Annual report: Period Ended 31 December 2012 - Invesco Perpetual

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54 City Merchants High Yield Trust Limited Notes to the Financial Statements continued 18. Financial Instruments continued Liquidity Risk This is the risk the Company encounters when realising assets or raising finance to meet financial commitments. A lack of liquidity in the portfolio may make it difficult for the Company to realise assets at or near their purported value in the event of a forced sale. Management of Liquidity Risk The portfolio managers, as part of their ongoing responsibilities, ascertain the Company’s cash requirements by reviewing future cash flows from purchases and sales of investments, interest and dividend receipts, expenses and dividend payment, and available financing. The portfolio managers review the draw downs on the borrowing facility on a daily basis. If the facility were fully utilised the portfolio managers could potentially realise the more liquid assets in the portfolio, taking into account the effect of this on performance as well as the objectives of the Company. Liquidity Risk Exposure The contractual maturities of the financial liabilities at the balance sheet, based on the earliest date on which payment can be required follow: Three months or less £’000 Forward currency contracts 10 Other payables 343 353 Credit Risk Credit risk encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered. This risk is mitigated by using only approved counterparties. The portfolio may be adversely affected if the Company’s custodian suffers insolvency or other financial difficulties. The Board reviews the custodian’s annual control <strong>report</strong> and the Manager’s management of the relationship with the custodian. Management of and Exposure to Credit Risk The Company’s principal credit risk is the risk of default of the non-investment grade debt. Where the portfolio managers make an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account to minimise the risk to the Company of default. Investments in bonds are across a variety of industrial sectors and geographical markets to avoid concentration of credit risk. Transactions involving derivatives are entered into only with banks whose credit rating are taken into account to minimise default risk. Details of the Company’s investments, including their credit ratings, are shown on pages 10 and 13. Credit risk for transactions involving equity investments is minimised as the Company only uses approved counterparties. Cash balances are limited to a maximum of 4% of the Company’s net asset value with any one depositary, with only approved depositaries being used. At the balance sheet date the Company had £3.4 million held in Short-Term Investments Company (Global Series) plc, a triple-A rated money market fund and £1.7 million held at the custodian.
City Merchants High Yield Trust Limited 55 Fair Values of Financial Assets and Financial Liabilities The financial assets and financial liabilities are either carried in the balance sheet at their fair value (investments and derivatives), or the balance sheet amount is a reasonable approximation of fair value (due from brokers, dividends receivable, accrued income, due to brokers, accruals and cash). Classification Under Fair Value Hierarchy The table that follows sets out the fair value of the financial instruments of the Company into the three levels defined in IFRS 7 “Financial Instruments: Disclosures”. Level 1 – valued using quoted prices in active markets for identical assets. Level 2 – valued by reference to valuation techniques using observable inputs other than quoted prices within Level 1. Level 3 – valued by reference to valuation techniques using inputs that are not based on observable market data. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability. <strong>2012</strong> Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000 Financial assets designated at fair value through profit or loss: Quoted securities Debt securities — 104,800 — 104,800 Equities 12,560 — — 12,560 Unquoted securities Debt securities — — 53 53 Equities — — 114 114 Total for financial assets 12,560 104,800 167 117,527 Financial liabilities Forward currency contracts (10) — — (10) Total for financial liabilities (10) — — (10) The valuation techniques used by the Company are explained in the accounting policies note. There were no transfers in the period between any of the levels. Normally investment company investments would be valued using stock market active prices, with investments disclosed as Level 1 and this is the case for the quoted equity investments that the Company holds. However, a majority of the investments are non-equity investments that are priced using Bloomberg, which in turn is based on broker quotes or pricing models. These investments are disclosed as Level 2 – recognising that the fair values of these investments are not as visible as quoted equity investments and their higher inherent pricing risk. However, this does not mean that the fair values shown in the portfolio valuation are not achievable at point of sale.
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Annual report: Period Ended 31 December 2012 - Invesco Perpetual

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