The CMI High Income Fund P.L.C. Annual report & accounts. For the year ended 30 September 2014

Transcription

1 The CMI High Income Fund P.L.C. Annual report & accounts For the year ended 30 September 2014

2 The CMI High Income Fund P.L.C. Annual report & accounts For the year ended 30 September 2014 Contents 1 Directors and administration 2 6 Manager's report (includes comparative table and portfolio statement) 7-8 Report of the Directors 9 Statement of Directors responsibilities 10 Statement of total return and statement of change in net assets attributable to holders of participating redeemable shares 11 Balance sheet Notes to the financial statements 20 Distribution table Independent auditor s report 23 Report of the fiduciary custodian

3 Directors and administration Directors J L Bezuidenhout W J Clarke P B Clucas* W J Hastings* (resigned 24 June 2014) N P Rothery (resigned 24 June 2014) D M Schuster* D J Walkden (Chairman) * denotes Non-executive Director Manager and registrar CMI Fund Managers (IOM) Limited Clerical Medical House Victoria Road Douglas Isle of Man IM99 1LT British Isles Telephone: +44 (0) Fax: +44 (0) Fiduciary custodian Barclays Trust Company (Isle of Man) Limited (formerly Barclays Private Bank & Trust (Isle of Man) Limited. Name changed 31 October 2014) 3rd Floor Barclays House Victoria Street Douglas Isle of Man IM1 2LE British Isles Investment adviser Scottish Widows Investment Partnership Limited (to 31 March 2014) 33 Old Broad Street London EC2N 1HZ United Kingdom Aberdeen Asset Management PLC (from 1 April 2014) Bow Bells House 1 Bread Street London EC4M 9HH United Kingdom Secretary V N Karran Auditor PricewaterhouseCoopers LLC Sixty Circular Road Douglas Isle of Man IM1 1SA British Isles 1

4 Manager s report Introduction The CMI High Income Fund P.L.C. ("the Fund") is an Authorised Scheme within the meaning of the Collective Investment Schemes Act The Fund is formed as an open-ended investment company and managed in the Isle of Man under the Companies Acts 1931 to 2004 and in accordance with the Authorised Collective Investment Scheme Regulations 2010 ("Regulations"). The Fund has elected to be a type A scheme for the purpose of the Regulations. In accordance with these regulations, the Fund complies with the Statement of Recommended Practice ("SORP") for Authorised Funds issued by the Investment Management Association ("IMA") in October 2010 and includes the portfolio statement as part of the Manager's report. Important information The Fund's prices, abbreviated and long reports can be viewed on our website - (click on "Funds and Prices" and choose the "CMI High Income Fund" option) or by contacting our administration team. The Fund remains a reporting fund at the date of this report. From 1 April 2014, Aberdeen Asset Management is the Fund's investment adviser. From 1 June 2014, the Fund will only accept business from existing participating shareholders. No new participating shareholders will be accepted into the Fund. Investment objective, policy and strategy The investment objective of the Fund is to provide a high income from a managed portfolio of predominantly fixed-interest securities denominated in sterling and other currencies. Income is distributed on a quarterly basis. Market review for the year ended September 2014 Corporate bonds outperformed government bonds, delivering a strong positive performance in the 12 months to 30 September Corporate bond prices are heavily influenced by underlying government bond yields. The credit spread is the difference in yield between government bonds and corporate bonds of a similar maturity. If the credit spread narrows, this indicates that the market deems that a company s creditworthiness has improved, and that its corporate bonds have outperformed government bonds of a similar maturity. However, if underlying government bond yields rise (and prices fall), this could nevertheless result in poor, or even negative, returns from corporate bonds. From October to December 2013, credit spreads over government bonds narrowed considerably. However, the rise in underlying sovereign yields was such that overall returns were only marginally positive. That said, there were pockets of excellent performance: high-yielding bonds were strongly positive, and potentially riskier instruments such as subordinated bank debt and corporate hybrids also delivered healthy returns. Moving into the first half of 2014, credit generated strong positive returns. Once more, the main influence was the performance of underlying government bonds. These benefited from a flight to safety, driven by fears over the low level of currency reserves in some emerging market countries, fears of Chinese economic slowdown and a plethora of political uncertainties. Meanwhile, a benign economic backdrop in the developed economies, and a continued hunt for yield and income, continued to provide support for the asset class. Between July and September, corporate bonds, while continuing to deliver positive returns, nevertheless underperformed government bonds. Credit spreads, the difference in yield between government bonds and equivalent corporate bonds, and a reflection of credit s perceived riskiness, widened. This was caused primarily by a continuation of geopolitical worries, notably in Ukraine and the Middle East, and by mixed economic data. Higher risk areas such as high yield were weakest, with a rise in stock-specific risk. Performance and activity of the Fund Early on in the review period, we participated in a new issue from DirecTV, a US television and media business. That purchase was financed by the sale of Comcast, a rival digital TV provider. We took profits on GKN. This was a sub-investment grade issue that we initially purchased at an attractive valuation, and which the market subsequently reassessed as due for a re-rating to investment grade. We also sold Tesco property bonds, using the proceeds to invest in Health Care Real Estate Investment Trust. In the first quarter of 2014, financials outperformed non-financials. Accordingly, portfolio exposure to banks increased modestly. We increased the proportion of utilities in the portfolio from underweight to overweight, participating in a new Electricité de 2

5 Manager s report (continued) Performance and activity of the Fund (continued) France issue with a 100-year maturity. We also participated in a new issue from Atlantia, the Italian toll road and airport operator. We topped up our holding in a hybrid issue from America Movil, the Mexican telecoms operator. This was financed via a sale of America Movil senior debt, thereby increasing the Fund s risk profile. Later, a new deal from Manchester Airports Group was added to the portfolios. Allocations to the asset-backed securities sector were also increased via purchases of bonds issued by Arkle Master and Annington Finance. Higher quality bonds issued by the UK Treasury and European Investment Bank were sold into corporate bonds issued by BAT and Bouygues, the French conglomerate, as risk was increased slightly. That latter holding was reduced in September; Bouygues telecoms business is under a good deal of competitive pressure, and conditions for the European construction market are tough. We extended Fund duration modestly by switching a short-dated European Investment Bank bond into a better value and longer bond from LCR, a UK Government-owned railway agency. Outlook Investment grade corporate bonds continue to be supported by monetary policy designed to stimulate economic growth, low default rates and a relative scarcity of supply. Meanwhile, we expect high yield corporate bonds to struggle in relative terms. Valuations have become more challenging, and the liquidity picture is deteriorating. Shareholders liability The participating shareholders are not liable for the debts of the Fund. Shares in existence The total number of participating redeemable preference shares in existence at the beginning and at the end of the year under review were: 30 September ,344, September ,257,400 Value per share The mid-market value per share at the beginning and the end of the year under review was: 30 September p 30 September p Portfolio statement Portfolio details are shown on pages 5 and 6. J L Bezuidenhout, Director W J Clarke, Director CMI Fund Managers (IOM) Limited 11 November 2014 Details of the following are set out on page 1: Directors, Manager and registrar, Fiduciary custodian, Auditor, Investment adviser and Secretary. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. 3

6 Comparative table As at 30 September 2014 Performance record Highest offer Lowest bid Net income distributed per share* p p p to to to to to *Net income distributed per share is based on average shares during the year. Net asset value record Net asset value Shares in issue Cancellation price of participating shares per share p ,439,386 90,188, ,602,605 87,344, ,276,003 82,257, Total expense ratio The Total Expense Ratio ( TER ) is the total expenses paid by share class in the year against its average daily net asset value. TER %

7 Portfolio statement As at 30 September 2014 Name of investment Quantity Valuation % of Fund s property Government Bonds Treasury Stock 1% 07/09/ , , % Treasury Stock 1.75% 22/01/ ,000 55, % Treasury Stock 4% 07/09/ ,000 47, % Treasury Stock 4.25% 07/03/ ,000 94, % Treasury Stock 4.75% 07/12/2030 9,000 11, % Treasury Stock 4.75% 07/12/ ,000 96, % Treasury Stock 5% 07/03/ , , % United Mexican States 5.625% 19/03/ , , % Total Government Bonds 919, % (2013: 4.85%) Corporate Bonds AA Bond Co Ltd % 02/07/ , , % Abbey National 5.125% 14/04/ , , % Abbey National 5.25% 16/02/ , , % America Movil SAB DE CV 4.375% 07/08/ , , % America Movil SAB DE CV 6.375% (F/R) 06/09/ , , % Amgen 4% 13/09/ ,000 99, % Amgen 5.5% 07/12/ , , % Annington Finance 4 PLC 8.07% 10/01/ , , % Arkle Master 3.986% (F/R) 17/05/ , , % Arkle Master Issuer 4.681% (F/R) 17/05/ , , % Artesian Finance Ii 6% 30/09/ , , % ASIF III 5.375% 14/10/ , , % Aspire Defence Finance 4.674% 31/03/ , , % AT&T CORP 4.875% 01/06/ , , % AT&T INC T 5.875% 28/04/ , , % Atlantia 6.25% 09/06/ , , % Aviva Plc 6.125% (F/R) 29/09/ , , % Aviva Plc 6.625% (F/R) 03/06/ , , % AXA 6.772% 29/10/ , , % Bank Nederlandse Gemeenten 4.5% 20/02/ , , % Bank Nederlandse Gemeenten 5.2% 07/12/ , , % Bank of America Corp 6.125% 15/09/ , , % Bank of America Corp 7% 31/07/ , , % Bank of America Corp 7.75% 30/04/ , , % Barclays Bank Plc 4.25% 12/01/ , , % Barclays Bank Plc 6.75% (F/R) 16/01/ , , % Barclays Bank Plc 10% 21/05/ , , % Barclays SLCSM 6.14% (F/R) PERP 29/06/ , , % BAT Intl Finance Plc 6% 24/11/ , , % BAT Intl Finance 7.25% 12/03/ , , % BBC Pacific Quay Finance % 25/07/ , , % BG Energy Capital 5% 04/11/ , , % BG Energy Capital 6.5% (F/R) 30/11/ , , % BHP Billiton Finance 3.25% 25/09/ ,000 98, % BNP Paribas 5.954% (F/R) 31/12/ , , % BP Capital Markets 4.325% 10/12/ , , % British Telecom PLC 5.75% 07/12/ , , % British Telecom PLC 6.375% 23/06/ , , % Centrica plc Centri 6.375% 10/03/ , , % Citigroup Inc 4.5% 03/03/ , , % Citigroup Inc 6.8% 25/06/ , , % Close Bros 6.5% 10/02/ , , % CNP Assurances CNPFP 7.375% (F/R) 30/09/ , , % Coventry Building Society 4.625% 19/04/ , , % Delamare Finance 6.067% 19/02/ , , % Deutsche Bahn Finance 3.125% 24/07/ , , % Deutsche Telekom 6.5% 08/04/ , , % Digital Stout Holdings 4.25% 17/01/ , , % Dignity Finance 8.151% 31/12/ , , % DirecTV Holdings 5.2% 18/11/ , , % Dong Energy 4.875% 12/01/ , , % Dong Energy 5.75% 09/04/ , , % E.on International 6.375% 07/06/ , , % Eastern Power Networks 5.75% 08/03/ , , % Electricite De France 5.5% 17/10/ , , % Electricite De France 6% (F/R) 31/12/ , , % Electricite De France 6% 23/01/ , , % Electricite De France 6.25% 30/05/ , , % ELM BV (SWISS REIN CO) % (F/R) 25/11/ , , % ENEL Finance INTL SA 5.75% 14/09/ , , % Equity Release 5.05% 26/04/ , , % Euro Inv Bank 4.5% 07/03/ , , % Euro Inv Bank 4.625% 12/10/ , , % Euro Inv Bank 4.875% 07/09/ , , % Euro Inv Bank 5% 15/04/ , , % Everything Everywhere 4.375% 28/03/ , , % First Group 8.75% 08/04/ , , % First Hydro Finance 9% 31/07/ , , % Friends Life Group 8.25% 21/04/ , , % G4S Plc 7.75% 13/05/ ,000 94, % Gatwick Funding Limited 5.75% 23/01/ , , % Gatwick Funding Limited 6.125% 02/03/ , , % GE Capital Corp 5.5% 07/06/ ,000 43, % GE Capital Corp 6.5% (F/R) 15/09/ , , % GE Capital UK Funding % (F/R) 20/03/ , , % GE Capital UK Funding 5.875% 18/01/ , , % Glaxosmithkline Capital 5.25% 10/04/ , , % Glencore Canada Finance 7.375% 27/05/ , , % Glencore Finance SA 6.5% 27/02/ , , % Great Rolling Stock Co Plc 6.5% 05/04/ , , % 5

8 Portfolio statement (continued) As at 30 September Name of investment Quantity Valuation % of Fund s property Corporate Bonds (continued) HBOS Capital Funding LP 6.461% (F/R) 29/11/ , , % Health Care REIT Inc 4.8% 20/11/ , , % Heathrow Funding Ltd 5.875% 13/05/ , , % Heathrow Funding Ltd 6.25% 10/09/ ,000 88, % Heathrow Funding Ltd 6.45% 10/12/ , , % Heathrow Funding Ltd 6.75% 03/12/ , , % Heathrow Funding Ltd 12.45% 31/03/ ,000 99, % Holmes % (F/R) 31/01/2016 (15/10/2054) 175, , % HSBC Bank Plc 5.375% 22/08/ , , % HSBC Holdings 5.75% 20/12/ , , % HSBC Holdings 6.375% 18/10/ , , % Hutchinson Whampoa Finance UK 5.625% 24/11/ , , % Imperial Tobacco Finance 7.75% 24/06/ ,000 96, % Imperial Tobacco Finance 9% 17/02/ , , % Intercontinental Hotels 3.875% 28/11/ , , % Juneau Investment LLC 5.9% 22/02/ , , % Kreditanst Fur Wiederau 4.875% 01/02/ , , % Kreditanst Fur Wiederau 5.5% 07/12/ , , % Kreditanst Fur Wiederau 5.5% 18/06/ , , % LCR Finance PLC 5.1% 07/03/ , , % Lloyds Bank Plc 6.5% 17/09/ , , % Lloyds Bank Plc % 29/05/ , , % Lloyds Bank Plc 7.5% 15/04/ , , % Lloyds Bank Plc 10.75% 16/12/ , , % Man Air Group Fund 4.125% 02/04/ , , % Marks & Spencer Plc 4.75% 12/06/ , , % Metlife 5.375% 09/12/ , , % Motability Operations 5.625% 29/11/ , , % National Capital Trust NAB 5.62% 29/09/ , , % National Express Group 6.25% 13/01/ ,000 65, % National Grid Gas Plc 7% 16/12/ , , % National Westminster Plc % 29/01/ , , % Nationwide Building Society 5.625% 28/01/ , , % Network Rail Infra Finance 4.875% 27/11/ , , % NGG Finance Plc 5.62% 18/06/ , , % Northern Gas Networks 4.875% 15/11/ , , % Northumbrian Water Finance 6% 11/10/ , , % Orange 5.375% 22/11/ , , % Orange 5.625% 23/01/ , , % Orange 5.875% (F/R) 07/02/ , , % Orange 7.25% 10/11/ , , % Petrobras Global Finance 5.375% 01/10/ , , % Picts Plc 5.218% 20/01/ , , % Places for People Holmes Limited 5.875% 23/05/ , , % Prudential prufin % 29/05/ , , % QBE Capital Funding Ltd 6.125% 28/09/ ,000 98, % QBE Capital Funding Ltd 7.5% 24/05/ , , % Rabobank Capital Funding 5.56% 29/10/ , , % Rio Tinto Finance 4% 11/12/ , , % RMPA Services 5.337% 30/09/ , , % Royal Bank of Scotland 7.5% 29/04/ , , % RSA Insurance Group 8.5% (F/R) 31/12/ , , % RWE Finance 6.125% 06/07/ , , % RWE Finance BV RWE 6.5% 20/04/ , , % Saint Gobain 5.625% 15/11/ , , % Scottish & Southern Energy 4.25% 14/09/ , , % Scottish & Southern Energy 5.453% (F/R) 31/12/ , , % Scottish & Southern Energy 6.25% 27/08/ , , % Siemens Finance 6.125% (F/R) 14/09/ , , % Society of Lloyds 7.421% (F/R) 29/06/ , , % Standard Chartered Bank 7.75% (F/R) 31/12/ , , % Svenska Handbanken 2.75% 05/12/ , , % Telefonica Emisiones Sau 5.445% 08/10/ , , % Telereal % (F/R) 10/12/ , , % Tesco Plc TSCOLN 5% 24/03/ , , % Tesco Property Finance 5.744% 13/04/ , , % Tesco Property % 13/10/ , , % Thames Water Util Cayman 5.5% 11/02/ , , % Thames Water Util Fin 5.125% 28/09/ , , % Time Warner Cable Inc 5.75% 02/06/ , , % UBS Jersey 8.75% 18/12/ , , % UK Care No.1 6.3% 01/10/ , , % Volkswagen Financial Services 1.75% 21/08/ , , % Wal-Mart Stores Inc 5.625% 27/03/ , , % Western Power 9.25% 09/11/ , , % Western Power District Holdings 5.75% 16/04/ , , % Yorkshire Building Society 4.75% 12/04/ , , % Total Corporate Bonds 41,076, % (2013: 95.03%) Total Bonds 41,996, % Bank Balances 763, % (2013: 0.12%) 42,760, % The total purchase costs for the year were 5,429,196 (2013: 22,983,545) and the total sale costs were 8,756,605 (2013: 23,847,653), see note 17. Credit rating analysis Due to licence restrictions, individual credit ratings have not been disclosed. However a credit quality analysis is disclosed below in accordance with paragraph 3.17 of the IMA SORP. Market Value Market Value As at As at Investment grade 41,275,754 42,559,903 Non-investment grade 721,062 1,488,790 Total debt securities 41,996,816 44,048,693

9 Report of the Directors The Directors have pleasure in submitting their Annual Report and Accounts of the Fund for the year ended 30 September Introduction The principal activity of the Fund is the investment into a managed portfolio of predominantly sterling fixed-interest securities. Review of activities The results of the Fund are set out on page 10. The change in net assets attributable to holders of participating redeemable shares from investment activities during the year was an increase of 1,282,625 (2013: decrease of 375,749). Interim distributions paid during the year were 1,254,391 (2013: 1,278,979) and a final distribution of 402,111 (2013: 438,288) will be paid on 15 November Directors The current Board of Directors are: Jacques Bezuidenhout Appointed as Finance Director in April 2013, Jacques joined Lloyds Banking Group (the "Group") in 2005 and has worked in various reporting and technical roles in Insurance and Group Finance before taking on his current role in May 2014 as Head of Finance Change & Transformation within Insurance Finance. Jacques is a member of the South African Institute of Chartered Accountants. William Juan Clarke Appointed in March 2012, Juan joined Clerical Medical in 1991 and has worked in various senior roles before being appointed Executive Director. Juan is a Chartered Fellow of the Chartered Institute for Securities and Investment. Juan was appointed as Managing Director of the CMI Group of Companies on 21 January Peter Clucas (Non-executive Director) Appointed in December 2010, Peter is a Director of Cains Advocates Limited, a law firm with offices in Douglas, London and Singapore and winner of the Queens Award for Enterprise International trade Peter has been with Cains since 1990 and is also a non-practising English solicitor. Peter has extensive experience in all aspects of commercial dispute resolution work and specialises in anti-money laundering legal compliance. He is a Member of the International Compliance Association. David Schuster (Non-executive Director) Appointed as an Executive Director in January 1993, David became a Non-executive Director in September 2006 following his retirement from the CMI Group of Companies. David joined Clerical Medical in 1973 and held a number of senior executive positions before being appointed General Manager of the Isle of Man business in David is a Fellow of the Association of Chartered Certified Accountants, past Chairman of the Manx Insurance Association and past Deputy Chairman of the Association of International Life Offices. David Walkden (Chairman) Appointed in July 2012, David has been with the Group since 1986 and is currently the Strategic Projects Director, Insurance. Prior to this David led the Integration Programme across the Insurance Division following the Lloyds acquisition of HBOS in David's other roles have included Operations Director Insurance Division Lloyds Banking Group, Operations Director of the Insurance and Investment Division of HBOS, Director, Group Programmes, Procurement and Property and Operations Director Retail Banking Division. David is a Director of a number of other companies in the Group including Clerical Medical International Holdings BV. 7

10 Report of the Directors (continued) Directors interests William Juan Clarke held 16, shares in the Fund as at 30 September 2014 and throughout the year. Other than noted above no Director had an interest, beneficial or non-beneficial, in the issued share capital of the Fund as at 30 September 2014 nor throughout the year. Auditor PricewaterhouseCoopers LLC, being eligible, has expressed its willingness to continue in office in accordance with Section 12 (2) of the Isle of Man Companies Act The CMI High Income Fund P.L.C. On behalf of the Board W J Clarke, Director 11 November

11 Statement of Directors responsibilities in respect of the Directors Report and financial statements The Directors are responsible for preparing the Directors Report and the financial statements in accordance with applicable Isle of Man law and regulations. Company law requires the Directors to prepare financial statements for each financial year. The financial statements are required by law to give a true and fair view of the state of affairs of the Fund and of the net revenue/(expense) and the net gains/(losses) of the property of the Fund for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures 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 Fund will continue in business. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Fund s transactions and disclose with reasonable accuracy at any time the financial position of the Fund and to enable them to ensure that the financial statements comply with the principal constitutional documents, the Statement of Recommended Practice relating to the Financial Statements of Authorised Funds issued by the Investment Management Association in October 2010, the Authorised Collective Investment Schemes Regulations 2010 and the Isle of Man Companies Acts 1931 to They are also responsible for safeguarding the assets of the Fund and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Fund s website. Legislation in the Isle of Man governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 9

12 Statement of total return For the year ended 30 September 2012 Income Note Year ended Year ended Net capital gains/(losses) 5 1,282,625) (375,749) Revenue 6 2,205,579) 2,287,739) Expenses 7 (535,223) (561,700) Net revenue before taxation 1,670,356) 1,726,039) Taxation 8 ) ) Net revenue after taxation 1,670,356) 1,726,039) Total return before distributions 2,952,981) (1,350,290) Finance costs: Distributions 9 (1,670,356) (1,726,039) Change in net assets attributable to holders of participating redeemable shares from investment activities 1,282,625 (375,749) Statement of change in net assets attributable to holders of participating redeemable shares For the year ended 30 September 2012 Year ended Year ended Opening net assets attributable to holders of participating redeemable shares 44,602,605) 46,439,386) Amounts receivable on issue of shares 1,608,593) 1,972,886) Amounts payable on cancellation of shares (4,217,820) (3,433,918) (2,609,227) (1,461,032) Change in net assets attributable to holders of participating redeemable shares from investment activities (see Statement of total return above) 1,282,625) (375,749) Closing net assets attributable to holders of participating redeemable shares 43,276,003 44,602,605 The notes on page 12 to 20 form part of these financial statements. 10

13 Balance sheet For the year ended 30 September 2012 Assets Note As at As at Investment assets 41,996,816) 44,048,693) Debtors 10 1,339,540) 1,349,157) Cash and bank balances ,482) 51,478) Total other assets 2,103,022) 1,400,635) Total assets 44,099,838) 45,449,328) Equity and liabilities Equity Management shares 14 10) 10) Nominal shares ,207) 272,120) Total equity 277,217) 272,130) Liabilities Creditors ,507) 136,305) Distribution payable 9 402,111) 438,288) Total other liabilities 546,618) 574,593) Total equity and other liabilities 823,835) 846,723) Net assets attributable to holders of participating redeemable shares 43,276,003 44,602,605 The financial statements on pages 10 to 20 were approved and authorised for issue by the Board of Directors on 11 November 2014 and signed on its behalf by: J L Bezuidenhout, Director W J Clarke, Director 11

14 Notes to the financial statements For the year ended 30 September Accounting policies a The financial statements on pages 10 to 20 have been prepared under the historic cost convention, as modified by the revaluation of the investments held, and in accordance with United Kingdom accounting standards, the Authorised Collective Investment Schemes Regulations 2010 and Isle of Man law. b c d e f g h The financial statements comply with the requirements of the Statement of Recommended Practice ("SORP") for Authorised Funds issued by the Investment Management Association ("IMA") in October The market value of listed investments is based on fair value (generally bid price) at the time of 2pm on the last working day. Fair value is defined by the SORP as the bid value of each security, excluding any accrued interest in the case of fixed and floating rate securities. Interest receivable on bank deposits is dealt with on an accruals basis and interest receivable on investments in securities is recognised on an effective interest rate method in accordance with the SORP. Effective interest is a calculation that reflects the amount of amortisation of any discount or premium on the purchase price over the remaining life of the security. Gains and losses on disposal and revaluation are taken to the statement of total return. The balance on the statement of total return is taken to capital reserve every year. All available revenue is distributed in full. The premium receivable on the issue of shares is credited to the share premium account. On redemption of participating redeemable shares the premium repayable is debited to the share premium account. Should the share premium account be fully utilised, premiums on redemption will be charged against other realised capital reserves. All participating redeemable shares issued by the Fund provide the investors with the right to require redemption for cash at the value proportionate to the investor's share in the Fund's net assets at the redemption date. In accordance with FRS 25 such instruments give rise to a financial liability for the present value of the redemption amount. The Fund has, in accordance with the IMA SORP 2010 and FRS 1, exercised its right of exemption from preparing a cash flow statement. 2. Equalisation Equalisation is accumulated income included in the price of the shares purchased and sold during the year, which is included as part of a shareholder's first distribution. 3. Management charge A recurring charge at an annual rate of 0.875% is payable to the Manager each month, calculated daily on the net asset value of the Fund. 4. Fiduciary custodian and safe custody fees A recurring charge is payable to the fiduciary custodian each month, calculated daily on a sliding scale based on the net asset value of the Fund. The annual charge is presently 0.10% plus VAT up to a Fund value of 50 million and thereafter 0.05% plus VAT. In addition to this, the fiduciary custodian charges the Fund a quarterly safe custody fee for the safe keeping of the Fund's assets. 12

15 Notes to the financial statements (continued) For the year ended 30 September Net capital gains/(losses) Non-derivative The net capital gains/(losses) during the year comprise: Realised gain on sale of investments 54, ,660) Unrealised profit/(loss) on revaluation of investments 1,227,875) (1,041,409) Net capital gains/(losses) 1,282,625 (375,749) 6. Revenue ) Non-derivative: Interest income from investments in fixed-income securities 2,204,546 2,286,388) Interest income on fixed term deposits 1,033 1,351) Total revenue 2,205,579 2,287, Expenses Payable to the Manager and Registrar Management charge 407, ,316) 407, ,316) Payable to the Fiduciary Custodian Fiduciary custodian fees 54,770 57,622) Safe custody fees 28,909 29,946) 83,679 87,568) Other expenses: Directors fees 7,662 7,831) Regulatory fees 1,200 1,033) Audit fees 12,500 12,323) Printing and postage 9,773 9,943) Sundry expenses 12,548 13,686) 43,683 44,816) Total expenses 535, ,700 13

16 Notes to the financial statements (continued) For the year ended 30 September Taxation The Fund is liable to Isle of Man tax at the standard rate of 0%. 9. Finance costs: Distributions The distributions take account of revenue received on the issue of shares and revenue deducted on the cancellation of shares and comprise: Interim distribution 1,254,391) 1,278,979) Final distribution 402,111) 438,288) Revenue deducted on the cancellation of shares (6,759) (7,579) Revenue received on the issue of shares 20,613) 16,351) 10. Debtors 1,670,356 1,726,039 Comprised as follows: Interest receivable 1,056,970 1,073,670 Sundry debtors 282, ,487 1,339,540 1,349, Cash Cash and bank balances 763,482 51, ,482 51, Creditors Comprised as follows: Sundry accruals 144, , Related party disclosure 144, ,305 CMI Insurance Company Limited and CMI Fund Managers (IOM) Limited are subsidiaries of Clerical Medical International Holdings B.V.. CMI Insurance Company Limited invests in The CMI High Income Fund P.L.C. and the number of participating shares held by them at the balance sheet date was 39,537,854 (2013: 41,939,223). Any redeemed shares are repurchased by CMI Fund Managers (IOM) Limited, the manager of The CMI High Income Fund P.L.C.. At the balance sheet date, 277,207 was owed from CMI Fund Managers (IOM) Limited to The CMI High Income Fund P.L.C. (2013: 272,120). CMI Fund Managers (IOM) Limited hold the management shares. The Fund has related party holdings with Lloyds Banking Group P.L.C. that are detailed within the Portfolio statement on pages 5 to 6. Manager's fees are detailed in note 3. William Juan Clarke, a Director of the Fund, held 16, shares as at 30 September 2014 (2013: 16, shares) and throughout the year. 14

17 Notes to the financial statements (continued) For the year ended 30 September Share capital ) ) a ) ) Authorised share capital 10 management shares of 1 each 10) 10) 499,990,000 unclassified shares of 0.1p each 499,990) 499,990) 500, ,000 b Issued share capital ) ) Management shares of 1 each Balance brought forward and carried forward 10) 10) Nominal shares of 0.1p each Balance brought forward 272,120) 269,276) Issued during the year 8,179) 6,598) Redeemed during the year (3,092) (3,754) Balance carried forward 277,207) 272,120) Participating shares of 0.1p each Balance brought forward 87,344) 90,188) Issued during the year 3,092) 3,754) Redeemed during the year (8,179) (6,598) Balance carried forward 82,257) 87,344) Total issued share capital 359, , ) ) No. of shares) No. of shares) Number of management shares of 1 each Balance brought forward and carried forward 10) 10) Nominal shares of 0.1p each Balance brought forward 272,120,080) 269,275,510) Issued during the year 8,178,610) 6,599,050) Redeemed during the year (3,091,820) (3,754,480) Balance carried forward 277,206,870) 272,120,080) Participating shares of 0.1p each Balance brought forward 87,344,190) 90,188,760) Issued during the year 3,091,820) 3,754,480) Redeemed during the year (8,178,610) (6,599,050) Balance carried forward 82,257,400) 87,344,190) Total shares in issue 359,464, ,464,280 15

18 Notes to the financial statements (continued) For the year ended 30 September Share capital (continued) Management shares are not redeemable, have no voting rights and do not entitle the holder to receive any dividends. On a winding-up, shareholders are entitled to receive the balance after the nominal and participating shareholders have been paid. Nominal shares are issued at par to provide funds for the redemption of the nominal value of participating shares. They may be converted into participating shares. They have no voting rights or rights to a dividend. On a winding up, the shareholders are entitled to the nominal value of the shares after the participating shareholders have been paid. Participating shares confer the right to a proportionate share in the property of the Fund and to dividends as determined by the Directors. They may be redeemed on any dealing day. Each share carries one vote. On a winding-up, the shareholders are entitled to a share of the assets available for distribution in accordance with their respective interest in the property of the Fund before other shareholders are paid c Holding over 5% CMI Insurance Company Limited 48% 48% 15. Reserves Share premium ) ) ) ) Opening balance 1 October 36,180,471) 37,638,659) Issue of shares during the year 1,605,502) 1,969,132) Redemption of shares during the year (4,209,642) (3,427,320) Closing balance 30 September 33,576,331 36,180,471 Capital reserve ) Opening balance 1 October 8,334,790) 8,710,539) Transfer from/(to) statement of total return 1,282,625) (375,749) Closing balance 30 September 9,617,415 8,334,790 Net assets attributable to holders of participating shares consist of: ) ) Share capital - participating shares 82,257) 87,344) Share premium 33,576,331) 36,180,471) Capital reserve 9,617,415) 8,334,790) 43,276,003 44,602,605 16

19 Notes to the financial statements (continued) For the year ended 30 September Financial instruments General The Fund aims to provide a high return from a managed portfolio of predominantly sterling fixed-interest securities. In pursuing this investment objective, the Fund holds a number of financial instruments. The Fund's financial instruments comprise debt securities, cash balances, debtors and creditors that arise directly from its operations, for example, in respect of sales and purchases awaiting settlement, amounts receivable for share issues and payable for share cancellations and debtors for accrued revenue. The main risks arising from the financial instruments are market risk, liquidity risk and credit risk. The Fund Manager's policies for managing these risks are summarised below and have been applied throughout the year. Market risk Market price risk Market price risk, being the risk that the value of the Fund's investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate movement, arise mainly from uncertainty about future prices of financial instruments the Fund holds. Market price risk represents the potential loss the Fund might suffer through holding market positions in the face of price movements. The Fund's Manager regularly reviews the asset allocation of the portfolio in order to minimise the risk associated with particular sectors whilst continuing to follow the investment objectives. The Fund s Manager has responsibility for monitoring the existing portfolio selected in accordance with the overall asset allocation parameters described in the Scheme Particulars and seeks to ensure that individual stocks also meet the risk reward profile that is acceptable. The market price risk is not a significant risk as the Fund invests primarily in long-term fixed rate bonds. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest bearing assets held by the Fund are cash and bank balances shown in note 11 and fixed and floating rate financial assets. Below is an analysis of the financial assets, for details of the individual Fund holdings please see the Fund portfolio statement on pages 5 and 6. Floating rate Fixed rate Financial assets not Total financial assets financial assets carrying interest 30 September ,362,058 36,398,240 1,339,540 44,099, September ,042,083 40,058,088 1,349,157 45,449,328 17

20 Notes to the financial statements (continued) For the year ended 30 September Financial instruments (continued) Market risk (continued) The Fund has no financial liabilities other than short-term creditors and participating shares. Interest receivable on cash is in general linked to the base rate. Fixed rate financial assets Weighted average Weighted average Interest rate period for which the rate is fixed % Years 30 September September The maturity of the non-interest bearing instruments is less than a year. Floating rate bond interest is calculated using daily published rates. Fair value of financial assets and liabilities There is no material difference between the value of the financial assets and liabilities, as shown in the balance sheet and their fair value. The main liability of the Fund is its obligation to redeem shares on demand. Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with its financial liabilities. The Fund holds assets comprising mainly readily realisable securities and has no significant unlisted securities. The main liability of the Fund is the cancellation of shares by shareholders. This risk is minimised by holding cash and readily realisable securities. 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. This includes counterparty and issuer risk. Certain transactions in securities that the Fund enters into expose it to the risk that the counterparty will not deliver the investment for a purchase, or cash for a sale after the Fund has fulfilled its responsibilities. The Fund only buys and sells investments through brokers which have been approved by the Fund's Manager as an acceptable counterparty and these are reviewed on an ongoing basis. The majority of the Fund's holdings are in investment grade bonds as shown in the Portfolio statement on pages 5 to 6. The holdings are spread across a variety of industry sectors to avoid concentrations of credit risk. Assets of the Fund may need to be sold if insufficient cash is available to finance redemptions. The Fund holds cash and cash deposits which potentially exposes the Fund to counterparty risk, the Manager constantly reviews the bank at which cash is deposited. Currently, the cash is held with Barclays which has a credit rating of A- (2013: A-). 18

21 Notes to the financial statements (continued) For the year ended 30 September Portfolio transactions Analysis of total purchase costs ) ) ) ) Purchases in period before transaction costs 5,427,396) 22,978,445) Purchase costs 1,800) 5,100) Gross purchases total 5,429,196 22,983,545 Analysis of total sale costs Gross sales before transaction costs 8,758,905) 23,853,053) Sales costs (2,300) (5,400) Total sales net of transaction costs 8,756,605 23,847, Contingent liabilities There were no contingent liabilities or commitments outstanding at the date of the financial statements. 19. Post balance sheet events There have been no material post balance sheet events. 19

22 Distribution table For the year ended 30 September 2014 Net revenue Equalisation Distribution Distribution payable* paid pence per share pence per share pence per share pence per share Final distribution Participating shares *The 2014 final distribution will be paid 15 November 2014 Interim distributions Interim distribution - Quarter 3 Participating shares *The quarter 3 distribution was paid 15 August 2014 Interim distribution - Quarter 2 Participating shares *The quarter 2 distribution was paid 15 May 2014 Interim distribution - Quarter 1 Participating shares *The quarter 1 distribution was paid 15 February

23 Independent auditor's report to the members of The CMI High Income Fund P.L.C. Report on the financial statements We have audited the accompanying financial statements of The CMI High Income Fund P.L.C. ("the Fund") which comprise the balance sheet as at 30 September 2014, the statement of total return and the statement of change in net assets attributable to holders of participating redeemable shares for the year then ended, a summary of significant accounting policies and other explanatory notes and the distribution table. Directors responsibility for the financial statements The Directors are responsible for the preparation and fair presentation of these financial statements in accordance with applicable Isle of Man law and United Kingdom Accounting Standards, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. This report, including the opinion, has been prepared for and only for the Fund s members as a body in accordance with Section 15 of the Isle of Man Companies Act 1982 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 21

24 Independent auditor's report to the members of The CMI High Income Fund P.L.C. (continued) Opinion In our opinion the Financial Statements: give a true and fair view of the financial position of the Fund as at 30 September 2014, and of its net income/(expense) and net gain/(loss) of the scheme property for the year then ended in accordance with United Kingdom Accounting Standards; and have been properly prepared in accordance with the Statement of Recommended Practice for Authorised Funds issued by the Investment Management Association in October 2010, the Authorised Collective Investment Schemes Regulations 2010, the Isle of Man Companies Acts and the Fund s Principal Constitutional Documents. Opinion on other matters prescribed by the Authorised Collective Investment Scheme Regulations 2010 In our opinion : we have obtained all the information and explanations we consider necessary for the purposes of the audit; and the information given in the Report of the Directors and the report of the Manager for the financial year for which the Financial Statements are prepared is consistent with the Financial Statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Isle of Man Companies Acts 1931 to 2004 and/or the Authorised Collective Investment Schemes Regulations 2010 require us to report to you if, in our opinion: Proper books of account have not been kept by the Fund or, proper returns adequate for our audit have not been received from branches not visited by us; or The Fund s balance sheet and statement of total return are not in agreement with the books of account and returns; or We have not received all the information and explanations necessary for the purposes of our audit; and Certain disclosures of directors loans and remuneration specified by law have not been complied with. PricewaterhouseCoopers LLC Chartered Accountants Douglas, Isle of Man 11 November

25 Report of the fiduciary custodian The fiduciary custodian has responsibility for the safekeeping of the Fund s assets and must take reasonable care to ensure that the scheme is managed by the Manager in accordance with the Regulations relating to, inter alia, investment and borrowing powers, dealing and valuation and pricing, and the Fund s constitutional documents and scheme particulars. In respect of the year ended 30 September 2014 we state that, in our opinion, CMI Fund Managers (IOM) Limited ("the Manager") has managed The CMI High Income Fund P.L.C. in the above period: a. in accordance with the limitations imposed upon the investment and the borrowing powers of the Manager and ourselves as fiduciary custodian by the principal constitutional documents, by the Scheme particulars and by the Authorised Collective Investment Schemes Regulations 2010, and b. otherwise in accordance with the provisions of the principal constitutional documents and the Authorised Collective Investment Schemes Regulations 2010, and c. the issue, sale, redemption and cancellation, and calculation of the price of the shares and the application of the scheme s income, have at all times been carried out in accordance with the provisions of the Regulations and, where applicable, the Act and the documents constituting the scheme. Barclays Trust Company (Isle of Man) Limited 11 November