MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

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1 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund (Formerly QAM Downing Investment Funds ICVC - QAM Downing Monthly Income Fund) Annual Report 31 March 2017

2 Contents Page Directory Investment Objective and Policy Investment Manager's report Portfolio Statement Comparative Tables Statement of the Authorised Corporate Directors Responsibilities Certification of Annual Report by the Authorised Corporate Director Statement of the Depositary's responsibilities Independent Auditor's Report to the Shareholders of the Fund Statement of Total Return Statement of Change in Net Assets Attributable to Shareholders Balance Sheet Notes to the Financial Statements Distribution Tables General Information

3 Directory Authorised Corporate Director (ACD) To 31 March 2017 Querns Asset Managers LLP 8 Weston Road, Lewknor, Watlington, Oxfordshire OX49 5TU Telephone: Website: (Authorised and regulated by the Financial Conduct Authority) Authorised Corporate Director (ACD) & Registrar From 1 April 2017 Maitland Institutional Services Ltd Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW Telephone: Fax: Website: (Authorised and regulated by the Financial Conduct Authority) Customer Service Centre Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW Telephone: Fax: downing@maitlandgroup.co.uk (Authorised and regulated by the Financial Conduct Authority) Directors of the Authorised Corporate Director To 31 March 2017 Peter Gardner John Tierney Stephen Whittaker From 1 April 2017 R.A. Ackermann P.J. Foley-Brickley S. Georgala D. Jones R.W. Leedham Investment Manager Downing LLP Ergon House, Horseferry Road, London SW1P 2AL (Authorised and regulated by the Financial Conduct Authority) MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 1

4 Directory Depositary To 31 March 2017 National Westminster Bank Plc Trustee & Depositary Services 135 Bishopsgate, London EC2M 3UR (Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority) From 1 April 2017 Northern Trust Global Services Ltd 50 Bank Street, Canary Wharf, London E14 5NT (Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority) Independent Auditor KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square, Canary Wharf, London E14 5GL 2 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

5 Investment Objective and Policy Investment Objective The investment objective of the Fund is to achieve a high level of income, together with long term capital growth. Investment Policy The Fund intends to invest primarily in equities listed on a UK stock exchange. The Fund may also invest in other transferable securities (for example, without limitation, international equities), units in collective investment schemes, money market instruments, warrants and deposits as detailed in the Prospectus. No more than 10% of the Scheme Property of the Fund will be invested in other collective investment schemes. Investment Manager s Report for the year ended 31 March 2017 Section 1: Performance Review Performance Overview The 12 months to 31 March 2017 have been instrumental to the longer term direction of the Fund. In June 2015 Downing assumed the Investment Management of the Fund from Querns, and as of 1 April 2017 (post year-end) the Fund changed ACD to Maitland Institutional Services Ltd. The priority of the Investment Manager is to ensure that the Fund will continue to provide investors with a premium yield to the market and the sector. As a guide in the current market we would not expect this to be lower than 4% and investors that bought the income share class at the beginning of the year would have received a yield of 5.35% over the following 12 months. This combined with capital appreciation of 8.37% provided a total return of 13.72%(based on published price) 1 to holders of the income share class. In order to generate these returns we have focused our attention on investing in businesses that demonstrate the characteristics of four principles that are proven to drive outperformance over the longer term. In the current market conditions these four principles are the foundation of our ongoing strategy and allow your Fund to take advantage of Downing s in house team of specialist smaller company fund managers. In Section 2 we discuss what we believe are the key attributes of these principles. Key Contributors and detractors 2 Premier Farnell was the subject of a bidding war that resulted in Avnet eventually securing the business for 185p per share, 69.00% higher than at the beginning of the period. Rio Tinto benefitted from the recovery in the commodity prices over the last 12 months, particularly in Hard Coking Coal. This in combination with a reduction in underlying cash costs helped the shares to finish the period 71.25% higher than at 31 March Source: Maitland 2 Source: Statpro MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 3

6 Investment Manager s Report 3i Group s results for the 6 months to 30 September 2016 showed that book value had been grown by 26% in the first 6 months of their financial year. Over half of this growth was due to the success of value European discount retailer Action. After profits and other adjustments this resulted in a 19% increase in net asset value per share. Given the strong performance of the shares in the period the position was exited following a gain of 60.92% over the holding period. Laird interims showed a sharp drop in demand in the high margin wireless controls business and an operating loss in the recently acquired Novero business leading to a 39% fall in profit before tax. The shares fell 44.76% over the period to 31 March Go-Ahead Group is a holding that was exited during the year due to the high levels of debt within the business coupled with low operating margins. Despite this the shares were still down 26.42% from the 31 March 2016 to the point of exit. Section 2: Performance Principles These four principles that Downing believe are proven to drive outperformance and where our skills as Investment Management are: Performance Principle 1: Income outperforms Compounding dividends provides a strong advantage and taking an income focussed approach in combination with a premium yield allows your fund to make the most of this natural advantage. Dividend paying businesses have outperformed even when dividends are ignored 3. The reason for this out performance is that companies that are able to pay a dividend are typically highly cash generative in nature. This cash can be paid out to shareholders by way of a dividend or reinvested in the business to continue creating shareholder value. Performance Principle 2: Smaller companies outperform It is far easier to double the size of a small business than that of a large one. The smallest 1000 listed businesses have generated over 1,790.89% since December This compares to the % that would have been achieved by investing in the wider market 4. Smaller companies have a more attractive return profile. The Numis Smaller Companies 1000 Excluding Investment Trusts Index has, since the end of 1992, generated an annualised return of 12.64% versus 7.54% for the MSCI United Kingdom All Cap Index with 25% less volatility or risk (annualised volatility of 12.32% versus 16.91% for the MSCI United Kingdom All Cap Index) 5. 3 Source: FE Analytics. When comparing price performance only of the IA UK Equity Income sector to the MSCI United Kingdom Index for the period 31/12/89 31/03/ Source: FE Analytics. When comparing total return of the Numis Smaller Companies 1000 excluding Investment Trusts to the MSCI United Kingdom Index for the period 31/12/92 31/03/ Source: FE Analytics. When comparing annualised ratios of the Numis Smaller Companies 1000 excluding Investment Trusts to the MSCI United Kingdom Index for the period 31/12/92 31/03/ MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

7 The smaller companies market is inefficient. c.50% of analysts in the UK are looking at the same 173 businesses however the smallest businesses have on average 0.6 analysts per company This lack of scrutiny creates an opportunity for the diligent investor to have a far greater level of insight into a business than his competition 6. Smaller companies are better value based on price-earnings multiples. The smallest companies can be bought at between an 8% - 30% discount to the largest listed businesses 7. Smaller companies provide diversified sources of income. 60% of the assets in the IA UK Equity Income Sector are invested in the same 50 businesses 8. Large funds have significant assets to invest so must invest in businesses that are large enough to absorb large investments. There is also significant concentration of dividend payers in these largest businesses. In the 10 years to 31 March 2017 on average over 80% of the total distributions in the UK market have come from just 15 companies 9. However, there are close to 1,000 smaller listed companies in the UK 10 many of which pay sustainable dividends. Your fund takes advantage of these often-overlooked smaller businesses to generate a premium yield from diversified sources of income. Performance Principle 3: Strong balance sheets outperform When assessing a business for its suitability for investment purposes the diligent investor considers the associated level of risk as well as the potential returns from an opportunity. In considering risk we make use of the Merton s Distance to Default and Altman Z-Score methodologies to assess a firm s likelihood of financial distress that can result in a reduction in the dividend or bankruptcy. A study conducted by Société Généralé demonstrates the predictive ability of the model showing that those businesses that score highest have volatility 58.4% lower and compounded returns 44.9% higher than those of the lowest quality 11. The Altman Z-Score, makes use of 7 variables to assess a firm s likelihood of bankruptcy. This measure has been proven to be up to 94% accurate at predicting bankruptcy in advance 12. Performance Principle 4: Efficient businesses outperform A study completed in January 2002 by Joseph Piotroski identified nine factors that when combined led to an average yearly return of 23%, substantially outperforming the 16% return of the S&P 500 index over the 20 years to 1996 these nine factors are known as F-score Source: Thompson Reuters as at 31/03/17. 7 Source: Thompson Reuters as at 31/03/17. 8 Source: FE Analytics. Based on holding information as at 31/7/15 for a sample of 40% of the sector by AUM. 9 Source: Capita Asset Services UK Dividend Monitor Q Source: Thompson Reuters as at 31/03/ Source: Société Généralé. Global Income Investor. 12 Source: Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. E. Altman. 13 Source: Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers. J.D. Piotroski. MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 5

8 Investment Manager s Report A further study was conducted on the European market covering the 12 years to 13 June 2011 by Phillip Vanstraceele & Tim du Toi of The outcome shows a variance in total outperformance between the highest scoring and lowest scoring businesses of 376% over the 12-year period 14. Section 3: Portfolio Over the last 12 months we have concentrated on applying the principles outlined in section 2 to the portfolio resulting in a number of themes. Increased exposure to smaller companies We believe smaller companies are more likely to outperform as well as presenting an opportunity to take advantage of market inefficiencies, cheaper valuations and better growth prospects. The portfolio is now 50% invested in businesses with a market capitalisation below 1bn. We expect the increased focus on this part of the market to continue in coming periods. 50% 45% 40% Increased Smaller Company Exposure Opening Closing 44% Portfolio % Allocation 35% 30% 25% 20% 15% 10% 14% 30% 20% 16% 13% 14% 22% 11% 5% 7% 0% < 500m 500m - 1bn 1bn - 2bn 2bn - 4bn Market Capitalisation Bands > 4bn 14 Source: Quantitative Value Investing in Europe: What Works for Achieving Alpha. Phillip Vanstraceele, Tim Du Toit. 6 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

9 Investment Manager s Report Increased exposure to more efficient companies We believe the best performance comes from those businesses that are run most efficiently. Over the last 12 months we transitioned the portfolio so that we are 94% invested in the most efficient businesses. 100% 90% Increased Exposure to Efficient Companies 94% 80% 70% 60% 50% 62% 40% 30% 20% 10% 0% F-score > 5 Opening Closing Increased exposure to strong balance sheets We believe that businesses with strong balance sheets will outperform and generate that performance with a lower level of risk. Over the last period we have increased the portfolio allocation to those businesses with lower levels of debt. Your Fund is now nearly 90% invested in businesses with Net Debt to Equity ratios of < 200%. 100% 90% 80% Increased Exposure to Strong Balance Sheets Opening Closing 87% Portfolio % Allocation 70% 60% 50% 40% 30% 74% 20% 10% 0% < 200% 16% 9% 10% 200% - 400% > 400% Net Debt to Equity Bands 4% MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 7

10 Investment Manager s Report Section 4: Investment Process We use our four principles of outperformance as the starting point for our analysis however we believe that a full and rigorous due diligence process is the most important element in investment management. Our investment process in rooted in Downing s private equity heritage that reaches back to the establishment of the firm in This process of applying a private equity approach to the public markets was first applied through the MI Downing UK Micro-Cap Growth Fund that has generated an annualised return of 14.6% since February The MI Downing Monthly Income Fund harnesses the same philosophy and approach and applies it up the market-cap spectrum. Starting 2,500 stock universe Screening yields c.250 stock universe Phase 1 Phase 2 Phase 3 Phase 4 Investment thesis Currently holdings. Active portfolio management. Daily risk monitoring and oversight. Monthly income forecasting. Phase 1 - Idea generation Initial red flag review identifies factors that would have a material impact on investment case. Phase 2 - Identify critical success factors & catalysts Historic review combined with forward looking analysis allows for initial projections and valuation. Phase 3 - Generate insight Site visits, management interviews, channel checks, etc. all aid in gaining an informational advantage. Phase 4 - Risk/reward assessment Finalised projections and valuation drive sensitivity and scenario analysis to establish a risk/reward profile. 15 Source: Maitland 8 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

11 Portfolio Statement as at 31 March 2017 Market % of total value net assets Holding Security 2017 Oil & Gas 1.44% (6.96%) 45,863 BP 209, Basic Materials 1.64% (2.14%) 7,447 Rio Tinto 238, Industrials 7.93% (22.83%) 373,655 Connect Group 498, ,163 Kier 658, ,157, Consumer Goods 6.75% (0.00%) 100,395 Character* 476, ,079 Crest Nicholson 358, ,294 Telford Homes* 148, , Health Care 5.84% (7.26%) 7,261 AstraZeneca 356, ,265 Caretech* 494, , Consumer Services 24.28% (15.36%) 160,272 B&M European Value Retail 479, ,856 Card Factory 472, ,175 Conviviality* 597, ,728 Marston's 455, ,735 McColl's Retail 772, ,641 Playtech 341, ,025 Safestyle UK 213, ,566 SCS 208, ,541, Financials 43.27% (39.44%) 336,148 Bluefield Solar Income Fund 369, ,294 Brewin Dolphin 144, ,754 British Land 321, ,270 Chesnara 438, ,415 Close Brothers 313, ,077 HICL Infrastructure 387, MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 9

12 Portfolio Statement Market % of total value net assets Holding Security 2017 Financials () 81,485 Intermediate Capital 576, ,885 International Public Partnerships 389, ,002 Jupiter Fund Management 217, ,718 Lloyds Banking 404, ,977 OneSavings Bank 383, ,000 Pacific Industrial & Logistics REIT* 382, ,258 Phoenix Group 240, ,025 Polar Capital* 248, ,265 Primary Health Properties 608, ,095 Regional REIT 331, ,509 Shawbrook 551, ,311, Telecommunications 1.83% (0.00%) 31,426 Inmarsat 267, Utilities 0.00% (0.92%) Technology 2.33% (0.00%) 80,158 Amino Technologies* 157, ,909 Laird 181, , Investment assets 13,901, Net other assets 683, Net assets 14,584, All investments are ordinary shares or stock units on a regulated securities market unless otherwise stated. The percentages in brackets show the equivalent % holdings as at * Quoted on the Alternative Investment Market. 10 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

13 Comparative Tables Change in net assets per share Income Accumulation p p p p p p Opening net asset value per share Return before operating charges^ Operating charges Return after operating charges^ Distributions Retained distributions on accumulation shares n/a n/a n/a Closing net asset value per share ^After direct transaction costs of Performance Return after charges 14.16% -6.67% 8.62% 14.58% -6.83% 8.86% Other Information Closing net asset value 9,921,518 8,790,899 9,728,110 4,663,455 4,836,494 5,188,615 Closing number of shares 7,254,572 6,991,888 6,896,250 2,438,136 2,897,364 2,895,968 Operating charges 1.47% 1.44% 1.44% 1.47% 1.44% 1.44% Ongoing operating charges 1.00% 1.00% Direct transaction costs 0.29% 0.27% 0.08% 0.29% 0.27% 0.08% Prices Highest share price Lowest share price From 1 April 2017 it is the intention of the Investment Manager to rebate expenses in order for the Fund s Ongoing Charge not to exceed 1% of the average Net Asset Value of the Fund. Operating charges include indirect costs incurred in the maintenance and running of the Fund, as disclosed (but not limited to) the detailed expenses within the Statement of Total Return. The figures used within this table have been calculated against the average Net Asset Value for the accounting year. The return after charges is calculated as the closing net asset value per share plus the distributions on income shares minus the open net asset value per share as a % of the opening net asset value per share. Direct transaction costs include fees, commissions, transfer taxes and duties in the purchasing and selling of investments, which are offset (where applicable) against any dilution levies charged within the accounting year. The figures used within the table have been calculated against the average Net Asset Value for the accounting year. MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 11

14 Comparative tables Risk and reward profile The risk and reward indicator table demonstrates where the Fund ranks in terms of its potential risk and reward. The higher the rank the greater the potential reward but the greater the risk of losing money. It is based on past data, may change over time and may not be a reliable indicator of the future risk profile of the Fund. The shaded area in the table below shows the Funds ranking on the risk and reward indicator. Typically lower rewards, Typically higher rewards, lower risk higher risk The Fund is ranked at 5 because funds of this type have experienced medium to high rises and falls in value in the past. Please note that even the lowest risk class can lose you money and that extreme market circumstances can mean you suffer severe losses in all cases. The indicator does not take into account the following risks of investing in this Fund: For funds investing globally, currency exchange rate fluctuations may have a positive or negative impact on the value of your investment. The Fund s charges are deducted from the capital of the Fund. This may allow more income to be paid, but it may also restrict capital growth and may result in capital erosion. The level of targeted income is not guaranteed and may not always be achieved. For further risk information please see the prospectus. Risk warning An investment in an Open Ended Investment Company should be regarded as a medium to long-term investment. Investors should be aware that the price of shares and the revenue from them can fall as well as rise and investors may not receive back the full amount invested. Past performance is not a guide to future performance. Investments denominated in currencies other than the base currency are subject to fluctuation in exchange rates, which can be favourable or unfavourable. 12 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

15 Statement of the Authorised Corporate Director s Responsibilities The ACD is responsible for preparing the financial statements in accordance with applicable law and United Kingdom Generally Accepted Accounting Practices. The Financial Conduct Authority s Collective Investment Schemes Sourcebook ( the COLL Sourcebook ) requires the ACD 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 net revenue/expenses and of the net gains/losses on the property of the Company for that year. In preparing the financial statements the ACD is required to: select suitable accounting policies, as described in the attached financial statements, and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable United Kingdom accounting standards have been followed, including Financial Reporting Standard 102 'The financial reporting standard applicable in the United Kingdom and the Republic of Ireland' (FRS102) and in accordance with the Statement of Recommended Practice for Financial Statements of UK Authorised Funds issued by the Investment Association (IA) in May 2014, subject to any material departures, which are required to be disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The ACD is responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable it to ensure that the financial statements comply with the COLL Sourcebook. The ACD is also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In so far as the ACD is aware: there is no relevant audit information of which the Company s auditor is unaware; and the ACD has taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. Certification of the Annual Report by the Authorised Corporate Director In accordance with the requirements of the Regulations and COLL Sourcebook, we hereby certify the Report on behalf of the ACD, Maitland Institutional Services Ltd. D. Jones R. W. Leedham Directors Maitland Institutional Services Ltd 18 May 2017 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 13

16 Statement of the Depositary s Responsibilities and Report of the Depositary to the Shareholders of MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund( the Company ) for the year ended 31 March 2017 The Depositary must ensure that the Company is managed in accordance with the Financial Conduct Authority s Collective Investment Schemes Sourcebook, the Open-Ended Investment Companies Regulations 2001 (SI 2001/1226) (the OEIC Regulations), as amended, the Financial Services and Markets Act 2000, as amended, (together the Regulations ), the Company s Instrument of Incorporation and Prospectus (together the Scheme documents ) as detailed below. The Depositary must in the context of its role act honestly, fairly, professionally, independently and in the interest of the Company and its investors. The Depositary is responsible for the safekeeping of all custodial assets and maintaining a record of all other assets of the Company in accordance with the Regulations. The Depositary must ensure that: the Company s cash flows are properly monitored and that cash of the Company is booked into the cash accounts in accordance with the Regulations; the sale, issue, redemption and cancellation of shares are carried out in accordance with the Regulations; the value of shares of the Company are calculated in accordance with the Regulations; any consideration relating to transactions in the Company s assets is remitted to the Company within the usual time limits; the Company s income is applied in accordance with the Regulations; and the instructions of the Authorised Fund Manager ( the AFM ) are carried out (unless they conflict with the Regulations). The Depositary also has duty to take reasonable care to ensure that the Company is managed in accordance with the Regulations and the Scheme documents in relation to the investment and borrowing powers applicable to the Company. Having carried out such procedures as we consider necessary to discharge our responsibilities as Depositary of the Company, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the Company acting through the AFM; (i) has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Company s shares and the application of the Company s income in accordance with the Regulations and the Scheme documents of the Company, and (ii) has observed the investment and borrowing powers and restrictions applicable to the Company. National Westminster Bank Plc 18 May MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

17 Independent Auditors Report to the Shareholders of MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund( the Company ) We have audited the financial statements of the Company for the year ended 31 March 2017 which comprise the Statements of Total Return, the Statements of Changes in Net Assets Attributable to Shareholders, the Balance Sheets, the Related Notes and Distribution Tables listed on pages 17 to 32. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. This report is made solely to the Company s shareholders, as a body, in accordance with Rule of the Collective Investment Schemes Sourcebook ('the COLL Rules') issued by the Financial Conduct Authority under the Open-Ended Investment Companies Regulations Our audit work has been undertaken so that we might state to the Company s shareholders those matters we are required to state to them in an auditor s 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 shareholders as a body, for our audit work, for this report, or for the opinions we have formed. Respective Responsibilities of the Authorised Corporate Director ('the ACD') Maitland Institutional Services Ltd and the Auditor As explained more fully in the Statement of ACD's Responsibilities set out on page 13 the ACD is responsible for the preparation of financial statements which give a true and fair view. Our responsibility is to audit, and express opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at Opinion on financial statements In our opinion the financial statements: give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the financial position of the Company as at 31 March 2017 and of the net revenue and the net capital gains on the property of the Company for the year then ended; and have been properly prepared in accordance with the Instrument of Incorporation, the Statement of Recommended Practice relating to Authorised Funds and the COLL Rules. MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 15

18 Independent Auditors Report to the Shareholders of MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund( the Company ) Opinion on other matters prescribed by the COLL Rules In our opinion the information given in the Authorised Corporate Director's Report is consistent with the financial statements. We have received all the information and explanations which we consider necessary for the purpose of our audit. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where under the COLL Rules we are required to report to you if, in our opinion: proper accounting records for the Company have not been kept; or the financial statements are not in agreement with the accounting records. Ravi Lamba for and on behalf of KPMG, Statutory Auditor Chartered Accountants 15 Canada Square, Canary Wharf, London E14 5GL 18 May MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

19 Statement of Total Return for the year ended 31 March Note Income Net capital gains / (losses) 2 1,382,223 (1,451,242) Revenue 3 734, ,935 Expenses 4 (200,354) (211,119) Interest payable and similar charges 4 Net revenue before taxation 533, ,816 Taxation 5 (1,822) (1,792) Net revenue after taxation 532, ,024 Total return before distributions 1,914,226 (1,022,218) Distributions 6 (724,227) (635,108) Change in net assets attributable to Shareholders from investment activities 1,189,999 (1,657,326) Statement of Change in Net Assets Attributable to Shareholders for the year ended 31 March Opening net assets attributable to Shareholders 13,627,393 14,916,725 Amounts receivable on issue of shares 1,561, ,907 Less: Amounts payable on cancellation of shares (2,029,166) (271,729) (467,675) 145,178 Change in net assets attributable to Shareholders from investment activities (see Statement of Total Return above) 1,189,999 (1,657,326) Retained distribution on accumulation shares 235, ,816 Closing net assets attributable to Shareholders 14,584,973 13,627,393 The notes on pages 19 to 30 form an integral part of these Financial Statements. MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 17

20 Balance Sheet as at 31 March 2017 ASSETS Note Fixed Assets Investments 13,901,542 12,933,341 Current Assets Debtors 7 138, ,696 Cash and bank balances 9 651, ,601 Total current assets 789,899 1,543,297 Total assets 14,691,441 14,476,638 LIABILITIES Investment liabilities Creditors Bank overdrafts 9 (27,988) Distribution payable (65,508) (29,639) Other creditors 8 (40,960) (791,618) Total creditors (106,468) (849,245) Total liabilities (106,468) (849,245) Net assets attributable to Shareholders 14,584,973 13,627,393 The notes on pages 19 to 30 form an integral part of these Financial Statements. 18 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

21 Notes to the Financial Statements for the year ended 31 March Accounting Policies (a) Basis of accounting The financial statements have been prepared under the historical cost basis, as modified by the revaluation of investments and in accordance with FRS 102 and the Statement of Recommended Practice ( SORP ) for Financial Statements of UK Authorised Funds issued by the Investment Association (IA) in May The financial statements have been prepared on the going concern basis. The authorised Status and head office of the Fund can be found within the general information starting on page 33. The Certification of the Annual Report by the Authorised Corporate Director can be found on page 13. (b) Recognition of revenue Revenue is included in the Statement of Total Return on the following basis: Dividends on quoted equities and preference shares are recognised when the securities are quoted ex-dividend. Interest on debt securities and bank and short-term deposits is recognised on an accrual basis. In the case of debt securities any difference between acquisition cost and maturity value is recognised as revenue over the life of the security using the effective yield basis of calculating amortisation. All revenue includes withholding taxes but excludes irrecoverable tax credits. (c) Treatment of stock and special dividends The ordinary element of stocks received in lieu of cash dividends is credited to capital in the first instance followed by a transfer to revenue of the cash equivalent being offered and this forms part of the distributable revenue. Special dividends are reviewed on a case by case basis in determining whether the dividend is to be treated as revenue or capital. Amounts recognised as revenue will form part of the distributable revenue. The tax accounting treatment follows the treatment of the principal amount. (d) Treatment of expenses All expenses, except for those relating to the purchase and sale of investments and stamp duty reserve tax, are charged against revenue for the year on an accruals basis. MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 19

22 Notes to the Financial Statements (e) Taxation Corporation tax is provided at 20% on revenue, after deduction of expenses. Deferred tax is provided using the liability method on all timing differences arising on the treatment of certain items for taxation and accounting purposes, calculated at the rate at which it is anticipated the timing differences will reverse. Deferred tax assets are recognised only when, on the basis of available evidence, it is more likely than not that there will be taxable profits in the future against which the deferred tax asset can be offset. Stamp duty reserve tax suffered on surrender of shares is deducted from capital. (f) Distribution policy The net revenue after taxation as disclosed in the financial statements, after adjustment for items of a capital nature, is distributable to Shareholders as dividend distributions. Any revenue deficit is funded from capital. At the year end, there were no items of a capital nature. Interim distributions may be made at the Investment Management s discretion and the balance of revenue is distributed in accordance with the regulations. For the purpose of enhancing revenue entitlement, all expenses (including those relating to the purchase and sale of investments and stamp duty reserve tax) are allocated to capital for the year on an accruals basis. This will reduce the capital growth of the Fund. Distributions not claimed within a six year period will be forfeited and added back to the capital of the Fund. (g) Basis of valuation of investments Listed investments are valued at close of business bid prices on the last business day of the accounting year excluding any accrued interest in the case of fixed and floating rate interest securities. Unlisted or suspended investments are valued by the Investment Manager taking into account where appropriate, latest dealing prices, valuations from reliable sources, financial performance and other relevant factors. Market value is defined by the SORP as fair value, which generally is the bid value of each security. Amendments to FRS Fair value hierarchy disclosures, amends paragraphs and of FRS 102, revising the disclosure requirements for financial instruments held at fair value and aligning the disclosures with those required by EU-adopted IFRS. The Fund has chosen to adopt early these amendments to FRS 102. There are no accounting policy or disclosure changes as a result of this adoption. 20 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

23 Notes to the Financial Statements (g) Basis of valuation of investments () Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset as follows: Level 1 The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date. Level 2 Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly. Level 3 Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability. (h) Exchange rates Transactions in foreign currencies are recorded in sterling at the rate ruling at the date of the transactions. Assets and liabilities expressed in foreign currencies at the end of the accounting period are translated into sterling at the closing exchange rates ruling on that date. (i) Dilution levy The Authorised Corporate Director may require a dilution levy on the sale and redemption of shares if, in its opinion, the existing shareholders (for redemptions) might otherwise be adversely affected. In particular, the dilution levy may be charged in the following circumstances: where the scheme property is in continual decline; on a fund experiencing large levels of net sales relative to its size; on large deals ; in any case where the Authorised Corporate Director is of the opinion that the interests of remaining shareholders require the imposition of a dilution levy. 2. Net Capital Gains/(Losses) Non-derivative securities 1,384,434 (1,449,338) Currency gains/(losses) 119 (214) Transaction charges (2,330) (1,690) Net capital gains 1,382,223 (1,451,242) 3. Revenue UK dividends: Ordinary 656, ,171 Overseas dividends 37,496 29,575 Property income dividends 40,672 25,189 Total revenue 734, ,935 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 21

24 Notes to the Financial Statements 4. Expenses Payable to the Authorised Corporate Director (ACD), associates of the ACD, and agents of either of them: Management fee 103, ,473 Payable to the Depositary, associates of the Depositary, and agents of either of them: Depositary s fee (including VAT) 13,295 12,058 Safe custody and other bank charges 20,836 18,821 34,131 30,879 Other expenses: Audit fee (including VAT) 7,200 11,172 Administration fees 24,949 25,051 FCA fee Listing fees 2,506 2,376 Legal fees 5,455 Printing costs 3,052 2,585 Registration fees 24,472 24,533 62,634 71,767 Expenses 200, ,119 Interest payable and similar charges Total 200, , MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

25 Notes to the Financial Statements 5. Taxation (a) Analysis of charge in the year: Overseas tax 1,822 1,792 Total tax charge (note 5b) 1,822 1,792 (b) Factors affecting taxation charge for the year: Net revenue before taxation 533, ,816 Corporation tax at 20% 106,765 86,163 Effects of: UK dividends (131,202) (117,434) Movement in surplus management expenses 31,936 37,186 Non-taxable overseas earnings (7,499) (5,915) Overseas withholding tax 1,822 1,792 Total tax charge (note 5a) 1,822 1,792 At the year end there is a potential deferred tax asset of 133,695 ( ,759) in relation to surplus management expenses. It is unlikely that the Fund will generate sufficient taxable profits in the future to utilise these expenses and therefore no deferred tax asset has been recognised in the year. MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 23

26 Notes to the Financial Statements 6. Distributions The distributions take account of revenue received on the issue of shares and revenue deducted on the cancellation of shares, and comprise: First Interim 66,128 55,320 Second Interim 58,983 57,965 Third Interim 62,495 52,167 Forth Interim 43,977 46,133 Fifth Interim 54,642 71,187 Sixth Interim 56,197 43,321 Seventh Interim 63,605 53,121 Eight Interim 53,387 45,381 Ninth Interim 46,431 52,651 Tenth Interim 52,897 44,195 Eleventh Interim 63,514 68,362 Twelfth Interim 95,503 45, , ,543 Revenue deducted on cancellation of Shares 12, Revenue received on issue of Shares (6,367) (1,368) Distributions 724, ,108 Interest payable and similar charges Total 724, ,108 Reconciliation of net revenue after taxation to net distributions: Net revenue after taxation per Statement of Total Return 532, ,024 Expenses allocated to capital 200, ,119 Relief on expenses allocated to capital (8,134) (5,037) Undistributed revenue brought forward 6 8 Undistributed revenue carried forward (2) (6) Distributions 724, , MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

27 Notes to the Financial Statements 7. Debtors Amounts receivable on issues 45,680 17,600 Sales awaiting settlement 725,666 Accrued income: Dividends receivable 90,913 75,282 Overseas tax recoverable 648 2,014 UK income tax recoverable 896 Prepaid expenses: Listing fee 134 Total debtors 138, , Other Creditors Purchases awaiting settlement 751,821 Accrued expenses: Amounts payable to the Authorised Corporate Director (ACD), associates of the ACD and agents of either of them: Management fee 9,227 8,645 Amounts payable to the Depositary, associates of the Depositary and agents of either of them: Depositary s fee (including VAT) 1,320 Safe custody and other bank charges 17,879 14,814 19,199 14,814 Other expenses: Audit fee (including VAT) 7,200 11,172 Administration fee 2,123 2,117 Printing costs 1, Registration fees 2,062 2,061 Listing fee ,534 16,338 Total other creditors 40, ,618 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 25

28 Notes to the Financial Statements 9. Cash and Bank Balances Cash and bank balances 651, ,601 Overdraft positions (27,988) Cash and bank balances 651, , Related Party Transactions Fees payable to Querns Asset Managers LLP (the ACD for the year) are disclosed in note 4 and amounts due at the year end are shown in note 8. Depositary and other fees payable to National Westminster Bank Plc are disclosed in note 4 and amounts due at the year end are shown in note 8. The partners of Querns Asset Managers LLP and those closely related to them at 31 March 2017 held 478,482 Accumulation Shares ( : 460,977) and 6,042,355 Income Shares ( : 5,363,428) to a value of 9,195,529 ( : 7,556,902) 11. Contingent Liabilities and Outstanding Commitments There were no contingent liabilities or outstanding commitments at the balance sheet date (2016: none). 26 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

29 Notes to the Financial Statements 12. Risk Management Policies and Disclosures In pursuing its investment objectives, the Fund may hold a number of financial instruments. These financial instruments comprise securities and other investments, cash balances, debtors and creditors that arise directly from the Fund s operations, for example, in respect of sales and purchases awaiting settlement, amounts receivable for creations and payable for redemptions and debtors for accrued revenue. In doing so, the ACD accepts market price risk and currency risk in relation to the investment portfolio and foreign cash positions. The Fund may also enter into a range of derivative transactions whose purpose is efficient portfolio management. In addition the Fund only executes derivative contracts where both the derivative instrument and the counterparty have been approved by the ACD. The risks arising from financial instruments and the ACD s policies for the monitoring and managing of these risks are stated below in accordance with the Risk Management Policy of the ACD. These policies have been consistent for both years through which these financial statements relate. Market price risk Market price risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Fund might suffer through holding market positions in the face of price movements. This means the value of an investor s holding may go down as well as up and an investor may not recover the amount invested. Investors should consider the degree of exposure of the Fund in the context of all their investments. The Fund s investment portfolio is exposed to market price fluctuations, which are monitored by the ACD as per the policies as set out in the Prospectus. The investment guidelines and investment and borrowing powers set out in the Instrument of Incorporation, the Prospectus and in the Financial Conduct Authority s Collective Investment Schemes Sourcebook describe the nature of the market risk to which the Fund will be exposed. At the balance sheet date, if the price of the investments held by the Fund increased or decreased by 10%, with all other variables held constant, the net assets attributable to Shareholders would increase or decrease by approximately 1,390,154 (2016: 1,293,334). Currency risk The majority of the Fund s assets comprise of investments and cash denominated in sterling. As a result, the income and capital value of the Fund are not affected by currency movements. Interest rate risk Interest rate risk, being the risk that the value of investments will fluctuate as a result of interest rate changes. The majority of the Fund s assets comprise equity shares which neither pay interest nor have a maturity date. Interest receivable on bank deposits or payable on bank overdraft positions will be affected by fluctuations in interest rates. MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 27

30 Notes to the Financial Statements 12. Risk Management Policies and Disclosures () Credit risk Credit risk arises from the possibility that the issuer of a security will be unable to pay interest and principal in a timely manner. Adhering to investment guidelines and avoiding excessive exposure to one particular issuer can limit credit risk. There are no net borrowings or unlisted securities and the Manager considers that the Fund has little exposure to credit risk. Liquidity risk Liquidity risk is the risk that a Fund cannot raise sufficient cash to meet its liabilities when due. One of the key factors influencing this will be the ability to sell investments at, or close to, the fair value without a significant loss being realised. Under normal circumstances, a Fund will remain close to fully invested. However, where circumstances require: either because a view of illiquid securities markets or high levels of redemptions in the Fund, the Fund may hold cash and/or more liquid assets. Temporary higher liquidity levels may also arise during the carrying out of a change in asset allocation policy, or following a large issue of shares. Counterparty risk The risk that the counterparty will not deliver the investments for a purchase or the cash for a sale after the Fund has fulfilled it s responsibilities which could result in the fund suffering a loss. The Investment Management minimises the risk by conducting trades through only the most reputable counter parties. Fair value of financial assets and liabilities Investments disclosed as at the balance sheet date are at fair value. Current assets and liabilities disclosed in the balance sheet are at amortised cost which is approximate to fair value. 28 MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund

31 Notes to the Financial Statements 13. Portfolio Transaction Costs Purchases Analysis Net before of purchases purchase Commissions Taxes transaction cost paid costs % % Equities 7,720,194 10, % 17, % 7,691,919 Corporate actions 259, % 0.00% 259,589 Total purchases after commissions and tax 7,979,783 Sales Analysis Net before of sales sale Commissions Taxes transaction proceeds paid costs % % Equities 8,396,012 12, % % 8,408,294 Total sales after commissions and tax 8,396,012 Commission as a % of average net assets 0.16% Taxes as a % of average net assets 0.13% Purchases Analysis Net before of purchases purchase Commissions Taxes transaction cost paid costs % % Equities 5,544,811 8, % 22, % 5,513,998 Corporate actions 1, % 0.00% 1,915 Total purchases after commissions and tax 5,546,726 Sales Analysis Net before of sales sale Commissions Taxes transaction proceeds paid costs % % Equities 5,774,618 8, % % 5,783,459 Total sales after commissions and tax 5,774,618 Commission as a % of average net assets 0.12% Taxes as a % of average net assets 0.15% MI Downing Investment Funds ICVC - MI Downing Monthly Income Fund 29