DW Catalyst Fund Limited
Annual Report and Audited Financial Statements 2015
ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
31 December 2015
The Directors of DW Catalyst Fund Limited announce the results for the year ended 31 December 2015. The Annual Report and Audited Financial Statements will shortly be available via the Company's website www.dwcatalystltd.com and will shortly be available for inspection online at www.morningstar.co.uk/uk/NSM.
For the year ended 31 December 2015, DW Partners, LP, was the commodity pool operator of DW Catalyst Fund Limited (the “Company”) and filed a claim of exemption with the Commodity Futures Trading Commission (the “CFTC”) in respect of the Company pursuant to Section 4.7 of the CFTC regulations.
Chair’s Statement
Performance:
Market sentiment was shaped by several factors in 2015, including a continued decline in energy prices, doubts about the global economic recovery, and default rates increasing to the highest levels seen since 2009. As a result, and against the backdrop of rising interest rates in the US, we saw heightened volatility across a number of asset classes. As we look forward in 2016, there are some headwinds facing global credit markets, but these will also present opportunities; the Board believes that the investment team at DW Partners, LP (formerly known as DW Investment Management, LP, “DW” or the “Manager”) is well-placed to take advantage of these.
2015 was a difficult period for credit markets, and the strategy of DW Catalyst Offshore Fund, Ltd. (the “Feeder Fund”) did not protect capital as successfully as it had in prior challenging periods such as 2008 and 2011. There was no change in strategy on the Manager’s part, but the longstanding approach of taking long positions in more credit sensitive investments and hedging those with shorts with higher rated instruments was not as protective as it had been in prior years. Long positions suffered as credit spreads for the lowest rated companies in the US high yield market rose sharply, while difficulties in the energy space bled into other sectors. The Feeder Fund did not have an outsized position in energy companies, but contagion from the energy sector impacted the US high yield market as a whole.
Difficult periods like 2015 are often the precursor to an improved opportunity set. Once periods of “non-economic selling” pass, the opportunity for patient investors with the ability to work through more complex situations, including bankruptcies and restructurings, can be significant. To wit- some market watchers are predicting default rates in the US of over 5% for 2016, compared to less than 2% over the last several years.
At the start of 2016, the Company held discussions regarding strategic initiatives to increase shareholder value and broaden the Company’s investor base.
While many shareholders were receptive to the proposed amendment to the Company’s investment policy to permit exposure to a wider range of DW’s investment activities, notably the DW Value Offshore Fund, Ltd. (“DW Value”), this was balanced with caution that this would decrease the liquidity of the Company’s investment portfolio. The liquidity terms for an investment in DW Value are more stringent than those for the Company’s existing investment in DW Catalyst Offshore Fund, Ltd. Regardless of the merits of the investment strategy, shareholders were reticent to initiate a less liquid investment at this time.
Accordingly, on the basis of these discussions, the Company has decided not to pursue an amendment to its investment policy in the near term.
Discount management:
It was disappointing that during the period the GBP Share Class discount widened to 11% and the Board is committed to taking action to improve the discount.
And of course the key factor in reducing the discount is improving Net Asset Value (“NAV”) performance.
Investor communication is always important, but especially so in periods of difficult markets, when discounts to NAV expand or when NAV performance is challenging. The Board remains committed to investor communication, and remains available to shareholders whenever they wish.
DW Partners, LP appointed as Investment Manager:
The change of the investment manager from Brevan Howard to DW was successfully completed on 1 January 2015. The Board would like once again to thank Brevan Howard for their continued support since the Company was established and during this transition period. DW is now manager for the Company rather than their original role which was limited to investment advisor.
Due to the change, the Board visited DW twice over 2015, meeting with its key personnel. This included DW’s chief risk officer, chief operating officer, the investment team, and the board of the DW Catalyst Master Fund, Ltd (formerly known as Brevan Howard Credit Catalysts Master Fund Limited, the “Master Fund”). The Board is pleased to report that risk oversight and management has remained strong, and that existing investment policy and processes have been maintained since the change. Furthermore, DW actively innovates with its product range, investing in new product classes that the Board believe the Company would be well served to be invested in.
Board of Directors:
With effect from 8 April 2015, the Board appointed Andrew Rosenthal, Chief Operating Officer of DW, as a member of the Board. Given his insight into the Manager, the Board believes his appointment will help the overall running of the Company and further strengthen alignment between the Company and DW. Andrew will not be regarded as independent, but the Board as a whole continues to have a majority of independent directors, with 4 out of 5 directors being independent.
The Board expresses its thanks for the continued support of the Company’s shareholders.
Charlotte Valeur
Chair
29 March 2016
Board Members
The Directors of the Company, all of whom are non-executive, are listed below:
Charlotte Valeur (Chair), age 52
Charlotte Valeur is the Managing Director of GFG Ltd, a Governance consultancy, which she founded in 2011. Ms Valeur has in excess of 30 years’ experience in the financial markets. Prior to GFG, Ms Valeur was the Managing Partner at Brook Street Partners Ltd from January 2003. Prior to Brook Street Partners, she worked in the City of London as a director in Capital Markets with various international banks. She began her career in Copenhagen in 1982 with Nordea A/S. In 1991, she moved to the London office of Nordea A/S. Ms Valeur currently serves as a non-executive director on boards and committees of listed and unlisted companies including NED of JPMorgan Global Convertibles Income Fund Limited, Renewable Energy Generation Limited and NTR Plc. She is the Chair of Kennedy Wilson Europe Real Estate Plc and of Blackstone/GSO Loan Financing Limited. Ms Valeur is a member of the Institute of Directors and is regulated by the Jersey Financial Services Commission in the conduct of Trust Company business. She is a resident of Jersey. Ms Valeur is the Chair of the Company’s Board of Directors. Ms Valeur was appointed to the Board in 2010.
Keith Dorrian (Senior Independent Director), age 69
Keith Dorrian has over 40 years’ experience in the offshore finance industry. Joining Manufacturers Hanover in 1973, he moved to First National Bank of Chicago in 1984. In 1989, he joined ANZ Bank (Guernsey) where as a director of the Bank and Fund Management company he was closely involved in the banking and fund management services of the ANZ group. He took up the position of “Manager - Corporate Clients” at the Bank of Bermuda Guernsey in 1999 and was appointed local Head of Global Fund Services, CEO and managing director of their fund administration company in 2001, retiring on 31 December 2003. He is currently a Director of a number of fund and fund management companies. He is a Director of the following listed companies: AB Alternative Strategies PCC Limited, AB International Fund PCC Limited, Eurocastle Investments Limited, IIAB PCC Limited, Master Capital Fund Limited, and Third Point Offshore Investors Limited. Mr Dorrian holds the Institute of Directors Diploma in Company Direction. Mr Dorrian has been elected a Fellow of the Institute of Directors. He is a resident of Guernsey. Mr Dorrian was appointed to the Board in 2010.
Patrick Firth, age 54
Patrick Firth qualified as a Chartered Accountant with KPMG in 1991 where he gained experience of the audit of a variety of financial services companies and investment funds. He joined Rothschild Asset Management (C.I.) Limited in 1992, where he assumed responsibility for the fund administration team. On the acquisition of the company by BISYS Fund Services in February 1999, Mr Firth became Head of Operations and subsequently Managing Director before moving to become Managing Director of Butterfield Fund Services (Guernsey) Limited (subsequently Butterfield Fulcrum Group (Guernsey) Limited), a company providing third party fund administration services, where he worked from April 2002 until June 2009. He is a member of the Institute of Chartered Accountants in England and Wales and the Chartered Institute for Securities and Investment. He is also a Director of a number of offshore funds and management companies, including JZ Capital Partners Limited, ICG-Longbow Senior Secured UK Property Debt Investments Limited, Riverstone Energy Limited and NextEnergy Solar Fund Limited. He is Chairman of GLI Finance Limited. He is a resident of Guernsey. Mr Firth was appointed to the Board in 2010.
Christopher Waldron, age 51
Christopher Waldron has extensive experience in international asset management and is a Director of a number of listed and unlisted companies, including GBD Limited, Multi Manager Investment Programmes PCC Limited, JZ Capital Partners Limited and Crystal Amber Fund Limited. He is also Chairman of UK Mortgages Limited and Ranger Direct Lending Fund Plc and a member of the States of Guernsey’s Treasury and Resources Investment Sub-Committee and its Bond Management Sub-Committee. He began his career with James Capel as a graduate in 1986, working initially as an institutional equity broker and later specialising in equity derivatives. He subsequently held investment management positions with Bank of Bermuda, the Jardine Matheson Group and Fortis before joining the Edmond de Rothschild Group in Guernsey as Investment Director in 1999, overseeing a team of managers specialising in fixed income and alternative investment strategies. He was appointed Managing Director of the Edmond de Rothschild companies in Guernsey in 2008, a position he held until 2013, when he stepped down to assume a consultancy role with the Edmond de Rothschild group and to devote more time to non-executive work. He is a graduate of London and Cranfield Universities and a Fellow of the Chartered Institute for Securities and Investment. He is a Guernsey resident. Mr Waldron was appointed to the Board in 2010.
Andrew Rosenthal, age 57
Andrew Rosenthal has been the Chief Operating Officer of DW Partners, LP since January 2010. Before joining DW, Andrew spent 13 years at Morgan Stanley where most recently he was an Executive Director in the Securitised Products Group in charge of principal investments in distressed consumer credit (2005-2007). Prior, he served as the Securitised Products Group’s Operations Officer and was a member of the Global Large Loan Committee. From 1994 to 1999, Mr Rosenthal was co-head of Morgan Stanley’s mortgage-backed derivatives trading effort. Prior to joining Morgan Stanley, Mr Rosenthal spent six years at Credit Suisse First Boston as head of mortgage-backed derivatives trading (1988-1994) and four years at Bear Stearns trading collateralized mortgage obligation residuals. He began his career as an Analyst in Morgan Stanley’s Mergers and Acquisitions Department (1980-1982). Mr Rosenthal has a BS in Economics, cum laude, from the Wharton School of the University of Pennsylvania and an MBA from Harvard University. He is a resident of the United States of America. Mr Rosenthal was appointed to the Board in 2015.
Strategic Report
The Company
The Company is a registered closed-ended collective investment scheme incorporated with limited liability in Guernsey on 19 October 2010, with registration number 52520.
The Company was admitted to a Premium Listing on the Official List of the London Stock Exchange on 14 December 2010.
The Company offers multiple classes of ordinary shares, which differ in terms of currency of issue. To date, ordinary shares have been issued in US Dollars and Sterling.
At the Extraordinary General Meeting held on 19 December 2014, shareholders approved the Company’s new investment policy, new management agreement, name change of the Company and amendments to the Company’s Articles of Incorporation with effect from 1 January 2015.
The Company changed its name to DW Catalyst Fund Limited from BH Credit Catalysts Limited and changed its manager to DW from Brevan Howard Capital Management LP (“BHCM”).
The amendments to the Company’s Articles of Incorporation included changing references to the Master Fund to reflect the new investment structure of the Company and also have the effect that, following a discount trigger resolution, shareholders voting in favour of that resolution will have their shares redeemed in four quarterly instalments (instead of being able to redeem their shares in one instalment on payment of a 3.75 per cent. redemption fee). Otherwise, the amendments to the Articles were largely technical in nature and did not materially affect the existing rights of shareholders.
Full details were set out in the Circular dated 28 November 2014 which is available on the Company’s website.
The Board
The Board is responsible for the overall stewardship of the Company, including general management, structure, finance, corporate governance, marketing, risk management, compliance, asset allocation and performance. Biographical details of the Directors, all of whom are non-executive, are listed on the Board Members section and on the Company Information. Andrew Rosenthal is not deemed to be an independent non-executive director as he is the Chief Operating Officer of the Company’s Manager. The Company has no executive directors or employees.
The Board has contractually delegated to external parties various functions as disclosed in the Corporate Governance Statement.
Investment policy
The Company’s investment objective is to seek to generate high absolute returns through exposure to financial assets predominantly in the corporate credit, mortgage-backed securities and asset-backed securities markets.
Previously, the Company’s investment policy was to invest all of its assets in Brevan Howard Credit Catalysts Master Fund Limited (“BHCC”, now known as DW Catalyst Master Fund, Ltd. (the “Master Fund”)), an open-ended investment company with limited liability formed under the laws of the Cayman Islands.
The Company’s current investment policy is to invest its assets in the Feeder Fund. The Feeder Fund holds its investment in the Master Fund via an intermediate entity, DW Catalyst Investments Ltd (the “Cayman Corporation”), a Cayman corporation, which is wholly owned by the Feeder Fund. The Cayman Corporation acts as a corporate blocker for US federal income tax purposes and its only asset is its shareholding in the Master Fund.
The Cayman Corporation is consolidated in the Financial Statements of the Feeder Fund.
The Financial Statements of the Company should be read in conjunction with the Consolidated Financial Statements of the Master Fund and the Consolidated Financial Statements of the Feeder Fund, which can be found on the Company’s website, www.dwcatalystltd.com.
The Feeder Fund may also make one or more Specific Investments (as defined below). DW is the investment manager of the Feeder Fund, Master Fund and the Cayman Corporation.
The Master Fund seeks to employ a multi-strategy approach to investing in order to generate attractive risk- adjusted returns via careful investment selection, portfolio construction, and risk management. The Master Fund makes fundamental research-based investments, opportunistically deploying capital across a broad range of asset types and strategies including, but not limited to the following: distressed; long/short credit and equity; event driven and special situations; securitized and structured product strategies involving a wide range of collateral including, but not limited to residential mortgages, commercial mortgages, student loans, corporate loans and derivatives, consumer loans, equipment leases and other collateral types. The Master Fund invests globally, taking positions in both developed and emerging markets. Positions may be in the form of securities, derivatives, claims, real assets or other asset types.
The Master Fund is permitted to acquire holdings in illiquid investments for which there may be no immediate readily assessable market value.
In instances in which the investment manager of the Feeder Fund determines, in its sole and absolute discretion, that it would be appropriate to do so for tax, regulatory, operational or other reasons, the Feeder Fund may invest a portion of its assets in investments that are held through specifically formed holding entities (“Specific Investments”), rather than through the Master Fund. Specific Investments are required to be consistent with the Master Fund’s investment objective, strategy and approach.
The Feeder Fund, the Master Fund and the Cayman Corporation, through their investment manager, DW, have agreed with the Company that for so long as the Company is invested in the Feeder Fund, (a) the Master Fund will hold at least 20 different investments and, at the time of investment, no investment will represent more than 20 per cent. of its gross assets and (b) at the time of investment, no more than 30 per cent. of the gross assets of the Feeder Fund will be invested in Specific Investments with no one Specific Investment (or, where a Specific Investment consists of a number of underlying investments, no one such underlying investment) representing more than 20 per cent. of the gross assets of the Feeder Fund. Neither the Master Fund nor the Feeder Fund will be required to liquidate any portion of its portfolio to remain within these diversification requirements. In addition, in determining whether an investment in an index complies with these diversification requirements, compliance will be determined by reference to the index constituents (by number and by weighting of the constituents) and not by treating the index as a single investment or security.
The Company may not incur borrowings other than for the purpose of financing share repurchases or redemptions or satisfying working capital requirements, and subject to outstanding borrowings being in compliance with the borrowing limit in its articles of incorporation of 20 per cent. of the net asset value of the Company, calculated as at the time of borrowing. The Master Fund and the Feeder Fund are not subject to any limitations on their ability to incur leverage.
The Manager
With effect from 1 January 2015, the Company entered into a new management agreement with DW (the “DW Management Agreement”) regarding the management of the Company and terminated the existing management agreement between the Company and BHCM (the “BH Management Agreement”).
Prior to 1 January 2015, BHCM was the manager of the Company. BHCM is a Jersey limited partnership, the sole general partner of which is Brevan Howard Capital Management Limited, a Jersey limited company. Brevan Howard Capital Management Limited is regulated in the conduct of fund services business by the Jersey Financial Services Commission pursuant to the Financial Services (Jersey) Law 1998 and the Orders made thereunder.
Following the implementation of the DW Management Agreement, the Company appointed DW as manager. Prior to 1 January 2015, DW served as investment manager for BHCC, responsible for the underlying investment of the Company’s funds since its inception. Since 1 January 2015, DW assumed management responsibilities for the Company, the Feeder Fund, the Master Fund and the Cayman Corporation.
DW is registered with the US Securities Exchange Commission as an investment adviser under the United States Investment Advisers Act of 1940, as amended. DW is also registered with the US Commodities and Futures Trading Commission (“CFTC”) as a commodity pool operator and is a member of the US National Futures Authority. DW is exempt from registration with the CFTC as a commodity trading advisor.
The general partner of DW is DW Investment Partners, LLC. For the purposes of the third country marketing provisions of the Alternative Investment Fund Managers Directive, DW is the Alternative Investment Fund Manager (“AIFM”) of the Company for the purposes of the European Union Alternative Investment Fund Manager Directive (“AIFMD”).
Performance
An outline of performance and market reviews of the year under consideration, as well as outlook is provided in the Chair’s Statement and the Manager’s Report.
Key performance indicators (“KPI’s”)
At each quarterly Board meeting, the Board considers a number of performance measures to assess the Company’s success in achieving its objectives. Below are the main KPI’s which have been identified by the Board for determining the progress of the Company:
· Net asset value;
· Share price; and
· Ongoing charges.
Shareholder value
The Board reviews on an ongoing basis the performance of the Manager and considers whether the investment strategy utilised is likely to achieve the Company’s investment objective. The Board has agreed that the interests of the shareholders as a whole are best served by the continuing appointment of the Manager on the terms agreed.
Principal risks and uncertainties
The Board is responsible for the Company’s system of internal control and for reviewing its effectiveness. As stated within the Corporate Governance Statement, the Board is satisfied that by using the Company’s risk matrix, the Board has carried out a robust assessment of the principal risks and uncertainties facing the Company.
The principal risks which have been identified and the steps which are taken by the Board to mitigate them are as follows:
· Investment Risks: The Company is exposed to the risk that its portfolio fails to perform in line with the Company’s objectives if it is inappropriately invested or markets move adversely. The consequence of this may be a widening discount to the NAV. The Board reviews reports from the Manager at each quarterly Board meeting, paying particular attention to the diversification of the portfolio and to the performance and volatility of underlying investments. Further details on Investment Risks are disclosed in the Manager’s Report;
· Market Risks: The Company and the Feeder Fund expect to be exposed to a number of market risks as a result of the types of investments that the Feeder Fund makes and the investment entities in which it invests. The Board believes that this exposure to market risks will relate primarily to changes in the values of publicly traded and over-the-counter securities that are held for investment, the credit risk of counterparties, movements in prevailing interest rates, changes in foreign currency exchange rates, risks arising from hedging arrangements and the risk of insolvency of any of its prime brokers and custodians. The Feeder Fund may seek to mitigate such risks through the use of hedging arrangements and derivative instruments, which could subject it to additional risks and which may not be completely effective. The Board reviews reports provided by the Manager on the controls in place to mitigate these risks at each quarterly Board meeting;
· Operational Risks: The Company is exposed to the risks arising from any failure of systems and controls in the operations of the Manager or Northern Trust International Fund Administration Services (Guernsey) Limited (the “Administrator”). The Board receives reports annually from the Manager and Administrator on their internal controls at each quarterly Board meeting;
· Accounting, Legal and Regulatory Risks: The Company is exposed to risk if it fails to comply with the regulations of the UK Listing Authority, Guernsey Financial Services Commission, or if it fails to maintain accurate accounting records. The Administrator provides the Board with regular reports on changes in regulations and accounting requirements; and
· Financial Risks: The financial risks faced by the Company, include market, credit and liquidity risk. These risks and the controls in place to mitigate them are reviewed at each quarterly Board meeting.
The Board reviews and updates the risk matrix at each quarterly Board Meeting to reflect any changes in the control environment.
Viability statement
In accordance with the AIC Code of Corporate Governance (the “AIC Code”), the Board has assessed the prospect of the Company over a longer period than the 12 months minimum required by the ‘Going Concern’ provision. The Board considers that three years is an appropriate period to assess the viability of the Company (the “Viability Period”). This determination was based on a review of the Company’s investment horizon, anticipated cash flows, management arrangements as well as the liquidity of the Company’s investment in the Feeder Fund.
The Board’s assessment of the Company over the Viability Period has been made with reference to the Company’s current position and prospects, the Company’s strategy, and the Board’s risk appetite having considered each of the Company’s principal risks and uncertainties summarised on the Strategic Report. Additionally, the Board has reviewed the Company’s investment in the Feeder Fund (further described below).
The investment objective of the Company is to invest all of its assets in the Feeder Fund. The Feeder Fund holds its investment in the Master Fund via the Cayman Corporation (together with the Feeder Fund, the Master Fund and Specific Investments, the “Catalyst Funds”). The Company’s performance and operations therefore depend upon the performance of the Catalyst Funds and the Manager. In assessing the viability of the Company, the Board pays particular attention to the risks facing the Catalyst Funds. As part of this review, the Board considered the performance, projected capital activity, results of stress tests, and recent trading activity of the Catalyst Funds. This information is provided to the Board for review by the Manager on a regular basis. Additionally, the Board engages the Manager in on-going discussions around the risk management processes governing the Catalyst Funds’ investments.
The continuation of the Company in its present form is dependent on the DW Management Agreement remaining in place during the Viability Period. The Board acknowledges the twenty four month notice period required of the Company’s Manager when serving notice under the DW Management Agreement. To mitigate this risk, the Board meets regularly with the Manager to review the Company’s performance, and through the Management Engagement Committee they monitor the relationship with the Manager. The Board is not aware of any reason why either the Company or the Manager would terminate the DW Management Agreement during the Viability Period.
Shares trading at a discount to NAV for an extended period may impact the viability of the Company. The potential for the Company’s shares to trade at a significant discount to NAV, and the potential inability of the Board to manage such a share price discount to NAV may cause Shareholder dissatisfaction. The Company’s discount management programme is described within note 7 including details as to conditions that are required to meet the Discount Trigger Extraordinary Meeting. The Board monitors the share price in relation to NAV on a regular basis.
Based on the Company’s processes for monitoring operating costs, share price discount, the Manager’s compliance with the investment objective and robust assessment of the principal risks and uncertainties facing the Company, the Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the Viability Period to 29 March 2019.
Future developments
The future performance of the Company depends upon the success of the Company’s investment strategy in the light of economic factors and regional market developments. Further comments on the outlook for the Company for the next
12 months are set out in both the Chair’s Statement and the Manager’s Report.
Directors’ Report
The Directors submit their Annual Report together with the Company’s Audited Statement of Assets and Liabilities, Audited Statement of Operations and Performance Allocation, Audited Statement of Changes in Net Assets, Audited Statement of Cash Flows, and the related notes for the year ended 31 December 2015 (collectively, the “Audited Financial Statements”). The Directors’ Report together with the Audited Financial Statements (the “Financial Statements”) and their related notes give a true and fair view of the financial position of the Company. They have been prepared properly, in conformity with United States Generally Accepted Accounting Principles (“US GAAP”) and are in accordance with any relevant enactment for the time being in force and are in agreement with the accounting records.
The Company
Details of the Company and its organisation are set out in the Strategic Report.
Investment Policy
The Company’s investment policy is set out in the Strategic Report.
Results and dividends
The results for the year are set out in the Audited Statement of Operations and Performance Allocation. The Directors do not recommend the payment of a dividend.
Share capital
The number of shares in issue at the year end is disclosed in note 4 to the Financial Statements.
Going concern
After making enquiries and given the nature of the Company and its investment, the Board is satisfied that it is appropriate to continue to adopt the going concern basis in preparing these Financial Statements and, after due consideration, the Board considers that the Company is able to continue for the foreseeable future. In reaching this conclusion the Board is mindful of the nature of the assets that underlie its investment in the Feeder Fund via the Master Fund, the Cayman Corporation and Specific Investments, including the Feeder Fund’s liquidity and has concluded that adverse investment performance will not have a material impact on the Company’s ability to meet its liabilities as they fall due on account of the liquidity of the investments in the Master Fund.
Foreign Account Tax Compliance Act
For purposes of the US Foreign Account Tax Compliance Act (“FATCA”), the Company registered with the US Internal Revenue Services (“IRS”) as a Guernsey reporting Foreign Financial Institution (“FFI”), received a Global Intermediary Identification Number (KT2S8Y.9999.SL.831), and can be found on the US Internal Revenue Service’s FFI list.
The Company is subject to Guernsey regulations and guidance based on reciprocal information sharing inter-governmental agreements which Guernsey has entered into with the United Kingdom and the United States of America. The Board will take the necessary actions to ensure that the Company is compliant with Guernsey regulations and guidance in this regard.
Discount management programme
The Directors review the share price in relation to NAV on a regular basis. For additional information, refer to note 7 of the Financial Statements.
Shareholders with any queries in relation to the above should contact the Administrator in the first instance, whose contact details can be found on the Company’s website, www.dwcatalystltd.com/contacts.
Statement of Directors’ responsibility in respect of the Annual Report and Audited Financial Statements
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable laws and regulations.
Guernsey company law requires the Directors to prepare Financial Statements for each financial year. Under that law they have elected to prepare the Financial Statements in conformity with US GAAP.
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.
In preparing these Financial Statements the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the Financial Statements; and
· prepare the Financial Statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies (Guernsey) Law, 2008, as amended. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
We confirm to the best of our knowledge that:
· so far as each of the Directors is aware, there is no relevant audit information of which the Company’s Independent Auditor is unaware, and each has taken all the steps they ought to have taken as a Director to make themselves aware of any relevant information and to establish that the Company’s Independent Auditor is aware of that information;
· the Annual Report and Audited Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for the shareholders to assess the Company’s performance, business model and strategy;
· these Financial Statements have been prepared in conformity with US GAAP and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
· the Annual Report and Financial Statements include information detailed in the Chair’s Statement, the Directors’ Report, the Audit and Risk Committee Report, Strategic Report and the Manager’s Report, which provides a fair view of the information required by:
a) DTR 4.1.8 of the Disclosure and Transparency Rules, being a fair review of the Company’s business and a description of the principal risks and uncertainties facing the Company;
b) DTR 4.1.11 of the Disclosure and Transparency Rules, being an indication of important events that have occurred since the end of the financial year and the likely future development of the Company; and
c) DTR 4.1.12 of the Disclosure and Transparency Rules, being that the Financial Statements are prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and that the Annual Report and Audited Financial Statements includes a fair review of the development and performance of the business and position of the Company together with a description of the principal risks and uncertainties that it faces.
Signed on behalf of the Board by:
Charlotte Valeur
Chair
Patrick Firth
Director
29 March 2016
Corporate Governance Statement
In accordance with the UK Listing Regime, the Company must comply with the requirements of the UK Corporate Governance Code (“UK Code”). The Company is also required to comply with the Code of Corporate Governance issued by the Guernsey Financial Services Commission.
The Company is a member of the Association of Investment Companies (the “AIC”) and by complying with the AIC Code of Corporate Governance (previously defined as the “AIC Code”) is deemed to comply with both the UK and Guernsey Codes of Corporate Governance.
The Financial Reporting Council (the “FRC”) issued a revised UK Code in September 2014, for reporting periods beginning on or after 1 October 2014. The AIC updated the AIC Code (including the Guernsey edition) and its Guide to Corporate Governance to reflect the relevant changes to the FRC document in February 2015. The Board has adopted the revised code.
The AIC Code and the AIC Guide are available on the AIC’s website, www.theaic.co.uk. The UK Code is available on the Financial Reporting Council’s website, www.frc.org.uk.
The Board has considered the principles and recommendations of the AIC Code, by reference to the guidance notes provided by the AIC (“AIC Guide”), and consider that reporting against these will provide appropriate information to shareholders. To ensure ongoing compliance with these principles, the Board receives and reviews a report from the Corporate Secretary, at each quarterly meeting, identifying how the Company is in compliance and identifying any changes that might be necessary.
Throughout the accounting year the Company has complied with the recommendations of the AIC Code and thus the relevant provisions of the UK Code, except as set out below.
The UK Code includes provisions relating to:
· the role of the chief executive;
· executive directors’ remuneration;
· Remuneration Committee;
· the need for an internal audit function; and
· the whistle-blowing policy
For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to the position of the Company as it is an externally managed investment company. The Company has therefore not reported further in respect of these provisions. The Directors are non-executive and the Company does not have employees, hence no whistle-blowing policy is required. However, the Directors have satisfied themselves that the Company’s service providers have appropriate whistle-blowing policies and procedures and have received confirmation from the service providers that nothing has arisen under those policies and procedures which should be brought to the attention of the Board.
The Company has adopted a policy that the composition of the Board of Directors, which is required by the Company’s Articles to comprise at least two persons, is at all times such that a majority of the Directors are independent of the Manager and any company in the same group as the Manager; the Chair of the Board of Directors is free from any conflicts of interest and is independent of the Manager and of any company in the same group as the Manager; and that no more than one director, partner, employee or professional adviser to the Manager or any company in the same group as the Manager may be a Director of the Company at any one time. Andrew Rosenthal who is the Chief Operating Officer of the Company’s Manager was appointed to the Board on 8 April 2015.
The Company’s risk exposure and the effectiveness of its risk management and internal control systems are reviewed by the Audit and Risk Committee at its meetings and annually by the Board. The Board believes that the Company has adequate and effective systems in place to identify, mitigate and manage the risks to which it is exposed.
The Board
The Board is the Company’s governing body and has overall responsibility for maximising the Company’s success by directing and supervising the affairs of the business, for safeguarding the Company’s assets, for the determination of the investment policy of the Company, for reviewing the performance the Manager, and the other service providers, meeting the appropriate interests of shareholders and relevant stakeholders, while enhancing the value of the Company and also ensuring protection of investors. A summary of the Board responsibilities is as follows:
· statutory obligations and public disclosure;
· strategic matters and financial reporting;
· risk assessment and management including reporting compliance, governance, monitoring and control; and
· other matters having a material effect on the Company.
The Board responsibilities for the Annual Report and Audited Financial Statements are set out in the Statement of Directors’ Responsibilities.
The Board consists solely of non-executive Directors. Keith Dorrian is the Senior Independent Director of the Board. The Board meets at least four times a year and between these formal meetings there is regular contact with the Manager and the Corporate Secretary. The Directors are kept fully informed of investment and financial controls, and other matters that are relevant to the business of the Company and should be brought to the attention of the Directors. The Directors also have access to the Administrator, and where necessary, in the furtherance of their duties, to independent professional advice at the expense of the Company. In addition to these scheduled meetings, 9 ad hoc meetings of committee of the Board were held to deal with matters that were of a fundamentally administrative nature, the majority being the conversions between share classes. These committee meetings were attended by those Directors available at the time.
On 24 June 2015, at the Annual General Meeting (“AGM”) of the Company, shareholders re-elected all Directors of the Company. Section 21.3 of the Company’s Articles requires any Directors who held office at the time of the two preceding AGMs and who did not retire at either of them, shall retire from office and may offer themselves for re-election. However in order to ensure continuity of experience, at least one Independent Director will retire each year and may offer themselves for re-election.
Chair
The Chair is Charlotte Valeur. The Chair of the Board must be independent for the purposes of Chapter 15 of the Listing Rules. Charlotte Valeur is considered independent because she:
· has no current or historical employment with the Manager; and
· has no current directorships in any other investment funds managed by the Manager.
The Directors are listed on the Board Members section and on the Company Information section. Andrew Rosenthal is not independent of the Manager for the purposes of LR15.2.12-A and otherwise.
Board diversity
The Board has also given careful consideration to the recommendations of the Davies Report on women on boards and as recommended in that report has reviewed its composition and believes that it has available an appropriate range of skills and experience. In order to extend its diversity, the Board is committed to implementing the recommendations of the Davies Report, if possible within the timescales proposed in the Davies Report, and to that end will ensure that women candidates are considered when appointments to the Board are under consideration – as indeed has always been its practice.
Board evaluation and succession planning
The AIC Code requires external evaluation of Board performance every three years. The Board undertook its first externally facilitated evaluation in early September 2013 by Trust Associates. The report of the evaluation confirmed that the Company observes a high standard of Corporate Governance and, accordingly, the Board has conducted self-appraisals in 2014 and in quarter three of 2015. The Board intends to commission a further independent study to be reported on in 2016.
The Board and Committees of the Board undertake an evaluation of their own performance and that of individual Directors on an annual basis. In order to review their effectiveness, the Board and its Committees carry out a process of formal self-appraisal.
The Board and Committees of the Board consider how they function as a whole and also review the individual performance of its members. This process is conducted by the respective Chair reviewing each member’s performance, contribution and commitment to the Company. Keith Dorrian as Senior Independent Director, takes the lead in reviewing the performance of the Chair.
The Board considers it has a breadth of experience relevant to the Company, and the Directors believe that any changes to the Board composition can be managed without undue disruption. An induction programme will be available for any future Director appointments.
Training is an ongoing matter for the Board as is discussion on the overall strategy of the Company and the Board has visited DW at their offices and elsewhere during the year to discuss these matters. Such meetings will be an ongoing occurrence. The Directors regularly review their requirements for continuous professional development and take actions as necessary to ensure they are up to date and current with their professional development requirements, where appropriate.
Committees of the Board
The Board has established Audit and Risk, Management Engagement and Nomination Committees and approved their terms of reference, copies of which can be obtained from the Administrator.
Audit and Risk Committee
The Audit and Risk Committee comprises Patrick Firth (Chairman), Keith Dorrian and Christopher Waldron. The Audit and Risk Committee meets formally at least twice a year and each meeting is attended by the external auditor and the Administrator.
Appointment to the Audit and Risk Committee is for a period up to three years which may be extended for two further three year periods provided that the majority of the Audit and Risk Committee remain independent of the Manager. Patrick Firth and Christopher Waldron are currently serving their second term of three years. On 27 January 2016, the Audit Committee Terms of Reference was amended to allow for staggered re-appointments. As a result, Keith Dorrian, Christopher Waldron and Patrick Firth were re-appointed for a term of 1 year, 2 years and 3 years, respectively.
A report of the Audit and Risk Committee detailing responsibilities and activities is presented on the Audit and Risk Committee Report.
Management Engagement Committee
The Management Engagement Committee comprises all independent Directors of the Board. Charlotte Valeur is Chair of the Management Engagement Committee. The Management Engagement Committee meets formally at least once a year.
The Management Engagement Committee has formal duties and responsibilities. The function of the Management Engagement Committee is to ensure that the Company’s management agreement is competitive and reasonable for the shareholders, along with the Company’s agreements with all other third party service providers (other than the external auditors). The Committee also reviews annually, the performance of the Manager with a view to determining whether to recommend to the Board that the Manager’s mandate be renewed, subject to the specific notice period requirement of the agreement. The other third party service providers are also reviewed on an annual basis.
The principal contents of the Manager’s contract and notice period are contained in note 3 to the Financial Statements.
At its meeting on 21 September 2015, the Management Engagement Committee concluded that the continued appointment of the Manager on the terms agreed would be in the best interests of the Company’s shareholders as a whole. At the date of this report the Board continued to be of the same opinion.
Nomination Committee
The Nomination Committee comprises all independent Directors of the Board, with the Chair of the Company being appointed as Chair of the Nomination Committee. The Nomination Committee has clear Terms of Reference. For new appointments to the Board, nominations are sought from the Directors and from other relevant parties and candidates are then interviewed by the Nomination Committee. In the event that a replacement for the Chair is being sought it would normally be expected that the Senior Independent Director would chair the Committee.
The Nomination Committee held its most recent meeting on 21 September 2015.
Remuneration Committee
In view of its non-executive and independent nature, the Board considers that it is not appropriate for there to be a separate Remuneration Committee as anticipated by the AIC Code. The Audit and Risk Committee make all representations to the Board regarding Directors remuneration. The Board as a whole fulfils the functions of the Remuneration Committee, although the Board has included a separate Directors’ Remuneration Report of this Annual Report.
Board and committee meetings
The next table sets out the number of Board, Audit and Risk, Management Engagement and Nomination Committee meetings held during the year ended 31 December 2015 and, where appropriate, the number of such meetings attended by each Director.
Attendance at scheduled Board and Committee meetings:
|
|
|
Board |
|
Audit and Risk |
|
Management Engagement |
|
Nominations |
| No of meetings |
|
|
4 |
|
3 |
|
1 |
|
1 |
| Attendance |
|
|
|
|
|
|
|
|
|
| Clarlotte Valeur |
|
|
4 |
|
2* |
|
1 |
|
1 |
| Keith Dorrian |
|
|
3 |
|
1 |
|
1 |
|
1 |
| Partick Firth |
|
|
4 |
|
3 |
|
1 |
|
1 |
| Christoper Waldron |
|
4 |
|
3 |
|
1 |
|
1 |
| Andrew Rosenthal** |
|
3 |
|
- |
|
- |
|
- |
* as invitee
** Andrew Rosenthal was appointed to the Board on 8 April 2015.
Directors’ interests
Directors’ interests in other companies are disclosed in the Board member section.
The Directors had the following interests in the Company, held either directly or beneficially at 31 December 2015:
|
|
|
US Dollar Shares |
|
Sterling Shares |
|
|
|
31.12.15 |
|
31.12.14 |
|
31.12.15 |
|
31.12.14 |
| Clarlotte Valeur |
|
|
Nil |
|
Nil |
|
4,236 |
|
4,236 |
| Keith Dorrian |
|
|
Nil |
|
Nil |
|
Nil |
|
Nil |
| Partick Firth |
|
|
Nil |
|
Nil |
|
500 |
|
500 |
| Christoper Waldron |
|
Nil |
|
Nil |
|
500 |
|
500 |
| Andrew Rosenthal |
|
Nil |
|
Nil |
|
Nil |
|
Nil |
The Company has adopted a Code of Directors’ dealings in shares, which is based on the Model Code for Directors’ dealings contained in the London Stock Exchange’s Listing Rules.
Directors’ indemnity
Directors’ and officers’ liability insurance cover is in place in respect of the Directors. The Directors entered into indemnity agreements with the Company which provide for, subject to the provisions of the Companies (Guernsey) Law, 2008, as amended, an indemnity for Directors in respect of costs which they may incur relating to the defence of proceedings brought against them arising out of their positions as Directors, in which they are acquitted or judgement is given in their favour by the Court. The agreement does not provide for any indemnification for liability which attaches to the Directors in connection with any negligence, unfavourable judgements, breach of duty or trust in relation to the Company.
Internal controls
The Board is ultimately responsible for establishing and maintaining the Company’s system of internal control and for maintaining and reviewing its effectiveness and to achieve this, a risk management process has been established which seeks to:
· Review the risks faced by the Company and the controls in place to address those risks;
· Identify and report changes in the risk environment;
· Identify and report changes in the operational controls;
· Identify and report on the effectiveness of controls and errors arising; and
· Ensure no override of controls by its service providers, the Manager or Administrator.
The Company’s risk matrix continues to be used as the basis for analysing the Company’s system of internal control. The risk matrix is prepared and maintained by the Audit and Risk Committee which initially identifies the risks facing the Company and then collectively assesses the likelihood of each risk, the impact of those risks and the strength of the controls operating over each risk. The Company’s system of internal control is designed to manage rather than to eliminate the risk of failure to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against misstatement and loss.
These controls aim to ensure that assets of the Company are safeguarded, proper accounting records are maintained and the financial information for publication is reliable. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company.
The AIC Code requires the Board to conduct at least annually a review of the Company’s system of internal control, covering all controls, including financial, operational, compliance and risk management. The Board has evaluated the systems of internal controls of the Company. In particular, it has prepared a process for identifying and evaluating the significant risks affecting the Company and the policies by which these risks are managed. The Board considers the Company’s risk management framework and the risk profile that is acceptable in order to achieve the Company’s strategic objectives. As a result, it is considered that the Board has fulfilled its obligations under the AIC Code.
A report is tabled and discussed at each quarterly Board meeting setting out the risks identified, their potential impact, the controls in place to mitigate them, the residual risk assessment and any exceptions identified during the period under review.
Further reports are received and reviewed from the Administrator in respect of compliance, London Stock Exchange continuing obligations and other matters. The Board also receives confirmation from the Administrator of its accreditation under its Service Organisation Controls 1 report.
Anti-Bribery and Corruption Policy
The Board has adopted a formal Anti-bribery and Corruption Policy. The policy applies to the Company and to each of its Directors. Furthermore, the policy is shared with each of the Company’s service providers.
Shareholder engagement
The Board welcomes shareholders’ views and places great importance on communication with its shareholders. Shareholders wishing to meet with the Chair and other Board members should contact the Company’s Administrator.
The Board receives regular reports on the views of its shareholders from its brokers, JP Morgan Cazenove and Fidante Capital, marketing consultants, Kepler Partners LLP and Peregrine Communications and from DW. In addition the Chair has conducted and continues to conduct meetings with a number of major shareholders in order to receive their views on the Company.
The Company’s AGM provides a forum for shareholders to meet and discuss issues of the Company and shareholders with the opportunity to vote on the resolutions as specified in the Notice of AGM.
The Company provides weekly unaudited estimates of the NAVs and month-end unaudited NAVs. The Company provides a quarterly newsletter. These are published via regulatory announcements and are also available on the Company’s website, www.dwcatalystltd.com. Risk reports are also available on the Company’s website.
The Manager maintains regular dialogue with institutional shareholders, the feedback from which is reported to the Board.
Significant shareholders
Shareholders with holdings of more than 3.0% of the Shares of the Company at 31 December 2015 were as follows:
| Significant Shareholders |
Total shares |
% holdings |
| US Dollar Shares |
held |
in class |
| Roy Nominees Limited |
641,450 |
29.01% |
| Hero Nominees Limited |
257,200 |
11.63% |
| Chase Nominees Limited |
241,631 |
10.93% |
| Canaccord Nominees Limited |
145,895 |
6.60% |
| Pershing Nominees Limited |
145,207 |
6.57% |
| Lynchwood Nominees Limited |
120,416 |
5.45% |
| Vidacos Nominees Limited |
115,046 |
5.20% |
| The Bank of New York (Nominees) Limited |
106,705 |
4.83% |
| J.P. Morgan Securities PLC |
97,065 |
4.39% |
|
|
|
| Significant Shareholders |
Total shares |
% holdings |
| Sterling Shares |
|
held |
in class |
| Nortrust Nominees Limited |
1,429,400 |
16.14% |
| Vidacos Nominees Limited |
1,239,709 |
14.00% |
| The Bank of New York (Nominees) Limited |
908,208 |
10.25% |
| Roy Nominees Limited |
845,818 |
9.55% |
| State Street Nominees Limited |
681,089 |
7.69% |
| HSBC Global Custody Nominee (UK) Limited |
439,461 |
4.96% |
| Harewood Nominees Limited |
357,525 |
4.04% |
| Brooks Macdonald Nominees Limited |
352,014 |
3.97% |
| Luna Nominees Limited |
337,067 |
3.81% |
| CGWL Nominees Limited |
269,497 |
3.04% |
|
|
|
|
Ongoing charges
Ongoing charges for the years ended 31 December 2015 and 31 December 2014 have been calculated in accordance with the AIC’s recommended methodology.
The following table presents the Ongoing Charges for each share class:
|
|
31.12.15 |
|
31.12.14 |
|
|
US Dollar |
|
Sterling |
|
US Dollar |
|
Sterling |
|
|
shares |
|
shares |
|
shares |
|
shares |
| Company - Ongoing Charges |
0.48% |
|
0.47% |
|
2.50% |
|
2.50% |
| Feeder Fund - Ongoing Charges |
2.33% |
|
2.36% |
|
0.19% |
|
0.19% |
| Master Fund - Ongoing Charges |
0.00% |
|
0.00% |
|
1.48% |
|
1.24% |
| Ongoing Charges |
2.81% |
|
2.83% |
|
4.17% |
|
3.93% |
Effective from 1 January 2015, the Feeder Fund Ongoing Charges represent the portion of the Feeder Fund’s operating expenses which have been allocated to the Company. The Company invests substantially all of its investible assets in the A Class Shares issued by the Feeder Fund. These shares were not subject to management fees and performance fees allocation within the Feeder Fund; however they are subject to a management and performance fee allocation at the level of the Master Fund and at the level of Specific Investments (see note 3).
Prior to 1 January 2015, the Master Fund Ongoing Charges represented the portion of the Master Fund’s operating expenses which had been allocated to the Company. The Company invested substantially all of its investible assets in Ordinary Shares issued by the Master Fund. These shares were not subject to management fees and performance fees within the Master Fund as they were charged at the level of the Company.
Audit and Risk Committee Report
31 December 2015
Dear Shareholder,
Below, we present the Audit and Risk Committee’s Report for 2015, setting out the responsibilities of the Audit and Risk Committee and its key activities in 2015. As in previous years, the Committee has reviewed the Company’s financial reporting, the independence and effectiveness of the external auditor and the internal control and risk management systems of the Company’s service providers. The Audit and Risk Committee considered whether the Annual Report and Audited Financial Statements are fair, balanced and understandable and whether they provided the necessary information for shareholders to access the Company’s performance, business model and strategy before recommending them to the Board for approval. In order to assist the Audit and Risk Committee in discharging these responsibilities, regular reports are received and reviewed from the Manager, Administrator and external auditor.
A member of the Audit and Risk Committee will continue to be available at each Annual General Meeting to respond to any shareholder questions on the activities of the Audit and Risk Committee.
Patrick Firth
Chairman, Audit and Risk Committee
Responsibilities
The Audit and Risk Committee reviews and recommends to the Board the Financial Statements of the Company and is
the forum through which the external auditor reports to the Board of Directors. The external auditor and the Audit and Risk Committee will meet together without representatives of either the Administrator or Manager being present if either party considers this to be necessary.
Members of the Audit and Risk Committee meet with the Manager at least annually to discuss the valuation process in relation to compliance and risk management.
The role of the Audit and Risk Committee is to:
· monitor the integrity of the published Financial Statements of the Company;
· review and report to the Board on the significant issues and judgements made in the preparation of the Company’s published Financial Statements, (having regard to matters communicated by the external auditors) and other financial information;
· monitor and review the quality and effectiveness of the external auditors and their independence;
· consider and make recommendations to the Board on the appointment, reappointment, replacement and remuneration to the Company’s external auditor;
· review the Company’s procedures for prevention, detection and reporting of fraud, bribery and corruption;
· monitor and review the internal control and risk management systems of the service providers; and
· consider and make representations to the Board regarding Director’s remuneration.
The Audit and Risk Committee’s full terms of reference can be obtained by contacting the Administrator.
Key Activities of the Audit and Risk Committee - 2015
The following sections discuss the assessments made by the Audit and Risk Committee during the year:
Financial Reporting:
The Audit and Risk Committee’s review of the annual financial statements focused on the following significant areas:
The Company’s investment in the Feeder Fund was valued at US$190.32 million as at 31 December 2015 which represented the majority of the net assets of the Company and as such is the single biggest factor in relation to the accuracy of the Financial Statements. The valuation of the investment is determined in accordance with the accounting policy in note 2 to the Financial Statements. For additional information in relation to the Master Fund’s and Feeder Fund’s valuation policy, refer to the Master Fund’s audited financial statements.
The consolidated financial statements of both the Master Fund and Feeder Fund for the year ended 31 December 2015 were audited by Ernst & Young LLP who issued an unqualified audit opinion dated 29 March 2016. The Audit and Risk Committee considered the financial statements of the Master Fund and its accounting policy in determining that the stated value of the Company’s investment in the Feeder Fund is reasonable.
The external auditor reported to the Audit and Risk Committee that no material misstatements were found in the course of their work. Furthermore, the Manager and Administrator confirmed to the Audit and Risk Committee that they were not aware of any material misstatements including matters relating to the Financial Statement presentation. The Audit and Risk Committee confirms that it is satisfied that the external auditor has fulfilled its responsibilities with diligence and professional scepticism.
Following a review of the presentations and reports from the Administrator and consulting where necessary with the external auditor, the Audit and Risk Committee is satisfied that the Financial Statements appropriately address the critical judgements and key estimates (both in respect to the amounts reported and the disclosures). The Audit and Risk Committee is also satisfied that any significant assumptions used for determining the value of assets and liabilities have been appropriately scrutinised, challenged and are sufficiently robust.
Risk Management:
The Audit and Risk Committee continued to consider the process for managing the risk of the Company and its service providers. Risk management procedures for the Company, as detailed in the Company’s risk assessment matrix, were reviewed and approved by the Audit and Risk Committee. During the year there were no issues noted.
Fraud, Bribery and Corruption:
The Audit and Risk Committee continues to monitor the anti-fraud, bribery and corruption policies of the Company. The Board receives a confirmation from all service providers that they are not aware of any instances of fraud, bribery or corruption.
The External Auditor
During the year, the Company entered into a competitive audit tender process and on 3 December 2015, Ernst & Young LLP was appointed as the Company’s new independent external auditor, replacing KPMG Channel Islands Limited, who had been the Company’s independent external auditor since the date of the initial listing on the London Stock Exchange.
Independence, objectivity and fees:
The independence and objectivity of the external auditor is reviewed by the Audit and Risk Committee which also reviews the terms under which the external auditor is appointed to perform non-audit services. The Audit and Risk Committee has established pre-approval policies and procedures for the engagement of the auditor to provide audit, assurance and tax services. These are that the external auditors may not provide a service which:
· places them in a position to audit their own work;
· creates a mutuality of interest;
· results in the external auditor developing close relationships with service providers of the Company;
· results in the external auditor functioning as a manager or employee of the Company; and
· puts the external auditor in the role of advocate of the Company.
The Company does not utilise external auditors for internal audit purposes, secondments or valuation advice. Services which are not in the nature of audit, such as tax compliance, tax structuring, private letter rulings, accounting advice, quarterly reviews and disclosure advice are normally permitted but are subject to prior approval by the Audit and Risk Committee.
The Audit and Risk Committee has examined the scope and results of the audit and the independence and objectivity of the external auditor, with particular regard to non-audit fees, and considers Ernst & Young LLP as external auditor, to be independent of the Company.
The following table summarises the remuneration payable to Ernst & Young LLP and KPMG Channel Islands Limited and to KPMG member firms for audit and non-audit services provided to the company during the years ended 31 December 2015 and 31 December 2014.
|
01.01.15 to |
|
01.01.14 to |
|
31.12.15 |
|
31.12.14 |
|
£ |
|
£ |
| Ernst & Young LLP |
|
|
|
| Annual Audit |
35,000 |
|
- |
|
|
|
|
| KPMG Channel Islands |
|
|
|
| Annual Audit |
- |
|
28,000 |
| Auditor's interim review |
8,750 |
|
8,750 |
|
|
|
|
| Other KPMG affiliates |
|
|
|
| Agreed upon procedures in relation to the changes in the |
|
|
- |
| shareholder circular on restructing of the Company |
- |
|
9,360 |
In line with the policies and procedures above, the Audit and Risk Committee did not consider the provision of non-audit services by KPMG Channel Islands, which comprised services in respect of the change in investment policy, to have been a threat to their objectivity and independence whilst in office. The Audit and Risk Committee has also considered the overall level of services provided by Ernst & Young LLP member firms to the wider DW organisation and does not consider these to pose a threat to the external auditor’s independence.
The recent revisions to the UK Corporate Governance Code introduced a recommendation that the external audit be put out to tender every ten years. The Audit and Risk Committee has noted this and will develop a plan for tendering at the appropriate time.
Performance and effectiveness:
During the year, when considering the effectiveness of the external auditors, the Audit and Risk Committee has taken into account the following factors:
· The audit plan presented to them before each audit;
· The post audit report including variations from the original plan;
· Changes in audit personnel;
· The external auditors own internal procedures to identify threats to independence; and
· Feedback received from both the Manager and Administrator.
The Audit and Risk Committee reviewed and discussed the audit plan and the audit findings report of the independent auditor and concluded that the audit plan sufficiently identified audit risks and that the audit findings report indicated that the audit risks were sufficiently addressed and that there were no variations from the audit plan. The Audit and Risk Committee considered reports from the external auditors on their procedures to identify threats to independence and concluded that the procedures were sufficient to identify potential threats to independence.
Reappointment of external auditors:
Consequent to this review process, the Audit and Risk Committee has recommended to the Board that a resolution be put to the 2016 AGM for the re-appointment of Ernst & Young LLP as external auditor. The Board has accepted this recommendation.
Internal control and risk management systems
Additional work performed by the Audit and Risk Committee in the areas of internal control and risk management are disclosed on the Corporate Governance Statement.
The Audit and Risk Committee has also reviewed the need for an internal audit function. The Audit and Risk Committee has decided that the systems and procedures employed by the Manager and the Administrator, which included an on-site visit by the Manager, including their internal control functions, provide sufficient assurance that a sound system of internal control, which safeguards the Company’s assets, is maintained. An internal audit function specific to the Company is therefore considered unnecessary.
Therefore, in finalising the Audited Financial Statements for recommendation to the Board for approval, the Audit and Risk Committee is satisfied that, taken as a whole, the Annual Report and Audited Financial Statements are fair, balanced and understandable.
Patrick Firth
Chairman of the Audit and Risk Committee
29 March 2016
Directors’ Remuneration Report
As at 31 December 2015
Introduction
An ordinary resolution for the approval of the Directors’ Remuneration Report will be put to the shareholders at the AGM to be held in 2016.
Remuneration policy
In view of its non-executive and independent nature, the Board considers that it is not appropriate for there to be a separate Remuneration Committee as anticipated by the AIC Code. The Audit and Risk Committee makes all representations to the Board regarding Directors remuneration. The Board as a whole fulfils the functions of the Remuneration Committee. No advice or services were provided by any external person in respect of its consideration of the Directors’ remuneration.
The Company’s policy is that the fees payable to the Directors should reflect the time spent by the Directors on the Company’s affairs and the responsibilities borne by the Directors and be sufficient to attract, retain and motivate Directors of a quality required to run the Company successfully. The Chair of the Board is paid a higher fee in recognition of her additional responsibilities, as is the Chairman of the Audit and Risk Committee. The policy is to review fee rates periodically, although such a review will not necessarily result in any changes to the rates, and account is taken of fees paid to directors of comparable companies.
There are no long term incentive schemes provided by the Company and no performance fees are paid to Directors.
No Director has a service contract with the Company but each of the Directors is appointed by a letter of appointment which sets out the main terms of their appointment. The Directors were appointed to the Board for an initial term of three years. Section 21.3 of the Company’s Articles requires any Directors who held office at the time of the two preceding AGM’s and who did not retire at either of them, shall retire from office and may offer themselves for re-election. In addition, any Director who is considered not independent of the Manager for the purpose of UK Listing Rules is subject to annual re-election. Director appointments can also be terminated in accordance with the Company’s Articles. Should shareholders vote against a Director standing for re-election, the Director affected will not be entitled to any compensation. There are no set notice periods and a Director may resign by notice in writing to the Board at any time.
Directors are remunerated in the form of fees, payable quarterly in arrears, to the Director personally. No other remuneration or compensation was paid or payable by the Company during the year ended 31 December 2015 to any of the Directors apart from the reimbursement of allowable expenses.
Directors’ fees
The Company’s Articles limit the fees payable to Directors in aggregate to £500,000 per annum. The fees are £66,000 per annum for the Chair, £40,000 per annum for the Chair of the Audit and Risk Committee and £33,000 per annum for all other Directors. Andrew Rosenthal has waived his right to receive a Director fee.
The fees payable by the Company in respect of each of the Directors who served during the year ended 31 December 2015 and 31 December 2014, were as follows:
|
01.01.15 to |
|
01.01.14 to |
|
31.12.15 |
|
31.12.14 |
|
£ |
|
£ |
| Clarlotte Valeur |
66,000 |
|
66,000 |
| Keith Dorrian |
33,000 |
|
33,000 |
| Partick Firth |
40,000 |
|
40,000 |
| Christoper Waldron |
33,000 |
|
33,000 |
| Stephen Stonberg* |
- |
|
8,250 |
| Andrew Rosenthal** |
- |
|
- |
|
|
172,000 |
|
180,250 |
|
|
|
|
|
* Stephen Stonberg resigned from the Board on 31 March 2014.
** Andrew Rosenthal has waived his right to receive a Director fee.
Signed on behalf of the Board by:
Charlotte Valeur
Chair
Patrick Firth
Director
29 March 2016
Manager’s Report
DW (hereinafter “we” or “us”) is the Manager of the Company and of the Catalyst Funds (as previously defined).
DW has been responsible for the underlying investment decisions of the Company’s funds since its inception, and following a vote of shareholders on 19 December 2014, DW assumed the corresponding management responsibilities for the Company, the Master Fund, the Cayman Corporation and the Feeder Fund effective from 1 January 2015.
In addition, effective from 1 January 2015, the Company’s assets (net of short-term working capital) ceased to be invested directly into the Master Fund and were invested in the Feeder Fund. The Feeder Fund may also make one or more Specific Investments (as defined in Strategic Report).
Net asset value summary
The NAV per share of the Company’s USD and GBP currency classes depreciated by 9.5% each in 2015. The month-by-month performance of each currency class is stated below:
| USD |
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
YTD |
| 2011* |
1.78 |
1.55 |
0.91 |
2.14 |
(0.03) |
(2.16) |
0.50 |
(0.37) |
(0.96) |
(0.50) |
(1.49) |
(0.50) |
0.81 |
| 2012 |
0.64 |
1.15 |
2.36 |
1.51 |
1.17 |
(0.10) |
1.38 |
1.39 |
1.65 |
0.8 |
0.73 |
1.26 |
14.83 |
| 2013 |
1.73 |
0.24 |
1.19 |
1.07 |
1.74 |
(0.52) |
0.16 |
1.07 |
1.18 |
1.68 |
1.7 |
1.52 |
13.5 |
| 2014 |
1.07 |
1.43 |
0.49 |
1.51 |
0.85 |
1.47 |
0.58 |
(1.00) |
(0.76) |
(0.72) |
0.04 |
0.35 |
5.39 |
| 2015 |
(0.04) |
0.48 |
0.31 |
1.23 |
(0.10) |
(0.76) |
(2.60) |
(0.97) |
(1.42) |
(2.08) |
(2.92) |
(1.00) |
(9.52) |
| GBP |
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
YTD |
| 2011* |
1.74 |
1.54 |
0.95 |
2.08 |
0.05 |
(2.16) |
0.51 |
(0.33) |
(0.93) |
(0.50) |
(1.49) |
(0.47) |
0.89 |
| 2012 |
0.64 |
1.15 |
2.40 |
1.5 |
1.22 |
(0.06) |
1.40 |
1.36 |
1.62 |
0.81 |
0.75 |
1.26 |
14.95 |
| 2013 |
1.76 |
0.27 |
1.20 |
1.05 |
1.81 |
(0.52) |
0.18 |
1.06 |
1.13 |
1.71 |
1.68 |
1.54 |
13.62 |
| 2014 |
1.08 |
1.43 |
0.53 |
1.51 |
0.88 |
1.48 |
0.63 |
(1.01) |
(0.77) |
(0.71) |
0.03 |
0.38 |
5.55 |
| 2015 |
(0.02) |
0.48 |
0.34 |
1.23 |
(0.11) |
(0.74) |
(2.58) |
(0.96) |
(1.41) |
(2.05) |
(2.94) |
(1.08) |
(9.48) |
Source: The Company’s NAV data is provided by the Administrator. Monthly NAV data is unaudited and net of all fees and expenses payable by the Company. Shares in the Company do not necessarily trade at a price equal to the prevailing NAV per Share.
Past performance is not indicative of future results.
* December 2011 is 1% lower than these figures due to the deduction of the expenses of the initial public offering borne by the Company in December 2010. See financial highlights.
Investment profile
The evolution of the strategy profile* of the Feeder Fund, as measured as a percentage of total Market Value**, is summarised below:
| Strategy |
31 December 2015 |
|
30 June 2015 |
|
Long (%) |
Short (%) |
|
Long (%) |
Short (%) |
| Corporate Performing |
45 |
(71) |
|
81 |
(68) |
| Corporate Distressed |
14 |
(12) |
|
14 |
(10) |
| Corporate Structured |
8 |
(4) |
|
16 |
(7) |
| Residential Real Estate |
38 |
(65) |
|
38 |
(64) |
| Commercial Real Estate |
32 |
(45) |
|
21 |
(31) |
| Agency MBS*** |
22 |
(8) |
|
3 |
(7) |
| Other Structured Finance |
10 |
(13) |
|
7 |
(11) |
| Total |
168 |
(218) |
|
187 |
(197) |
* Strategy profile is subject to change.
** Market Values are shown as a percentage of Feeder Fund NAV, excluding positions in US Treasuries. Market Value for derivatives is calculated in bond-equivalent terms, as underlying notional less current replacement cost. For example, a $100mm notional credit default swap trading at 5 points upfront creates $95mm of Market Value..
*** The “Agency MBS” strategy includes 5% long market value in Agency Tranche positions. Remaining 17% long and 8% short are in Agency Passthrough positions.
Performance Review
The NAV of the Company declined by approximately 9.5% (in the USD Share Class) over 2015. Structured Finance performance was positive through 2015, but was more than offset by losses in Corporate Credit during the second half of the year. The Catalyst Funds had losses in both Performing and Distressed Corporate Strategies as short positions simply did not protect from the heavy price declines in long positions in lower rated, more credit sensitive corporate holdings.
Portfolio Overview
After such a difficult year as 2015, it is important to state that we did not change the Catalyst Funds’ investment approach that DW has followed since 2008 and that has worked so well in past difficult market environments. We continue to look for asymmetric investments that marry fundamental research and comfort with complex situations, to run modest individual position sizes and to balance long and short exposures in the portfolio (although shorts did not protect it sufficiently in 2015).
The Structured Finance portfolio performed solidly in 2015, both on an absolute basis and relative to peers and the opportunity set. Gains from Commercial Real Estate and Residential Real Estate strategies were the strongest contributors last year.
There were three primary sources of 2015 Residential Real Estate returns: rising home prices, higher employment levels and higher borrower income and litigation settlements. In Commercial Real Estate, 2015 represented the beginning of the 10-year “Wall of Maturities” resulting from the tremendous surge in CMBS new issuance in 2005-07. Commercial Real Estate loans maturing over the next two years will rise sharply from 2015 levels, and DW expects the volume and pace of catalysts for our CMBS portfolio to increase accordingly in 2016 and 2017.
Corporate investments were more challenging in 2015. While the troubles in High Yield began with energy and commodity companies, and the Catalyst Funds had some losses in companies in those sectors, less than half of the Catalyst Funds’ Corporate losses came from energy and commodity investments. The bulk of the drawdown in the Corporate portfolio came from lower rated, credit sensitive high yield long positions in other sectors.
In both the Structured Finance and Corporate Credit portfolios, throughout DW’s history we have preferred long investments in lower price/lower rated securities and short positions in higher price/higher rated ones. We believe this type of approach is essential to finding asymmetric investment opportunities in credit. From the long side, we employ a deep fundamental research process to identify long positions where the market has missed drivers of upside value, or where other market participants are overly cautious or sceptical. And from the short side, we similarly use our fundamental research process to find the opposite: drivers of potential downside the market has yet to broadly recognize, or where other market participants are overly optimistic. It is usually far more asymmetric to be long securities that have already experienced price declines, where other investors shy away from these riskier securities.
We recognize and expect that higher rated shorts will have lower betas during difficult markets than lower rated longs. This is why the Catalyst Funds typically hold short positions with a notional value larger than its long positions. This was the case as well last year – the Catalyst Funds had more corporate shorts than longs again in 2015, but not enough to counteract the losses on the long portfolio. What was different in 2015 was the multiple and duration of the spread widening in lower rated high yield as compared to the high yield market as a whole.
As a first step to addressing Corporate Credit underperformance, we began making changes to the portfolio in Q3, and accelerated portfolio adjustments in Q4. We focused the portfolio on high conviction positions, with catalysts that we believe will help force market recognition of its view of value — either because restructuring will unlock asset value or because there are near term events which could move prices higher.
While 2015 was a difficult year, it comes on the back of many successful years where the DW team and process produced strong results for investors. As we thought about areas for improvement, we have focused on keeping intact has worked well over the years while looking for ways to augment our process to produce better outcomes in environments like 2015.
Opportunity Set
After a wave of “non-economic selling” is completed such as we began to see in 2015, there have historically been huge opportunities for “distressed” investors with the patience to work with companies through restructurings. Going back to 2009 and 2010, a large portion of DW’s returns came from these types of opportunities. And through year-end 2015 there has been only minor spillover or contagion to debt yields of safer high yield companies. It may be that the cycle is just beginning, providing opportunities on the short and long sides of the portfolio.
On the Structured Finance side, we are extremely excited about the outlook for the legacy CMBS bonds in particular. The pace of catalysts for these positions is set to pick up meaningfully in 2016 relative to last year, which we expect to be a positive for its difficult-to-replicate portfolio. Beyond the CMBS portfolio, the Catalyst Funds hold RMBS positions which provide solid yields but are amortizing, high-yielding student loan residuals and other consumer finance positions. We are optimistic on the outlook of these positions, with the US consumer helped by growth in jobs, growth in wages, growth in real estate prices, and sharp reductions in gasoline prices.
In Corporates, we have simplified positions focusing on those we believe have the greatest upside prospects into 2016. The Catalyst Funds own a variety of high-in-the-capital-structure bonds, either first liens or bonds just behind first liens that are well covered, even in restructuring scenarios, in each case that are trading at substantial discounts to par.
We are excited about opportunities in distressed securities with prices below 50c, in some cases well below. In some of these instances, the Catalyst Funds hold the fulcrum security and will be equitized. Other positions have a more relative value construction either long and short in the same credit complex, or long and short companies’ debt in the same industry.
And our prediction that banks’ behaviour may be changed for a generation appears to be on track. This change is providing investors, especially those comfortable with complex structures, as DW certainly is, with new sources of alpha. Some investments of this type will fit the Catalyst Fund, and others will be far more appropriate for, or can be better sized up in DW’s less liquid Value Fund. DW continues to believe that the ability to invest for both Funds has made it better investors, and has allowed it to attract more talent to DW, which will inure to the benefit of both sets of Fund investors over time.
The DW team and I are very excited about the opportunities ahead. The market is not without risks (as we have already seen in the start of this year) but DW is investing in opportunities as they present themselves, and looking to create its own opportunities where possible.
David Warren
Chief Investment Officer
DW Partners, LP
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF DW CATALYST FUND LIMITED
Opinion on financial statements
In our opinion the financial statements:
· give a true and fair view of the state of the Company’s affairs as at 31 December 2015 and of its net decrease in net assets resulting from operations for the year then ended;
· have been properly prepared in accordance with United States Generally Accepted Accounting Principles; and
· have been prepared in accordance with the requirements of The Companies (Guernsey) Law, 2008.
What we have audited
DW Catalyst Fund Limited (the “Company”) financial statements comprise:
· statement of assets and liabilities;
· statement of operations and performance allocation;
· statement of changes in net assets;
· statement of cash flows; and
· related notes 1 to 10.
The financial reporting framework that has been applied in their preparation is applicable law and United States Generally Accepted Accounting Principles.
Overview of our audit approach
Risk of material misstatement
Incorrect valuation of investment in the Feeder Fund.
Audit scope
We performed an audit of the Company for the year ended 31 December 2015. The audit was led from Guernsey and included team members from Ernst & Young LLP in the USA. We operated as an integrated team across both jurisdictions.
Materiality
$3.8m which represents 2% of net assets.
Our assessment of risk of material misstatement
We identified the risk described below as that which would have the greatest effect on our overall audit strategy, the allocation of resources and directing the efforts of the audit team. In addressing this risk, we have performed the procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any opinion on this individual area.
| Risk |
Our response to the risk |
What we concluded to the Audit Committee |
|
|
|
Investment valuation
Incorrect valuation of the investment in the Feeder Fund.
See also Audit and Risk Committee report.
Management may seek to inflate the value of investments in order to improve performance and earn additional fees. |
We confirmed the valuations of the Feeder Fund and the Master Fund with their independent administrators and we agreed the valuation to the audited financial statements of the Feeder fund. |
We confirmed that there were no material matters identified during our audit work on investment valuation that we wanted to bring to the attention of the Audit Committee. |
The scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope and the allocation of work between the audit team and internal valuation specialists. Taken together, this enables us to form an opinion on the financial statements.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our opinion
Materiality
“Materiality” is the magnitude of an omission or misstatement that, individually or in aggregate, could reasonably be expected to influence the economic decisions of the users of financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Company to be $3.8m which is approximately 2% of net assets. This provided a basis for determining the nature timing and extent of risk assessment procedures. We used net assets as a basis for determining planning materiality because the Company’s primary performance measures for internal and external reporting are based on net assets.
During the course of our audit we reassessed initial materiality and noted no factors leading us to amend materiality levels from those originally determined at the audit planning stage.
Performance materiality
“Performance materiality” is the application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Company’s overall control environment our judgement was that overall performance materiality (i.e. our tolerance for misstatement in an individual account balance) for the Company should be 50% of materiality, namely $1.9m.
Our objective in adopting this approach was to ensure that total uncorrected and undetected audit differences in the Financial Statements did not exceed our materiality level.
Reporting threshold
“Reporting threshold” is an amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee at audit planning stage that we would report to them all audit differences in excess of $0.2m which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We evaluated any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.
Scope of the Audit of the Financial Statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and financial statements to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Respective responsibilities of directors and auditor
As explained more fully in the Statement Directors’ Responsibilities set out on the Directors Report, the directors are responsible for the preparation of the financial statements and for being satisfied that they 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 in accordance with International Standards on Auditing (UK & Ireland).
This report is made solely to the Company’s members, as a body, in accordance with Section 262 of The Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Matters on which we are required to report by exception
ISAs (UK and Ireland)
We are required to report to you, if in our opinion, financial and non-financial information in the Annual Report is:
· materially inconsistent with the information in the financial statements
· apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Company acquired in the course of performing our audit; or
· otherwise misleading
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed.
We have no exceptions to report.
Listing Rules review requirements
We are required to review:
· the directors’ statement in relation to going concern, set out on the Directors Report, and longer term viability, set out on the Strategic Report; and
· the part of the Corporate Governance Statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
We have no exceptions to report.
Companies (Guernsey) Law, 2008 requirements
We are required to report to you, if, in our opinion:
· proper accounting records have not been kept; or
· the financial statements are not in agreement with the accounting records; or
· we have not received all the information and explanations required for the audit.
We have no exceptions to report.
Statement on the Directors’ assessment of the principal risks that would threaten the solvency or liquidity of the entity
ISAs (UK and Ireland) reporting
We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to:
· the directors’ confirmation in the Annual Report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;
· the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated;
· the directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and
· the directors’ explanation in the Annual report as to how they have assessed the prospects of the entity over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing material to add or to draw attention to.
Michael Bane
For and on behalf of Ernst & Young LLP
Guernsey
29 March 2016
INDEPENDENT AUDITORS REPORT TO THE DIRECTORS OF DW CATALYST FUND LIMITED
We have audited the accompanying financial statements of DW Catalyst Fund Limited. (the “Company”), which comprise the Statement of Assets and Liabilities as of December 31, 2015, and the related Statement of Operations and Performance Allocation, Statement of Changes in Net Assets and Statement of Cash Flows for the year then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with United States generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the statement of assets and liabilities of DW Catalyst Fund Limited at December 31, 2015 and 2014, and the results of its operations and performance allocation, changes in net assets and its cash flows for the year then ended, in conformity with United States generally accepted accounting principles.
Other Matters
The financial statements of the prior year were audited by KPMG Channel Islands Limited and their unmodified audit report was signed on 24 March 2015.
Ernst & Young LLP
Guernsey
29 March 2016
Audited Statement of Assets and Liabilities
As at 31 December 2015
(Expressed in ‘000 US Dollars)
|
|
|
|
|
|
|
31.12.15 |
|
31.12.14 |
| Assets |
|
|
|
|
|
|
|
|
| Investment in the Feeder Fund |
|
|
|
|
|
190,317 |
|
- |
| Investment in the Master Fund (BHCC) |
|
|
|
- |
|
220,828 |
| Total Investments |
|
|
|
|
|
190,317 |
|
220,828 |
|
|
|
|
|
|
|
|
|
|
| Amounts due from the Master Fund (BHCC) |
|
|
|
- |
|
2,495 |
| Prepaid expenses |
|
|
|
|
|
19 |
|
- |
| Cash and bank balances denominated in Sterling |
|
|
|
164 |
|
67 |
| Cash and bank balances denominated in US Dollars |
|
|
|
43 |
|
3 |
| Total assets |
|
|
|
|
|
190,543 |
|
223,393 |
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
| Performance fees payable (note 3) |
|
|
|
- |
|
2,856 |
| Management fees payable (note 3) |
|
|
|
- |
|
379 |
| Directors' fees and expenses payable |
|
|
|
65 |
|
67 |
| Accrued expenses and other liabilities |
|
|
|
42 |
|
31 |
| Administration fees payable (note 3) |
|
|
|
33 |
|
33 |
| Registrar fees payable (note 3) |
|
|
|
|
5 |
|
11 |
| Total liabilities |
|
|
|
|
|
145 |
|
3,377 |
|
|
|
|
|
|
|
|
|
|
| Net assets |
|
|
|
|
|
190,398 |
|
220,016 |
|
|
|
|
|
|
|
|
|
|
| Number of shares in issue (note 4) |
|
|
|
|
|
|
| US Dollar shares |
|
|
|
|
|
2,211,203 |
|
3,024,729 |
| Sterling shares |
|
|
|
|
|
8,856,566 |
|
8,332,877 |
|
|
|
|
|
|
|
|
|
|
| Net asset value per share (notes 6 and 8) |
|
|
|
|
|
|
| US Dollar shares |
|
|
|
|
|
US$12.40 |
|
US$13.71 |
| Sterling shares |
|
|
|
|
|
|
£12.47 |
|
£13.77 |
The accompanying notes are an integral part of these financial statements
Signed on behalf of the Board by:
Charlotte Valeur
Chair
Patrick Firth
Director
29 March 2016
Audited Statement of Operations and Performance Allocation
For the year ended 31 December 2015
(Expressed in ‘000 US Dollars)
|
|
|
|
01.01.15 |
|
01.01.14 |
|
|
|
|
to 31.12.15 |
|
to 31.12.14 |
| Net investment gain allocated from the Feeder Fund |
|
|
|
|
|
| Interest |
|
|
|
35,041 |
|
- |
| Dividend income (net of withholding tax of: US$43,469) |
|
|
100 |
|
- |
| Expenses |
|
|
(4,576) |
|
- |
| Management fees (note 3) |
|
|
(4,254) |
|
- |
| Net investment gain allocated from the Feeder Fund |
|
|
26,311 |
|
- |
|
|
|
|
|
|
|
| Net investment gain allocated from the Master Fund (BHCC) |
|
|
|
|
|
| Interest |
|
|
|
- |
|
29,162 |
| Dividend income (net of withholding tax of: US$91,148) |
|
|
- |
|
276 |
| Expenses |
|
|
|
- |
|
(3,783) |
| Net investment gain allocated from the Master Fund (BHCC) |
|
|
- |
|
25,655 |
|
|
|
|
|
|
|
| Company expenses |
|
|
|
|
|
|
| Performance fees (note 3) |
|
|
|
- |
|
2,975 |
| Management fees (note 3) |
|
|
|
- |
|
4,641 |
| Other expenses |
|
|
|
663 |
|
534 |
| Directors' fees and expenses |
|
|
|
264 |
|
297 |
| Administration fees (note 3) |
|
|
|
200 |
|
200 |
| Registrar fees (note 3) |
|
|
|
32 |
|
39 |
| Foreign exchange losses (note 2) |
|
|
|
9,088 |
|
10,956 |
| Total Company expenses |
|
|
|
10,247 |
|
19,642 |
|
|
|
|
|
|
|
| Net investment gain |
|
|
|
16,064 |
|
6,013 |
|
|
|
|
|
|
|
| Net realised loss and change in unrealised depreciation on investments allocated from the Feeder Fund |
| Net realised depreciation on investments |
|
|
(10,909) |
|
- |
| Net unrealised depreciation on investments |
|
|
(34,773) |
|
- |
| Net realised and unrealised depreciation |
|
|
|
|
|
| on investments allocated from the Feeder Fund |
|
|
(45,682) |
|
- |
|
|
|
|
|
|
|
| Net realised gain and change in unrealised depreciation on investments allocated from the Master Fund (BHCC) |
| Net realised gain on investments |
|
|
|
- |
|
15,389 |
| Net unrealised depreciation on investments |
|
|
- |
|
(20,326) |
| Net realised and unrealised depreciation |
|
|
|
|
|
| on investments allocated from the Master Fund (BHCC) |
|
|
- |
|
(4,937) |
|
|
|
|
|
|
|
| Net (decrease)/increase in net assets resulting from operations after performance allocation |
(29,618) |
1,076 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
Audited Statement of Changes in Net Assets
For the year ended 31 December 2015
(Expressed in ‘000 US Dollars)
|
|
|
|
|
|
|
01.01.15 |
|
01.01.14 |
|
|
|
|
|
|
|
to 31.12.15 |
|
to 31.12.14 |
| Net increase in net assets resulting from operations |
|
|
|
|
|
|
| Net investment gain |
|
|
|
|
|
16,064 |
|
6,013 |
| Net realised loss on investments allocated from |
|
|
|
|
|
|
| the Feeder Fund |
|
|
|
|
|
(10,909) |
|
- |
| Net change in unrealised depreciation on investments allocated from |
|
|
|
|
|
| the Feeder Fund |
|
|
|
|
|
(34,773) |
|
- |
| Net realised gain on investments allocated from |
|
|
|
|
|
|
| the Master Fund (BHCC) |
|
|
|
|
|
- |
|
15,389 |
| Net change in unrealised depreciation on investments allocated from |
|
|
|
|
|
| the Master Fund (BHCC) |
|
|
|
|
|
- |
|
(20,326) |
|
|
|
|
|
|
|
|
|
|
| Net (decrease)/increase in net assets |
|
|
|
(29,618) |
|
1,076 |
| Net assets at the beginning of the year |
|
|
|
220,016 |
|
218,940 |
| Net assets at the end of the year |
|
|
|
190,398 |
|
220,016 |
The accompanying notes are an integral part of these financial statements
AUDITED STATEMENT OF CASH FLOWS
For the year ended 31 December 2015
(Expressed in ‘000 US Dollars)
|
|
|
01.01.15 |
|
01.01.14 |
|
|
|
to 31.12.15 |
|
to 31.12.14 |
| Cash flows from operating activities |
|
|
|
|
|
| Net (decrease)/increase in net assets resulting from operations |
(29,618) |
|
1,076 |
| Adjustments to reconcile net increase in net assets resulting from operations |
|
|
|
| to net cash generated from/(used in) operating activities: |
|
|
|
| Net investment gain allocated from the Feeder Fund |
|
(26,311) |
|
- |
| Net investment gain allocated from the Master Fund (BHCC) |
|
- |
|
(25,655) |
| Net realised loss on investments allocated from the Feeder Fund |
10,909 |
|
- |
| Net realised gain on investments allocated from the Master Fund (BHCC) |
- |
|
(15,389) |
| Net change in unrealised depreciation on investments allocated from the Feeder Fund |
34,773 |
|
- |
| Net change in unrealised depreciation on investments allocated from the Master Fund (BHCC) |
- |
|
20,326 |
| Proceeds from sale of investment in the Feeder Fund |
|
4,545 |
|
- |
| Proceeds from sale of investment in the Master Fund (BHCC) |
|
- |
|
10,632 |
| Foreign exchange losses |
|
|
9,088 |
|
10,956 |
| Increase in prepaid expenses |
|
|
(19) |
|
- |
| Decrease in performance fees payable |
|
|
(2,856) |
|
(3,659) |
| Decrease in management fees payable |
|
|
(379) |
|
(281) |
| Decrease in Directors' fees and expenses payable |
|
(2) |
|
(9) |
| Increase/(decrease) in accrued expenses and other liabilities |
|
11 |
|
(6) |
| (Decrease)/increase in registrar fees payable |
|
(6) |
|
7 |
| Net cash generated from/(used in) operating activities |
|
135 |
|
(2,002) |
|
|
|
|
|
|
| Change in cash |
|
|
135 |
|
(2,002) |
| Cash, beginning of the year |
|
|
70 |
|
2,053 |
| Effect of exchange rate fluctuations |
|
|
2 |
|
19 |
| Cash, end of the year |
|
|
207 |
|
70 |
|
|
|
|
|
|
| Cash, end of the year |
|
|
|
|
|
| Cash and bank balances denominated in Sterling |
|
164 |
|
67 |
| Cash and bank balances denominated in US Dollars |
|
43 |
|
3 |
|
|
|
207 |
|
70 |
| Supplemental disclosure of non-cash financing activities: |
|
|
|
| In specie divestment in the Master Fund (BHCC) (note 9) |
|
220,828 |
|
- |
| In specie investment in the Feeder Fund (note 9) |
|
(220,828) |
|
- |
The accompanying notes are an integral part of these financial statements
Notes to the Annual Report and Audited Financial Statements
For the year ended 31 December 2015
1. The Company
Details of the Company and its organisation are set out in the Strategic Report.
2. Significant accounting policies
The Annual Report and Audited Financial Statements, which give a true and fair view, are prepared in conformity with US GAAP and comply with the Companies (Guernsey) Law, 2008. The functional and reporting currency of the Company is US Dollars.
The Company is an Investment Entity which has applied the provisions of ASC 946.
Going Concern
Having reassessed the principal risks; the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the Annual Report and Audited Financial Statements.
The following are significant accounting policies adopted by the Company:
Valuation of investments
The Company recorded its previous investment in the Ordinary shares of BHCC at fair value. Fair value was determined as the Company’s proportionate share of the BHCC’s net assets. At 31 December 2014 the Company’s US Dollar and Sterling capital account represented 1.00% and 4.29% respectively of the BHCC’s capital.
The Company records its investment in Class A shares of the Feeder Fund at fair value. Fair value was determined as the Company’s proportionate share of the Feeder Fund’s net assets respectively. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurement” defines fair value as the price the Company would receive upon selling a security in a timely transaction to an independent buyer in the principal or most advantageous market of the security. At 31 December 2015 the Company’s US Dollar and Sterling capital accounts represented 1.29% and 7.69% respectively of the Feeder Fund’s capital. For further information refer to the Audited Consolidated Financial Statements of the Feeder Fund.
The Company’s investment in the Master Fund via the Feeder Fund and the Cayman Corporation was determined as the Company’s proportionate share of the Master Fund’s net assets. At 31 December 2015 the Company’s US Dollar and Sterling capital account represented 0.82% and 4.85% respectively of the Master Fund’s capital. For further information refer to the Master Fund’s Audited Consolidated Financial Statements.
The valuation and classification of securities held by the Master Fund, Feeder Fund and Cayman Corporation are discussed in the notes to the Financial Statements of the Master Fund and the Audited Consolidated Financial Statements of the Feeder Fund which are available on the Company’s website, www.dwcatalystltd.com.
Fair value measurement
ASC 820 establishes a three-level hierarchy to maximise the use of observable market data and minimise the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value including such a pricing model and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable.
As a result of the changes in ASC 820 “Fair Value Measurements”, the Company is using the practical expedient and therefore is not using fair value hierarchy.
Income and expenses
The Company records monthly its proportionate share of the Feeder Fund’s income, expenses and realised and unrealised gains and losses, which in turn records its proportionate share of the Master Fund’s income, expenses and realised and unrealised gains and losses. In addition, the Company accrues its own income and expenses, allocated proportionately to the US Dollar and Sterling share classes based on their respective NAVs.
Use of estimates
The preparation of Financial Statements in conformity with US GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of those Financial Statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Share issue expenses
Share issue expenses of US$1,592,065 were borne by the Company and were charged against the share capital account at launch (the “Offer”). In accordance with the Placing Agreement dated 19 November 2010, BHCM paid the costs and expenses of, and incidental to, the Offer (including all costs related to the establishment of the Company) (the “Offer Costs”) which were in excess of 1% of the gross proceeds of the Offer. The Offer Costs paid by BHCM amounted to US$3,261,054. The DW Management Agreement replicates the provisions in the BH Management Agreement regarding repayment of BHCM’s outstanding costs incurred in connection with the Company’s IPO.
Pursuant to the terms of the DW Management Agreement, the Company must repay to DW a fraction of these Offer Costs for every US Dollar by which repurchases, redemptions or cancellations of the Company’s shares reduce the current US Dollar NAV of the Company below its NAV at the time of the Company’s listing, being US$157,614,394. The current US Dollar NAV is calculated using the exchange rates ruling at the time of the Company’s listing and at 31 December 2015 stood at US$190,398,244.
The amount of these Offer Costs to be repaid for every US Dollar by which the Company’s NAV is reduced will be up to 2.07 cents (or such lower amount as may result from any reduction in the Offer Costs actually paid by the Manager), being the figure obtained by dividing the Offer Costs by the NAV of the Company at the time of its listing.
In addition, if the DW Management Agreement were to be terminated for certain reasons before the seventh anniversary of admission to the London Stock Exchange, being 14 December 2017, the Company will be required to reimburse the Manager in respect of the offer costs borne by the Manager. The Directors consider the likelihood of the DW Management Agreement terminating and as a consequence the contingent liability described above arising as remote and therefore no provision has been made within these Financial Statements.
The Directors confirm that there are no other contingent liabilities that require disclosure or provision.
Foreign exchange
Investment securities and other assets and liabilities denominated in foreign currencies are translated into US Dollars, the Company’s reporting currency and functional currency, using exchange rates at the reporting date. Transactions reported in the Consolidated Statement of Operations and Performance Allocation are translated into US Dollar amounts at the date of such transactions. The share capital and other capital reserve accounts are translated at the historic rate ruling at the date of the transaction. Exchange differences arising on translation are included in the Consolidated Statement of Operations and Performance Allocation. This adjustment has no effect on the value of the net assets allocated to the individual share classes.
Cash and bank balances
Cash and cash equivalents comprise cash in bank and demand deposits.
Treasury shares
Where the Company may purchase its own share capital, the consideration paid, which includes any directly attributable costs, is recognised as a deduction from equity shareholders’ funds through the share capital account. When such shares are subsequently sold or reissued to the market, any consideration received, net of any directly attributable incremental transaction costs, is recognised as an increase in equity shareholders’ funds through the share capital account. Where the Company cancels treasury shares, no further adjustment is required to the share capital account of the Company at the time of cancellation. Shares held in treasury are excluded from calculations when determining NAV per share as detailed in note 6 or in the Financial Highlights in note 8.
Allocation of results of the Feeder and Master Funds
Net realised and unrealised gains/losses of the Feeder Fund and Master Fund are allocated to the Company’s share classes based upon the percentage ownership of the equivalent Feeder Fund and Master Fund class.
Leverage
The Company, subject to Board approval, may not incur leverage other than for the purpose of financing share repurchases or satisfying working capital requirements, and subject to outstanding borrowings being in compliance with the borrowing limit in the Articles of 20% of the NAV of the Company, calculated as at the time of borrowing.
Recent Standards and Pronouncements
Recent standards and pronouncements applicable to the Company are consistent with those adopted by the Master Fund and Feeder Fund. Refer to the audited consolidated financial statements of the Master Fund and the Feeder Fund.
3. Management, Performance, Administration and Registrar fees
Management and Performance fees
The Company has entered into a management agreement with the Manager to manage the Company’s investment portfolio. Prior to 1 January 2015, the Company had entered into an agreement with BHCM to manage the Company’s investment portfolio. BHCM received a management fee of 1/12 of 2% (or a pro rata proportion thereof) per month of the closing NAV (before deduction of that month’s management fee and before making any deduction for any accrued performance fee) as at the last valuation day in each month, payable monthly in arrears.
BHCM was also entitled to an annual performance fee for each share class in issue at the end of the calculation period. The performance fee was equal to 20% of the appreciation in the NAV per share of that class during that calculation period which was above the base NAV per share of that class. The base NAV per share was the greater of the NAV per share of the relevant class at the beginning of the relevant calculation period and the highest NAV per share achieved as at the end of any previous calculation period.
Following the implementation of the DW Management Agreement, the Manager is entitled to management fee and performance allocation at the level of the Master Fund and the holding entities of Specific Investments but not payment of management and performance fees by the Company. Instead, the Company will indirectly bear a portion of the management fee and performance allocation charged by DW to the Master Fund and to any holding entity of a Specific Investment.
Due to the change in management agreement there are no management or performance fees payable by the Company for the year ended 31 December 2015. Under the BH Management Agreement, for the year ended 31 December 2014: US$4,641,046 was charged by BHCM as management fees and 31 December 2014: US$2,974,788 were incurred as performance fees.
Prior to 1 January 2015, the management agreement could be terminated by either party giving the other party not less than 24 months written notice. In certain circumstances the Company would have been obliged to pay compensation to BHCM of the aggregate management fees which would otherwise have been payable during the 24 months following the date of such notice and BHCM would have been entitled to receive any performance fees due and other related costs. Compensation would not be payable if more than 24 months notice of termination was given. In certain circumstances, the management agreement would have been terminated by the Company giving the Manager not less than 30 days’ or 90 days’ notice. On termination of the management agreement, BHCM received payment of all management and performance fees accrued and owing under the agreement until the date of termination but otherwise was not be entitled to any other payment from the Company.
Effective 1 January 2015, the DW Management Agreement may be terminated by either party giving the other party not less than 24 months written notice. In certain circumstances the Company will be obliged to pay compensation to the Manager of the aggregate management fees which would otherwise have been payable on the Company’s indirect interests in the Master Fund and the Specified Investments during the 24 months following the date of such notice and the Company will be obliged to pay any other related costs. Compensation is not payable if more than 24 months notice of termination is given. In certain circumstances, the management agreement may be terminated by the Company giving the Manager not less than 30 days’ or 90 days’ notice.
Administration fee
The Company has appointed Northern Trust International Fund Administration Services (Guernsey) Limited as Administrator and Corporate Secretary. The Administrator is paid fees based on the NAV of the Company, payable quarterly in arrears. The fee is at a rate of 0.025% per annum of the first US$750 million of net assets of the Company and then 0.015% per annum thereafter, subject to a minimum fee of US$200,000 per annum.
The Administrator is entitled to be reimbursed out-of-pocket expenses incurred in the course of carrying out its duties. The fee will be reviewed on an annual basis.
During the year ended 31 December 2015, US$200,000 (31 December 2014: US$200,150) was earned by the Administrator as administration fees. At 31 December 2015, US$33,155 (31 December 2014: $33,337) of the fee remained outstanding.
Registrar fee
The Company appointed Computershare Investor Services (Guernsey) Limited as Registrar, with effect from 19 November 2010. The Registrar is paid fees according to the agreement, subject to a minimum fee of £6,000 per annum, payable quarterly in arrears. During the year ended 31 December 2015, US$32,344 (31 December 2014: US$38,937) were charged by the Registrar. At 31 December 2015: US$5,184 (31 December 2014: US$11,311) of the fee remained outstanding.
4. Share capital
Issued and authorised share capital
The Company was incorporated with the authority to issue up to one billion shares of no par value in each class, which authority expired on 19 October 2015. As approved by the shareholders at the AGM held on 24 June 2015, the Directors have the power to issue 1,014,259 US dollar shares and 2,773,329 Sterling shares. Such power expires fifteen months after the passing of the resolution or on the conclusion of the next AGM of the Company, whichever is earlier. The Articles require any further issues of shares for cash to be made on a pre-emptive basis to holders of shares of the same class, except to the extent that such pre-emption rights have been disapplied by shareholders in general meeting. The shares may be issued in differing currency classes of ordinary redeemable shares including C shares (described in the Company’s Prospectus) at the discretion of the Board. At 31 December 2015 and 31 December 2014, no C shares were in issue.
For the year ended 31 December 2015
|
|
|
US Dollar shares |
|
Sterling shares |
| Number of ordinary shares |
|
|
|
|
| In issue at 1 January 2015 |
|
3,024,729 |
|
8,332,877 |
| Share conversions from US Dollar shares to Sterling shares |
|
(910,568) |
|
586,303 |
| Share conversions from Sterling shares to US Dollar shares |
|
97,042 |
|
(62,614) |
| In issue at 31 December 2015 |
|
2,211,203 |
|
8,856,566 |
|
|
|
|
|
|
|
Company Total |
|
|
|
US$'000 |
|
£'000 |
|
US$'000 |
| Share capital account |
|
|
|
|
|
|
| At 1 January 2015 |
|
|
23,360 |
|
86,635 |
|
157,615 |
| Share conversions from US Dollar shares to Sterling shares |
(12,335) |
|
7,984 |
|
- |
| Share conversions from Sterling shares to US Dollar shares |
1,321 |
|
(857) |
|
- |
| At 31 December 2015 |
|
12,346 |
|
93,762 |
|
157,615 |
For the year ended 31 December 2014
|
|
|
US Dollar shares |
|
Sterling shares |
| Number of ordinary shares |
|
|
|
|
| In issue at 1 January 2014 |
|
4,296,668 |
|
7,563,008 |
| Share conversions from US Dollar shares to Sterling shares |
|
(1,375,907) |
|
831,153 |
| Share conversions from Sterling shares to US Dollar shares |
|
103,968 |
|
(61,284) |
| In issue at 31 December 2014 |
|
3,024,729 |
|
8,332,877 |
|
|
|
|
|
|
|
Company Total |
|
|
|
US$'000 |
|
£'000 |
|
US$'000 |
| Share capital account |
|
|
|
|
|
|
| At 1 January 2014 |
|
|
40,905 |
|
75,972 |
|
157,615 |
| Share conversions from US Dollar shares to Sterling shares |
(18,963) |
|
11,502 |
|
- |
| Share conversions from Sterling shares to US Dollar shares |
1,418 |
|
(839) |
|
- |
| At 31 December 2014 |
|
23,360 |
|
86,635 |
|
157,615 |
|
|
|
|
|
|
|
|
|
Share classes
In respect of each class of shares a separate class account has been established in the books of the Company. An amount equal to the aggregate proceeds of issue of each share class has been credited to the relevant class account. Any increase or decrease in the NAV of the Feeder Fund’s US Dollars shares and the Feeder Fund’s Sterling shares as calculated by the Feeder Fund is allocated to the relevant class account in the Company.
Voting rights
Ordinary redeemable shares carry the right to vote at general meetings of the Company and to receive any dividends, attributable to the ordinary shares as a class, declared by the Company and, in a winding-up will be entitled to receive, by way of capital, any surplus assets of the Company attributable to the ordinary shares as a class in proportion to their holdings after settlement of any outstanding liabilities of the Company.
Each shareholder shall have one vote for each share denominated in the base class held by them. As prescribed in the Company’s Articles, the different classes of ordinary shares have different values attributable to their votes. The attributed values have been calculated on the basis of the Weighted Voting Calculation (as described in the Articles) which takes into account the prevailing exchange rates on the date of initial issue of ordinary shares. Currently, on a vote, a single US Dollar ordinary share has one vote, and a single Sterling ordinary share has 1.5774 votes.
Treasury shares do not have any voting rights.
Repurchase of shares
The Directors have been granted authority to purchase in the market up to 14.99% of each class of shares and they intend to seek annual renewal of this authority from shareholders which was last granted on 24 June 2015. The Directors may, at their discretion, utilise this share repurchase authority to address any imbalance between the supply of and demand for shares.
Distributions
The Directors may from time to time authorise dividends and distributions to be paid to Shareholders on a class by class basis.
The amount of such dividends or distributions paid in respect of one class may be different from that of another class.
The Feeder Fund does not expect to pay dividends to its investors. Therefore, the Directors of the Company do not expect to declare any dividends. This does not prevent the Directors of the Company from declaring a dividend at any time in the future if the Directors consider payment of a dividend to be appropriate in the circumstances.
As announced on 15 January 2014, the Company intends to be operated in such a manner to ensure that its shares are not categorised as non-mainstream pooled investments. This may mean that the Company may pay dividends in support of any income that it receives or is deemed to receive for UK tax purposes so that it would qualify as an investment trust if it were UK tax-resident.
Treasury shares are not entitled to distributions.
Deferred share
The Company has issued one, non-participating, non voting, non redeemable deferred share having the right to the payment of £1 on liquidation of the Company. The deferred share was issued on 19 October 2010 and has a right to vote only if there are no other classes of voting share in issue.
Annual partial capital return offer
Commencing on or after 1 January 2012, for each calendar year the Directors may, in their absolute discretion, determine that the Company should make an offer to redeem such number or value of shares as they may determine provided that the minimum amount distributed shall not be less than 33% and not more than 100% of the increase in the NAV of the Company in the prior calendar year.
The Directors shall, in their absolute discretion, determine the particular class or classes of shares in respect of which an Annual Partial Capital Return Offer will be made, the timetable for that Annual Partial Capital Return Offer and the price at which the shares of each relevant class will be redeemed.
Whether a return of capital is made in any particular year and, if so, the amount of the return, may depend, among other things, on prevailing market conditions, the ability of the Company to liquidate its investment to fund the capital return, the success of prior capital returns and applicable legal, regulatory and tax considerations.
The Directors determined that the Company would not offer an annual partial capital return during 2015.
Share conversion scheme
The Company has implemented a Share Conversion Scheme. The scheme provides shareholders with the ability to convert some or all of their shares in the Company of one class into shares of another class. Shareholders, at the discretion of the Board, are able to convert ordinary shares on the last business day of every month. Each conversion will be based on NAV (note 6) of the share classes to be converted.
5. Taxation
Overview
The Company is exempt from taxation in Guernsey under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and pays an annual fee of £1,200 (2014: £600). Accordingly, no provision for Guernsey income tax is included in these Audited Financial Statements.
Uncertain tax positions
The Company recognises the tax benefits of uncertain tax positions only where the position is more likely than not (i.e. the likelihood is greater than 50 per cent) to be sustained assuming examination by a tax authority based on the technical merits of the position. In evaluating whether a tax position has met the recognition threshold, the Company must presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognise in the Company’s Audited Financial Statements. Income tax and related interest and penalties would be recognised by the Company as tax expense in the Consolidated Statement of Operations and Performance Allocation if the tax positions were deemed not to meet the 50% likelihood threshold.
The Company analyses all open tax years for all major taxing jurisdictions. Open tax years are those that are open for examination by taxing authorities, as defined by the Statute of Limitations in each jurisdiction. The Company identifies its major tax jurisdictions as the Cayman Islands and foreign jurisdictions where the Company makes significant investments. The Company has no examinations by tax authorities in progress.
The Directors have analysed the Company’s tax positions, and has concluded that no liability for unrecognised tax benefits should be recorded related to uncertain tax positions. Further, the Directors are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognised tax benefits will significantly change in the next twelve months.
6. Publication and calculation of net asset value
The NAV of the Company is equal to the value of its total assets less its total liabilities. The NAV per share of each class is calculated by dividing the NAV of the relevant share class by the number of shares of the relevant class in issue on that day.
The Company publishes the NAV per share for each class of shares as calculated by the Administrator based in part on information provided by the Feeder Fund, monthly in arrears, as at each month end.
The Company also publishes an estimate of the NAV per share for each class of shares as calculated by the Administrator based in part on information provided by the Feeder Fund, weekly in arrears.
7. Discount management programme
The Company has a discount management programme which includes the ability to make market purchases of shares and the obligation to convene an Extraordinary General Meeting of the Company (a “Discount Trigger EGM”) if, in any fixed discount management period (1 January to 31 December each year), the average daily closing market price of the relevant class of shares during such period is less than 95% of the average NAV per share of the relevant class taken over the 12 monthly NAV Determination Dates in that fixed discount management period, as described more fully in the Company’s Articles.
The discount management measures will be funded by and subject to the Company’s ability to make partial redemptions of the Company’s investment in the Feeder Fund.
In the event of the relevant conditions being met, the Board will hold a Discount Trigger EGM and propose an ordinary resolution, which, if approved, will require the Company to compulsorily redeem the shares which voted in favour of the resolution.
The price at which the shares will be redeemed will be based on the NAV per share of the relevant class, less:
(i) any costs and expenses (including redemption fees) incurred in relation to the Discount Trigger EGM, and
(ii) a fractional share of any Offer Costs paid by the Manager (note 2).
Shareholders voting in favour of the resolution will have their shares redeemed in four quarterly instalments.
The Annual Partial Capital Return Offer described in note 4 which enables a partial return of capital also forms part of the discount management programme.
During the year ended 31 December 2015, the Company recorded an average discount to NAV of 4.70% and 4.73% for US Dollar Shares and Sterling Shares respectively (31 December 2014: premium to NAV of 0.81% and 0.42%).
At the date of this report, the discount had moved to 11.42% and 10.79% for the US Dollar Shares and Sterling Shares respectively. The estimated NAV per share stood at 10.36 and 11.77 for the US Dollar Shares and Sterling Shares respectively.
8. Financial highlights
The following tables include selected data for a single ordinary share of each of the ordinary share classes in issue at the year end and other performance information derived from the Audited Financial Statements.
The per share amounts and ratios which are shown reflect the income and expenses of the Company for each class of ordinary share.
|
|
|
01.01.15 to |
|
01.01.15 to |
|
01.01.14 to |
|
01.01.14 to |
|
|
|
31.12.15 |
|
31.12.15 |
|
31.12.14 |
|
31.12.14 |
|
|
|
US Dollar shares |
|
Sterling shares |
|
US Dollar shares |
|
Sterling shares |
|
|
|
US$ |
|
£ |
|
US$ |
|
£ |
| Per share operating performance |
|
|
|
|
|
|
|
|
| Net asset value at beginning of the year |
|
13.71 |
|
13.77 |
|
13.01 |
|
13.05 |
|
|
|
|
|
|
|
|
|
|
| Income from investment operations |
|
|
|
|
|
|
|
|
| Net investment gain 1 |
|
1.47 |
|
1.63 |
|
1.25 |
|
0.96 |
| Net realised loss and unrealised depreciation on investment |
(2.83) |
|
(2.92) |
|
(0.22) |
|
(0.31) |
| Other capital items 2 |
|
0.05 |
|
(0.01) |
|
(0.33) |
|
0.07 |
| Total (loss)/return |
|
(1.31) |
|
(1.30) |
|
0.70 |
|
0.72 |
|
|
|
|
|
|
|
|
|
|
| Net asset value, end of the year |
|
12.40 |
|
12.47 |
|
13.71 |
|
13.77 |
|
|
|
|
|
|
|
|
|
|
| Total return before performance fee |
|
(9.52%) |
|
(9.48%) |
|
7.38% |
|
6.75% |
| Performance allocation |
|
- |
|
- |
|
(2.00%) |
|
(1.23%) |
| Total (loss)/return after performance allocation (net of IPO expenses) |
|
(9.52%) |
|
(9.48%) |
|
5.38% |
|
5.52% |
Total return reflects the net return for an investment made at the beginning of the year and is calculated as the change in the NAV per ordinary share during the year to 31 December 2015 and 31 December 2014. An individual shareholder’s return may vary from these returns based on the timing and entry price of their purchase or sale of shares.
1. The net investment gain figures disclosed above do not include net realised and unrealised gains/losses on investments allocated from the Feeder Fund and Master Fund.
2. Included in other capital items are share issue costs and the discounts and premiums on conversions between share classes during the period as compared to the NAV per share at the beginning of the year.
|
|
|
01.01.15 to |
|
01.01.15 to |
|
01.01.14 to |
|
01.01.14 to |
|
|
|
31.12.15 |
|
31.12.15 |
|
31.12.14 |
|
31.12.14 |
|
|
|
US Dollar shares |
|
Sterling shares |
|
US Dollar shares |
|
Sterling shares |
|
|
|
US$'000 |
|
£'000 |
|
US$'000 |
|
£'000 |
| Supplemental data |
|
|
|
|
|
|
|
|
| Net asset value, end of the year |
|
27,425 |
|
110,397 |
|
41,462 |
|
114,748 |
| Average net asset value for the year |
|
36,688 |
|
115,109 |
|
52,427 |
|
107,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
01.01.15 to |
|
01.01.15 to |
|
01.01.14 to |
|
01.01.14 to |
|
|
|
31.12.15 |
|
31.12.15 |
|
31.12.14 |
|
31.12.14 |
|
|
|
US Dollar shares |
|
Sterling shares |
|
US Dollar shares |
|
Sterling shares |
| Ratio to average net assets |
|
|
|
|
|
|
|
|
| Operating expense |
|
|
|
|
|
|
|
|
|
Company expenses 3 |
|
0.55% |
|
0.54% |
|
2.50% |
|
2.49% |
|
Feeder Fund/Master Fund expenses 4 |
2.33% |
|
2.36% |
|
0.19% |
|
0.20% |
|
Feeder Fund/Master Fund interest expenses 5 |
1.75% |
|
1.82% |
|
1.46% |
|
1.46% |
| Performance allocation |
|
- |
|
- |
|
1.48% |
|
1.24% |
|
|
|
4.63% |
|
4.72% |
|
5.63% |
|
5.39% |
|
|
|
|
|
|
|
|
|
|
| Net investment gain before performance allocation 1 |
10.91% |
|
12.05% |
|
8.72% |
|
8.71% |
| Net investment gain after performance allocation 1 |
|
|
|
|
|
|
|
| 10.91% |
|
12.05% |
|
7.24% |
|
7.47% |
1. The net investment gain figures disclosed above do not include net realised and unrealised gains/losses on investments allocated from the Feeder Fund and Master Fund.
2. Included in other capital items are share issue costs and the discounts and premiums on conversions between share classes during the period as compared to the NAV per share at the beginning of the year.
3. Company expenses are as disclosed in the Statement of Operations, excluding the performance fees.
4. The Feeder and Master Fund’s expenses are the operating expenses of the Feeder and Master Fund respectively.
5. Feeder and Master Fund interest expense includes interest and dividend expenses on investments sold short.
9. Related party transactions
On 1 January 2015, the Company redeemed, in specie, $41,646,556 of the US Dollar shares and £115,151,649 of the Sterling shares it held in BHCC, amounting to an equivalent amount of US$220,828,279, and in return received Class A Shares of the Feeder Fund (a company managed by the Manager) in US Dollar and Sterling classes in proportions matching the relative number of US Dollar and Sterling Shares of the Company in issue at the time.
Parties are considered to be related if one party has the ability to control the other party in making financial or operational decisions.
Management fees are disclosed in note 3.
Directors’ fees are disclosed in the Directors’ Remuneration Report.
Directors’ interests are disclosed in the Corporate Governance Statement with further disclosures in the Board Members section.
At 31 December 2015, David Warren - the Chief Investment Officer of DW – held 52,270 US Dollar Shares and 135,512 Sterling Shares of the Company.
10. Subsequent events
The Financial Statements were approved for issuance by the Directors on 29 March 2016. Subsequent events have been evaluated up to this date.
The Company announced on 29 March 2016 that as at 29 February 2016, the net asset value of its US Dollar Share Class declined below US$25 million. Accordingly, the Company determined in accordance with its Articles of Incorporation to convert the outstanding US Dollar Shares into Sterling Shares by reference to the respective net asset values of each class of shares as at 31 March 2016. The conversion of the US Dollar Shares into Sterling Shares is expected to take place in April 2016, following which the US Dollar Share Class will have been closed. Following the closure of the US Dollar Share Class, the Company will have only Sterling Shares in issue; the Company’s share class conversion facility is now withdrawn with immediate effect.
There are no further items that require disclosure or adjustment to the Financial Statements.
Historic Performance Summary
As at 31 December 2015
(Expressed in ‘000 US Dollars)
|
|
|
|
31.12.15 |
|
31.12.14 |
|
|
|
|
|
|
|
| Net increase in net assets resulting from operations |
(29,618) |
|
1,076 |
| Total assets |
|
|
190,543 |
|
223,393 |
| Total liabilities |
|
|
(145) |
|
(3,377) |
| Net assets |
|
|
190,398 |
|
220,016 |
|
|
|
|
|
|
|
| Number of shares in issue |
|
|
|
|
|
| US Dollar shares |
|
|
2,211,203 |
|
3,024,729 |
| Sterling shares |
|
|
8,856,566 |
|
8,332,877 |
|
|
|
|
|
|
|
| Net asset value per share |
|
|
|
|
|
| US Dollar shares |
|
|
US$12.40 |
|
US$13.71 |
| Sterling shares |
|
|
|
£12.47 |
|
£13.77 |
Affirmation of the Commodity Pool Operator
31 December 2015
To the best of my knowledge and belief, the information detailed in this Annual Report and these Audited Financial Statements is accurate and complete:
By:
Name: Shawn R. Singh, Esq.
Title: General Counsel
DW Partners, LP, acting by its general partner DW Investment Partners, LLC, the manager and commodity pool operator of DW Catalyst Fund Limited.
29 March 2016
COMPANY INFORMATION
Directors
Charlotte Valeur* (Chair)
(appointed 31 October 2010)
Keith Dorrian* (Senior Independent Director)
(appointed 31 October 2010)
Patrick Firth*
(appointed 31 October 2010)
Christopher Waldron*
(appointed 31 October 2010)
Andrew Rosenthal
(appointed 8 April 2015)
(All Directors are non-executive)
* These Directors are independent for the purpose of LR15.2.12-A.
Registered Office
PO Box 255
Trafalgar Court
Les Banques
St. Peter Port
Guernsey
GY1 3QL
Manager
DW Partners, LP (appointed 1 January 2015)
590 Madison Avenue
9th Floor
New York
NT 10022
Brevan Howard Capital Management LP (resigned 1 January 2015)
6th Floor
37 Esplanade
St. Helier
Jersey
JE2 3QA
Administrator and Corporate Secretary
Northern Trust International Fund
Administration Services (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St. Peter Port
Guernsey
GY1 3QL
Independent Auditor
Ernst & Young LLP
(appointed 03 December 2015)
PO Box 9, Royal Chambers
St Julian’s Avenue
St Peter Port
Guernsey
GY1 4AF
KPMG Channel Islands Limited
(resigned 6 October 2015)
Glategny Court
Glategny Esplanade
Guernsey
GY1 1WR
Registrar and CREST Service Provider
Computershare Investor Services (Guernsey) Limited
3rd Floor, Natwest House
Le Truchot
St. Peter Port
Guernsey
GY1 1WD
Legal Advisors (Guernsey Law)
Carey Olsen
Carey House
Les Banques
St. Peter Port
Guernsey
GY1 4BZ
Legal Advisors (UK Law)
Freshfields Bruckhaus Deringer LLP
65 Fleet Street
London
EC4Y 1HS
Corporate Brokers
JPMorgan Cazenove
25 Bank Street
London
E14 5JP
Fidante Capital
(formerly Dexion Capital Plc)
1 Tudor Street
London
EC4Y 0AH
For the latest information www.dwcatalystltd.com
