INVESCO Leveraged High Yield Fund Limited: Annual Financial Report

INVESCO Leveraged High Yield Fund Limited: Annual Financial Report
Performance Statistics 
Balance sheet at 30 September                       2012        2011      
Shareholders' funds (£'000)                       72,391      60,476       
Net asset value per ordinary share                 65.1p       54.3p       
Mid-market price per ordinary share                59.9p       50.0p       
Discount per ordinary share                         8.0%        7.9%             
Gross gearing                                        38%         68%             


Net gearing                                          29%         54%            
                                               Year Ended  Year Ended
                                                       30          30
                                                September   September

Total Return                                         2012        2011 
3 month LIBOR rate                                   0.6%        1.0% 
Net asset value                                     29.1%       -8.1% 
Share price (Source: Thomson Reuters                31.6%      -11.7%
Gross income (£'000)                                6,879       7,203 
Net revenue available for ordinary shares (£'000)   5,988       6,283 
Dividends per ordinary share:                                         
  - First interim                                   1.25p       1.25p 
  - Second interim                                  1.25p       1.25p 
  - Third interim                                   1.25p       1.25p 
  - Fourth interim                                  1.25p       1.25p 
  - Total                                           5.00p       5.00p 
Ongoing Charges                                                       
  - ongoing charges                                 1.49%       1.37% 
  - performance fee                                 0.00%       0.00% 
Return per Ordinary Share                                             
Revenue return                                       5.4p        5.6p 
Capital return                                      10.4p     (10.9)p 
Total return                                        15.8p      (5.3)p 
The year under review, whilst rewarding for shareholders, was not an easy one
to predict nor in which to position the portfolio for optimum returns. The
world economic turmoil showed no sign of abating and in such uncertain times,
your investment managers demonstrated the high conviction that characterises
their approach by investing in, for example, financial debt instruments against
the market trend. 
Results for the Year 
In such testing times, I am pleased to report that the Company's net asset
value (`NAV') per share increased by 19.9% to 65.1p. The mid-market price of
the Company's ordinary shares increased by 19.8% to 59.9p at the year end. NAV
total return per share increased by 29.1% after fees and expenses. 
Your Board believes that shareholders value highly the Company's dividend
stream and has continued to prioritise revenue generation through investment in
relatively high-yielding and secure debt positions. Despite a substantially
lower level of gearing throughout the year, the Company has produced earnings
per share of 5.4p, which is comfortably in excess of the annual cost of the
dividend. The Board and investment managers expect this situation to continue
for the foreseeable future. 
The Board declared a 4th interim dividend of 1.25p per share on 19 September
2012, making a total of 5p for the year (2011: 5p). The Board intends that the
Company will maintain an annual dividend of not less than 5p per share, paid
equally and quarterly, in the absence of unforeseen circumstances. One of the
particular benefits of closed-end funds is their ability to smooth dividend
payments through the use of the revenue reserve when required. Careful
management of the Company's revenue reserve over the last few years has enabled
the Company to build a significant revenue reserve equivalent to two years of
annual dividends. 
The ordinary shares are geared by the repo financing. Gearing was reduced in
the first quarter of the period and net gearing stood at 29% at the year end
(2011:54%). On an average basis, net gearing decreased to 34% for the year
being reported from 41% last year. 
Repo financing remains a very flexible method of providing additional capital
when appropriate, and the very low interest rate environment affords the
investment managers an ability to achieve an attractive `carry' on the
investments. The level of gearing is carefully monitored and managed by both
the Board and the investment managers, fully cognisant of the greater capital
volatility that comes with the enhancement to income. 
Share Buy Backs 
Your Directors are again seeking the authority to buy back up to 16,682,749
shares (14.99% of the Company's issued share capital as at 27 November 2012)
subject to the restrictions referred to in the notice of the AGM. This
authority will expire at the AGM in 2014. In association with this authority
the Board is seeking shareholder approval for the renewal of the waiver of the
obligation under Rule 9 of the Takeover Code that would otherwise fall on
Invesco Perpetual if its shareholding increased above 30% as a result of
It is the Board's current intention to buy back shares at a discount to NAV
where the Board believes it is in shareholders' interests to do so. Your
Directors are proposing that shares bought back by the Company either be
cancelled or, alternatively, be held as treasury shares with a view to their
resale, if appropriate, or later cancellation. 
The Board 
There have been a number of changes to the Board during the year, most notably
the retirement of George Baird on 30 September 2012 and my appointment as
Chairman of the Company, also on this date. In addition, Hugh Ward retired from
the Board with effect from 30 September 2012. The Board would like to take this
opportunity to thank George and Hugh for their most valuable contribution to
the Company since its launch in 1999 and to wish them well in the future. 
There were two appointments to the Board during the year, with Michael Lombardi
and Peter Yates each having been appointed as a Director of the Company with
effect from 1 August 2012. Mr Lombardi is a corporate lawyer specialising in
investment fund and structured finance transactions. Mr Yates is an experienced
Chartered Accountant and has been appointed to the role of Chairman of the
Company's Audit Committee. Their respective biographies and further information
in relation to the selection and appointment process can be found on
pages 12 and 23 of the annual financial report. It is the Board's
recommendation that shareholders support the resolutions concerning their
respective appointments at the Company's AGM to be held in January of the
coming year, as the Directors intend to do themselves. 
Corporate Governance 
The Board continues to be committed to maintaining the highest standards of
Corporate Governance and is accountable to you as shareholders for the
governance of the Company's affairs. The Directors believe that, during the
year under review, they have complied with the provisions of the AIC Code of
Corporate Governance as endorsed by the Financial Reporting Council. 
After a year of good performance, it is important to remind ourselves that we
have had a long bull market in fixed income and several factors such as very
low government bond yields and tight corporate spreads suggest that some parts
of the market are fully valued, particularly sovereign and investment grade
corporate bonds. In contrast, low inflation and interest rates together with
the actions of policy-makers are supportive. In such markets the Directors
believe the Managers' flexible and active approach can be successful in
providing an attractive return, although it is most unlikely that this year's
capital performance will be repeated in the current financial year. 
Donald Adamson 
27 November 2012 
Market Background 
Over the 12 months to the end of September 2012 more credit risk-sensitive
assets enjoyed strong returns as the market's fear of systemic risk in the
eurozone's banking system, particularly acute in the third quarter of 2011, was
gradually overturned by the actions of monetary and political authorities to
put in place support for the eurozone's sovereign bond markets and to promote
economic growth. Combined with a macroeconomic environment of low inflation and
interest rate expectations, this burgeoning investor risk appetite pushed
yields down sharply from the high levels seen at times last year. 
According to data from Merrill Lynch, European high yield bonds had a total
return for the 12 month period under review of 17.0% (in sterling terms). The
aggregate yield for the asset class fell by 353 basis points to 8.04%. This
compares to a return of 3.0% for euro investment grade corporate bonds (11.3%
in local currency terms) and 16.3% for sterling investment grade. Gilts
returned 8.8%. 
With risk appetite rising and yields low across many areas of the bond market,
this period has seen strong demand for high yield bonds. European high yield
bond issuance was above the average of recent years in the first quarter of
2012, following very low levels in mid-2011 (source: Barclays). In the third
quarter of this year, companies were encouraged by very supportive market
conditions to raise capital, pushing the supply of new bonds well above average
levels for the time of year, reaching €10.2 billion (across all currencies) 
September. Many individual issues have been heavily oversubscribed despite
having relatively low coupons. Throughout the period, the level of defaults has
remained moderate. According to Moody's, the European high yield corporate
default rate rose to 2.6% in August 2012, from 1.1% a year before. 
The recovery of investor confidence has been built more than anything else on
two actions by the European Central Bank (`ECB') under its new president, Mario
Draghi. In November and February, the bank carried out Long Term Refinancing
Operations, lending a total of more than €1 trillion to some 800 European 
for a three-year term, at a low rate of interest and with relaxed collateral
requirements. This effectively addressed market concerns about the funding of
the European banking system. Then this summer, Draghi signalled his intent that
the ECB should move towards playing the role of the eurozone's lender of last
resort, a commitment that was spelled out in the announcement of conditional
but, crucially, unlimited, direct support for member states' sovereign debt
under the Outright Monetary Transactions programme. Combined with political
progress towards a single eurozone banking supervisor and larger and more
flexible rescue funds, the eurozone now appears to be significantly closer to
having some structure for debt mutualisation. This has helped to contain the
risk premia on the sovereign and corporate debts of peripheral eurozone states. 
Across the major developed economies, monetary policy has been loosened
further. The US Federal Reserve (`Fed') has continued to put downward pressure
on market interest rates, both through transactions - under the auspices of
Operation Twist and the recently announced third round of quantitative easing
(`QE3') - and through market guidance that Fed interest rates will remain at
their current near-zero level until mid-2015. The Bank of England has also
maintained its record low interest rate of 0.5% and has increased its programme
of asset purchases by a total of £175 billion over the past 12 months. This
easy policy reflects the ongoing, weak macroeconomic environment. Across
Europe, economic growth remains near zero, with business sentiment low and
unemployment levels high. The US economy has improved in the last year but the
recovery has been modest and consumption is still being hampered by weak
employment and housing markets. 
Portfolio Strategy 
Our strategy is to construct a diversified portfolio of bonds from across the
credit market which will provide an attractive level of income while seeking to
keep default risk low. Our investments are concentrated in higher credit
quality high yield bonds and in higher yielding investment grade bonds. In
sector terms, we see financials as the biggest area of value in the corporate
bond markets. We hold senior and subordinated bank debt, with a preference for
large, northern European banks. Companies in this sector have continued to make
progress in reforming and strengthening their capital structures. We see
individual opportunities across the credit market, although there is clearly
less value than a year ago when many bonds were trading considerably below par
and with high yields relative to history. We think that some areas of the
corporate bond market, particularly non-financials and the higher credit
quality categories, now offer relatively little value. 
In the year under review, the Company's NAV rose from 54.3p to 65.1p, with a
total NAV return of 29.1%, gross of dividend. We commenced the year with net
gearing of 54% and with net assets of £60.5 million. We reduced net gearing
over the year to close at a level of 29%, while net assets rose to £72.4
million. Funding costs remain relatively low. The dividend is 5p and is well
covered by the income of the portfolio. 
Over the early months of this review period we took advantage of volatile
markets to add exposure to high yield bonds and to financials. As the market
rallied into the first quarter of 2012, we sold and trimmed positions. We have
continued to take opportunities to add attractive yields to the portfolio while
reducing our gearing to the market as it has rallied over the period. A large
number of banks have tendered to buy back outstanding debt in the last year,
seeking to take advantage of their higher liquidity levels to reduce their
funding costs. In most cases, we have chosen to retain our positions rather
than sell. 
The corporate bond market is being supported by several important factors.
Inflation and interest rates are low. There is strong demand currently for
corporate debt and this is pushing down funding costs. Furthermore, political
and monetary authorities have shown real commitment in the last year to address
the eurozone debt crisis and to stimulate growth. However, the market has
reacted to this good news with a strong rally and bond yields are now
significantly lower than they were. Also, economic growth remains weak and that
is a negative factor for corporates in any circumstances. While we continue to
see value and opportunities in the market, we are increasingly cautious. We
expect that corporate bond returns will be more highly correlated with income,
with less capital growth, and our focus is on finding securities that will add
attractive income streams to the portfolio. 
Paul Read/Paul Causer 
Investment Managers 
27 November 2012 
Report of the Directors 
for the year ended 30 September 2012 
Principal Risks and Uncertainties 
Investment Policy (incorporating the Investment Objective) 
There is no guarantee that the Company's investment objective will be achieved
or provide the returns sought by shareholders. The Board has established
guidelines to ensure that the investment policy that has been approved is
pursued by the Manager. 
Market Risk 
The majority of the Company's investments are traded on the major securities
markets. The principal risk for investors in the Company is of a significant
fall in the markets and/or a prolonged period of decline in the markets
relative to other forms of investment. The value of investments held within the
investment portfolio is influenced by many factors including the general health
of the world economy, interest rates, inflation, government policies, industry
conditions, political and diplomatic events, tax laws, competition,
environmental laws and by changing investor demand. In addition, there is a
risk that European policy makers fail to maintain the current fragile market
confidence by not implementing an effective and lasting solution to the
Eurozone crisis. The Manager strives to maximise the total return from the
investments held, but these investments are influenced by market conditions and
the Board acknowledges the external influences on investment portfolio
Investment Risk 
The investment process employed by the Manager is set out in the first
paragraph under Investment Policy and Risk on page 15 of the annual financial
Investment portfolio performance is dependent on the performance of high yield
corporate bonds in the UK and elsewhere in the Company's investment universe.
These stocks are particularly influenced by prevailing interest rates,
government monetary policy and by demand for income. The Manager strives to
maximise both capital growth and high income from the investment portfolio and
the Board naturally recognises the external influences on investment portfolio
The Company is likely, from time to time, to maintain a more concentrated
investment portfolio (both in terms of individual holdings and in terms of its
exposure to particular industries) than those of many other investment funds.
Accordingly, shareholders should be aware that the investment portfolio
potentially carries a higher level of risk than a more diversified investment
The Company is permitted from time to time to invest in other listed investment
companies (including investment trusts) subject to a limit on such investment
of 15% of its Total Assets. As a consequence of these investments, the Company
may itself be indirectly exposed to gearing through the borrowings of these
other investment companies. The Company is not currently invested in any listed
investment companies (including investment trusts). 
The performance of the Manager is carefully monitored by the Board, and the
continuation of the Manager's mandate is reviewed each year. 
Past performance of the Company is not necessarily indicative of future
A fuller discussion of the economic and market conditions facing the Company
and the current and future performance of the investment portfolio of the
Company, see both the Chairman's Statement and Manager's Report on pages 5 to 8
of the annual financial report. 
Foreign Exchange Risk 
The movement of exchange rates may have unfavourable or favourable impact on
returns as the Company holds non-sterling denominated investments and cash.
This risk is mitigated by the use of non-sterling denominated repo financing.
The foreign currency exposure of the Company is monitored by the Manager on a
daily basis and formally at Board meetings. 
Ordinary Shares 
The market value of the ordinary shares will be affected by a number of
factors, including the dividend yield from time to time of the ordinary shares,
prevailing interest rates and supply and demand for those ordinary shares,
along with wider economic factors and changes in the law, including tax law,
and political factors. The market value of, and the income derived from, the
Company's ordinary shares can fluctuate and may go down as well as up. 
The market value of the ordinary shares may not always reflect the NAV per
ordinary share. The market price of an ordinary share may therefore trade at a
discount to its NAV. As at 30 September 2012, an ordinary share of the Company
traded at a discount of 8.0%. The Board and the Manager maintain an active
dialogue with the aim of ensuring that the market rating of the Company's
shares reflects the underlying NAV and the buy back and issuance facilities
help the management of this process. 
The ordinary shares are geared by the repo financing. As at 30 September 2012,
net gearing was 29% at the year end (2011: 54%) and an investment in the
ordinary shares should therefore be regarded as highly geared and consequently
a higher risk investment. 
Gearing levels may change from time to time in accordance with the Manager's
assessment of risk and reward. As a consequence, any reduction in the value of
the Company's investments may lead to a correspondingly greater percentage
reduction in its NAV (which is likely to adversely affect the Company's share
price). Any reduction in the number of ordinary shares in issue (for example,
as a result of buy backs) will, in the absence of a corresponding reduction in
borrowings or repo financing, result in an increase in the Company's gearing. 
If it were not possible to roll over any repo financing on any repurchase date
on acceptable terms, the amounts then owing by the Company under the repo
financing arrangement would become payable to the counterparty. Also, although
the repo financing requires the counterparties to sell the assets to the
Company on the repurchase date at a fixed price, if a counterparty failed to do
so the Company would be left with a contractual claim against the defaulting
counterparty and there is no guarantee the Company would be able to recover all
or any of the value of the assets from that counterparty. 
In adverse market conditions, the risks of counterparty default may be greater
than at any other time. 
There is no guarantee that it will be possible to re-finance the repo financing
or any other borrowings on their maturity either at all or on terms that are
acceptable to the Company. 
The Company currently has arranged facilities for repo financing with three
counterparties. All borrowings, including repo financing, are actively managed
by the Manager and monitored by the Board. If one or more of the counterparties
with which the Company enters into repo financing decided to stop accepting
non-investment grade bonds as collateral for repo financing or decided
otherwise to restrict the repo financing currently provided to the Company then
the Company may be unable, or it may be impracticable, to continue utilising
repo financing and/or to replace its current repo financing as it expires. In
certain circumstances, such as a material increase in the margins payable on
repo financing, it may be uneconomical for the Company to continue utilising
repo financing. The counterparties may force closure of the repo financing
positions in which case the Company may be forced to repay the repo financing
at short notice and the Company may be forced to sell assets at short notice to
repay that debt and may not be able to realise the expected market value of
those assets. 
High Yield Corporate Bonds 
Corporate bonds are subject to credit, liquidity, duration and interest rate
risks. Adverse changes in the financial position of an issuer of corporate
bonds or in general economic conditions may impair the ability of the issuer to
make payments of principal and interest or may cause the liquidation or
insolvency of an issuer. 
The majority of the Company's investment portfolio at the year end consists of
non-investment grade securities. To the extent that the Company invests in
non-investment grade securities, the Company may realise a higher current yield
than the yield offered by investment grade securities, but investment in such
securities involves a greater volatility of price and a greater risk of default
by the issuers of such securities, with consequent loss of interest payment and
principal. Non-investment grade securities are likely to have greater
uncertainties of risk exposure to adverse conditions and will be speculative
with respect to an issuer's capacity to meet interest payments and repay
principal in accordance with its obligations. 
A lack of liquidity in corporate bonds may make it difficult for the Company to
sell those bonds at or near their purported value. This may particularly be the
case if the Company is forced to sell assets quickly, for example, to repay any
repo financing that becomes unexpectedly repayable or which it is not possible
to rollover or in the event of a liquidation of the Company. A lack of
liquidity in corporate bonds may also make it difficult or impossible to
rebalance the Company's investment portfolio as and when it believes it would
be advantageous to do so. To mitigate these risks, the investment manager
actively monitors both the ratings and liquidity of the bond portfolio in
relation to the Company's known repo financing requirements. 
The Company may enter into derivative transactions (including options, futures,
contracts for difference, credit derivatives and interest rate swaps) for the
purpose of efficient portfolio management. The Company will not enter into
derivative transactions for speculative purposes. Efficient portfolio
management may include reduction of risk, reduction of cost and enhancement of
capital or income through transactions designed to hedge all or part of the
investment portfolio, to replicate or gain synthetic exposure to a particular
investment position where this can be done more effectively or efficiently
through the use of derivatives than through investment in physical securities
or to transfer risk or obtain protection from a particular type of risk which
might attach to portfolio investments. 
The Company may hedge against exposure to changes in currency rates to the
extent that repo financing has not offset such exposure. 
Derivative instruments can be highly volatile and expose investors to a high
risk of loss. The low initial margin deposits or low initial amounts payable in
relation to or to enter into some derivatives enable a higher degree of
leverage than might be acquired in respect of a direct investment in the
underlying asset. As a result, relatively small fluctuations in the value of
the underlying asset or the subject of the derivative may result in a
substantial fluctuation in the value of the derivative, either up or down.
In addition, the amount of loss to the Company through holding a derivative may
not be restricted to, and indeed may be many times greater than, the initial
margin deposit or amount payable in respect of the derivative. Daily limits on
price fluctuations and speculative position limits on exchanges may prevent
prompt liquidation of positions resulting in potentially greater losses. 
Where derivatives are used for hedging, there is a risk that the returns on the
derivative do not exactly correlate to the returns on the underlying
investment, obligation or market sector being hedged against. If there is an
imperfect correlation, the Company may be exposed to greater loss than if the
derivative had not been entered into. 
Trading in derivatives markets may be unregulated or subject to less regulation
than other markets. 
Derivatives markets are historically relatively new and there are uncertainties
as to how these markets will perform during periods of unusual price volatility
or instability, market liquidity or credit distress, including current market
circumstances. The Company could suffer substantial losses from its derivatives
holdings in these or other situations. 
Reliance on Third Party Service Providers 
The Company has no employees and the Directors have all been appointed on a
non-executive basis. The Company is reliant upon the performance of third party
service providers for its executive function. The Company's most significant
contract is with the Manager, to who the responsibility for the Company's
portfolio is delegated. The Company has other contractual arrangements with
third parties to act as company secretary, auditor, registrar, custodian and
broker. Failure by any service provider to carry out its obligations to the
Company in accordance with the terms of its appointment could have a materially
detrimental impact on the operation of the Company and could affect the ability
of the Company to successfully pursue its investment policy and expose the
Company to reputational risk. 
The Manager may be exposed to the risk that litigation, misconduct, operational
failures, negative publicity and press speculation, whether or not it is valid,
will harm its reputation. Any damage to the reputation of the Manager could
result in counterparties and third parties being unwilling to deal with the
Manager and by extension the Company. This could have an adverse impact on the
ability of the Company to pursue its investment policy. 
The Board seeks to manage these risks in a number of ways: 
• The Manager monitors the performance of all third party providers in 
to agreed service standards on a regular basis, and any issues and concerns are
dealt with promptly and reported to the Board. The Manager formally reviews the
performance of all third party providers and reports to the Board on an annual
• The Board reviews the performance of the Manager at every board meeting and
otherwise as appropriate. The Board has the power to replace the Manager and
reviews the management contract formally once a year. 
• The day-to-day management of the portfolio is the responsibility of Paul 
and Paul Causer, who are Co-Heads of the Invesco Perpetual Fixed Interest Team.
They have 17 years and 18 years' experience in fixed income markets,
respectively and have been the investment managers of the Company since 2001.
The Board has adopted guidelines within which the investment managers are
permitted wide discretion. Any proposed variation outside these guidelines is
referred to the Board and the guidelines themselves are reviewed at every board
• The risk that the investment managers might be incapacitated or otherwise
unavailable is mitigated by the fact that they work closely with each other and
they also work within, and are supported by the wider Invesco Perpetual Fixed
Interest team. 
The Company is subject to various laws and regulations by virtue of its status
as a Company registered under the Companies (Jersey) Law 1991, as an investment
company and its listing on the London Stock Exchange. A serious breach of
regulatory rules may lead to suspension from the London Stock Exchange or a
qualified Audit Report. Other control failures, either by the Manager or any
other of the Company's service providers, may result in operational or
reputational problems, erroneous disclosures or loss of assets through fraud,
as well as breaches of regulations. 
The Manager reviews the level of compliance with financial regulatory
requirements on a daily basis. All transactions, income and expenditure are
reported to the Board. The Board regularly considers all risks, the measures in
place to control them and the possibility of any other risks that could arise.
The Board ensures that satisfactory assurances are received from service
providers. The Manager's compliance and internal audit officers produce regular
reports for review by the Company's Audit Committee. 
Any changes in the Company's tax status or in taxation legislation or
accounting practice could affect the value of investments held by the Company,
affect the Company's ability to provide returns to shareholders or alter the
post-tax returns to shareholders. 
Other Risks 
As a result of the Company's policy of charging 50% of management fees and
financing costs (including the cost of the repo financing) to capital,
maintenance of its NAV requires that the Company's investment portfolio
achieves capital growth equivalent to the total amount of such costs and that
all other costs are covered by income. Any changes to the way in which the
Company accounts for expenses, tax or tax relief as a result of changes to
recommended accounting practices, accounting standards, or tax legislation
could have an adverse effect on the level of profits available for the payment
of dividends. 
in respect of the Preparation of the Annual Financial Report 
The Directors are responsible for preparing the annual financial report in
accordance with applicable laws and regulations. 
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with International Financial Reporting
Standards (`IFRSs') as adopted by the European Union. The financial statements
are required by law to give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period. 
International Accounting Standard 1 requires that financial statements present
fairly for each financial year the Company's financial position, financial
performance and cash flows. This requires the faithful representation of the
effects of transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities, income and
expenses set out in the International Accounting Standards Board's `Framework
for the preparation and presentation of financial statements'. In virtually all
circumstances, a fair presentation will be achieved by compliance with all
applicable IFRSs. 
In preparing these financial statements, the Directors are required to: 
• properly select and apply accounting policies and then apply them
• present information, including accounting policies, in a manner that 
relevant, reliable, comparable and understandable information; 
• provide additional disclosures when compliance with specific requirements 
IFRSs are insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the entity's financial position
and financial performance; and 
• make an assessment of the Company's ability to continue as a going concern. 
The Directors are responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and which enable them to ensure that the accounts comply with the
Companies (Jersey) Law 1991. They are 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. 
Under applicable law and regulations, the Directors are also responsible for
preparing a Directors' Report (including a Business Review) and a Corporate
Governance Statement that comply with that law and those regulations. 
The Directors of the Company, each confirm to the best of their knowledge that: 
• the financial statements, which have been prepared in accordance with
applicable accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company; 
• this annual financial report includes a fair review of the development and
performance of the business and the position of the Company, together with a
description of the principal risks and uncertainties that it faces; and 
• the annual report and accounts, taken as a whole, are fair, balanced and
understandable and provide the information necessary for shareholders to assess
the Company's performance, business model and strategy. 
Donald Adamson 
Signed on behalf of the Board of Directors 
27 November 2012 
INVESTMENT Portfolio at 30 September 2012 
All investments are fixed interest bonds unless otherwise stated. 
The definitions of the Moody/Standard & Poor ratings below are set out on page
57 of the annual financial report. 
Bonds and Equity Investments 

                           COUPON                            VALUE         % OF

COMPANY                         %   MATURITY     RATING      £'000    
UPC                         7.625     15 Jan    Ba3/BB-      1,717  }       6.1 

                            8.125     01 Dec    Ba3/BB-      1,707  }           
                            9.750     15 Apr      B2/B-      1,273  }           
                            9.500     15 Mar      B3/B-        895  }           

Ally Financial              7.500     21 Apr      B1/B+      3,435          3.7 
Santos Finance           Floating     22 Sep      NR/BB      2,427          2.6 
                        8.250       2070                                    
UBS Capital              Floating  Perpetual   Ba2/BBB-      2,403          2.6
Securities                  8.836                                               
Unicredit                Floating  Perpetual    Ba2/BB+      2,140          2.4 
Telecom Italia              5.250     17 Mar   Baa2/BBB      1,179  }       2.2 

                            7.750     24 Jan   Baa2/BBB        847  }           

Rexam                    Floating     29 Jun     Ba2/BB      1,921          2.1 
                        6.750       2067                                    
Bank of America             4.625     07 Aug    Baa2/A-      1,749          1.9 
Alliander                Floating  Perpetual      A3/A-      1,675          1.8 
Origin                   Floating     16 Jun    Baa3/BB      1,625          1.8 
                        7.875       2071                                    
SSE                      Floating  Perpetual   Baa2/BBB      1,612          1.7 
Allianz Finance          Floating     08 Jul      A2/A+      1,608          1.7 
                        5.750       2041                                    
Lottomatica              Floating     31 Mar     Ba2/BB      1,566          1.7 
                        8.250       2066                                    
RWE                      Floating  Perpetual  Baa2/BBB-      1,562          1.7 
Commerzbank                 7.750     16 Mar    Ba1/BBB      1,524          1.7 
Aviva                    Floating     22 May     A3/BBB        772  }       1.2 

                            6.875       2038                                   
                         Floating  Perpetual   Baa1/BBB        347  }           

Intesa Sanpaolo          Floating  Perpetual    Ba2/BB+      1,115          1.2 
Wind Acquisition           11.750     15 Jul     B3/BB-        804  }       1.2 

                            7.375     15 Feb     Ba3/BB        295  }           

Lloyds Banking Group        6.385     12 May    Ba3/BB+      1,088          1.1
- LBG Capital No 2 (ECN)                2020                                    
Levi Strauss                7.750     15 May      B2/B+        975          1.1 
Ineos                       9.250     15 May      B1/B+        857          0.9 
Reynolds                    7.750     15 Oct      B1/B+        829          0.9 
Gategroup Finance           6.750     01 Mar      B1/BB        817          0.9 
Campofrio                   8.250     31 Oct    Ba3/BB-        803          0.9 
ECO-BAT Finance             7.750     15 Feb      B1/B+        801          0.9 
Matterhorn Mobile        Floating     15 May     B1/BB-        798          0.9 
                        5.599       2019                                    
Xefin                       8.000     01 Jun     Ba3/B+        789          0.9 
BPCE                     Floating  Perpetual   Ba2/BBB-        787          0.8 
Abengoa                     8.500     31 Mar      B1/B+        772          0.8 
Zinc Capital                8.875     15 May      B2/B+        546          0.6 
Schaeffler Finance          6.750     01 Jul     Ba3/B+        422          0.5 
Sappi Papier                6.625     15 Apr     Ba2/BB        406          0.4 
Stora Enso                  5.500     07 Mar     Ba2/BB        402          0.4 
Fiat Finance & Trade        6.375     01 Apr    Ba3/BB-        395          0.4 
Mark IV Europe              8.875     15 Dec    Ba3/BB-        380          0.4 
Cirsa Finance               8.750     15 May      B3/B+        375          0.4 
Telenet Finance             6.750     15 Aug     Ba3/B+        201  }       0.4 

                            6.250     15 Aug     Ba3/B+        161  }           

Beverage Packaging*         9.500     15 Jun  Caa2/CCC+        353          0.4 
CNP Assurances           Floating  Perpetual         A-        350          0.4 
Codere Finance              8.250     15 Jun    Caa2/B-        348          0.4 
Ono Finance                11.125     15 Jul    Caa1/B-        339          0.4 
Lecta                       8.875     15 May      B1/B+        198          0.2 
Fortis Bank              Floating  Perpetual     Ba3/BB        183          0.2 
Techem                      6.125     01 Oct     Ba3/B+        147          0.2 

                                                            50,720         55.1

*A subsidiary of the Reynolds Group Inc.
                          COUPON                             VALUE         % OF

COMPANY                        %    MATURITY     RATING      £'000    
Virgin Media Finance       7.000 15 Jan 2018  Baa3/BBB-      2,151  }       3.5 

                           8.875 15 Oct 2019    Ba2/BB-      1,122  }           

Lloyds Banking Group                                                            
- Lloyds TSB               7.625 22 Apr 2025  Baa3/BBB-      2,084  }        
- LBG Capital No 2 (ECN)   9.000 15 Dec 2019    Ba3/BB+      1,010  }          
Iron Mountain              7.250 15 Apr 2014      B1/B+      2,020          2.2 
Enterprise Inns            6.500 06 Dec 2018     NR/BB-      1,752          1.9 
Intergen                   9.500 30 Jun 2017    Ba3/BB-      1,425          1.5 
Société Genérale        Floating   Perpetual   Ba2/BBB-      1,329          
Barclays Bank           Floating   Perpetual    Ba1/BBB      1,252          1.4 
Aviva                      6.125   Perpetual     A3/BBB      1,190          1.3 
Jaguar Land Rover          8.250 15 Mar 2020    Ba3/BB-      1,079          1.2 
Thames Water               7.750 01 Apr 2019      B1/NR      1,063          1.2 
DFS Furniture              9.750 15 Jul 2017      B2/B+      1,040          1.1 
Pipe                       9.500 01 Nov 2015       B3/B      1,013          1.1 
Southern Water             8.500 15 Apr 2019     NR/BB-        998          1.1 
General Electric        Floating 15 Sep 2066     A2/AA-        931          1.0
Capital                    5.500                                                
Boparan                    9.875 30 Apr 2018     Ba3/B+        852          0.9 
Odeon & UCI Finco          9.000 01 Aug 2018       B3/B        505          0.5 
EDP Finance                8.625 04 Jan 2024    Ba1/BB+        503          0.5 
Matalan Finance            8.875 29 Apr 2016     B1/BB-        483          0.5 
Gala Finance               8.875 01 Sep 2018      B3/B+        477          0.5 
Santander               Floating 27 Jul 2019  Baa3/BBB+        465          0.5 
Novae                      6.500 27 Apr 2017    Baa3/NR        454          0.5 
Bakkavor Finance           8.250 15 Feb 2018      B2/B-        449          0.5 
Legal & General         Floating   Perpetual  Baa2/BBB+        449          0.5 
AXA                     Floating   Perpetual   Baa1/BBB        428          0.5 
Premier Farnell            89.2p     Cum Red      NR/NR        427          0.5 
Unicredit               Floating   Perpetual    Ba2/BB+        414          0.4 
Care UK                    9.750 01 Aug 2017      B2/B+        398          0.4 
Bupa Care Homes           11.800 30 Jun 2014      NR/NR        268          0.3 
Skipton                 Floating 12 Dec 2018     Ba2/NR        249          0.3 
Cattles                    6.875 17 Jan 2014      NR/NR          6  }         - 

                           7.125 05 Jul 2017      NR/NR          3  }           
                                                            28,289         30.6

US Dollar                                                                       
General Motors                   10 Jul 2019    Warrant      1,821  }        

                                 10 Jul 2016    Warrant        134  }           

General Motors             0.000 15 Jul 2033      NR/NR         44  }            
(Motors Liquidation)                                                            
Compagnie Générale de      7.750 15 May 2017    Ba3/BB-      1,289          
Géophysique - Veritas                                                           
Hutchison Whampoa          6.000   Perpetual   Baa2/BBB      1,286          1.4 
Vedanta Resources          6.750 07 Jun 2016     Ba3/BB      1,215          1.3 
Catlin                  Floating   Perpetual    NR/BBB+      1,210          1.3 
Stora Enso                 7.250 15 Apr 2036     Ba2/BB      1,114          1.2 
Citigroup                         Preference      NR/NR        838          0.9 
Cemex                      9.250 12 May 2020      NR/B-        699          0.8 
Chrysler                   8.000 15 Jun 2019       B2/B        662          0.7 
Société Genérale           8.750   Perpetual   Ba2/BBB-        627          
Nara Cable                 8.875 01 Dec 2018      B1/B+        564          0.6 
Aperam                     7.750 01 Apr 2018     B2/BB-        511          0.6 
Schaeffler Finance         8.500 15 Feb 2019     Ba3/B+        344          0.4 
Prudential                 6.500   Perpetual    Baa1/A-        305          0.3 
Peabody                    4.750 15 Dec 2066      NR/NR        263          0.3 
Rothschilds             Floating   Perpetual      NR/NR        217          0.2 
Novasep                    8.000 15 Dec 2016    Caa1/B-         63          0.1 

                                                            13,206         14.3

Total investments                                           92,215        100.0 

                                        2012                     2011           

                           REVENUE CAPITAL   TOTAL REVENUE  CAPITAL    
                     NOTES   £'000   £'000   £'000   £'000    £'000    
Profit/(loss) on            11       -   8,589   8,589       - (11,406) 
investments at fair                                                              
Exchange differences                 -   1,751   1,751       -    (718)    
Profit on derivative                                                             
  - currency hedges                  -   1,763   1,763       -      522     
Income                       2   6,879       -   6,879   7,203        -    
Investment management        3   (339)   (339)   (678)   (347)    (347)    
Other expenses                   (310)     (1)   (311)   (276)      (1)    
Profit/(loss) before             6,230  11,763  17,993   6,580 (11,950)  
finance costs and                                                                
Finance costs                    (213)   (213)   (426)   (264)    (264)    
Profit/(loss) before tax         6,017  11,550  17,567   6,316 (12,214)  
Taxation                          (29)       -    (29)    (33)        -     
Profit/(loss) after tax          5,988  11,550  17,538   6,283 (12,214)  


Return per ordinary          4    5.4p   10.4p   15.8p    5.6p  (10.9)p   

The total column of this statement represents the Company's statement of
comprehensive income, prepared in accordance with International Financial
Reporting Standards. The profit/(loss) after tax is the total comprehensive
income. The supplementary revenue and capital columns are both prepared in
accordance with the Statement of Recommended Practice issued by the Association
of Investment Companies. All items in the above statement derive from
continuing operations. No operations were acquired or discounted in the year.



                                     SHARE    SHARE  CAPITAL  REVENUE         
                                   CAPITAL  PREMIUM  RESERVE  RESERVE    TOTAL
                            NOTES    £'000    £'000    £'000    £'000       

At 1 October 2010                    5,570  113,634 (58,524)   12,689   73,369 
Total comprehensive                      -        - (12,214)    6,283  (5,931)
income for the year                                                            
Dividends paid                  5        -        -        -  (6,962)  (6,962) 
At 1 October 2011                    5,570  113,634 (70,738)   12,010   60,476 
Total comprehensive                      -        -   11,550    5,988   17,538
income for the year                                                            
Shares bought back and                 (5)        -     (51)        -     (56)
Dividends paid                  5        -        -        -  (5,567)  (5,567) 
At 30 September 2012                 5,565  113,634 (59,239)   12,431   72,391 

                                                              2012         2011

                                            NOTES        £'000        
Non-current assets                                                              
  Investments held at fair value through                    92,215       
  profit or loss                                                                 
Current assets                                                                  
  Other receivables                                          2,265        
  Derivative financial instruments -                             -          
  unrealised gain                                                                
  Cash and cash equivalents                                  6,868        

                                                             9,133       11,709

Current liabilities                                                             
  Other payables                                           (1,081)        
  Derivative financial instruments -                         (104)          
  unrealised loss                                                                
  Securities sold under agreements to                     (27,772)     

                                                          (28,957)     (41,530)

Net current liabilities                                   (19,824)     (29,821) 
Total net assets                                            72,391       60,476 
Issued capital and reserves attributable                                       
to equity holders                                                               
Share capital                                       6        5,565        5,570 
Share premium                                              113,634      113,634 
Capital reserve                                           (59,239)     (70,738) 
Revenue reserve                                             12,431       12,010 
Shareholders' funds                                         72,391       60,476 
Net asset value per ordinary share                  7        65.1p        54.3p 
These financial statements were approved and authorised for issue by the Board
of Directors on 27 November 2012. 
Donald Adamson

                                                              2012         2011

                                            NOTES        £'000        
Cash flow from operating activities                                             
Profit/(loss) before tax                                    17,567      (5,898) 
Taxation                                                      (29)         (33) 
Adjustments for:                                                                
  Purchases of investments                                (13,137)     
  Sales of investments                                      20,605       

                                                             7,468      (8,581)

(Decrease)/increase from securities sold                  (13,453)       11,906
under agreements to repurchase                                                  
(Profit)/loss on investments                               (8,589)       11,406 
Exchange differences                                       (1,751)          718 
Net cash inflow/(outflow) from derivative                      440      (1,492)
instruments - currency hedges                                                   
Finance costs                                                  426          528 
Operating cash flows before movements in                     2,079        8,554
working capital                                                                 
Decrease/(increase) in receivables                             393        (328) 
Increase/(decrease) in payables                                 40         (39) 
Net cash flows from operating activities                     2,512        8,187 
Cash flows from financing activities                                            
Interest paid                                                (487)        (476) 
Shares repurchased and cancelled                              (56)            - 
Equity dividends paid                               5      (5,567)      (6,962) 
Net cash used in financing activities                      (6,110)      (7,438) 
Net (decrease)/increase in cash and cash                   (3,598)          749
Exchange differences                                         1,751        (718) 
Cash and cash equivalents at beginning of                    8,715        8,684
Cash and cash equivalents at end of year                     6,868        8,715 
1. Principal Accounting Policies 
The principal accounting policies adopted in the preparation of these financial
statements are set out below. These policies have been consistently applied
during the current year and the preceding year, unless otherwise stated. The
accounts have been prepared on a going concern basis. 
Basis of Preparation 
Accounting Standards Applied 
The financial statements have been prepared on an historical cost basis, except
for the measurement at fair value of investments and derivatives, and in
accordance with the applicable International Financial Reporting Standards
(`IFRS') and interpretations issued by the International Financial Reporting
Interpretations Committee as adopted by the European Union. The standards are
those endorsed by the European Union and effective at the date the financial
statements were approved by the Board. 
Where presentational guidance set out in the Statement of Recommended Practice
(`SORP') `Financial Statements of Investment Trust Companies and Venture
Capital Trusts', issued by the Association of Investment Companies in January
2009, is consistent with the requirements of IFRS, the Directors have sought to
prepare the financial statements on a basis compliant with the recommendations
of the SORP. The supplementary information which analyses the statement of
comprehensive income between items of a revenue and a capital nature is
presented in accordance with this. 
2. Income 

                                                               2012        2011

Income from investments                                                         
UK dividends                                                     27          27 
UK bond interest                                              2,143       2,232 
Overseas bond interest                                        4,667       4,856 
Overseas dividends                                               29          67 

                                                              6,866       7,182

Other income                                                                    
Deposit interest                                                 13          21 
Total income                                                  6,879       7,203 
3. Investment Management Fees 

                                   2012                       2011           
                         Revenue  Capital    Total  Revenue  Capital    Total

                       £'000    £'000    £'000    £'000    £'000    
Investment management        339      339      678      347      347      694

                             339      339      678      347      347      694

Details of the investment management agreement are disclosed in the Report of
the Directors. At the year end the management fee accrued was £181,000 (2011: 
151,000). No performance related fee was accrued for the year (2011: £nil) as
previous years' underperformance has not been fully recovered.

4. Return per Share

The basic revenue, capital and total return per ordinary share is based on each
of the returns on ordinary activities after taxation and on 111,342,253 (2011:
111,392,526) ordinary shares, being the weighted average number of ordinary
shares in issue throughout the year.

5. Dividends
                                                2012              2011       
                                             Pence    £'000    pence    £'000

Dividends paid and recognised in the                                         
  Second interim for 2010                        -        -     2.50    
  Fourth interim for 2011                     1.25    1,393        -        
  First interim for 2012/2011                 1.25    1,392     1.25    
  Second interim for 2012/2011                1.25    1,391     1.25    
  Third interim for 2012/2011                 1.25    1,391     1.25    

                                              5.00    5,567     6.25    6,962

Set out below are the dividends that have been declared in respect of the
financial years ended 30 September:
                                                2012                2011        

                                         Pence     £'000     pence     
Dividends in respect of the year:                                                
  First interim                               1.25     1,392      1.25     
  Second interim                              1.25     1,391      1.25     
  Third interim                               1.25     1,391      1.25     


  Fourth interim                              1.25     1,391      1.25     

                                          5.00     5,565      5.00     
The fourth interim dividend for 2012 was paid on 31 October 2012 to
shareholders on the register on 12 October 2012. 
6. Share Capital 

                                                                 2012      2011

200,000,000 ordinary shares of 5p each (2011: 200,000,000      10,000    10,000
Allotted, called-up and fully paid:                                             
111,292,526 ordinary shares of 5p each (2011: 111,392,526       5,565     5,570
During the year 100,000 ordinary shares were bought back at 56.325p and
7. Net Asset Value per Share 
The net asset value per ordinary share and the net assets attributable at the
year end were as follows: 

                                           NET ASSET VALUE      NET ASSETS    
                                         PER ORDINARY SHARE    ATTRIBUTABLE   
                                              2012      2011     2012     2011

                                         PENCE     PENCE    £'000    
Ordinary shares                               65.1      54.3   72,391   60,476 
Net asset value per ordinary share is based on net assets at the year end and
on 111,292,526 (2011: 111,392,526) ordinary shares, being the number of
ordinary shares in issue at the year end. 
8. Related Party Transactions and Transactions with the Manager 
Under international GAAP and accounting standards, the Company has identified
no related parties and there have been no related party transactions during the
year. Invesco Asset Management Limited (`IAML'), a wholly owned subsidiary of
Invesco Limited, acts as Manager to the Company. Details of the investment
management agreement are disclosed in the Report of the Directors and
management fees payable to IAML are shown in note 5 of the annual financial
This annual financial report announcement is not the Company's statutory
accounts. The statutory accounts for the year ended 30 September 2011 and for
the year ended 30 September 2012 received an audit report which was unqualified
and did not include a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying the report. The statutory
accounts for the financial year ended 30 September 2012 have been approved and
audited but not yet filed. 
The audited annual financial report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
Registered Office, Ordnance House, 31 Pier Road, St.Helier, Jersey, JE4 8PW or
the Manager's website at 
The Annual General Meeting of the Company will be held at the offices of R&H
Fund Services (Jersey) Limited on 24 January 2013 at 10.30am. 
By order of the Board 
R&H Fund Services (Jersey) Limited 
Company Secretary 
27 November 2012 
-0- Nov/27/2012 14:35 GMT
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