TIDMKGR
KGR ABSOLUTE RETURN PCC LIMITED
(Registered in Guernsey - Number 43789)
Registered Office:
MARTELLO COURT, ADMIRAL PARK, ST PETER PORT, GUERNSEY, GY1 3HB
__________________________
TELEPHONE: +44 1481 751000
FACSIMILE: +44 1481 751001
e-mail: fundcosec@gg.fortis.com
For immediate release 26th March 2009
KGR ABSOLUTE RETURN PCC LIMITED - KGR ASIA DYNAMIC 1 (GBP)
(a closed-ended protected cell company incorporated in Guernsey with
registration number 43789)
ANNOUNCEMENT OF RESULTS
For the year ended 31 December 2008
The financial information attached does not constitute the Company's statutory
accounts for the year ended 31 December 2008, but is derived from those
accounts. Statutory accounts for 2008 will be delivered to Shareholders during
April 2009. Ernst & Young as auditors have reported on the accounts and their
report was unqualified.
The financial statements have been prepared in accordance with International
Financial Reporting Standards ("IFRS").
In accordance with the prospectus the Directors have not declared an interim
dividend and do not recommend the payment of a final dividend for the year.
The Annual General Meeting of the Company will be held on 16 June 2009.
Company Secretary
Fortis Fund Services (Guernsey) Limited
Tel: 01481 751000
Fax: 01481 751001
27 March 2009
KGR ABSOLUTE RETURN PCC LIMITED
ANNUAL REPORT
and AUDITED FINANCIAL STATEMENTS
For the year ended 31 December 2008
INVESTOR INFORMATION
General Information
KGR Absolute Return PCC Limited (the "Company") was registered on 13 October
2005 in Guernsey, Channel Islands as a closed-ended protected cell company in
accordance with the provisions of The Protected Cell Companies Ordinance, 1997
and The Companies (Guernsey) Law, 1994. It is established with one Cell known
as the KGR Asia Dynamic 1 (GBP) (the "Fund" or "Cell") which has an unlimited
life.
The Fund's redeemable participating preference shares were listed on the
Official List of the UK Listing Authority and commenced trading on the London
Stock Exchange on 22 November 2005. The Annual Report and Audited Financial
Statements cover the year ended 31 December 2008.
Investment Objective
The Fund is a fund of hedge funds. The Company's investment objective in
respect of the Fund is to seek long term capital appreciation through
investment in a diversified multi-manager, multi-strategy portfolio of hedge
funds investing in Asia. The Fund seeks to achieve a Sterling net annualised
return in excess of 12 per cent., with a volatility of less than 10 per cent.,
over the course of an investment cycle (typically five years). The Fund aims to
exhibit moderate volatility characteristics and a low correlation to market
returns of the broad equity and fixed income markets. Since its incorporation
the Company has not paid, and it is not currently expected that the Company
will pay, any dividends in respect of the Fund.
Investment Policy
The Investment Adviser seeks to accomplish the Fund's investment objective by
investing the assets of the Fund predominantly in hedge funds worldwide, which
have an investment focus on Asia, whose managers employ a variety of investment
strategies.
The underlying portfolio managers' investment strategies include but are not
limited to, convertible/capital structure arbitrage, credit based, event
driven, fixed income arbitrage and hedged equity.
The Fund may invest up to 20 per cent. of its gross assets in the securities of
any one company or group. The Fund may invest up to 60 per cent. of its Net
Asset Value in any one investment strategy.
The Fund's policy is to remain substantially fully invested at all times whilst
retaining modest amounts of liquid resources to cover short term liquidity
requirements.
The Fund generally has the power to borrow up to 25 per cent. of the Fund's Net
Asset Value. It will not utilise this power to make long term investments. Any
such borrowings will be short term in nature and will be for the purposes of
efficient portfolio and working capital management.
The Fund generally invests in underlying Investee Funds which are predominantly
US Dollar denominated. The Fund will engage in currency hedging on an ongoing
basis by selling the currency of denomination back into Sterling through the
use of rolling forward foreign exchange transactions.
FINANCIAL HIGHLIGHTS
At 31 At 31
December December Movement
Note 2008 2007 in year
Redeemable participating 1 59,649,105 46,569,999 28.1%
preference shares in
issue
Total cellular net assets GBP59,585,653 GBP56,415,135 5.6%
Market capitalization GBP49,061,389 GBP56,000,424 (12.4)%
Share price 82.25p 120.25p (31.6)%
Net Asset Value per 99.89p 121.14p (17.5)%
redeemable participating
preference share
MSCI Asia Pacific Index 89.58 157.79 (43.2)%
Share price discount to 17.7% 0.7%
Net Asset Value per share
Total expense ratio 2 1.4% 1.4%
("TER") (excluding
performance fee &
repurchase loan interest)
Annualised return since 0.5% 10.6%
launch
Notes.
1 During the year the Fund issued 15,030,000 C shares, which were converted
into 13,079,106 redeemable participating preference shares on 8 September 2008.
Further details of the transactions can be found in note 10 of the financial
statements.
2 TER has been calculated by taking the operating costs (excluding the
performance fee and repurchase loan Interest) incurred by the Fund divided by
the average Net Asset Value in the year.
CHAIRMAN'S STATEMENT
PERFORMANCE
The year under review has been a particularly challenging one for most asset
classes and the hedge fund sector has been no exception. It is disappointing to
report a significant fall in the Company's net asset value (NAV) per share,
which declined by 17.5 per cent. during the year under review, surrendering
virtually all of the gains made in the period from the Company's launch to 31
December 2008. The annualised return since inception now stands at 0.5 per
cent. with an annualised volatility of 9.1 per cent. This compares to the
Company's objective of achieving an annualised return in excess of 12 per cent.
over the course of an investment cycle (typically five years), with volatility
of less than 10 per cent. Despite the disappointing performance over the year
it is worthy of note that the NAV performance of the Company ranked 8th out of
35 similar vehicles in 2008, with only the top 3 vehicles recording a positive
NAV return for the year (source: Cazenove). In addition, and by way of
additional comparison, the MSCI Asia Pacific index declined by over 40 per
cent. during the year under review.
The opening months of 2009 have proved just as challenging as the closing ones
of 2008. Volatility has remained high and investor sentiment febrile. However,
our managers are demonstrating their ability to adjust to the difficult market
conditions successfully with the result that the NAV has declined less than 1
per cent. despite Asian market indices being down more than 15 per cent. so far
this year. Their low gross and net exposures together with the growing cash
position have also helped to reduce volatility.
The Company's share price fell by 31.6 per cent. over the year as the discount
of share price to net asset value per share widened significantly to finish the
year at 17.7 per cent., compared to a discount of 0.7 per cent. at the
beginning of the year. This widening of the share price discount was in part
due to the disappointing investment performance, but was also due to poor
sentiment towards the hedge fund sector as a whole in the second half of the
year, with none of the 35 investment companies making up the listed hedge fund
sector recording a positive share price return in 2008. Investor activity,
particularly on the part of private wealth managers, demonstrated a strong
liquidity preference during the 4th quarter of 2008, which now appears to be
abating.
INVESTMENT PORTFOLIO
Despite a recovery in December 2008, the majority of the managers making up the
investment portfolio are maintaining a cautious stance into 2009. The number of
funds making up the investment portfolio reduced from 35 to 28 during the year
and our Investment Adviser's belief is that current market conditions present
opportunity for a number of strategies. These include variable exposure,
catalyst driven, trading orientated equity long/short which should benefit from
increasing differentiation in stock and sector performance as markets move away
from the extreme levels of correlation witnessed in late 2008. Macro
strategies, particularly those focussing on foreign exchange and interest rate
movements, should be able to exploit opportunities that result from the
currently high level of policy intervention. There are also a number of niche
strategies where prices became extremely distorted at the end of last year
which are now beginning to see a degree of rationality returning.
As well as the continuing search for attractive new funds, a great deal of
effort continues to be devoted by the Investment Adviser to operational due
diligence work on our existing holdings as well as close engagement with
managers who have introduced `gates' or other restrictions on our ability to
redeem.
C SHARE ISSUE
The Company issued 15,030,000 C shares in July 2008 at a price of GBP1 which were
subsequently converted to 13,079,106 redeemable participating preference shares
on 8 September 2008. Whilst the amount of new money raised was less than we had
originally expected, the broadening of the shareholder base was a positive
outcome in the circumstances.
GEARING AND HEDGING
It is not the Company's policy to be `structurally' geared by maintaining net
borrowing over the longer term. However in the second half of the year the
rapid and sustained weakening of Sterling against the US Dollar resulted in the
Company becoming temporarily geared. This was a consequence of our hedging
strategy since inception whereby the Company's exposure to the US Dollar was
fully hedged using monthly forward foreign exchange contracts. However the pace
of the deterioration of Sterling in the period from July to November 2008
resulted in significant negative cash flow demands on the Company which could
not be met immediately through redemptions from investee funds. The overall
loss on the foreign exchange hedging strategy during the year was GBP20.3
million, however, this was equally matched by a corresponding increase in the
valuation of investee funds denominated in foreign currencies. In the face of
growing indebtedness, the Board announced a temporary suspension of the hedging
strategy on 17 November 2008. I am pleased to report that this situation has
now been resolved through successful redemptions from investee funds and the
policy of being fully hedged was reinstated on 29 December 2008. At the time of
writing the Company has no outstanding borrowing or net gearing.
BOARD
Dennis Phillips has indicated his intention to retire from the Board at the
forthcoming Annual General Meeting (AGM). We will be sorry to see him leave and
he will be missed. His contribution to Board deliberations over the course of
the life of the Company to date, both professionally and personally, has been
invaluable. The Board is in the process of identifying a replacement and we
expect to make an announcement in due course.
DISCOUNT MANAGEMENT POLICY AND BUY-BACK AUTHORITY
For the first half of the year the share price traded at a small premium to net
asset value per share. However as I mentioned earlier, against a background of
particularly difficult market conditions and poor sentiment towards the listed
fund of funds sector, the share price moved to a significant discount in the
second half and persisted through the year end. The focus of the Company during
this period was to re-establish the foreign exchange hedging strategy.
Accordingly, no shares were bought back while the borrowing was being paid
down. However, the Board remains committed to maintaining the share price
discount to net asset value per share at an acceptable level over the longer
term and since the year end, following the re-establishment of the hedging
strategy, the Company has repurchased 1,350,000 shares which are being held in
Treasury. If not reissued within 12 months of purchase these shares will be
cancelled.
Overall however, the re-establishment of a premium rating for the Company's
shares is conditional on a period of consistent underlying hedge fund
performance at the fund level as well as there being an improvement in the
Investment Companies sector as a whole.
The execution and timing of any share buy-back will continue to be at the
absolute discretion of the Board and shareholder approval to renew the
authority to buy-back shares will be sought at the AGM.
INVESTMENT ADVISER AND CHANGE OF NAME OF THE COMPANY
As referred to in the interim financial statements, during the year our
Investment Adviser was acquired by LGT Capital Partners, a leading alternative
asset manager based in Switzerland, focused on institutional investors. The
firm currently manages over US$18 billion in hedge fund and private equity
investments globally. As a consequence, our Investment Adviser has changed its
name from KGR Capital (Hong Kong) Limited to LGT Capital Partners
(Asia-Pacific) Limited. Your Board regards this as a positive development and
would like to record its appreciation of the support provided to date by LGT
Capital Partners and LGT Bank.
In light of the change of ownership of the Investment Adviser, the Board will
propose a special resolution at the forthcoming AGM to change the name of the
Company to Castle Asia Alternative PCC Limited. The name of the only existing
cell, within the Company's protected cell structure, will be changed to
Sterling Class. The Board believes that the new name will make it easier for
the Company to benefit from marketing and investor relations initiatives
undertaken by LGT Capital Partners on behalf of two other listed companies for
which it is responsible: Castle Alternative Invest and Castle Private Equity.
CUSTODIAN, ADMINISTRATOR AND COMPANY SECRETARY
During the year the Company changed its custodian, administration and company
secretarial arrangements and on 22 September 2008 Fortis Bank (Guernsey)
Limited were appointed as the Company's custodian and Fortis Fund Services
(Guernsey) Limited were appointed as administrator and Company Secretary.
OUTLOOK
I reported in my statement this time last year that the Board continued to
believe that the prospects for the sector and for the Asia Pacific region were
bright. This did not turn out to be the case in 2008 but we remain of the view
that the patient investor will be rewarded in the medium term. Although we are
cautiously optimistic for Asian markets in the medium term and valuations
appear attractive across a range of asset classes, the significant slowdown
being observed globally, together with fragile western financial and banking
market conditions, is expected to provide a catalyst for further turbulent
stock market conditions. Despite the global slowdown, your Board continues to
believe that the outlook for Asian economies and financial markets is stronger
than that for Western economies. Our Investment Adviser's focus will continue
to be on the selection of hedge fund managers with strong prospects for capital
enhancement and strategies appropriate to the more difficult market conditions.
We remain optimistic as to the future prospects for the investment portfolio
over the medium term.
ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at Martello Court,
Admiral Park, St Peter Port, Guernsey, GY1 3HB on 16 June 2009.
Rupert Dorey
Chairman
26 March 2009
INVESTMENT ADVISER'S REPORT
The NAV ended 2008 down 17.5 per cent. net of fees and expenses. After a strong
2007 last year saw significant performance problems in the investment portfolio
against the background of a rapidly deteriorating environment for risk assets
and shrinking liquidity globally. Over the 37 month period since inception the
annualised return of the NAV per share was 0.5 per cent..
Review of Markets
2008 will be remembered as one of the most eventful years in recent financial
history. The severity of the financial crisis was highlighted by the collapse
of Bear Stearns earlier in the year, followed by the bankruptcy of Lehman
Brothers, the sale of Merrill Lynch, the bail out of Freddie Mac, Fannie Mae,
and AIG by the U.S. government later in the year. By the end of the year, the
US government had announced various stimulus plans, including a US$700 billion
financial package, in an attempt to support liquidity in the credit markets and
revive the rapidly slowing economy.
In Asia all equity markets saw a sea of red over the year as panic swept
through the global markets due to the massive deleveraging of balance sheets
and the unwinding of risk by global financial institutions. The positive
momentum from the previous year was reversed immediately at the start of the
year. There was some brief respite in May as markets responded positively to
the bailout of Bear Stearns. However, financial market turbulence returned with
a vengeance following the collapse of Lehman Brothers in September and the sell
off quickly reached historic levels. The VIX index spiked above 80 in October
as selling reached a climax, before stabilising in the 40's towards the end of
the year. Overall, all major Asian equity indices ended the year down, with
China on-shore A-shares, Vietnam, and India BSE30 being the three worst
performing markets.
Japanese equities sold off heavily along with the rest of Asia, as regional
markets continued to be affected by the uncertainty in the U.S. financial
system and the realisation of an imminent global slowdown. Over the 12- month
period, Nikkei and Topix were down 42.1 per cent. and 41.8 per cent.
respectively. It is also worth mentioning that small-caps broadly performed
better than large-caps in Japan, with Topix Small and Topix Large down 32.0 per
cent. and 43.4 per cent. respectively.
Credit markets also experienced a very difficult environment in the face of
escalating concerns over corporate credit risks worldwide. Spreads on both
Asian high grade debt and high yields widened substantially and ended the year
much wider than their respective levels at the end of 2007.
With almost every asset class selling off in the face of massive deleveraging
in the financial markets, commodity prices also declined sharply. Over the year
the S&P Goldman Sachs Commodity Index was down 50.3 per cent.. The volatility
in the commodity markets can perhaps be best summarised by the extreme
volatility in the price of crude oil. It escalated to a historical high over
US$140 in July 2008 before abruptly dropping back to the mid 30's in December
2008 - a difference of over US$100 in a span of six months.
Liquidity Restrictions
Across the hedge fund industry the end of 2008 saw many managers experiencing
record levels of redemptions from their investors just at the time when
available liquidity in most markets was collapsing. In order to avoid having to
become forced sellers, a number of managers exercised their "gates", suspended
redemptions entirely, or temporarily restricted the liquidity they offered to
their investors to protect their portfolios. This was justified as being in the
interests of all investors and not just those that were redeeming.
At the end of the year there were a total of 6 hedge funds in the investment
portfolio which had taken some kind of corporate action to preserve liquidity,
although at the time of writing 3 of these had either re-opened their funds
having raised sufficient liquidity, or have made announcements that they intend
to re-open within the next few months. Only 3 funds remain which have not yet
given details of when they will do so. The funds in question are Eastern
Advisors, CAI Global and Swordfish, representing 6.3 per cent. of the Fund's
NAV. We are in frequent contact with each of the managers concerned and we are
hopeful that all of these situations will be resolved or very significantly
reduced over the next few quarters.
Review of Fund Performance
Many of our managers found these extreme conditions with sharply rising
volatility and shrinking liquidity very challenging and in some cases this was
reflected in some very poor performance. Event driven managers were the only
contributor to performance over 2008, while all other strategies contributed
negatively to performance, with the worst performance coming from long/short
pan-asia managers.
Portfolio Review
The number of managers had been reduced to 28 by the end of December 2008 from
35 managers at the end of December 2007. During the year, the portfolio
turnover was higher than anticipated, with the addition of 8 new managers and
the redemption of 15. Portfolio turnover in 2008 amounted to 64 per cent. of
the portfolio against 31 per cent. in 2007.
This higher than expected turnover, to a great extent, reflected a continued
move away from long-biased equity strategies and a certain amount of upgrading
of individual managers and individual instances where a change in mandate or
other fund specific issues necessitated an exit. In addition, the depreciation
of GBP against USD also added extra pressure to the fund's cash resources in
order to satisfy the hedging requirements throughout 2008.
On the positive side, we have been increasing allocations to arbitrage managers
and multi-strategy funds in the expectation that the higher levels of
uncertainty seen in all areas in 2008 will persist into 2009. Although
valuations appear attractive across a range of asset classes, the significant
slowdown underway across the globe, still fragile western financial/banking
systems and the impact of policy actions should provide a catalyst for further
downside and volatility, which has already been in evidence in early 2009.
These conditions nevertheless open up opportunities for a number of strategies
such as those trading FX and rates in an environment that will continue to see
significant activity and volatility in the macro/policy space, strategies
trading on-shore Chinese convertible bonds that can be negatively correlated
and carry an attractive risk-return trade-off, as well as volatility trading
strategies, and trading oriented, catalyst driven long/short equity strategies
with flexible exposure management.
As liquidation pressure settles down, convertible bonds and credit strategies,
both hedged and long biased, should also present an attractive investment
opportunity, as should experienced distressed managers without legacy positions
and with cash to deploy in companies facing severe earnings declines and
refinancing problems.
In the light of the severe deterioration in credit conditions worldwide since
the beginning of 2008, we have increased our monitoring of exposure levels at
the individual fund level. In aggregate, gross exposure levels declined from as
high as 173 per cent. in the middle of 2008 to approximately 130 per cent. at
the end of 2008. Equity long/short managers are broadly in the 10 per cent. to
110 per cent. gross exposure range, although a number of our arbitrage-related
managers have gross exposure higher than this range. Furthermore, we have put
extra emphasis on our operational due diligence efforts and our monitoring of
counterparty risks in all of the funds.
LGT Capital Partners (Asia-Pacific) Limited
26 March 2009
DIRECTORS' REPORT
For the year ended 31 December 2008
The Directors have pleasure in submitting their Annual Report and the Audited
Financial Statements for the year ended 31 December 2008.
Principal Activities
The Company is a Guernsey registered closed-ended Protected Cell Company
established with one Cell known as KGR Asia Dynamic 1 (GBP) (the "Cell" or the
"Fund"). The Cell's redeemable participating preference shares are listed on
the London Stock Exchange. The Cell's objective is to seek long-term capital
appreciation through investment in a diversified multi-manager, multi strategy
portfolio of hedge funds investing in Asia. The Cell seeks to achieve a
sterling net annualised return in excess of 12 per cent., with a volatility of
less than 10 per cent. over the course of an investment cycle (typically five
years).
Revenue and dividends
The income statement shows a revenue account loss for the year amounting to GBP
870,717 (2007: loss of GBP1,384,673) which has been transferred from revenue
reserves. It also shows a net capital loss of GBP10,725,740 (2007: profit of GBP
9,229,067) comprising gains on investments of GBP6,832,443 (2007: gain of GBP
8,572,463) and capital losses on currency and derivative movements of GBP
17,558,183 (2007: gain of GBP656,604) which have been transferred from capital
reserves. The Directors have not paid an interim dividend and do not recommend
the payment of a final dividend for the year (2007: nil).
Assets
At the year end the net assets attributable to the redeemable participating
preference shares were GBP59,585,653 (31 December 2007: GBP56,415,135). Based on
this figure the net asset value of a redeemable participating preference share
in the Cell was 99.89p (31 December 2007: 121.14p).
Share capital
As at 31 December 2008 the Company had 59,649,105 shares in issue in relation
to the Cell (31 December 2007: 46,569.999). During the year the Cell issued
15,030,000 C shares which were subsequently converted to 13,079,106 redeemable
participating preference shares. The Company also cancelled 250,000 Treasury
shares during the year. Further details of these transactions are disclosed in
note 10 to the Financial Statements.
Substantial shareholdings in the Cell
At 9 March 2009, the holders of redeemable participating preference shares in
excess of 3 per cent. were as follows:
Registered holders Redeemable Participating Preference
Shares
Pershing Nominees Limited - TMCLT 11.40%
HSBC Global Custody Nominee (UK) Limited - 8.47%
771096
Nortrust Nominees Limited - NTGSLEND 8.38%
Bank of New York Nominees Limited - 468641 6.56%
Bank of New York Nominees Limited - MBGF 6.04%
Chase Nominees Limited - LEND 5.29%
BNY (OCS) Nominees Limited 5.16%
HSBC Global Custody Nominee (UK) Limited - 5.06%
872873
Chase Nominees Limited 4.64%
HSBC Global Custody Nominee (UK) Limited - 3.86%
977761
Cheviot Capital Nominees Limited 3.27%
Nortrust Nominees Limited - TDS 3.20%
So far as the Directors are aware there is no other interest of 3 per cent. or
more in the shares of the Cell.
Crest registration
The Cell trades its shares by way of Crest registration and the shareholders
have the option to hold stock in either certified or un-certificated form.
Directors
The Directors who served on the Board during the year, together with their
beneficial interests and those of their families at 31 December 2008, were as
follows:
Redeemable Participating
Preference Shares
31.12.2008 31.12.2007
Rupert Dorey (Chairman) 20,000 20,000
Dennis Phillips 20,000 20,000
Nigel Rich 20,000 20,000
Alan Smith nil nil
There have been no changes in the Directors' interests in the shares of the
Company between 1 January 2008 and 31 December 2008, or from 1 January 2009
until the date of approval of these financial statements. The Company has no
formal service contracts with the Directors.
The Directors are:
Rupert Dorey (Chairman)
Rupert Dorey has over 22 years experience in debt capital markets, specialising
in credit related products, including derivative instruments. Mr Dorey's
expertise is principally in the areas of debt distribution, origination and
trading, covering all types of debt from investment grade to high yield and
distressed debt. He was at Credit Suisse First Boston for 17 years from 1988 to
2005, and from 2000 until he left was head of sterling credit sales.
Previously, he held a number of positions at Credit Suisse First Boston,
including establishing Credit Suisse First Boston's high yield debt
distribution business in Europe, fixed income credit product coordinator for
European offices and head of UK Credit and Rates Sales. Mr Dorey currently sits
on the boards of AcenciA Debt Strategies Limited, Dexion Alpha Strategies
Limited, Partners' Group Global Opportunities Limited, Babcock and Brown Public
Partnerships Limited, Tetragon Financial Group Limited, AP Alternative Assets
LP and Saltus European Debt Strategies Limited.
Dennis Phillips
Dennis Phillips is an investment director at Ashburton (Jersey) Limited. He is
personally responsible for Ashburton (Jersey) Limited's discretionary portfolio
management service and has more than 36 years experience in global asset
management with major international institutions. Prior to joining Ashburton
(Jersey) Limited, Mr Phillips was Head of Investment at Banque Belge in
Guernsey. From 1987 to 1991 he was senior investment manager at the Abu Dhabi
Investment Authority, where he managed a multi-billion dollar portfolio,
specialising in Asia. Mr Phillips is a fellow of the Securities and Investment
Institute and an associate member of the CFA society of the UK.
Nigel Rich CBE, FCA
Nigel Rich is Chairman of SEGRO plc, Chairman of Xchanging plc, a non-executive
Director of Bank of Philippine Islands (Europe) plc, Pacific Assets Trust plc
and of Matheson and Co. He was previously Chairman of Exel plc, CP Ships
Limited and earlier in his career he was Managing Director of Jardine Matheson
Holdings. His other activities include being Co-Chairman of the Philippine
British Business Council. He is a Fellow of the Institute of Chartered
Accountants in England and Wales.
Alan Smith
Alan Smith was the Vice Chairman, Pacific Region, of Credit Suisse First Boston
from 1997 until he retired in December 2001. Prior to joining Credit Suisse
First Boston, he was chief executive of the Jardine Fleming Group from 1983 to
1994 and then chairman from 1994 to 1996. He has over 28 years' banking
experience in Asia. He was twice elected as a council member of The Stock
Exchange of Hong Kong and was a member of the Hong Kong Special Administrative
Region Government's Economic Advisory Committee. He holds a law degree from
Bristol University and was admitted as a solicitor in England in 1967 and in
Hong Kong in 1970. He was a member of the Hong Kong Government's Standing
Committee on Company Law Reform for 10 years. Mr Smith is a Director of Asia
Credit Hedge Fund, CQS Asia Feeder Fund Limited, CQS Convertible and
Quantitative Strategies Feeder Fund Ltd., Frasers Property (China) Limited,
Global Investment House, KSC, Kingway Brewery Holdings Limited, Noble Group
Limited, Star Cruises Limited, The Hong Kong Building and Loan Agency Limited,
United International Securities Limited and VXL Capital Limited.
Corporate Governance
Since the Company has a London Stock Exchange listing, the Annual Report and
Audited Financial Statements must disclose:
(a) whether or not it complies with the corporate governance regime of the
Company's country of incorporation;
(b) the significant ways in which its actual corporate governance practices
differ from those set out in the Combined Code; and
(c) the unexpired term of service contract of any Director proposed for
election or re-election at the forthcoming Annual General Meeting and, if any
Director for election or re-election does not have a service contract, a
statement to that effect.
There is no standard code of corporate governance in Guernsey. The Board of
Directors believes that the principles of the revised AIC Code of Corporate
Governance ("the AIC Code") issued by the Association of Investment Companies
("AIC") in February 2006 and amended in May 2007 and March 2009, are
appropriate to its circumstances and the following statement details how this
has been applied to the affairs of the Company. In February 2006, the Financial
Reporting Council ("the FRC") confirmed that investment companies who report in
accordance with the revised AIC Code will be deemed to have met their
obligations under the Combined Code on Corporate Governance. Details of the AIC
code are publicly available and can be found on their website at
www.theaic.co.uk.
The principles laid down by the two Codes are similar but there are some areas
where the AIC Code is more specifically applicable to investment companies. The
Directors attach importance to the matters set out in the AIC Code, and the
Directors believe that the Company was fully compliant with all of the
principles of the AIC Code in 2008.
The Board
The Company is led and controlled by a Board comprising four non-executive
Directors, all of whom have wide experience and are considered to be
independent. The Company does not have any employees. The Board believes that
it is in the shareholders' best interests for the Chairman to be the point of
contact for all matters relating to the governance of the Company and as such
has not appointed a senior independent non-executive Director. The Board has
established a Nominations and Remuneration Committee which was chaired until 17
December 2008 by Dennis Phillips, which reviews Directors' nominations,
remuneration and the contracts of key service providers. With effect from 17
December 2008 Rupert Dorey became Chairman of the Committee. It is intended
that one-third, or the number nearest to but not exceeding one third, of the
Directors shall retire and offer themselves for reappointment at each Annual
General Meeting in accordance with the Articles of Association.
Although no formal training in Corporate Governance is given to Directors, the
Directors are kept up-to-date on Corporate Governance issues through bulletins
and training materials provided from time to time by the Company Secretary, the
Board Adviser and the AIC.
The Board meets at least quarterly to review the overall business of the
Company and to consider matters specifically reserved for its review. At these
meetings the Board monitors the investment performance of the Fund.
The Directors also review the Company's activities every quarter to ensure that
it adheres to the Fund's investment policies or, if appropriate, to make any
changes to those policies. Additional ad hoc reports are received as required
and Directors have access at all times to the advice and services of the
Company Secretary, who assists the Board in ensuring that Board procedures are
followed and that applicable rules and regulations are complied with.
The Board met during the year to review its performance and composition and was
satisfied on both subjects. In addition, following the informal evaluation of
performance of the Board, its committees and individual Directors, it is
considered that the performance of all Directors continues to be effective and
they have demonstrated commitment to their roles. Under the Articles of
Association, R O Dorey and A H Smith retire by rotation and being eligible
offer themselves for re-election at the forthcoming Annual General Meeting.
As referred to in the Chairman's Statement, D G Phillips has indicated his
intention to retire from the Board at the forthcoming AGM. The Board is
currently in the process of appointing a new Director and an announcement will
be made in due course.
The Board has an Audit Committee (Chairman: N M S Rich) which meets at least
twice a year to review the interim and final financial statements. The
Company's external auditors are invited to attend the meeting regarding the
final financial statements. In addition the Board reviews the independence and
objectivity of the auditors.
The Company maintains Directors' and Officers' liability insurance which
provides insurance cover for Directors against certain personal liabilities
which they may incur by reason of their duties as Directors.
The Company has a procedure whereby the Board is entitled to obtain independent
advice where relevant at the expense of the Company.
Meeting Attendance
The table below sets out the number of Board meetings held during the year and
the number of meetings attended by each Director.
Quarterly Other Nomination and
Board Board Audit Remuneration
Meetings Meetings Committee Committee
Number of 4 5 2 1
meetings
Meetings
attended
Rupert Dorey 4 5 2 1
Dennis Phillips 4 5 2 1
Nigel Rich 4 2 2 1
Alan Smith 3 2 N/A 0
The emoluments of the Directors for the years ended 31 December 2007 and 2008
were as follows:
Director 2008 2007
GBP GBP
Rupert Dorey (Chairman) 23,750 20,000
Dennis Phillips 18,750 15,000
Nigel Rich 20,750 17,000
Alan Smith 18,750 15,000
82,000 67,000
In 2008 each Director received an additional fee of GBP3,750 which is included
above, over and above their agreed Directors fee, as a result of additional
time spent in connection with the C share issue during the year. The additional
fees totalling GBP15,000 have been included in the C share issue costs which have
been deducted from the proceeds received.
The Manager, Administrator and Secretary
During the year Kleinwort Benson (Channel Islands) Fund Services Limited gave
notice to terminate their Management Agreement with the Company.
As Manager, Kleinwort Benson (Channel Islands) Fund Services Limited was
entitled to receive a Management fee payable by the Company quarterly in
arrears at a rate of 1 per cent. per annum of the average Net Asset Value of
the Fund calculated over the relevant quarter period. Management fees due to
Kleinwort Benson (Channel Islands) Fund Services Limited for the period to 22
September 2008 totalled GBP413,928 (2007: GBP516,812). The Manager had agreed to
pay the Investment Adviser 70 per cent. of such fee in consideration of the
services provided by the Investment Adviser under the Investment Advisory
Agreement dated 1 November 2005. The Manager agreed to pay 20 per cent. of the
management fee to Dresdner Kleinwort as an ongoing trail fee.
Fortis Fund Services (Guernsey) Limited ("the Administrator") was appointed
Administrator and Secretary under an agreement dated 22 September 2008. Either
party, giving no less than 6 months notice, may terminate the agreement. The
Administration and Secretarial agreement may also be terminated with immediate
effect by either party if the other has been declared en desastre or has gone
into liquidation or receivership; has committed a material breach of the
agreement; or in the event the Administrator ceases to be a holder of a permit
under any applicable law. This agreement contains provisions limiting the
liability of the Administrator and Secretary for any damages and claims
suffered by the Company unless such damages and claims arise from fraud, wilful
default, negligence or dishonesty.
The Administrator is entitled to a fee payable by the Company quarterly in
arrears at a rate of 10 basis points of the Net Asset Value of the Fund up to
the value of GBP75 million, and then 5 basis points on the balance of any NAV
over GBP75 million, calculated over the relevant quarter period, and subject to a
minimum fee of GBP60,000 per annum. Administration fees due to Fortis Fund
Services (Guernsey) Limited from the date of appointment to the year end total
GBP16,433.
Investment Adviser
The Directors are responsible for the determination of the Company's investment
policy and have overall responsibility for the Company's activities. The
Directors have contractually delegated the overall responsibility for the
management of the Cell's investment portfolio to LGT Capital Partners (Asia
Pacific) Limited, formerly KGR Capital (Hong Kong) Limited, subject to the
overriding supervision of the Directors. KGR Capital (Hong Kong) Limited was
acquired during the year by LGT Capital Partners Limited, however the key staff
of KGR Capital (Hong Kong) Limited were retained and continue to manage the
Company's investment portfolio.
The Investment Adviser is, with effect from 22 September 2008, entitled to a
fee payable by the Cell quarterly in arrears at a rate of 77.5 basis points of
the Net Asset Value of the Cell. From 1 January 2008 to 21 September 2008 the
fee was at a rate of 70 basis points. Investment Adviser fees payable for the
year totalled GBP431,860.
The Directors are of the opinion that the continuing appointment of the
Investment Adviser, pursuant to the terms of the Investment Advisory agreement,
is beneficial to the interests of shareholders as a whole.
Board Adviser
During the year the Company appointed Frostrow Capital LLP as Board Adviser,
with the appointment becoming effective from 1 January 2008. The Board Adviser
is engaged to oversee, on behalf of the Board, the accounting, administrative,
general operational, advisory and company secretarial services provided to the
Company by its service providers. For the period during the year to 21
September the Board Adviser was contracted to receive 0.1 per cent. of the Net
Asset Value of the Cell. With effect from 22 September this fee rose to 0.125
per cent. of the Net Asset Value of the Cell, payable monthly in arrears.
Relations with Shareholders
In conjunction with the Board, the Manager keeps under review the register of
members of the Cell.
All shareholders are encouraged to participate in the Company's Annual General
Meeting.
Accountability and audit
a) Statement of going concern
The Company's business activities, together with the factors likely to affect
its future development, performance and position are set out in the Chairman's
Statement on pages 4 to 6. The financial position of the Company, its cash
flows, liquidity position and borrowing facilities are described in the notes
to the financial statements.
The Company has financial resources which it regards as reasonable in the
current economic environment. The Company has secured a long term loan facility
which has been partially drawn down, as well as an overdraft facility, which to
date the Company has not had the need to use. While there is some concern as to
the liquidity of certain investments within the investment portfolio such
concerns are considered unlikely to significantly impact the overall liquidity
of the Company, as highlighted in the Investment Adviser's Report. As a
consequence, the Directors believe that the Company is well placed to manage
its business risks successfully despite the current uncertain economic outlook.
After making enquiries, the Directors consider that the Company has adequate
resources to continue in operational existence for the foreseeable future. For
this reason, they continue to adopt a going concern basis in preparing the
financial statements.
b) Internal control
The Board is responsible for establishing and maintaining the Company's system
of internal control and reviewing its effectiveness. The Administrator is
responsible for all the operational aspects of the Company's business and
therefore the Board is reliant on the Administrator's internal control systems
including the financial, operational and compliance controls and risk
management. The audit committee has received assurance from the Administrator
that it has in place robust financial controls in respect of the Company and
that these controls are subject to audit by the Administrator's compliance and
internal audit functions and, in addition, that these controls are subject to
external audit. The Board has received assurance that no weaknesses or breaches
in those controls have been identified which might have affected the Company
during the year. The Administrator's procedures are designed to manage rather
than eliminate risk and by their nature can only provide reasonable but not
absolute assurance against material misstatement or loss.
The Board has reviewed the need for an internal audit function. The Board has
decided that the systems and procedures employed by the Administrator,
including its internal audit function and the review of its annual financial
report by a firm of independent auditors, adequately safeguards the Company's
assets. An internal audit function specific to the Company is therefore
considered unnecessary.
c) Audit
So far as each Director is aware, there is no relevant audit information of
which the Company's auditor is unaware. Each Director has taken all the steps
he ought to have taken as a Director to make himself aware of any relevant
audit information and to establish that the Company's auditor is aware of that
information.
Auditors
A resolution to re-appoint Ernst & Young LLP as auditors of the Company will be
proposed at the forthcoming Annual General Meeting on 16 June 2009.
Annual General Meeting
The notice of the Annual General Meeting convened for 16 June 2009 is to be
found at the back of this announcement.
On behalf of the Board.
R O Dorey
Chairman
26 March 2009
DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the financial statements in
accordance with applicable Guernsey Law and generally accepted accounting
principles. Guernsey Company Law requires the Directors to prepare financial
statements for each financial year which give a true and fair view of the state
of affairs of the Company and of the profit or loss of the Company for that
period. In preparing the financial statements the Directors are required to:
(a) select suitable accounting policies and apply them consistently;
(b) make judgements and estimates that are reasonable and prudent;
(c) state whether applicable accounting standards have been followed; and
(d) prepare financial statements on a going concern basis unless it is
inappropriate to assume the Company will continue in business.
The Directors confirm that the financial statements comply with the above
requirements.
The Directors are also responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with the
requirements of The Companies (Guernsey) Law, 2008. They are also responsible
for safeguarding the assets of the Company and for taking reasonable steps for
the protection against, and the detection of, fraud and other irregularities.
Directors' responsibility statement
We confirm that to the best of our knowledge:
1. the financial statements, prepared in accordance with International
Financial Reporting Standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company; and
2. the Investment Adviser's report includes a fair review of the development,
performance and position of the Company, together with a description of the
principal risks and uncertainties faced by the Company.
On behalf of the Board
R O Dorey
Chairman
26 March 2009
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF
KGR ABSOLUTE RETURN PCC LIMITED
We have audited the company's financial statements for the year ended 31
December 2008 which comprise the Income Statement, the Balance Sheet, the
Statement of Changes in Equity, the Cash Flow Statement and the related notes 1
to 21. These financial statements have been prepared under the accounting
policies set out therein.
This report is made solely to the Company's members, as a body, in accordance
with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been
undertaken so that we might state to the Company's members those matters we are
required to state to them in an auditors' report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company's members as a body, for our
audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditors
The Directors are responsible for the preparation of the financial statements
in accordance with applicable Guernsey law as set out in the Statement of
Directors' Responsibilities.
Our responsibility is to audit the financial statements in accordance with
relevant legal and regulatory requirements and International Standards on
Auditing (UK and Ireland).
We also report to you our opinion as to whether the financial statements give a
true and fair view and are properly prepared in accordance with the Companies
(Guernsey) Law, 2008. We also report to you if, in our opinion, the Company has
not kept proper accounting records or if we have not received all the
information and explanations we require for our audit.
We read the Investor Information, Financial Highlights, Chairman's Statement,
Investment Adviser's Report, Directors' Report, Directors' Responsibilities and
Investment Portfolio and consider the implications for our report if we become
aware of any apparent misstatements or material inconsistencies with the
financial statements. Our responsibilities do not extend to any other
information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing
(UK and Ireland) issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgments made by the Directors in the preparation of
the financial statements, and of whether the accounting policies are
appropriate to the Company's circumstances, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view, in
accordance with International Financial Reporting Standards, of the state of
the Company's affairs as at 31 December 2008 and of its loss for the year then
ended and have been properly prepared in accordance with the Companies
(Guernsey) Law, 2008.
Ernst & Young LLP
26 March 2009
INCOME STATEMENT
For the year ended 31 December 2008
2008 2007
Notes Revenue Capital Total Revenue Capital Total
GBP GBP GBP GBP GBP GBP
Operating
income
Net gains on
investments
and repurchase
agreement
loan 8c - 6,832,443 6,832,443 - 8,572,463 8,572,463
receivable
Net (loss)/ 4 - (20,297,967) (20,297,967) - 709,355 709,355
gain on
derivatives
Other foreign 4 - 2,739,784 2,739,784 - (52,751) (52,751)
exchange gain/
(loss)
Interest and 3 77,079 - 77,079 171,565 - 171,565
similar income
77,079 (10,725,740) (10,648,661) 171,565 9,229,067 9,400,632
Operating
expenses
Management and
advisory fees 5 (567,382) - (567,382) (516,812) - (516,812)
Performance 5 - - - (693,563) - (693,563)
fee
Custodian fee 5 (37,765) - (37,765) (31,994) - (31,994)
Directors' 18 (67,000) - (67,000) (67,000) - (67,000)
fees
Other expenses 6 (140,381) - (140,381) (100,618) - (100,618)
Total
operating
expenses
before finance (812,528) - (812,528) (1,409,987) - (1,409,987)
costs
Operating
(loss)/profit
before
finance costs (735,449) (10,725,740) (11,461,189) (1,238,422) 9,229,067 7,990,645
Finance costs
Repurchase (60,772) - (60,772) (144,606) - (144,606)
loan interest
Loan interest (44,975) - (44,975) - - -
Loan (16,985) - (16,985) - - -
arrangement
fee
Bank overdraft (12,536) - (12,536) (1,645) - (1,645)
interest
Net (loss)/ (870,717) (10,725,740) (11,596,457) (1,384,673) 9,229,067 7,844,394
profit for
year
(Loss)/
earnings per
redeemable
participating
preference 12 (1.72)p (21.16)p (22.88)p (2.95)p 19.68p 16.73p
share
There are zero earnings attributable to the management shares.
All revenue and capital items in the above statement derive from continuing
operations.
The total column of this Income Statement is prepared in accordance with
International Financial Reporting Standards (IFRS). The revenue and capital
columns are supplementary to this and are prepared under guidance published by
the Association of Investment Companies.
The notes 1 to 21 are an integral part of these financial statements.
BALANCE SHEET
As at 31 December 2008
Notes 2008 2007
GBP GBP
Non-current assets
Financial assets held at fair 8 59,571,860 48,932,733
value through profit or loss
59,571,860 48,932,733
Current assets
Cash and cash equivalents 809,996 5,903,415
Repurchase agreements assets at
fair value through
profit or loss - 5,226,692
Advance applications 3,417,869 629,760
Amounts due from redemptions 3,806,120 1,595,984
awaiting settlement
Other receivables 9,524 43,924
8,043,509 13,399,775
Total assets 67,615,369 62,332,508
Current liabilities
Repurchase agreement loan 15 - 3,036,208
Bank loan 16 6,967,667 -
Other payables 9 178,130 891,268
Fair value of derivative 8(d),14 883,917 1,989,895
financial instrument
Total liabilities 8,029,714 5,917,371
Net assets 59,585,655 56,415,137
Shareholders' funds
Management shares 10 2 2
Share premium account 10 60,730,018 46,238,863
Treasury shares 10 (50,000) (325,820)
Reserves 11 (1,094,365) 10,502,092
Total equity 59,585,655 56,415,137
Net asset value per redeemable
participating
preference share 13 99.89p 121.14p
Net asset value per management 100.00p 100.00p
share
These financial statements were approved by the Board of Directors on 26 March
2009.
Signed on behalf of the Board
R O Dorey
Chairman
The notes 1 to 21 are an integral part of these financial statements.
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2008
Shares
Management Share held in Capital Revenue
Shares Premium Treasury Reserve Reserve Total
GBP GBP GBP GBP GBP GBP
Balance at
31 2 46,238,863 (325,820) 12,637,582 (2,135,490) 56,415,137
December
2007
C Shares - 15,030,000 - - - 15,030,000
issued
Direct
costs of
issuing
C Shares - (263,025) - - - (263,025)
Treasury - (275,820) 275,820 - - -
shares
cancelled
Loss for - - - (10,725,740) (870,717) (11,596,457)
the year
Balance at
31 2 60,730,018 (50,000) 1,911,842 (3,006,207) 59,585,655
December
2008
For the year ended 31 December 2007
Shares
Management Share held in Capital Revenue
Shares Premium Treasury Reserve Reserve Total
GBP GBP GBP GBP GBP GBP
Balance at
31 December 2 46,678,624 - 3,408,515 (750,817) 49,336,324
2006
Shares
purchased
for - (439,761) - - - (439,761)
cancellation
Shares
purchased
for treasury - - (325,820) - - (325,820)
Profit/ - - - 9,229,067 (1,384,673) 7,844,394
(loss) for
the year
Balance at
31 December 2 46,238,863 (325,820) 12,637,582 (2,135,490) 56,415,137
2007
The notes 1 to 21 are an integral part of these financial statements.
CASH FLOW STATEMENT
For the year ended 31 December 2008
2008 2007
Cash flows from operating activities
Net (loss)/profit for year (11,596,457) 7,844,394
Add back interest payable 118,283 146,251
Loss/(gains) on investments held at fair value
through
profit or loss and foreign exchange gains/ 10,725,740 (9,229,067)
(losses)
Interest and similar income (77,079) (171,565)
Decrease/(increase) in other receivables 34,400 (8,325)
(Decrease)/increase in other payables (713,138) 572,955
Purchase of investments held at fair value
through profit or
loss and repurchase agreement loan receivable (32,664,852) (26,245,847)
Sales of investments held at fair value through 29,086,615 24,680,025
profit or loss
Short term interest 77,079 155,849
Net settlement on derivatives (21,403,945) 2,610,764
Net cash (outflow)/inflow from operating
activities
before interest (26,413,354) 355,434
Interest paid (12,536) (132,789)
Net cash (outflow)/inflow from operating (26,425,890) 222,645
activities
Financing activities
Issue of shares 15,030,000 -
Issue costs paid (263,025) -
Repurchase of shares - (765,581)
Repurchase loan (3,141,955) 3,022,746
Credit facility drawdown 6,967,667 -
Net cash inflow from financing activities 18,592,687 2,257,165
(Decrease)/increase in cash and cash equivalents (7,833,203) 2,479,810
during the year
Reconciliation of cash flow to movement in net
cash
(Decrease)/increase in cash and cash equivalents (7,833,203) 2,479,810
during the year
Cash and cash equivalents at beginning of year 5,903,415 3,476,356
Effect of foreign exchange rate changes 2,739,784 (52,751)
Cash and cash equivalents at end of year 809,996 5,903,415
Cash and cash equivalents consist of:
Cash and cash equivalents 810,341 5,903,415
Bank overdraft (345) -
809,996 5,903,415
The notes 1 to 21 are an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2008
1. Principal Activity
The Company is a Guernsey incorporated, closed-ended, Protected Cell Company
with an unlimited life, governed by the provisions of The Companies (Guernsey)
Law, 2008 and The Protected Cell Companies Ordinance, 1997 (the "Ordinance").
The Company has initially been established with one Cell in accordance with the
Ordinance: KGR Asia Dynamic 1 (GBP). The KGR Asia Dynamic 1 (GBP) Cell was
listed on 22 November 2005 on the London Stock Exchange. The Company retains
the option to create new Cells with different investment objectives and terms
in the future.
2. Principal Accounting Policies
Basis of preparation
The financial statements have been prepared in accordance with International
Financial Reporting Standards ("IFRS") issued by the International Accounting
Standards Board (IASB) and with the Statement of Recommended Practice
"Financial Statements of Investment Trust Companies" (AIC SORP) issued in
January 2009, insofar as it is not inconsistent with IFRS.
Owing to a requirement of the United Kingdom Listing Authority, the financial
statements contained within the 31 December 2007 Annual Report and Audited
Financial Statements were converted from presentation under UK Generally
Accepted Accounting Practice (UK GAAP) to presentation under IFRS. The 31
December 2007 financial statements can be found in the prospectus issued on 26
June 2008 and the comparative figures shown in these financial statements
reflect the amount presented under IFRS.
The date of transition to IFRS from UK GAAP and the date of the opening IFRS
balance sheet was 13 October 2005. The transition to IFRS did not entail any
significant changes in accounting policies nor any restatement of figures.
The financial statements have been prepared on a total company basis and not on
a cell-by-cell basis as there is currently only one cell. The only non-cellular
assets and liabilities are in respect of the two management shares of no par
value issued at GBP1 each fully paid and represented by cash and cash
equivalents.
The financial statements are prepared on a fair value basis for financial
assets at fair value through profit and loss and derivative financial
instruments. Other financial assets and liabilities are stated at amortised
cost.
New Accounting Standards
At the date of authorisation of these financial statements, the following
standards and interpretations, which have not been applied, were in issue but
are not yet effective:
IFRS 8: Operating segments - for accounting periods commencing on or after 1
January 2009.
IAS 23: Borrowing costs (Revised) - for accounting periods commencing on or
after 1 January 2009.
IAS 1: Presentation of financial statements (Revised) - for accounting periods
commencing on or after 1 January 2009.
IFRS 3: Business combinations (Revised) - for accounting periods commencing on
or after 1 July 2009.
IFRS 1: First time adoption of international financial reporting standards
(Revised) - for accounting periods commencing on or after 1 January 2009.
IFRS 1 and IAS 27: Cost of an investment in a subsidiary, jointly controlled
entity or associate - for accounting periods commencing on or after 1 January
2009.
IFRS 2: Amendments to IFRS 2 - Vesting conditions and cancellations - for
accounting periods commencing on or after 1 January 2009.
IAS 27: Consolidated and separate financial statements (Amendment) - for
accounting periods commencing on or after 1 July 2009.
IAS 32 and IAS 1: Puttable financial instruments and obligations arising on
liquidation - for accounting periods commencing on or after 1 January 2009.
IAS 39: Eligible hedged items - for accounting periods commencing on or after 1
January 2009.
IAS 39: Financial Instruments: Recognition and measurement - for accounting
periods commencing on or after 1 July 2008.
IFRS 7: Financial instruments: Disclosures - Reclassification of financial
assets (Amendments) - for accounting periods on or after 1 July 2008.
IFRIC 13: Customer loyalty programmes - for accounting periods commencing on or
after 1 July 2008.
IFRIC 15: Agreements for the construction of real estate - for accounting
periods commencing on or after 1 January 2009.
IFRIC 16: Hedges of a net investment in a foreign operation - for accounting
periods commencing on or after 1 October 2008.
IFRIC 17: Distribution of non-cash assets to owners - for accounting periods
commencing on or after 1 July 2009.
The Directors do not anticipate that the adoption of these standards will have
a material impact on the financial statements of the Company when the relevant
standards and interpretations come into effect. The Directors have adopted a
policy of applying new statements and interpretations when they become
effective.
Significant accounting judgements and key accounting estimates
The preparation of financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and amounts reported of assets, liabilities, income and
expenses. The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis of making the judgements
about carrying values of assets and liabilities that are not readily apparent
from other sources. However, the nature of estimation means that actual
outcomes could differ from those estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of revision and future periods if the revision affects both current and future
periods.
In the process of applying the Company's accounting policies, management has
made the following judgements, apart from those involving estimations, which
have the most significant effect on the amounts recognised in the financial
statements.
Fair value of investments
The investments have been valued based on information supplied by the Fund
Administrator of the Cell's underlying investments.
Functional and presentational currency
The financial information shown in the financial statements is shown in
Sterling, being the Company's presentational currency. In arriving at the
functional currency the Directors have considered the primary economic
environment of the Company and in doing so have considered the currency in
which the original capital was raised, any distributions are to be made,
performance is evaluated and ultimately the currency the capital would be
returned on a break up basis. The Directors have also considered the currency
to which the underlying investments are exposed and liquidity is managed. The
Directors are of the opinion that Sterling best represents the functional
currency.
The following principal accounting policies have been applied consistently in
dealing with items which are considered material in relation to the Company's
financial statements:
(A) Financial Instruments
a) Classification
i) Financial assets and liabilities at fair value through profit or loss
All investments (including those which were held under the repurchase agreement
loan) are classified as "fair value through profit or loss". The Company's
business is investing in financial assets with a view to profiting from their
total return in the form of dividends or increases in fair value. Investments
are designated as fair value through profit or loss on initial recognition.
ii) Other financial liabilites
This category includes all financial liabilities other than those classified as
fair value through profit or loss. This includes bank loans.
b) Recognition and basis of measurement
Purchases of investments are recognised on a trade-date basis and are initially
measured at fair value, being the consideration given, excluding transaction
costs which are expensed in the Income Statement. The fund recognises other
financial liabilities when, and only when, it becomes party to the contractual
provisions of the instrument. Such financial liabilities are initially
recognised at fair value and subsequently measured at amortised cost using the
effective interest method. Bank loans are accounted for on this basis, with
initial recognition being net of any transaction costs incurred in obtaining
such loans. Any bank overdrafts are recorded when the proceeds are received,
with any associated interest recognised in the income statement.
c) Valuation
Assets at fair value through profit or loss comprise investments in hedge
funds. These are included in the balance sheet at the net asset value supplied
by each hedge fund's administrator or manager.
d) Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount is reported in
the balance sheet when there is a legally enforceable right to set off the
recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously.
e) Gains and losses and de-recognition
Gains and losses are treated as realised for financial statement purposes on
the trade date of the securities sold or the closing or offsetting of an open
position. Unrealised gains and losses are the differences between the fair
value and cost of the open position. Cost of investments sold is determined on
an average basis and any realised gain or loss arising on disposal is
recognised in the income statement and transferred to the capital reserve
realised.
Gains and losses arising from changes in fair value are included in the income
statement and are transferred to the capital reserve unrealised.
The company ceases to recognise a financial asset when the contractual rights
to the cash flows from the financial asset expire. A financial liability ceases
to be recognised when the obligation specified in the contract is discharged,
cancelled or expired.
(B) Income
Bank deposit interest is accounted for on an accruals basis. Dividends are
accounted for when the right to receive them arises.
(C) Expenses
Expenses are accounted for on an accruals basis and all amounts have been
allocated to the income account except issue costs as described in (F) below.
(D) Foreign exchange
Foreign currency monetary assets and liabilities are translated into sterling
at the rate of exchange ruling at the balance sheet date. Transactions in
foreign currencies are translated into sterling at the rate ruling at the date
of the transaction. Any gain or loss arising from a change in exchange rate
subsequent to the date of the transaction is included as an exchange gain or
loss in the income statement in the capital reserve or revenue reserve as
appropriate.
(E) Derivative financial instruments - forward currency contracts
A forward currency contract obligates the Company to receive or deliver a fixed
quantity of foreign currency at a specified price on an agreed basis. These
contracts are accounted for when any contract becomes binding and are valued in
the balance sheet at the period end forward rate. Realised and unrealised gains
and losses are included in the income statement.
(F) Issue costs
All issue costs directly attributable to the issue of the shares have been
charged to equity via the share premium account. The costs incurred in the C
share issue during the year were borne solely by the holders of the C shares.
(G) Cash and cash equivalents
Cash and cash equivalents comprise bank balances and cash held by the Company
including short-term bank deposits and bank overdrafts with an original
maturity of three months or less.
(H) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business, being investment business, and one geographic segment,
being Asia.
(I) Repurchase agreements
Securities sold subject to a simultaneous agreement to repurchase the
securities at a certain later date at a fixed price (repurchase agreements) are
retained in the Balance Sheet and are measured in accordance with their
original measurement principles. Repurchase loans are treated as collateralised
financing transactions and are carried at their contractual amounts, including
accrued interest, as specified in the respective agreements.
Obligations for repurchase agreements loans are recognised when the Company
becomes party to the related contracts and are measured initially at the fair
value of consideration received less directly attributable transaction costs.
After initial recognition, repurchase agreement loans are subsequently measure
at amortised cost using the effective interest method.
Gains and losses arising on the repurchase, settlement or otherwise
cancellation of liabilities are recognised respectively in finance revenue or
finance costs.
(J) Share capital
Redeemable participating preference shares are classified as equity. Management
shares are issued in accordance with Guernsey Law in order that the redeemable
participating preference shares may be issued, as there must be non redeemable
shares. Incremental costs directly attributable to the issue of new shares are
shown in equity as a deduction from the proceeds. Further details are disclosed
in note 10.
(K) Treasury shares
Shares held in Treasury are deducted from equity, are shown separately on the
Balance Sheet and are recognised at cost. Consideration received from the sale
of such shares is also recognised in equity, with any difference between the
proceeds from sale and the original cost being taken to capital reserves.
3. Interest and similar income
2008 2007
GBP GBP
Dividends 12,048 15,716
Bank interest 65,031 155,849
Total income 77,079 171,565
4. Foreign exchange and derivative (losses)/gains
2008 2007
GBP GBP
Net (loss)/gain on
derivatives
Realised (loss)/gain on (19,414,050) 2,610,764
forward currency contracts
Unrealised loss on forward (883,917) (1,901,409)
currency contracts
(20,297,967) 709,355
Other foreign exchange
gains/(losses)
Realised currency gains 1,614,210 -
Unrealised currency gains/ 1,125,574 (52,751)
(losses)
2,739,784 (52,751)
Total foreign exchange and (17,558,183) 656,604
derivative (losses)/gains
5. Management, performance and custodian fees
Management fee
Kleinwort Benson (Channel Islands) Fund Services Limited was appointed Manager,
Secretary and Administrator (the "Manager") under an agreement dated 1 November
2005. During the year it was agreed that the agreement was to be terminated
with effect from 22 September 2008. Under the agreement Kleinwort Benson
(Channel Islands) Fund Services Limited was entitled to a fee, payable
quarterly in arrears, of 1 per cent. per annum calculated on the Net Asset
Value of the Fund. The Company had directed the Manager to pay the Investment
Adviser 70 per cent. of such fee in consideration of the services provided by
the Investment Adviser under the Investment Advisory Agreement dated 1 November
2005, together with 20 per cent. of such fee to Dresdner Kleinwort Benson
("Dresdner Kleinwort"). As of 1 January 2008 Dresdner Kleinwort was entitled to
receive 10 per cent. of the management fee. As of that date the Manager agreed
to pay 10 per cent. of the management fee to Frostrow Capital LLP in their role
as Board Adviser.
On 22 September 2008, Fortis Fund Services (Guernsey) Limited ("the
Administrator") was appointed as Company Secretary and Administrator to the
Company. Under the Administration Agreement of this date the Administrator is
entitled to receive a fee of 10 basis points of the Net Asset Value of the
Cell, up to a value of GBP75 million and 5 basis points on any amounts of the Net
Asset Value over GBP75 million, subject to a minimum of GBP60,000 per annum. This
fee is payable quarterly in arrears.
On 1 January 2008 Frostrow Capital LLP was appointed as the Board Adviser, to
oversee, on behalf of the Board, the accounting, administrative, general
operational, advisory and company secretarial services provided to the Company
by its service providers. With effect from 22 September 2008 the Board Adviser
became entitled to a fee of 12.5 basis points per annum of the Net Asset Value
of the Cell, accrued daily and payable monthly in arrears (period 1 January
2008 to 21 September 2008: 10 basis points).
During the year the Company's Investment Adviser, KGR Capital (Hong Kong) Ltd
was acquired by LGT Capital Partners. The Investment Adviser is now known as
LGT Capital Partners (Asia - Pacific) Limited. This has had no significant
effect on the services provided by the Investment Adviser and the key staff
formerly involved with the Company have been retained. The Company, or the
Investment Adviser, may terminate the contract with not less than six months'
notice. With effect from 22 September 2008 LGT Capital Partners (Asia-Pacific)
Limited became entitled to an annual fee of 77.5 basis points of the Net Asset
Value of the Cell, payable quarterly in arrears.
Performance fee
The Investment Adviser is also entitled to a performance fee in respect of any
financial year in which the Net Asset Value of the Fund increases by more than
3 per cent. over the higher of 98.25 pence and the Net Asset value at which a
performance fee was last paid (the "High Water Mark"). The performance fee is
equal to 10 per cent. of any increase in the Net Asset Value over the High
Water Mark during the financial year over and above 3 per cent.. The aggregate
management and performance fees payable in any one year are capped at 4 per
cent. of Net Asset Value.
As of 1 January 2008 the Investment Adviser directed the Manager to pay 10 per
cent. of any future performance fee that became payable to Dresdner Kleinwort
with the balance of 90 per cent. of any fee being payable to the Investment
Adviser. With effect from 30 June 2008 the relationship with Dresdner Kleinwort
was terminated, and from this date 100 per cent. of the performance fee is due
to the Investment Adviser. No performance fee is due for the year ended 31
December 2008 (2007: GBP693,563) as the Net Asset Value of the Fund has decreased
over the year.
Custodian fee
Kleinwort Benson (Guernsey) Limited was appointed Custodian under an agreement
with the Company dated 1 November 2005. As Custodian, Kleinwort Benson
(Guernsey) Limited was entitled to receive a fee, payable quarterly in arrears,
of 0.06 per cent. per annum calculated on the Net Asset Value of the Fund up to
GBP50 million and 0.045 per cent. per annum thereafter subject to a minimum
annual fee of GBP15,000. The agreement was terminated on 22 September 2008.
On 22 September 2008 the Company appointed Fortis Bank (CI) Limited as its
Custodian. The Company pays to the Custodian an annual fee of 0.06 per cent.
per annum of the Fund's Net Asset Value, subject to a minimum annual fee of GBP
15,000. The Custodian's fee is paid quarterly, pro-rated for any period less
than one quarter, in arrears within fifteen days of the end of the relevant
quarter. The Custodian is also entitled to receive transaction charges of GBP75
per transaction.
6. Other expenses
2008 2007
GBP GBP
Registrar's fee 17,285 11,909
Board expenses 10,913 16,847
Auditors' remuneration - 22,463 19,250
statutory audit work
Auditors' remuneration - - 4,175
non-audit work
Legal and professional 50,983 2,797
fees
Printing 5,721 13,303
Sundry expenses (including 33,016 32,337
bank charges)
140,381 100,618
The auditors received GBP41,955 in relation to non-audit work for the services
they provided during the C share issue. This amount has been included within
the direct costs of issuing C shares and is deducted from equity.
7. Taxation
During the year the Company was exempt from Guernsey Income Tax under the
Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and was charged an annual
exemption fee of GBP600. It is expected that the Company will continue to qualify
for exempt status in the future.
8. Financial assets and liabilities
a. Categories of Investments
2008 2007
Fair Fair
Value % of Value % of
Designated as GBP net assets GBP net assets
At fair value through
profit or loss
- Listed securities 4,429,550 7.4% 15,281,076 27.1%
- Non listed investment 55,142,310 92.6% 33,651,657 59.7%
funds
59,571,860 100.0% 48,932,733 86.8%
Repurchase agreement
assets at fair
value through profit or
loss
- Listed securities - - 4,504,556 8.0%
- Non listed investment - - 722,136 1.3%
funds
- - 5,226,692 9.3%
Financial liabilities at
fair value through
profit or loss
Held for trading
- Derivative financial 883,917 1.5% 1,989,895 3.5%
instrument
883,917 1.5% 1,989,895 3.5%
Under a Security Interest agreement dated 28 November 2008, in conjunction with
the Credit agreement entered into with LGT Bank in Lichtenstein Limited ("LGT
Bank") and as disclosed in note 16, the Company has agreed to provide as
security against this credit facility all assets which are held under the
control of the Custodian.
As at 31 December 2008 assets at fair value through the profit or loss to the
value of GBP6,967,667 (2007: nil) were held by the Custodian as security against
the credit facility drawn down.
b. Movement on investments
2008 2007
GBP GBP
Opening valuation 54,159,425 45,846,639
Purchases at cost 29,876,743 26,016,352
Sales proceeds (31,296,751) (26,276,029)
Realised gains/(losses) on 3,353,496 (513,828)
sales
Movement on unrealised
appreciation on
revaluation
of investments 3,478,947 9,086,291
Closing valuation 59,571,860 54,159,425
Transfer to Repurchase - 5,226,692
agreement loan (see note
15)
Investments as shown on 59,571,860 48,932,733
Balance Sheet
Comprising:
Closing book cost 46,914,772 44,981,285
Closing unrealised 12,657,088 9,178,140
appreciation
Closing valuation 59,571,860 54,159,425
Transfer to Repurchase - 5,226,692
agreement loan (see note
15)
Investments as shown on 59,571,860 48,932,733
Balance Sheet
c. Net gains/(losses) on financial assets at fair value through profit or loss
and repurchase loan receivable.
2008 2007
GBP GBP
Net movement in gains/
(losses) on financial
assets
at fair value through
profit or loss
Realised gains/(losses) on 3,353,496 (513,828)
sale
Movement in unrealised 3,478,947 9,086,291
appreciation on
revaluation of investments
6,832,443 8,572,463
d. Derivative financial instruments
Forward foreign exchange contracts
Outstanding contracts to buy Sterling
As at 31 December 2008
Financial
Contracted Closing Contract Contract asset/
rate rate value value (liability)
Maturity date USD GBP GBP
27 February 2009 1.4768 1.4610 30,750,000 21,046,846 (224,799)
31 March 2009 1.5090 1.4605 30,909,725 21,163,427 (679,845)
30 April 2009 1.4590 1.4604 31,657,711 21,677,499 20,727
63,887,772 (883,917)
As at 31 December 2007
Contracted Closing Contract Contract Financial
rate rate value value liability
USD GBP GBP
4 January 2008 1.9849 2.0601 108,189,560 52,516,655 (1,989,895)
In accordance with the Company's investment objectives and policies the Company
may enter into forward foreign exchange contracts traded over the counter to
hedge specific foreign currency payments. As there is no assurance that these
hedges will be effective in achieving the offsetting of changes in the cash
flows attributable to the currency risk on these specific foreign currency
payments it is the policy of the Company not to apply hedge accounting.
9. Other payables
2008 2007
GBP GBP
Performance fee - 693,563
Management fee - 128,550
Investment Adviser's fee 67,274 -
Board Adviser's fee 12,192 -
Administration fee 32,473 -
Custodian fee 10,560 8,583
Registrar's fee 2,262 2,318
Directors' fees 16,920 17,255
Auditor's remuneration 17,350 24,004
Printing 13,348 14,027
Sundry expenses 5,751 2,968
178,130 891,268
10. Share Capital
The authorised share capital of the Company is GBP2 divided into 2 management
shares of GBP1 each and an unlimited number of no par value shares that may be
issued as cell shares. The cell shares are issued as redeemable participating
preference shares ("shares").
2008 2007
Management shares - Issued 2 2
and fully paid
Redeemable participating
preference shares
Opening balance 46,569,999 47,299,999
Shares cancelled - (430,000)
Shares transferred to - (300,000)
treasury
Shares issued on 13,079,106 -
conversion of C shares
59,649,105 46,569,999
Treasury shares
Opening balance 300,000 -
Shares transferred from - 300,000
preference shares
Shares cancelled (250,000) -
50,000 300,000
Management shares
Two Management shares of GBP1 each in issue were beneficially owned by Kleinwort
Benson nominee companies until 3 November 2008. With effect from this date the
beneficial ownership of the two Management Shares were transferred to two
Fortis Fund Services (Guernsey) Limited nominee companies.
The Management Shares were created to comply with Guernsey Company Law, under
which there must be a class of non-redeemable shares in issue in order that the
cellular shares may be redeemable participating preference shares in accordance
with Guernsey Company Law. The sums paid up on the management shares are
credited to the non-cellular assets of the Company. The Management shares do
not carry any rights to dividends and holders of management shares are only
entitled to participate in the non-cellular assets of the Company on a
winding-up.
Redeemable participating preference shares
The holders of the shares attributable to a particular cell will only be
entitled to participate in the income, profits and assets attributable to that
cell. On a winding up the holders of the shares are only entitled to
participate in the assets of the cell and have no entitlement to participate in
the distribution of any assets attributable to any other cell. Holders of
shares are entitled to attend and vote at general meetings of the Company.
Under the discretionary Redemption Facility the Directors may at their sole
discretion offer the holders of shares an opportunity to redeem all or part of
their holdings on a bi-annual basis commencing on 30 June 2007. Although shares
are redeemable, redemption is at the sole discretion of the Directors.
C Shares
An Extraordinary General Meeting was held on 6 June 2008, followed by a Class
meeting on 13 June 2008, at which proposals were approved granting the Board of
Directors authority to amend the Articles of Association of the Company in
order to create C shares and the rights attaching to them, including the
conversion rights and the conversion mechanism.
Following a placing and offer for subscription, 15,030,000 C shares were issued
at GBP1 each on 15 July 2008, raising GBP15,030,000 before expenses.
The C shares were issued on the basis that they would convert into redeemable
participating preference shares, on the basis of a conversion ratio once 80 per
cent. of the proceeds received on the issue were invested. The calculation of
the conversion ratio was carried out by reference to the net asset value
attributable to the C shares and the existing shares.
On 11 August 2008 it was announced that the conditions required for the
conversion to proceed had been met and that the calculation date in respect of
the conversion was set as 31 July 2008. Based on the net asset value as at this
date the conversion ratio was set at 0.8702 redeemable preference shares for
every one C share held. The record date for conversion was 5 September 2008
with the conversion taking place on 8 September 2008. On this date 13,079,106
redeemable participating preference shares were issued.
Treasury shares
On 1 July 2008 the Company announced that it was cancelling 50,000 redeemable
preference shares of no par value which were previously held in Treasury. On 31
October 2008 the Company announced that it was cancelling a further 200,000
redeemable preference shares that it held in Treasury.
As at 31 December 2008 the total number of shares held in Treasury was 50,000
(2007: 300,000) representing 0.08 per cent. of the issued share capital (2007:
0.64 per cent.). These shares were subsequently cancelled on 15 January 2009.
11. Reserves
Capital Capital
Reserve Reserve Revenue
Realised Unrealised Reserve Total
2008 2008 2008 2008
GBP GBP GBP GBP
Opening Balance 4,883,137 7,754,445 (2,135,490) 10,502,092
Realised gain of 3,353,496 - - 3,353,496
investments
Movement in unrealised - 3,478,947 - 3,478,947
gain on investments
Realised (losses)/
gains on forward
currency
contracts (21,403,945) 1,989,895 - (19,414,050)
Unrealised loss on - (883,917) - (883,917)
forward currency
contracts
Other realised and - 2,739,784 - 2,739,784
unrealised currency
gains
Revenue loss for the - - (870,717) (870,717)
year
(13,167,312) 15,079,154 (3,006,207) (1,094,365)
2007 2007 2007 2007
GBP GBP GBP GBP
Opening Balance 2,786,201 622,314 (750,817) 2,657,698
Realised loss on (513,828) - - (513,828)
investments
Movement in unrealised - 9,086,291 - 9,086,291
gain on investments
Realised gains on 2,610,764 - - 2,610,764
forward currency
contracts
Unrealised loss on - (1,901,409) - (1,901,409)
forward currency
contracts
Unrealised currency - (52,751) - (52,751)
losses
Revenue loss for the - - (1,384,673) (1,384,673)
year
4,883,137 7,754,445 (2,135,490) 10,502,092
12. (Loss)/earnings per Redeemable Participating Preference Share
Revenue loss per redeemable participating preference share is based on the loss
attributable to the redeemable participating preference shares of GBP870,717
(2007: GBP1,384,673) and on the weighted average number of redeemable
participating preference shares in issue of 50,679,554 (2007: 46,900,985).
Capital (loss)/earnings per redeemable participating preference share is based
on the net capital loss attributable to the redeemable participating preference
shares of GBP10,725,740 (2007: GBP9,229,067 gain) and on the weighted average
number of redeemable shares in issue of 50,679,554 (2007: 46,900,985).
13. Net Asset Value per Redeemable Participating Preference Share
The net asset value per redeemable participating preference share is based on
net assets attributable to redeemable participating preference shares of GBP
59,585,653 (2007: GBP56,415,135) and on the redeemable participating preference
shares in issue at the year end of 59,649,105 (2007: 46,569,999).
14. Derivative Financial Instrument: Forward Foreign Exchange Contract
The Company hedges its US Dollar exposure by entering into forward sales of US
Dollars into Sterling. The intention is that this should create a gain (or
loss) that offsets the loss (or gain) that results from holding assets that are
denominated in US Dollars. Occasionally, the Company may invest in Funds that
are denominated in currencies other than US Dollars and because of this from
time to time it may be necessary for the Company to hedge against its exposure
to these currencies. At the year end there were three outstanding forward sale
contracts, as disclosed in note 8, totalling US$ 93,317,436 against Sterling.
These contracts showed an aggregate unrealised loss at 31 December 2008 of GBP
883,917 (at 31 December 2007: loss GBP1,989,895).
15. Repurchase Agreement Loan
In the year to 31 December 2007, and up to 4 January 2008, the Company had
entered into an agreement whereby funds were raised by offering the
counterparty, Dresdner Kleinwort, a specified selection of securities in the
portfolio as collateral for the funds borrowed.
From 4 January 2008 the Company switched the counterparty to this transaction
to Barclays Private Clients International Limited ("Barclays"). This new
revolving credit facility meant it was no longer necessary for the Company to
use the borrowing facility to post collateral for the forward currency
transactions involved in the hedging policy, and as such it was used
exclusively for short term funding requirements. The loan was fixed on a
monthly basis and either repaid or rolled over at the end of each month
depending on the funding requirements of the Company.
On 27 November 2008 the revolving Credit facility came to the end of its term.
The Company chose not to renew this facility.
16. Bank Loan
At the end of the term of the revolving Credit facility with Barclays the
Company chose to enter into a credit facility agreement with LGT Bank. This
facility is primarily for the purposes of hedging and to maintain liquidity.
LGT Bank have provided a facility which allows the drawdown of fixed advances
and of overdrafts in current accounts, but in total is limited to the lowest of
the following three scenarios;
(1) GBP15,000,000, or
(2) 20 per cent. of the Net Asset Value of the cell, or
(3) 35 per cent. of the Cell's three month average market capitalisation.
This facility is valid until further notice, although it may be terminated by
either party subject to three months' notice or immediately on any event of
default.
On fixed amounts drawn down the facility attracts interest at a rate equivalent
to the lender's interbank market rate two days prior to the drawdown, plus a
margin of 0.9 per cent. per annum. On any overdraft the interest rate will be
the standard variable overdraft rate as set by the lender, calculated daily and
charged quarterly.
This loan is secured against all assets held on behalf of the Company by its
Custodian. The fair value of such assets held as at 31 December 2008 was GBP
59,571,860.
As at 31 December 2008 the loan facility and the amounts drawn down are as
follows;
Drawdown Amount Sterling Available Interest Accrued
rate
date drawn down equivalent facility % p.a. interest
30 December 2008 US$10,193,000 GBP6,967,667 GBP11,949,128 2.025 GBP758
The amounts drawndown and outstanding as at 31 December 2008 were subsequently
repaid on 29 January 2009.
17. Financial risk management objectives and policies
The Company's principal activity and primary investment objective is to seek
long-term capital appreciation through investment in a diversified
multi-manager, multi-strategy portfolio of hedge funds investing in Asia.
Accordingly concentration of risk is minimised. The Investment Adviser seeks to
accomplish the investment objective by investing the assets of the Company
predominantly in hedge funds worldwide, which invest in Asia, whose managers
employ a variety of investment strategies. The underlying portfolio managers'
investment methods may include, but are not limited to, convertible/capital
structure arbitrage, credit based, event driven, fixed income arbitrage and
hedged equity.
The Investment Adviser's investment process constitutes a three stage procedure
comprising manager selection, portfolio construction and ongoing portfolio
management.
Manager selection involves a screening of participants within the hedge fund
universe in Asia in order to identify suitable candidates for consideration.
The analysis and screening methodology undertaken involves quantitative
analysis of all funds within each investment strategy, use of a propriety
quantitative ranking model, meetings with managers, discussions with prime
brokers and newsletter reviews. This process results in the construction of a
`top tier focus list' of managers which is then subject to detailed due
diligence, with the intention of selecting managers with, inter alia, a clear
and successful `edge' in investment strategy, a sensible and well executed
investment process and appropriate and sufficient operational risk controls.
Portfolio construction involves the adoption of a 'top down' approach
underpinned by risk analytics. The Investment Adviser combines the benefit of
its experience in hedge fund markets in Asia with macro economic and strategy
analysis and quantitative analytics (e.g. risk/diversification measurements,
calculation of management exposure) in order to construct an appropriate
portfolio. Factors which the Investment Adviser will consider include portfolio
diversification (in terms of manager, strategy and style), liquidity profile of
the underlying investment and value at risk monitoring.
Ongoing portfolio management focuses on all areas which could impact on the
construction of the investment portfolio or its risk profile. This involves a
number of actions, including monitoring of underlying managers and portfolio
risk, trailing performance analysis, the creation of watch lists and efficient
portfolio management.
The Board of Directors and the Investment Adviser believe that the investment
process adopted will, over the longer term, meet the investment objectives of
the Company which is to seek to achieve a Sterling net annualised return in
excess of 12 per cent. with a volatility of less than 10 per cent. over the
course of an investment cycle (typically five years).
The processes above and the following policies and procedures to mitigate risk
have been in place throughout the year.
The main risks to which the Company is exposed are market risk (including
currency risk, price risk and interest rate risk), credit risk and liquidity
risk.
(a) Market risk
The Company's exposure to market risk is comprised mainly of movements in the
net asset value of investee hedge funds making up the Company's investment
portfolio, which are mainly denominated in currencies other than Sterling, and,
to the extent that the Company incurs indebtedness, changes in interest rates
that change its cost of borrowings. The exposure to market risk is made up of
changes in foreign currency exchange rates, interest rates and market prices.
Currency risk
Currency risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign currency
exchange rates.
The Cell invests in underlying funds which are predominantly denominated in US
Dollars. From time to time, funds denominated in other currencies may be
selected. The Company has had exposure to fluctuations in the exchange rate
between Sterling and the US Dollar.
In an attempt to reduce the impact on the Company of currency fluctuations,
under normal circumstances, the Company enters into a contract or contracts
involving the forward sale of the total value of all investments in their
currency of denomination for sterling delivery. These contracts are then closed
out at the end of each period with a further foreign exchange transaction and a
new forward contract established. A consequence of this hedging strategy is
that any changes in the value of the investments during the period of the
contract will not be hedged.
On 17 November 2008 the Company announced that it was temporarily suspending
the operation of its currency hedging arrangements with immediate effect due to
the significant depreciation of the value of Sterling against the US Dollar.
The Directors reinstated the hedging arrangement with effect from 10 December,
as this was felt to be the earliest date at which it was practical and in the
best interests of the Company to resume this activity.
In view of the hedges entered into by the Company during the year, and the
recent movements in the exchange rate between Sterling and the US Dollar, the
Directors consider that the currency risk is mitigated. The Company's
investments themselves are exposed to currency risk but this is reflected in
their valuation and forms part of price risk.
At 31 December 2008 the Company's net currency exposure was as follows:
2008 2007
GBP % GBP %
Sterling 63,745,474 99.5 55,785,262 97.4
United States 324,700 0.5 1,477,219 2.6
Dollar
64,070,174 100.0 57,262,481 100.0
The analysis includes amounts due from redemptions awaiting settlement and
excludes short term other receivables and other payables. The analysis takes
into account the forward foreign exchange contracts disclosed in note 8.
At 31 December 2008, should the US Dollar have strengthened, or weakened, by 10
per cent. against Sterling and all other variables, including the price of the
Company's investments, had held constant, the net assets attributable to
shareholders would have decreased, or increased, by GBP20,096 (2007: GBP132,950).
Price risk
Price risk is the risk that the fair value of future cash flows of a financial
instrument will fluctuate because of changes in market prices (other than those
arising from currency risk or interest rate risk), whether those changes are
caused by factors specific to the individual financial instrument or its
issuer, or factors affecting similar financial instruments traded on the
market.
The Company is exposed to market price risk arising from its investment in a
variety of hedge funds.
The Company's exposure to market price risk is managed by the Investment
Adviser, which has a robust monitoring process through which the investment
performance of the funds within the portfolio is assessed. Investment
performance is monitored on a weekly basis to ensure that NAV movements in the
underlying funds are consistent with the Company's strategy. In addition, the
Investment Adviser holds a detailed monthly investment committee meeting at
which the performance of the investment portfolio is monitored.
The Company's exposure to price risk takes the form of net asset value
movements delivered by the underlying hedge fund investments. The Directors
consider that the Investment Adviser manages the Company's exposure to price
risk by way of its rigorous investment process, as described above.
If the price of the underlying hedge funds as at 31 December had increased, or
decreased, by 10 per cent. the net asset value of the Company would have
increased/decreased by GBP5,957,186 (2007: GBP5,415,943).
If the historically worst month for each of the underlying funds held at year
end were to be repeated simultaneously, the Company would suffer a reduction in
its value of investments of 9.27 per cent..
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates.
The Company's interest-bearing financial assets and liabilities expose it to
risks associated with the effects of fluctuations in the prevailing levels of
market interest rates on its financial position and cash flows.
The Company holds only modest amounts of cash on deposit and the only interest
bearing liability is the loan, therefore exposure to interest rate changes is
limited to the effect on cash and the loan.
The following table details the Company's exposure to interest rate risk as at
31 December 2008.
Financial
assets/ Floating
(liabilities) Rate
on which financial
no interest assets/
is paid (liabilities) Total
2008 2008 2008
GBP GBP GBP
Sterling (883,917) 741,619 (142,298)
U.S. Dollars. 59,639,847 (6,967,277) 52,672,570
58,755,930 (6,225,658) 52,530,272
2007 2007 2007
GBP GBP GBP
Sterling (1,989,895) 3,268,607 1,278,712
U.S. Dollars. 54,159,425 (401,400) 53,758,025
52,169,530 2,867,207 55,036,737
The above analysis includes all loans, but excludes short term other
receivables and other payables as all the material amounts are non-interest
bearing.
At 31 December 2008, should interest rates have increased by 100 basis points
with all other variables held constant, the increase in net assets attributable
to redeemable participating preference shareholders for the year would amount
to approximately GBP7,416 (At 31 December 2007: GBP32,686) offset by a decrease in
the net assets attributable to redeemable participating preference shareholders
by approximately GBP69,673 (31 December 2007: GBP4,014). A decrease of 100 basis
points would have had an equal but opposite effect.
(b) Credit risk
Credit risk is the risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an obligation. The
counterparty credit risk of the loan is the main risk to the Company.
In addition there is the risk that an investee hedge fund is unable to satisfy
valid redemption instructions delivered by the Company. The Directors consider
that the Investment Adviser manages the Company's exposure to this credit risk
by way of its rigorous investment process, as described above.
The company manages its exposure to credit risk associated with the loan, and
with the hedging, by selecting counterparties with a high credit rating with
which to carry out these transactions. The counterparty for the hedging
transactions, the loan held at year end, in addition to the maintenance of cash
deposit accounts, is LGT Bank who hold a Moody's rating of Aa3.
Thc Company also holds cash deposits with Fortis Bank (C.I) Limited, part of
the Fortis Group, who have a credit rating of A-.
The Company's maximum exposure to credit risk is the carry value of the assets
on the balance sheet.
As at 31 December 2008 the exposure to credit risk was as follows:
2008 2007
GBP GBP
Financial assets at fair 59,571,860 48,932,733
value through profit or
loss
Repurchase agreement - 5,226,692
assets at fair value
through profit or loss
Advance applications 3,417,869 629,760
Amounts due from 3,806,120 1,595,984
redemptions awaiting
settlement
Other receivables 9,524 43,924
Cash and cash equivalents 809,996 5,903,415
67,615,369 62,332,508
(c) Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting
obligations associated with its financial liabilities.
The Company's exposure to liquidity risk mainly arises through the inability to
recover funds invested in an underlying portfolio fund through the usual fund
redemption process.
Investee hedge funds typically require notice of redemption of between 30 and
90 days and have either monthly or quarterly dealing days.
The maturity profile of the Company's assets and liabilities as at 31 December
2008 was as follows:
1 month 1 to 3 3 to 6
or less months months Total
GBP GBP GBP GBP
Assets:
Financial assets at fair
value through
profit or loss* 17,473,509 39,277,246 - 56,750,755
Advance applications - 3,417,869 - 3,417,869
Amounts due from
redemptions awaiting
settlement 2,909,039 897,081 - 3,806,120
Other receivables 952 2,857 5,714 9,523
Cash and cash equivalents 809,996 - - 809,996
21,193,496 43,595,053 5,714 64,794,263
Liabilities:
Bank loan (6,967,667) - - (6,967,667)
Other payables - (178,130) - (178,130)
Unrealised positions on
forward foreign
exchange contracts - (904,644) 20,727 (883,917)
(6,967,667) (1,082,774) 20,727 (8,029,714)
14,225,829 42,512,279 26,441 56,764,549
*Amounts relating to investments which have had all redemptions suspended have
been excluded in this analysis.
The maturity profile of the Company's assets and liabilities as at 31 December
2007 was as follows:
1 month 1 to 3 3 to 6
or less months Months Total
GBP GBP GBP GBP
Assets:
Financial
assets at fair
value through
through profit - 46,282,314 2,650,419 48,932,733
or loss
Repurchase
agreement
assets at fair
value
through profit - 5,226,692 - 5,226,692
or loss
Advance 629,760 - - 629,760
applications
Amounts due
from
redemptions
awaiting
settlement 1,595,984 - - 1,595,984
Other 43,924 - - 43,924
receivables
Cash and cash 5,903,415 - - 5,903,415
equivalents
8,173,083 51,509,006 2,650,419 62,332,508
Liabilities:
Repurchase - (3,036,208) - (3,036,208)
agreement loan
Other payables (891,268) - - (891,268)
Unrealised loss
on forward
foreign
exchange (1,989,895) - - (1,989,895)
contract
(2,881,163) (3,036,208) - (5,917,371)
5,291,920 48,472,798 2,650,419 56,415,137
Against the background of difficult market conditions, the liquidity of the
Company's portfolio of investments remains under close review by the Investment
Adviser and the Board. The investments within the portfolio can be broken down
into the following categories, describing their current position regarding
their ability to make redemptions;
Normal redemption - no change from that as laid out in their prospectus.
Gated - a limit is placed on the number of redemptions that can be made on any
one dealing day. The investments which fall into this category are:
Asian CRC Hedge Fund 2.4%
CC Asia Advantage Fund Limited 3.0%
LIM Asia Multi Strategy Fund Inc 3.4%
8.8%
Side pocketed - illiquid investments within an investee company are placed in a
separate fund and any redemptions receive only their share of the liquid
investments at the current time with the balance being held until such time, if
at all, that the illiquid investments can be redeemed. The investments which
fall into this category are:
Eastern Advisor Offshore Fund Limited 1.6%
1.6%
Redemption suspended - No redemptions until further notice. The investments
which fall into this category are:
CAI Global Fund (Cayman) Limited 2.1%
Swordfish Fund Limited 2.6%
4.7%
As at 31 December 2008 the redemption status of the investment portfolio of the
Company can be summarised as follows;
Normal Side Redemption
redemption Gated Pocketed suspended
% of fair value 84.9% 8.8% 1.6% 4.7%
of financial
assets
As described on page 34 of the annual report, the Investment Adviser adopts a
rigorous fund selection process which is designed to include management of the
Company's exposure to liquidity risk. Once a fund is selected for inclusion
with the investment portfolio, all operational aspects of the investee fund are
closely monitored on a continuous basis by the Investment Adviser, including
the ability to make redemptions. The Board receives a report on a quarterly
basis from the Investment Adviser which includes reference to the redemption
status of each fund. These procedures were in place throughout the year.
Management of capital
The Board, with the assistance of the Investment Adviser, manages the capital
of the Company in accordance with the Company's investment objectives and
policies. The Company's overall strategy remains unchanged from 2007.
The capital structure of the Company consists of proceeds from the issue of
preference shares and the reserve accounts, as disclosed on the balance sheet.
The Manager reviews the capital structure on an ongoing basis. The Company does
not have any externally imposed capital requirements.
The Revolving Credit Facility which existed with Barclays Private Clients
International Limited was used exclusively for covering short term funding
requirements. It was the Board's intention that the facility should not be used
to introduce net gearing into the Company's capital structure.
The loan facility provided by LGT Bank, as disclosed in note 16, is to be used
for hedging purposes and to assist in maintaining liquidity.
Pursuant to the authority granted to the Company at its Annual General Meeting
on 6 June 2008 to purchase its own redeemable participating preference shares
of no par value, the Company has acquired 1,525,000 such shares post year end
at an average price of 82.86 pence per share.
Fair value disclosure
In the opinion of the Directors there is no material difference between the
book values and the fair values of the financial assets and liabilities.
18. Related parties
LGT Capital Partners (Asia Pacific) Limited, formerly KGR Capital (Hong Kong)
Limited, (the "Investment Adviser"), KGR Capital China Absolute Return SP
(which is held as an investment and managed by LGT Capital Partners) and the
Directors are regarded as related parties. Kleinwort Benson (Channel Islands)
Fund Services Limited was a related party until 22 September 2008 by way of its
appointment as Manager. The only related party transactions are described
below;
The Loan from LGT Bank, as disclosed in note 16, is a related party transaction
by virtue of the fact that LGT Bank and the Investment Adviser, LGT Capital
Partners, are both members of the LGT group.
The fees and expenses payable to the Investment Adviser are as disclosed in
note 5. The outstanding Investment Adviser fee due at the year end was GBP67,274.
As at 31 December 2007 the fee outstanding to the Investment Adviser was
included within the outstanding Management fee of GBP128,550.
The fees and expenses payable to the Manager during the year were GBP398,871. As
at 31 December 2008 the outstanding fee due to the Manager is GBP10,076. As per
note 5 the agreement with the Manager was terminated on 22 September 2008.
Fees earned by the Directors of the Company during the year all of which
comprise short term benefits under the Directors' remuneration agreements were
GBP67,000 (2007: GBP67,000). In addition each Director received GBP3,750 over and
above their agreed Director's fee, as a result of additional time spent in
connection with the C Share issue during the year as reported in the Directors'
report on page 13. Fees of GBP16,920 remained outstanding as at the year end
(2007: GBP17,255).
As at 31 December 2008 the Company held 3,348.3034 shares in KGR Capital China
Absolute Return Segregated Portfolio, which is managed by the Investment
Adviser to the Company. An agreement is in place to ensure that any fees
received by the Investment Adviser in relation to this investment will be
rebated back to the Company so as to avoid double charging. Any rebate due is
deducted from the fee payable to the Investment Adviser as disclosed above.
19. Ultimate controlling party
In the opinion of the Directors on the basis of shareholdings advised to them
the Company has no ultimate controlling party.
20. Exchange rates
The exchange rates to sterling at 31 December were as follows
2008 2007
US Dollar 1.46290 1.98495
21. Reconciliation of published valuation to financial statements
GBP
Net assets per financial statements 59,585,655
Amendment to asset valuations for final 252,404
prices received
Adjustment to accruals (31,908)
Net assets per published valuation 59,806,151
INVESTMENT PORTFOLIO
At 31 December 2008
Investments Fair % of
Value Net Assets
GBP
AB2 Fund 4,032,851 6.8
Horizon Portfolio I 3,767,092 6.3
Limited
Dragonback Asia Pacific 3,646,778 6.1
Equity
Nezu Cyclicals Fund Ltd 3,042,401 5.1
Bannelong Asia Pacific 2,973,820 5.0
Multi Strategy Equity Fund
Limited
RAB Northwest Fund Limited 2,795,630 4.7
East of Suez Fund 2,721,229 4.6
SR Global Fund Inc 2,683,211 4.5
Akamatsu Fund 2,668,839 4.5
Alphadyne Investment 2,624,668 4.4
Strategies Fund Limited
Clairvoyance Asia Fund 2,333,185 3.9
Limited
WF Asia Fund 2,295,723 3.8
777 Fund 2,214,517 3.7
KGR Capital China Absolute 2,063,524 3.5
Return Segregated
Portfolio
LIM Asia Multi-Strategy 2,043,974 3.4
Fund Inc
EB Asia Absolute Return 1,936,651 3.3
Fund Limited
Octagon Pan Asia Fund 1,880,948 3.2
CC Asia Advantage Fund 1,797,030 3.0
Limited
DoReMi Fund 1,784,650 3.0
Swordfish Fund Limited 1,546,965 2.6
Asian CRC Hedge Fund 1,446,765 2.4
Penta Asia Long Short Fund 1,435,712 2.4
Limited
PD Star Fund 1,382,684 2.3
CAI Global Fund (Cayman) 1,274,138 2.1
Limited
Artradis Barracuda Fund 1,229,231 2.1
Ishin Fund 992,667 1.7
Eastern Advisor Offshore 953,981 1.6
Fund Limited
CC Asia Absolute Return 2,996 0.0
Fund
59,571,860 100.0
NOTICE OF ANNUAL GENERAL MEETING
Notice is hereby given that the Annual General Meeting of the Company will be
held at
Martello Court, Admiral Park, St Peter Port, Guernsey GY1 3HB on Tuesday, 16
June 2009
at 10.30 a.m. to consider and if thought fit pass the following resolutions:
ORDINARY RESOLUTIONS
RESOLUTIONS
THAT:
1 the Report of the Directors, the Report of the Investment Adviser and the
audited Financial Statements of the Company for the year ended 31 December 2008
be received and considered.
2 Alan H Smith to be re-elected as a Director of the Company.
3 Ernst & Young LLP be re-appointed as the auditors of the Company, to hold
office from the conclusion of the meeting until the conclusion of the next
meeting at which the accounts are presented to the Company.
4 the Directors are authorised to fix the level of the Auditor's remuneration.
5 the Directors are authorised to fix the level of the Directors' remuneration.
SPECIAL RESOLUTIONS
6 The Company's authority to make market purchases of its own shares be and is
hereby renewed in accordance with the Companies (Guernsey) Law, 2008 (as
amended) provided that:
(a) to consider and if thought fit, pass a special resolution to renew the
Company's authority to make market purchases of up to 14.99 per cent. of its
own issued shares, with a view to addressing any imbalance between the supply
of and demand for shares, to enhance the Net Asset Value per share and to
assist in minimising the discount to Net Asset Value per share at which the
share price may be trading;
(b) such authority shall expire on the date of the annual general meeting of
the Company in 2010 unless the authority is varied, renewed, or revoked prior
to such date by a resolution of the Company in a general meeting or the Company
has made a contract to purchase its own shares under such authority prior to
its expiry which will or may be executed wholly or partly after its expiration.
7 That the Company be and is hereby authorised in accordance with Section 25(2)
of The Companies (Guernsey) Law, 2008 (as amended) to change its name from KGR
Absolute Return PCC Limited to Castle Asia Alternative PCC Limited and that the
Cell name be changed from KGR Asia Dynamic 1 (GBP) to Sterling Class.
Fortis Fund Services (Guernsey) Limited
As Company Secretary
26 March 2009
Note:
Please note that you are entitled to appoint a Proxy to vote instead of you on
any poll. The Proxy need not be a Member of the Company. The form appointing a
Proxy must be lodged at the registered office of the Company C/O Fortis Fund
Services (Guernsey) Limited, Martello Court, Admiral Park, St Peter Port,
Guernsey GY1 3HB or for convenience with the Company's Registrar, C/O Capita
Registrars, 34 Beckenham Road, Beckenham BR3 4TU at least 48 hours before the
Meeting to enable the Proxy to vote for you.
END
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