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GABELLI MERGER PLUS+ TRUST PLC
Annual Report • Oct 8, 2020
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Annual Report
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RNS Number : 4414B
Gabelli Merger Plus+ Trust PLC
08 October 2020
GABELLI MERGER PLUS+ TRUST PLC
Annual Report and Accounts for the year ended 30 June 2020
Financial Highlights
| Performance (unadjusted for distributions) | As at 30 June 2020 |
As at 30 June 2019 |
| Net asset value per share (cum income) | $9.33 | $9.71 |
| Net asset value per share (ex income) | $9.52 | $9.82 |
| Dividends per share paid during the year/period | $0.48 | $0.48 |
| Share price | $7.50 | $8.60 |
| Discount 1, 5 | 19.61% | 11.43% |
| \========= | \========= | |
| Total returns | Year ended 30 June 2020 |
Year ended 30 June 2019 |
| Net asset value per share 2, 5 | 0.98% | 3.69% |
| U.S. 3-month Treasury Bill Index | 0.16% | 2.31% |
| Share price 3, 5 | (7.69%) | (6.51%) |
| \========= | \========= | |
| Income | Year ended 30 June 2020 |
Year ended 30 June 2019 |
| Revenue return per share | ($0.08) | ($0.07) |
| \========= | \========= |
| Ongoing charges 4 | Year ended 30 June 2020 |
Year ended 30 June 2019 |
| Annualised ongoing charges | 1.74% | 1.47% |
| \========= | \========= |
Source: Investment Manager (Gabelli Funds, LLC), verified by the Administrator (State Street Bank and Trust Company).
1 Figures are inclusive of income and dividends paid, in line with the Association of Investment Companies (the "AIC") guidance.
2 The net asset value ("NAV") total return for the year reflects the movement in the NAV, adjusted for the reinvestment of any dividends paid and market movements.
3 The total share price return for the year to 30 June 2020 reflects the movement in the share price during the year, adjusted to reflect the reinvestment of any dividends paid.
4 Ongoing charges are calculated as a percentage of shareholders' funds using the average net assets over the year and calculated in line with the AIC's recommended methodology. Annualised ongoing charges in 2020 include 25 bps attributable to the performance fee.
5 These key performance indicators are alternative performance measures. Further information regarding the use of alternative performance measures can be found on page 13 and in the glossary on page 61 of the Annual Report and Financial Statements.
CHAIRMAN'S STATEMENT
We share this Annual Report to Shareholders covering the year to 30 June 2020. Gabelli Merger Plus+ Trust Plc (the "Company") operates globally in the highly specialised investment discipline of event driven merger arbitrage. The objectives are to compound and preserve wealth over time, while remaining non correlated to the broad equity and fixed income markets. The investment programme is global, encompassing a broad spectrum of special situations and event driven opportunities, with an emphasis on announced merger transactions. The portfolio is a highly liquid, non-market correlated alternative to traditional equity and fixed income securities.
Merger returns are derived through the narrowing of deal spreads from time of announcement until their expected closure. The spread is a function of three primary elements: the risk free rate, the risk premium associated with transaction fundamentals, and the time value of money. The dynamic interplay across these components is evaluated constantly within every investment by the Manager. Position sizing will vary according to a probabilistic assessment of the risk. The inherent risk in all merger investing is a broken deal rather than the standard deviation or price variance of the market price movements over the deal timeline. Gabelli Funds LLC, the Portfolio Manager, employs an active approach to analysing the fundamentals of a merger investment and has a long history of implementing such a programme. At its core, this differentiated investment approach utilises the Gabelli PMV with a CatalystTM analytical methodology to manage risk amongst other inputs and factors. The full details of this investment programme were set out in the offering Prospectus and are found on the Company's web site www.Gabelli.com/MergerPlus.
The Board is always receptive to feedback and is available should you have any questions or comments via the Portfolio Manager's Investor Relations group directly, or through the Company Secretary, whose contact details are at the end of this Report. We thank you, our shareholders, for your confidence entrusting a portion of your assets to our team.
PRINCIPAL DEVELOPMENTS ON INVESTMENTS DURING THE YEAR
Worldwide M&A activity totalled $3.9 trillion in the calendar year 2019, the fourth largest year on record. The U.S. remained a bright spot with volume totalling $1.8 trillion, an increase of 6% compared to 2018 and the strongest year since 2015. Forty three announced deals greater than $10 billion accounted for 31% of deal activity totalling $1.2 trillion, the largest concentration of "mega deals" since 2015. The most active sectors for M&A activity were Healthcare ($533 billion, an all-time record), Technology and Energy & Power.
This momentum continued into 2020, until mid-February when markets began to pull back broadly over concerns related to the COVID-19 pandemic. Market volatility spilled into merger arbitrage investments, exacerbated as hedge funds faced margin calls and sold stocks to raise cash, causing mark-to-market declines in the GMP Portfolio. Since the peak volatility we experienced in March, the Portfolio's returns have been bolstered by deals that have closed, progress on deals in the pipeline, and the continued normalization of merger spreads. Regulators and advisers around the world have successfully transitioned to working remotely and continue to advance and approve transactions.
We are seeing early signs of a return to deal making. The Federal Reserve and other central banks have responded with fiscal stimulus and monetary measures which should provide for accommodative capital markets. CEOs and Boards of Directors continue to seek ways to create shareholder value in an increasingly global marketplace, while competing with well financed market disruptors with models designed to challenge established businesses and a consumer base that is shifting online at an increased pace. This includes both M&A and financial engineering, which can spur deal activity.
Economies have reopened and consumers are adapting to a "new normal." Post our reporting period, announced deals in July totalled $305 billion, a 60% increase from $189 billion in June, and $290 billion in August; both months were essentially at the same levels of activity year-on-year. The GMP Portfolio Team are continuing to invest in highly strategic, well-financed deals with an emphasis on near-term catalysts. The Portfolio Team's immediate focus is to ensure deals in the portfolio are completed, and that it can continue to deploy capital in attractive situations. The top holdings in the GMP Portfolio remain deals expected to close in the near term, and those with the highest certainty of value.
The Company's net asset value (NAV) plus dividends paid delivered a total return to shareholders during the year under review of 0.98% in U.S. dollars. This performance compared to the equivalent 13-week U.S. Treasury Bill which returned 0.16% and also relative to the MNA ETF, which returned (0.07)%, and merger arbitrage indices such as the S&P Merger Arbitrage Index which delivered 3.22%, and the Credit Suisse Merger Arbitrage Liquid Index, down 0.01%. The share price total return with dividends reinvested was (7.69)%, with low trading volumes impacted by a widening of the discount which was exacerbated throughout March.
The Company responded to the widening discount by buying 5,960 shares into treasury during the financial year at an average discount of 24.6%. Shares held in treasury may only be resold either at, or a premium to, the prevailing net asset value. The company has not currently bought any additional shares since the announcement of the share repurchase programme in April 2020.
We underscore that the Portfolio Manager aligns its interests with those of other shareholders in two respects: (i) Gabelli, its affiliates and its principals are our largest shareholders, with 59.8% of the shares, so they participate fully in the ups and downs of performance; and (ii) the performance fee is subject to a high water mark on total returns, a hurdle rate payable after the NAV exceeds two times the 13-week U.S. Treasury Bill return, capped at 3% of NAV. The Board recognises that, while the positive absolute returns of NAV since listing are consistent with the Company's investment objectives, the share price performance fell short of the NAV achievements at the year end. We remain focused on the dynamics of the market price discovery process in secondary trading and will consider selective buybacks as necessary. The Board remains alert to these issues and closely monitors and reviews this regularly.
SHAREHOLDER BASE AND THE DEVELOPMENTS IN THE U.K.
On August 30 2019, we announced that the Company had introduced a Sterling market quote. The additional market quotation for the shares on the London Stock Exchange is found under the ticker symbol "GMPP." The Board is seeking to broaden the shareholder base and build its attributes to accommodate future investors. This process is built on three interrelated pillars: governance, improving liquidity, and ongoing positive Portfolio Manager performance. The Board also closely monitors liquidity in the Company's shares on an ongoing basis and will consider actions to improve this when determined necessary.
The Company's broker, Cantor Fitzgerald Europe, voluntarily withdrew from the investment trust market in April 2020. The appointment of a new adviser will be announced in due course. Until then, the Portfolio Manager's Investor Relations teams in New York and London remain available to assist shareholders in the market and continue to examine potential opportunities for additional capital raises in the future as conditions merit.
The key priority of the Board and Portfolio Manager remains to serve the interests of shareholders through seeking improved portfolio performance. The Board believes that the shares' rating would be likely to respond favourably to ongoing positive performance, which in turn could create an opportunity to expand the capital of the Company. In addition, the Board seeks to diversify the shareholder base, spread the fixed costs over a wider base, and improve the trading liquidity. During the period, the Company has utilised nominal gearing of up to 20% through contracts for difference (CFDs). The difference between actual and nominal gearing is explained in the glossary on page 62.
The Portfolio Manager has looked at a range of options for using borrowing facilities as a means of adding to returns, and currently believes the use of CFDs offers the most flexibility and the best cost to shareholders. The Board believes that the investment policy carried out is consistent with its initial prospectus.
DIVIDEND
The Company's portfolio is diversified across various arbitrage strategies, with holding periods averaging 120 days each. In arbitrage, the culmination of a position is effectively a return of cash as the position is closed. As such, the portfolio is constructed to implement the managed distribution of capital through the payment of quarterly dividends, giving investors access to the cash harvested from the portfolio's investment programme.
Between inception and 30 June 2020, the Company returned $1.31 per share to shareholders, consistent with its dividend policy. This return is exclusive of the first interim dividend for the 2021 financial year due to be paid on 30 October 2020.
Stakeholders
The Board has spent time this year considering its responsibilities to its wider stakeholders and broader environmental, social and governance factors. We outline the approach we have taken in these areas following the expectations of updated UK governance standards in this Report on pages 26 and 27.
Outlook
Early signs of a recovery in M&A activity have begun to emerge, and absent a significant COVID-19 second wave hindering economic reopenings, we remain optimistic on the opportunity sets for our team in the second half of the year.
We expect borrowing costs to remain historically low for longer, and companies who entered the slowdown with strong balance sheets and sufficient liquidity to search for opportunities to increase efficiencies and consolidate. Financial flexibility and rigorous capital allocation procedures are the long term ingredients for both companies and investors. This is a core strength of the PMV with a CataylstTM stock selection process and its focus on intrinsic values. As such the Company looks to the medium term, and its scope for shareholder value creation, with confidence.
MARC GABELLI
Chairman
7 October 2020
PORTFOLIO MANAGER'S REVIEW
METHODOLOGY AND MARKET OPPORTUNITY
Gabelli Funds would like to thank our investors for allocating a portion of their assets to the Gabelli Merger Plus+ Trust ("GMP"). We appreciate the confidence and trust you have placed in our organization through your investment in GMP. Our investment objective is to compound and preserve wealth over time while remaining non-correlated to the broad markets. As a firm, we have invested in mergers since 1977 and created the Gabelli group's first dedicated, announced merger fund more than thirty years ago. We remain vigilant in the application of our investment philosophy and in our search for opportunities. In this context, let us outline our investment methodology and the investment environment through 30 June 2020.
Merger arbitrage is a highly specialized investment approach designed principally to profit from corporate events, including the successful completion of proposed mergers, acquisitions, takeovers, tender offers, leveraged buyouts, restructurings, demergers, and other types of corporate reorganizations and actions. As arbitrageurs, we seek to earn the differential, or "spread," between the market price of our investments and the value ultimately realized through deal consummation.
We are especially enthusiastic about the opportunities to grow client wealth in the decades to come, and we highlight below several factors that should help drive results. These include:
• Increased market volatility, which enhances our ability to establish positions for the prospect of improved returns;
• A return of corporate deal making, as unprecedented liquidity provides an accommodative market for mergers and acquisitions;
• The Fund's experienced investment team, which pursues opportunities globally through the disciplined application of Gabelli's investment methodology.
GLOBAL DEAL ACTIVITY
Global deal merger and acquisition activity ("M&A") totalled $1.2 trillion during the first half of 2020, a year-over-year decrease of 41% and slowest start since 2013. As the spread of COVID-19 accelerated and global economies largely shuttered in the second quarter, M&A activity recorded a 25% decrease quarter over quarter. Only thirteen deals were announced with a valuation greater than $10 billion in the first half of the year, with an aggregate value 62% lower than the same period last year.
Cross border M&A activity totalled $441 billion during the first half, a decline of 15% and the weakest start to a year since 2013. Similarly, the value of private equity backed buyouts decreased 24% year over year, but still accounted for nearly 17% of total M&A activity, the highest since 2007.
The slowdown was particularly driven by a lack of deal volume in the United States, as U.S. targets saw $355 billion in deal activity through June 30, a decrease of 69% year over year. European M&A was a rare bright spot, tallying $420 billion of transactions over the same period, an increase of 37%. Asia Pacific saw an 8% decline, while Japan saw a 3% increase in the first half of the year.
The Financials sector was the biggest contributor to merger activity during the first half, totalling $228 billion, though still a decrease of 19% compared to 2019 levels. Financials accounted for nearly 19% of total announced deal volume. Industrials and Technology sectors were also large contributors, accounting for 15% and 13% of overall M&A activity, respectively.
PORTFOLIO IN REVIEW
As we entered 2020, the bull market perpetuated, and stocks continued to hit new highs into mid-February; however, the spread of COVID-19 and subsequent economic closings resulted in a 34% peak-to-trough market retrenchment in February and March 2020. COVID-19 has triggered a peculiar recession, one largely caused or worsened by - and that may ultimately be resolved by - government intervention. Officially dated to February 2020, the current recession has been swift, with April unemployment of 14.7% in the United States quickly exceeding the Great Recession peak of 10.6% in January 2010. After declining 5% in the first quarter, expectations are for a 35% decline in second quarter global GDP, the sharpest fall on record. This recession may turn out, however, to be shorter than the eighteen-month average duration, with the shape of the recovery - V, U, L, W, and Swoosh are some of the often-cited images - influenced by the trajectory of the virus. Economic indicators have already evidenced a rebound, but that could stall with local outbreaks of COVID-19. Corporate earnings in 2020 will be poor but largely irrelevant as we look forward to easier comparisons in 2021. Thus far, unprecedented global fiscal and monetary stimulus has appeased the market, as the S&P 500 Index posted its best second quarter since 1938 with a 21% rise.
While the slowdown in deal volume combined with the continued closing of deals has led to increased cash in the portfolio, we are starting to see early signs of a return to deal making and increasing opportunities to deploy capital as we move beyond the air pocket created by COVID-19. We experienced similar instances of this dynamic before, for example, in the Crash of 1987 and in Long-Term Capital debacle in September 1998.
These market dislocations force arbitrage investors to reassess the standalone value of target companies, driving target company prices lower as comparable valuations decline. Our strategy is to take advantage of these market dislocations by adding to positions at lower prices. By selectively focusing on deals with short term catalysts - tender offers, deals with a short time horizon and strategic deals that have our highest level of conviction - we were able to recover nearly all of our first quarter drawdown in the second quarter.
We are continuously evaluating deal risks and outcomes. Globally, companies and government agencies have safety measures in place in response to COVID-19, allowing them to remain operational. Most notably, the deals in your portfolio have continued to receive regulatory approvals from regulatory bodies around the globe and have continued to close.
And while deal volume certainly slowed with the onset of the pandemic, we are starting to see early signs of a return to deal making as we move beyond the air pocket created by COVID-19. We saw four deals with a value of $2 billion or more announced in just the first week of July, despite the U.S. holiday. The Federal Reserve and other central banks have unleashed unprecedented liquidity that should provide an accommodative market for new issuances and M&A.
As we continue to navigate the "new normal," the investment team is observing social distancing guidelines and remains fully operational and focused, with teammates working in the office rotationally. Over the years, we have invested in technology and infrastructure that allow teammates to work remotely in anticipation of the need to invest seamlessly from remote locations.
We remain focused on investing in highly strategic, well-financed deals with great attention to near-term catalysts. Our immediate focus is to ensure deals in our portfolio are completed, and that we continue to deploy capital in attractive situations. The top holdings in our Fund are deals we expect to close in the near term and those with the highest certainty of value.
Notable drivers of performance, most of which closed during the financial year, include:
• Allergan (AGN-NYSE), the maker of Botox as well as branded pharmaceutical products, received approval from the U.S. Federal Trade Commission (FTC) to be acquired by AbbVie on May 8, 2020.
• Altaba Inc. (AABA-Escrow), an equity liquidation, continued to make progress toward the distribution of its remaining assets to shareholders.
• Caesar's Entertainment (CZRNASDAQ), an operator of regional and destination casinos as well as online gaming, made significant progress towards closing its acquisition by Eldorado Resorts in the second quarter of 2020. The deal received the final outstanding state approvals and ultimately closed on 20 July.
• Cypress Semiconductor (CY-NYSE), which designs semiconductors used in telecommunications, automotive, and industrial applications, was acquired by Infineon Technologies for $23.85 cash per share, or about $9 billion. The deal subsequently closed on April 17, 2020.
• Mellanox Technologies (MLNXNASDAQ), which designs high performance interconnect products used in data centers, was acquired by NVIDIA Corp. for $125 cash per share, or about $7 billion. The deal was highly strategic for NVIDIA. The final regulatory hurdle, Chinese SAMR approval, was received on April 16, and the deal was completed on April 28, 2020.
• The Stars Group (TSG-NYSE), an online gaming company with a portfolio of brands including PokerStars and Sky Betting & Gaming, was acquired by U.K. gambling firm Flutter Entertainment after receiving final shareholder and regulatory approvals. The deal was completed on May 5, 2020.
• The Blackstone Group acquired Tallgrass Energy (TGE-NYSE), a midstream energy services provider, for $22.45 cash per share, or about $6 billion. Blackstone completed the Tallgrass acquisition the day following shareholder approval, on April 16, 2020.
• Sprint (S-NYSE) and T-Mobile prevailed in court against a number of State Attorneys General who sued to block T-Mobile's acquisition of Sprint, arguing the merger would result in increased prices for consumers. On Thursday, February 20, T-Mobile entered into a revised agreement which left the deal terms unchanged for Sprint minority shareholders, but resulted in a "haircut" for Sprint's 85% shareholder, SoftBank.
_____________________________
1 Thomson Reuters M&A Review - First Half 2020
SELECT PORTFOLIO HOLDINGS AS OF 30 JUNE 2020
Advanced Disposal Services, Inc. (ADSW-NYSE) agreed to be acquired by Waste Management, Inc. (WMNYSE). Advanced Disposal Services is the fourth largest solid waste company in the U.S., and provides integrated, non-hazardous solid waste collection, recycling, and disposal services. Under terms of the agreement, Advanced Disposal shareholders will receive $30.30 cash per share, valuing the transaction at approximately $5 billion. The transaction is subject to shareholder as well as regulatory approvals, and is expected to close in the third quarter of 2020.
Caesars Entertainment Corp. (CZRNASDAQ) agreed to be acquired by Eldorado Resorts, Inc. (ERI-NASDAQ). Caesars Entertainment provides casino entertainment and hospitality services internationally. Under the terms of the agreement, Caesars shareholders received $8.40 cash and 0.0899 shares of Eldorado common stock per share, subject to an election, valuing the transaction at approximately $27 billion. The transaction was subject to approval by shareholders of both companies, as well as regulatory approval and closed in July 2020.
El Paso Electric Co. (EE-NYSE) agreed to be acquired by J.P. Morgan's Infrastructure Investments Fund. El Paso Electric engages in the generation, transmission, and distribution of electricity in west Texas and southern New Mexico. Under terms of the agreement, El Paso shareholders will receive $68.25 cash per share, valuing the transaction at approximately $3 billion. The transaction is subject to shareholder as well as regulatory approvals, and is expected to close in the third quarter of 2020.
E*TRADE Financial Corp. (ETFCNASDAQ) agreed to be acquired by Morgan Stanley (MS-NYSE). E*TRADE Financial, a financial services company, operates in the online brokerage industry. Under terms of the agreement, E*TRADE shareholders will receive 1.0432 shares of Morgan Stanley common stock per share, valuing the transaction at approximately $14 billion. The transaction is subject to shareholder as well as regulatory approvals, and is expected to close in the fourth quarter of 2020.
Ingenico Group - GCS (ING FP-Paris) agreed to be acquired by Worldline SA (WLN FP-Paris). Ingenico Group provides payment solutions through in-store, mobile, and online channels worldwide. Under terms of the agreement, Ingenico shareholders will receive €22.93 cash and 1.57 shares of Worldline common stock per share, valuing the transaction at approximately €8 billion. The transaction is subject to the tender of at least a majority of shares outstanding as well as regulatory approval, and is expected to close in the third quarter of 2020.
Legg Mason, Inc. (LM-NYSE) agreed to be acquired by Franklin Resources, Inc. (BEN-NYSE). Legg Mason is a publicly owned asset management holding company. Under terms of the agreement, Legg Mason shareholders would receive $50 cash per share, valuing the transaction at approximately $6 billion. The transaction was subject to shareholder as well as regulatory approvals, and closed on 31 July 2020.
LogMeIn, Inc. (LOGM-NASDAQ) agreed to be acquired by Francisco Partners and Elliott Management Corp. LogMeIn provides a portfolio of cloud-based communication and collaboration, identity and access, and customer engagement and support solutions. Under terms of the agreement, LogMeIn shareholders would receive $86.05 cash per share, valuing the transaction at approximately $4 billion. The transaction was subject to shareholder as well as regulatory approvals, and closed with effect 31 August 2020. LogMeIn was permitted to solicit superior bids from parties during a 45 day "go-shop" period.
QIAGEN NV (QIA GY-Frankfurt) agreed to be acquired by Thermo Fisher Scientific, Inc. (TMO-NYSE). QIAGEN provides sample and assay technologies for molecular diagnostics, applied testing and various research applications. Under terms of the agreement, QIAGEN shareholders will receive €43 cash per share, valuing the transaction at approximately €11 billion. Thermo Fisher bumped its bid from €39 as QIAGEN saw an increase in demand for its diagnostic products as a result of the COVID-19 pandemic. The transaction is subject to the tender of at least 2/3 of shares outstanding as well as regulatory approval, and is expected to close in the first half of 2021.
Sony Financial Holdings, Inc. (8729 JPTokyo) agreed to be acquired by Sony Corp. (SNE-NYSE). Sony Financial Holdings provides financial services in Japan and internationally. Under the terms of the agreement, Sony Financial shareholders will receive ¥2,600, valuing the transaction at approximately ¥400 billion. The transaction is subject to the tender of at least a majority of shares outstanding as well as regulatory approval, and is expected to close in the third quarter of 2020.
Tiffany & Co. (TIF-NYSE) agreed to be acquired by LVMH Moët Hennessy Louis Vuitton SE (MC FP-Paris) in November 2019. Tiffany Co. designs, manufactures, and retails jewelry and other items internationally. Under terms of the agreement, Tiffany shareholders will receive $135 cash per share, valuing the transaction at approximately $18 billion. In September 2020, LVMH said it would not be able to complete the takeover because it believed Tiffany had suffered a material adverse effect (MAE) resulting from the pandemic, and also because the company had received a letter from a French government official suggesting it delay the takeover until January 6, which is after the termination date of the merger agreement. Later that same day, Tiffany filed suit in Delaware Court alleging LVMH was delaying efforts to receive regulatory approvals in an effort to cut the price of the Tiffany acquisition. Tiffany also asserted that it had not suffered a material adverse effect, and that the impacts from COVID-19 are excluded from the definition. The trial is currently scheduled to commence in January 2021. Given the fact pattern, strength of the merger agreement, and strategic merit that still remains for LVMH to own the asset, we believe the most likely outcome is that the deal ultimately closes (albeit, potentially with a minor price cut).
Wright Medical Group NV (WMGINASDAQ) agreed to be acquired by Stryker Corp. (SYK-NYSE). Wright Medical Group, a medical device company, designs, manufactures, and sells upper and lower extremities and biologics products internationally. Under the terms of the agreement, Wright shareholders will receive $30.75 cash per share, valuing the transaction at approximately $5 billion. The transaction is subject to shareholder as well as regulatory approvals, and is expected to close in the second half of 2020.
SELECT CLOSED DEALS AS OF 30 JUNE 2020
Achillion Pharmaceuticals, Inc. was acquired by Alexion Pharmaceuticals, Inc. in January 2020. Achillion discovers, develops, and commercializes small molecule drug therapies for immune system disorders. On October 16, 2019, Alexion announced it would acquire Achillion for $6.30 cash per share, valuing the transaction at approximately $900 million. The agreement also included a Contingent Value Right ("CVR") with a potential value of up to $2 per share.
Allergan plc was acquired by AbbVie, Inc. in May 2020. Allergan develops and manufactures branded pharmaceutical, biologic, surgical, and regenerative medicine products. On June 25, 2019, AbbVie announced it would acquire Allergan for $120.30 cash and 0.866 shares of AbbVie common stock per share, valuing the transaction at approximately $80 billion.
Anixter International, Inc. was acquired by WESCO International, Inc. in a deal completed in June 2020. Anixter International distributes enterprise cabling and security solutions, electrical and electronic wire and cable solutions, and utility power solutions worldwide. On January 13, 2020, WESCO announced it would acquire Anixter for $70 cash and 0.2397 shares of WESCO common stock per share, valuing the transaction at approximately $5 billion. The terms also included a preferred stock consideration of 0.6356 depositary shares.
Cobham plc. Advent International Corp. completed its acquisition of Cobham plc in January 2020. Cobham provides a range of technologies and services to commercial, defense, aerospace, space, and security markets. On July 25, 2019, Advent International announced it would acquire Cobham for £1.65 cash per share, valuing the transaction at approximately £4 billion.
Cypress Semiconductor Corp. Infineon Technologies AG completed its acquisition of Cypress Semiconductor in April 2020. Cypress Semiconductor designs embedded system solutions in the Microcontroller and Connectivity and Memory Products segments. On June 2, 2019, Infineon announced they would acquire Cypress for $23.85 cash per share, valuing the transaction at approximately $9 billion.
Mellanox Technologies Ltd. NVIDIA Corp. completed its acquisition of Mellanox in April 2020. Mellanox supplies end-to-end Ethernet and InfiniBand smart interconnect solutions and services for servers and storage. On March 11, 2019, NVIDIA announced it would acquire Mellanox for $125 cash per share, valuing the transaction at approximately $7 billion.
OMNOVA Solutions, Inc. Synthomer plc completed its acquisition of OMNOVA Solutions in April 2020. OMNOVA Solutions creates specialty solutions and performance materials for various commercial, industrial, and residential uses in the U.S., Europe, and Asia. On July 3, 2019, Synthomer announced it would acquire OMNOVA for $10.15 cash per share, valuing the transaction at approximately $800 million.
Ra Pharmaceuticals, Inc. UCB SA completed its acquisition of Ra Pharmaceuticals in April 2020. Ra Pharmaceuticals develops therapeutics for the treatment of diseases caused by excessive or uncontrolled activation of the complement system, which is a critical component of the innate immune system. On October 10, 2019, UCB SA announced it would acquire Ra Pharmaceuticals for $48 cash per share, valuing the transaction at approximately $2 billion.
Sprint Corp. T-Mobile US, Inc. completed its acquisition of Sprint Corp. in April 2020. Sprint provides wireless and internet services to mobile users in the U.S. On April 29, 2018, T-Mobile announced it would acquire Sprint for 0.10256 shares of T-Mobile US common stock per share, valuing the transaction at approximately $60 billion.
The Stars Group, Inc. Flutter Entertainment plc completed its acquisition of The Stars Group in May 2020. The Stars Group engages in online gaming and betting businesses primarily in Europe, Australia, and the Americas. On October 2, 2019, Flutter announced it would acquire The Stars Group for 0.2253 shares of Flutter common stock per share, valuing the transaction at approximately $9 billion.
Tallgrass Energy LP Blackstone Infrastructure Partners completed its acquisition of Tallgrass Energy in April 2020. Tallgrass Energy provides crude oil and natural gas transportation services to customers in the Midwest U.S. On August 28, 2019, Blackstone announced it would acquire Tallgrass for $22.45 cash per share, valuing the transaction at approximately $10 billion.
Tech Data Corp. Apollo Global Management, Inc. completed its acquisition of Tech Data Corp. in June 2020. Tech Data offers endpoint portfolio solutions, including personal computer systems, mobile phones and accessories, and consumer electronics. On November 13, 2019, Apollo announced it would acquire Tech Data for $130 cash per share. The terms were increased on November 27, 2019, to $145 cash per share, valuing the transaction at approximately $6 billion.
Zayo Group Holdings, Inc. EQT and Digital Colony Partners completed its acquisition of Zayo in March 2020. Zayo provides mission-critical bandwidth with a 130,000- mile network in North America and Europe. On May 8, 2019, EQT and Digital Colony Partners announced they would acquire Zayo for $35 cash per share, valuing the transaction at approximately $14 billion.
GABELLI FUNDS, LLC
7 October 2020
PORTFOLIO SUMMARY
Largest Portfolio Security holdings (excluding cash and cash equivalents)
| As at 30 June 2020 | |||||
| Security 1 | Offsetting short position 2 | % of total portfolio (net) 3 |
Market value 4 $000 |
Offsetting market value 5 $000 |
% of total portfolio 6 (gross) |
| Altaba Inc. | - | 11.9 | 6,716 | - | 13.4 |
| El Paso Electric Co. | - | 8.9 | 5,039 | - | 10.1 |
| Caesers Entertainment Corp. | Eldorado Resorts Inc. | 6.4 | 3,596 | (952) | 7.2 |
| Legg Mason, Inc | - | 5.3 | 2,966 | - | 5.9 |
| Liberty Media Corp-Liberty SiriusXM. | Sirius XM Holdings Inc. | 4.8 | 2,686 | (218) | 5.4 |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Advanced Disposal Services Inc. | - | 4.3 | 2,429 | - | 4.8 |
| LogMeIn Inc. | - | 4.2 | 2,367 | - | 4.7 |
| Wright Medical Group N.V. | - | 4.0 | 2,254 | - | 4.5 |
| Flutter Entertainment, Inc. | - | 3.4 | 1,932 | - | 3.9 |
| Tiffany & Co. | - | 3.3 | 1,890 | - | 3.8 |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| E*TRADE Financial Corp. | Morgan Stanley | 2.9 | 1,643 | (1,665) | 3.3 |
| Portola Pharmaceuticals Inc. | - | 2.6 | 1,468 | - | 2.9 |
| Lennar Corp. B | Lennar Corp. A | 2.3 | 1,289 | (1,378) | 2.6 |
| Fitbit Inc. | - | 2.1 | 1,159 | - | 2.3 |
| Acacia Communications Inc. | - | 1.9 | 1,073 | - | 2.1 |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Fusion Acquisition Corp. | - | 1.7 | 986 | - | 2.0 |
| Canfor Corp. | - | 1.7 | 940 | - | 1.9 |
| GS Acquisition Holdings Corp II. | - | 1.6 | 896 | - | 1.8 |
| Grifols SA. | - | 1.5 | 857 | - | 1.7 |
| Trebia Acquisition Corp. | - | 1.3 | 744 | - | 1.5 |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Subtotal | 76.1 | 42,930 | (4,213) | 85.8 | |
| Other holdings 7 | 23.9 | 13,551 | (2,136) | 14.2 | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Total holdings | 100.0 | 56,481 | (6,349) | 100.0 | |
| \========== | \========== | \========== | \========== |
1 Long position.
2 Short position taken, based on the acquirer of the security when acquirer stock is being offered in whole, or in part, to finance the transaction.
3 Represents the total position value (market value plus the offsetting market value) as a percentage of the total portfolio value.
4 Market value of the long position.
5 Market value of the offsetting short position.
6 Represents the market value as a percentage of the total portfolio value.
7 Including derivatives and equity short positions, and excluding U.S. Treasuries
STRATEGY
The Company's strategy is to generate returns for its shareholders by pursuing its investment objective while mitigating shareholder risk, by investing in a diversified spread of equity investments. Through a process of bottom-up stock selection and the implementation of disciplined portfolio construction, we aim to create value for the Company's shareholders.
The largest holdings in the Company's portfolio are listed in the Annual Report and Financial Statements on page 12.
Business Model
Please see the Methodology in Action in the Annual Report and Financial Statements.
Gearing Policy
At the sole discretion of the Portfolio Manager, the Company may use leverage as part of its investment programme. It is anticipated that the Company will structurally gear and use tactical leverage or portfolio borrowings in an amount (calculated at the time of draw down) of around 2 times of the Net Asset Value, subject to maximum gearing of 2.5 times the Net Asset Value.
Our Key Performance Indicators ("KPIs")
The Board recognises that it is share price performance that is most important to the Company's shareholders. Fundamental to share price performance is the performance of the Company's net asset value. The central priority is to generate returns for the Company's shareholders through net asset value and share price total return, and discount management.
For the year ended 30 June 2020, the Company's KPIs as monitored closely by the Board at each meeting, are listed below:
| 30 June 2020 % |
30 June 2019 % |
|
| Net Asset Value Total Return | 0.98 | 3.69 |
| Share Price Total Return | (7.69) | (6.51) |
| Discount to Net Asset Value | 19.61 | 11.43 |
The above table sets out the key KPIs for the Company. These KPIs fall within the definition of 'Alternative Performance Measures' (APMs) under guidance issued by the European Securities and Markets Authority (ESMA). Information explaining how these are calculated is set out in the Glossary in the Annual Report and Financial Statements. These KPIs including APMs have been carefully selected by the Board on discussion with the Portfolio Manager, to give the most appropriate overview of performance in the financial year to shareholders and other stakeholders.
| Performance measured against various indices | The Company does not use a benchmark. However, at each meeting the Board reviews and compares portfolio performance in the context of the performance of the ETF MNA and Credit Suisse Merger Arb Liquid Indices. Information on the Company's performance is given in the Chairman's Statement and the Portfolio Manager's Review. |
| Share Price Total Return | The Company's primary investment objective is to seek to generate total return consisting of capital appreciation and current income. In order to allow shareholders to realise a predictable, but not assured, level of cash flow on their investment the Company has adopted a "managed dividend policy" which may be changed at any time by the Board. The Company intends, subject to legal and regulatory requirements to pay shareholders a quarterly dividend at a minimum annualised dividend rate of 5% of the average NAV per share during each calendar quarter. The Board reviews the amount of any potential distribution and the Company's income, capital gains and capital available for each distribution period. |
| Share price discount to net asset value (NAV) per share | The NAV per share is published on a daily basis on the London Stock Exchange and The International Stock Exchange. The NAV is calculated in accordance with the Association of Investment Companies (AIC) formula. At each Board meeting, the Board monitors the level of the Company's discount to NAV, the changes thereto and the reason for such changes. The Directors recognise the importance to investors that the shares should not trade at a significant discount to NAV. Accordingly, the Board would consider implementing a share buy back programme to ensure that the share price does not trade at a significant discount to the NAV. In the year under review, the Company's shares have traded from a discount of 11.43% as at 30 June 2019 to a discount of 19.61%, as at 30 June 2020. |
Performance is assessed on a total return basis for the NAV and share price.
Principal Risks
The Company is exposed to a variety of risks and uncertainties, and the events of 2020 have highlighted the importance of maintaining a robust system of controls to minimise exposure to global macro events in particular. Exposure to a global event was highlighted as a generic risk in the 2019 Annual Report.
The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its investment objective, business model, future performance, solvency or liquidity. The Company maintains a risk matrix which sets out the risks facing the Company, the likelihood and potential impact of each risk and the controls established for mitigation. The risk matrix is reviewed by the Audit Committee on a regular basis throughout the financial year.
The principal risks set out in the 2019 Annual Report remain largely unchanged and are set out in the following table with an explanation of how they are mitigated. On review during the year, the Board added a significant new risk as a sub-category of the Global Macro Event Risk relating to the global effects of the pandemic and new risks encompassing the environment, and social and climate change. The risk narrative includes a summary of the actions taken to position the Company to withstand the related effects for markets and investments:
| Risk | Mitigation |
| Investment Portfolio | |
| Decline in the U.S. equity markets. | Investing in a diversified portfolio and by adhering to a carefully monitored series of investment restrictions, enabled by automated pre-trade compliance features and daily review of trade tickets. These strictures mandate that no single security purchase can, at the time of investment, account for more than 15% of the gross assets of the Company. The Board meets the portfolio management team quarterly at the Board meetings to review the risk factors and their effect on the portfolio, and a thorough analysis of the investment strategy is undertaken. |
| Merger and event driven risks address the possibility that deals do not go through, are delayed beyond the original closing dates, or that the terms of the proposed transactions change adversely. | Portfolio management team's careful selection and active monitoring of mergers and acquisitions deals, and maintaining a thorough knowledge of the selected securities in the portfolio. |
| Global Macro Event | |
| Global instability or events external to the management and controls of the Company. | Global economic, geopolitical, and financial conditions are constantly monitored. Diversification of Company assets is incorporated into the investment strategy, and if disruptive events occur, the Manager is prepared to adopt a temporary defensive position and invest some or all of the Company's portfolio in cash or cash equivalents, money market instruments, bonds, commercial paper, or other debt obligations with banks or other counterparties, with appropriate ratings as determined by an internationally recognised rating agency and approved by the Board. Another option is the investment in "government and public securities" as defined for the purposes of the Financial Conduct Authority Handbook. |
| The COVID-19 pandemic has caused volatility and disruption across global economies and markets. The Manager has therefore carefully managed the Company's investments to protect shareholders interests and to position the Company to benefit from future performance of markets in line with its key investment principle. | |
| The pandemic has also impacted the day-to-day operational management of both the Board and the Company's third party service providers. The Board and all its third party service providers have successfully transitioned to working and meeting remotely, and regular third party briefings have kept the Board informed of how related risks are minimised through the pandemic and global recovery. | |
| It is possible that a future event may temporarily compromise the availability of an individual board member or a key representative or integral team member of a third party service provider, in turn impacting the Company's performance. | |
| Operational | |
| The operational functions of the Company are outsourced to third parties. Systems disruptions, control failures and/or operational lockdowns caused by the COVID-19 pandemic at these companies could impact the Company. | All third parties report to the Board on a regular basis and their reports and representations are reviewed by the Board, the AIF Manager and the Portfolio Manager. |
| Market and Share Price | |
| The market price of the Company may fall below the NAV. | To address a discount, the Board may consider using share buy-backs, through which shares would be repurchased when trading at a discount from NAV, up to a maximum percentage of 14.99% of the issued share capital. The Company has increased its shareholder engagement programmes to increase its visibility and interaction with existing and potential investors. |
| Financial | |
| Comprise: (i) market price risk (comprising interest rate risk, currency risk and other price risk); (ii) liquidity risk; and (iii) credit risk. | Further details of these risks are disclosed in Note 12 to the financial statements together with a summary of the policies for managing these risks. |
| Corporate Governance and Regulatory | |
| Damage to its reputation through poor corporate governance. Shareholder discontent due to a lack of appropriate communications and/or inadequate financial reporting. |
The Board actively performs self-assessments of compliance with best governance practices. The Board is in contact with its major shareholders on a regular basis, and it monitors shareholder sentiment. In addition, regulatory risks, in the form of failure to comply with mandatory regulations, could have an impact on the Company's continuity. The Company receives, and responds to, guidance from both its external and internal advisors on compliance with the Listing Rules, and Disclosure and Transparency Rules, as well as other applicable regulations. |
| Tax Risks | |
| In order to qualify as an investment trust, the Company must comply with Section 1158-59 of the Corporation Tax Act 2010. A breach of these sections could result in the Company losing investment trust status and, as a consequence, capital gains realised within the Company's portfolio would be subject to Corporation Tax. |
The criteria are monitored by the Administrator, AIF Manager and the Portfolio Manager and the Board receives a report on compliance at each quarterly meeting. |
| Environmental, Social and Climate Change Risks | |
| Each of environmental, social and climate risks are gaining traction globally as key priorities, including for investment companies. The Company could be exposed by a failure to integrate these themes in its strategy and investment approach. | The Board and Investment Manager actively consider how environmental, social and climate change risks potentially affect the Company's portfolio companies and shareholder returns. |
Viability Statement
In accordance with the provisions of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months referred to in the 'Going Concern' guidelines.
The Board conducted this review focusing on a period of five years. This period was selected as it is aligned with the Company's investment objective of generating total return, consisting of capital appreciation and current income. In making this assessment the Board also considered the Company's principal risks.
Investment trusts in the UK operate in a well established and robust regulatory environment and the Directors have assumed that:
· Investors will continue to want to invest in closed-end investment trusts because the fixed capitalisation structure is suited to pursuing the Portfolio Manager's proprietary long term Private Market Value ("PMV") investment strategy;
· The Company's remit of investing globally with an emphasis on securities traded in the U.S., and predominantly equity securities issued by companies of any market capitalisation will continue to be attractive to investors.
As with all investment vehicles, there is a risk that the performance of individual investments will vary and that capital may be lost, but this is not regarded as a threat to the viability of the Company. Operationally, the Company retains title to all assets, and cash and securities are held with a custodian bank approved by the Portfolio Manager and the Board.
The nature of the Company's investments means that solvency and liquidity risks are low because:
· The Company's portfolio is invested mainly in readily realisable, listed securities;
· The closed-end nature of the Company means that, unlike an open-ended fund, it does not need to liquidate positions when shareholders wish to sell their shares; and
· The expenses of the Company are predictable and modest in comparison with the assets and there are no capital commitments currently foreseen which would alter that position.
The Board have closely monitored the impact of the COVID-19 pandemic on global markets during 2020. Those impacts and related continuing uncertainty have short and potentially medium term implications for the Company's investment strategy. However, the Board continuously monitors the Company's investment portfolio, liquidity and gearing, along with levels of market activity, to appropriately minimise and mitigate consequential risks to capital and future income. The risks are discussed in more detail on pages 15 and 16 of the Annual Report and Financial Statements.
Taking these factors into account, the Directors confirm that they have a reasonable expectation that the Company will continue to operate and meet its expenses as they fall due over the next five years.
The Directors have also taken into account the fact that the Company has a continuation vote to be considered by shareholders at the Company's 2022 Annual General Meeting and the likelihood of shareholders voting in favour of continuation, having consulted and maintained close contact with the Company's major shareholders through its advisers.
The Company's portfolio consists primarily of U.S. investments, accordingly, the Company believes that the "Brexit" process will not materially affect the prospects for the Company, but the Board and Portfolio Manager will continue to keep developments under review.
MARC GABELLI
Chairman
7 October 2020
Statement of Directors' Responsibilities in respect of the Financial Statements
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.
Company Law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· state whether applicable IFRSs as adopted by the European Union, have been followed, subject to any material departures disclosed and explained in the financial statements;
· make judgements and accounting estimates that are reasonable and prudent; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for keeping adequate 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 them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.
The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors' confirmations
The Directors consider that the annual report and accounts, 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.
In the case of each Director in office at the date the Director's Report is approved:
· so far as the Director is aware, there is no relevant audit information of which the Company's auditors are unaware; and
· they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.
By order of the Board
Marc Gabelli
Chairman of the Board
7 October 2020
STATEMENT OF COMPREHENSIVE INCOME
| Year ended 30 June 2020 | 30 June 2019 | |||||||
| Income | Notes | Revenue $000 |
Capital $000 |
Total $000 |
Revenue $000 |
Capital $000 |
Total $000 |
|
| Investment Income | 5 | 925 | - | 925 | 885 | - | 885 | |
| ---------------- | -------------- | ----------- | ----------- | ---------- | -------------- | |||
| Total investment income | 925 | - | 925 | 885 | - | 885 | ||
| ---------------- | -------------- | ----------- | ---------- | ---------- | -------------- | |||
| Gains on investments | ||||||||
| Net realised and unrealised gains on investments | 3, 14 | - | 2,318 | 2,318 | - | 4,421 | 4,421 | |
| Net realised and unrealised currency gains | - | 144 | 144 | - | 24 | 24 | ||
| ---------------- | -------------- | ----------- | ----------- | ---------- | -------------- | |||
| Net gains on investment | - | 2,462 | 2,462 | - | 4,445 | 4,445 | ||
| ---------------- | -------------- | ----------- | ----------- | --------- | -------------- | |||
| Total income and gains on investment | 925 | 2,462 | 3,387 | 885 | 4,445 | 5,330 | ||
| ---------------- | -------------- | ----------- | ---------- | ---------- | -------------- | |||
| Expenses | ||||||||
| Portfolio management fee | 6 | (840) | - | (840) | (852) | - | (852) | |
| Performance fee | 6, 13 | - | (248) | (248) | - | - | ||
| Other expenses | 6 | (886) | (352) | (1,238) | (710) | (103) | (813) | |
| ---------------- | -------------- | ----------- | ---------- | ---------- | -------------- | |||
| Total expenses | (1,726) | (600) | (2,326) | (1,562) | (103) | (1,665) | ||
| ---------------- | ------------- | ---------- | ----------- | ---------- | -------------- | |||
| (Loss)/Profit before taxation | (801) | 1,862 | 1,061 | (677) | 4,342 | 3,665 | ||
| ---------------- | -------------- | ----------- | ----------- | --------- | ------------- | |||
| Taxation on ordinary activities | 8 | (65) | - | (65) | (77) | - | (77) | |
| ---------------- | -------------- | ----------- | ----------- | --------- | -------------- | |||
| (Loss)/profit for the year/period | (866) | 1,862 | 996 | (754) | 4,342 | 3,588 | ||
| ---------------- | -------------- | ----------- | ---------- | --------- | ------------- | |||
| Earnings per share (basic and diluted) | 9 | ($0.08) | $0.18 | $0.10 | ($0.07) | $0.42 | $0.35 | |
| \========= | \======= | \===== | \===== | \===== | \======== | |||
The total column of this statement represents the Statement of Comprehensive Income prepared in accordance with International Financial Reporting Standards ("IFRS"). The supplementary revenue return and capital return columns are both prepared under guidance issued by the Association of Investment Companies. All items in the above statement derive from continuing operations.
No operations were acquired or discontinued during the year ended 30 June 2020.
The Company does not have any income or expense that is not included in net profit for the year. Accordingly, the net profit for the year is also the total comprehensive income for the year, as defined in IAS1 (revised).
The notes form part of these financial statements.
STATEMENT OF CHANGES IN EQUITY
| Year ended 30 June 2020 | Note | Called up Share Capital $000 |
Special Distributable Reserve* $000 |
Capital Reserve $000 |
Revenue Reserve* $000 | Total $000 |
|
| Balance as at 30 June 2019 | 103 | 93,872 | 7,459 | (1,088) | 100,346 | ||
| Ordinary shares bought back into treasury | - | - | (42) | - | (42) | ||
| Profit/(loss) for the year after tax on ordinary | - | - | 1,862 | (866) | 996 | ||
| activities | |||||||
| Dividends paid | 7 | - | (4,960) | - | - | (4,960) | |
| --------- | ------------ | ----------- | ------------ | ------------ | |||
| Balance as at 30 June 2020 | 103 | 88,912 | 9,279 | (1,954) | 96,340 | ||
| \===== | \====== | \====== | \====== | \======= |
| Year ended 30 June 2019 | Note | Called up Share Capital $000 |
Special Distributable Reserve* $000 |
Capital Reserve $000 |
Revenue Reserve* $000 |
Total $000 |
|
| Balance as at 30 June 2018 | 103 | 98,832 | 3,117 | (334) | 101,718 | ||
| Profit/(loss) for the period after tax on ordinary activities | - | - | 4,342 | (754) | 3,588 | ||
| Dividends paid | 7 | - | (4,960) | - | - | (4,960) | |
| --------- | ----------- | ----------- | ----------- | ------------ | |||
| Balance as at 30 June 2019 | 103 | 93,872 | 7,459 | (1,088) | 100,346 | ||
| \===== | \====== | \====== | \====== | \======= |
* The revenue reserve and Special Distributable Reserve are distributable. The amount of the revenue reserve and Special Distributable reserve that is distributable is not necessarily the full amount of the reserves as disclosed within these financial statements of $86,958,000 as at 30 June 2020.
The notes form part of these financial statements.
STATEMENT OF FINANCIAL POSITION
| As at 30 June 2020 | As at 30 June 2019 | |||||||||
| Note | $000 | $000 | $000 | $000 | ||||||
| Non-current assets | ||||||||||
| Investments held at fair value through profit or loss | 3 | 56,481 | 104,468 | |||||||
| Current assets | ||||||||||
| Cash and cash equivalents | 10 | 45,074 | 27,398 | |||||||
| Receivable for investments sold | 3,935 | 3,097 | ||||||||
| Other receivables | 15 | 68 | 33 | |||||||
| ------------ | ----------- | |||||||||
| 49,077 | 30,528 | |||||||||
| Current liabilities | ||||||||||
| Portfolio management fee payable | (67) | (70) | ||||||||
| Offering fees payable | (52) | (52) | ||||||||
| Performance fee | (248) | - | ||||||||
| Payable for investments purchased | (2,265) | (4,408) | ||||||||
| Other payables | 15 | (237) | (173) | |||||||
| ------------ | ------------ | |||||||||
| Net current assets | 46,208 | 25,825 | ||||||||
| Non-current liabilities | ||||||||||
| Investments at fair value through profit or loss | 3 | (6,349) | (29,947) | |||||||
| ------------ | ------------ | |||||||||
| Net assets | 96,340 | 100,346 | ||||||||
| ----------- | ----------- | |||||||||
| Share capital and reserves | ||||||||||
| Called-up share capital | 11 | 103 | 103 | |||||||
| Special distributable reserve* | 88,912 | 93,872 | ||||||||
| Capital reserve | 9,279 | 7,459 | ||||||||
| Revenue reserve* | (1,954) | (1,088) | ||||||||
| ------------ | ------------ | |||||||||
| Total shareholders' funds | 96,340 | 100,346 | ||||||||
| Net asset value per share | $9.33 | $9.71 | ||||||||
| \===== | \===== | |||||||||
* These reserves are distributable.
Gabelli Merger Plus+ Trust Plc is registered in England and Wales under Company number 10747219.
The financial statements were approved by the Board of Directors on 7 October 2020 and signed on its behalf by
MARC GABELLI
Chairman
The notes form part of these financial statements.
STATEMENT OF CASH FLOWS
| Year ended 30 June 2020 | Year ended 30 June 2019 | |||
| $000 | $000 | $000 | $000 | |
| Cash flows from operating activities | ||||
| Profit before tax | 1,061 | 3,665 | ||
| Adjustments for: | ||||
| Gains on investments | (2,462) | (4,445) | ||
| Cash flows from operating activities | ||||
| Purchases of investments* | (266,640) | (309,199) | ||
| Sales of investments* | 293,347 | 326,941 | ||
| Increase in receivables | (1,524) | (1,316) | ||
| (Decrease)/increase in payables | (1,834) | (7,095) | ||
| Dividend income | 651 | 457 | ||
| Foreign withholding taxes on dividends | (65) | (77) | ||
| Currency gain on cash equivalents | 144 | 24 | ||
| ---------------- | ---------------- | |||
| Net cash flows from operating activities | 22,678 | 8,995 | ||
| ---------------- | ---------------- | |||
| Cash flows from financing activities | ||||
| Shares bought back for cash | (42) | - | ||
| Dividends paid | (4,960) | (4,960) | ||
| ---------------- | ---------------- | |||
| Net cash flows from financing activities | (5,002) | (4,960) | ||
| ---------------- | ---------------- | |||
| Net increase in cash and cash equivalents | 17,676 | 3,995 | ||
| ---------------- | ---------------- | |||
| Cash and cash equivalents at the start of the year/period | 27,398 | 23,403 | ||
| ---------------- | ---------------- | |||
| Cash and cash equivalents at the end of the year/period | 45,074 | 27,398 | ||
| \========= | \========= |
* Receipts from the sale of, and payments to acquire, investment securities have been classified as components of cash flows from operating activities because they form part of the Company's dealing operations.
The notes form part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
1 GENERAL INFORMATION
Gabelli Merger Plus+ Trust Plc (the "Company") is a closed-ended public limited company incorporated in England and Wales on 28 April 2017 with registered number 10747219. The Company commenced operation on 19 July 2017 and intends to conduct its affairs so as to qualify, at all times, as an investment trust for the purposes of section 1158 of the Corporation Tax Act 2010 (as amended).
2 ACCOUNTING POLICIES
(a) Basis of preparation
The financial statements of Gabelli Merger Plus+ Trust Plc have been prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative financial instruments) at fair value through profit or loss.
The principal accounting policies adopted by the Company are set out below. Where presentational guidance set out in the Statement of Recommended Practice ('SORP') for investment trusts issued by the Association of Investment Companies ('AIC') in October 2019 is consistent with the requirements of IFRS, the directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.
(b) Presentation of Statement of Comprehensive Income
To better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income.
(c) Going concern
Having assessed the principal risks and the other matters discussed in connection with the viability statement on page 17, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements.
(d) Statement of estimation uncertainty
In the application of the Company's accounting policies, the Investment Manager is required to make judgements, estimates, and assumptions about carrying values of assets and liabilities that are not always readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may vary from these estimates. There have been no significant judgements, estimates, or assumptions for the period.
(e) Income recognition
Revenue from investments (other than special dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend, or where no ex-dividend date is quoted, when the Company's right to receive payment is established. Franked investment income is stated net of the relevant tax credit. Other income includes any taxes deducted at source.
Special dividends are credited to capital or revenue, according to the circumstances. Scrip dividends are treated as unfranked investment income; any excess in value of the shares received over the amount of the cash dividend is recognised as a capital item in the Statement of Comprehensive Income.
Interest income is accounted for on an accrual basis by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount.
(f) Expenses
The management fees are allocated to revenue in the Statement of Comprehensive Income. Interest receivable and payable and management expenses are treated on an accruals basis. All other expenses are charged to revenue except where they directly relate to the acquisition or disposal of an investment, in which case, they are added to the cost of the investment or deducted from the sale proceeds.
The formation and initial expenses of the Company are allocated to capital.
(g) Investments
Investments have been designated upon initial recognition at fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at fair value. Subsequent to initial recognition, investments are valued at fair value. Movements in the fair value of investments and gains/losses on the sale of investments are taken to the Statement of Comprehensive Income as capital items.
The Company's investments are classified as held at fair value through profit or loss in accordance with applicable International Financial Reporting Standards.
Financial assets and financial liabilities are recognised in the Statement of Financial Position when the Company becomes a party to the contractual provisions of the instrument. The Company shall offset financial assets and financial liabilities if it has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis. Financial assets and liabilities are derecognised when the Company settles its obligations relating to the instrument.
Contracts for Difference (CFDs)
CFDs are recognised in the Statement of Financial Position at the accumulated unrealised gain or loss as an asset or liability, respectively. This represents the difference between the nominal book cost and market value of each position held. Movements in the unrealised gains/losses are taken to the Statement of Comprehensive Income as capital items.
(h) Cash and cash equivalents - The Company may invest part of its net assets in cash and cash equivalents, money market instruments, bonds, commercial papers or other debt obligations with banks or other counterparties, having at least a single-A (or equivalent) credit rating from an internationally recognised rating agency or government and other public securities, if the Portfolio Manager believes that it would be in the best interests of the Company and its shareholders. This may be the case, for example, where the Portfolio Manager believers that adverse market conditions justify a temporary defensive position. Any cash or surplus assets may also be temporarily invested in such instruments pending investment in accordance with the Company's investment policy. Cash balances are marked to market based on the prevailing exchange rate as of the valuation date. US Treasuries are valued at their amortised cost.
(i) Transaction costs
Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Statement of Comprehensive Income.
(j) Foreign currency
Foreign currencies are translated at the rates of exchange ruling on the year end date. Revenue received/receivable and expenses paid/payable in foreign currencies are translated at the rates of exchange ruling at the transaction date.
(k) Fair value
All financial assets and liabilities are recognised in the financial statements at fair value.
(l) Dividends payable
Interim and final dividends are recognised in the period in which they are declared.
(m) Capital reserve
Capital distributions received, realised gains or losses on investments that are readily convertible to cash, and capital expenses are transferred to the capital reserve. Share buybacks are funded through the capital reserve, with details of buybacks disclosed in note 11.
(n) Taxation
The tax effect of different items of income/gains and expenditure/losses is allocated between revenue and capital on the same basis as the particular item to which it relates, under the marginal method, using the Company's effective rate of tax. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the period end date where transactions of events that result in an obligation to pay more or a right to pay less tax in future have occurred at the period end date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods.
(o) Functional and presentation currency
The functional and presentation currency of the Company is the U.S. dollar.
3 INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
The financial assets measured at fair value through profit or loss in the financial statements are grouped into the fair value hierarchy as follows:
| As at 30 June 2020 | ||||||||
| Level 1 $000 |
Level 2 $000 |
Level 3 $000 |
Total $000 |
|||||
| Financial assets at fair value through profit or loss | ||||||||
| Quoted equities | 48,917 | 6,716 | - | 55,633 | ||||
| Contingent value rights | - | 243 | 42 | 285 | ||||
| Derivatives | - | 563 | - | 563 | ||||
| ---------------- | ---------------- | ---------------- | ---------------- | |||||
| Gross fair value | 48,917 | 7,522 | 42 | 56,481 | ||||
| Derivatives | - | (350) | - | (350) | ||||
| Quoted equities - shorts | (5,999) | - | - | (5,999) | ||||
| ---------------- | ---------------- | ---------------- | ---------------- | |||||
| Net fair value | 42,918 | 7,172 | 42 | 50,132 | ||||
| \========= | \========= | \========= | \========= | |||||
| As at 30 June 2019 | ||||||||
| Level 1 $000 |
Level 2 $000 |
Level 3 $000 |
Total $000 |
|||||
| Financial assets at fair value through profit or loss | ||||||||
| Quoted equities | 104,180 | - | - | 104,180 | ||||
| Contingent Value Rights | - | - | 229 | 229 | ||||
| Derivatives | - | 59 | - | 59 | ||||
| ---------------- | ---------------- | ---------------- | ---------------- | |||||
| Gross fair value | 104,468 | |||||||
| Derivatives | - | (234) | - | (234) | ||||
| Quoted equities - shorts | (29,713) | - | - | (29,713) | ||||
| ---------------- | ---------------- | ---------------- | ---------------- | |||||
| Net fair value | 74,467 | 175 | 229 | 74,521 | ||||
| \========= | \========= | \========= | \========= | |||||
| Analysis of changes in market value and book cost of portfolio investments in year | ||||||||
| Year ended 30 June 2020 $000 |
Year ended 30 June 2019 $000 |
|||||||
| Opening book cost | 74,893 | 88,865 | ||||||
| Opening investment holding losses | (372) | (1,023) | ||||||
| ---------------- | ---------------- | |||||||
| Opening market value | 74,521 | 87,842 | ||||||
| Add: additions at cost | 266,640 | 309,199 | ||||||
| Disposal proceeds received Gains on investments |
(293,347) 2,318 |
(326,941) 4,421 |
||||||
| ---------------- | ---------------- | |||||||
| Closing cost | 59,508 | 74,893 | ||||||
| Closing unrealised losses on investments | (9,377) | (372) | ||||||
| ---------------- | ---------------- | |||||||
| Closing valuation | 50,132 | 74,521 | ||||||
| \========= | \========= | |||||||
The Company received $293,347,000 (2019: $326,941,000) from investments sold in the year. The book cost of these investments when they were purchased was $282,024,000 (2019: $323,171,000). Further explanation of the disposal proceeds received in the year can be found in the Net realised and unrealised gains/(losses) on investments section in page 48.
Fair value hierarchy
IFRS 13 requires the Company to classify its financial instruments held at fair value using a hierarchy that reflects the significance of the inputs used in the valuation methodologies. These are as follows:
• Level 1 - quoted prices in active markets for identical investments;
• Level 2 - other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc.); and
• Level 3 - Significant unobservable inputs.
Valuation Process and Techniques for Level 3 Valuations
The investments in contingent value rights are reviewed regularly to ensure that the initial classification remains correct given each asset's characteristics and the Company's investment policies. The contingent value rights are initially recognised using the transaction price as the best evidence of fair value at acquisition, and are subsequently measured at fair value. At 30 June 2020, the quantitative inputs used to value the level 3 contingent value rights were the last sale price and the merger price for each.
Level 2 financial assets at fair value through profit or loss
The investments in contracts for difference are marked at the price of the underlying equity. Contingent value rights in Level 2 are marked using broker quotes.
Level 3 financial assets at fair value through profit or loss at 30 June
| 2020 $000 |
2019 $000 |
|
| Opening valuation | 229 | - |
| - Assets acquired during the year | 29 | 435 |
| - Assets disposed during the year | (196) | - |
| Total profit or loss included in net profit/(loss) on investments in the Statement of Comprehensive Income | (20) | (206) |
| ---------------- | ---------------- | |
| Closing balance | 42 | 229 |
| \========= | \========= |
Level 2 financial assets at fair value through profit or loss
The investments in contracts for difference are marked at the price of the underlying equity. Contingent value rights in Level 2 are marked using broker quotes.
Net realised and unrealised gains/(losses) on investments
| Year ended 30 June 2020 $000 |
Year ended 30 June 2019 $000 |
|
| Realised gains on investments | 11,323 | 3,770 |
| Movement in unrealised (losses)/gains on investments | (9,005) | 651 |
| ---------------- | ---------------- | |
| Net realised and unrealised gains on investments | 2,318 | 4,421 |
| \========= | \========= |
4 TRANSACTION COSTS
During the year commissions and other expenses were incurred in acquiring or disposing of investments classified at fair value through profit or loss. These have been charged through capital and are within gains/(losses) in the Statement of Comprehensive Income. The total costs were as follows:
| Year ended 30 June 2020 $000 |
Year ended 30 June 2019 $000 |
|
| Purchases | 88 | 84 |
| Sales | 25 | 37 |
| ---------------- | ---------------- | |
| Total | 113 | 121 |
| \========= | \========= |
5 INCOME
| Year ended 30 June 2020 $000 |
Year ended 30 June 2019 $000 |
|
| Income from investments | ||
| Overseas equities | 546 | 584 |
| Income on short term investments 1 | 256 | 418 |
| Other (expense)/income | (123) | (117) |
| ---------------- | ---------------- | |
| Total income | 925 | 885 |
| \========= | \========= |
1 Income on short term investments represents the return on cash and cash equivalents, primarily U.S. Treasury Bills. Further information can be found in Note 10 on page 52 of the Annual Report and Financial Statements.
6 EXPENSES
| Year ended 30 June 2020 $000 |
Year ended 30 June 2019 $000 |
|
| Revenue expenses | ||
| Portfolio Management Fee | (840) | (852) |
| Dividend Expense on Securities Sold Short | (275) | (189) |
| Directors' Remuneration | (132) | (108) |
| Administration Fees - State Street | (81) | (42) |
| Swap Contracts 1 | (60) | - |
| Company Secretary Fees - Maitland | (57) | (53) |
| AIFM - Carne | (54) | (50) |
| Audit Fees - PwC | (46) | (43) |
| Custodian/Depositary Fees - State Street | (42) | (32) |
| Broker Retainer Fee | (38) | (31) |
| Directors' Expenses | (22) | (22) |
| Other | (19) | (37) |
| Printing | (15) | (24) |
| LSE RNS Fees | (14) | (15) |
| Marketing expenses | (12) | (12) |
| Registrar - Computershare | (11) | (18) |
| Ongoing LSE and UKLA Fees | (10) | (13) |
| Legal fees 2 | 2 | (21) |
| ---------------- | ---------------- | |
| Total revenue expenses | (1,726) | (1,562) |
| \========= | \========= | |
| Capital expenses | ||
| Performance fee 3 | (248) | - |
| Transaction costs on derivatives | (189) | (102) |
| Finance Charges (Paid)/Received - State Street | (91) | 50 |
| Transaction Charges - State Street | (72) | (51) |
| ---------------- | ---------------- | |
| Total capital expenses | (600) | (103) |
| \========= | \========= |
1 The expenses associated to Swap Contracts incurred in the year to 30 June 2020 reflect that these contracts were not in operation in the prior year.
2 The legal fees in the year to 30 June 2020 reflect a partial rebate of costs incurred in the 2019 financial year.
3 Further information regarding the Performance Fee can be found in Note 13.
Portfolio Management Fee
Under the terms of the Portfolio Management Agreement, the Portfolio Manager will be entitled to a management fee ("Management Fee"), together with reimbursement of reasonable expenses incurred by it in the performance of its duties under the Portfolio Management Agreement, other than the salaries of its employees and general overhead expenses attributable to the provision of the services under the Portfolio Management Agreement. The Management Fee shall be accrued daily and calculated on each Business Day at a rate equivalent to 0.85% of NAV per annum.
AIFM Fees
The Company has appointed Carne Global Fund Managers (Ireland) Limited ("Carne") as its Alternative Investment Fund Manager pursuant to the AIFMD. Carne is entitled to receive from the Company such annual fees, accrued and payable at such times, as may be agreed in writing between itself and the Company from time to time. The fees are payable monthly and subject to a minimum monthly fee of €2,500.
7 EQUITY DIVIDENDS
| Year ended 30 June 2020 $000 ----------------- |
Year ended 30 June 2019 $000 ------------------ |
|
| Dividends paid | 4,960 | 4,960 |
| \========== | \========== |
During the year ended 30 June 2020 dividends paid per share totalled $0.48 (30 June 2019: $0.48 per share). More detailed information can also be found in the Dividend History table on page 14 of the Annual Report and Financial Statements.
8 TAXATION ON ORDINARY ACTIVITIES
| Year ended 30 June 2020 | |||
| Analysis of the charge in the year | Revenue $000 |
Capital $000 |
Total $000 |
| Irrecoverable overseas tax | (65) | - | (65) |
| ---------------- | ---------------- | ---------------- | |
| Total | (65) | - | (65) |
| \========= | \========= | \========= |
| Year ended 30 June 2019 | |||
| Analysis of the charge in the period | Revenue $000 |
Capital $000 |
Total $000 |
| Irrecoverable overseas tax | (77) | - | (77) |
| ---------------- | ---------------- | ---------------- | |
| Total | (77) | - | (77) |
| \========= | \========= | \========= |
| Year ended 30 June 2020 | |||
| Factors affecting the tax charge for the year | Revenue $000 |
Capital $000 |
Total $000 |
| (Loss)/profit before taxation | (801) | 1,862 | 1,061 |
| ---------------- | ---------------- | ---------------- | |
| UK Corporation tax at effective rate of 19% | 152 | (354) | (202) |
| ---------------- | ---------------- | ---------------- | |
| Effects of: | |||
| Non taxable overseas dividends | 96 | - | 96 |
| Overseas tax expensed | 1 | - | 1 |
| Gains on investments held at fair value through profit or loss | - | 441 | 441 |
| Irrecoverable overseas tax | (65) | - | (65) |
| Expenses not deductible for tax purposes | (52) | (14) | (66) |
| Gains on foreign currencies | - | 27 | 27 |
| Movement in excess management expenses | (231) | (101) | (332) |
| Movement in deferred tax rate on excess management expenses | 34 | 1 | 35 |
| ---------------- | ---------------- | ---------------- | |
| Total | (217) | 354 | 137 |
| ---------------- | ---------------- | ---------------- | |
| Total tax charge for the year | (65) | - | (65) |
| \========= | \========= | \========= |
| Year ended 30 June 2019 | |||
| Factors affecting the tax charge for the period | Revenue $000 |
Capital $000 |
Total $000 |
| Profit/(loss) before taxation | (677) | 4,342 | 3,665 |
| ---------------- | ---------------- | ---------------- | |
| UK Corporation tax at effective rate of 19% | 130 | (826) | (696) |
| ---------------- | ---------------- | ---------------- | |
| Effects of: | |||
| Non taxable overseas dividends | 101 | - | 101 |
| Overseas tax expensed | 2 | - | 2 |
| Gains on investments held at fair value through profit or loss | - | 840 | 840 |
| Irrecoverable overseas tax | (77) | - | (77) |
| Expenses not deductible for tax purposes | (36) | (10) | (46) |
| Gains on foreign currencies | - | 5 | 5 |
| Movement in excess management expenses | (176) | (8) | (184) |
| Movement in deferred tax rate on excess management expenses | (21) | (1) | (22) |
| ---------------- | ---------------- | ---------------- | |
| Total | (207) | 826 | 619 |
| ---------------- | ---------------- | ---------------- | |
| Total tax charge for the period | (77) | - | (77) |
| \========= | \========= | \========= |
At the year end after offset against income taxable on receipt, there is a potential deferred tax asset of $628,620 (2019: $301,205) in relation to surplus tax reliefs. It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these amounts and therefore no deferred tax asset has been recognised.
Due to the Company's status as an investment trust and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on capital gains and losses arising on the revaluation or disposal of investments.
9 EARNINGS PER SHARE
Earnings per ordinary share is calculated with reference to the following amounts:
| Year ended 30 June 2020 |
Year ended 30 June 2019 | |
| Revenue return | ||
| Revenue return attributable to ordinary shareholders ($000) | (866) | (754) |
| ---------------- | ---------------- | |
| Weighted average number of shares in issue during year | 10,335,485 | 10,334,166 |
| Total revenue return per ordinary share | ($0.08) | ($0.07) |
| ---------------- | ---------------- | |
| Capital return | ||
| Capital return attributable to ordinary shareholders ($000) | 1,862 | 4,342 |
| ---------------- | ---------------- | |
| Weighted average number of shares in issue during year | 10,335,485 | 10,334,166 |
| Total capital return per ordinary share | $0.18 | $0.42 |
| ---------------- | ---------------- | |
| Total return per ordinary share | $0.10 | $0.35 |
| \========= | \========= |
| Net asset value per share | As at 30 June 2020 |
As at 30 June 2019 |
| Net assets attributable to shareholders ($000) | 96,340 | 100,346 |
| Number of shares in issue at year end | 10,328,206 | 10,334,166 |
| Net asset value per share | $9.33 | $9.71 |
| \========= | \========= |
10 CASH AND CASH EQUIVALENTS
| As at 30 June 2020 $000 |
As at 30 June 2019 $000 |
|
| Cash | 6,580* | 6,433 |
| U.S. Treasuries | 38,494 | 20,965 |
| ---------------- | ---------------- | |
| Total | 45,074 | 27,398 |
| \========= | \========= |
* As at 30 June 2020, $6,283,161 was held as collateral at UBS securities, LLC and is restricted.
The Board and Investment Manager oversee investments held in cash and cash equivalents in accordance with the Investment Policy.
11 CALLED UP SHARE CAPITAL
| As at 30 June 2020 $000 |
As at 30 June 2019 $000 |
|
| Allotted, called up and fully paid: | ||
| 10,328,206 (2019: 10,334,166) Ordinary shares of $0.01 each - equity | 103 | 103 |
| Treasury Shares: 5,960 (2019: nil) Ordinary shares of $0.01 each - equity |
* | - |
| ---------------- | ---------------- | |
| Total shares | 103 | 103 |
| \========= | \========= |
* less than £500.
12 FINANCIAL RISK MANAGEMENT
The Company's financial instruments comprise securities and other investments, cash balances, receivables, and payables that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and receivables for accrued income. The Company also has the ability to enter into derivative transactions in the form of forward foreign currency contracts, futures, and options, for the purpose of managing currency and market risks arising from the Company's activities.
The main risks the Company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk, and other price risk), (ii) liquidity risk, and (iii) credit risk.
The Board regularly reviews, and agrees upon, policies for managing each of these risks. The Portfolio Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short term receivables and payables, other than for currency disclosures.
(i) Market price risk
The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk, and other price risk.
Interest rate risk
Interest rate movements may affect the level of income receivable and payable on cash deposits.
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions.
Interest risk profile
The interest rate risk profile of the portfolio of financial assets and liabilities at the year end date was as follows:
| As at 30 June 2020 | ||||
| Interest rate % |
Local currency 000 |
Foreign exchange rate |
US Dollar Equivalent $000 |
|
| Assets: | ||||
| US dollar | 0.00 | 45,035 | 1.00 | 45,035 |
| Australian dollar | 0.00 | 17 | 1.45 | 12 |
| Canadian dollar | 0.00 | 1 | 1.36 | 1 |
| Euro currency | (0.75) | 9 | 0.89 | 10 |
| GBP sterling | 0.00 | (8) | 0.81 | (10) |
| Japanese yen | (0.35) | (216) | 107.89 | (2) |
| New Israeli sheqel | (0.50) | 10 | 3.46 | 3 |
| New Zealand dollar | 0.00 | 20 | 1.55 | 13 |
| Norwegian krone | 0.00 | (10) | 9.65 | (1) |
| Singapore dollar | 0.00 | 15 | 1.40 | 11 |
| Swedish krona | (1.25) | 19 | 9.32 | 2 |
| ---------------- | ||||
| Total | 45,074 | |||
| \========= |
| As at 30 June 2019 | ||||||
| Interest rate % |
Local currency 000 |
Foreign exchange rate |
US Dollar equivalent $000 |
|||
| Assets: | ||||||
| US dollar | 0.50 | 28,836 | 1.00 | 28,836 | ||
| Canadian dollar | 0.18 | (1,856) | 1.31 | (1,420) | ||
| Euro | (0.60) | (2) | 0.88 | (2) | ||
| GBP sterling | 0.07 | (12) | 0.79 | (15) | ||
| Norwegian krone | 0.06 | (9) | 8.53 | (1) | ||
| ---------------- | ||||||
| Total | 27,398 | |||||
| \========= | ||||||
Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the year end date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.
If interest rates had been 10 (2019: 75) basis points higher or lower and all other variables were held constant, the Company's profit or loss for the reporting year to 30 June 2020 would increase/decrease by $45,000 (2019: $205,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances.
Currency risk
The Company's investment portfolio is invested predominantly in foreign securities and the year end can be significantly affected by movements in foreign exchange rates. It is not the Company's policy to hedge this risk on a continuing basis but the Company may, from time to time, match specific overseas investments with foreign currency borrowings.
The revenue account is subject to currency fluctuation arising from overseas income.
Currency risk exposure by currency of denomination:
| As at 30 June 2020 | |||
| Net Investments $000 |
Net monetary assets $000 |
Total currency exposure $000 |
|
| Australian dollar | 6 | 12 | 18 |
| Canadian dollar | 1,204 | (1,274) | (70) |
| Euro | 54 | (78) | (24) |
| GBP sterling | 1,932 | (10) | 1,922 |
| Japanese yen | 1 | (3) | (2) |
| New Israeli sheqel | - | 3 | 3 |
| New Zealand dollar | 15 | 13 | 28 |
| Norwegian krone | - | (1) | (1) |
| Singapore dollar | (1) | 10 | 9 |
| Swedish krona | (3) | 2 | 2 |
| ---------------- | ---------------- | ---------------- | |
| Total non US Investments | 3,211 | (1,326) | 1,885 |
| ---------------- | ---------------- | ---------------- | |
| US dollar | 46,921 | 47,559 | 94,480 |
| ---------------- | ---------------- | ---------------- | |
| Total | 50,132 | 46,233 | 96,365 |
| \========= | \========= | \========= |
| As at 30 June 2019 | |||
| Net Investments $000 |
Net monetary assets $000 |
Total currency exposure $000 |
|
| Australian dollar | 1 | 1 | 2 |
| Canadian dollar | 1,448 | (2,866) | (1,418) |
| Euro | 5 | - | 5 |
| GBP sterling | 80 | (15) | 65 |
| Norwegian krone | (1) | (1) | (2) |
| Swiss franc | (3) | - | (3) |
| ---------------- | ---------------- | ---------------- | |
| Total non US Investments | 1,530 | (2,881) | (1,351) |
| ---------------- | ---------------- | ---------------- | |
| US dollar | 72,991 | 28,706 | 101,697 |
| ---------------- | ---------------- | ---------------- | |
| Total | 74,521 | 25,825 | 100,346 |
| \========= | \========= | \========= |
Currency sensitivity
The following table details the Company's sensitivity to a 10% increase and decrease in US dollars against the relevant foreign currencies and the resultant impact that any such increase or decrease would have on net return before tax and equity shareholders' funds. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the year end for a 10% change in foreign currency rates.
| As at 30 June 2020 $000 |
As at 30 June 2019 $000 |
|
| Australian dollar | 1 | - |
| Canadian dollar | - | (142) |
| Euro | 1 | - |
| GBP sterling | (1) | (2) |
| New Zealand dollar | 1 | - |
| Singapore dollar | 1 | - |
| \========= | \========= |
The relevant US dollar exchange rates as at 30 June 2020 were: Australian Dollar (1: 1.4524); Canadian Dollar (1: 1.362); Euro currency (1: 0.8903); GBP Sterling (1: 0.8093); New Zealand dollar (1: 1.5533) and Singapore dollar (1: 1.3950).
Other price risk
Other price risks, i.e., changes in market prices other than those arising from interest rate or currency risk, may affect the value of the quoted investments.
The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on a recognised stock exchange.
Other price risk sensitivity
If market prices at the year end date had been 20% higher or lower while all other variables remained constant, the return attributable to ordinary shareholders for the year ended 30 June 2020 would have increased/decreased by $10,026,400. The calculations are based on the portfolio valuations as at the year end date, and are not representative of the year as a whole.
(ii) Liquidity risk
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. All creditors are payable within 3 months.
Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary.
(iii) Credit risk
This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.
The table below shows the counterparty risk as at the Balance Sheet date:
| Short equities $000 |
Derivative exposure: CFDs $000 |
Collateral posted $000 |
Net exposure $000 |
|
| Counterparty | ||||
| UBS Securities, LLC | - | (213) | (6,283) | (6,496) |
| State Street | 5,999 | - | - | 5,999 |
| --------------- | ---------------- | ---------------- | ---------------- | |
| Total | 5,999 | (213) | (6,283) | (497) |
| \========= | \========= | \========= | \========= |
Net exposure represents the mark-to-market value of derivative contracts less any cash collateral held. Negative exposure represents the Fund's exposure to that counterparty. Positive amounts are not an exposure to the Fund.
The risk is managed as follows:
• Investment transactions are carried out mainly with brokers whose credit ratings are reviewed periodically by the Portfolio Manager.
• Most transactions are made delivery versus payment on recognised exchanges.
• Cash is held at State Street Bank and Trust which has a credit rating by Standard and Poor's on short term deposits of A-1+ and long term deposits AA-.
The maximum credit risk exposure as at 30 June 2020 was $49,077,000 (2019: $30,528,000). This was due to cash and receivables as per note (10) 'Cash & cash equivalents', note (15) 'Total other receivables' and Statement of Financial Position Receivable for investment sold.
Capital management policies and procedures
The Company's capital management objectives are:
• to ensure that the Company will be able to continue as a going concern; and
• to maximise the revenue and capital return to its equity shareholders through an appropriate balance of equity capital and debt.
The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. The Board considers the Company's capital requirements in the context of both the Special Distributable and Revenue reserves being treated as distributable, as permitted by current accounting standards for listed investment trusts. The distributable reserves can be used to fund dividends and share repurchase programmes. The review also includes the nature and planned level of gearing, which takes account of the Portfolio Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed under the investment trust rules should be retained.
The analysis of shareholders' funds is as follows:
| As at 30 June 2020 $000 |
As at 30 June 2019 $000 |
|
| Called up share capital | 103 | 103 |
| Special distributable reserve* | 88,912 | 93,872 |
| Capital reserve | 9,279 | 7,459 |
| Revenue reserve* | (1,954) | (1,088) |
| -------------- | --------------- | |
| Total | 96,340 | 100,346 |
| \========= | \========= |
* These reserves are distributable.
Alternative Investment Fund Managers' ('AIFM') Directive
In accordance with the Alternative Investment Fund Managers' Directive ("AIFMD"), the Company has appointed Carne Global Fund Managers (Ireland) Limited as its Alternative Investment Fund Manager (the "AIFM") to provide portfolio management and risk management services to the Company in accordance with the investment management agreement.
Leverage
For the purposes of the AIFM Directive, leverage is required to be calculated using two prescribed methods: (i) the gross method; and (ii) the commitment method, and expressed as the ratio between a fund's total exposure and its net asset value. As measured using the gross method, the level of leverage to be incurred by the Portfolio Manager on behalf of the Company is not to exceed the equivalent of a ratio of 5. The gross method calculates exposure as the absolute value of the sum of all investment positions (long and short), including derivative positions for which exposure is calculated as the equivalent position in an underlying asset. As measured using the commitment method, the level of leverage to be incurred by the Portfolio Manager on behalf of the Company is not to exceed the equivalent of a ratio of 2.5. The commitment method calculates exposure from all investment positions, including derivative positions for which exposure is calculated as the equivalent position in an underlying asset, but factors in hedging arrangements that offset exposure.
The Company's maximum leverage levels at 30 June 2020 are shown below:
| Leverage Exposure | Gross method |
Commitment method |
| Maximum permitted limit | 500% | 250% |
| Actual | 91% | 136% |
| \========= | \========= |
The leverage limits are set by the AIFM and approved by the Board and are in line with the maximum leverage levels permitted in the Company's Articles of Association. The AIFM is also required to comply with the gearing parameters set by the Board in relation to borrowings.
13 PERFORMANCE FEE
Subject to the satisfaction of the Performance Conditions, the Portfolio Manager shall be entitled, in respect of each Performance Period, to receive 20% of the Total Return relating to such Performance Period, provided that such amount shall not exceed 3% of the Average NAV.
Performance Conditions
The Portfolio Manager's entitlement to a Performance fee in respect of any Performance Period shall be conditional on the Closing NAV per Share in respect of the Performance Period (adjusted for any changes to the NAV per Share through dividend payments, Share repurchases (howsoever effected) and Share issuances since Admission) being in excess of the Performance Hurdle and High Water Mark. For the year ended 30 June 2020, a performance fee of $248,101 (2019: $0) was to be paid. As at 30 June 2020, $248,101 was outstanding to the Portfolio Manager in respect of the performance fee, reflecting the performance period matching the Company's financial year (2019: $0).
14 DERIVATIVES RISK
The Company's investment policy may involve the use of derivatives (including, without limitation, forward foreign exchange contracts, equity contracts for difference swap agreements ("CFDs"), securities sold short and/or structured financial instruments). The Company may use both exchange-traded and over-the-counter derivatives as part of its investment activity. The cost of investing utilizing derivatives may be higher than investing in securities (whether directly or through nominees) as the Company will have to bear the additional costs of purchasing and holding such derivatives, which could have a material adverse effect on the Company's returns. The low initial margin deposits normally required to establish a position in such instruments permit a high degree of leverage. As a result, depending on the type of instrument, a relatively small movement in the price of a contract may result in a profit or a loss which is high in proportion to the amount of funds actually placed as initial margin and may result in unquantifiable further losses exceeding any margin deposited. In addition, daily limits on price fluctuations and speculative position limits on exchanges may prevent prompt liquidation of positions resulting in potentially greater losses.
The use of derivatives may expose the Company to a higher degree of risk. These risks may include credit risk with regard to counterparties with whom the Company trades, the risk of settlement default, lack of liquidity of the derivative, imperfect tracking between the change in value of the derivative and the change in value of the underlying asset that the Company is seeking to track and greater transaction costs than investing in the underlying assets directly. Additional risks associated with investing in derivatives may include a counterparty breaching its obligations to provide collateral, or, due to operational issues (such as time gaps between the calculation of risk exposure to a counterparty's provision of additional collateral or substitutions of collateral or the sale of collateral in the event of a default by a counterparty), there may be instances where credit exposure to its counterparty under a derivative contract is not fully collateralised. The use of derivatives may also expose the Company to legal risk, which is the risk of loss due to the unexpected application of a law or regulation, or because a court declares a contract not legally enforceable.
The use of CFDs is a highly specialised activity that involves investment techniques and risks different from those associated with ordinary portfolio security transactions. In a CFD, a set of future cash flows is exchanged between two counterparties. One of these cash flow streams will typically be based on a reference interest rate combined with the performance of a notional value of shares of a stock. The other will be based on the performance of the shares of a stock. Depending on the general state of short term interest rates and the returns on the Company's portfolio securities at the time a CFD transaction reaches its scheduled termination date, there is a risk that the Company will not be able to obtain a replacement transaction or that terms of the replacement will not be as favourable as on the expiring transaction. At 30 June 2020 the Company held CFDs, as shown in the following table.
| Security name | Trade currency |
Shares (000) |
As at 30 June 2020 Unrealised gain/(loss) $000 |
| Ampol Ltd | AUD | 6 | 6 |
| AON PLC | USD | (2) | (2) |
| Atrium European Real Estate Ltd | EUR | 95 | (14) |
| Biotest AG | EUR | 9 | 1 |
| Charles Schwab plc | USD | (33) | 5 |
| E*TRADE Financial Corp | USD | 15 | 2 |
| Faurecia SE | EUR | 2 | 7 |
| Fiat Chrysler Automobiles NV | EUR | 69 | 66 |
| Flutter Entertainment plc | USD | (14) | 87 |
| Grandvision NV | EUR | 31 | 49 |
| Grifols SA | USD | (33) | 61 |
| Ingenico Group SA | EUR | 16 | 233 |
| Just Eat takeawaycom NV | USD | (1) | (6) |
| Keppel Corp Ltd | SGD | 18 | (1) |
| Masmovil Ibercom SA | EUR | 5 | (1) |
| Metlifecare Ltd | NZD | 55 | 15 |
| Morgan Stanley PLC | USD | (16) | (3) |
| Osram Licht AG | EUR | * | ** |
| Partner Communications Co Ltd | ILS | 22 | ** |
| Peugeot SA | EUR | (40) | (66) |
| Porsche Automobil Holding SE | EUR | 7 | 17 |
| QIAGEN NV | EUR | 37 | 9 |
| RIB Software SE | EUR | 27 | ** |
| Sony Financial Holdings SE | JPY | 56 | 1 |
| TD Ameritrade Holding Corp | USD | 30 | (6) |
| Volkswagen AG | EUR | (2) | 3 |
| Willis Towers Watson LLC | USD | 2 | 1 |
| Worldline SA | EUR | (26) | (250) |
| ---------------- | |||
| Total unrealised gain on derivatives | 214 | ||
| \========= |
* Less than 500 shares
** Less than $500.
15 CURRENT ASSETS AND LIABILITIES
The categories of other receivables and other payables include:
| As at 30 June 2020 $000 |
As at 30 June 2019 $000 |
|
| Other receivables | ||
| FX currency sold | - | 2 |
| All other receivables | 68 | 31 |
| ---------------- | ---------------- | |
| Total other receivables | 68 | 33 |
| \========= | \========= | |
| Other payables | ||
| FX currency purchased | 6 | 2 |
| Custodian fees | 9 | 3 |
| Accounting fees | 19 | 14 |
| Audit fees | 35 | 35 |
| All other payables | 168 | 119 |
| ---------------- | ---------------- | |
| Total other payables | 237 | 173 |
| \========= | \========= |
16 RELATED PARTY DISCLOSURE: DIRECTORS
Each of the Directors is entitled to receive a fee from the Company at such rate as may be determined in accordance with the Articles of Incorporation. The Directors' remuneration is $20,000 per annum for each Director, other than:
• the Chairman, who will receive an additional $1,000 per annum*;
• the Chairman of the Audit Committee, who will receive an additional $5,000 per annum; and
• the Members of the Audit Committee, who will receive an additional $1,000 per annum.
· Following the approval of shareholders at the 2019 Annual General Meeting, the Directors' fees were also increased during the year to include an aggregate $10,000 fee supplement to be paid annually in the form of Ordinary shares in the Company.
* Mr Gabelli has waived his fees since appointment as Chairman.
Each of the Directors is also entitled to be paid all reasonable expenses properly incurred by them in connection with the performance of their duties. These expenses will include those associated with attending general meetings, Board or committee meetings and legal fees. The Board may determine that additional remuneration may be paid, from time to time, to any one or more Directors in the event such Director or Directors are requested by the Board to perform extra or special services on behalf of the Company.
The related party transactions with the Directors are set out in the Directors' Remuneration Report on pages 32 to 34.
Related parties disclosure: other
The Portfolio management fee for the year ended 30 June 2020 paid by the Company to the Portfolio Manager is presented in the Statement of Comprehensive Income. Details of Portfolio management fee paid during the year is disclosed in Note 6.
At 30 June 2020, Associated Capital Group Inc., an affiliate of the Portfolio Manager, held 5,260,735 Ordinary Shares in the Company.
Further details of related parties and transactions, including with the Company's AIFM Carne Global Fund Managers (Ireland) Limited, are disclosed in the Directors' Report on pages 22 and 23.
Connected party transactions
All connected party transactions are carried out at arm's length. There were no such transactions during the year ended 30 June 2020.
17 CONTINGENT LIABILITIES AND COMMITMENTS
As at 30 June 2020, the Company had no contingent liabilities or commitments (30 June 2019: nil).
18 SIGNIFICANT EVENTS
On 5 August 2019 Mr Nakamura and Mr Hammond-Chambers retired from the Board.
The COVID-19 epidemic is believed to have originated in Wuhan, Hubei, China. While containment efforts were made to slow the spread of the epidemic the outbreak has now spread globally and has led to the World Health Organisation declaring the COVID-19 outbreak a pandemic on 11 March 2020.
The Board is aware that global financial markets have been monitoring and reacting to the outbreak. All markets have incurred increased volatility and uncertainty since the onset of the pandemic.
The Board has also noted the operational risks that are posed to the Company and its service providers due to global and local movement restrictions that have been enacted by various governments. COVID-19 pandemic is an unprecedented event and the
eventual impact on the global economy and markets will largely depend on the scale and duration of the outbreak. The Board will continue to monitor this situation.
19 POST BALANCE SHEET EVENTS
From the year end to 30 September 2020, the NAV per share of the Company increased 0.5%, from $9.33 to $9.38 and the share price decreased 1.3%, from $7.50 to $7.40.
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FR FSEEFWESSESS