Chairman's Statement and Business Review

Dear Shareholder

I am pleased to present the Annual Financial Report for the year to 31 December 2022.

The Strategic Report section of this Annual Report has been prepared to help all Shareholders understand the drivers of performance in the past year, how the Company operates and to assess its performance.

Overview

The key performance points are as follows:

•             At 31 December 2022, audited Net Asset Value (NAV) was 219.4 p per share (2021: 310.3p), a decrease of 29.3% over the year as compared to a 19.7% decrease in the FTSE 250 and a 1% increase in the FTSE 100.

•             The share price fell to 210.0p from 225.0p at 31 December 2021 a negative return of 6.7%.

•             The discount to NAV at the end of year had reduced to 4.3% compared to 27.4% at 31 December 2021.

•             The Trust's investment performance over 12 months as measured by NAV total return, which is the change in NAV plus the dividend paid, was minus 26.2% (2021:25.2%).

•             The Trust's performance over 12 months as measured by share price total return, which is the change in share price plus the dividend paid, was minus 3.3% (2021:8.2%)

•             The 12-month revenue return per ordinary share was 6.9p (2021:7.0p), a decrease of 1%.

•             The interim dividend of 2.1p per share was paid on 23 September 2022.

•             Your Board recommends a final dividend of 7.5p per share increasing a total dividend payable for the year to 9.6p (2021: 9.5p) an increase of 1%.  UK inflation for the 12 months to December 2022 slowed for the second month in a row to 10.5%

•             This is the 20th successive year of progressive dividend and importantly returns the Trust to a high position in the dividend yield league table for Investment Companies. It also promotes us to the "Dividend Heroes" list maintained by the AIC, a list of investment companies that have consistently increased their dividends for 20 or more years in a row.

Board and Governance

The Board places significant importance on corporate governance and compliance with the AIC and UK Corporate Governance Codes.  Full details are set out in the Corporate Governance section on pages 15 to 18.

We note the Financial Conduct Authority's Policy Statement PS22/3 of April 2022 to comply or explain in relation to board diversity and inclusion, with changes to the Listing Rules commencing in 2023 for the Trust.  As a small, low-cost fund, your board continues to assess how best to structure and plan for a board that meets shareholder and regulatory needs, has continuity, stability and reflects prudent management of costs.

An Independent Board

The Directors in place at the time of signing these accounts are:

•             Myself, Frank Ashton - Non-Executive Chairman

•             Simon Moore - Non-Executive Director, Chair of Audit Committee, Chair of Remuneration Committee

•             Dr Manny Pohl - Managing Director, Fund Manager

We currently have three directors who together make up an independent Board under the AIC Code of Governance 2021.

Capital Gains

During the year the Company realised capital profits before expenses arising on the sale of investments in the sum of £382,704 (2021: £354,843).

Portfolio Review

Additional Holdings Purchased

Additional holdings of AEW UK, Cerillion. Close Brothers, Fevertree, Gamma, Impax Asset Management, Paypoint, Target Healthcare, Treatt  and Tritax Bigbox  were acquired.

Holdings Sold or Trimmed

Abcam, Clinigen, Forterra, Homeserve, Jarvis Securities, JD Sports, Lok'n Store  and LXI Reit.

Dividend

During the year the Company paid an interim dividend of 2.1p on 23 September 2022.

The Board recommends a final dividend of 7.5p per ordinary share making an increased dividend this year of 9.6p (2021: 9.5p).  Subject to shareholder approval at the Annual General Meeting on 16 March 2023, the dividend will be paid on 6 April 2023 to shareholders on the register on 10 March 2023.

Period Review

The year of 2022 was, for many, including the investment community, one to forget.  Shocks and surprises marked the year, which ended very poorly with market uncertainty and loss of confidence created by the short-lived Liz Truss premiership, made worse by the impact of double-digit UK inflation.

In an interview with the BBC in 2014, Charlie Munger, renowned partner in Berkshire Hathaway said:

"Without a system of wise restraints, gross immorality and extreme craziness will happen in markets. They need to be dampened."

He was talking about some of the causes of the Crash and Global Financial Crisis in 2007-08, but this is also true elsewhere.  For example, a leader operating in a powerful political and governmental system with few restraints represents a risk:  Ukraine's citizens, and to a lesser extent a large proportion of Europe's population are paying the price for Putin's 'grossly immoral' and unfettered ambition to control that country.

A new prime minister, seemingly believing the only opinions on the September mini-budget that mattered were her own and her Chancellor's, was swiftly brought low; however the damage had been done.  The mini-budget resulted in 'craziness' for a few weeks with a dramatic loss of financial market confidence in the UK resulting in the Bank of England being forced to stabilise the bond market by temporarily buying long-dated UK gilts. Enter Hunt and Sunak as new Chancellor and PM to try to return the narrative to calmer and more acceptable content and tones.  Now homeowners who have to start a new mortgage term face a dramatic rise in cost and many wish Truss and Kwarteng had used any 'system of wise restraints' before launching that particular mini-budget against the backdrop of a rising cost of living crisis.

All these events had a heavy impact on the UK Smaller Companies segment, the focus of this fund; smaller companies can be perceived to be a riskier investment because they tend to be less liquid and less resilient stocks in a challenging environment, compared even to FTSE-250 companies.  Market sentiment has recently been strongly negative to this segment.  By comparison the blue-chip FTSE-100 fared better than most markets because these large 'old-fashioned', liquid, oil/gas- and commodity-based stocks were buoyed by the run from UK bonds, representing a safer haven than, for example the NASDAQ where Big Tech companies had a torrid 2022.

I am disappointed to report the poor absolute performance of the Company in the past 12 months and comparatively against FTSE-250 and especially FTSE-100 indices.  We are very aware of the trust placed in us by investors in the company and take our responsibilities very seriously.  However a better comparison is against UK Smaller Company investment fund peers, and our Share Price Total Return at minus 2.57% has performed much better over the past 12 months in comparative terms than the segment weighted average of minus 23.52%.  Our NAV one year Total Return at minus 23.64% confirms we performed similarly to investment funds in the same sector, whose weighted average return was minus 22.32%. 

Further information on portfolio activity and the drivers behind the performance is contained in the Managing Director, Dr Manny Pohl's Report below.  Manny is highly experienced at managing funds in challenging market environments, and your board is very pleased with the comparative outcome for the year, given the conditions faced.  Our invested companies perhaps have a vote of confidence taken as a portfolio, given that the share price was trading at year end at a slightly lower discount of 7.85% (2021: 29.45%) compared to the AIC UK Smaller Companies weighted average of 9.88%.

This time last year I commented on Apple being the first stock to reach $1 trillion market cap on 4 January 2022, after tripling the share price over the prior two years.  Well, in 2022 Apple lost a third of that value, beset with problems on iPhone 14 shipments due to COVID restrictions at its main Chinese factory, resulting in declining earnings and disappointing fourth quarter guidance.

I mention such a large US stock in a UK small company fund report because this poor year, especially for Apple shareholders is a timely reminder;  we should be investing in good stocks and management teams for the long term and resist perhaps emotionally driven reactions to news or poor performance over a relatively short period of time.   Wars, times of political incompetence, market corrections and yes, apparent evidence of fraud at 'star companies' (such as Sam Bankman-Fried's crypto empire FTX) should really not surprise us much.  Human nature and systemic failings are hardly news. Temperament is much more important than intelligence for investors (as Messrs Buffett and Munger have told us for a long time).

While others run for safety, cool-headed investors look widely and carefully, to find good companies with shares at low price-book ratios to invest in.  In his report below, Manny explains the care he takes to deliver income for investors, as well as investing for growth (which may take a little longer to realise at the moment, but it will come).  The coming year will be a time for patience and resisting temptation to run with the herd.

At the start of the year we had hoped dividend income would return to pre-pandemic levels, but that evaporated in the second half as inflation and interest rates rocketed, reducing many UK companies' margins and cash generated.  In the end net income was very similar to last year at £148,531 (2021: £151,260).  I remind you that as a closed-ended fund we can save up to 15% of our portfolio income each year, which, unlike open-ended funds, provides a reserve to use in those leaner income years.

I am very pleased to tell you that the Board recommends a final dividend payment of 7.5p (total 9.6p) an increase of 0.01p (2021:9.5p).  Subject to shareholder approval at the AGM and based on our share price at 31 December 2022 of 210p this represents a dividend yield of 4.6% (2021: 3.1%) and is better than the AIC UK Smaller Companies' weighted average yield of 2.80%.

With this further year of progressive dividend payment (if approved at the AGM), I am delighted to say your company is promoted to the full list of AIC Dividend Heroes, as this would represent the 20th consecutive year of dividend growth.  In 2022 this list comprised just seventeen investment companies (out of 324 AIC members), and therefore would be a marvellous company milestone since its inception as a founder member of AIM in 1995, especially because this has been delivered from the UK Smaller Companies segment only. 

This is testament and credit to the current MD, Fund Manager and long-standing major shareholder and board member, Manny Pohl, and his predecessor, Robin Boyle who managed the fund over many years, and also to other board members of Athelney Trust, including Simon Moore, well-known in the industry, supported by John Girdlestone, the immediate past CoSec, and ably succeeded by Debbie Warburton.  Thank you all.

In terms of controllable costs, I confirm the board has approved a continued freeze on the non-executive director's fee (£10,500) with no premium for Chair positions, which is comparable to NED fees of other, similarly-sized funds.  Our Ongoing Charges Figure (OCF, calculated using the AIC recommended Ongoing Charges methodology, April 2022, taking annualised costs that would reasonably be incurred if there was no trading of the investee shares, divided by the average of published monthly NAV) is 2.89% (2021: 2.38%).  The increase is due to the decrease in NAV through 2022, and also £1,000 net increase in Ongoing Charges in 2022 compared to 2021.  While we remain a small fund, reducing the OCF will continue to be a challenge, however every effort is made to do this, while applying appropriate time and resource to growth and good governance.

Outlook

Perhaps the main questions that will affect our performance for 2023 include:

• How long will UK inflation remain above that of other countries in Europe, and what interest rate medicine will be needed to bring it back in line (after reaching a peak of 11.7% in October, are we over the worst). This will affect our income

• What costs, including those to settle public sector pay negotiations, will be incurred by the government, over what period of time, and is a Labour government now inevitable in 2025; this affects general sentiment on the economy, tax burden and confidence for investors, including inward investors

• What global assistance or headwind for UK economic recovery might be expected?  Potential global recession, no sight of an end to war in Ukraine, the rate and strength of recovery for China's economy, and the apparent weakening of America's economy, all play into the geo-political environment.

We cannot know the answers to these questions; however, I do know that Manny Pohl's meticulous and repeatable investment and divestment approach, explained in his report, will on average, find and capture value and that being invested for the long term, in those shares, is right also.

I would encourage you to actively take interest in your company; perhaps come to meet the board at the AGM in central London on Thursday 16 March 2023 at 12 noon.

Frank Ashton

Non-Executive Chairman

13 February 2023

Fund Manager's Review

Reflecting on 2022

By any measure, the past twelve months have delivered a very poor result, especially when compared to the remarkable return achieved in 2021 when the FTSE 100 was up by 14.6% and our portfolio up by 29.1%. Over the past twelve months we have under-performed the various benchmarks as shown in Table 1 and as one would expect, while our long-term results are still in line with the FTSE 250, this recent underperformance has prompted us to consider if we missed anything in our deliberations or if there was anything we should have done differently in our analysis? 

Our Investment Philosophy is based on the belief the economics of a business drives long-term investment returns and evidenced through our investment process which delivers a portfolio of high-quality businesses in the growth stage of their life cycle.  However, investment returns over any period comprise two components, namely the dividends received and the movement in the value of the investment portfolio.  While the dividends we are likely to receive from the companies in our portfolio are fairly easy to predict and, for the most part increase over time, the same cannot be said for the market price for the shares. These are affected by investors responding to daily news feeds and commentary on local and global economic data as well as macro events.

In the first quarter of the financial year, Russia invaded the Ukraine. The West was quick to issue sanctions and multinationals started closing down any operations linked to Russia.  However, the war amplified energy and food price issues straining an already COVID constrained supply-side environment and pushing inflation higher.  Central banks began raising rates and forecasting future increases which drove down equity-based valuations across the board.

By the second quarter the high inflation readings were a major detractor for all sectors of the financial markets other than mining and energy stocks.  The fiscal stimulus plan and series of tax cuts and regulatory reforms announced in the mini-budget in September sent financial markets into a tailspin with the pound reaching a record low and short-term interest rates and bond yields moving sharply up.  The yields on five-year government bonds reached levels similar to those of more heavily-indebted European economies such as Italy and Greece. Commensurate with this rise in short and medium-term interest rates, the quoted prices for income generating assets and REITs in particular, declined materially. The net effect of this and the tightening in monetary policy has been to put pressure on the high PE valuations of the market and growth stocks in particular, as future earnings are discounted at a higher rate. 

In spite of this, recent operating results from companies in our portfolio indicate that they have been able to partially withstand these inflationary pressures by implementing appropriate short-term strategies and adapting their business models accordingly.  While the majority of the stocks in the portfolio have declined in value over the past year, dividends for the most part were maintained, with a handful of names producing positive returns for the year.  These were Begbies Traynor (LSE: BEG), 4Imprint (LSE: FOUR) and NWF (LSE: NWF).

While we do sell some of our investments from time to time, our process aims to find high-quality businesses that we own for the very long-term and as a result our portfolio turnover remains low. During the past year, while we did reduce our overall exposure to the Property Trusts, we still maintained a material exposure in recognition of the need to maintain the dividend paid to shareholders within a growth style portfolio. However, we are always looking for new investments and when we do find them, we ensure that they have sustainable and resilient characteristics.  In the past twelve months we added two new names to the portfolio:

Cerillion: (LSE: CER)

Cerillion joined AIM in 2016 and has since established a very strong record of revenue and profit growth principally from software licences and related support and maintenance sales.  It operates in approximately forty-five countries globally, providing customers with mission-critical software for billing, charging and customer relationship management mainly for telecommunications providers, but also for other sectors, including energy and utilities.

Whilst the coronavirus pandemic is no longer directly affecting business operations, the global experience of remote-working - still in place in many economies - has continued to emphasise the dependence of the world economy on state-of-the-art telecoms infrastructure. Over the year, we continued to see high levels of investment in the sector, and an acceleration of investment in 5G and fibre rollouts, with spending trickling down from core network improvements to ancillary system upgrades and replacements, particularly due to national security concerns. We expect to see these trends continue with increasing pressure on telcos to find efficiencies in their digital real-estate. This is likely to encourage further market take-up of product-based SaaS solutions, which Cerillion offers, rather than the more bespoke solutions available from more traditional vendors which require highly complex implementations over several years and have a higher total cost of ownership.

Impax Asset Management (LSE: IPX)

Impax Asset Management is a fund manager who invests globally in companies focused on the transition to a more sustainable global economy and is well placed to benefit from the profound changes to the economic landscape particularly in the areas of climate change, pollution and essential investments in human capital, infrastructure and resource efficiency. Impax has proven expertise in finding and investing in companies and assets that are well positioned in this space and should benefit from these mega-trends which will drive growth for them and create risks for those unable or unwilling to adapt to the changes. They offer a well-rounded suite of investment solutions spanning multiple asset classes and should be able to deliver superior shareholder returns over the medium to long-term.

Looking ahead

While I was preparing to write this year's commentary, the following quote came to my attention:

"Time is the friend of the wonderful business, the enemy of the mediocre." Warren Buffett - Letter to Shareholders 1989

While supply chains are stretched and input products in short supply, it can be challenging to recognise the potential in companies, particularly those that are in the growth stage of their life cycle. It can also be difficult to evaluate the 'narratives' that some companies are telling about themselves.  To invest in a company in the growth stage of their life cycle it is important to balance the company's narrative alongside its numbers and it is vital not to get caught up in the hype and noise of the internet and daily market movements. 

A sound investment philosophy sets out a number of 'rules' or 'procedures' to fall back on when the market noise gets too loud.  Companies that have a sustainable competitive advantage will always be well-placed to withstand short-term headwinds, regardless of market conditions, maintain market share and ultimately find new ways to grow. Their ability to be flexible, to move quickly, to take advantage of opportunities as they arise, and to capitalise on market trends and demand, will continue to support the ongoing success of such businesses, and provide significant long-term opportunities for their investors.  The pandemic, devastating weather events, and the invasion of Ukraine are examples of macro-environmental shocks impacting companies worldwide and it is also of paramount importance to take a holistic approach when analysing the companies and their sustainability by considering the business competitiveness and ability to dynamically adapt and react to black swan events - to be resilient.

Over the past few years our industry, and society more broadly, has continued to evolve with higher expectations being made of businesses and their social licence to operate. Being a good corporate citizen is only part of it. Being a good corporate citizen that is compassionate, committed to its people, planet, and the community is mandatory.  Any successful business owner makes decisions for the betterment of their long-term business. Having sustainable practices and a long-term mindset is vital for any operator in this modern, rapidly changing world. Sustainability has long been part of our investment process and since we see ourselves as business owners (and not share traders), we invest along similar principles where sustainability and competitiveness are central to any investment analysis. 

A genuine long-term approach

Investment management is more than merely generating alpha in excess of a benchmark.  While that is a core part of our mandate, other very important qualitative issues are central to what we do.  For example, we recognise that capital allocation is a vehicle through which to drive change.  We have the opportunity to demand specific standards of corporate governance, decide whether specific social and ethical issues are acceptable and, if they are not, we vote with our feet. 

For us, the integrity and credibility of any management team is a founding principle to our investment process. We need to trust that management has the best interests for all stakeholders at heart, and we have faith that they will make sound strategic decisions and have substantial experience and capabilities in their chosen field. As custodians of our capital, we must ensure that we are doing whatever we can to preserve capital and grow it over time.  We allocate capital to investments which we believe are sustainable in the long-term, and finding trustworthy, values-based management that aligns with our core values and beliefs will ensure above-average economic portfolio returns. Sustainability of investment performance or the improvement of the wellbeing of broader society hinges upon ethical, transparent, and honest leadership and in cases where we feel we can add something to the conversation, we engage with the company. 

While current macro events have put pressure on our portfolio in the short-term, our investment philosophy is based on the belief the long-term economics of a business drives long-term investment returns. Our companies have strong business models with capable and experienced management teams and the long- term financial metrics of our portfolio companies, including organic sales growth, earnings and dividend growth, should provide the impetus for an improvement in valuations or at least be supportive of the current valuations in the future.

The Athelney dividend is supported in the short-term by the reserves we have built up in the good times as well as by the ongoing distributions from the high yielding property trusts.  For many of the companies in the portfolio our estimates and forecasts for earnings and dividends remain promising and over time we expect that dividends from the high growth quality companies in the portfolio will increase sufficiently so that the property trusts can be replaced by other high growth quality companies without jeopardising our AIC dividend hero status.

Update

The unaudited NAV on 31 January 2023 was 229.4p per share - up by 4.6% from 31 December 2022. The share price on the same day was 205p (trading at a discount of 10.7%). Further updates can be found at www.athelneytrust.co.uk

Dr Manny Pohl AM

Fund Manager

13 February 2023

Section 172(1) Statement

The Directors of the Company are required to promote the success of the Company for the benefit of the Members and Shareholders as a whole. Section 172(1) of the Companies Act (2006) expands this duty and requires the Directors to consider a broader range of interested parties when considering the promotion of the Company. This wider group of stakeholders will include employees, if any, suppliers, customers and others, and the Board will look to understand and take into account the needs of each stakeholder, although recognising that different stakeholders may have conflicting priorities and not all decisions made will be to the benefit of all stakeholder groups.

When making decisions the Board should consider the following:

·      the likely consequences of any decisions in the long-term;

·      the interests of the Company's employees (if applicable);

·      the impact of the Company's operations on the environment and the community;

·      the need to foster the Company's business relationships with suppliers, customers and others;

·      the need to act fairly for all members of the Company, and

·      the desirability of the Company maintaining a reputation for high standards of business conduct.

In line with similar small Investment Trusts and Investment Companies, Athelney Trust plc does not have any customers and relies on a number of third-party providers of services such as Company Administrator, the Custodian and the Registrar to maintain its operations. The Company takes into account the regulations of the market in which it operates and has regard to the environment and the wider community in which it operates.

At every Board meeting the Directors review the performance of the Company towards meeting the Company's Investment Objective through its strategy. Manny Pohl is the fund manager, reports to other Board members and answers any questions raised. Compliance with existing regulatory and legal requirements is reviewed, together with any new regulations that are due to be introduced or are being proposed that may affect the Company.

The Board recognises the importance of, and is committed to, understanding the views of Shareholders and maintaining communication with its Shareholders in the most appropriate manner.

This is undertaken through:

Annual General Meeting

The Company, in normal circumstances encourages all Shareholders to attend and participate at its Annual General Meeting ("AGM"). Whilst the formal business of the meeting is the primary purpose of the meeting, members of the Board are available to answer questions directly from Shareholders, to provide an update to the meeting and to offer Shareholders an insight into the business.

The Board plan to hold the 2023 AGM on 16 March 2023 at 12.00 noon. Further details regarding the 2023 AGM are contained in the Notice of the Annual General Meeting published in a separate notification.

Published Reports

The Company produces Annual and Half Yearly Reports and monthly fact sheets are all available from the Company's website and paper copies are available on request from the registered office. The publication of these reports is considered to be the primary method of communication to Shareholders and other readers of the reports and provides detailed information on the portfolio, performance over the period and an assessment of the outlook for the Company.

The Annual Report also contains details regarding the Company's corporate governance and the Board seek to ensure that the Report is readable and is mindful that it should be fair, balanced and understandable.

Shareholder enquiries

Shareholders can contact the Company or any of its Directors through the Company Secretary or through their company email address.  Alternatively, letters can be sent to the registered office address. Although the Directors are not available full time, with the assistance of the Company Secretary they seek to maintain open communication to all Shareholders.

Suppliers

The Company Secretary Deborah Warburton and Administrator GW & Co. Limited are often the main contact point for advisors and stakeholders in the Company. Regular communication is maintained between the Company Secretary and the Directors advising them of all matters concerning the Company. The Company also relies on the provision of services from outside parties to operate and gives consideration to the needs and objectives of those providers and recognises that their success will often assist the Company in achieving its objectives.

Regulators

The Company operates in an environment that is governed by legal and regulatory requirements. The Board recognises that these requirements are there to protect stakeholders, including the government.

Environment and Community

As the Company does not have any direct employees nor any physical office environment of its own it has little direct impact on the community or the environment. The Company seeks to reduce its impact on the environment in encouraging Shareholders to receive Reports electronically rather than through printed hard copies. When paper copies are requested FSC paper is used. The Board also engage through electronic means where possible rather than hold excessive face to face meetings.

Other Statutory Information

As explained within the Report of the Directors on pages 20 to 21, the Company carries on business as an investment trust. Investment trusts are collective closed-ended public limited companies.

Board

The Board of Directors is responsible for the overall stewardship of the Company, including investment and dividend policies, corporate and gearing strategy, corporate governance procedures and risk management. Biographical details of the three male Directors, can be found on pages 2 and 3.

One of the Directors is the Company's only employee (2021: one employee).

Investment Objective

The investment objective of the Trust is to provide shareholders with prospects of long-term capital growth with the risks inherent in small cap investment minimised through a spread of holdings in quality small cap companies that operate in various industries and sectors. The Fund Manager also considers that it is important to maintain a progressive dividend record.

Investment Policy

The assets of the Trust are allocated predominantly to companies with either a full listing on the London Stock Exchange or a trading facility on AIM or AQSE. The assets of the Trust have been allocated in two main ways: first, to the shares of those companies which have grown steadily over the years in terms of revenue and profits but, despite this progress are undervalued by the market when compared to future earnings and dividends; second, those companies whose shares are undervalued by the market when compared with the value of land, buildings, other assets or cash on their balance sheet.

Investment Strategy

The investment strategy employed by the Fund Manager in meeting the investment objective focuses on active stock selection. The selection of individual holdings is based on analysis of, amongst other things, market positioning, competitive advantage, future growth, financial strength and cash flows. The weighting of individual investments reflects the Fund Manager's conviction in the expected future returns from those holdings.

Investment of Assets

At each Board meeting, the Board considers compliance with the Company's investment policy and other investment restrictions during the reporting period. An analysis of the portfolio on 31 December 2022 can be found on pages 11 and 12 of this report.

Responsible Ownership

The Fund Manager takes a particular interest in corporate governance and social responsibility investment policy. As stated within the Corporate Governance Statement on pages 16 to 19, the Fund Manager's current policy is available on the Trust's website www.athelneytrust.co.uk. The Board supports the Fund Manager on his voting policy and his stance towards environmental, social and governance issues.

Review of Performance and Outlook

Reviews of the Company's returns during the financial year, the position of the Company at the year end, and the outlook for the coming year are contained in the Chairman's Statement on pages 4 to 6 and the Fund Manager's review on pages 7 to 10 which form part of the Strategic Report.

Principal Risks and Uncertainties and Risk Management

As stated within the Corporate Governance Statement on pages 16 to 19, the Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council, and has established a continuing process designed to meet the particular needs of the Company in managing the risks and uncertainties to which it is exposed.

The principal risks and uncertainties faced by the Company are described below and in note 12 which provides detailed explanations of the risks associated with the Company's financial instruments.

·              Market - the Company's fixed assets consist almost entirely of listed securities and it is therefore exposed to movements in the prices of individual securities and the market generally.

·              Investment and strategic - incorrect investment strategy, asset allocation, stock selection and the use of gearing could all lead to poor returns for shareholders.

·              Regulatory - Relevant legislation and regulations which apply to the Company include the Companies Act 2006, the Corporation Tax Act 2010 ("CTA") and the Listing Rules of the Financial Conduct Authority ("FCA"). The Company has noted the recommendations of the UK Corporate Governance Code and its statement of compliance appears on pages 16 to 19. A breach of the CTA could result in the Company losing its status as an investment company and becoming subject to capital gains tax, whilst a breach of the Listing Rules might result in censure by the FCA. At each Board meeting the status of the Company is considered and discussed, so as to ensure that all regulations are being adhered to by the Company and its service providers.

·              Operational - failure of the accounting systems or disruption to its business, or that of other third-party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.

·              Financial - inadequate controls by the Fund Manager or other third-party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.