TIDMBHGG TIDMBHGU
BH Global Limited
Annual Report and Audited Financial Statements 2017
LEI: 549300BIIO4DTKEMXV14
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
31 December 2017
CHAIRMAN'S STATEMENT
Dear Shareholder,
Albeit at a more modest pace than had been experienced a year earlier, 2017 was
a further year of growth in the Net Asset Value ("NAV") per share for BH Global
Limited's (the "Company" or "BH Global") two share classes. The US Dollar is
the Company's functional currency and the NAV per share of the US Dollar class
appreciated by 2.59% and that of the much larger Sterling class by 1.75%.
Once again many equity markets enjoyed significant appreciation taking, in many
cases, valuations to new heights. However, as I have written in previous
Statements, the Company is intended to have low correlation to bond and equity
markets with limited downside risk and thus act as a diversifier in the
construction of portfolios. In terms of volatility and correlation it has once
again performed just such a function with further, albeit modest, positive
annual NAV per share growth as has been achieved in eight out of the nine
calendar years since its first full year in 2009 together with low volatility
of 3.7%.
Since 1 September 2014 the Company has invested all of its assets, save for
working cash balances, in Brevan Howard Multi-Strategy Master Fund Limited
("BHMS"). At 31 December 2017 BHMS had net assets of US$843 million and BH
Global's investment of US$431 million represented approximately 51.1% of BHMS.
In recent years the Company's holding in BHMS has grown significantly as a
percentage of that fund's assets. Nevertheless, both Manager and Board
consider that the liquidity profile of the assets held by BHMS is consistent
with the redemption notice periods granted to BH Global and therefore the
present position, whereby BH Global holds approximately 50% of BHMS, is not a
cause for concern.
As a percentage of assets, the allocation to the Direct Investment Portfolio
("DIP") grew to 63.0% at 31 December 2017 and comprised nine separate
allocations. For the year the DIP appreciated by 3.86% (adjusted for fees).
All but one of the traders within the DIP also have an allocation in Brevan
Howard's core fund, the Brevan Howard Master Fund, in which BH Global retains
a significant holding through BHMS amounting to 21.3% of the Company's assets.
NAV enhancement and share buy backs
Regular buy backs continued throughout the year in order to seek to moderate
the discount to NAV at which the shares traded, whilst enhancing NAV per share.
During the year 2,771,968 Sterling class shares were bought back at a weighted
average discount of 10.41% and a cost of GBP36.467 million together with 350,991
US Dollar class shares at a weighted average discount of 9.59% and a cost of
$4.493 million. These buy-backs added 18 pence (1.22%) and 15 cents (1.02%)
respectively to NAV per share.
When authorising buy backs, and subsequent to the changes made to the Company's
management agreement with effect from 1 April 2017, the directors were always
mindful that any reduction in the number of shares in either class beyond the
Annual Buy Back Allowance for 2017 (as announced on 12 April 2017) would
trigger the requirement to pay the Manager a fee of 2% of the repurchase price
of the shares bought back. During 2017 12.34% of the Sterling shares and 8.38%
of the US Dollar shares outstanding at the 2016 year end were bought back
triggering payments to the Manager totalling GBP433,742 and $42,524. In every
case buy backs were always enhancing to NAV per share.
On 1 January 2018 the "clock was reset" and the Company became entitled to buy
back up to an aggregate number equal to 5% of the shares of each class in issue
as at 31 December 2017 being 150,222 US Dollar shares and 1,017,344 Sterling
shares before the 2% additional fee is triggered. As at the date of this
Statement, during 2018 the Company had bought back no US Dollar shares and
472,389 Sterling shares.
Discount Management
Both in my Statement last year, and again in the interim report for the six
months to 30 June 2017, I referred to the Board's considerable frustration with
the discount to NAV at which the Company's shares were then trading. At 31
December 2016 the discount on the Sterling shares had been 8.92% which had
widened at 30 June 2017 to 11.06%. During the second half of the year the
discount narrowed significantly and at the Company's year-end on 31 December
stood at 6.44%. Since the year-end the average daily discount has been around
7% and is currently at around the 6% level.
In recent Statements I have indicated that if there were not a substantial
reduction in the discount by the end of 2017 then the Board would consider
further options to enhance shareholder value. At the time that I signed off my
Statement for the year to 31 December 2016 at the end of March 2017 the
Sterling discount was close to 9%. At 30 June 2017 it was over 11% and I
consider the reduction to 6.44% at 31 December 2017 to be a significantly
material move in the right direction.
Discontinuation Threshold and Capital Redemption
As already announced on 18 January 2018, the average discount at which shares
traded over the year was less than the 10% discount threshold, at or above
which a class closure vote in either class of share would have been triggered.
The Board has considered whether it would be appropriate to offer a partial
return of capital of all or part of the 2017 NAV per share growth. It has
concluded that the quantum would not be material enough to justify such a
redemption offer.
The Future for the Company
Toward the end of 2017 the Board asked the Company's brokers, JPMorgan Cazenove
and Canaccord Genuity, to contact major shareholders and canvas their views.
The majority of the views as reported to the Board was that shareholders wished
the Company to continue in its present form so as to provide a low risk,
minimally correlated, diversifier when constructing portfolios in the face of
elevated valuations of many equity markets. Nevertheless, those views are
predicated on acceptable and regular NAV per share growth and continuing
downward pressure on the overall costs of managing the assets. Shareholders
will recall that the reduction in the core management fee from 2% to 1% which
took effect on 1 April 2017 has bought about an annual saving of approximately
$4.5 million based on the current size of the Company.
As I have written before, the key to success for the Company as a listed entity
will be NAV per share performance. It is very much to be hoped that the trading
environment for the Manager will enable the delivery of robust growth in 2018.
The Board will continuously monitor performance, discounts and feed-back from
shareholders. On the basis of the current position, absent a change of view of
major shareholders, the Board expects the Company to continue in its present
form.
The Board
John Hallam and Nick Moss have served as directors of the Company since its IPO
in May 2008 with John serving as chair of the Audit Committee. Although both
remain robustly independent the Board acknowledges the need to refresh the
membership at the appropriate juncture once directors have served more than
nine years.
John has indicated that he is content to stand down as a director on 30
September 2018 as a part of this refreshment process and the Board respects his
decision. I would like to record his outstanding contribution both as a
director and as chair of the Audit Committee. The Company has been fortunate to
recruit Sally-Ann (Susie) Farnon to join the Board as prospective chair of the
Audit Committee. Susie was formerly head of KPMG's Channel Island audit
practice and served for nine years as a Commissioner on the Guernsey Financial
Services Commission. She is an extremely experienced director of listed
alternative asset companies and is a director of a further five listed public
companies. I have discussed with Susie her time availability and capacity to
focus on the affairs of BH Global. Other than her family interests, Susie has
no business responsibilities beyond her non-executive directorships and she is
not the chair of any of the boards on which she serves. I am fully satisfied
that she has the time and capacity to serve as a director of BH Global and am
very pleased that she has agreed to join the Board. Susie was appointed a
director on 13 March 2018.
.
Relationship with the Manager
The directors continue to pursue active dialogue with the Manager both at
quarterly Board meetings and also in between those formal meetings. The
portfolio manager of BHMS, Magnus Olsson, reports at each Board meeting. I and
other directors have regular contact with a number of people at the Manager who
support the administration and promotion of the Company.
The relationship with the Manager is robust and, despite the reduction in the
net assets of the Company, the Manager has assured the Board that the
continuing management of the Company's assets, and its London Main Market
listing, are both of key importance. Shareholders will recall that as part of
the changes to the Management Agreement announced in April 2017, the Board
agreed that, in the event of the NAV of the Company falling below $300 million
at the end of any calendar quarter, the Board would bring forward a special
resolution proposing the liquidation of the Company. As at the date of this
Statement the NAV of the Company is approximately $453 million.
Conclusion
The future of the Company will be determined by its performance and the views
of its shareholders. With the discount to NAV now closer to 5% than the nearly
10% of a year ago (and indeed in excess of 10% for periods in 2017) the Board
considers that sufficient progress in respect of reduction in the discount has
been made to justify continuing support for the Company. However, continued
growth of NAV per share, preferably at greater pace than 2017, and a modest
discount are prerequisites for stability. Should either falter then the Board
will, as previously indicated, consider options in the best interests of
shareholders.
Yours sincerely,
Sir Michael Bunbury
Chairman
22 March 2018
GLOSSARY OF ACRONYMS
Detailed below are the underlying funds and their acronyms used within this
report:
BHAMF Brevan Howard Asia Master
Fund Limited
BHDGST BH-DG Systematic Trading
Master Fund Limited
BHMF Brevan Howard Master Fund
Limited
BHMS or the Fund Brevan Howard
Multi-Strategy Master Fund
Limited
DIP Direct Investment Portfolio
UNAUDITED SUPPLEMENTAL FINANCIAL STATEMENTS
In order to provide shareholders with further information regarding the net
asset value of each class of shares, coupled with greater transparency as to
the income, gains and expenses incurred and the changes in net assets of the
two classes, the results have been presented in the tables. These tables show
the allocation of all transactions in the currency of the respective share
class.
It should be noted that these tables have not been subject to audit by KPMG
Channel Islands Limited.
UNAUDITED SUPPLEMENTAL STATEMENT OF ASSETS AND LIABILITIES
As at 31 December 2017
US Dollar Sterling Company
shares shares Total
US$'000 GBP'000 US$'000
Assets
Investment in 42,670 288,757 430,643
BHMS
Other debtors 3 18 29
Cash and bank balances denominated in US Dollars 1,334 - 1,334
Cash and bank balances denominated in Sterling - 8,709 11,701
Total assets 44,007 297,484 443,707
Liabilities
Management fees payable 37 253 377
Performance fees payable 200 469 831
Accrued expenses and other liabilities 22 109 167
Administration fees payable 4 27 41
Total liabilities 263 858 1,416
Net assets 43,744 296,626 442,291
Number of shares in issue 3,004,442 20,346,871 -
Net asset value per share US$14.56 GBP14.58 -
UNAUDITED SUPPLEMENTAL STATEMENT OF OPERATIONS
For the year ended 31 December 2017
US Dollar Sterling Company
shares shares Total
US$'000 GBP'000 US$'000
Net investment gain allocated from BHMS
Interest income 2,484 15,344 22,333
Expenses (582) (3,617) (5,260)
Net investment gain allocated from BHMS 1,902 11,727 17,073
Company income
Interest income 2 - 2
Foreign exchange (losses)/gains * (20) 43 38,012
Total Company income (18) 43 38,014
Company expenses
Management fees 681 4,264 6,197
Performance fees 200 469 807
Other expenses 140 628 951
Directors' fees and expenses 48 286 417
Administration fees 20 122 178
Total Company expenses 1,089 5,769 8,550
Net investment gain 795 6,001 46,537
Net realised and unrealised gains/(losses) on investments allocated from BHMS
Net realised gain on 2,541 14,407 21,178
investments
Net unrealised loss on (2,547) (15,076) (22,051)
investments
Net realised and unrealised foreign exchange
loss
- on hedging - (3,581) (4,632)
Net realised and unrealised (6) (4,250) (5,505)
losses on investments allocated
from BHMS
Net increase in net assets resulting from 789 1,751 41,032
operations
*The Company total for foreign exchange (losses)/gains contains the results of
translating the Sterling class into US Dollars.
The trades carried out in the various underlying portfolios have structures of
varying complexity and inherent leverage. This can result in situations where,
at an individual trade level, interest income or expense is offset by losses or
gains on other investments to achieve a net return. However accounting
conventions require that all these elements are disclosed gross which can
result in separate reporting of what would otherwise be off-setting interest
income and expenses, realised gains and losses or unrealised gains and losses.
UNAUDITED SUPPLEMENTAL STATEMENT OF CHANGES IN NET ASSETS
For the year ended 31 December 2017
US Dollar Sterling Company
shares shares Total
US$'000 GBP'000 US$'000
Net increase in net assets resulting from
operations
Net investment gain 795 6,001 46,537
Net realised gain on investments allocated 2,541 14,407 21,178
from BHMS
Net unrealised loss on investments (2,547) (15,076) (22,051)
allocated from BHMS
Net realised and unrealised foreign - (3,581) (4,632)
exchange loss allocated from BHMS
789 1,751 41,032
Share capital transactions
Net share conversions (11,968) 9,375 -
Purchase of own shares (4,493) (36,466) (51,792)
(16,461) (27,091) (51,792)
Net decrease in net assets (15,672) (25,340) (10,760)
Net assets at the beginning of the year 59,416 321,966 453,051
Net assets at the end of the year 43,744 296,626 442,291
MANAGER'S REPORT
Brevan Howard Capital Management LP ("BHCM") is the Manager of BH Global
Limited ("BHG" or the "Company"). BHG invests all its assets (net of short-term
working capital) in Brevan Howard Multi-Strategy Master Fund Limited ("BHMS" or
the "Fund") a company also managed by BHCM.
Performance Summary
The NAV per share of the USD shares appreciated by 2.59% in 2017, while the NAV
per share of the GBP shares appreciated by 1.75% in 2017.
The month-by-month NAV performance of the USD and GBP currency classes of BHG
since it commenced operations in 2008 is set out below:
USD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2008 - - - - - 1.16* 0.10 0.05 (3.89) 1.13 2.74 0.38 1.55
2009 3.35 1.86 1.16 1.06 2.79 (0.21) 1.07 0.27 1.49 0.54 0.11 0.04 14.31
2010 0.32 (0.85) (0.35) 0.53 (0.06) 0.60 (0.79) 0.80 1.23 0.39 (0.21) (0.06) 1.54
2011 0.09 0.42 0.34 1.20 0.19 (0.56) 1.61 3.51 (1.29) (0.14) 0.19 (0.88) 4.69
2012 1.22 1.02 (0.54) (0.10) (0.65) (1.53) 1.46 0.70 1.47 (0.72) 0.81 1.26 4.44
2013 1.33 0.49 0.33 1.60 (0.62) (1.95) (0.14) (0.86) 0.09 (0.13) 0.95 0.75 1.79
2014 (0.98) (0.04) (0.26) (0.45) 0.90 0.70 0.60 0.05 1.56 (0.75) 0.71 0.44 2.49
2015 3.37 (0.41) 0.35 (1.28) 1.03 (1.49) (0.06) (1.56) (0.58) (0.67) 3.06 (3.31) (1.73)
2016 0.82 1.03 (0.83) (0.66) 0.28 1.71 0.13 0.10 (0.23) 0.47 3.62 0.82 7.42
2017 0.22 0.92 (0.99) (0.10) 0.26 0.19 3.21 0.21 (0.44) (0.85) (0.02) 0.03 2.59
GBP Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2008 - - - - - 1.40* 0.33 0.40 (4.17) 1.25 3.27 0.41 2.76
2009 3.52 1.94 1.03 0.68 2.85 (0.28) 1.05 0.31 1.51 0.58 0.12 0.08 14.15
2010 0.35 (0.93) (0.32) 0.58 (0.04) 0.62 (0.81) 0.84 1.17 0.37 (0.20) (0.03) 1.61
2011 0.10 0.41 0.38 1.13 0.04 (0.59) 1.69 3.67 (1.41) (0.15) 0.21 (0.84) 4.65
2012 1.23 1.05 (0.51) (0.08) (0.62) (1.51) 1.50 0.70 1.44 (0.72) 0.72 1.31 4.55
2013 1.36 0.56 0.36 1.63 (0.48) (1.91) (0.11) (0.84) 0.14 (0.11) 0.97 0.77 2.32
2014 (0.97) (0.14) (0.33) (0.30) 0.56 0.48 0.42 0.03 1.85 (0.76) 0.78 0.48 2.09
2015 3.48 (0.34) 0.33 (1.26) 1.18 (1.50) (0.03) (1.44) (0.64) (0.79) 3.02 (3.16) (1.32)
2016 0.91 1.08 (1.04) (0.65) 0.24 1.46 0.13 (0.14) (0.34) 0.59 3.28 0.96 6.60
2017 0.16 0.87 (1.15) (0.04) 0.10 (0.21) 3.12 0.24 (0.43) (0.75) (0.02) (0.11) 1.75
Source: BHG NAV and NAV per Share data is provided by BHG's administrator,
Northern Trust International Fund Administration Services (Guernsey) Limited
("Northern Trust"). BHG NAV per Share % Monthly Change calculations are made by
BHCM.
BHG NAV data is unaudited and net of all investment management fees and all
other fees and expenses payable by BHG. NAV performance is provided for
information purposes only. Shares in BHG do not necessarily trade at a price
equal to the prevailing NAV per Share.
* Performance is calculated from a base NAV per Share of 10 in each currency.
The opening NAV in May 2008 was 9.9 (after deduction of the IPO costs borne by
BHG).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
Underlying allocation review
The Investment Committee ("IC") made the decision to keep the Fund's allocation
to the DIP and the underlying funds relatively stable over the period. The
allocations to the DIP and BHDGST were marginally increased whereas the
allocations to BHAMF and BHMF were reduced accordingly. At the end of December
2017, the allocation to the DIP stood at approximately 63%. The Fund's
performance has benefitted significantly from the increased allocation to the
DIP since early 2016. The DIP, which included macro, credit and emerging market
trading, has been the key positive driver to the Fund's returns.
The IC will continue to take advantage of the flexibility within the Fund's
mandate in order to seek high risk adjusted returns and keep a healthy
diversification across strategies, asset classes and traders.
Performance Review
During 2017, the NAV per share of the USD and GBP shares appreciated by 2.59%
and 1.75% respectively. The returns were accompanied by a low volatility of
3.7%. 2017 proved to be a relatively lacklustre year for many macro managers,
with declining volatility across most asset classes. The NAV performance of BHG
was in line with the US Dollar HFRI Macro Total Index which returned 2.21% over
the period.
The DIP was the main positive contributor to the Fund's performance. The DIP is
the area of the portfolio which allows the IC of the Manager to allocate
directly to trading books and funds which are managed by an individual
portfolio manager. For the period the DIP was up 5.1% (on a gross performance
basis). The bulk of the profits arose in credit trading and in interest rate
trading. Some of the gains were offset by losses in FX and to a small extent in
equity indices. In credit, long exposure to mortgage backed securities ("MBS")
generated gains on the back of a relatively strong US housing market. The
Fund's non-agency residential mortgage-backed security ("RMBS") and legacy
commercial mortgage-backed security ("CMBS") positions continued to perform
well; the former were increasingly in demand from outright long money managers
as "safe yield" assets, while underlying loan performance and refinancing
activity in the latter beat market expectations. Additional gains arose in
agency trading, selected asset backed securities ("ABS") and in emerging market
credit.
In ABS, most of the gains were generated from long exposures to securities
structured around student loans and originated pre the financial crisis. The
Fund had acquired these bonds at very low prices but with meaningful
optionality. Most of the Fund's position was sold at attractive levels during
the summer.
The DIP's interest rate gains arose predominately from relative value trading
within European sovereign bond markets during the first quarter. Trading in
some of the smaller markets including South Africa, Czech Republic and Turkey
generated additional small gains. A part of the gains was offset by losses in
USD rates from keeping a bias towards higher USD rates during the first half of
the year.
In FX the losses in the DIP arose mainly from entering the year with a long USD
exposure against a basket of currencies including the EUR, which strengthened.
FX positioning changed over the year and the earlier losses were significantly
reduced from reversing the long USD exposure to an overall short exposure
during most of the remainder of the year.
A long exposure to the S&P Equity Index at the start of the year generated
losses. Losses were reduced from tactical trading with a long bias throughout
the rest of the year.
The returns of the underlying fund allocations were mixed. BHAMF and BHDGST
contributed positively whereas BHMF was a detractor.
With regard to the performance attribution when looking through all the Fund's
allocations, equity indices and credit trading generated gains, FX trading
generated losses and trading within interest rates was overall flat. Commodity
trading was a small part of the Fund during the year. It was a modest detractor
with most of the losses coming from long exposure to oil during the first half
of the year.
Systematic trading had a positive year. The bulk of the gains arose from a long
exposure to equity indices. A part of the gains were offset by losses in other
asset classes where trend reversals or range bound markets created a
challenging environment. BHDGST (Class Z USD shares) appreciated by 7.92% in
2017. This compares favourably to the SG Trend Index (+2.20%).
In measuring the attribution of the underlying portfolios, the Manager employs
a number of metrics including the two set out in the below tables. All
positions, regardless of which trading book holds them, are allocated to an
asset class and the attribution per asset class is summarised in the first
table below. The second table summarises the attribution, but by reference to
the overall strategy classification of each trading book. It should be noted
that, as the second table indicates, there are some strategy groups which at 31
December 2017 had been allocated no trading books.
Quarterly and annual contribution (%) to the performance of BHG USD Shares (net
of fees and expenses) by asset class*
Rates FX Commodity Credit Equity Discount TOTAL
Management
Q1 2017 0.88 (2.22) (0.16) 1.31 0.26 0.08 0.14
Q2 2017 (1.21) (0.31) (0.15) 1.27 0.07 0.69 0.34
Q3 2017 (0.61) 2.23 (0.02) 1.21 (0.10) 0.26 2.96
Q4 2017 0.07 (1.11) 0.25 (0.94) 0.89 0.00 (0.85)
YTD 2017 (0.89) (1.46) (0.08) 2.85 1.13 1.03 2.59
*Data as at 29 December 2017
Quarterly figures are calculated by BHCM based on performance data for each
period provided by BHG's administrator, Northern Trust. Figures rounded to two
decimal places.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
Methodology and Definition of Contribution to Performance:
Attribution by asset class is produced at the instrument level, with
adjustments made based on risk estimates.
The above asset classes are categorised as follows:
"Rates": interest rates markets
"FX": FX forwards and options
"Commodity": commodity futures and options
"Credit": corporate and asset-backed indices, bonds and CDS
"Equity": equity markets including indices and other derivatives
"Discount Management": buyback activity for discount management purposes
Quarterly and annual contribution (%) to the performance of BHG USD Shares (net
of fees and expenses) by strategy group*
Macro Systematic Rates FX Equity Credit EMG Commodity Discount TOTAL
Management
Q1 2017 (0.92) (0.13) (0.06) (0.12) (0.00) 1.04 0.26 (0.00) 0.08 0.14
Q2 2017 (1.63) (0.15) 0.07 0.00 (0.00) 1.26 0.12 (0.00) 0.69 0.34
Q3 2017 1.33 0.30 (0.04) 0.01 (0.00) 0.98 0.13 (0.00) 0.26 2.96
Q4 2017 (0.40) 0.51 0.15 (0.00) (0.00) (0.87) (0.24) (0.00) 0.00 (0.85)
YTD 2017 (1.64) 0.53 0.12 (0.12) (0.00) 2.42 0.27 (0.00) 1.03 2.59
*Data as at 29 December 2017
Quarterly figures are calculated by BHCM based on performance data for each
period provided by BHG's administrator, Northern Trust. Figures rounded to two
decimal places.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
Methodology and Definition of Contribution to Performance:
Strategy Group Attribution is approximate and has been derived by allocating
each underlying trader book to a single category. In cases where a trader book
has activity in more than one category, the most relevant category has been
selected.
The above strategies are categorised as follows:
"Macro": multi-asset global markets, mainly directional (for BHG, the majority
of risk in this category is in rates)
"Systematic": rules-based futures trading
"Rates": developed interest rates markets
"FX": global FX forwards and options
"Equity": global equity markets including indices and other derivatives
"Credit": corporate and asset-backed indices, bonds and CDS
"EMG": global emerging markets
"Commodity": liquid commodity futures and options
"Discount Management": buyback activity for discount management purposes
Commentary and Outlook
The global expansion accelerated and broadened in 2017, leaving behind
lingering worries about downside risks. At the same time, inflation remained
calm in most major economies, except the UK which experienced a sharp increase
on the heels of the Brexit-related fall in Sterling. The combination of strong
growth and generally modest inflation led to a continuation of monetary policy
trends, with the US and Canada gradually removing policy accommodation, the
Euro area tapering asset purchases, and Japan maintaining a high level of
accommodation. Political risks that loomed large at the start of 2017, such as
the upcoming elections in France, Germany, Netherlands and possibly Italy, were
favourably resolved with little disruption. This favourable backdrop buoyed
financial markets, leading to record highs in many global equity markets,
relatively low interest rates, and tight credit spreads.
As we enter the ninth year of the expansion in 2018, the ageing business cycle
would typically be displaying late-cycle dynamics of slower growth and rising
inflation. However, this cycle is defying that pattern. Economic activity
appears to be accelerating further above trend in most economies and inflation
pressures are only beginning to emerge. Despite the age of the business cycle,
the data suggest that this cycle is behaving more mid-cycle or even early-cycle
in certain sectors like manufacturing. Underpinning this dynamic are the early
signs that business investment and productivity are picking up from the
doldrums. If those trends continue, they could have far reaching consequences,
including continued support for risk assets, higher equilibrium interest rates,
and an end to secular stagnation. Tax reform in the US is a further tailwind
promoting growth and investment in an economy that is already operating above
its potential. If these favourable trends persist, there will be pressure on
central banks to provide less accommodation going forward. Policy makers will
face a tricky balancing act between strong growth and easy financial
conditions, on the one hand, and inflation that generally remains below target,
on the other hand.
We look forward to exploiting any opportunities that these factors may create.
Brevan Howard wishes to thank shareholders once again for their continued
support.
Brevan Howard Capital Management, LP,
acting by its sole general partner,
Brevan Howard Capital Management Limited
22 March 2018
DIRECTORS' REPORT
The Directors submit their Report together with the Company's Audited Statement
of Assets and Liabilities, Audited Statement of Operations, Audited Statement
of Changes in Net Assets, Audited Statement of Cash Flows, and the related
notes (together, the "Financial Statements") for the year ended 31 December
2017. The Directors' Report together with the Audited Financial Statements 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
The Company is a limited liability closed-ended investment company which was
incorporated in Guernsey on 25 February 2008.
It was admitted to the Official List of the London Stock Exchange on 29 May
2008 when it raised approximately US$1 billion and where it currently has a
Premium Listing.
The Company's US Dollar Share Class had Secondary Listings on the Bermuda Stock
Exchange and on NASDAQ Dubai until 30 September 2017 and 31 December 2017
respectively.
The Company can offer multiple classes of ordinary shares, which differ in
terms of currency of issue with ordinary shares denominated in US Dollar and
Sterling currently being in issue.
Investment Policy
The Company's investment objective is to seek to generate consistent long-term
capital appreciation through an investment policy of investing all of its
assets (net of funds required for its short-term working capital requirements)
in Brevan Howard Multi-Strategy Master Fund Limited ("BHMS" or the "Master
Fund").
The Company is organised as a feeder fund and invests substantially all of its
investable assets in the ordinary US Dollar and Sterling denominated Class G
shares issued by BHMS, and, as such, the Company is directly and materially
affected by the performance and actions of BHMS.
BHMS spreads investment risk by providing exposure to a range of strategies,
asset classes and geographies.
BHMS has flexibility to invest in a wide range of instruments including, but
not limited to, debt securities and obligations (which may be below investment
grade), bank loans, listed and unlisted equities, other collective investment
schemes or vehicles (which may be open-ended or closed-ended, listed or
unlisted, regulated or unregulated and may employ leverage (each an "Investment
Fund")), currencies, commodities, futures, options, warrants, swaps and other
derivative instruments. Derivative instruments may be exchange-traded or OTC.
BHMS may engage in short sales. BHMS may retain amounts in cash or cash
equivalents (including money market funds) pending reinvestment, for use as
collateral or if this is considered appropriate to the investment objective.
Subject to the investment restrictions and investment approach disclosed in any
prospectus for BHMS that may be published from time to time and subsequent BHMS
Directors' resolutions, BHMS employs an investment process which empowers the
Manager to allocate assets both to Investment Funds and directly to the
investment managers of BHMS from time to time on an opportunistic basis.
Contractual relationship with the Manager
The Company's relationship with its Manager is defined in the Management
Agreement. Further revisions were made during the course of 2017 affecting fee
levels and buy backs and these are set out in detail in note 4.
Results and Dividends
The results for the year are set out in the Audited Statement of Operations.
The Directors do not recommend the payment of a dividend.
Share Capital
The number of shares in issue at the year end and the changes during the year
are disclosed in the note 5 to the Audited Financial Statements.
International Tax Reporting
For the purposes of the US Foreign Account Tax Compliance Act, the Company
registered with the US Internal Revenue Services ("IRS") as a Guernsey
reporting Foreign Financial Institution ("FFI"), received a Global Intermediary
Identification Number (U2S6ID.99999.SL.831), and can be found on the IRS FFI
list.
The Common Reporting Standard ("CRS") is a global standard for the automatic
exchange of financial account information developed by the Organisation for
Economic Co-operation and Development ("OECD"), which has been adopted by
Guernsey and which came into effect on 1 January 2016. The Board has taken the
necessary action to ensure that the Company is compliant with Guernsey
regulations and guidance in this regard.
Discount Management Programme
In consultation with the broker and other advisors, the Directors review the
share price in relation to NAV on a regular basis and take such action as they
consider to be in the best interests of shareholders. For additional
information refer to note 8 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.bhglobal.com/contacts.
Viability Statement
The investment objective of the Company, as outlined earlier, is currently
implemented through a policy of investing all of its assets (net of funds
required for its short-term working capital requirements) in the ordinary US
Dollar and Sterling denominated Class G shares issued by BHMS.
The Company's investment performance depends upon the performance of BHMS and
the Manager as manager of BHMS. The Directors, in assessing the viability of
the Company, pay particular attention to the risks facing BHMS. The Manager
operates a risk management framework which is intended to identify, measure,
monitor, report and where appropriate, mitigate key risks identified by it or
its affiliates in respect of BHMS.
The Company's assets exceed its liabilities by a considerable margin. Further,
the majority of the Company's most significant liabilities, being the fees
owing to the Manager and to the Company's administrator, fluctuate by reference
to the Company's investment performance and net asset value.
The Directors confirm that their assessment of the principal risks facing the
Company was robust and that they have assessed the viability of the Company
over the period to 31 December 2020. The viability statement covers a period of
three years, which the Directors consider sufficient given the inherent
uncertainty of the investment world and the strategy period. In selecting this
period, the Directors considered the environment within which the Company
operates, its liabilities, the performance of the Master Fund and the risks
associated with the Company.
The continuation of the Company in its present form is, inter alia, dependent
on the Management Agreement with the Manager remaining in place. The Directors
note that the Management Agreement with the Manager is terminable on one year's
notice by either party. The Directors know of no current reason why either the
Company or the Manager might serve notice of termination of the Management
Agreement during the three year period covered by this viability statement. To
ensure that the Company maintains a constructive and informed relationship with
the Manager, the Directors meet regularly with the Manager to review BHMS's
performance, and through the Management Engagement Committee, they review the
nature of the Company's relationship with the Manager.
Besides the possible termination of the Management Agreement, at the Company
level, the main risks to the Company's continuation would be a) the Company's
shares trading at a significant and/or persistent discount to NAV, or b) the
Company's NAV falling below US$300 million.
The Company's discount management programme is described within note 8
including details as to when class closure resolutions would have to be put to
shareholders. The Company actively undertakes discount management actions,
including share buybacks, so that as far as possible the share prices properly
reflect the Company's underlying performance; such actions seek to mitigate the
risk of a class closure resolution being triggered.
As a part of the agreement to reduce the management fee, it was agreed that
should the Company's NAV fall below US$300 million on certain dates, the Board
will convene a general meeting at which a special resolution proposing the
liquidation of the Company would be put forward. Further details are provided
in note 4. It is the Board's current view that it is unlikely that such a
scenario will arise as a consequence solely of its discount management
programme.
After having considered the above risks based on the assumption that they are
managed or mitigated in the ways noted above, and having reviewed the budgeted
ongoing expenses, the Directors have a reasonable expectation that the Company
would be able to continue in operation and meet its liabilities as they fall
due over the three year period of their assessment.
Going Concern
After making enquiries and given the nature of the Company and its investment,
the Directors are satisfied that it is appropriate to continue to adopt the
going concern basis in preparing these Financial Statements and, after due
consideration, the Directors consider that the Company is able to continue for
the foreseeable future and at least twelve months from the date of this report.
In reaching this conclusion the Board is mindful of the nature and liquidity of
the assets that underlie its investment in BHMS, the terms under which it may
redeem its investment in BHMS and utilise the borrowing facilities available to
it and has concluded that moderate adverse investment performance would not
have a material impact on the Company's ability to meet its liabilities as they
fall due.
Signed on behalf of the Board by:
Sir Michael Bunbury
Chairman
John Hallam
Director
22 March 2018
CORPORATE GOVERNANCE STATEMENT
Corporate Governance
To comply with the UK Listing Regime, the Company must comply with the
requirements of the UK Corporate Governance 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 ("AIC Code") is
deemed to comply with both the UK and Guernsey Codes of Corporate Governance.
The Board has considered the principles and recommendations of the AIC Code, by
reference to the guidance notes provided by the AIC Guide, and considers that
reporting against these will provide appropriate information to shareholders.
To ensure ongoing compliance with these principles the Board 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.
The Company has complied with the recommendations of the AIC Code throughout
the accounting period and thus the relevant provisions of the UK Corporate
Governance Code, except as set out below.
The UK Corporate Governance Code includes provisions relating to:
- the role of the chief executive;
- the executive Directors' remuneration;
- the annual assessment of the need for an internal audit function;
- the remuneration committee;
- the whistle blowing policy; and
- the Directors' independence.
For the reasons set out in the AIC Guide, and as explained in the UK Corporate
Governance 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 all non-executive and the Company does not have employees, hence
no whistle blowing policy is required. The key service providers all have
whistle blowing policies in place. The Board as a whole fulfils the function of
a Remuneration Committee. Details of compliance are noted below. There have
been no instances of non-compliance, other than those noted above.
The Company has adopted a policy that the composition of the Board of
Directors, which is required by the Company's Articles to comprise of 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 Chairman 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.
Under provision B.1.1. of the UK Corporate Governance Code, having considered
the directorship of Julia Chapman in DG Macro Fund Limited (formerly London
Select Fund Limited), whose Alternative Investment Fund Manager is one in which
Brevan Howard has an economic interest, the Board has determined that she
remains independent.
As noted below, Messrs Moss and Hallam have served on the Board since the
Company was formed in 2008 but, for the reasons noted it is considered that
they remain independent and that their continued service is in the best
interests of shareholders.
Risk Management
The Company's risk exposure and the effectiveness of its risk management and
internal control systems are reviewed by the Audit Committee at its quarterly
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, which currently consists solely of independent non-executive
Directors, meets at least four times a year and between these formal meetings
there is regular contact with both the Manager and the Administrator. Clear
terms of reference outline the full schedule of matters reserved for the
Board's decision and that of its committees. The Directors are kept fully
informed of investment and financial controls, and other matters that are
relevant to the business of the Company and which 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, 15 ad-hoc meetings were held in 2017, to deal with
matters that were of a fundamentally administrative nature, the majority being
to deal with conversions between share classes. These meetings were attended by
those Directors available at the time.
On 26 June 2017, at the Annual General Meeting of the Company, shareholders
re-elected all Directors of the Company. Section 21.3 of the Company's Articles
requires all Directors at the date of the notice convening the annual general
meeting, shall retire from office and may offer themselves for re-election. Mr
Morgan did not offer himself for re-election at the 2017 Annual General
Meeting.
The Board of Directors has overall responsibility for safeguarding the
Company's assets, for the determination of the investment policy of the
Company, for reviewing the performance of the Manager and the other service
providers and for the Company's activities. The Directors are listed on the
Board Members section below.
The Board needs to ensure that information presented is fair, balanced and
understandable, and provide information necessary for the shareholders to
assess the Company's performance, business model and strategy. In achieving
this, the Directors have explained the Company's investment objective and
policy, how the Board operates through its structure of reserved powers of the
Board, its delegated Committees and how the Directors consider and explain the
risk environment within which the Company operates. Further, through the Annual
Report and ancillary documents the Board has sought to provide information to
enable shareholders to have a fair, balanced and understandable view.
Board Evaluation and Succession Planning
The AIC Code requires external evaluation of Board performance every three
years. During 2016, the Board commissioned an external evaluation of its
performance by Board Alpha. The report of the evaluation confirmed that the
Company applies a high standard of corporate governance. The report indicated
that there were no significant issues to raise; some helpful procedural
suggestions were offered which the Board has implemented. The Board conducted
self-appraisal during 2017.
The Board has chosen not to adopt a definitive policy with quantitative targets
for board diversity. However, gender, knowledge, skills, experience, residency
and governance credentials are all considered by the Nominations Committee when
recommending appointments to the Board and in formulating succession plans.
The Board, Audit Committee, Management Engagement Committee and Nominations
Committee 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 consider how they function as a whole
and also review the individual performance of its members.
This process is conducted by the respective Chairman reviewing each members'
performance, contribution and commitment to the Company. John Hallam, as Senior
Independent Director, takes the lead in reviewing the performance of the
Chairman. Each Board member undertakes ongoing training and maintenance of
continuing professional development requirements.
The Board considers it has a breadth of experience relevant to the Company, and
the Directors believe that any changes to the Board's composition can be
managed without undue disruption. An induction programme has been put in place
for all Director appointments.
Board and Committee Meetings
The table below sets out the number of Board, Audit, Management Engagement and
Nominations Committee scheduled meetings held during the year ended 31 December
2017 and, where appropriate, the number of such meetings attended by each
Director.
Attendance at scheduled Board and Committee meetings:
Management
Board Audit Engagement Nominations
No of meetings 4 4 1 1
Attendance
Sir Michael Bunbury 4 2 * 1 1
John Hallam 4 4 1 1
Graham Harrison 4 4 1 1
Talmai Morgan1 2 2 * - -
Nicholas Moss 4 3 1 1
Julia Chapman 4 4 1 1
* in attendance
1 Talmai Morgan retired from the board on 26 June 2017.
Directors' Independence
The Company has five non-executive Directors, all of whom are independent of
the Manager.
Under the AIC Code the board must consider whether directors continue to be
independent of the Company if they have served for over nine years. Mr Hallam
and Mr Moss were appointed to the Board in February 2008. The Board takes the
view that their independence is not compromised by the length of tenure on the
Board and considers their experience to significantly add to the Board's
strength
At a Board meeting held on 13 March 2018, and as a part of the ongoing process
of board refreshment, Sally-Ann Farnon was appointed to the board. In due
course she will assume the chairmanship of the Audit Committee and John Hallam
will resign from the Board.
Directors' Interests
The current Directors had the following interests in the Company, held either
directly or beneficially:
31.12.2017 31.12.2016
US Sterling US Sterling
Dollar Dollar
Shares Shares Shares Shares
Sir Michael Bunbury - 7,000 - 4,000
John Hallam 5,000 - 5,000 -
Graham Harrison - 1,500 - 1,500
Nicholas Moss - 839 - 839
Julia Chapman1 - - - -
Sally-Ann Farnon2 - - - -
1 Julia Chapman was appointed to the board on 16 January 2017.
2 Sally-Ann Farnon was appointed to the board on 13 March 2018.
The Company has adopted a Code of Directors' dealings in securities.
Further Directors' interests in other public companies are disclosed in the
Board Members' report.
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, 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.
Committees of the Board
The Board has established Audit, Management Engagement and Nominations
Committees and approved their terms of reference, copies of which can be
obtained from the Administrator.
Audit Committee
The Audit Committee is chaired by John Hallam, and its other members are Graham
Harrison, Nicholas Moss and Julia Chapman. The Committee meets formally at
least twice a year and each meeting is attended by the external auditor and
Administrator.
Appointment to the Audit 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 Committee remain independent of the Manager. John Hallam and Nicholas
Moss have served 10 years on the Audit Committee and have had their tenure
extended for a further year whilst suitable replacements are appointed. At the
date of this report, Graham Harrison will be in the second year of his third
term of three years.
The table above, sets out the number of Audit Committee Meetings held during
the year ended 31 December 2017 and the number of such meetings attended by
each Committee member.
A report of the Audit Committee detailing its responsibilities and its key
activities is presented in the Audit Committee Report.
Management Engagement Committee
The Board has established a Management Engagement Committee with 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 Management Engagement Committee meets formally at least once a year and
comprises all Directors of the Board, with Nicholas Moss being appointed as
chairman.
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 4 to the Financial Statements.
The Manager has wide experience in managing and administering investment
companies and has access to extensive investment management resources. At its
meeting of 5 December 2017, 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 continues to be of the same opinion.
Nominations Committee
The Nominations Committee comprises all Directors of the Board, with the
Chairman being appointed as Chairman of the Nominations Committee. For new
appointments to the Board, nominations are sought from the Directors and from
other relevant parties and candidates are then interviewed by the Nominations
Committee. In the event that a replacement for the Chairman is being sought it
would normally be expected that the Senior Independent Director would chair the
Committee.
The other duties of the Committee include:
1. To review the structure, size and composition (including the skills,
knowledge, experience and diversity) of the Board;
2. To consider succession planning;
3. To consider the performance of individual Directors and determine
whether to recommend to the Board that they be put forward for re-election; and
4. To consider the ongoing terms of appointment of each Director.
At its meeting of 19 September 2017, the Nominations Committee concluded that
the continued appointment of the Board would be in the best interests of the
Company's shareholders as a whole. At the date of this report the Board
continues to be of the same opinion.
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 Board as a whole fulfils the functions of the
Remuneration Committee, although the Board has included a separate Remuneration
Report of these Financial Statements. The consideration of the Chairman's
remuneration is led by the Senior Independent Director without the Chairman
being present.
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. To achieve this a 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 and the 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 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 has delegated the investment management of the Company, the
administration, corporate secretarial and registrar functions including the
independent calculation of the Company's NAV and the production of the Annual
Report and Financial Statements, which are independently audited. Whilst the
Board delegates these functions, it remains responsible for the functions it
delegates and for the systems of internal control. Formal contractual
agreements have been put in place between the Company and providers of these
services. On an ongoing basis, Board reports are provided at each quarterly
Board meeting from the Manager, Administrator and Company Secretary and
Registrar. A representative from the Manager is asked to attend these meetings.
The Board has reviewed the need for an internal audit function and has decided
that the systems and procedures employed by the Manager, Administrator and the
Company Secretary and Registrar, including their own internal review processes,
and the work carried out by the Company's external auditors, 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.
A report is tabled and discussed at each quarterly Audit Committee meeting, and
reviewed once a year by the Board, setting out the Company's risk exposure and
the effectiveness of its risk management and internal control systems. 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.
Further reports are received from the Administrator in respect of compliance,
London Stock Exchange continuing obligations and other matters. These reports
were reviewed by the Board. No material adverse findings were identified in
these reports.
Corporate Social Responsibility
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 main service providers.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which has introduced a new
Corporate Criminal Offence of 'failing to take reasonable steps to prevent the
facilitation of tax evasion', the Board confirms that it is committed to zero
tolerance towards the criminal facilitation of tax evasion.
The Board also keeps under review developments involving other social and
environmental issues, such as Modern Slavery and General Data Protection
Regulation ("GDPR"), and will report on those to the extent they are considered
relevant to the Company's operations.
Principal Risks and Uncertainties
The Board is responsible for the Company's system of internal controls and for
reviewing its effectiveness. The Board is satisfied, by using the Company's
risk matrix in establishing the Company's system of internal controls, while
monitoring the Company's investment objective and policy, that the Board has
carried out a robust assessment of the principal risks and uncertainties facing
the Company. The principal risks and uncertainties 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 Board reviews reports
from the Manager, which has discretion over portfolio allocation, at each
quarterly Board meeting, paying particular attention to this allocation and to
the performance and volatility of underlying investments;
- Operational Risks: The Company is exposed to the risks arising from
any failure of systems and controls in the operations of the Manager or the
Administrator. The Board receives reports annually from the Manager and
Administrator on their internal controls;
- 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 accounting records prepared by the Administrator are
reviewed by the Manager. The Administrator provides the Board with regular
reports on changes in regulations and accounting requirements;
- Financial Market Risks: The financial risks faced by the Company,
include market, and credit risk. These risks and the controls in place to
mitigate them are reviewed at each quarterly Board meeting; and
- Liquidity Risks: While the Company retains sufficient working
capital to ensure that it can meet its normal running costs, this is a
relatively modest amount. It is therefore dependent on its continued access to
funding from third parties and the timely receipt of the proceeds from
redemption requests made to BHMS for all other purposes. The Board monitors the
liquidity needs of the Company and takes such action as is appropriate.
The Board seeks to mitigate and manage these risks through continual review,
policy-setting and enforcement of contractual obligations and will update the
risk assessment matrix to reflect any changes to the control environment.
Relations with Shareholders
The Board welcomes shareholders' views and places great importance on
communication with its shareholders. The Chairman has conducted and continues
to conduct meetings with a number of major shareholders in order to receive
their view on the Company. The Board also receives regular reports on the views
of its shareholders from its brokers, JP Morgan Cazenove and Canaccord Genuity,
marketing consultants, Kepler Partners LLP and from the Manager. In addition,
the Chairman and other Directors are available to shareholders if requested and
the Annual General Meeting of the Company provides a forum for shareholders to
meet and discuss issues with the Directors of the Company.
The Company provides weekly unaudited estimates of the NAVs, month-end
unaudited NAVs and a monthly newsletter. These are published via RNS and are
also available on the Company's website, www.bhglobal.com. Risk reports are
also available on the Company's website.
In addition to the Company's brokers, the Manager maintains regular dialogue
with institutional shareholders, the feedback from whom is reported to the
Board.
Significant Shareholders
As at 31 December 2017, the following registered shareholders had significant
shareholdings in the Company:
% holdings
Significant shareholders Total shares in class
held
Sterling shares
Cheviot Capital (Nominees) Limited 4,361,731 21.44
Rathbone Nominees Limited 2,752,056 13.53
Nortrust Nominees Limited 1,564,807 7.69
Smith & Williamson Nominees Limited 1,074,249 5.28
The Bank Of New York (Nominees) Limited 990,049 4.87
Wealth Nominees Limited 964,124 4.74
Brooks MacDonald Nominees Limited 802,771 3.95
Roy Nominees Limited 748,913 3.68
Pershing Nominees Limited 690,421 3.39
HSBC Global Custody Nominee (UK) Limited 638,189 3.14
% holdings
Significant shareholders Total shares in class
held
US Dollar shares
Wealth Nominees Limited 1,160,437 38.62
Euroclear Nominees Limited 624,889 20.80
Pershing Nominees Limited 162,265 5.40
Rathbone Nominees Limited 126,267 4.20
Vidacos Nominees Limited 124,861 4.16
Lynchwood Nominees Limited 94,185 3.13
Ongoing charges
Ongoing charges for the year ended 31 December 2017 and 31 December 2016 have
been prepared in accordance with the AIC's recommended methodology. Note this
was not the methodology used when producing the Key Information Document
("KID").
The Ongoing Charges figures include the ongoing charges of BHMS.
BHMS investments are not subject to management fees, operational services fees
or performance fees but do bear normal administrative expenses.
The following table presents the Ongoing Charges and the Company's performance
fees for each share class:
31.12.17
US Dollar Sterling
Shares Shares
Company - Ongoing Charges 1.71% 1.68%
BHMS - Ongoing Charges 0.13% 0.13%
Performance fee 0.40% 0.15%
Total Ongoing Charges plus performance fees 2.24% 1.96%
Ongoing charges
31.12.16
US Dollar Sterling
Shares Shares
Company - Ongoing Charges 2.38% 2.31%
BHMS - Ongoing Charges 0.09% 0.09%
Performance fee 0.73% 0.81%
Total Ongoing Charges plus performance fees 3.20% 3.21%
Further information regarding expenses is provided in the KID for each share
class which is available on the Company's website.
Signed on behalf of the Board by:
Sir Michael Bunbury
Chairman
John Hallam
Director
22 March 2018
AUDIT COMMITTEE REPORT
Dear Shareholder,
We present the Audit Committee's Report for 2017, setting out the
responsibilities of the Audit Committee and its key activities in 2017. As in
previous years, the Audit Committee has reviewed the Company's financial
reporting, the independence and effectiveness of the Independent Auditor and
the internal control and risk management systems of the Company's service
providers. In order to assist the Audit Committee in discharging these
responsibilities, regular reports are received and reviewed from the Manager,
Administrator and Independent Auditor. Following the review of the
independence, objectivity and effectiveness of the Company's Independent
Auditor, the Audit Committee has recommended to the Board that KPMG Channel
Islands Limited be reappointed as Independent Auditor, which the Board will
submit to the Company's Members for approval.
As noted earlier Sally-Ann Farnon has now joined the Board and will take over
from me as Chairman of the Audit Committee in due course.
A member of the Audit Committee will be available at each Annual General
Meeting to respond to any shareholder questions on the activities of the Audit
Committee.
John Hallam
Chairman, Audit Committee
Responsibilities
The Audit Committee reviews and recommends to the Board, the Financial
Statements of the Company and is the forum through which the Independent
Auditor reports to the Board of Directors. The Independent Auditor and the
Audit Committee are able to meet together, without representatives of either
the Administrator or Manager being present, if either consider this to be
necessary.
The role of the Audit Committee includes:
- monitoring the integrity of the published financial statements of
the Company;
- reviewing and reporting 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 Independent Auditor)
and other financial information;
- monitoring and reviewing the quality and effectiveness of the
Independent Auditor and their independence;
- considering and making recommendations to the Board on the
appointment, reappointment, replacement and remuneration to the Company's
Independent Auditor;
- reviewing the Company's procedures for prevention, detection and
reporting of fraud, bribery and corruption; and
- monitoring and reviewing the internal control and risk management
systems of the service providers.
The Audit Committee's full terms of reference can be obtained by contacting the
Administrator.
Key activities of the Audit Committee:
The following sections discuss the activities of the Audit Committee during the
year:
Financial Reporting:
The Audit Committee's review of the annual financial statements focused on what
it believes to be the only significant issue:
The Company's investment in BHMS had a fair value of US$430,643,187 as at 31
December 2017 and represents the majority of the net assets of the Company and
as such is the 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 3 to the Financial Statements. The Financial
Statements of BHMS for the year ended 31 December 2017 were audited by KPMG
Cayman Islands who issued an unqualified audit opinion dated 21 March 2018. The
Audit Committee considered the Financial Statements of BHMS and its accounting
policies in determining that the fair value of the investment in BHMS at
31 December 2017 is reasonable.
The Independent Auditor reported to the Committee that no material
misstatements were found in the course of their work. Furthermore, the Manager
and Administrator confirmed to the Committee that they were not aware of any
material misstatements including matters relating to financial statement
presentation. The Audit Committee confirms that it is satisfied that the
Independent Auditor has fulfilled its responsibilities with diligence and
professional scepticism. At the request of the Board, the Audit Committee
considered whether the 2017 Annual Report and Audited Financial Statements,
taken as a whole, are fair, balanced and understandable and whether they
provided the necessary information for shareholders to assess the Company's
performance, business model and strategy. The Audit Committee are satisfied
that the Annual Report and Audited Financial Statements, taken as a whole, are
fair, balanced and understandable, and provide the necessary information for
the shareholders to assess the Company's performance.
Following a review of the presentations and reports from the Administrator and
consulting where necessary with the Independent Auditor, the Audit Committee is
satisfied that the financial statements appropriately address any critical
judgements and key estimates (both in respect to the amounts reported and the
disclosures). The Audit Committee is also satisfied that the significant
assumptions used for determining the value of assets and liabilities have been
appropriately scrutinised, challenged and are sufficiently robust.
Risk Management:
The Audit Committee continued to consider the process for managing the risk
faced by 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 Committee.
Corporate Social Responsibility
The Audit Committee, in conjunction with the Management Engagement Committee,
continued to monitor and review the procedures of the Company to combat fraud,
bribery and corruption. Confirmation is received from all major service
providers that they are not aware of any instances of fraud, bribery or
corruption.
The Independent Auditor:
Independence, objectivity and fees:
The independence and objectivity of the Independent Auditor is regularly
reviewed by the Audit Committee which also reviews the terms under which the
Independent Auditor is appointed to perform non-audit services. The Audit
Committee has established pre-approval policies and procedures for the
engagement of the Independent Auditor to provide audit, assurance and tax
services.
These are that the Independent Auditor may not provide a service which:
- places them in a position to audit their own work;
- creates a mutuality of interest;
- results in the Independent Auditor developing close relationships
with service providers of the Company;
- results in the Independent Auditor functioning as a manager or
employee of the Company; or
- puts the Independent Auditor in the role of advocate of the
Company.
As a general rule, the Audit Committee does not utilise the Independent Auditor
for internal audit purposes, secondment or valuation advice. Services such as
tax compliance, tax restructuring, quarterly reviews and disclosure advice are
normally permitted but must be pre-approved by the Audit Committee where fees
are likely to be in excess of GBP25,000.
The Audit Committee considered reports from the Independent Auditor on their
procedures to identify and mitigate any threats to independence and concluded
that the procedures were sufficient to identify any threats to independence.
The Audit Committee together with the Chairman and the Administrator completed
a questionnaire covering areas such as quality of audit team, business
understanding, audit approach and management. The results of the questionnaire
indicated that the Independent Auditor performed effectively during the period.
The following table summarises the remuneration paid to KPMG Channel Islands
Limited for audit and non-audit services provided to the Company during the
years ended 31 December 2017 and 31 December 2016:
01.01.17 01.01.16
to 31.12.17 to
31.12.16
KPMG Channel Islands Limited
- Annual audit GBP28,000 GBP28,000
- Auditor's interim review GBP8,800 GBP8,800
In line with the policies and procedures above, the Audit Committee does not
consider that the provision of these non-audit services, which comprised the
Auditor's interim review, to be a threat to the objectivity and independence of
the Independent Auditor. The Audit Committee has also considered the overall
level of services provided by KPMG member firms to the wider Brevan Howard
organisation and does not consider these to pose a threat to the Independent
Auditor's independence.
KPMG Channel Islands Limited has been the Company's Independent Auditor from
the date of the initial listing on the London Stock Exchange. The external
audit was most recently tendered for the years commencing after 31 December
2015. As reported in the Annual Report for the year ended 31 December 2015,
KPMG Channel Islands Limited was re-appointed as auditor following the
completion of the tender process and currently it is anticipated that the audit
will be tendered within the next eight years.
The Audit Committee has examined the scope and results of the external audit,
its cost effectiveness and the independence and objectivity of the Independent
Auditor, with particular regard to non-audit fees, and considers KPMG Channel
Islands Limited, as Independent Auditor, to be independent of the Company.
Performance and Effectiveness:
During the year, when considering the effectiveness of the Independent Auditor,
the Audit Committee has taken into account the following factors:-
- The audit plan presented to them;
- The audit findings report including variations from the original
plan;
- Changes in audit personnel;
- The Independent Auditor's own internal procedures to identify
threats to independence; and
- Feedback from both the Manager and Administrator.
The Audit Committee reviewed the audit plan and the audit findings report of
the Independent Auditor and concluded that a) the audit plan sufficiently
identified audit risks; b) that the audit findings report indicated that the
audit risks were sufficiently addressed; and c) there were no significant
variations from the audit plan.
Reappointment:
Consequent to the review discussed above, the Audit Committee has recommended
to the Board that a resolution be put to the 2018 AGM for the reappointment of
KPMG Channel Islands Limited as Independent Auditor. The Board has accepted
this recommendation.
Internal Control and Risk Management Systems
As the Company's investment objective is to invest substantially all of its
assets in BHMS, the Audit Committee, after consultation with the Manager and
Independent Auditor, considers the key risk of material misstatement in its
financial statements to be the valuation of its investment in BHMS, but are
also mindful of the risk of the override of controls by its service providers,
the Manager and Administrator.
The Audit Committee reviews and examines externally prepared assessments of the
control environment in place at the Manager and the Administrator, with each
providing a Service Organisation Report ("SOC1") on an ongoing basis. No
significant failings or weaknesses were identified in these reports by the
Audit Committee.
The Audit Committee annually reviews the need for an internal audit function.
The Committee is of the view that the systems, procedures and internal audit
functions in operation at both the Manager and Administrator provide sufficient
assurance that a sound system of internal control is being maintained. An
internal audit function, specific to the Company, is therefore considered
unnecessary.
The Audit Committee Report was approved by the Board on 22 March 2018 and
signed on its behalf by:
John Hallam
Chairman, Audit Committee
STATEMENT OF DIRECTORS' RESPONSIBILITY IN RESPECT OF THE ANNUAL REPORT AND
AUDITED FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and financial
statements in accordance with applicable law and regulations.
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 accordance with accounting principles generally accepted in the
United States of America and applicable law.
Under Company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of its profit or loss 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, relevant and
reliable;
- state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the Financial
Statements;
- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and
- use the going concern basis of accounting unless they either intend
to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
The Directors are responsible for keeping proper accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that its financial statements comply with the Companies
(Guernsey) Law, 2008. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error, and 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.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company's website.
Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial
report
We confirm that to the best of our knowledge:
- 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 Financial Statements, 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
- the Chairman's Statement, Director's report and Manager's report
includes a fair review of the development and performance of the business and
the position of the issuer, together with a description of the principal risks
and uncertainties that they face.
We consider the annual report and audited financial statements, taken as a
whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's position and performance,
business model and strategy.
Signed on behalf of the Board by:
Sir Michael Bunbury
Chairman
John Hallam
Director
22 March 2018
DIRECTORS' REMUNERATION REPORT
As at 31 December 2017
Introduction
An ordinary resolution for the approval of this Directors' Remuneration Report
will be put to the shareholders at the forthcoming Annual General Meeting to be
held in 2018.
Remuneration Policy
All Directors are non-executive and a Remuneration Committee has not been
established. The Board as a whole considers matters relating to the Directors'
remuneration. An external assessment of Directors' remuneration has not been
undertaken.
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 Chairman of the Board is paid a higher fee in recognition of his additional
responsibilities, as are the Chairmen of the Audit Committee and Management
Engagement 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 and Section 21.3 of the Company's Articles requires, as does the
AIC Code, that all of the Directors to retire at each Annual General Meeting.
At the Annual General Meeting of the Company, on 26 June 2017, Mr Morgan did
not offer himself for re-election and shareholders re-elected all other
Directors of the Company. Director appointments can also be terminated in
accordance with the 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.
Directors' Fees
The Company's Articles limit the fees payable to Directors in aggregate to GBP
500,000 per annum.
With effect from 1 July 2017, director's fees paid to each Director increased
to GBP40,000, with additional fees of GBP3,000 payable to both the Senior
Independent Director, and the Chairman of the Management Engagement Committee
and an additional GBP10,000 payable to the Chairman of the Audit Committee.
The fees payable by the Company in respect of each of the Directors who served
during the year, and during 2016, were as follows:
01.01.17 01.01.16
to 31.12.17 to 31.12.16
GBP GBP
Sir Michael Bunbury 150,000 150,000
John Hallam 44,500 36,000
Graham Harrison 36,500 33,000
Talmai Morgan1 16,500 33,000
Nicholas Moss 39,500 36,000
Julia Chapman2 35,031 -
Sally-Ann Farnon3 - -
Total 322,031 288,000
1 Talmai Morgan retired from the board on 26 June 2017.
2 Julia Chapman was appointed to the board on 16 January 2017.
3 Sally-Ann Farnon was appointed to the board on 13 March 2018.
Signed on behalf of the Board by:
Sir Michael Bunbury
Chairman
John Hallam
Director
22 March 2018
BOARD MEMBERS
The Directors of the Company, all of whom are non-executive, are listed below:
Sir Michael Bunbury (Chairman), age 71
Sir Michael Bunbury is Chairman and non-executive Director of the Company. He
is an experienced Director of listed and private investment, property and
financial services companies. He is currently the Chairman of HarbourVest
Global Private Equity Limited, a Director of Invesco Perpetual Select Trust
plc, former chairman of JP Morgan Claverhouse Investment Trust plc, and a
former Director of Foreign & Colonial Investment Trust plc. Sir Michael began
his career in 1968 at Buckmaster & Moore, before joining Smith & Williamson,
Investment Managers and Chartered Accountants, in 1974 as a Partner. He later
served as Director and chairman and retired as a consultant to the firm in
2017. Sir Michael was appointed to the Board in 2013.
John Hallam, (Senior Independent Director), age 68
John Hallam is resident in Guernsey, is a Fellow of the Institute of Chartered
Accountants in England and Wales and qualified as an accountant in 1971. He is
a former partner of PricewaterhouseCoopers having retired in 1999 after 27
years with the firm both in Guernsey and in other countries. He is Chairman of
NB Distressed Debt Investment Fund Limited as well as being a Director of a
number of financial services companies, some of which are listed on the London
Stock Exchange. He served for many years as a member of the Guernsey Financial
Services Commission (Guernsey's financial regulatory agency) from which he
retired in 2006 having been its Chairman for the previous three years. Mr
Hallam was appointed to the Board in 2008.
Julia Chapman, age 52
Julia Chapman is a solicitor qualified in England & Wales and in Jersey with
over 25 years' experience in the investment fund and capital markets sector.
After working at Simmons & Simmons in London, she moved to Jersey and became a
partner of Mourant du Feu & Jeune (now Mourant Ozannes) in 1999. She was then
appointed general counsel to Mourant International Finance Administration (the
firm's fund administration division). Following its acquisition by State Street
in April 2010, Mrs Chapman was appointed European Senior Counsel for State
Street's alternative investment business. In July 2012, Mrs Chapman left State
Street to focus on the independent provision of directorship and governance
services to a small number of investment fund vehicles (including GCP
Infrastructure Investments Limited and Henderson Far East Income Limited). Mrs
Chapman was appointed to the Board on 16 January 2017.
Graham Harrison, age 52
Graham Harrison is a Guernsey resident and a Chartered Fellow of the Chartered
Institute for Securities and Investment. Mr Harrison is co-founder and Group
Managing Director of Asset Risk Consultants ("ARC"). After obtaining a post
graduate degree from the London School of Economics, Mr Harrison worked for
HSBC in its corporate finance division where he specialised in financial
engineering. Following a secondment with the Caribbean Development Bank he
moved to Guernsey to work for the Bachmann Group with a brief to develop asset
management and investment consultancy services. In 2002 he led the management
buy-out of ARC, taking the company independent. Mr Harrison is a Director of a
number of investment vehicles two of which are listed. Mr Harrison was
appointed to the Board in 2010.
Nicholas Moss, age 58
Nicholas Moss is a Guernsey resident and a Fellow of the Institute of Chartered
Accountants in England & Wales. After leaving N M Rothschild in 2005 where he
was a managing director in their international private wealth division he co-
founded the Virtus Trust Group, an international fiduciary and investment
services business headquartered in Guernsey with operations in several
countries including the US, UK, New Zealand and the Cayman Islands. In 2017 he
led the sale of Virtus to Equiom group, a well-established, international
professional services provider offering a range of innovative and effective
business solutions. Mr Moss is a highly experienced ?duciary and investment
practitioner, advising family of?ces and private clients in many jurisdictions.
He regularly assists clients in the establishment and ongoing monitoring of
complex multi-manager client investment portfolios as well as advising on other
assets such as real estate, art collections and other collectables. He holds a
number of non-executive Board appointments including the London premium segment
listed Carador Income Fund PLC as well as FTSE 250 listed Syncona Limited and
several real estate, specialist asset and investment funds. Mr Moss was
appointed to the Board in 2008.
Sally-Ann Farnon, age 57
Sally-Ann ("Susie") Farnon is a Guernsey resident and is a fellow of the
Institute of Chartered Accountants in England and Wales, having qualified as an
accountant in 1983. Mrs Farnon is a non-executive Director of a number of
property and investment companies. Mrs Farnon was a Banking and Finance Partner
with KPMG Channel Islands from 1990 until 2001 and head of Audit KPMG Channel
Islands from 1999. She has served as President of the Guernsey Society of
Chartered and Certified Accountants and as a member of The States of Guernsey
Audit Commission and Vice-Chairman of the GFSC. Mrs Farnon was appointed to the
Board in 2018.
The following summarises the Directors' directorships in other public
companies:
Company Name Exchange
Sir Michael Bunbury
HarbourVest Global Private Equity Limited London
Invesco Perpetual Select Trust plc London
John Hallam
NB Distressed Debt Investment Fund Limited SFS
Real Estate Credit Investments Limited London
Julia Chapman
GCP Infrastructure Investments Limited London
Henderson Far East Income Limited London and New Zealand
Graham Harrison
Real Estate Credit Investments Limited London
Volta Finance Limited London & Amsterdam
Nicholas Moss
Syncona Limited London
Carador Income Fund PLC London
Sally-Ann Farnon
Apax Global Alpha Limited London
Breedon Aggregates Limited AIM
HICL Infrastructure Company Limited London
Real Estate Credit Investments Limited London
Standard Life Investments Property Income London
Trust Limited
Certain Directors hold additional directorships in companies that are listed on
various exchanges but are not actively traded. Details of these may be obtained
from the Company Secretary.
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF BH GLOBAL LIMITED
Our opinion is unmodified
We have audited the financial statements of BH Global Limited (the "Company"),
which comprise the Audited Statement of Assets and Liabilities as at 31
December 2017, the Audited Statements of Operations, Changes in Net Assets and
Cash Flows for the year then ended, and notes, comprising significant
accounting policies and other explanatory information.
In our opinion, the accompanying financial statements:
- give a true and fair view of the financial position of the Company
as at 31 December 2017, and of the
Company's
financial performance and the Company's cash flows for the year then ended;
- are prepared in conformity with United States Generally Accepted
Accounting Principles; and
- comply with the Companies (Guernsey) Law, 2008.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities are described below.
We have fulfilled our ethical responsibilities under, and are independent of
the Company in accordance with, UK ethical requirements including FRC Ethical
Standards as applied to listed entities. We believe that the audit evidence we
have obtained is a sufficient and appropriate basis for our opinion.
Key Audit Matters: our assessment of the risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of
most significance in the audit of the financial statements and include the most
significant assessed risks of material misstatement (whether or not due to
fraud) identified by us, including those which had the greatest effect on: the
overall audit strategy; the allocation of resources in the audit; and directing
the efforts of the engagement team. These matters were addressed in the
context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters. In
arriving at our audit opinion above, the key audit matter was as follows
(unchanged from 2016):
The risk Our response
Valuation of Basis: Our audit procedures
Investment in The Company, which is a included, but were not
Brevan Howard multi-class feeder fund, limited to:
Multi-Strategy had invested 97% of its net -Confirmed the net asset
Master Fund assets at 31 December 2017 value per share and holdings
Limited (the into the ordinary US Dollar per share for each respective
"Master Fund") and Sterling denominated share class directly with the
Class G Shares issued by administrator of the Master
$430,643,187; the Master Fund, which is Fund
(2016 an open ended investment -Reviewing the audit work
$438,851,412) company. performed by the auditor of
The Company's investment the Master Fund in respect of
Refer to the holdings in the Master Fund their audit, to gain insight
report of the are valued using the over the audit work performed
Audit Committee respective net asset value on the significant elements
and note 3 per share class as provided of the Master Fund's NAV; and
accounting policy by the Master Fund's holding discussions on key
administrator. audit findings with the
Risk: auditor of the Master Fund
The valuation of the -Examination of the Master
Company's Investment in the Fund's coterminous audited
Master Fund, given it financial statements to
represents the majority of corroborate the net asset
the net assets of the value per share
Company, is a significant -We also considered the
area of our audit. Company's investment
valuation policies as
disclosed in note 3 to the
financial statements for
conformity with United States
Generally Accepted Accounting
Principles
Our application of materiality and an overview of the scope of our audit
Materiality for the financial statements as a whole was set at $13,268,000,
determined with reference to a benchmark of Net Assets of $442,291,000, of
which it represents approximately 3% (2016: 3%).
We reported to the Audit Committee any corrected or uncorrected identified
misstatements exceeding $663,000, in addition to other identified misstatements
that warranted reporting on qualitative grounds.
Our audit of the Company was undertaken to the materiality level specified
above, which has informed our identification of significant risks of material
misstatement and the associated audit procedures performed in those areas as
detailed above.
We have nothing to report on going concern
We are required to report to you if we have anything material to add or draw
attention to in relation to the directors' statement in note 3 to the financial
statements on the use of the going concern basis of accounting with no material
uncertainties that may cast significant doubt over the Company's use of that
basis for a period of at least twelve months from the date of approval of the
financial statements. We have nothing to report in this respect.
We have nothing to report on the other information in the Annual Report
The directors are responsible for the other information presented in the Annual
Report together with the financial statements. Our opinion on the financial
statements does not cover the other information and we do not express an audit
opinion or any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider
whether, based on our financial statements audit work, the information therein
is materially misstated or inconsistent with the financial statements or our
audit knowledge. Based solely on that work we have not identified material
misstatements in the other information.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit, we
have nothing material to add or draw attention to in relation to:
* the directors' confirmation within the Viability Statement that
they have carried out a robust assessment of the principal risks facing the
Company, including those that would threaten its business model, future
performance, solvency or liquidity;
* the Principal Risks disclosures describing these risks and
explaining how they are being managed or mitigated;
* the directors' explanation in the Viability Statement as to how
they have assessed the prospects of the Company, 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 Company
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;
Corporate governance disclosures
We are required to report to you if:
* we have identified material inconsistencies between the knowledge
we acquired during our financial statements audit and the directors' statement
that they consider that the annual report and financial statements taken as a
whole is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's position and performance,
business model and strategy; or
* the section of the annual report describing the work of the Audit
Committee does not appropriately address matters communicated by us to the
Audit Committee.
We are required to report to you if the Corporate Governance Statement does not
properly disclose a departure from the eleven provisions of the 2016 UK
Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report to you in these respects.
We have nothing to report on other matters on which we are required to report
by exception
We have nothing to report in respect of the following matters where the
Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:
* the Company has not kept proper accounting records; or
* the financial statements are not in agreement with the accounting
records; or
* we have not received all the information and explanations, which to
the best of our knowledge and belief are necessary for the purpose of our
audit.
Respective responsibilities
Directors' responsibilities
As explained more fully in their statement set out on the Statement of
Directors' Responsibility, the Directors are responsible for: the preparation
of the financial statements including being satisfied that they give a true and
fair view; such internal control as they determine is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error; assessing the Company's ability to continue as a
going concern, disclosing, as applicable, matters related to going concern; and
using the going concern basis of accounting unless they either intend to
liquidate the Company or to cease operations, or have no realistic alternative
but to do so.
Auditor's responsibilities
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue our opinion in an auditor's report. Reasonable
assurance is a high level of assurance, but does not guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of
the financial statements.
A fuller description of our responsibilities is provided on the FRC's website
at www.frc.org.uk/auditorsresponsibilities.
The purpose of this report and restrictions on its use by persons other than
the Company's members as a body
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.
Barry T. Ryan
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors
Glategny Court
Glategny Esplanade
St Peter Port
Guernsey
GY1 1WR
22 March 2018
AUDITED STATEMENT OF ASSETS AND LIABILITIES
As at 31 December 2017
31.12.17 31.12.16
US$'000 US$'000
Assets
Investment in BHMS 430,643 438,851
Amount due from BHMS - 300
Other debtors 29 106
Cash and bank balances denominated in US Dollars 1,334 2,110
Cash and bank balances denominated in Sterling 11,701 16,280
Total assets 443,707 457,647
Liabilities
Management fees payable 377 734
Performance fees payable 831 3,608
Accrued expenses and other liabilities 167 136
Directors' fees and expenses payable - 88
Administration fees payable 41 30
Total liabilities 1,416 4,596
Net assets 442,291 453,051
Number of shares in issue
US Dollar shares 3,004,442 4,186,219
Sterling shares 20,346,871 22,471,006
Net asset value per share
US Dollar shares US$14.56 US$14.19
Sterling shares GBP14.58 GBP14.33
See accompanying notes to the Financial Statements.
Signed on behalf of the Board by:
Sir Michael Bunbury
Chairman
John Hallam
Director
22 March 2018
AUDITED STATEMENT OF OPERATIONS
For the year ended 31 December 2017
01.01.17 01.01.16
to 31.12.17 to 31.12.16
US$'000 US$'000
Net investment gain allocated from BHMS
Interest income 22,333 19,933
Expenses (5,260) (1,650)
Net investment gain allocated from BHMS 17,073 18,283
Company income
Interest income 2 -
Foreign exchange gains 38,012 -
Total Company income 38,014 -
Company expenses
Management fees 6,197 9,747
Performance fees 807 3,938
Other expenses 951 1,232
Directors' fees and expenses 417 389
Administration fees 178 196
Foreign exchange losses - 84,593
Total Company expenses 8,550 100,095
Net investment gain/(loss) 46,537 (81,812)
Net realised and unrealised gains/(losses) on investments
allocated from BHMS
Net realised gain on investments 21,178 60,944
Net unrealised loss on investments (22,051) (33,816)
Net realised and unrealised foreign exchange loss
- on hedging (4,632) (2,703)
Net realised and unrealised (losses)/ (5,505) 24,425
gains on investments allocated from BHMS
Net increase/(decrease) in net assets resulting from operations 41,032 (57,387)
See accompanying notes to the Financial Statements.
AUDITED STATEMENT OF CHANGES IN NET ASSETS
For the year ended 31 December 2017
01.01.17 01.01.16
to to 31.12.16
31.12.17
US$'000 US$'000
Net increase/(decrease) in net assets resulting from operations
Net investment gain/(loss) 46,537 (81,812)
Net realised gain on investments allocated from 21,178 60,944
BHMS
Net unrealised loss on (22,051) (33,816)
investments allocated from
BHMS
Net realised and unrealised (4,632) (2,703)
foreign exchange loss
allocated from BHMS
41,032 (57,387)
Share capital transactions
Purchase of own shares
US Dollar shares (4,493) (9,142)
Sterling shares (47,299) (46,077)
(51,792) (55,219)
Net decrease in net assets (10,760) (112,606)
Net assets at the beginning of the year 453,051 565,657
Net assets at the end of the year 442,291 453,051
See accompanying notes to the Financial Statements.
AUDITED STATEMENT OF CASH FLOWS
For the year ended 31 December 2017
01.01.17 01.01.16
to 31.12.17 to 31.12.16
US$'000 US$'000
Cash flows from operating activities
Net increase/(decrease) in net assets resulting from operations 41,032 (57,387)
Adjustments to reconcile net increase/(decrease) in net assets
resulting from operations to net cash provided by operating activities:
Net investment gain allocated from BHMS (17,073) (18,283)
Net realised gain on investments allocated from BHMS (21,178) (60,944)
Net unrealised loss on investments allocated from BHMS 22,051 33,816
Net realised and unrealised foreign exchange loss
allocated from BHMS 4,632 2,703
Purchase of investment in BHMS - (2,000)
Proceeds from sale of investment in BHMS 57,521 106,181
Interest expense on short term loan 53 207
Foreign exchange (gains)/losses (38,012) 84,593
Decrease/(increase) in other debtors 77 (38)
Decrease in management fees payable (357) (229)
(Decrease)/increase in performance fees (2,777) 3,333
payable
Increase/(decrease) in accrued expenses and 31 (26)
other liabilities
Decrease in Directors' fees payable (88) (19)
Increase/(decrease) in administration fees payable 11 (8)
Net cash provided by operating activities 45,923 91,899
Cash flows from financing activities
Purchase of own shares (51,792) (56,162)
Proceeds of borrowings from short term loan 14,024 3,415
Repayment of borrowings from short term loan (14,222) (28,239)
Interest paid on short term loan (53) (704)
Net cash used in financing activities (52,043) (81,690)
Change in cash (6,120) 10,209
Cash, beginning of the year 18,390 11,978
Effect of exchange rate fluctuations 765 (3,797)
Cash, end of the year 13,035 18,390
Cash, end of the year
Cash and bank balances denominated in US Dollars 1,334 2,110
Cash and bank balances denominated in Sterling1 11,701 16,280
13,035 18,390
1 Cash and bank balances in Sterling (GBP'000) 8,709 13,316
See accompanying notes to the Financial Statements.
NOTES TO THE AUDITED FINANCIAL STATEMENTS
For the year ended 31 December 2017
1. The Company
BH Global Limited (the "Company") is a limited liability closed-ended
investment company incorporated in Guernsey on 25 February 2008 for an
unlimited period, with registration number 48555.
The Company has a Premium Listing on the London Stock Exchange and until 30
September 2017 and 31 December 2017, had Secondary Listings on the Bermuda
Stock Exchange and on NASDAQ Dubai respectively.
The Company can offer multiple classes of ordinary shares, which differ in
terms of currency of issue with ordinary shares denominated in US Dollar and
Sterling currently being in issue.
2. Organisation
The Company's investment objective is to seek to generate consistent long-term
capital appreciation through an investment policy of investing all of its
assets (net of funds required for its short-term working capital requirements)
in Brevan Howard Multi-Strategy Master Fund Limited ("BHMS" or the "Master
Fund").
The Company is organised as a feeder fund and invests substantially all of its
investable assets in the ordinary US Dollar and Sterling denominated Class G
shares issued by BHMS, and, as such, the Company is directly and materially
affected by the performance and actions of BHMS.
As such the Financial Statements of the Company should be read in conjunction
with the Annual Audited Financial Statements of BHMS, which can be found on the
Company's website, www.bhglobal.com.
BHMS is an open-ended investment company incorporated with limited liability in
the Cayman Islands on 21 January 2008.
BHMS's underlying investments in funds at 31 December 2017 and the percentage
that BHMS's investment represented of the underlying fund's Net Asset Value
("NAV") are as follows:
Brevan Howard AH Master Fund Limited* 2.95%
Brevan Howard AS Macro Master Fund Limited* 10.81%
Brevan Howard Master Fund Limited
3.69%
Brevan Howard Asia Master Fund Limited
3.22%
BH-DG Systematic Trading Master Fund Limited 21.84%
*Investment is made through the DIP.
BHMS has flexibility to invest in a wide range of instruments including, but
not limited to, debt securities and obligations (which may be below investment
grade), bank loans, listed and unlisted equities, other collective investment
schemes or vehicles (which may be open-ended or closed-ended, listed or
unlisted, regulated or unregulated and may employ leverage (each an "Investment
Fund")), currencies, commodities, futures, options, warrants, swaps and other
derivative instruments. Derivative instruments may be exchange traded or OTC.
BHMS may engage in short sales. BHMS may retain amounts in cash or cash
equivalents (including money market funds) pending reinvestment, for use as
collateral or if this is considered appropriate to the investment objective.
Subject to the investment restrictions and investment approach disclosed in any
prospectus for BHMS that may be published from time to time and subsequent BHMS
Directors' resolutions, BHMS employs an investment process which empowers the
Manager to allocate assets to both Investment Funds and directly to the
investment managers of BHMS from time to time on an opportunistic basis.
At the date of these Financial Statements, there were two other feeder funds in
operation in addition to the Company that invest all of their assets (net of
working capital) in BHMS.
Off-balance sheet, market and credit risks of BHMS's investments and activities
are discussed in the notes to the Annual Audited Financial Statements of BHMS.
The Company's investment in BHMS exposes it to various types of risk, which are
associated with the financial instruments and markets in which the Brevan
Howard funds invest. Market risk represents the potential loss in value of
financial instruments caused by movements in market factors including, but not
limited to, market liquidity, investor sentiment and foreign exchange rates.
The Manager
Brevan Howard Capital Management LP (the "Manager") is the manager of the
Company. The Manager is a Jersey limited partnership, the sole general partner
of which is Brevan Howard Capital Management Limited, a Jersey limited company
(the "General Partner"). The General Partner 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 and is
the Alternative Investment Fund Manager ("AIFM") of the Company for the
purposes of the European Union Alternative Investment Fund Manager Directive
("AIFMD").
The Manager also manages BHMS.
3. Significant Accounting Policies
The Annual Audited Financial Statements, which give a true and fair view, are
prepared in conformity with United States Generally Accepted Accounting
Principles 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
Accounting Standards Codification ("ASC") 946.
Going concern
After making enquiries and given the nature of the Company and its investment,
the Directors are satisfied that it is appropriate to continue to adopt the
going concern basis in preparing these Financial Statements and, after due
consideration, the Directors consider that the Company is able to continue for
the foreseeable future and at least twelve months from the date of this report.
In reaching this conclusion the Board is mindful of the nature of the assets
that underlie its investment in BHMS, including BHMS's liquidity and has
concluded that moderate adverse investment performance will not have a material
impact on the Company's ability to meet its liabilities as they fall due.
The following are significant accounting policies adopted by the Company:
Valuation of investments
The Company records its investment in the Class G shares of BHMS as the
Company's proportionate share of BHMS's net assets which approximates fair
value. At 31 December 2017, the Company's US Dollar and Sterling capital
account represents 5.06% and 46.05% respectively of BHMS's capital. The net
asset value of BHMS is used as a measure of fair value as this is the price at
which the Company may redeem its investment.
Fair value measurement
ASC Topic 820 defines fair value as the price that the Company would receive
upon selling a security in an orderly transaction to an independent buyer in
the principal or most advantageous market of the security.
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.
Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability based on market data obtained from
sources independent of the reporting entity.
Unobservable inputs are inputs that reflect the reporting entity's own
assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances.
Level 1 - Valuations based on unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to access.
Valuation adjustments and block discounts are not applied to Level 1
securities. Since valuations are based on quoted prices that are readily and
regularly available in an active market, valuation of these securities does not
entail a significant degree of judgement.
Level 2 - Valuations based on quoted prices in markets that are not active and
for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to
the overall fair value measurement.
Inputs are used in applying the various valuation techniques and broadly refer
to the assumptions that market participants use to make valuation decisions,
including assumptions about risk. Inputs may include price information,
volatility statistics, specific and broad credit data, liquidity statistics,
and other factors.
A financial instrument's level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value measurement.
However, the determination of what constitutes "observable" requires
significant judgement by the Company's Directors (the "Board"). After
consultation with the Administrator and Manager, the Board considers observable
data to be that market data which is readily available, regularly distributed
or updated, reliable and verifiable, not proprietary, and provided by
independent sources that are actively involved in the relevant market.
The categorisation of a financial instrument within the hierarchy is based upon
the pricing transparency of the instrument and does not necessarily correspond
to the Board's perceived risk of that instrument.
Fair value is a market-based measure considered from the perspective of a
market participant rather than an entity-specific measure. Therefore, even when
market assumptions are not readily available, the Board's own assumptions are
set to reflect those that market participants would use in pricing the asset or
liability at the measurement date.
The Board uses prices and inputs that are current as of the measurement date,
including periods of market dislocation. In periods of market dislocation, the
observability of prices and inputs may be reduced for many securities. This
condition could cause a security to be reclassified to a lower level within the
fair value hierarchy.
The valuation and classification of securities held by BHMS is discussed in the
notes to its Financial Statements which are available on the Company's website,
www.bhglobal.com. The Company's investment in BHMS is classified as a Level 2
investment.
Income and expenses
The Company records monthly its proportionate share of BHMS's income, expenses
and realised and unrealised gains and losses. In addition, the Company accrues
its own income and expenses.
Use of estimates
The preparation of Financial Statements in conformity with United States
Generally Accepted Accounting Principles requires the Board 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.
Foreign exchange
Investment securities and other assets and liabilities of the Sterling share
class are translated into US Dollars, the Company's reporting currency, using
exchange rates at the reporting date. Transactions reported in the Audited
Statement of Operations 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 Audited Statement of
Operations. This foreign exchange adjustment has no effect on the value of net
assets allocated to the individual share classes.
Cash and bank balances
Cash and bank balances comprise cash on hand and demand deposits.
Treasury shares
Where the Company purchases 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 7 and in the Financial Highlights
in note 10.
Allocation of results of BHMS
Net realised and unrealised gains/losses of BHMS are allocated to the Company's
share classes based upon the percentage ownership of the equivalent BHMS class.
Loan notes payable
Loans are classified in the Audited Statement of Assets and Liabilities as Loan
notes payable and are accounted for at amortised cost using the effective
interest method.
Under a Note Purchase Agreement (note 9), the Company is obliged to pay back
the total outstanding amount and any relevant fees and expenses, reimbursements
and indemnities by the stated maturity date, unless the Note is previously
terminated. Interest shall accrue daily on each Note at the applicable rate.
The Company's obligations under the Agreement are secured by charges over a
portion of its shares in BHMS. The purpose of the Note Purchase Agreement is to
permit the Company to draw funds to finance the acquisition of the Company's
own shares and for other working capital purposes.
4. Management, Performance, and Administration Agreements
Management fee
The Company has entered into a management agreement with the Manager to manage
the Company's investment portfolio.
In the period from 1 January 2016 to 2 October 2016, in line with the
management agreement, the Manager received a management fee of 1/12 of 2% (or a
pro rata proportion thereof) per month of the NAV of each share class (before
deduction of that month's management fee and before making any deduction for
any accrued performance fee) calculated as at the last business day in each
month and payable monthly in arrears.
With effect from 3 October 2016, the Manager does not charge the Company a
management fee in respect of any increase in the NAV of each class of shares of
the Company. The Management Fee is calculated on the basis of the lower of the
NAV of the relevant share class and the Base NAV, as defined in the Amended and
Restated Management Agreement dated 4 July 2017, of that share class (adjusted
for certain changes in shares in issue).
With effect from 1 April 2017 the management fee was reduced from 2% to 1% per
annum.
The Company may repurchase or redeem shares of either class in each calendar
year, including pursuant to the class closure and annual partial capital return
provisions contained in the Company's articles of incorporation (the
"Articles"), in respect of the 2018 calendar year and all subsequent years, up
to an aggregate number equal to 5% of the shares of that class in issue as at
31 December in the prior calendar year (the "Annual Buy Back Allowance")
without making any payment to the Manager.
In the event that, in any calendar year, the aggregate number of shares
repurchased or redeemed by the Company exceeds the Annual Buy Back Allowance
for that class, the Company will be required to pay the Manager an amount equal
to 2% of the repurchase price of any share that is repurchased or redeemed by
the Company in excess of the Annual Buy Back Allowance, including pursuant to
the class closure and annual partial capital return provisions contained in the
Articles.
The Board has agreed with the Manager that if, on the last business day in
March, June, September or December of any year, the net asset value of the
Company were to be below US$300 million (on the basis of the prevailing US
Dollar/Sterling exchange rate), the Board would convene a general meeting of
the Company's shareholders at which a special resolution proposing the
liquidation of the Company would be put forward. Were the resolution to be
passed, the Company would be liquidated and an amount equal to 2% of the
Company's net asset value (subject to a deduction in respect of any amount of
the Annual Buy Back Allowance for the relevant calendar year that remains
unused) would be paid to the Manager in addition to any other fees due to the
Manager up to the date of termination of the management agreement.
In respect of the period from 1 April 2017 to 31 December 2017, (having taken
into account shares that had been repurchased by the Company between 1 January
2017 and 31 March 2017), the Annual Buy Back Allowance for the Company's
Sterling share class was 806,164 Sterling shares and for the US Dollar share
class was 152,630 US Dollar shares.
Between 1 April 2017 and 31 December 2017, the Company repurchased 2,435,052
Sterling shares and 318,988 US Dollar shares, thereby exceeding both the
Sterling and US Dollar Annual Buy Back Allowance.
During the year ended 31 December 2017, US$603,629 was charged by the Manager
due to the Annual Buy Back Allowance being exceeded, of which US$nil remained
payable at year end. The expense has been included in Management fees in the
Audited Statement of Operations.
There are no fees charged by the Manager at the level of BHMS or any of its
underlying funds.
In respect of the year ended 31 December 2017, the Manager charged the Company
a total of US$6,196,942 (31 December 2016: US$9,746,589) under the terms of the
management agreement. At 31 December 2017, US$376,556 (31 December 2016:
US$733,634) of the fee remained outstanding.
Performance fee
The Manager is entitled to an annual performance fee for each share class
accrued monthly in arrears. The performance fee is equal to 20% of the
appreciation in the NAV per share (adjusted for any increases or decreases in
NAV arising from issues (including the sale or re-issue of Shares held in
treasury), repurchases or redemptions of Shares and calculated before deduction
of the performance fee in respect of the relevant period) which is above the
performance fee Base NAV per share of that class multiplied by the number of
shares of such class at the end of the relevant period.
The performance fee Base NAV per share is the greater of (a) the NAV per share
of the relevant class as at 31 December 2016 and (b) the highest NAV per share
of the relevant class of shares achieved as at the final BHMS NAV calculation
date as at the end of any calculation period after the calculation period
ending on 31 December 2016.
The Manager is not entitled to any performance fee in respect of any increase
in NAV (whether in respect of a class of shares as a whole or on a per share
basis) arising to the remaining shares of the relevant class from any
repurchase, redemption or cancellation of any share, provided that any
performance fee due to the Manager shall not be reduced below zero.
Any accrued performance fee in respect of shares which are converted into
another share class prior to the date on which the performance fee would
otherwise have become payable in respect of those Shares will crystallise and
become payable on the date of such conversion. The performance fee is accrued
on an on-going basis and is reflected in the Company's published NAV.
On the business day preceding the last business day of each period in respect
of which a performance fee is payable, the Company shall pay an estimated
performance fee to the Manager in respect of that period. The estimated fee
shall be the performance fee payable to the Manager in respect of that period
as estimated by the Company's administrator on the basis of the estimated NAV
of each class of Shares as at the close of business on the second Friday of
December in each year. The difference between the estimated fee paid in respect
of any period and the actual performance fee payable in respect of that period
shall be paid to the Manager within 5 business days of the publication of the
final NAV of each class of Shares as at the end of the period, provided that if
the difference is a negative amount then it shall be repaid by the Manager to
the Company at such time.
During the year ended 31 December 2017, US$807,374 (31 December 2016:
US$3,937,849) was charged as performance fees of which, US$830,823 (31 December
2016: US$3,607,909) remained payable at year end. The total performance fee
charged during the year includes fees crystallised upon conversion and upon
buyback of shares at points when the NAV per share of the shares exceeded their
performance fee Base NAV per share (being GBP14.33 (Sterling shares) and US$14.19
(US dollar shares)).
Of the total crystallised performance fee charged for the year, US$30,550 (31
December 2016: US$1,440) related to share conversions and US$134,584 (31
December 2016: US$nil) related to the buyback of shares.
In establishing the parameters for the execution of buybacks, account is taken
of the impact of any performance fees that would become payable so as to ensure
that such buy backs are still accretive to net asset value.
The Management Agreement can be terminated by either the Company or the Manager
on the giving of 12 months' written notice to the other party, or alternatively
the Company may terminate the Management Agreement on 90 days' notice by
payment to the Manager of an amount equal to the aggregate of the Management
Fee during such twelve month period. The Company may terminate the management
agreement forthwith by notice in the event of specified acts of default by the
Manager without payment of compensation.
Were the Management Agreement to be terminated by the Company, the management
fee would revert to 2% of the prevailing net asset value in respect of the
notice period, or in respect of any payment in lieu of 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 monthly in
arrears. The fee is at a rate of 0.03% of the first US$1 billion of net assets
of the Company and then 0.01% per annum thereafter, subject to a minimum fee of
GBP115,000 per annum. In addition to the NAV based fee the Administrator is also
entitled to an annual fee of GBP21,000 (2016: GBP36,000) for certain additional
administration services. The Administrator is entitled to be reimbursed
out-of-pocket expenses incurred in the course of carrying out its duties as
Administrator.
During the year ended 31 December 2017, US$178,329 (31 December 2016:
US$196,286) was earned by the Administrator as administration fees. At 31
December 2017, US$40,784 (31 December 2016: US$30,165) of the fee remained
outstanding.
5. Share Capital
Issued and authorised share capital
The Company's Articles permit the issuance of an unlimited number of ordinary
shares with no par value which may be divided into at least two classes
denominated in US Dollars and Sterling. The treasury shares have arisen as a
result of the discount management programme as described in note 8.
US Dollar Sterling
shares shares
Number of ordinary shares
In issue at 1 January 2017 4,186,219 22,471,006
Share conversions (830,786) 647,833
Purchase of own shares into Treasury (350,991) (2,771,968)
In issue at 31 December 2017 3,004,442 20,346,871
Number of treasury shares
In issue at 1 January 2017 456,452 2,024,737
Shares purchased and held in Treasury during the year:
- On market purchases 350,991 2,771,968
Shares cancelled (540,000) (2,875,000)
In issue at 31 December 2017 267,443 1,921,705
Total shares in issue 3,271,885 22,268,576
Percentage of class held as Treasury Shares 8.17% 8.63%
Company Total
Share capital account US$'000 GBP'000 US$'000
At 1 January 2017 - 198,891 419,281
Share conversions (11,968) 9,375 -
Purchase of own shares into (4,493) (36,466) (51,792)
Treasury
Transfer from realised investment reserve 16,461 - 16,461
At 31 December 2017 - 171,800 383,950
US Dollar Sterling
shares shares
Number of ordinary shares
In issue at 1 January 2016 4,850,613 25,161,387
Share conversions 72,534 (45,049)
Purchase of own shares into Treasury (736,928) (2,645,332)
In issue at 31 December 2016 4,186,219 22,471,006
Number of treasury shares
In issue at 1 January 2016 537,524 2,249,405
Shares purchased and held in treasury during the year:
- On market purchases 736,928 2,645,332
Shares cancelled (818,000) (2,870,000)
In issue at 31 December 2016 456,452 2,024,737
Total Shares in issue 4,642,671 24,495,743
Percentage of class held as Treasury Shares 9.83% 8.27%
Company
Total
Share capital account US$'000 GBP'000 US$'000
At 1 January 2016 - 232,649 466,289
Share conversions 931 (585) -
Purchase of own shares into (9,142) (33,173) (55,219)
Treasury
Transfer from realised 8,211 - 8,211
investment reserve
At 31 December 2016 - 198,891 419,281
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 NAVs of each of the share classes in
the Master Fund as calculated by BHMS are allocated to the relevant class
account in the Company. Each class account is allocated those costs, pre-paid
expenses, losses, dividends, profits, gains and income which the Directors
determine in their sole discretion relate to a particular class.
Voting rights
Ordinary 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 remaining after settlement of
any outstanding liabilities of the Company.
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 1.97950 votes.
Treasury shares do not have any voting rights.
Repurchase of ordinary shares
The Directors have been granted authority to purchase in the market up to
542,305 US Dollar shares, and 3,323,063 Sterling shares respectively and they
intend to seek annual renewal of this authority from shareholders which was
last granted on 26 June 2017. The Directors may, at their discretion, utilise
this share repurchase authority to address any imbalance between the supply of
and demand for shares.
Under the Company's Articles, the Directors are required to convene a
shareholders' meeting to consider the redemption of a class of shares in
certain circumstances. See note 8 for further details.
Further issue of shares
As approved by the shareholders at the Annual General Meeting held on 26 June
2017 (the "AGM"), the Directors have the power to issue further shares on a non
pre-emptive basis for cash in respect of 361,778 US Dollar shares, and
2,216,853 Sterling shares respectively.
This power expires on the date falling fifteen months after the date of the AGM
or the conclusion of the next Annual General Meeting of the Company, whichever
is the earlier.
Distributions
BHMS has not previously paid 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. If the Directors declare a dividend, such dividend will be
paid on a per class basis.
The Company operates in such a manner that its shares are not categorised as
non-mainstream pooled investments. This may mean that the Company pays
dividends in respect 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.
However, the Company will first apply any such income in payment of its
management and performance fees.
Treasury shares are not entitled to distributions.
Annual redemption offer
Each calendar year the Directors may, in their absolute discretion, determine
that the Company should make an offer to redeem such number of shares of the
Company in issue as they may determine provided that the maximum amount
distributed does not exceed 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 Redemption Offer will
be made, the timetable for that Annual Redemption 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 investments to fund the
capital return, the success of prior capital returns and applicable legal,
regulatory and tax considerations.
Share conversion scheme
The Company has implemented a Share Conversion Scheme which provides
shareholders with the ability to convert some or all of their ordinary shares
in the Company of one class into ordinary shares of the other class on the last
business day of every month. Each conversion will be based on the NAV (note 7)
of the share classes to be converted.
6. Taxation
Overview
The Company is exempt from taxation in Guernsey under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989. Accordingly, no provision for Guernsey
income taxes is included in these 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. greater than 50-percent) 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 Financial Statements. Income tax and related interest and penalties
would be recognised by the Company as a tax expense in the Statement of
Operations if the tax positions were deemed to not meet the
more-likely-than-not threshold.
The Company analyses all open tax years for all major tax 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 Board received advice in respect of the Company's tax positions, and is
advised that no liability for unrecognised tax benefits should be recorded
related to uncertain tax positions. Further, the Board is 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.
7. 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 will be 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 BHMS, 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 BHMS, weekly in arrears.
8. Discount Management Programme
The Company's discount management programme includes the ability to make market
purchases of shares and the obligation to propose class closure resolutions 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 10% or more below the average NAV per share of the relevant
class taken over the 12 monthly NAV Determination Dates (generally the last
business day of each month) in that fixed discount management period, as
described more fully in the Company's principal documents, which are available
from the Administrator on request.
In the event a class closure resolution is passed, Shareholders in a class have
the following options available to them:
a) to redeem all or some of their shares at NAV per share less the costs and
expenses of the Class Closure vote and other outstanding costs and expenses of
the Company, attributable to the relevant class (including any redemption
fees); or
b) subject to certain limitations, to convert all or some of their shares
into shares of another class; or
c) subject to the class continuing and remaining viable, to remain in the
class.
The Annual Redemption Offer described in note 5 which enables a partial return
of capital is also part of the discount management programme.
The discount management measures are and will be funded by partial redemptions
of the Company's investment in BHMS.
During the year to 31 December 2017, the Company recorded an average discount
to NAV of 9.20% and 9.60% for US Dollar shares and Sterling shares respectively
(year to 31 December 2016: 8.30% and 8.88 % for US Dollar shares, and Sterling
shares respectively).
9. Note Purchase Agreement
The Company is party to a Note Purchase Agreement with JP Morgan Chase Bank,
pursuant to which the Company may obtain financing of up to US$5 million and GBP
15 million, if required, to finance (inter alia) share buybacks pending receipt
of the proceeds of redemption from its underlying investments. As at 31
December 2017 and 2016, there were no amounts outstanding under the Note
Purchase Agreement, neither was any interest payable. As disclosed in note 12,
on 18 February 2018 the sterling financing available under the Note Purchase
Agreement was increased from GBP15 million to GBP30 million.
10. Financial Highlights
The following tables include selected data for a single ordinary share of each
of the ordinary share classes in issue at the year end and other performance
information derived from the Financial Statements.
The per share amounts and ratios which are shown reflect the income and
expenses of the Company for each class of ordinary share.
01.01.17 01.01.17
to 31.12.17 to 31.12.17
US Dollar Sterling shares
shares
US$ GBP
Per share operating performance
Net asset value at beginning of the year 14.19 14.33
Income from investment operations
Net investment 0.23 0.28
gain1
Net realised and unrealised gain/(loss) on 0.05 (0.18)
investment
Other capital 0.09 0.15
items2
Total return 0.37 0.25
Net asset value, end of the 14.56 14.58
year
Total return before performance fees 3.05% 1.91%
Performance fees (0.46%) (0.16%)
Total return after performance fees 2.59% 1.75%
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 ended 31 December 2017. An individual shareholder's return may vary
from these returns based on their timing of purchases and sales of Shares.
01.01.17 01.01.17
to 31.12.17 to 31.12.17
US Dollar Sterling shares
shares
US$'000 GBP'000
Supplemental data
Net asset value, end of the 43,744 296,626
year
Average net asset value for the year 50,692 311,963
01.01.17 01.01.17
to 31.12.17 to 31.12.17
US Dollar Sterling shares
shares
Ratio to average net assets
Operating expense
Company expenses3 1.75% 1.70%
Master Fund expenses4 1.15% 1.16%
Performance fees 0.40% 0.15%
3.30% 3.01%
Net investment gain1 1.57% 1.92%
01.01.16 01.01.16
to 31.12.16 to 31.12.16
US Dollar Sterling shares
shares
Per share operating performance
Net asset value at beginning of the year 13.21 13.44
Income from investment operations
Net investment 0.08 0.08
gain1
Net realised and unrealised gain on 0.76 0.70
investment
Other capital 0.14 0.11
items2
Total return 0.98 0.89
Net asset value, end of the 14.19 14.33
year
Total return before performance fees 8.21% 7.46%
Performance fees (0.79%) (0.86%)
Total return after performance fees 7.42% 6.60%
Total return reflects the net return for an investment made at the beginning of
the year and is calculated as the change in the NAV per ordinary share during
the year ended 31 December 2016. An individual shareholder's return may vary
from these returns based on the timing of their purchases and sales of Shares.
01.01.16 01.01.16
to 31.12.16 to 31.12.16
US Dollar Sterling shares
shares
US$'000 GBP'000
Supplemental data
Net asset value, end of the 59,416 321,966
year
Average net asset value for the year 59,733 318,110
01.01.16 01.01.16
to 31.12.16 to 31.12.16
US Dollar Sterling shares
shares
Ratio to average net assets
Operating expense
Company expenses3 2.44% 2.35%
Master Fund expenses4 0.33% 0.34%
Performance fees 0.73% 0.82%
3.50% 3.51%
Net investment gain1 0.56% 0.57%
1 The net investment gain figure shown above does not include net
realised and unrealised gains and losses on investments allocated from BHMS.
2 Included in other capital items are the discounts and premiums on
conversions between share classes during the year, share buybacks and partial
capital returns, as compared to the NAV per share at the beginning of the year.
3 Company expenses are as disclosed in the Audited Statement of
Operations, excluding performance fees and foreign exchange gains and losses on
aggregation.
4 Master Fund expenses are the allocated operating expenses of BHMS.
11. Related Party Transactions
Parties are considered to be related if one party has the ability to control
the other party or exercise significant influence over that party in making
financial or operational decisions.
The payments to and receipts from the Master Fund are disclosed in the cash
flow statement.
Management and performance fees are disclosed in note 4.
Directors' fees are disclosed in the Directors' Remuneration Report.
Directors' interests are disclosed in the Corporate Governance Statement.
12. Subsequent Events
Management has evaluated subsequent events up to 22 March 2018, which is the
date that the Financial Statements were available to be issued.
On 18 February 2018 the sterling financing available under the Note Purchase
Agreement with JP Morgan Chase Bank was increased from GBP15 million to GBP30
million.
Subsequent to the year end and up to the date of this report, the Company
purchased the following shares of the Company to be held as treasury shares:
Number of Cost Cost
shares
Treasury shares purchased (US$) (in
currency)
Sterling shares 472,389 9,084,391 GBP6,495,996
In addition to the buyback of the above shares, 490,000 Sterling Treasury
shares were also cancelled.
Following the purchase and cancellation of shares, the Company has 2,957,806 US
Dollar, and 19,908,697 Sterling ordinary shares in issue.
On 13 March 2018, Sally-Ann Farnon was appointed as a Director of the Company
subject to completion of all statutory and regulatory requirements.
No other subsequent events have occurred.
HISTORICAL PERFORMANCE SUMMARY
As at 31 December 2017
31.12.17 31.12.16 31.12.15 31.12.14
(Audited) (Audited) (Audited) (Audited)
US$'000 US$'000 US$'000 US$'000
Net increase/(decrease) in net assets
resulting from operations 41,032 (57,387) (36,073) (42,762)
Total assets 443,707 457,647 593,888 682,694
Total liabilities (1,416) (4,596) (28,231) (9,787)
Net assets 442,291 453,051 565,657 672,907
Number of shares in issue
US Dollar shares 3,004,442 4,186,219 4,850,613 6,994,093
Sterling shares 20,346,871 22,471,006 25,161,387 27,313,033
Net asset value per share
US Dollar shares US$14.56 US$14.19 US$13.21 US$13.44
Sterling GBP14.58 GBP14.33 GBP13.44 GBP13.62
shares
AFFIRMATION OF THE COMMODITY POOL OPERATOR
31 December 2017
To the best of my knowledge and belief, the information detailed in this Annual
Report and these Audited Financial Statements is accurate and complete:
Name: Jonathan Wrigley
Title: Group Head of Finance and Authorised Signatory
Brevan Howard Capital Management Limited as general partner of Brevan Howard
Capital Management LP, the manager and commodity pool operator of BH Global
Limited
22 March 2018
MANAGEMENT AND ADMINISTRATION
Directors
Sir Michael Bunbury (Chairman)
(appointed 1 January 2013)
John Hallam (Senior Independent Director)
(appointed 28 February 2008)
Julia Chapman
(appointed on 16 January 2017)
Graham Harrison
(appointed 17 March 2010)
Talmai Morgan
(retired 26 June 2017)
Nicholas Moss
(appointed 28 February 2008)
Sally-Ann Farnon
(appointed 13 March 2018)
(All Directors are non-executive and 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
Brevan Howard Capital Management LP
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
For the latest information
www.bhglobal.com
Independent Auditor
KPMG Channel Islands Limited
Glategny Court
Glategny Esplanade
St Peter Port
Guernsey
GY1 1 WR
Registrar and CREST Service Provider
Computershare Investor Services
1st Floor
Tudor House
Le Bordage
Guernsey
GY1 1DB
Legal Advisors (Guernsey Law)
Carey Olsen
Carey House
Les Banques
St. Peter Port
Guernsey
GY1 4BZ
Legal Advisors (UK Law)
Hogan Lovells International LLP
Atlantic House
Holborn Viaduct
London EC1A 2FG
Corporate Brokers
JPMorgan Cazenove
25 Bank Street
Canary Wharf
London
E14 5JP
Canaccord Genuity Limited
88 Wood Street
London
EC2V 7QR
END
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