Smith & Williamson Fixed Interest Fund Annual Long Report
Contents Page Report of the Manager 2 Statement of the Manager's responsibilities 4 Report of the Trustee to the unitholders of Smith & Williamson Fixed Interest Fund 5 Independent Auditor's report to the unitholders of Smith & Williamson Fixed Interest Fund 6 Accounting policies of Smith & Williamson Fixed Interest Fund 7 Investment Adviser's report 9 Summary of portfolio changes 11 Portfolio statement 12 Risk and reward profile 15 Comparative table 16 Ongoing charges figure 18 Financial statements: Statement of total return 19 Statement of change in net assets attributable to unitholders 19 Balance sheet 20 Notes to the financial statements 21 Distribution table 30 Further information 33 Appointments 34 1
Smith & Williamson Fixed Interest Fund Report of the Manager Smith & Williamson Fund Administration Limited as the Manager hereby presents the Annual Long Report ( the Report ) for Smith & Williamson Fixed Interest Fund. Smith & Williamson Fixed Interest Fund ( the Trust or the Fund ) is an authorised unit trust scheme further to an authorisation order dated 2 May 1995 and is a UCITS scheme complying with the investment and borrowing power rules in the Collective Investment Schemes sourcebook ( COLL ), as issued and amended by the Financial Conduct Authority ( FCA ). The Manager is of the opinion that it is appropriate to continue to adopt the going concern basis in the preparation of the accounts as the assets of the Fund consist predominantly of securities which are readily realisable and, accordingly, the Fund has adequate financial resources to continue in operational existence for the foreseeable future. Further, appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, have been used in the preparation of these accounts and applicable accounting standards have been followed. The base currency of the Trust is UK sterling. The Trust Deed can be inspected at the offices of the Manager. Copies of the Prospectus and Key Investor Information Document ("KIID") are available on request free of charge from the Manager. Investment objective and policy The objective of the Fund is to achieve a high income through investing primarily in bonds. The Manager may invest in transferable securities, including warrants, in UK and other exchanges as well as collective investment schemes, money market instruments, deposits and cash and near cash. The policy in order to achieve the Fund s objective will be to invest primarily in corporate bonds, other fixed interest securities (including gilts and permanent interest bearing securities (PIBs)) without geographic restriction and preference shares in UK and European Community companies. The Manager may also apply for new issues. The Manager may, from time to time, invest more than 35% of the property of the Fund in Government and other public securities. The investment policy may mean that at times it may be appropriate for the Fund not to be fully invested but to hold cash or near cash. In the light of extreme market conditions, the Manager may raise or reduce the liquidity of the Fund from normal working levels. The Fund may hedge transactions against price or currency fluctuations by back to back foreign currency borrowings against sterling or by suitable transactions permitted for hedging. The extent will depend upon the circumstances and the objective will normally be to reduce the currency risk to a sterling based unitholder. The Manager does not envisage that they will enter into hedging transactions to a major extent. Remuneration In accordance with COLL 4.5.7R (7) The Authorised Fund Manager (AFM) is required to make disclosures of remuneration paid to staff and UCITS remuneration code staff by the AFM and a description of how the remuneration has been calculated. COLL 4.5.7A G allows the relevant disclosure not to be included in these accounts as the first full performance period of the AFM is not complete and the required information is therefore not currently available. 2
Report of the Manager (continued) Changes affecting the Fund in the year There were no fundamental or significant changes to the Fund in the year. Further information in relation to the Fund is illustrated on page 33. In accordance with the requirements of the Collective Investment Schemes sourcebook as issued and amended by the Financial Conduct Authority, we hereby certify the Report on behalf of the Manager, Smith & Williamson Fund Administration Limited. G Murphy T Quayum Directors Smith & Williamson Fund Administration Limited 28 July 2017 3
Statement of the Manager's responsibilities The Collective Investment Schemes sourcebook ("COLL") requires the Manager to prepare financial statements for each annual accounting period which give a true and fair view of the financial affairs of the Fund as at the end of the financial period and of its net revenue and the net capital gains on the property of the Fund for the year. In preparing the financial statements, the Manager is required to: - - - - - select suitable accounting policies and then apply them consistently; comply with the disclosure requirements of the Statement of Recommended Practice: Financial Statements of UK Authorised Funds issued by the Investment Association ( the IA ) in May 2014; follow generally accepted United Kingdom accounting principles (UK accounting standards and applicable law) including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Fund will continue in operation; keep proper accounting records which enable it to demonstrate that the financial statements as prepared comply with the above requirements; - - make judgements and estimates that are reasonable and prudent; and take reasonable steps for the prevention and detection of fraud and other irregularities. The Manager is responsible for the management of the Fund in accordance with the Trust Deed, the Prospectus and COLL. 4
Report of the Trustee to the unitholders of Smith & Williamson Fixed Interest Fund Trustee's responsibilities The Trustee must ensure that the Fund is managed in accordance with the Financial Conduct Authority's Collective Investment Schemes sourcebook, the Financial Services and Markets Act 2000, as amended, (together "the Regulations"), the Trust Deed and Prospectus (together "the Scheme documents") as detailed below. The Trustee must in the context of its role act honestly, fairly, professionally, independently and in the interests of the Fund and its investors. The Trustee is responsible for the safekeeping of all custodial assets and maintaining a record of all other assets of the Fund in accordance with the Regulations. The Trustee must ensure that: - - the Fund's cash flows are properly monitored and that cash of the Fund is booked into the cash accounts in accordance with the Regulations; the sale, issue, redemption and cancellation of units are carried out in accordance with the Regulations; - - - the value of units in the Fund are calculated in accordance with the Regulations; any consideration relating to transactions in the Fund's assets is remitted to the Fund within the usual time limits; the Fund's income is applied in accordance with the Regulations; and - the instructions of the Manager are carried out (unless they conflict with the Regulations). The Trustee also has a duty to take reasonable care to ensure that the Fund is managed in accordance with the Regulations and the Scheme documents in relation to the investment and borrowing powers applicable to the Fund. Report of the Trustee to the unitholders of Smith & Williamson Fixed Interest Fund Having carried out such procedures as we consider necessary to discharge our responsibilities as Trustee of the Fund, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the Fund, acting through the Manager: (i) (ii) has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Fund's units and the application of the Funds income in accordance with the Regulations and the Scheme documents; and has observed the investment and borrowing powers and restrictions applicable to the Fund. National Westminster Bank Plc Trustee and Depositary Services 28 July 2017 5
Independent Auditor s report to the unitholders of Smith & Williamson Fixed Interest Fund ( the Trust ) We have audited the financial statements of the Trust which comprise the Statement of Total Return, the Statement of Change in Net Assets Attributable to Unitholders, the Balance Sheet, the Related Notes and Distribution Table and the accounting policies set out on pages 7 to 8. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. This report is made solely to the Trust s unitholders, as a body, in accordance with Rule 4.5.12 of the Collective Investment Schemes sourcebook ( the COLL Rules ) issued by the Financial Conduct Authority under section 247 of the Financial Services and Markets Act 2000. Our audit work has been undertaken so that we might state to the Trust s unitholders those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Trust and the Trust s unitholders as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the Manager Smith & Williamson Fund Administration Limited and Auditor As explained more fully in the Statement of Manager s responsibilities set out on page 4 the Manager is responsible for the preparation of financial statements which give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at: www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the financial statements: - give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the financial position of the Trust as at 30 April 2017 and of the net revenue and the net capital gains on the property of the Trust for the year then ended; and - Opinion on other matters prescribed by the COLL Rules - - have been properly prepared in accordance with the Trust Deed, the Statement of Recommended Practice relating to Authorised Funds, and the COLL Rules. In our opinion the information given in the Manager s report is consistent with the financial statements. We have received all the information and explanations which we consider necessary for the purposes of our audit. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where under the COLL Rules we are required to report to you if, in our opinion: proper accounting records for the Trust have not been kept; or the financial statements are not in agreement with the accounting records. Grant Archer for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Saltire Court 20 Castle Terrace Edinburgh EH1 2EG 28 July 2017 6
Accounting policies of Smith & Williamson Fixed Interest Fund a Basis of accounting The financial statements have been prepared under the historical cost convention, as modified by the revaluation of investments. They have been prepared in accordance with FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland ("FRS 102") and in accordance with the Statement of Recommended Practice for UK Authorised Funds ("the SORP") issued by The Investment Association in May 2014. The Fund has elected to early adopt the amendments to FRS 102 in respect of the fair value hierarchy disclosure requirements for financial instruments held at fair value as permitted for authorised funds. As described in the Manager's report, the Manager continues to adopt the going concern basis in the preparation of the accounts. b Valuation of investments The purchase and sale of investments are included up to close of business on 28 April 2017, being the last business day. Purchases and sales of investments are recognised when a legally binding and unconditional right to obtain, or an obligation to deliver an asset arises. Investments are stated at their fair value at the balance sheet date. In determining fair value, the valuation point is global close of business on 28 April 2017 with reference to quoted bid prices from reliable external sources. c Where an observable market price is unreliable or does not exist, investments are valued at the Manager's best estimate of the amount that would be received from an immediate transfer at arm's length. Foreign exchange The base currency of the Fund is UK sterling which is taken to be the Fund's functional currency. All transactions in foreign currencies are converted into sterling at the rates of exchange ruling at the dates of such transactions. The resulting exchange differences are disclosed in note 2 of the Notes to the financial statements. Any foreign currency assets and liabilities at the end of the accounting period are translated at the exchange rate prevailing at the balance sheet date. d e f Revenue Revenue is recognised in the Statement of total return on the following basis: Interest on bank deposits and short term deposits is recognised on an accruals basis. Interest on debt securities is recognised on an effective yield basis. Accrued interest purchased and sold on interest bearing securities is excluded from the capital cost of these securities and dealt with as part of the revenue of the Fund. The amortised amounts are accounted for as revenue or as an expense and form part of the distributable revenue of the Fund. Expenses All expenses, with the exception of those expenses directly related to the purchase and sale of securities, which are charged to the capital property of the Fund, are charged to revenue. 50% of the annual management charge is then reallocated to capital, net of any tax effect for distribution purposes only. Allocation of revenue and expenses to multiple unit classes All revenue and expenses which are directly attributable to a particular unit class are allocated to that class. All revenue and expenses which are attributable to the Fund are allocated to the Fund and are normally allocated across the unit classes pro rata to the net asset value of each class on a daily basis. 7
Accounting policies of Smith & Williamson Fixed Interest Fund (continued) g Taxation Tax payable on profits is recognised as an expense in the period in which profits arise. The tax effects of tax losses available to carry forward are recognised as an asset when it is probable that future taxable profits will be available, against which these losses can be utilised. UK corporation tax is provided as amounts to be paid/recovered using the tax rates and laws that have been enacted at the balance sheet date. Deferred taxation is provided in full on timing differences that result in an obligation at 30 April 2017 to pay more or less tax, at a future date, at rates expected to apply when they crystallise based on current rates and tax laws. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements. Deferred tax assets and liabilities are not discounted. h i j Provision for deferred tax assets are only made to the extent the timing differences are expected to be of future benefit. Efficient portfolio management Where appropriate, certain permitted instruments such as derivatives or forward currency contracts may be used for efficient portfolio management purposes. Where such instruments are used to protect or enhance revenue, the revenue or expenses derived therefrom are included in the Statement of total return as revenue related items and form part of the distribution. Where such instruments are used to protect or enhance capital, the gains and losses derived therefrom are included in the Statement of total return as capital related items. Dilution levy The need to charge a dilution levy will depend on the volume of sales or redemptions. The Manager may charge a discretionary dilution levy on the sale and redemption of units if, in its opinion, the existing unitholders (for sales) or remaining unitholders (for redemptions) might otherwise be adversely affected, and if charging a dilution levy is, so far as practicable, fair to all unitholders and potential unitholders. Please refer to the Prospectus for further information. Distribution policies i Basis of distribution The distribution policy is to distribute all available revenue after deduction of expenses payable from revenue. Distributions attributable to income units are paid to unitholders. Distributions attributable to accumulation units are re-invested in the Fund on behalf of the unitholders. ii Unclaimed distributions Distributions to unitholders outstanding after 6 years are taken to the capital property of the Fund. iii Revenue All revenue is included in the final distribution with reference to policy d. iv Expenses Expenses incurred against the revenue of the Fund are included in the final distribution, subject to any expense which may be transferred to capital for the purpose of calculating the distribution, with reference to policy e. v Equalisation Group 2 units are units purchased on or after the previous XD date and before the current XD date. Equalisation applies only to group 2 units. Equalisation is the average amount of revenue included in the purchase price of group 2 units and is refunded to holders of these units as a return of capital. Being capital it is not liable to income tax in the hands of the unitholders but must be deducted from the cost of units for capital gains tax purposes. Equalisation per unit is disclosed in the Distribution table. 8
Investment Adviser's report The portfolio, as presently invested, qualifies for use in an ISA and it is the Manager s intention that the Trust will maintain this status. Investment performance Over the past six months, the Trust (A Class Income) produced a return net of basic rate tax of +1.29%. This compared with a return on the median trust in the Corporate Bond sector of +3.01 % (net of tax) and on the FTSE Actuaries All Gilts Index of +2.36% (gross of tax). The table below shows returns over 1, 3 and 5 years. 1 year 3 years 5 years Trust return* +7.1% +13.9% +22.6% Median Trust* +9.2% +19.7% +37.7% FTSE Govt Index** +8.2% +24.8% +28.4% *Source: Morningstar Direct. Mid to Mid net income re-invested. **Source: Bloomberg. Investment activities Investment summary The most significant event to affect the sterling bond market throughout the past year was the UK s decision to leave the European Union (EU) following the referendum on 23 June 2016. Coming somewhat unexpectedly, the result saw a considerable fall in bond yields as investors anticipated the subsequent reduction in UK interest rates. The election of President Trump in the USA, although a similar political surprise, saw a more muted reaction as markets assessed the outlook for the US economy more favourably. By the end of the period under review there appeared to be little chance interest rates here changing, with bond yields continuing to fall as investors sought yield. The Bank of England (BoE) waited until August before it announced that it was reducing the UK base rate to 0.25% in order to offset the negative effects that the referendum result would have on the economy. The main stimulus to bond prices, however, was the announcement that there would also be a further round of quantitative easing, including the central bank purchasing 10billion worth of sterling corporate bonds. This move saw yields fall to record low levels, with that of the 10 year gilt falling to just 0.7%. Yields did begin to rise once it became apparent that the UK economy was not about to nosedive, but the presence of a central bank buyer and huge political uncertainty meant that fixed interest markets would remain relatively firm throughout the year. The fact that the BoE was also buying corporate issues saw the price rises for riskier bonds outstrip those of government issues, especially given the poorer liquidity in these markets. With the average yield spread for sterling credit issues over gilts falling by over 0.5% within two months, the Bank could be proud of achieving its aim to lower corporate bond yields dramatically. In the USA the surprise election result did little to hold back the Federal Reserve in carrying out its stated policy of raising interest rates there to near normal levels. Although the central bank raised interest rates there twice during the year, this had little effect on risk markets. These remained firm owing to the anticipation of an expansionary fiscal policy that the new President would implement, whilst financial stocks rallied as it was deemed banks would find higher interest rates more profitable. During the period under review we continued to raise the credit quality of the Smith & Williamson Fixed Interest Fund. As the prices of riskier assets rose strongly, we sold into this strength, with sales of issues such as Electricite de France 6% Perpetual. Our preference was to reinvest into higher quality issues such as those from Toyota Motor Credit Corporation 1% 27/09/2022, National Grid Index Linked 1.25% 06/10/2021 and Thames Water Utilities Cayman Finance 4.375% 03/07/2034. We also increased the fund s holding in both corporate index-linked issues and UK gilts. Financial instruments and management of risk The Trust is invested predominantly in fixed coupon bonds, the breakdown of which is shown in the Portfolio statement. Corporate bonds include the risks of both yields rising, as well as that of the issuing company being unable to meet its liability to repay the bond. The Manager, therefore, adjusts the fund s duration on an active basis and selects bonds taking into account the credit rating of bonds which are predominantly rated BBB- or better. During the period no derivatives were used by the Fund. 9
Investment Adviser's report (continued) Investment strategy and outlook Both the cut in UK interest rates and further bout of quantitative easing here have seen bond yields fall to historically low levels. Although there has been a modest reversal of this trend since last summer, the fact remains that corporate bond yields offer very little in the way of value when both the rise in inflation and the economic risks posed by the EU referendum result are taken into consideration. If these risks are overstated then it is government bond issues that are expensive. As fund managers, we continue to focus on high credit quality and liquid bond issues as we do not believe that the yields on higher risk, lower quality issues offer enough in the way of compensation for the uncertainty that both the EU referendum result and the continuing geopolitical situation still present. Smith & Williamson Investment Management LLP 30 May 2017 FTSE is a trade mark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE under licence. All rights in the FTSE Indices vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept liability for any errors or omissions in the FTSE Indices or underlying data. 10
Summary of portfolio changes Purchases Cost Sales Proceeds UK Treasury Gilt 4.75% 07/12/2038 6,769,692 UK Treasury Gilt 4.75% 07/12/2038 5,835,158 UK Treasury Gilt 4.25% 07/06/2032 3,246,481 UK Treasury Gilt 4.25% 07/06/2032 3,274,933 UK Treasury Gilt Inflation Linked UK Treasury Gilt Inflation Linked 0.75% 22/03/2034 2,224,579 1.25% 22/11/2027 2,483,347 UK Treasury Gilt 4.25% 07/12/2040 2,099,345 UK Treasury Gilt Inflation Linked UK Treasury Gilt 4.25% 07/03/2036 1,541,020 0.75% 22/03/2034 2,208,200 UK Treasury Gilt Inflation Linked UK Treasury Gilt Inflation Linked 6.7088% 17/07/2024 1,485,184 6.7088% 17/07/2024 1,461,128 UK Treasury Gilt Inflation Linked Coventry Building Society 1.25% 22/11/2027 1,230,857 6.092% Perpetual 1,310,000 UK Treasury Gilt 4.25% 07/09/2039 1,029,789 UK Treasury Gilt 4.25% 07/12/2040 1,242,603 KFW 1.375% 01/02/2021 1,021,465 UK Treasury Gilt Inflation Linked Prudential 1.375% 19/01/2018 1,005,704 1.875% 22/11/2022 1,149,685 Toyota Motor 1% 27/09/2022 984,850 KFW 1.375% 01/02/2021 1,028,200 P&G Company 5.25% 19/01/2033 969,359 UK Treasury Gilt 4.25% 07/09/2039 1,019,469 International Bank for Reconstruction & Development Deutsche Bahn Finance 0.625% 15/12/2023 962,700 3.125% 24/07/2026 1,001,151 BAT International Finance 1.75% 05/07/2021 754,581 Intu Metrocentre Finance Thames Water Utilities Cayman Finance 4.125% 06/12/2028 886,720 4.375% 03/07/2034 618,250 Procter & Gamble 2.3% 06/02/2022 802,836 National Grid Index Linked P&G Company 5.25% 19/01/2033 778,140 1.25% 06/10/2021 612,250 Broadgate Financing Lloyds Banking Group 5.75% 09/07/2025 553,220 4.821% 05/07/2036 746,646 Sky 2.875% 24/11/2020 545,213 Electricite de France 6% Perpetual 693,000 Orange 5.875% Perpetual 514,000 UK Treasury Gilt 4.25% 07/03/2036 683,640 United Kingdom Treasury Gilt Inflation Linked LCR Finance 4.5% 07/12/2028 668,352 1.25% 22/11/2032 492,398 Network Rail Infrastructure Finance 4.75% 22/02/2024 636,058 Prudential 6.875% 20/01/2023 635,750 The above represents the major purchases and the major sales in the year to reflect a clearer picture of the major investment activities. 11
Portfolio statement as at 30 April 2017 Nominal Market % of total value or value net assets Investment holding Debt Securities* 95.51% (93.71%) Debt Securities - United Kingdom 57.53% (52.20%) AAA to AA 10.67% (14.20%) UK Treasury Gilt 4.25% 07/03/2036 600,000 853,200 2.88 UK Treasury Gilt 4.75% 07/12/2038 600,000 931,140 3.15 UK Treasury Gilt 4.25% 07/12/2040 600,000 890,700 3.01 United Kingdom Treasury Gilt Inflation Linked 1.25% 22/11/2032** 250,000 483,416 1.63 3,158,456 10.67 A to A- 10.64% (10.72%) Eversholt Funding 6.359% 02/12/2025 300,000 395,581 1.34 National Grid Electricity Transmission 3.806% 27/07/2020** 564,000 1,016,164 3.43 Prudential 1.375% 19/01/2018 1,000,000 1,004,850 3.39 Royal Bank of Scotland 7.5% 29/04/2024 220,000 296,705 1.00 Yorkshire Water Services Finance 5.5% 28/05/2037 300,000 437,460 1.48 3,150,760 10.64 BBB+ to BBB 20.89% (11.10%) Aviva 6.125% 14/11/2036** 750,000 861,035 2.91 BAT International Finance 1.75% 05/07/2021 750,000 760,583 2.57 Direct Line Insurance Group 9.25% 27/04/2042** 300,000 378,381 1.28 Eastern Power Networks 4.75% 30/09/2021 580,000 667,707 2.26 Hammerson 6.875% 31/03/2020 250,000 291,413 0.98 Legal & General Group 5.375% 27/10/2045** 850,000 929,988 3.14 Lloyds Banking Group 5.75% 09/07/2025** 500,000 551,605 1.86 Manchester Airport Group Funding 4.125% 02/04/2024 500,000 574,544 1.94 National Grid Index Linked 1.25% 06/10/2021** 500,000 613,000 2.07 Sky 2.875% 24/11/2020 525,000 556,914 1.88 6,185,170 20.89 BBB- and below 15.33% (16.18%) John Lewis 6.125% 21/01/2025 500,000 617,615 2.09 Marks & Spencer 7.125% 01/12/2037 $400,000 350,782 1.18 Nottingham Building Society 7.875% Perpetual 355,000 411,800 1.39 Pennon Group 6.75% Perpetual** 938,000 974,104 3.29 Tesco 1.982% 24/03/2036** 950,000 1,248,500 4.23 Wm Morrison Supermarkets 3.5% 27/07/2026 875,000 933,609 3.15 4,536,410 15.33 Total debt securites - United Kingdom 17,030,796 57.53 12
Portfolio statement (continued) as at 30 April 2017 Nominal Market % of total value or value net assets Investment holding Debt Securities - Europe 11.83% (18.27%) AAA to AA 2.90% (6.55%) Nestle Finance International 2.25% 30/11/2023 800,000 857,806 2.90 AA- to A+ 2.16% (4.29%) Siemens Financieringsmaatschappij NV 2.75% 10/09/2025 300,000 327,669 1.11 Statoil ASA 4.25% 10/04/2041 250,000 311,651 1.05 639,320 2.16 A to A- 4.91% (5.24%) Anheuser-Busch InBev 4% 24/09/2025 150,000 174,733 0.59 Linde Finance 5.875% 24/04/2023 400,000 506,434 1.71 Volkswagen Financial Services 2.625% 22/07/2019 750,000 773,583 2.61 1,454,750 4.91 BBB+ to BBB 0.00% (2.19%) - - BBB- and below 1.86% (2.97%) Orange SA 5.875% Perpetual** 500,000 549,809 1.86 Total debt securities - Europe 3,501,685 11.83 Debt Securities - North America 16.79% (17.87%) AAA to AA 3.38% (5.85%) Apple 3.05% 31/07/2029 200,000 220,811 0.75 Microsoft Corporation 2.375% 12/02/2022 $1,000,000 777,623 2.63 998,434 3.38 AA- to A+ 10.32% (6.42%) International Business Machines 2.625% 05/08/2022 750,000 803,137 2.71 Pfizer 6.5% 03/06/2038 150,000 243,431 0.82 PepsiCo 2.5% 01/11/2022 750,000 805,129 2.72 Procter & Gamble 5.25% 19/01/2033 150,000 213,732 0.72 Toyota Motor Credit Corporation 1% 27/09/2022 1,000,000 991,680 3.35 3,057,109 10.32 A to A- 0.00% (2.55%) - - BBB+ to BBB 3.09% (3.05%) McDonald's 6.375% 03/02/2020 800,000 916,035 3.09 Total debt securities - North America 4,971,578 16.79 13
Portfolio statement (continued) as at 30 April 2017 Nominal Market % of total value or value net assets Investment holding Debt Securities - Rest of the World 9.36% (5.37%) AAA to AA 3.32% (0.00%) International Bank for Reconstruction & Development 0.625% 15/12/2023 1,000,000 981,510 3.32 A to A- 2.10% (0.00%) Thames Water Utilities Cayman Finance 4.375% 03/07/2034 500,000 621,246 2.10 BBB+ to BBB 2.71% (2.40%) Gatwick Funding 5.25% 23/01/2024 250,000 301,485 1.02 QBE Insurance Group 6.115% 24/05/2042** 449,000 499,791 1.69 801,276 2.71 BBB- and below 1.23% (2.97%) Porterbrook Rail Finance 4.625% 04/04/2029 300,000 364,350 1.23 Total debt securities - Rest of the World 2,768,382 9.36 Total debt securities 28,272,441 95.51 Portfolio of investments 28,272,441 95.51 Other net assets 1,330,068 4.49 Total net assets 29,602,509 100.00 All investments are listed on recognised stock exchanges and are approved securities unless otherwise stated. The comparative figures in brackets are as at 30 April 2016. * Grouped by credit rating - source: Interactive Data and Bloomberg. ** Variable interest security. 14
Risk and reward profile The risk and reward profile is representative of all unit classes. 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, lower risk 1 2 3 4 5 6 7 The price of the Fund and any income from it can go down as well as up and is not guaranteed. Investors may not get back the amount invested. Past performance is not a guide to the future. Where this Fund invests in bonds, there is a risk the bond issuer may fail to meet its repayments. This is usually a greater risk for bonds that produce a higher level of income. Changes in interest rates, inflation and the creditworthiness of the bond issuer may also affect the bond s market value. There have been no changes to the risk and reward indicator in the year. Typically higher rewards, higher risk The Fund is in a medium category because the price of its investments have risen or fallen to some extent. The category shown is not guaranteed to remain unchanged and may shift over time. Even the lowest category does not mean a riskfree investment. The Fund is entitled to use derivative instruments for efficient portfolio management. Derivatives may not achieve their intended purpose. Their prices may move up or down significantly over relatively short periods of time which may result in losses greater than the amount paid. This could adversely impact the value of the Fund. The organisation from which the Fund buys a derivative may fail to carry out its obligations, which could also cause losses to the Fund. For further information please refer to the Key Investor Information Document ("KIID"). For full details on risk factors for the Fund, please refer to the Prospectus. 15
Comparative table The following disclosures give a unitholder an indication of the performance of a unit in the Fund. It also discloses the operating charges and direct transaction costs applied to each unit. Operating charges are those charges incurred in operating the Fund and direct transaction costs are costs incurred when purchasing or selling securities in the portfolio of investments. A Class Income launched on 3 May 1995 at 100p per unit. B Class Income launched on 8 June 2011 at 100p per unit. A Class Income B Class Income 2017 2016 2015 2017 2016 2015 p p p p p p Change in net assets per unit Opening net asset value per unit 120.60 123.87 119.45 109.44 112.14 107.90 Return before operating charges 10.79 1.43 10.26 9.80 1.32 9.29 Operating charges (1.37) (1.31) (1.33) (0.73) (0.69) (0.71) Return after operating charges * 9.42 0.12 8.93 9.07 0.63 8.58 Distributions^ (2.85) (3.39) (4.51) (2.84) (3.33) (4.34) Closing net asset value per unit 127.17 120.60 123.87 115.67 109.44 112.14 * after direct transaction costs of: 0.16 0.05 0.06 0.15 0.05 0.06 Performance Return after charges 7.81% 0.10% 7.48% 8.29% 0.56% 7.95% Other information Closing net asset value ( ) 870,844 904,973 1,900,627 28,431,355 29,246,599 30,967,488 Closing number of units 684,812 750,421 1,534,393 24,579,838 26,723,275 27,614,641 Operating charges 1.08% 1.08% 1.08% 0.63% 0.63% 0.63% Direct transaction costs 0.13% 0.04% 0.01% 0.13% 0.04% 0.05% Prices Highest offer unit price 131.3 124.3 128.6 119.3 112.5 116.4 Lowest bid unit price 121.7 118.7 120.1 110.5 107.6 108.5 ^ Rounded to 2 decimal places. Investments carry risk. Past performance is not a guide to future performance. Investors may not get back the amount invested. Comparative figures differ from previous published accounts as the distributions above are quoted gross, previously the net distribution rates were disclosed. 16
Comparative table (continued) A Class Accumulation launched on 28 January 2016 at 100p per unit. A Class Accumulation 2017 2016^^ p p Change in net assets per unit Opening net asset value per unit 101.43 100.00 Return before operating charges 8.78 2.52 Operating charges (1.15) (1.09) Return after operating charges * 7.63 1.43 Distributions^ (2.42) (0.60) Retained distributions on accumulation units^ 2.42 0.60 Closing net asset value per unit 109.06 101.43 * after direct transaction costs of: 0.14 0.01 Performance Return after charges 7.52% 1.43% Other information Closing net asset value ( ) 300,310 279,306 Closing number of units 275,370 275,370 Operating charges 1.08% 1.08% Direct transaction costs 0.13% 0.01% Prices Highest offer unit price 111.0 102.8 Lowest bid unit price 102.2 99.3 ^ Rounded to 2 decimal places. ^^ Annualised based on the expenses incurred during the period 28 January 2016 to 30 April 2016. Investments carry risk. Past performance is not a guide to future performance. Investors may not get back the amount invested. Comparative figures differ from previous published accounts as the distributions above are quoted gross, previously the net distribution rates were disclosed. 17
Ongoing charges figure The ongoing charges figure ("OCF") provides investors with a clearer picture of the total annual costs in running a collective investment scheme. The ongoing charges figure consists principally of the Manager's periodic charge and the Investment Adviser's fee which are included in the annual management charge, but also includes the costs for other services paid. A Class Income 30.04.17 30.04.16 Annual management charge 1.00% 1.00% Other expenses 0.08% 0.08% Ongoing charges figure 1.08% 1.08% A Class Accumulation 30.04.17 30.04.16^ Annual management charge 1.00% 1.00% Other expenses 0.08% 0.08% Ongoing charges figure 1.08% 1.08% B Class Income 30.04.17 30.04.16 Annual management charge 0.55% 0.55% Other expenses 0.08% 0.08% Ongoing charges figure 0.63% 0.63% ^ Annualised based on the expenses incurred during the period 28 January 2016 to 30 April 2016. Please note the ongoing charges figure is indicative of the charges which the unit classes may incur in a year as it is calculated on historical data. 18
Financial statements - Smith & Williamson Fixed Interest Fund Statement of total return Income: Notes 2017 2016 Net capital gains / (losses) 2 1,792,283 (694,167) Revenue 3 890,780 1,059,944 Expenses 4 (197,725) (203,334) Net revenue before taxation 693,055 856,610 Taxation 5 - - Net revenue after taxation 693,055 856,610 Total return before distributions 2,485,338 162,443 Distributions 6 (780,870) (946,670) Change in net assets attributable to unitholders from investment activities 1,704,468 (784,227) Statement of change in net assets attributable to unitholders 2017 2016 Opening net assets attributable to unitholders 30,430,878 32,868,115 Amounts receivable on issue of units 654,249 2,047,264 Amounts payable on cancellation of units (3,192,885) (3,703,348) (2,538,636) (1,656,084) Dilution levy - 1,749 Change in net assets attributable to unitholders from investment activities 1,704,468 (784,227) Retained distributions on accumulation units 5,799 1,325 Closing net assets attributable to unitholders 29,602,509 30,430,878 19
Balance sheet as at 30 April 2017 Assets: Notes 2017 2016 Fixed assets: Investments 28,272,441 28,516,500 Current assets: Debtors 7 317,028 350,433 Cash and bank balances 8 1,270,096 2,340,711 Total assets 29,859,565 31,207,644 Liabilities: Creditors: Distribution payable 6 (180,403) (157,172) Other creditors 9 (76,653) (619,594) Total liabilities (257,056) (776,766) Net assets attributable to unitholders 29,602,509 30,430,878 20
Notes to the financial statements 1. Accounting policies The accounting policies are disclosed on pages 7 to 8. 2. Net capital gains / (losses) 2017 2016 Non-derivative securities - realised gains / (losses) 805,937 (278,514) Non-derivative securities - movement in unrealised gains / (losses) 995,680 (397,672) Currency losses (6,865) (19,204) Forward currency contracts - 3,877 Transaction charges (2,469) (2,654) Total net capital gains / (losses) 1,792,283 (694,167) Unrealised gains/(losses) are disclosed as the movement in unrealised gains/(losses) on investments between the prior year and the current year. Where realised gains/(losses) on investments include unrealised gains/(losses) arising in previous periods, a corresponding gain/(loss) is included in unrealised gains/(losses). 3. Revenue 2017 2016 Interest on debt securities 887,064 1,054,313 Bank and deposit interest 3,716 5,631 Total revenue 890,780 1,059,944 4. Expenses 2017 2016 Payable to the Manager and associates Annual management charge 175,920 179,986 Registration fees 309 367 176,229 180,353 Payable to the Trustee Trustee fees 10,226 11,162 Other expenses: Audit fee 7,740 7,920 Safe custody fees 3,471 3,486 FCA fee 59 96 Legal fee - 317 11,270 11,819 Total expenses 197,725 203,334 5. Taxation 2017 2016 a. Analysis of the tax charge for the year Total taxation (note 5b) - - 21
Notes to the financial statements (continued) 5. Taxation (continued) b. Factors affecting the tax charge for the year The tax assessed for the year is lower (2016: lower) than the standard rate of UK corporation tax for an authorised collective investment scheme of 20% (2016: 20%). The differences are explained below: 2017 2016 Net revenue before taxation 693,055 856,610 Corporation tax @ 20% 138,611 171,322 Effects of: Interest distributions (138,639) (171,398) Expenses not deductible for tax purposes - 63 Movement in short term timing differences 28 13 Total taxation (note 5a) - - 6. Distributions The distributions take account of revenue added on the issue of units and revenue deducted on the cancellation of units, and comprise: 2017 2016 Quarter 1 income distribution 168,237 199,290 Quarter 1 accumulation distribution 1,481 - Interim income distribution 158,883 196,616 Interim accumulation distribution 1,393 - Quarter 3 income distribution 139,620 195,526 Quarter 3 accumulation distribution 1,245 - Final income distribution 180,403 157,172 Final accumulation distribution 1,680 1,325 Tax payable on interest distributions 119,048 189,335 Equalisation: 771,990 939,264 Amounts deducted on cancellation of units 9,847 12,712 Amounts added on issue of units (955) (5,279) Net equalisation on conversions (12) (27) Total net distributions 780,870 946,670 Reconciliation between net revenue and distributions: 2017 2016 Net revenue after taxation per Statement of total return 693,055 856,610 Undistributed revenue brought forward 32 99 Expenses paid from capital 87,960 89,993 Undistributed revenue carried forward (177) (32) Distributions 780,870 946,670 Details of the distribution per unit are disclosed in the Distribution table. 22
Notes to the financial statements (continued) 7. Debtors 2017 2016 Amounts receivable on issue of units - 7,163 Accrued revenue 317,028 343,270 Total debtors 317,028 350,433 8. Cash and bank balances 2017 2016 Bank balances 1,103,356 114,110 Cash on deposit 166,740 2,226,601 Total cash and bank balances 1,270,096 2,340,711 9. Other creditors 2017 2016 Amounts payable on cancellation of units 67,187 569,319 Accrued expenses: Payable to the Manager and associates Annual management charge 928 481 Registration fees 2-930 481 Other expenses: Trustee fees 54 28 Safe custody fees 631 1,145 Audit fee 7,740 7,920 FCA fee 5 11 Transaction charges 106 459 8,536 9,563 Total accrued expenses 9,466 10,044 Tax payable on distributions 40,231 Total other creditors 76,653 619,594 10. Commitments and contingent liabilities At the balance sheet date there are no commitments or contingent liabilities. 11. Unit classes The Fund currently has three unit classes; A Class Income, A Class Accumulation and B Class Income. The following reflects the change in units in issue for each unit class in the year: A Class Income Opening units in issue 750,421 Total units issued in the year 199 Total units cancelled in the year (23,206) Total units converted in the year (42,602) Closing units in issue 684,812 23
Notes to the financial statements (continued) 11. Unit classes (continued) A Class Accumulation Opening units in issue 275,370 Closing units in issue 275,370 B Class Income Opening units in issue 26,723,275 Total units issued in the year 568,770 Total units cancelled in the year (2,759,056) Total units converted in the year 46,849 Closing units in issue 24,579,838 The annual management charge for each unit class is as follows: A Class Income and A Class Accumulation: 1.00% B Class Income: 0.55% The annual management charge includes the Manager's period charge and the Investment Adviser's fee. Further information in respect of the return per unit is disclosed in the Comparative table. On the winding up of a Fund all the assets of the Fund will be realised and apportioned to the unit classes in relation to the net asset value on the closure date. Unitholders will receive their respective share of the proceeds, net of liabilities and the expenses incurred in the termination in accordance with the FCA regulations. Each unit class has the same rights on winding up. 12. Related party transactions Smith & Williamson Fund Administration Limited, as Manager is a related party due to its ability to act in respect of the operations of the Fund. The Manager acts as principal in respect of all transactions of units in the Fund. The aggregate monies received and paid through the creation and cancellation of units are disclosed in the Statement of change in net assets attributable to unitholders. Amounts payable to the Manager and its associates are disclosed in note 4. The amount due to the Manager and its associates at the balance sheet date is disclosed in note 9. The Investment Adviser, Smith & Williamson Investment Management LLP is a related party to the Manager as they are within the same corporate body. A director of the Manager, the Investment Adviser or a body corporate within the same group as the Manager or Investment Adviser may have significant influence over the financial and operating policies of the Fund and as such are deemed to be a related party. 2017 2016 Smith & Williamson Nominees Limited 84.78% 97.64% A unitholder with a holding in excess of 20% of the value of the Fund may be able to exercise significant influence over the financial and operating policies of the Fund with reference to unitholders' voting rights at general meetings and as such is deemed to be a related party. Parties with an interest in excess of 20% of the Fund are as follows: 2017 2016 Smith & Williamson Nominees Limited 84.78% 97.64% 13. Events after the balance sheet date Subsequent to the year end, the net asset value per A Class Income unit has increased from 127.2p to 127.3p, the B Class Income unit has increased from 115.7p to 116.0 and the A Class Accumulation unit has increased from 109.1p to 109.2p as at 24 July 2017. This movement takes into account routine transactions but also reflects the market movements of recent months. 24
Notes to the financial statements (continued) 14. Transaction costs a Direct transaction costs Direct transaction costs include fees and commissions paid to agents, advisers, brokers and dealers; levies by regulatory agencies and security exchanges; and transfer taxes and duties. Commission is a charge which is deducted from the proceeds of the sale of securities and added to the cost of the purchase of securities. This charge is a payment to agents, advisers, brokers and dealers in respect of their services in executing the trades. Tax is payable on the purchase of securities in the United Kingdom. It may be the case that 'other taxes' will be charged on the purchase of securities in countries other than the United Kingdom. The total purchases and sales and the related direct transaction costs incurred in these transactions are as follows: 2017 % of purchases by asset class 2016 Purchases: % of purchases by asset class Bonds - purchases before transaction costs 30,683,346 23,988,105 Commission 17,930 0.06% 7,735 0.03% Total direct transaction costs - Bonds 17,930 0.06% 7,735 0.03% Bonds - purchases after direct transaction costs 30,701,276 23,995,840 Total purchases after direct transaction costs 30,701,276 23,995,840 2017 % of sales by asset class 2016 Sales: % of sales by asset class Bonds - sales before transaction costs 32,635,547 24,953,059 Commission (21,820) 0.07% (6,241) 0.03% Total direct transaction costs - Bonds (21,820) 0.07% (6,241) 0.03% Bonds - sales after direct transaction costs 32,613,727 24,946,818 Total sales after direct transaction costs 32,613,727 24,946,818 Summary of direct transaction costs The following represents the total of each type of transaction cost, expressed as a percentage of the Fund's average net asset value in the year: 2017 % of average net asset value 2016 % of average net asset value Commission 39,750 0.13% 13,976 0.04% b Average portfolio dealing spread The average dealing spread is calculated as the difference between the bid and offer value of the portfolio as a percentage of the offer value. The average portfolio dealing spread of the investments at the balance sheet date was 0.71% (2016: 0.91%). 25
Notes to the financial statements (continued) 15. Risk management policies In pursuing the Fund's investment objective, as set out in the Prospectus, the following are accepted by the Manager as being the main risks from the Fund's holding of financial instruments, either directly or indirectly through its underlying holdings. These are presented with the Manager's policy for managing these risks. To ensure these risks are consistently and effectively managed these are continually reviewed by the risk committee, a body appointed by the Manager, which sets the risk appetite and ensures continued compliance with the management of all known risks. a Market risk Market risk is the risk that the value of the Fund s financial instruments will fluctuate as a result of changes in market prices and comprise three elements; other price risk, currency risk, and interest rate risk. (i) Other price risk The Fund's exposure to price risk comprises mainly of movements in the value of investment positions in the face of price movements. (ii) This risk is generally regarded as consisting of two elements; stock specific risk and market risk. Through these two factors, the Fund is exposed to price fluctuations, which are monitored by the Manager in pursuance of the investment objective and policy. Adhering to investment guidelines and avoiding excessive exposure to one particular issuer can limit stock specific risk. Subject to compliance with the investment objective of the Fund, spreading exposure in the portfolio of investments both globally and across sectors or geography can mitigate market risk. As the Fund had no exposure to equities and collective investment schemes, there is no exposure to other price risk within the Fund. Currency risk Currency risk is the risk that the value of investments or future cash flows will fluctuate as a result of exchange rate movements. Investment in overseas securities or holdings of foreign currency cash will provide direct exposure to currency risk as a consequence of the movement in foreign exchange rates against sterling. These fluctuations can also affect the profitability of some UK companies, and thus their market prices, as sterling s relative strength or weakness can affect export prospects, the value of overseas earnings in sterling terms, and the prices of imports sold in the UK. Forward currency contracts may be used to manage the portfolio exposure to currency movements. The foreign currency risk profile of the Fund's financial instruments and cash holdings at the balance sheet date is as follows: Financial instruments and cash holdings Net debtors and creditors Total net foreign currency exposure 2017 US dollar Total foreign currency exposure 1,128,405-1,128,405 1,128,405-1,128,405 Financial instruments and cash holdings Net debtors and creditors Total net foreign currency exposure 2016 US dollar Total foreign currency exposure 1,405,313-1,405,313 1,405,313-1,405,313 In the event of a change in exchange rates, there would be no material impact upon the assets of the Fund (2016: same). 26