Annual Financial Report

Invesco Enhanced Income Ltd - Annual Financial Report

PR Newswire

London, December 16

Invesco Enhanced Income Limited

Annual Financial Report for the Year to 30 September 2019

FINANCIAL INFORMATION AND PERFORMANCE STATISTICS

Performance Statistics

(1) Source: Refinitiv.

(2) See Glossary of Terms and Alternative Performance Measures (APM) on pages 68 to 71 of the financial report for details of the explanation and reconciliation of APMs.

(3) The increase in total return NAV includes a 0.08% enhancement to NAV generated by the issue of ordinary shares at a premium to NAV during the year.

(4) Reflects 5,075,000 (2018: 3,227,852) ordinary shares issued in the year.

(5) The management fee was reduced with effect from 1 January 2018.

(6) The return per ordinary share is the amount of profit (or loss) generated for the financial year divided by the weighted average number of ordinary shares in issue for the financial year.

CHAIRMAN’S STATEMENT

Introduction

This is my first year reporting to you as Chairman. Having had time to work with both the manager and board, I am confident that we have the structure and governance in place to continue to serve shareholders’ interests well. I am grateful to them both for the time and energy that they have devoted and continue to devote to the Company. I will now report in detail on the year to 30 September 2019 and the outlook for the Company.

Results for the Year

The Portfolio Managers’ Report which follows explains the market background and portfolio strategy during the year which provides context for the Company’s results.

The Company achieved a positive total return for shareholders in the year, based on the share price with dividends reinvested, of 6.7%. The dividend was maintained at 5p per share, whilst the share price fell marginally from 75.4p at the start of the year to 75.2p at the year end, a decrease of 0.3%. The NAV total return was 8.9% for the year and the NAV per share increased 1.5% to 74.2p.

In the current low interest rate environment, your Board continues to believe that shareholders place great value on the Company’s consistent dividend stream and has prioritised revenue generation through investment in relatively high-yielding and considered debt positions. Market yields remain at historically low levels but, despite this, your portfolio managers have generated a net revenue return of 4.7p per share. The Board has maintained the 5p annual dividend for the year and a fourth interim dividend of 1.25p per share was declared on 24 September 2019. As reported in the Chairman’s Statements in previous annual financial reports, in the absence of unforeseen circumstances, it is the Board’s current intention that the Company will maintain the annual dividend of not less than 5p per annum per share, paid equally and quarterly.

The shortfall of net revenue earned versus dividend paid was 0.3p which is the equivalent of £525,000 (2018: £615,000). This has been funded from revenue reserves which the Company has accumulated over a number of years. The revenue reserve is well funded and should continue to provide support to the dividend over a number of years.

Borrowings

The portfolio manager uses borrowings to gear the portfolio during most market conditions. The Company’s upper limit for net gearing is 50% of shareholders’ funds and the portfolio manager, working with the Board, will vary the level from time to time according to their view of prevailing market conditions. During the year to 30 September 2019 the level of gearing has averaged 17.5%, well below the permitted level. It should be noted that preservation of the Company’s NAV remains a key consideration. As a result, the portfolio managers are focussing the Company’s holdings towards generally lower risk bonds as a way to mitigate capital volatility.

The Company uses repo financing, which the Board believes remains a flexible and relatively low cost method of providing additional capital when appropriate. The level of gearing is carefully monitored by the Board which is fully cognisant of the capital volatility which the strategy entails.

The Company started the year with gross borrowings of 18% and this has increased marginally so that at the year end gross borrowings were 19%. Taking the Company’s cash position into account, net borrowings were 15%, and average net borrowings for the year were 17.5% (2018: 18.4%). As at 13 December 2019, the latest practical date before publication, the level of borrowing is 15% (gross) and 11% (net).

Share Discount/Premium and Share Issuance

The Board monitors the price of the Company’s shares in relation to their NAV and the premium/discount at which they trade. During the year the shares traded within the range of –1.4% (discount) to +7.1% (premium). In order to satisfy market demand the Company issued 5,075,000 new shares at an average price of 75.02p during the year to 30 September 2019. This enhanced the NAV by 0.08%. Following the year end, a further 725,000 new shares have been issued at an average price of 76.08p per share.

At the Company’s Annual General Meeting (AGM), in special resolution 9, your Directors are seeking to renew the authority granted by shareholders at the last AGM to authorise the issue of up to 20% of the Company’s issued share capital in order to provide additional flexibility to increase the size of the Company when the Board considers the circumstances to be appropriate. I would like to stress that when considering any issue of new shares, your Board is mindful that existing shareholders’ interests are paramount and will always ensure that issues of new shares take place at an appropriate premium to the cum dividend NAV. In determining the appropriate premium, the Board will aim for a minimum premium of 3.0% before expenses.

Share Buy Backs

At the AGM, in special resolution 10, your Directors are seeking the authority to buy back up to 25,602,149 (14.99% of the Company’s issued share capital) subject to the restrictions referred to in the notice of the AGM. This authority will expire at the AGM in 2021. It is the Board’s current intention to buy back shares at a discount to NAV where it is in the Company’s interests to do so. Your Directors are proposing that shares bought back by the Company either be cancelled or, alternatively, be held as treasury shares with a view to their resale, if appropriate, or later cancellation.

Board Composition and Corporate Governance

Christine Johnson and I were appointed to the Board with effect from 16 January 2019. I immediately succeeded Peter Yates as Chairman of the Board and Christine succeeded Michael Lombardi as Chairman of the Management Engagement Committee. These roles had been undertaken by Peter and Michael on an interim basis while the Board was in the process of recruiting. Peter resumed his role as Chairman of the Audit Committee and Michael has been appointed Chairman of the Nomination and Remuneration Committee.

Change of Name

In line with Invesco’s move to a unified global brand – Invesco – the Invesco Perpetual name was retired with effect from 1 October 2018. Following shareholder approval at the last annual general meeting, the Company changed its name to Invesco Enhanced Income Limited with effect from 5 March 2019.

Change of Company Secretary and Administrator

During the year R&H Fund Services (Jersey) Limited advised the Board that they would no longer be carrying out limited company secretarial services for listed funds and served notice on 1 August 2019. Following a competitive tender process the Board has selected JTC Fund Solutions (Jersey) Limited as their new Company Secretary and Administrator with effect from 10 December 2019.

AGM

The Company’s Notice of AGM is contained on page 62 in the annual financial report and will be held at 9.30 a.m. on 25 February 2020. A summary of the special business is set out in the Directors’ Report on page 35 in the annual financial report, and the special resolutions relating to share issuance and buy-backs are explained above. The Directors have considered all the resolutions proposed in the Notice of AGM and, in their opinion, consider them to be in the interests of shareholders as a whole. The Directors therefore recommend that shareholders vote in favour of each resolution.

Outlook

The outlook is clearer than it has been for some time following the election result. Both the UK market and Sterling have strengthened and we have clarity on the direction of travel in terms of our future relationship with the EU. Turning to the bond markets, yields remain low and the manager continues to focus on quality when assessing current and potential investments. Whilst there is much commentary in the press about the high levels of bond prices, having discussed this with the manager, the board is comfortable that the portfolio is well positioned. Indeed, any weakness in prices could well provide a good buying opportunity.

Kate Bolsover

Chairman

16 December 2019

STRATEGIC REPORT

PORTFOLIO MANAGERS’ REPORT

Market Background

Over the twelve months to 30 September 2019, the European high yield bond market has delivered a strong positive return. However, the headline numbers mask two distinct periods. A weak finish to 2018 was immediately followed by a strong rally during the rest of the period under review. An about turn by global central bankers from rate hiking to rate cutting played a key role in driving investor sentiment. The period under review ended with central banks once again supportive for high yield bond markets.

During the final three months of 2018, many market participants thought that US interest rates were rising too quickly and that this could tip the US economy into recession. Weaker economic data appeared to confirm the market’s fears. Meanwhile, in Europe, the end of the European Central Bank’s (ECB) asset purchase programme added to the sense that we were at the beginning of a more restrictive period of monetary policy.

After the strong support central banks had provided financial markets over the past decade, this shift contributed to a widespread repricing of risk. European high yield credit spreads (the premium over government bonds that companies need to pay to borrow) widened by 171bps (basis points) peaking at 538bps in early January. Companies with structural weaknesses, particularly those in the retail and consumer services sectors, came under significant pressure.

The narrative changed at the turn of the year as the US Federal Reserve (Fed) led other central banks in a pivot toward easier monetary policy. As central bank statements became more dovish, expectations rose that the Fed would soon begin cutting interest rates. In Europe, the ECB signalled that it too would ease policy potentially restarting its asset purchase programme. Both policy announcements were subsequently made over the summer.

The expectation and then delivery of these policy changes helped the European high yield bond market to deliver its best year-to-date returns for many years. As a result, credit spreads for European high yield are now slightly below their 5-year average ending the reporting period at 383bps compared to an average of 397bps.

Despite the positive tone at an index level, a healthy level of dispersion exists within the market, with the bonds of weaker companies trading at significantly higher yields than the rest of the market. This dispersion has become more noticeable during 2019, having been almost absent at points over the past few years. We view this as rational behaviour but also indicative of heightened concerns over the economic outlook. Furthermore, there have been several high profile bankruptcies and restructurings in the European high yield market during 2019, including Thomas Cook, New Look, House of Fraser and Debenhams.

Portfolio strategy

The portfolio holds a core of non-financial high yield corporate bonds, focused on seasoned issuers that we consider have a low likelihood of default. In addition to the corporate high yield bond allocation, the portfolio has significant exposure to the financial sector through both subordinated bank and insurance bonds. Outside of the financial sector, the largest holdings at a sector level are telecoms, food and utilities. Alongside these core income-focussed positions the portfolio has a smaller allocation to more speculative positions. The expectation with these bonds is that the return will come from both capital appreciation and income.

We currently use borrowing, through repo financing, to try and enhance the portfolio’s income. Gross borrowing was 19% at the end of the twelve months and net borrowing was 15%. In the year under review, the total NAV return including dividends was 8.9%.

Outlook

The performance of the high yield bond market over this reporting period is testament to the power of central banks to shape markets and ultimately to drive demand for yield. We anticipate that the ECB’s decision to resume asset purchases should offer support to markets as a whole during 2020. More broadly, the technical backdrop remains supportive of the sector. Demand for high yield bonds has been influenced by the paucity of yield elsewhere, as well as a slowdown in issuance levels that has barely met reinvestment demand.

Yields in the high yield market are lower today than they were at the start of the reporting period and we must ensure that credit risk is being adequately compensated by the yield on offer. The increase in default levels during 2019 is likely to continue, based on our observations of companies that may struggle during 2020. Credit analysis and bond selection will, as always, be a crucial factor in portfolio management.

Finally, factors such as uncertainty over global trade, political risks and concerns about the global economy all have the potential to raise market volatility. But as we saw in late 2018, such periods of market weakness can often provide buying opportunities. The closed ended structure of the Company means it is ideally suited for more volatile times.

Our approach remains focussed on seeking to deliver a consistent and attractive level of income for shareholders.

Rhys Davies/Paul Read/Paul Causer

Portfolio Managers

16 December 2019

BUSINESS REVIEW

Background to the Company

The Company is a Jersey based, London listed investment company which at the year end had a portfolio of investments with a market value in excess of £144 million. The Company’s investment objective is shown below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are set out below and have been approved by shareholders.

The business model the Company has adopted to achieve its objective has been to contract the services of:

– Invesco Fund Managers Limited (the ‘Manager’) to manage the portfolio in accordance with the Board’s strategy; and

– JTC Fund Solutions (Jersey) Limited (‘JTC’) to provide company secretarial and general administration services with effect from 10 December 2019. This service was, until this date, undertaken by R&H Fund Services (Jersey) Limited (‘R&H’).

All administrative support is provided by third parties. In addition to the management and administrative functions of the Manager and JTC, the Company has contractual arrangements with Link Market Services (Jersey) Limited to act as registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian.

The Board has oversight of the Company’s service providers, and monitors them on a formal and regular basis. The portfolio managers responsible for the day-to-day management of the portfolio are Rhys Davies, Paul Read and Paul Causer.

For the purposes of the Alternative Investment Fund Managers Directive, the Company is an alternative investment fund. This has had no impact on the business model adopted by the Company.

At the Annual General Meeting held on 25 February 2019, shareholders approved that the Company name be changed to Invesco Enhanced Income Limited, previously Invesco Perpetual Enhanced Income Limited. This change took effect on 5 March 2019.

Investment Policy

The Company’s Investment Policy comprises its investment objective, investment policy and risk and investment limits and is designed so as to provide shareholders with information on the policies that the Company will follow relating to asset allocation, risk diversification and gearing, including maximum exposures.

The Manager monitors the investment portfolio on an ongoing basis to ensure adherence to the Company’s Investment Policy.

Investment Objective

The Company’s principal objective is to provide shareholders with a high level of income whilst seeking to maximise total return through investing in a diversified portfolio of high yielding corporate and government bonds. The Company may also invest in equities and other instruments that the Manager considers appropriate.

The Company seeks to balance the attraction of high yield securities with the need for protection of capital and to manage volatility. The Company generally employs gearing in its Investment Policy.

Investment Policy and Risk

The investment portfolio is constructed in order to gain exposure to attractive ideas within the investment parameters of the investment portfolio and to express the Company’s views on fixed interest markets. The investment process comprises three key elements which drive portfolio construction – macroeconomic analysis, credit analysis and value assessment. The Manager aims to control stock-specific risk by ensuring that the investment portfolio is appropriately diversified. In-depth, continual analysis of the fundamentals of all holdings gives the Manager an understanding of the financial risks associated with any particular stock.

The Company may enter into derivative transactions (including, but not limited to, options, futures, and contracts for difference, credit derivatives and interest rate swaps) periodically for the purposes of efficient portfolio management. Derivative transactions may only be entered into if they are compatible with the Company’s Investment Policy and fall within the limits determined by the Board from time to time. The Company will not enter into derivative transactions for speculative purposes.

Efficient portfolio management may include the reduction of risk, reduction of cost and the enhancement of capital or income, including transactions designed to hedge all or part of the investment portfolio, to replicate or gain synthetic exposure to a particular investment position where this can be done more effectively or efficiently through the use of derivatives than through investment in physical securities, or to transfer risk or obtain protection from a particular type of risk which might attach to portfolio investments.

The Company may enter into a derivative transaction provided the maximum exposure (including any initial outlay in respect of the transaction) to which the Company is committed by virtue of the transaction, when aggregated with all other outstanding derivative positions, is covered by the Company’s net assets.

The Manager may invest in money market instruments and currencies.

The Company may borrow for investment purposes and principally does so using repo agreements. Under the repo financing, the Company sells fixed interest securities held by it to a counterparty for consideration that is less than such assets’ market value and agrees to repurchase on a fixed date the same assets for a fixed price above the consideration received by it on the sale. The difference in these two amounts equates to the cost (effectively interest) of the repo financing.

Investment Limits

The Board has prescribed limits on the Investment Policy, among which are the following:

– investments in equities are restricted to no more than 20% of the Company’s investment portfolio;

– no single investment (bond or equity) may exceed 10% of gross assets;

– no more than 5% of gross assets may be exposed to unquoted investments;

– no more than 15% of the Company’s gross assets will be invested in other investment companies (including investment trusts); and

– repo financing and other borrowings may be used to raise the exposure to bonds and equities. Net borrowings (comprising aggregate borrowings less cash) may not, at the time of drawdown, exceed 50% of shareholders’ funds (as determined under the Company’s normal accounting policies).

For the purpose of the investment limits, excluding the borrowing limit, gross assets is defined as the investment portfolio plus cash and the limits are measured at the time of investment.

Gearing Policy

Under the Company’s Investment Policy, borrowings may be used to raise exposure to bonds and equities and net borrowings may not exceed 50% of shareholders’ funds. Gearing levels will change from time-to-time in accordance with the Board and the Manager’s assessment of risk and reward.

From time-to-time, the Company arranges facilities for repo financing with counterparties. The Company manages counterparty exposure to ensure that under normal circumstances its exposure to the creditworthiness or solvency of any one counterparty does not exceed 20% of its gross assets. The Company’s exposure to any one counterparty is calculated for these purposes as the difference between the aggregate amount owed by that counterparty to the Company less the aggregate amount owed by the Company to that counterparty.

The effective cost of the repo financing is allocated over the period to repurchase at a constant rate and is charged 50% to revenue and 50% to capital. Each repo financing arrangement typically has a fixed life of between one and six months. The short-term nature of the repo financing means that the effective cost of the Company’s borrowings will fluctuate from time to time in accordance with the market rates of repo financing (which are closely related to interest rates).

Key Performance Indicators

The Board reviews performance by reference to a number of Key Performance Indicators which include the following:

• portfolio performance;

• net asset value (NAV);

• share price;

• premium/discount;

• dividends; and

• ongoing charges.

The Company’s focus has been on absolute returns. The portfolio performance of the Company is commented on in both the Chairman’s Statement on pages 5 and 6 and, in more detail, in the Portfolio Managers’ Report immediately following. These also set out the NAV per share and share price total return performance for the year, with the NAV per share increasing 8.9% (2018: 0.8%) and the share price increasing 6.7% (2018: 0.1%). For a longer term view, the graph on the bottom of page 3 shows the movements in these for the ten years ended 30 September 2019.

The Board monitors the price of the Company’s shares in relation to their NAV and the share price premium/discount to NAV at which they trade. Over the year the shares have traded at a discount/premium within the range, discount 1.4% to premium 7.1%, and ended the year at a premium of 1.3%. The graph below shows the premium/discount throughout the year.

The Board and Manager closely monitor movements in the Company’s ordinary share price and dealings in the Company’s ordinary shares. The Board seeks approvals from shareholders every year to allow for the issue of new ordinary shares and the buy back of ordinary shares (for cancellation or to be held as treasury shares). This may assist in the management of any premium or discount at which the Company’s shares may trade, although the primary reason for buying back ordinary shares is to enhance investor value.

Any issues of new ordinary shares will be at a price above NAV per share so the interests of existing shareholders are not diluted and where the Board considers it is in shareholders’ interests to do so.

Any buy back of shares will be made within guidelines established from time to time by the Board and the making and timing of any buy backs will be at the absolute discretion of the Board. Buy backs will only be made where the Directors consider it to be in the interests of shareholders as a whole, taking into consideration the working capital and cashflow requirements of the Company.

Dividends are a key component of the total return to shareholders, and the level of potential dividend payable and income from the portfolio is reviewed at every board meeting. The Company has paid 5p each year in respect of the ten financial years to 30 September 2019. The Company will only pay dividends in respect of a year to the extent that it has accumulated revenue reserves available for that purpose.

The expenses of managing the Company are carefully monitored by the Board at every meeting. It is the intention of the Board to minimise the ongoing charges which provide a guide to the effect on performance of all annual operating costs of the Company. The ongoing charges figure for the past year was 1.04% which compares with 1.06% for the previous year, excluding borrowing costs.

Financial Position

As at 30 September 2019, the Company’s net assets were £126 million (2018: £121 million). These comprised a portfolio of predominantly corporate bonds. Due to the realisable nature of the majority of the Company’s assets, cash flow does not have the same significance as for an industrial or commercial company. The Company’s principal cash flows arise from the purchases and sales of investments, repo financing, proceeds from the issue of shares and the income from investments against which must be set the costs of borrowing and management expenses.

As explained previously, the ordinary shares are geared by borrowings, principally in the form of repo financing. As at 30 September 2019, net borrowing was 15% (2018: 16%).

Future Trends

Details of the main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Managers’ Report on pages 7 and 8 Further details as to the risks affecting the Company are set out in the next section.

Principal Risks and Uncertainties

The Audit Committee regularly undertakes a robust assessment of the principal risks facing the Company, on the Board’s behalf. As part of this process, new and emerging risks are considered. These are not currently considered to be principal risks for the Company, but may have the potential to be in the future.

Investment Policy (incorporating the Investment Objective)

There is no guarantee that the Company’s investment objective will be achieved or provide the returns sought by shareholders. The Board monitors the performance of the Company and has established guidelines to ensure that the investment policy that has been approved is pursued by the Manager.

Market Risk

The majority of the Company’s investments are traded on the major securities markets. The principal risk for investors in the Company is of a significant fall in the markets and/or a prolonged period of decline in the markets relative to other forms of investment. The value of investments held within the investment portfolio is influenced by many factors including the general health of the world economy, interest rates, inflation, government policies, industry conditions, political and diplomatic events, tax laws, competition, environmental laws and by changing investor demand. The Portfolio Managers’ Report summarises particular macro economic factors affecting performance during the year and the portfolio managers’ views on those most relevant to the outlook for the portfolio. The Manager strives to maximise the total return within certain risk parameters from the investments held, but these investments are influenced by market conditions and the Board acknowledges the external influences on investment portfolio performance.

Investment Risk

The investment process employed by the Manager is set out in the first paragraph under Investment Policy and Risk on page 9.

Investment portfolio performance is dependent on the performance of high yield corporate bonds. These stocks are particularly influenced by prevailing interest rates, government monetary policy and by demand for income. The Manager strives to maximise within its mandate both capital growth and high income from the investment portfolio. The inherent risk of investment is that the stocks selected for the portfolio do not perform.

The Company is likely, from time-to-time, to maintain a more concentrated investment portfolio (both in terms of individual holdings and in terms of its exposure to particular industries) than those of many other investment funds. Accordingly, shareholders should be aware that the investment portfolio potentially carries a higher level of risk than a more diversified investment portfolio.

The Company is permitted from time to time to invest in other listed investment companies (including investment trusts) subject to a limit on such investment of 15% of its gross assets. As a consequence of these investments, the Company may itself be indirectly exposed to gearing through the borrowings of these other investment companies. The Company is not currently invested in any listed investment companies (including investment trusts).

The Portfolio Managers’ Report sets out the portfolio’s strategy and results for the year, as well as their outlook. The performance of the Manager is carefully monitored both during the year and post year end by the Board. The continuation of the Manager’s mandate is reviewed each year and investment performance is a principal consideration in this review.

Past performance of the Company is not necessarily indicative of future performance.

Foreign Exchange Risk

The movement of exchange rates may have an unfavourable or favourable impact on returns as the Company holds non-sterling denominated investments and cash. This risk is partially mitigated by the use of non-sterling denominated repo financing and the use of forward currency contracts. The foreign currency exposure of the Company is monitored by the Manager on a daily basis and formally at Board meetings.

Shares

The market value of the ordinary shares of the Company will be affected by a number of factors, including the dividend yield from time-to-time of the ordinary shares, prevailing interest rates and supply and demand for those ordinary shares, along with wider economic factors. The market value of, and the income derived from, the Company’s ordinary shares can fluctuate and may go down as well as up.

While it is the intention of Directors to pay dividends to shareholders on a quarterly basis, the ability to do so will largely depend on the amount of income the Company receives on its investments, the timing of such receipts and its costs including the repo financing. Any reduction in income receivable by the Company, or increase in the costs, will lead to a reduction in earnings per share and therefore in the Company’s ability to pay dividends. Accordingly, the amount of dividends payable by the Company may fluctuate. The Board monitors the level of net revenue available for distribution at each Board meeting and prior to the declaration of each dividend.

The market value of the ordinary shares may not always reflect the NAV per ordinary share. The Directors seek powers to issue and buy back the Company’s shares each year, which can be used to help manage the level of discount or premium. Both the Board and the Manager monitor the share price and level of discount/premium on a regular basis, as well as formally at Board meetings.

Gearing Returns Using Borrowings

Borrowing levels may change from time to time in accordance with the Manager’s assessment of risk and reward. As a consequence, any reduction in the value of the Company’s investments may lead to a correspondingly greater percentage reduction in its NAV (which is likely to adversely affect the Company’s share price). Any reduction in the number of ordinary shares in issue (for example, as a result of buy backs) will, in the absence of a corresponding reduction in borrowings, result in an increase in the Company’s gearing. Net borrowing may not exceed 50% of shareholders’ funds and this is monitored on a daily basis by the Manager.

There is no guarantee that it will be possible to re-finance the repo financing arrangements or any other borrowings on their maturity either at all or on terms that are acceptable to the Company. If it were not possible to roll over any repo financing, the amounts then owing by the Company under the repo financing arrangement would become payable to the counterparty. Also, although the repo financing requires the counterparties to sell the assets to the Company on the repurchase date at a fixed price, if a counterparty failed to do so the Company would be left with a contractual claim against the defaulting counterparty and there is no guarantee the Company would be able to recover all or any of the value of the assets from that counterparty. In adverse market conditions, the risks of counterparty default may be greater than at other times.

The Company currently has arranged facilities for repo financing with four counterparties. All borrowings, including repo financing, are actively managed by the Manager and monitored by the Board. If one or more of the counterparties with which the Company enters into repo financing decided to stop accepting non-investment grade bonds as collateral for repo financing or decided otherwise to restrict the repo financing currently provided to the Company then the Company may be unable, or it may be impracticable, to continue utilising repo financing and/or to replace its current repo financing as it expires. In certain circumstances, such as a material increase in the margins payable on repo financing, it may be uneconomical for the Company to continue utilising repo financing. The counterparties may force closure of the repo financing positions in which case the Company may be forced to repay the repo financing at short notice and the Company may be forced to sell assets at short notice to repay that debt and may not be able to realise the expected market value of those assets.

High Yield Corporate Bonds

Corporate bonds are subject to credit, liquidity, duration and interest rate risks. Adverse changes in the financial position of an issuer of corporate bonds or in general economic conditions may impair the ability of the issuer to make payments of principal and interest or may cause the liquidation or insolvency of an issuer.

The majority of the Company’s investment portfolio at the year end consists of non-investment grade securities. To the extent that the Company invests in non-investment grade securities, the Company may realise a higher current yield than the yield offered by investment grade securities, but investment in such securities involves a greater volatility of price and a greater risk of default by the issuers of such securities with consequent loss of interest payment and principal. Non-investment grade securities are likely to have greater uncertainties of risk exposure to adverse conditions and will be speculative with respect to an issuer’s capacity to meet interest payments and repay principal in accordance with its obligations.

A lack of liquidity in corporate bonds may make it difficult for the Company to sell those bonds at or near their purported value. This may particularly be the case if the Company is forced to sell assets quickly, for example, to repay any repo financing that becomes unexpectedly repayable or which it is not possible to rollover or in the event of a liquidation of the Company. A lack of liquidity in corporate bonds may also make it difficult or impossible to rebalance the Company’s investment portfolio as and when it believes it would be advantageous to do so. To mitigate these risks, the portfolio managers monitor daily both the ratings and liquidity of the bond portfolio in relation to the Company’s known repo financing requirements, and the Board receives regular reports which it reviews throughout the year.

Derivatives

The Company may enter into derivative transactions for the purposes of efficient portfolio management (‘EPM’), as set out in the investment policy. The Company may also hedge against exposure to changes in currency rates to the extent that repo financing has not offset such exposure. The Manager has systems in place to monitor derivative levels on a daily basis. These also ensure exposure levels are in accordance with EPM and investment limits.

Derivative instruments can be highly volatile and expose investors to a higher risk of loss. Derivatives enable a higher degree of leverage than might be acquired in respect of a direct investment in the underlying asset. As a result, relatively small fluctuations in the value of the underlying asset or the subject of the derivative may result in a substantial fluctuation in the value of the derivative, either up or down. Daily limits on price fluctuations and position limits on exchanges may prevent prompt liquidation of positions resulting in potentially greater losses.

Where derivatives are used for hedging, there is a risk that the returns on the derivative do not exactly correlate to the returns on the underlying investment, obligation or market sector being hedged against. If there is an imperfect correlation, the Company may be exposed to greater loss than if the derivative had not been entered into.

Trading in derivatives markets may be unregulated or subject to less regulation than other markets.

Reliance on External Service Providers

The Company has no employees and the Directors have all been appointed on a non-executive basis. The Company is reliant upon the performance of third party service providers for its executive function. The Company’s most significant contract is with the Manager, to whom the responsibility for the Company’s portfolio is delegated. The Company has other contractual arrangements with third parties to act as company secretary, registrar, depositary and broker. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to pursue successfully its investment policy and expose the Company to reputational risk. The Company has limited exposure to cyber risk. However, the Company’s operations or reputation could be affected if any of its service providers suffered a major cyber security breach. The Board monitors the preparedness of its service providers in this regard and is satisfied that the risk is given due priority.

The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.

The Board seeks to manage these risks, and others, in a number of ways:

• The Manager monitors the performance of all third party providers in relation to agreed service standards on a regular basis, and any issues and concerns would be dealt with promptly and reported to the Board. The Manager formally reviews the performance of all third party providers and reports to the Board on an annual basis.

• The Board monitors the performance of the Manager at every board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.

• The day-to-day management of the portfolio is the responsibility of Rhys Davies, the portfolio manager, along with Paul Read and Paul Causer who are co-heads of the Invesco Fixed Interest Team. In 2002, Mr Davies joined Invesco and has 18 years’ experience in fixed income markets. He has been associated with the Company’s portfolio for many years and was appointed portfolio co-manager in May 2016. Messrs Read and Causer have 25 years’ and 26 years’ experience in fixed income markets respectively, and have been the portfolio managers of the Company since 2001. The Board has adopted guidelines within which the portfolio managers are permitted wide discretion. Any proposed variation outside these guidelines is referred to the Board and the guidelines themselves are reviewed at every board meeting.

• The risk that any one of the portfolio managers might be incapacitated or otherwise unavailable is mitigated by the fact that they work closely with each other and they also work within the wider Invesco Fixed Interest team.

Regulatory

The Company is subject to various laws and regulations by virtue of its status as a Company registered under the Companies (Jersey) Law 1991, under Alternative Investment Fund Regulations and Collective Investment Funds (Jersey) Law 1998, and as an investment company and its listing on the London Stock Exchange. A serious breach of regulatory rules may lead to suspension from the London Stock Exchange or a qualified Audit Report. Other control failures, either by the Manager or any other of the Company’s service providers, may result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.

Any changes in the Company’s tax status or in taxation legislation or accounting practice could affect the value of investments held by the Company, affect the Company’s ability to provide returns to shareholders or alter the post-tax returns to shareholders.

To mitigate regulatory risk, the Manager reviews compliance with regulatory requirements on a regular basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers all risks, the measures in place to control them and the possibility of any other risks that could arise. The Board ensures that satisfactory assurances are received from service providers. The Manager’s compliance and internal audit officers produce regular reports for review by the Company’s Audit Committee.

Additionally, the depositary monitors stock, cash, borrowings and investment restrictions throughout the year. The depositary reports formally once a year and also has access to the Company Chairman and the Audit Committee Chairman if needed during the year.

Viability Statement

An investment company, such as this Company, is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. Long term for this purpose is considered to be at least three years and so the Directors have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.

The main risk to the Company’s continuation is shareholder dissatisfaction through failure to meet the Company’s investment objective, through poor investment performance or the investment policy not being appropriate in prevailing market conditions. The Board actively reviews the Company’s performance against its investment objective and policy as well as reviewing the Company’s objective to ensure that this continues to meet shareholder requirements. Accordingly, in 2013 the Company changed its name and investment policy, which was well received by both shareholders, who voted for it, and the stock market. Performance has been strong for many years and through different, and difficult, market cycles as shown by the ten year total return performance graph on page 3, and the stable level of dividend paid by the Company over the last ten years, as set out on page 3. Throughout these times there has been no change in Manager and the five-yearly continuation vote in 2019 was passed with 99.9% of shareholders voting in favour. The next continuation vote is due in 2024.

Other principal risks arise from the make-up of the portfolio, especially as it contains a high level of non-investment grade (or so-called ‘junk’) bonds which may have a higher risk of default, and the use of gearing to enhance returns. The portfolio managers constantly monitor the portfolio and its ratings, a bond rating analysis of which is shown on page 4. Even though a majority of the portfolio is formally ranked as non-investment grade, the portfolio remains defensively positioned. The Portfolio Managers’ Report on pages 7 and 8 sets out the current portfolio strategy, with exposure positioned towards higher quality issuers where risk of default is considered low, and high levels of liquidity. The Company’s investment limits permit borrowings of up to 50% of shareholders’ funds. At this level, borrowings are twice covered. At the year end, net gearing as a result of borrowings was 15% and thus six times covered.

Based on the above analysis of the Company’s current position and prospects, the Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.

Board Responsibilities

The Directors have a duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and have regards to their interests. However, the Company has no employees and no customers in the traditional sense. In accordance with the Company’s nature as an investment company the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole. Notwithstanding this, the Board has a responsible governance culture and also has due regard for broader matters so far as they apply. In particular, the Board engages with the Manager at every Board meeting and reviews its relationships with other service providers at least annually.

Board Diversity

The Nomination and Remuneration Committee considers diversity, including the balance of skills, knowledge, diversity (including gender) and experience amongst other factors when reviewing the composition of the Board and appointing new directors, but does not consider it appropriate to establish targets or quotas in this regard. The Board currently comprises three male and two female non-executive directors and their summary biographical details are set out on page 22. The Company has no employees.

Environmental, Social and Governance (ESG) Matters

As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Company has delegated the management of the Company’s investments to the Manager, who has an ESG Guiding Framework which sets out a number of principles that are intended to be considered in the context of its responsibility to manage investments that are in the financial interests of shareholders. The Manager is committed to being a responsible investor and applies the United Nations Principles for Responsible Investment which demonstrates its extensive efforts in terms of ESG integration, active ownership, investor collaboration and transparency.

The Manager is signatory to the FRC Stewardship Code which seeks to improve long-term returns to shareholders and the efficient exercise of governance responsibilities. While an investee company’s policy towards the environment and social responsibility, including with regard for human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not make its investment decisions on environmental and social grounds alone. A copy of the Manager’s Stewardship Code can be found at www.invesco.co.uk.

Modern Slavery Act 2015

The Company is an investment vehicle and does not provide goods or services in the normal course of business, or have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.

Approved by the Board of Directors on 16 December 2019.

JTC Fund Solutions (Jersey) Limited

Company Secretary

.

INVESTMENT PORTFOLIO

at 30 September 2019

All investments are fixed interest bonds unless otherwise stated; floating rates notes are depicted by FRN.

The definitions of the Moody/Standard & Poor’s ratings below are set out on page 71.

Bonds and Equity Investments

Top Ten Investments

at 30 September 2019

BOND RATING ANALYSIS

at 30 September

Standard and Poors (S&P) ratings. Where a S&P rating is not available, an equivalent average rating has been used. The ratings for 2018 have been adjusted accordingly for comparative purposes. Investment grade is BBB– and above.

For the definitions of these ratings see the Glossary of Terms and Alternative Performance Measures on page 71.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for ensuring that the annual financial report is prepared in accordance with applicable laws and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (‘IFRSs’). The financial statements are required by law to 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.

International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation and presentation of financial statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs.

In preparing these financial statements, the Directors are required to:

• properly select and apply accounting policies and then apply them consistently;

• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

• provide additional disclosures when compliance with specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and

• make an assessment of the Company’s ability to continue as a going concern.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the financial statements comply with the Companies (Jersey) Law 1991. They 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.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, a Corporate Governance Statement and a Directors’ Report that comply with that law and those regulations.

The Directors of the Company, each confirm to the best of their knowledge that:

• the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

• this annual financial report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and

• the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

Michael Lombardi

Director

Signed on behalf of the Board of Directors

16 December 2019

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 SEPTEMBER

The total column of this statement represents the Company’s statement of comprehensive income, prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The profit/(loss) after taxation is the total comprehensive income/(loss). The supplementary revenue and capital columns are both prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 SEPTEMBER

The accompanying accounting policies and notes are an integral part of these financial statements.

BALANCE SHEET

AS AT 30 SEPTEMBER

These financial statements were approved and authorised for issue by the Board of Directors on 16 December 2019.

Michael Lombardi

Director

Signed on behalf of the Board of Directors

The accompanying accounting policies and notes are an integral part of these financial statements.

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 30 SEPTEMBER

The accompanying accounting policies and notes are an integral part of these financial statements.

NOTES TO THE FINANCIAL STATEMENTS

1. Principal Activity

The Company is a closed-end investment company incorporated in Jersey and it operates under the Companies (Jersey) Law 1991. The Company was incorporated on 10 September 1999. The principal activity of the Company is investment in a diversified portfolio of high yielding corporate and government bonds and, to a lesser extent, equities and other instruments as appropriate to its Investment Policy.

2. Principal Accounting Policies

The principal accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the current year and the preceding year, unless otherwise stated. The financial statements have been prepared on a going concern basis. The disclosure on going concern on page 30 in the Directors’ Report forms part of the financial statements.

(a) Basis of Preparation

(i) Accounting Standards Applied

The financial statements have been prepared on an historical cost basis, except for the measurement at fair value of investments and derivatives, and in accordance with the applicable International Financial Reporting Standards (IFRS) as adopted by the European Union and interpretations issued by the International Financial Reporting Interpretations Committee. The standards are those endorsed by the European Union and effective at the date the financial statements were approved by the Board.

Where presentational guidance set out in the Statement of Recommended Practice (SORP) ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’, issued by the Association of Investment Companies in October 2019, is consistent with the requirements of IFRS, the Directors have prepared the financial statements on a basis compliant with the recommendations of the SORP. The supplementary information which analyses the statement of comprehensive income between items of a revenue and a capital nature is presented in accordance with the SORP.

The revised SORP issued in October 2019 is applicable for accounting periods beginning on or after 1 January 2019 and early adoption is encouraged. The Company has chosen to early adopt the revised SORP. As a result, the presentation of gains and losses arising from disposals of investments and gains and losses on revaluation of investments have now been combined, as shown in note 11 with no impact to the net asset value or profit/(loss) reported for both the current or prior year. No other accounting policies or disclosures have changed as a result of the revised SORP.

(ii) Adoption of New and Revised Standards

New and revised standards and interpretations that became effective during the year had no significant impact on the amounts reported in these financial statements but may impact accounting for future transactions and arrangements.

At the date of authorising these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU).

The following standards became effective during the year:

• IFRS 16: Leases (effective 1 January 2019). This requires lessees to recognise new assets and liabilities under an on-balance sheet accounting model that is similar to current finance lease accounting.

• IFRIC 23: Uncertainty over Income Tax Treatments (effective 1 January 2019). This applies where there is uncertainty over the acceptable income tax treatment of an item under IAS12.

The Directors do not expect the adoption of above standards and interpretations (or any other standards and interpretations which are in issue but not effective) will have a material impact on the financial statements of the Company in future periods.

(iii) Critical Accounting Estimates and Judgements

The preparation of the financial statements may require the Directors to make estimations where uncertainty exists. It also requires the Directors to make judgements, estimates and assumptions, in the process of applying the accounting policies. There have been no significant judgements, estimates or assumptions for the current or preceding year, except for the allocation of management fee and finance costs (see note 2(h)).

(b) Foreign Currency

(i) Functional and Presentation Currency

The financial statements are presented in sterling, which is the Company’s functional and presentation currency and is the currency in which the Company’s share capital and the predominant currency in which the Company’s shares are traded.

(ii) Transactions and Balances

Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rate of exchange ruling on the date of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any profits or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue reserve, depending on whether the gain or loss is of a capital or revenue nature. All profits and losses are recognised in the statement of comprehensive income.

(c) Financial Instruments

(i) Recognition of Financial Assets and Financial Liabilities

The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.

(ii) Derecognition of Financial Assets

The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.

(iii) Derecognition of Financial Liabilities

The Company derecognises financial liabilities when its obligations are discharged, cancelled or expired.

(iv) Trade Date Accounting

Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.

(v) Classification of financial assets and financial liabilities

Financial assets

The Company’s investments are classified as held at fair value through profit or loss.

Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the statement of comprehensive income, and are subsequently valued at fair value.

Fair value for investments that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including broker quotes and price modelling.

Other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using effective interest method less any impairment.

Financial liabilities

Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating interest income or expense over the relevant period.

(d) Derivatives

Derivative instruments are valued at fair value through profit and loss in the balance sheet.

Forward currency contracts are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are recognised as capital in the statement of comprehensive income.

(e) Cash and Cash Equivalents

Cash and cash equivalents comprise cash at bank, short-term deposits and investment in the Short-Term Investments Company (Global Series) plc, all with an original maturity date of three months or less.

(f) Securities Sold Under Agreements to Repurchase (‘repo financing’)

The Company participates in repo financing arrangements in connection with its investment portfolio. Under these arrangements, the Company sells fixed interest securities but is contractually obliged to repurchase them at a fixed price on a fixed date. Securities which are the subject of repo financing arrangements are included in investments in the balance sheet at their fair value and the associated liability is recognised at amortised cost, being the capital amounts owing under the repo financing arrangements. The difference between sale and repurchase prices for such transactions is reflected in the statement of comprehensive income over the lives of the transactions, within finance costs which is allocated equally between capital and revenue. This accounting has been adopted because the repurchase price results in a lender‘s return for the transferee as the Company has retained substantially all the risks and rewards of ownership of the asset.

(g) Revenue Recognition

Interest income arises from cash and cash equivalents and fixed income securities and is recognised in the statement of comprehensive income using the effective interest method. Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’. Where the Company elects to receive dividends in the form of additional shares rather than cash, the equivalent to the cash dividend is recognised as income in revenue and any excess in value of the shares received over this is recognised in capital.

(h) Expenses and Finance Costs

All expenses and finance costs are accounted for on an accruals basis and are recognised in the statement of comprehensive income. The base investment management fee and finance costs are allocated equally to capital and revenue. This is in accordance with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio. All other expenses, except for custodian dealing costs, are charged through revenue in the statement of comprehensive income.

(i) Tax

Overseas interest and dividends are shown gross of withholding tax and the corresponding irrecoverable tax is shown as a charge in the statement of comprehensive income.

3. Segmental Reporting

No segmental reporting is provided as the Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt, and, to a significantly lesser extent equity securities.

4. Income

This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.

5. Investment Management Fee

This note shows the fees paid to the Manager. This is made up of the base management fee payable per annum.

Details of the investment management agreement are given on page 34 in the Directors’ Report.

At 30 September 2019, £241,000 (2018: £230,000) was accrued in respect of the investment management fee.

6. Other Expenses

The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.

 (i) The Directors’ Remuneration Report provides further information on Directors’ fees.

(ii) Auditor’s fees include out of pocket expenses.

(iii) General expenses include:

• custodian transaction charges of £1,000 (2018: £1,000). These are charged to capital.

• amounts due to R&H Fund Services (Jersey) Limited who acted as Administrator and Company Secretary to the Company under an agreement dated 8 October 1999. This agreement was terminable by not less than three months’ written notice subject to earlier termination as provided for therein. The fee is calculated at the rate of £13,000 (2018: £13,000) per annum for company secretarial services and £27,000 (2018: £25,000) per annum for Administration Services.

• for 2018 only, costs in relation to the search of a new manager and shareholder requisition amounted to £310,000 net of Invesco’s contribution and were charged to revenue.

7. Finance Costs

Finance costs arise on any borrowing that the Company has, with the main borrowing being in the form of repo financing (see note 2(f)).

8. Taxation

As a Jersey investment company no tax is payable on capital gains and, as the Company principally invests in assets which do not result in a revenue tax, the only overseas tax arises on assets domiciled in countries with which Jersey has no double-taxation treaty.

The Company is subject to Jersey income tax at the rate of 0% (2018: 0%).

9. Return per Share

Return per share is the amount of profit (or loss) generated for the financial year divided by the weighted average number of ordinary shares in issue.

The basic revenue, capital and total return per ordinary share is based on each of the returns on ordinary activities after taxation and on 166,398,417 (2018: 164,635,825) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.

10. Dividends

Dividends represent the return of income less expenses to shareholders. Dividends are paid as an amount per ordinary share held.

Set out below are the dividends that have been declared in respect of the financial years ended 30 September:

Dividends paid in respect of the year have been charged to revenue except for £30,000 (2018: £23,000) which was charged to share premium. This amount is equivalent to the income accrued on the new shares issued in the year. This income accrued represented the income element of the net asset value at the time of each individual new share issue.

The fourth interim dividend for 2019 was paid on 31 October 2019 to shareholders on the register on 4 October 2019.

11. Investments Held at Fair Value Through Profit and Loss

The portfolio is made up of investments which are traded on regulated exchanges. Gains and losses are either:

• realised, usually arising when investments are sold; or

• unrealised, being the difference from cost on the investments held at the year end.

(a) Analysis of investments:

 (b) Analysis of investment profits/(losses):

The Company received £43,721,000 (2018: £42,487,000) from investments sold in the year. The book cost of these investments when they were purchased was £41,077,000 (2018: £40,688,000) realising a profit of £2,644,000 (2018: £1,799,000). These investments have been revalued over time and until they were sold any unrealised profits/losses were included in the fair value of the investments.

* Due to early adoption of the revised SORP issued in October 2019 (see Note 2(a)(i)). The loss on investments figure of £4,408,000 for the year ended 30 September 2018 is as follows:

(c) Registration of investments

The investments of the Company are registered in the name of the Company or in the name of nominees and held to the account of the Company. Securities transferred under repo financing arrangements are registered in the name of the counterparty until these are repurchased by the Company, when these are re-registered in the name of the Company.

(d) Securities under agreements to repurchase had a market value of £29,850,000 (2018: £29,222,000).

(e) The transaction costs on investments amount to £nil for both purchases and sales (2018: £nil for both purchases and sales).

12. Other Receivables

Other receivables are amounts which are due to the Company, such as income which has been earned (accrued) but not yet received and monies due from brokers for investments sold.

13. Derivative Financial Instruments

Derivative financial instruments are financial instruments that derive their value from the performance of another item, such as an asset or exchange rates. They are used to manage the risk associated with fluctuations in the value of certain assets and liabilities. In accordance with Board approved policies, the Company can use derivatives to manage its exposure to fluctuations in foreign exchange rates.

Derivative financial instruments comprise forward currency contracts.

14. Other Payables

Other payables are amounts which must be paid by the Company, and include any amounts due to brokers for the purchase of investments or amounts owed to suppliers, such as the Manager and auditor.

15. Provision

The Company makes a provision when a potential obligation exists, relating to events in the future that will probably result in payment of the amount.

Performance fee arrangements have been removed with effect from 1 October 2017. The deferred performance fee, earned for the year to 30 September 2017, continues to be recognised as a provision of £306,000 (2018: £306,000). This would become payable if the Company surpasses a NAV high watermark in the next year and maintains a dividend payout of at least 5p per share.

16. Share Capital

The share capital represents the total number of shares in issue, for which dividends accrue.

During the year 5,075,000 (2018: 3,227,852) ordinary shares were issued at an average share price excluding costs of 75.02p per share (2018: 79.32p).

Subsequent to the year end 725,000 ordinary shares were issued at an average share price excluding costs of 76.08p per share.

17. Reserves

This note explains the different reserves that have arisen over the years. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.

The share premium arises from the excess of consideration received on the issue of shares over the nominal 5p value. The capital reserve includes investment holding profits and losses (being the difference between cost and market value at the balance sheet date), realised profits and losses on disposals of investments, profits and losses on derivatives and expenses allocated to capital. The revenue reserve is formed from the aggregate of income received less expenses and any dividends paid from revenue. All reserves, including the share premium, are distributable.

18. Net Asset Value per Share

The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue.

The net asset value per share and the net assets attributable at the year end were as follows:

Net asset value per ordinary share is based on net assets at the year end and on 170,069,855 (2018: 164,994,855) ordinary shares, being the number of ordinary shares in issue (excluding treasury) at the year end.

19. Financial Instruments

Financial instruments comprise the Company’s investment portfolio and derivative financial instruments (for the latter see note 13) as well as its cash, borrowings (i.e. securities sold under agreements to repurchase otherwise known as ‘repo financing’, and overdraft), other receivables and other payables.

The Company’s financial instruments comprise its investment portfolio (as shown on pages 18 to 20), cash, securities sold under agreements to repurchase (repo financing), derivative financial instruments, other receivables and other payables that arise directly from its operations such as sales and purchases awaiting settlement and accrued income. The accounting policies in note 2 include criteria for the recognition and the basis of measurement applied for financial instruments. Note 2 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.

The principal risks that an investment company faces in its portfolio management activities are set out below:

Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:

Currency risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in foreign exchange rates;

Interest rate risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates; and

Other price risk – arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other than changes in foreign exchange rates or market interest rates.

Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.

Credit risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation.

Risk Management Policies and Procedures

The Directors have delegated to the Manager the responsibility for the day-to-day investment activities, management of borrowings and hedging undertaken by the Company as more fully described in the Directors’ Report.

Investments include, but are not restricted to, corporate bonds, government bonds, preference shares, loan stocks and equities for the long-term so as to comply with its Investment Policy (incorporating the Company’s investment objective). In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for dividends. The risks applicable to the Company and the policies the Company uses to manage these risks for the two years under review are detailed overleaf.

Market Risk

The Manager assesses the exposure to market risk when making each investment decision, and monitors the overall level of market risk on the whole of the portfolio on an ongoing basis. Risk management is an integral part of the investment management process. The Manager controls risk by ensuring that the Company’s investment portfolio is appropriately diversified. In-depth and continual analysis of market and stock fundamentals give the Manager the best possible understanding of the risks associated with a particular stock.

As more fully described in the Business Review on page 14, high-yield corporate bonds are subject to a variety of risks. A majority of the Company’s investments are in non-investment grade securities and so adverse changes in the financial position of an issuer of corporate bonds or in the general economy may affect both the principal and the interest.

(a) Currency Risk

The sterling value of the Company’s assets, liabilities and income which are denominated in currencies other than sterling will be affected by movements in exchange rates.

Management of the currency risk

The Manager monitors the Company’s exposure to foreign currencies on a daily basis and reports to the Board on a regular basis. The Company uses both forward currency contracts and repo financing to mitigate currency movements that would affect the investment portfolio and cash.

Repo financing is matched to the currency of the underlying assets, which minimises currency risk on the movement of exchange rates affecting the underlying investments. Non-sterling investments that are not pledged under repo financing can be hedged using forward currency contracts.

Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.

Currency exposure

The fair values of the Company’s monetary items that have foreign currency exposure at 30 September are shown in the table below. Where the Company’s investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis so as to show the overall level of exposure.

Cash and cash equivalent figures include amounts at custodian that have a right of offset. Sterling cash at the year end was £3,951,000 (2018: £1,727,000).

Currency sensitivity

The following tables illustrate the sensitivity of the profit after taxation for the year with respect to the Company’s monetary financial assets and liabilities and each of the exchange rates for £ to Euro and £ to US dollar based on the following:

The above percentages have been determined based on the market volatility in exchange rates in the year. The sensitivity analysis is based on the Company’s monetary foreign currency financial instruments held at each balance sheet date and takes account of any forward foreign exchange contracts that offset the effects of changes in currency exchange rates. The effect of the strengthening or weakening of sterling against currencies to which the Company is exposed is calculated by reference to the volatility of exchange rates during the year using the standard deviation of currency fluctuations against the mean.

If sterling had strengthened by the changes in exchange rates shown in the table above, this would have had the following effect:

If sterling had weakened against the euro or dollar to this extent, the effect would have been the converse.

In the opinion of the Directors, this sensitivity analysis is not representative of the year as a whole, since the level of exposure changes frequently as part of the currency risk management process of the Company.

 (b) Interest Rate Risk

Interest rate movements may affect:

– the fair value of the investments in fixed interest rate securities;

– the level of income receivable on cash deposits; and

– the interest payable on variable rate borrowings.

Management of interest rate risk

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 and borrowings. The Board reviews on a regular basis the investment portfolio and borrowings. This encompasses the valuation of fixed interest, floating rate securities and gearing levels. When the Company has custodian cash or overdraft balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian, The Bank of New York Mellon (International) Limited. Holdings in the Short-Term Investments Company (Global Series) plc (‘STIC’) are subject to interest rate changes.

Interest rate exposure

At 30 September the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to:

– floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be reset; and

– fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment.

*Includes £3,150,000 (2018: £950,000) held on STIC.

The nominal interest rates on investments at fair value through profit or loss are shown in the portfolio statement on pages 18 to 20. The weighted average effective interest rate on these investments is 6.3% (2018: 6.3%).

Interest rate sensitivity

The following table illustrates the sensitivity of the profit after taxation for the year to a 1.0% increase in interest rates in regard to the Company’s financial assets and financial liabilities. This level of change is considered to be reasonably possible based on the observation of current market conditions. The sensitivity analysis is based on the Company’s financial instruments held at the balance sheet date, with all other variables held constant.

The effect would have been the exact opposite if interest rates had decreased by the same amount.

The above exposure and sensitivity analysis are not representative of the year as a whole, since the level of exposure changes frequently as borrowings are drawn down and repaid throughout the year.

(c) Other Price Risk

Other price risk (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the portfolio. It is the business of the Manager to manage the portfolio and borrowings to achieve the best returns.

Management of other price risk

The Directors manage the market price risks inherent in the portfolio by meeting regularly to monitor, on a formal basis, the Manager’s compliance with the Company’s stated Investment Policy and to review investment performance.

The Company’s portfolio is the result of the Manager’s investment process and the result is not correlated with the market in which the Company invests, with the value of the portfolio moving as a result of the performance of the company shares held in the portfolio. The Company can hedge part of its portfolio denominated in foreign currency by using repo financing arrangements in the same foreign currency. It can also hold derivative positions in options and futures to hedge movements in the stocks in which the Company’s portfolio has an exposure.

The Company’s exposure to other changes in market prices at 30 September on its quoted equity investments and fixed interest investments was as follows:

*Equity comprised of Balfour Beatty 10.75p Convertible Preference of £1,644,000 and CGG ordinary shares of £162,000

Concentration of exposure to other price risks

The Company’s investment portfolio on pages 18 to 20 is not concentrated to any single country of domicile, however, it is recognised that an investment’s country of domicile or listing does not necessarily equate to its exposure to the economic conditions in that country.

Other price risk sensitivity

At the year end, the Company held equity investments of £1,806,000 (2018: £2,129,000). The effect of a 10% increase or decrease in the fair values (including equity exposure through derivatives) on the profit after taxation for the year is £181,000 (2018: £213,000). This level of change is considered to be reasonably possible based on the observation of current market conditions. The sensitivity analysis is based on the Company’s equities and equity exposure through derivatives at the balance sheet date with all other variables held constant.

Liquidity Risk

This is the risk that the Company may encounter in realising assets or raising/replacing repo financing to meet financial commitments. A lack of liquidity in corporate bonds may make it difficult for the Company to sell its bonds at or near their purported value compounding the liquidity pressure caused by the requirement to roll repo financing at repo maturity dates.

Management of Liquidity Risk

The Manager, as part of the ongoing management of the Company, ascertains the Company’s cash requirements taking account of the asset purchases and sales, income receivable from investments, running expenses and dividend payments as well as the ongoing borrowing requirements of the Company arising from repo financing. The Manager reviews the repo financing of the Company on a daily basis, with a view to new repo agreements ending at a quarter end, and rolling of existing repo agreements on a quarterly time basis. If any shortfalls could not be met by repo financing, the Manager could potentially realise the more liquid corporate bonds in the portfolio, taking into account the effect of this on performance as well as the objectives of the Company.

Further details can be found in the ‘Gearing Policy’ section on page 10 in the Business Review, which also discusses the risks arising from repo financing and gearing of the investment portfolio.

Liquidity Risk Exposure

The contractual maturities of the financial liabilities at 30 September, based on the earliest date on which payment can be required, was as follows:

Credit Risk

The Company’s principal credit risk is the risk of default on the non-investment grade debt. The Company’s other main credit risk arises from the repo financing arrangements whereby, if a counterparty failed to sell the required assets to the Company on the repurchase date, the Company would be left with the claim against the defaulting counterparty for the stock and, if applicable, any margin held by the counterparty and not returned.

Credit risk also encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered. This risk also includes transactions involving derivatives.

The portfolio may be adversely affected if the custodian of the Company’s assets suffers insolvency or other financial difficulties. The portfolio in this instance covers both investments and any cash held at the custodian.

Exposure to and Management of Credit Risk

The Company’s portfolio of investments on pages 18 to 20 shows the Moody’s and Standard & Poor’s ratings and an analysis of this is also shown by the graph on page 4. Where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account to manage the Company’s exposure to risk of default. Investments in bonds are across a variety of industrial sectors and geographical markets, to avoid concentration of credit risk.

The Company manages the credit risk inherent in repo financing by only dealing with good quality counterparties whose credit-standing is reviewed periodically by the Manager. There is a maximum limit allowed with any one counterparty, and have a maturity tenor of three months or less. The Company has exposure to credit risk on securities pledged under repo financing held, with four counterparties, as follows:

Transactions in derivatives, including forward currency contracts (the exposure to which is shown in this note, under currency risk) are entered into only with investment banks, the credit rating of which is taken into account to manage default risk. Failure by counterparties is mitigated by using only approved counterparties.

As part of the Board’s risk management and control monitoring, the Board reviews the custodian’s annual control report and the Manager’s management of the relationship with the custodian.

The risk associated with failure of the custodian is mitigated by the depositary, which is ultimately responsible for safekeeping of the Company’s assets and is strictly liable for the recovery of financial instruments in the event of loss. Additionally, the depositary reconciles both stock and cash held at the custodian to custodian records throughout the year and reports to the audit committee at the year end.

Cash balances are limited to a maximum of £10 million with any one deposit taker, with only approved deposit takers being used, and a maximum of £10 million for holdings in the Short-Term Investments Company (Global Series) plc, a triple A rated money market fund.

Fair Values of Financial Assets and Financial Liabilities

The financial assets are either carried at their fair value (investments and derivatives), or the balance sheet amount is a reasonable approximation of fair value (due from brokers, dividends receivable, accrued income and cash and cash equivalents). Total gains and losses on investments, represents the total carrying amount of gains and losses on financial assets designated by the Company as financial assets at fair value through profit and loss.

The financial liabilities are carried at amortised cost except for derivatives which are carried at fair value.

20. Classification Under Fair Value Hierarchy

Nearly all of the Company’s portfolio of investments are in the Level 2 category as defined in IFRS 7 ‘Financial Instruments: Disclosures’. The three levels set out in IFRS 7 follow:

Level 1 – The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.

Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.

The valuation techniques used by the Company are explained in the accounting policies note. There were no transfers in the year between any of the levels.

Normally, investment company investments would be valued using stock market active prices with investments disclosed as Level 1, and this is the case for the quoted equity investments that the Company holds. However, a majority, if not all, of the investments are non-equity investments. These securities are priced using evaluated prices from a third party vendor, together with a price comparison made to secondary and tertiary evaluated third party sources. Evaluated prices are in turn based on a variety of sources, including broker quotes and benchmarks. As a result these investments are disclosed as Level 2 – recognising that the fair values of these investments are not as visible as quoted equity investments and their higher inherent pricing risk. However, this does not mean that the fair values shown in the portfolio valuation are not achievable at point of sale. No Level 3 investments were held in the year, or the previous year and there have been no transfers between levels during the year.

21. Maturity Analysis of Contractual Liability Cash Flows

The financial liabilities of the Company comprise securities sold under agreement to repurchase which are all repayable within three months of the balance sheet date totalling £24,161,000 (2018: £22,109,000), together with interest thereon of £9,000 (2018: £10,000). Other liabilities may include forward currency contracts, amounts due to brokers and accruals. All are paid under contractual terms. Forward currency contracts in place at the balance sheet date were all due within three months. Any amounts due to brokers, are usually payable on the purchase date of the investment plus three business days.

22. Capital Management

The Company’s total capital employed at 30 September 2019 was £150,318,000 (2018: £142,786,000) comprising repo financing of £24,161,000 (2018: £22,109,000) and equity share capital and other reserves of £126,157,000 (2018: £120,677,000).

The Company’s total capital employed is managed to achieve the Company’s objective and investment policy as set out on pages 9 and 10.

The main risks to the Company’s investments are shown in the Business Review under the ‘Principal Risks and Uncertainties’ section on pages 12 to 16. These also explain that the Company is able to gear its portfolio by borrowing in the form of repo financing and that gearing will amplify the effect on equity of changes in the value of the portfolio. At the balance sheet date, net borrowing was 15% (2018: 16%). Net borrowings cannot exceed 50% of shareholders’ funds. The Company’s policies and processes for managing capital were unchanged throughout the year and the preceding year.

The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy back shares and it also determines dividend payments.

The Company is subject to counterparty imposed requirements with respect to the repo financing and the terms imposed by the lenders with respect to the short term overdraft facility. The Board regularly monitors, and has complied with, these requirements and are unchanged from the prior year.

23. Contingent Liabilities

Contingent liabilities that the Company will or has given would be disclosed in this note if any existed.

There were no material outstanding contingent liabilities as at 30 September 2019 (2018: nil).

24. Related Party Transactions and Transactions with the Manager

A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. The Manager is not considered a related party.

Under International Financial Reporting Standards, the Company has identified the Directors as related parties. The Directors’ interests and remuneration have been disclosed on pages 30 and 31 with additional disclosure in note 6. No other related parties have been identified.

Details of the Manager’s services and fees are disclosed in the Directors’ Report on page 34, and in note 5.

25. Post Balance Sheet Events

Any significant events that occurred after the end of the reporting period but before the signing of the statement of financial position will be shown here.

Since the year end and disclosed in the Chairman’s Statement on page 6, JTC Fund Solutions (Jersey) Limited were appointed as corporate company secretary and administrator on 10 December 2019.

There are no other significant events after the end of the reporting period requiring disclosure.

This annual financial report announcement is not the Company's statutory accounts. The statutory accounts for the year ended 30 September 2018 and for the year ended 30 September 2019 received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. The statutory accounts for the financial year ended 30 September 2019 have been approved and audited but not yet filed.

The audited annual financial report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the Company's Registered Office, 28 Esplanade, Jersey, JE2 3QA or the Manager's website at:

www.invesco.co.uk/enhancedincome

The Annual General Meeting of the Company will be held at the offices of JTC Fund Solutions (Jersey) Limited, 28 Esplanade, St. Helier, Jersey, JE2 3QA on 25 February 2020 at 9.30am.

By order of the Board

JTC Fund Solutions (Jersey) Limited

Company Secretary

Contacts:

Invesco Fund Managers Limited

Will Ellis

Kelly Nice

Tel - 020 3753 1000