PFS Downing UK Micro-Cap Growth Fund (formerly PFS Downing Active Management Fund)

Transcription

1 PHOENIX Fund Services PFS Downing UK Micro-Cap Growth Fund (formerly PFS Downing Active Management Fund) Annual Report 31 July 2015

2 Contents Page Directory Investment Objective and Policy Investment Manager's report Portfolio Statement Comparative Tables Statement of 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 General Information

3 Directory Authorised Corporate Director (ACD) & Registrar Phoenix Fund Services (UK) 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: (Authorised and regulated by the Financial Conduct Authority) Directors of the Authorised Corporate Director P.J. Foley-Brickley S. Georgala (appointed 24 August 2015) D. Jones R.W. Leedham D.W. Munting D.C. Tibble (retired 24 July 2015) Investment Manager Downing LLP Ergon House, Horseferry Road, London SW1P 2AL (Authorised and regulated by the Financial Conduct Authority) Depositary National Westminster Bank Plc Trustee & Depositary Services 135 Bishopsgate, London EC2M 3UR (Authorised and regulated by the Financial Conduct Authority) Auditor KPMG Audit Plc Statutory Auditor Chartered Accountants 15 Canada Square, Canary Wharf, London E14 5GL PFS Downing UK Micro-Cap Growth Fund 1

4 Investment Objective and Policy The investment objective of PFS Downing UK Micro-Cap Growth Fund is to generate capital growth from a portfolio consisting of companies within the Numis Smaller Companies Indices. The Fund takes a pro-active private equity approach to investing in quoted smaller companies. Investee companies will typically be capitalised between 20m - 150m. The Fund will aim to hold a concentrated portfolio of investments. The Investment Manager aims to identify investments that are valued on low pricecash flow ratios relative to peers, and will undertake rigorous due-diligence, modelled on that of a private equity style, to establish the robustness of management teams and company strategy. The Investment Manager will invest when the results of due-diligence highlight strength of management, a corporate strategy that has been largely overlooked by the market and the potential for the company to demonstrate an uplift in valuation of at least 30% in the first year of investment. Investment Manager's Report for the year ended 31 July 2015 Performance In the 12 month period to 31 July 2015 the quoted share price has increased by nearly 20% in all share classes*, far in excess of UK small company indices. * The majority of Funds under management are held in the A and B share classes, with the C share class having a nominal amount invested. Since Downing assumed the management of the Fund in early 2011 the B Share class, where the majority of shareholders hold funds, has increased by 95% (equivalent to over 16%) annualised compound growth*. Given that we target 15% annualised long-term returns from each of our underlying investments we are comfortable with our progress, despite having to deal with a number of legacy positions which we inherited. However we are not complacent, and results are seldom linear. The Fund has been the beneficiary of a relatively benign period for equity investing and it would be prudent to assume that this backdrop will not continue forever. The macro-outlook cannot be forecast with any certainty, therefore we prefer to focus on the factors affecting our underlying investments. Therefore it is here that we spend a considerable amount of time, continuing to monitor the individual companies within the Fund. In the year to July we took the decision to change the name of the Fund to reflect the strategy and investment objective more clearly. We have also taken the decision to limit the size of the Fund and soft-close it when it reaches approximately 30m in size. This is subject to FCA approval. We believe that current and future shareholders are best served by a smaller fund that will allow the Investment Manager to effectively carry-out the investment policy. Larger funds in micro-cap either have to invest in more companies (which we want to avoid as we believe it is impossible to know a large number of companies well), or are forced up the market capitalisation scale (which we want to avoid as we believe better-valued companies are smaller). During the last 12 months there have been changes to the portfolio because companies attained our target prices or were acquired and we replaced these with new investments. Our top 10 holdings continue to account for a large percentage of the Fund and we view these as the key drivers to future performance. 2 PFS Downing UK Micro-Cap Growth Fund

5 Investment Manager's Report Period % gain in A Shares** % gain in B Shares** July July % 6.0% July July % 18.3% July July % 30.3% July July % 20.6% Compound annual return over 4 years 17.7% 18.5% Inception* 89.0% 95.1% Compound annual return since Inception* 15.2% 16.0% * Downing assumed the full management of the Fund on 4 February 2011 ( inception date ). The NAV to 31 January 2011 is the closest accounts date to the inception date. ** Gains based on quoted share price. Fund Activity In the last 12 months 6 positions were sold in their entirety, being replaced by a number of new introductions to the portfolio. Office2Office, the document management and procurement business, which was a holding of over 5% in the Fund was sold to a private equity buyer at a 98% gain over cost. Update on holdings of over 5% Pittards PLC Pittards Pittards is an international producer of high grade leather and leather products. The high barriers to entry, and the skill of being able to produce high quality leathers, combined with the opportunity to enhance margins through increased focus on finished goods were all integral to our investment case. Historically Pittards had an onerous capital structure. However, renegotiation of the pension deficit and de-gearing over the last few years have left it more appropriately financed. After a period of diligence the Fund supported the company to fund the buy-back of its Yeovil Tannery facility, alongside the remaining minority holding in its Ethiopian Tannery. This strategic financing should enhance the earnings base and improve Return On Capital Employed ( ROCE ). The Board has been complimented by the introduction of a new Non-Executive Director, Stephen Yapp. Downing client funds now own over 16% of the enlarged share capital of Pittards. The share price of Pittards is up 10% since the Fund first invested. Finsbury Food Group Plc ( Finsbury ) Finsbury is a leading UK speciality bakery manufacturer of cake, bread and morning goods for both the retail and foodservice channels. In the last year the company acquired Fletchers, which was private equity owned and is a UK manufacturer and supplier of fresh and frozen bakery products including buns, muffins and scones. Since we acquired the holding in the combined group it has delivered on market expectations and integrated the businesses well. We remain confident that the acquisition has created a larger, more diversified speciality bakery group with a strong multi-channel business, well equipped to deliver growth and improved shareholder value over the coming years. The Finsbury share price appreciated by 54% over the period. PFS Downing UK Micro-Cap Growth Fund 3

6 Investment Manager's Report Amino Technologies Plc or Amino Amino Communications is a world leading IPTV and hybrid/ott innovator bringing entertainment products and solutions to a global market. With over five million devices sold to 850 customers in 85 countries, Amino s solutions are deployed by major network operators and service providers worldwide. Amino s has secured important partnerships with global vendors, including Intel and Ericsson. The investment case for Amino is predicated on the company having strong well invested IP (enabling it to protect margins), market share and its resulting cash generative attributes. During the year the company used some of its cash resources to acquire US competitor Entone. The share price of Amino appreciated by 76% over the period. Outlook The portfolio has undergone some changes over the last 12 months with profits and gains being taken in a number of holdings. Opportunities in our work-in-progress and potential new investments are encouraging and will be introduced to the portfolio as and when each entry price reflects a sufficient discount to what we believe is the intrinsic value of the investment. We continue to focus on these opportunities and the existing portfolio instead of trying to forecast the macro-economic outlook and shorter-term stock market sentiment. 4 PFS Downing UK Micro-Cap Growth Fund

7 Portfolio Statement as at 31 July 2015 Market % of total value net assets Holding Security 2015 BASIC MATERIALS 4.34% (3.15%) Chemicals 4.34% (3.15%) 644,237 Plastics Capital 747, INDUSTRIALS 24.69% (27.54%) Electronic & electrical equipment 5.31% (7.81%) 1,190,743 Flowgroup 178, ,001 Sprue Aegis 734, , Industrial transportation 3.77% (2.06%) 137,766 Braemar Shipping Services 648, Support services 15.61% (17.67%) 98,906 Andrew Sykes 326, ,091,295 Norman Broadbent 141, ,626 Latham (James) 314, ,505,000 Petards 403, ,049,056 Red24 563, ,037 RWS 111, ,016,859 Universe 826, ,687, CONSUMER GOODS 22.68% (16.23%) Food producers 11.62% (12.15%) 1,475,000 China Food^ 961,878 Finsbury Food 933, ,447 Produce Investments 444, ,463 Science in Sport 622, ,999, Leisure goods 5.89% (4.08%) 80,444 Games Workshop 452, ,108 Hornby 560, ,013, Personal goods 5.17% (0.00%) 712,464 Pittards 890, PFS Downing UK Micro-Cap Growth Fund 5

8 Portfolio Statement Market % of total value net assets Holding Security 2015 HEALTHCARE 5.94% (1.55%) Health care equipment & services 2.59% (0.00%) 176,131 Caretech 445, Pharmaceuticals & Biotechnology 3.35% (1.55%) 188,914 Anpario 576, CONSUMER SERVICES 3.51% (7.13%) Food & drug retailers 0.95% (0.00%) 106,885 Conviviality Retail 163, Media 0.00% (3.94%) Travel & leisure 2.56% (3.19%) 99,151 Dart 440, TELECOMMUNICATIONS 4.88% (0.00%) Fixed line telecommunications 4.88% (0.00%) 345,316 Adept Telecom 839, UTILITIES 2.41% (0.00%) Electricity 2.41% (0.00%) 884,191 Renewable Energy Generation 415, FINANCIALS 4.45% (10.04%) Real estate investments & services 4.26% (6.10%) 1,052,045 Inland Homes 733, Financial services 0.19% (3.94%) 157,389 Ludorum 32, TECHNOLOGY 15.13% (25.70%) Software & computer services 9.74% (23.60%) 2,485,003 Lombard Risk Management 304, ,025,594 SciSys 625, ,616 Tracsis 746, ,676, PFS Downing UK Micro-Cap Growth Fund

9 Portfolio Statement Market % of total value net assets Holding Security 2015 Technology hardware & equipment 5.39% (2.10%) 556,049 Amino Technologies 928, Investment assets 15,152, Net other assets 2,059, Net assets 17,211, 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 ^ This is a delisted security and has been valued at the Manager's best assessment of its fair value. PFS Downing UK Micro-Cap Growth Fund 7

10 Comparative Tables Change in net assets per share A Accumulation p p p Opening net asset value per share Return before operating charges^ Operating Charges Return after operating charges^ Closing net asset value per share Retained distributions on accumulation shares ^After direct transaction costs of Performance Return after charges 19.68% 28.78% 18.10% Other Information Closing net asset value 732, , ,430 Closing number of shares 448, , ,942 Operating Charges 2.35% 2.43% 2.59% Performance fee N/A N/A N/A Direct transaction costs -0.20% 0.17% 0.19% Prices Highest share price Lowest share price B Accumulation p p p Opening net asset value per share Return before operating charges^ Operating Charges Return after operating charges^ Closing net asset value per share Retained distributions on accumulation shares ^After direct transaction costs of Performance Return after charges 20.51% 29.66% 18.98% Other Information Closing net asset value 16,474,551 8,340,789 5,654,396 Closing number of shares 9,386,021 5,726,740 5,033,738 Operating Charges 1.60% 1.68% 1.84% Performance fee N/A N/A N/A Direct transaction costs -0.20% 0.17% 0.19% Prices Highest share price Lowest share price PFS Downing UK Micro-Cap Growth Fund

11 Comparative Tables Change in net assets per share C Accumulation p p Opening net asset value per share Return before operating charges^ Operating Charges Return after operating charges^ Closing net asset value per share Retained distributions on accumulation shares ^After direct transaction costs of Performance Return after charges 18.03% -2.70% Other Information Closing net asset value 4,628 3,921 Closing number of shares 4,030 4,030 Operating Charges 2.10% 2.18% Performance fee 1.68% 0.00% Direct transaction costs -0.20% 0.17% Prices Highest share price Lowest share price From launch date 08 May 2014 ^ 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. 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. Performance fees (where applicable), are charged in accordance to the terms detailed in the prospectus of the Fund, and are charged when the overall performance is in excess of the given benchmark from which it is calculated. Full details of the performance fee are available from the ACD. PFS Downing UK Micro-Cap Growth Fund 9

12 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 indication of the future risk profile of the Fund. The shaded area in the table below shows the Fund s ranking on the risk and reward indicator. Typically lower rewards, Typically higher rewards, lower risk higher risk The Fund is ranked 4 because funds of this type have experienced average 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: This Fund holds a limited number of investments. If one of these investments falls in value this can have a greater impact on the Fund s value than if it held a larger number of investments. Smaller company shares can be riskier as they may be more difficult to buy and sell and their share price may fluctuate more than that of larger companies. For further risk information please see the prospectus. Risk warning An investment in an Investment Company with Variable Capital 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. 10 PFS Downing UK Micro-Cap Growth Fund

13 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, 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 auditors are 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, we hereby certify the Report on behalf of the ACD, Phoenix Fund Services (UK) Ltd. R. W. Leedham D. W. Munting Directors Phoenix Fund Services (UK) Ltd 25 September 2015 PFS Downing UK Micro-Cap Growth Fund 11

14 Statement of the Depositary s Responsibilities and report of the Depositary to the shareholders of PFS Downing UK Micro-Cap Growth Fund ('the Company') for the year ended 31 July 2015 The depositary is responsible for the safekeeping of all of all custodial assets of the Company which is entrusted to it, for verifying ownership and maintaining a record of all other assets of the Company, and for the collection of revenue that arises from those assets. It is the duty of the depositary to take reasonable care to ensure that the Company is managed in accordance with the Financial Conducts Authority's ('FCA') Collective Investment Schemes Sourcebook ('COLL'), the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228) (the 'OEIC Regulations'), the Company s instrument of incorporation and prospectus, and where applicable, the FCA's Investment Funds Sourcebook ('FUND'), in relation to the pricing of, and dealings in, shares in the Company, the application of revenue of the Company, and the investment and borrowing powers and restrictions applicable to the Company. Having carried out such procedures as we considered 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 other material respects the Company, acting through the Authorised Corporate Director: (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 revenue, in accordance with COLL, the OEIC Regulations, the Instrument of Incorporation and Prospectus of the Company and, where applicable FUND. (ii) has observed the investment and borrowing powers and restrictions applicable to the Company. National Westminster Bank Plc 25 September PFS Downing UK Micro-Cap Growth Fund

15 Independent Auditor s Report to the Shareholders of PFS Downing UK Micro- Cap Growth Fund We have audited the financial statements of the Company for the year ended 31 July 2015 which comprise the Statement of Total Return, the Statement of Change in Net Assets, the Balance Sheet, the Distribution Table, the Portfolio Statement and the related notes. These financial statements have been prepared under the historical cost convention as modified by the revaluation of investments and the accounting policies set out therein. This report is made solely to the Company s shareholders, as a body, in accordance with Rule of the Collective Investment Schemes Sourcebook issued by the Financial Services Authority under S.247 of the Financial Services and Markets Act 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 auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s 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 and the Auditor The ACD s responsibility for preparing the Annual Report and the financial statements in accordance with applicable law, UK Financial Services Rules and Regulations and UK Accounting Standards (UK Generally Accepted Accounting Practice) is set out in the Statement of ACD s Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Prospectus, the Instrument of Incorporation, the Statement of Recommended Practice for Financial Statements of Authorised Funds and the rules in the Collective Investment Schemes Sourcebook published by the Financial Services Authority. We also report to you whether in our opinion the information given in the ACD s Report is not consistent with the financial statements, if the ACD has not kept proper accounting records for the Company, if the Financial Statements are not in agreement with the accounting records for the Company, or if we have not received all the information and explanations necessary for the purposes of our audit. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any further information. PFS Downing UK Micro-Cap Growth Fund 13

16 Independent Auditors Report to the Shareholders of PFS Downing UK Micro- Cap Growth Fund () Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the ACD in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: the financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the financial position of the Company as at 31 July 2015 and of the net expenses and the net losses on the property of the Company for the year then ended; the financial statements have been properly prepared in accordance with the Prospectus, the Instrument of Incorporation, the Statement of Recommended Practice for Financial Statements of Authorised Funds and the rules in the Collective Investment Schemes Sourcebook published by the Financial Services Authority; and the information given in the Authorised Corporate Director s Report is consistent with the financial statements for the period ended 31 July We have received all the information and explanations which we consider necessary for the purposes of the audit. Ravi Lamba for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 25 September PFS Downing UK Micro-Cap Growth Fund

17 Statement of Total Return for the year ended 31 July Note Income Net capital gains 2 2,051,613 1,784,587 Revenue 3 177, ,103 Expenses 4 (192,574) (131,781) Finance costs: interest 6 (39) Net expense before taxation (14,630) (29,717) Taxation 5 Net expense after taxation (14,630) (29,717) Total return before distributions 2,036,983 1,754,870 Finance costs: distributions Change in net assets attributable to Shareholders from investment activities 2,036,985 1,754,923 Statement of Change in Net Assets Attributable to Shareholders for the year ended 31 July Opening net assets attributable to shareholders 8,733,678 5,767,826 Amounts receivable on issue of shares 12,133,957 3,565,039 Less: Amounts payable on cancellation of shares (5,738,131) (2,360,231) 6,395,826 1,204,808 Dilution levy 45,482 7,945 Stamp duty reserve tax (1,824) Change in net assets attributable to Shareholders from investment activities (see Statement of Total Return above) 2,036,985 1,754,923 Closing net assets attributable to Shareholders 17,211,971 8,733,678 PFS Downing UK Micro-Cap Growth Fund 15

18 Balance Sheet as at 31 July Note ASSETS Investment assets 15,152,245 7,977,774 Debtors 7 171,379 27,534 Cash and bank balances 9 2,307, ,570 Total other assets 2,479, ,104 Total assets 17,631,588 8,796,878 LIABILITIES Investment liabilities Creditors 8 (419,617) (50,755) Bank overdrafts 9 (12,445) Total other liabilities (419,617) (63,200) Total liabilities (419,617) (63,200) Net assets attributable to shareholders 17,211,971 8,733, PFS Downing UK Micro-Cap Growth Fund

19 Notes to the Financial Statements for the year ended 31 July 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 the Statement of Recommended Practice ( SORP ) for Financial Statements of Authorised Funds issued by the Investment Association in May The financial statements have been prepared on the going concern basis. (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. 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. (e) Allocation of revenue and expenses to multiple share classes Any revenue or expense not directly attributable to a particular share class or Fund will normally be allocated pro-rata to the net assets of the relevant share classes and Funds on the day that the revenue or expense is recognised. With the exception of the Investment Manager's fee which is directly attributable to individual share classes, all revenue and expenses are apportioned to the Fund's share classes pro-rata to the value of the net assets of the relevant share class on the day that the revenue or expense is recognised. PFS Downing UK Micro-Cap Growth Fund 17

20 Notes to the Financial Statements (f) 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. (g) 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. Interim distributions may be made at the Investment Manager s discretion and the balance of revenue is distributed in accordance with the regulations. Distributions not claimed within a six year period will be forfeited and added back to the capital of the Fund. (h) 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. (i) 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. (j) Dilution levy The ACD 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. 18 PFS Downing UK Micro-Cap Growth Fund

21 Notes to the Financial Statements 2. Net capital gains Non-derivative securities 2,053,823 1,786,127 Transaction charges (2,210) (1,540) Net capital gains 2,051,613 1,784, Revenue UK dividends: Ordinary 171, ,103 Overseas dividends 6,577 Total revenue 177, ,103 PFS Downing UK Micro-Cap Growth Fund 19

22 Notes to the Financial Statements 4. Expenses Payable to the Authorised Corporate Director (ACD), associates of the ACD and agents of either of them: Registration fees 37,477 14,476 Payable to the Investment Manager, associates of the Investment Manager and agents of either of them: Investment Manager's fee 119,577 80,386 Payable to the Depositary, associates of the Depositary and agents of either of them: Depositary's fee (including VAT) 12,000 12,000 Safe custody and other bank charges 5,291 4,770 17,291 16,770 Other expenses: Audit fee (including VAT) 6,060 6,060 Audit fee (including VAT): taxation services 1,596 1,596 FCA fees 808 Legal fees 6,646 8,097 Performance fees 73 Printing costs 3,854 3,588 18,229 20,149 Total expenses 192, , PFS Downing UK Micro-Cap Growth Fund

23 Notes to the Financial Statements 5. Taxation a) Analysis of charge in the year: Current tax charge (note 5b) b) Factors affecting taxation charge for the year Net expense before taxation (14,630) (29,717) Corporation tax at 20% (2,926) (5,943) Effects of: UK dividends (34,273) (20,421) Movement in surplus management expenses 38,514 26,364 Non-taxable overseas earnings (1,315) Current tax charge (note 5a) (c) Deferred tax At the year end there is a potential deferred tax asset of 131,035 (2014: 92,521) 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. PFS Downing UK Micro-Cap Growth Fund 21

24 Notes to the Financial Statements 6. Finance costs Distributions The distributions take account of revenue received on the creation of shares and revenue deducted on the cancellation of shares, and comprise: Final distribution Revenue deducted on cancellation of shares 6 1 Revenue received on issue of shares (8) (54) Finance costs: distributions (2) (53) Finance costs: interest 39 Total finance costs (2) (14) Reconciliation of net expense after taxation to net distributions: Net expense after taxation per statement of total return (14,630) (29,717) Expenses transferred to capital 73 Revenue deficit to be transferred from capital 14,555 29,664 Finance costs: distributions (2) (53) 7. Debtors Amounts receivable on creations 171,379 17,106 Accrued income: Dividends receivable 10,428 Total debtors 171,379 27, PFS Downing UK Micro-Cap Growth Fund

25 Notes to the Financial Statements 8. Creditors Amounts payable on cancellations 22,394 23,107 Purchases awaiting settlement 359,636 Accrued expenses: Amounts payable to the Authorised Corporate Director (ACD), associates of the ACD and agents of either of them: Registration fee 5,466 1,543 Amounts payable to the Investment Manager, associates of the Investment Manager and agents of either of them: Investment Manager's fee 14,404 7,974 Amounts payable to the Depositary, associates of the Depositary and agents of either of them: Depositary's fee (including VAT) 1,019 1,019 Safe custody and other bank charges 4,373 4,956 5,392 5,975 Other expenses: Audit fee (including VAT) 6,060 6,060 Audit fee (including VAT) taxation services 4,692 4,596 Performance fees 73 Printing costs 1,500 1,500 12,325 12,156 Total creditors 419,617 50,755 PFS Downing UK Micro-Cap Growth Fund 23

26 Notes to the Financial Statements 9. Cash and bank balances Cash and bank balances 2,307, ,570 Overdraft positions (12,445) Cash and bank balances 2,307, , Related party transactions Authorised Corporate Director and other fees payable to Phoenix Fund Services (UK) Ltd (the ACD) are disclosed in note 4 and amounts due at the year end are shown in note 8. Fees payable to Downing LLP (the Investment Manager) 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. Downing LLP and its associates had the following shareholdings in the Fund: Held at Change in Held at period A Accumulation Units Shareholding Percentage of shares 0.05 (0.03) Contingent liabilities and outstanding commitments There were no contingent liabilities or outstanding commitments at the balance sheet date (2014: none). 24 PFS Downing UK Micro-Cap Growth Fund

27 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 in relation to the investment portfolio. 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 main 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. 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. As at the balance sheet date, all of the Fund's asset and liabilities were denominated in sterling. 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. PFS Downing UK Micro-Cap Growth Fund 25

28 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 so 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. There is little exposure to liquidity risk. 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 Manager minimises the risk by conducting trades through only the most reputable counter parties. Derivatives The Fund may enter into derivative contracts for Efficient Portfolio Management (EPM) purposes. The purposes of EPM must be to achieve reduction of risk, the reduction of cost, or the generation of additional income or capital with an acceptably low level of risk and the use of these instruments must not cause the Fund to stray from its investment objectives. Any EPM transaction must be economically appropriate and the exposure fully covered. The ACD monitors the use of derivatives to ensure EPM rules are satisfied. In the opinion of the ACD there is no sophisticated derivative use within the Fund and accordingly a sensitivity analysis is not presented. Fair value of financial assets and liabilities There is no material difference between the carrying values and fair values of the financial instruments disclosed in the balance sheet. 26 PFS Downing UK Micro-Cap Growth Fund

29 Notes to the Financial Statements 13 Portfolio transaction costs Analysis of purchases Net purchase Commissions Taxes cost paid % % Equities 9,498,543 13, % 4, % Total purchases after commissions and tax 9,498,543 Analysis of sales Net sales Commissions Taxes proceeds paid % % Equities 4,366,923 4, % % Total sales after commissions and tax 4,366,923 Commission as a % of net assets 0.16% Taxes as a % of net assets 0.04% Analysis of purchases Net purchase Commissions Taxes cost paid % % Equities 3,936,539 5, % 13, % Total purchases after commissions and tax 3,936,539 Analysis of sales Net sales Commissions Taxes proceeds paid % % Equities 2,420,181 1, % % Total sales after commissions and tax 2,420,181 Commission as a % of net assets 0.09% Taxes as a % of net assets 0.18% PFS Downing UK Micro-Cap Growth Fund 27

30 Notes to the financial statements 14 Shareholders funds A Accumulation B Accumulation C Accumulation Opening number of shares 284,748 5,726,740 4,030 Shares issued 623,971 6,820,915 Shares cancelled (396,797) (3,221,139) Converted (63,674) 59,505 Closing number of shares 448,248 9,386,021 4, Fair value disclosure Valuation technique Assets Liabilities Assets Liabilities Quoted prices for identical instruments in active markets^ 15,152,245 7,977,774 Prices of recent transactions for identical instruments^^ Valuation techniques using observable market data^^^ Valuation techniques using non-observable data^^^^ 15,152,245 7,977,774 ^ Fair value based on a quoted price for an identical instrument in an active market and generally will include quoted equities, some highly liquid bonds and exchange traded derivatives ^^ Fair value based on the price of a recent transaction for an identical instrument and will generally include holdings in other schemes. ^^^ Fair value based on a valuation technique using observable market data and will generally include evaluated pricing techniques using inputs such as quoted prices for similar instruments, interest rates, yield curves and credit spreads. ^^^^ Fair value based on a valuation technique that relies significantly on non-observable market data and will generally include unquoted equities and other values not primarily derived from observable market data. 28 PFS Downing UK Micro-Cap Growth Fund

31 General Information Authorised Status PFS Downing UK Micro-Cap Growth Fund (the Company ) is structured as an Investment Company with Variable Capital (''ICVC''), under regulation 12 (Authorisation) of the OEIC Regulations (Open- Ended Investment Companies Regulations 2001 (SI 2001/1228)). The Company does not intend to have an interest in immovable property. The Company is authorised and regulated in the UK by the Financial Conduct Authority (''FCA'') as a UCITS Retail Scheme under the COLL Sourcebook. The Company was incorporated in England and Wales on 19 September 2007 under registration number IC The Shareholders are not liable for the debts of the Company. PFS Downing UK Micro-Cap Growth Fund is structured as an umbrella company. Provision exists for an unlimited number of Sub-funds, and at the date of this Report one sub-fund, the PFS Downing UK Micro-Cap Growth Fund is authorised. Head Office Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW Address for Service The Head Office is the address in the United Kingdom for service on the Company of notices or other documents required or authorised to be served on it. Base Currency The base currency of the Company is Pounds Sterling. Share Capital The minimum share capital of the Company is 1 and the maximum is 100,000,000,000. Shares in the Company have no par value. The share capital of the Company at all times equals the sum of the net asset value of the Fund. Classes of Shares The Instrument of Incorporation allows each Fund to issue different classes of shares in respect of any Fund. The Fund currently has the following classes of shares available for investment: A Accumulation B Accumulation C Accumulation Holders of Accumulation shares are not entitled to be paid the revenue attributable to such shares, but that revenue is retained and accumulated for the benefit of shareholders and is reflected in the price of shares. PFS Downing UK Micro-Cap Growth Fund 29

32 General Information Valuation Point The scheme property of the Company and each Sub-Fund will normally be valued at 10:00am on each dealing day for the purpose of calculating the price at which shares in the Company may be issued, sold, repurchased or redeemed. For the purpose of the pricing of units, a business day is defined as a day on which the dealing office of the ACD is open for the buying and selling of shares. The ACD may at any time during a business day carry out an additional valuation of the property of the Fund if the ACD considers it desirable to do so, with the Depositary's approval. Buying and Selling of Shares The ACD will accept orders for the purchase and sale of shares on normal business days between 8:30am and 4:30pm. Instructions to buy or sell shares may either be in writing to: Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW Or by telephone to: The ACD has the right to establish facilities for recording telephone calls made or received on this telephone line. A contract note giving details of the shares purchased will be issued no later than the next business day after the business day on which an application to purchase shares is received and instrumented by the ACD. Certificates will not be issued in respect of shares. Ownership of shares will be evidenced by an entry on the register of shareholders. Pricing Basis There is a single price for buying, selling and switching shares in a Fund which represents the Net Asset Value of the Fund concerned. The share price is calculated on a forward pricing basis, that is at the next Valuation Point after the purchase or redemption is deemed to be accepted by the ACD. The prices of shares are published daily on the Investment Association website at and in the Financial Times at Neither the ACD nor the Company can be held responsible for any errors in the publication of the prices. The shares in the Company will be issued and redeemed on a forward pricing basis which means that the price will not necessarily be the same as the published price. Other Information The Instrument of Incorporation, Prospectus, Key Investor Information Document and the most recent interim and annual reports may be inspected at the office of the ACD which is also the Head Office of the Company, of which copies may be obtained free of charge upon application. They are also available from the website of the ACD, the details given in the directory of this report. Shareholders who have complaints about the operation of the Company should in the first instance contact the ACD, or, following that, may make their complaint direct to the Financial Ombudsman Service, South Quay Plaza, 183 Marsh Wall, London E14 9SR. 30 PFS Downing UK Micro-Cap Growth Fund