:00 ET (06:00 GMT)
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