Marlborough Extra Income Fund Interim Report For the six month period ended 20th October 2016 (Unaudited) MARLBOROUGH EXTRA INCOME FUND Authorised Fund Manager and Registrar Marlborough Fund Managers Ltd Marlborough House 59 Chorley New Road Bolton BL1 4QP Investor Support: (0808) 145 2500 (FREEPHONE) Authorised and regulated by the Financial Conduct Authority Trustee HSBC Bank plc 8 Canada Square London E14 5HQ Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority Investment Adviser Hargreave Hale Ltd 9-11 Neptune Court Hallam Way Whitehills Business Park Blackpool Lancashire FY4 5LZ Authorised and regulated by the Financial Conduct Authority Auditor Barlow Andrews LLP Carlyle House 78 Chorley New Road Bolton BL1 4BY Directors of Marlborough Fund Managers Ltd Andrew Staley Chairman Nicholas F J Cooling Deputy Chairman Allan Hamer Joint Managing Director Wayne D Green Joint Managing Director Dom M Clarke Finance Director Geoffrey Hitchin Investment Director Keith Ounsworth Director – Sales John R Heap Director – Strategic Development B John Leyland Director Helen Derbyshire Director – Compliance & Risk MARLBOROUGH EXTRA INCOME FUND CONTENTS PAGE AUTHORISED INVESTMENT ADVISER’S REPORT 1 AUTHORISED STATUS AND GENERAL INFORMATION 3 DIRECTORS’ STATEMENT 3 FUND INFORMATION Price and distribution record 4 Number of units in issue/Net asset value per unit 4 Ongoing charges 4 Synthetic risk and reward indicator 5 Portfolio statement 6 Portfolio split by investment grade 10 Portfolio transactions 10 INTERIM FINANCIAL STATEMENTS Statement of total return 11 Statement of change in net assets attributable to unitholders 11 Balance sheet 12 Notes to the interim financial statements 12 MARLBOROUGH EXTRA INCOME FUND AUTHORISED INVESTMENT ADVISER'S REPORT For the six month period ended 20 October 2016 Percentage change and sector position to 20 October 2016 Six months 1 year 3 years 5 years Since March 09** Marlborough Extra Income Fund 5.24% 7.62% 20.34% 69.89% 126.91% Quartile Ranking* 4 4 3 2 2 * Based on ranking within The Investment Association’s UK Equity & Bond Income sector ** Nigel Beidas appointed fund manager Fund launched 12 July 1995 External Source of Economic Data: Morningstar (Class P - bid to bid, net income reinvested) On a total return basis, the FTSE All-Share Index was up 11.3% over the period under review. International equity markets benefitted generally from continued monetary accommodation which both underpinned economic growth and attracted yield driven investors. In the UK, the FTSE 100 outperformed its mid- and smaller-cap brethren. This was primarily a result of the UK’s decision to exit the European Union, an outcome which is seen as potentially negative for domestic activity and which resulted in a significant depreciation of the £ exchange rate. Both factors are seen as relatively favourable for larger companies which are more exposed to overseas markets and which will benefit from the weakness of the domestic currency. In fixed interest markets, the yield on the 10-year Gilt fell from 1.7% to 1.1% providing a strong capital return for sovereign bonds and domestic bonds that are priced off the risk free rate. The fall in yield was primarily a function of perceived economic weakness within the UK economy following the Brexit vote, an outcome which resulted in the Bank of England further cutting domestic interest rates to stimulate growth. The Fund has endured a relatively difficult 6 months with a return of 5.24% being below the median return of 8.56% from the IA UK Equity & Bond sector. The essential problem was a degree of under-performance against the UK equity market. The Fund was underweight in commodities which have seen significant year-to-date performance whilst exposure to domestic stocks such as Lloyds Banking Group was detrimental given the Brexit vote and the expectation this would be negative for UK economic performance. On the positive side, the Fund benefitted from its position in Tate & Lyle, a group who continue to make great strides in developing the value add of its business portfolio and in RPC, a significant contributor to performance given the group’s consistent acquisition strategy and resilient UK/European demand for plastic packaging. We continue to believe that the Fund benefits from having a wide spread of investments, including medium sized companies which have the ability to provide above average dividend growth. This has been borne out by the longer term record of the Fund, which remains above average. Fund activity during the period has been relatively light although advantage was taken of Brexit induced weakness in domestic names such as Crest Nicholson, ITV and St James Place Capital which fell to attractive levels following the EU vote. A new holding was commenced in Ibstock who remain key beneficiaries of housing demand and command significant market share exposure. CRH was bought to reflect the group’s ability to consolidate key heavy side building markets and to reflect its attractive positioning in key US and European infrastructure markets. During the period, a decision was taken to sell our holding in the steel consumables business Vesuvius due its cyclical and commodity end market exposure whilst GKN was disposed of given the maturity of global auto cycles and its debilitating pension deficit, a financial situation likely to constrain prospective dividend growth. Looking forward, global growth remains anaemic compared to previous periods and continues to be supported by historically low interest rates. Recent political developments, particularly in both the US and the UK, represent a protest vote against inequality and current economic policies. With key elections in Germany and France next year, it appears probable that geo-political developments may continue to shape markets for some time to come. It would be our view that underlying economic growth will remain sub-par relative to recent history but is unlikely to fall into recession territory given significant policy support and a growing reform agenda. We feel that a multi asset fund such as Extra Income continues to provide the stability of fixed exposure aligned to an equity portfolio that can seek out quality companies offering investors an attractive combination of long term dividend and capital growth. Nigel Beidas - Investment Adviser Matthew Rainbird - Assistant Investment Adviser 17 November 2016 This report contains FTSE data. Source: FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. 1 MARLBOROUGH EXTRA INCOME FUND AUTHORISED INVESTMENT ADVISER'S REPORT (CONTINUED) Distributions (pence per unit) Year 2016 Year 2015 Year 2014 Year 2013 Class A Income Net income paid 20 March 0.8511 0.7221 0.7578 0.7785 Net income paid 20 June 0.7493 0.9646 0.7901 0.7294 Net income paid 20 September 0.9642 0.9702 1.0389 1.0562 Net income paid 20 December 0.7904 0.8144 0.8231 0.7115 Class B Income Net income paid 20 March 0.8676 0.7323 0.7647 0.7793 Net income paid 20 June 0.7648 0.9796 0.7984 0.7314 Net income paid 20 September 0.9909 0.9865 1.0507 1.0607 Net income paid 20 December 0.8092 0.8292 0.8337 0.7167 Class P Income Net income paid 20 March 0.8740 0.7360 0.7666 0.7796 Net income paid 20 June 0.7711 0.9871 0.8010 0.7252 Net income paid 20 September 0.9937 0.9926 1.0575 1.0551 Net income paid 20 December 0.8159 0.8348 0.8373 0.7190 Material Portfolio Changes For the six month period ended 20 October 2016 Major Purchases Cost (£) Major Sales Proceeds (£) Wolseley 768,516 UK Treasury 3.25% 22.01.44 686,821 Unilever 598,624 Crest Nicholson Holdings 637,233 Associated British Foods 569,545 Next 526,429 3i Group 543,930 GKN 507,259 Equiniti Group 526,240 HSBC Holdings 450,545 Severn Trent 516,171 Greene King 442,615 CRH 514,719 St. James's Place 392,193 Crest Nicholson Holdings 480,458 Vesuvius 389,304 Victrex 475,029 Legal & General Group 383,252 Tesco 5.5% 13.01.33 461,246 British Land Company 372,109 Provident Financial 5.125% 09.10.23 434,392 Connect Group 361,888 Tritax Big Box REIT 431,000 Aviva 361,759 Cisco Systems 420,704 Inmarsat 356,395 Places for People Treasury 2.875% 17.08.26 405,221 Booker Group 351,929 Imperial Brands 404,431 Morgan Sindall Group 345,548 Diageo 396,238 Dixons Carphone 342,123 Johnson & Johnson 395,774 European Assest Trust 340,553 Phoenix Group 393,876 Centrica 337,190 GlaxoSmithKline 389,468 Investec Non-Cum Ptg Prf 333,450 St. James's Place 382,676 Melrose Industries NP 332,992 Other purchases 5,750,475 Other sales 3,960,327 Total purchases for the period 15,258,733 Total sales for the period 12,211,914 2 MARLBOROUGH EXTRA INCOME FUND AUTHORISED STATUS AND GENERAL INFORMATION Authorised Status The Fund is an authorised unit trust scheme within the meaning of the Financial Services and Markets Act 2000 and is a UCITS scheme operating under the Collective Investment Schemes Sourcebook (COLL) as issued by the Financial Conduct Authority. Nature and Objectives of the Fund The investment objective of the Fund is to achieve a higher yield with the prospect of receiving increasing income and growth in the value of the units by purchasing high yielding shares, corporate loan stocks and preference shares.