REG-BlackRock Throg Tst: Final Results <Origin Href="QuoteRef">THRG.L</Origin> - Part 1
10/02/2017 13:50
BlackRock Throgmorton Trust plc
Annual Results Announcement for the year ended 30 November 2016
PERFORMANCE RECORD
FINANCIAL HIGHLIGHTS
As at 30 November 2016 As at 30 November 2015 Change %
Assets
Net assets (£’000) 301,547 286,343 +5.3
Net asset value per share 412.34p 391.55p +5.3
– with income reinvested – – +7.3
Ordinary share price (mid-market) 325.00p 339.50p -4.3
– with income reinvested – – -2.1
Numis Smaller Companies excluding AIM (excluding Investment Companies) Index 18,157.95 17,086.77 +6.3
As at 30 November 2016 As at 30 November 2015 Change %
Revenue
Net revenue return after taxation (£’000) 5,723 5,911 -3.2
Revenue return per ordinary share 7.83p 8.08p -3.1
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Dividends
– Interim 1.25p 1.10p +13.6
– Final 6.25p 5.60p +11.6
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Total dividends paid and payable in respect of the year ended 30 November 7.50p 6.70p +11.9
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OVERVIEW AND PERFORMANCE
HISTORICAL RECORD
ASSETS
Year to 30 November Equity shareholders’ funds £m NAV per share p Total return % Mid-market price per share p
2016 301.5 412.3 +7.3 325.0
2015 286.3 391.6 +23.2 339.5
2014 235.5 322.0 -1.1 270.0
2013 240.8 329.2 +40.1 290.0
2012 174.1 238.0 +19.4 193.3
2011 147.8 202.1 -3.9 170.0
2010 127.3 212.8 +51.7 163.0
2009 106.9 144.3 +63.7 115.8
2008 77.0 (1) 93.5 -51.4 (3) 62.8
2007 272.5 194.6 (2) -1.6 152.0
2006 326.2 199.4 (2) +15.4 164.3
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Compound annual growth rate over the ten year period – 7.5% – 7.1%
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1. Reduction from a tender offer and reorganisation of the Company in 2008,
as well as market movements.
2. Prior charges at par.
3. Includes £5.5 million in respect of the write-back of prior years’
VAT.
REVENUE
Year to 30 November Net revenue after taxation (5 ) £m Revenue return per share (5) p Dividends per share p
2016 5.7 7.83 7.50
2015 5.9 8.08 6.70
2014 3.8 5.19 4.40
2013 3.7 4.99 4.00
2012 2.7 3.64 3.32
2011 2.1 3.29 3.15
2010 1.9 2.85 3.00
2009 3.1 3.86 2.75 (4)
2008 4.8 3.85 2.40 (4)
2007 2.3 1.54 2.20
2006 3.3 1.84 2.00
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Compound annual growth rate over the ten year period – 15.6% 14.1%
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4. Dividends per share do not include special dividends of 2.00 pence per
share paid in 2009 and 3.00 pence per share paid in 2008.
5. Net revenue after taxation and revenue return per share for the years
ended 30 November 2013 and 2012 relate to the parent company and for the years
up to 30 November 2011, related to the Group including subsidiary companies.
CHAIRMAN’S STATEMENT
PERFORMANCE
During the year to 30 November 2016, the Company’s Net Asset Value per share
(NAV) returned 7.3% compared with a return of 6.3% from the Company’s
benchmark, the Numis Smaller Companies excluding AIM (excluding Investment
Companies) Index, both on a total return basis. Further information on the
performance of the portfolio can be found in the Investment Manager’s
report.
This modest outperformance of the benchmark index should be viewed in the
context of what has been a particularly volatile year for UK equity
markets. It is also important to consider the Company’s NAV and share price
performance over a longer period than just one year. During the five year
period to 30 November 2016, NAV and share price returns have been 118.9% and
107.7% respectively. This compares very favourably to the benchmark index
return over the same period of 81.2%. However, when we compare the Company’s
NAV performance to the wider UK stock market, the Company’s five year NAV
return of 118.9% represents a substantial and gratifying outperformance of
63.5% over the FTSE All-Share Index return of 55.4% over the same period. This
demonstrates the ability of smaller companies to outperform their larger
counterparts over the medium to longer term.
Since the year end and up to the close of business on 8 February 2017, the
NAV has risen by 10.8%, compared to the benchmark index return which rose by
8.2%. (All figures in sterling terms with income reinvested.)
MARKET OVERVIEW
The year under review has been challenging for both domestic and world markets
and was characterised by sustained political and macroeconomic uncertainty.
Market volatility remained high throughout the year, reflecting concern around
global growth, particularly in China as it seeks to rebalance its economy. The
unprecedented and sustained low interest rate environment, volatility in oil
prices, the Federal Reserve’s decision on when and to what extent to raise
US interest rates and, more recently, concerns over the impact of
President-elect Trump’s unexpected victory in the US presidential elections
ensured market uncertainty persisted.
The UK electorate’s historic vote in June to leave the European Union came
as a surprise to many. Stock markets fell sharply in the days following the
announcement, with the FTSE 250 hit hardest due to its greater domestic
exposure. Markets have since recovered and the detrimental impact of the vote
on the UK economy, as forecast by many, has yet to materialise. The
depreciation of sterling since the date of the referendum has also been
beneficial to stock market investors given that UK listed companies derive
around two thirds of their earnings overseas. However, this currency
depreciation is likely to result in inflationary pressure, increasing
operating costs for UK smaller companies and an increase in the cost of living
for consumers. This may be reflected in decreased consumer spending as we
enter 2017.
In August of this year, the Bank of England reduced interest rates for the
first time since 2009, down from 0.5% to 0.25%, and announced a further £60
billion in government bond purchases following similar degrees of quantitative
easing by other European central banks. Government bond yields remain at
record lows and the bond purchase programme has only exacerbated this
situation. Although supportive of the economy, it remains to be seen whether
this monetary stimulus will filter down and materially benefit the ‘real’
economy.
REVENUE RETURN AND DIVIDENDS
The revenue return per share for the year amounted to 7.83 pence per share,
compared with 8.08 pence per share for the previous year, a marginal decrease
of 3.1%.
During this past year we have seen a 15% increase in dividends (excluding
specials) from our portfolio companies. However, the level of special
dividends received this year has fallen compared to the prior year. Special
dividends, by their nature, are non-recurring and the amount of special
dividends received in the current financial year decreased by 67%.
On 6 February 2017 the Directors declared a proposed final dividend of 6.25
pence per share for the year ended 30 November 2016. This, together with the
interim dividend of 1.25 pence paid on 19 August 2016, gives a total dividend
for the year of 7.50 pence per share, an increase of 11.9% on the total
dividend distributed to shareholders last year. This dividend will be paid on
29 March 2017, subject to shareholder approval at the AGM, to shareholders on
the Company’s register on 17 February 2017. The ex-dividend date is 16
February 2017.
POLICY ON DISCOUNT MANAGEMENT
During the year to 30 November 2016, the Company’s share price discount to
NAV ranged between 4.6% and 22.0%, ending the year at 21.2%. The UK Smaller
Companies sector has historically traded at a significant discount to NAV and
the Company’s average discount to NAV since 1 July 2008 (the date BlackRock
became Manager of the Company) has been 16.2%.
The Board recognises the importance to shareholders that the Company’s share
price should not, in normal market conditions, trade at an excessive discount
to NAV and, where deemed to be in the interests of shareholders, the Board may
exercise the Company’s share buy back authorities to encourage a narrowing
of the discount.
The Board carefully monitors the level of discount of the Company's shares,
and that of the peer group. It is aware that some trusts have taken action,
including introducing measures to encourage a narrowing of the discount. The
Board intends to consult and discuss with shareholders a number of potential
options designed to assist with this, including reviewing the quantum and
timing of the dividend paid to shareholders. However, we believe that the best
way of addressing the discount over the medium to longer term is to continue
to generate strong NAV total return performance and also to create demand for
the Company’s shares in the secondary market through broadening awareness of
the benefits of the Company’s unique structure.
BOARD COMPOSITION
As part of the Board’s succession plan, a search and selection process was
initiated during the year, which culminated in the appointment of two new
non-executive Directors. I am delighted to welcome Christopher Samuel and
Andrew Pegge to the Board, who were appointed on 1 June and 29 November
respectively. Mr Samuel and Mr Pegge bring with them a wealth of industry
experience and financial sector expertise, further strengthening the existing
Board. Information on their background, and that of all Directors, can be
found in their biographies on pages 21 and 22 of the Annual Report and
Financial Statements.
As I mentioned in my statement to the half-yearly report earlier this year, Mr
Stobart will retire from the Board with effect from the conclusion of this
year’s AGM and Mr Greenlees will succeed him as Chairman of the Company’s
Audit Committee. I would like to take this opportunity to place on record the
Board’s gratitude for Mr Stobart’s invaluable contribution to the success
of the Company during his tenure. We wish him well for the future.
Having been Chairman of the Company since March 2012, following my appointment
to the Board in March 2007, I shall retire from the Board in July 2017 after
the publication of the Company’s interim results. As part of the Board’s
succession plan, Christopher Samuel will succeed me as Chairman of the Board
with effect from the date of my retirement. Mr Samuel has extensive investment
company experience and financial sector expertise and I have no doubt that he
will provide strong leadership of the Board and the Company going forward.
ANNUAL GENERAL MEETING
The Company’s Annual General Meeting will be held on Wednesday, 22 March
2017 at 11.00 a.m. at the offices of BlackRock at 12 Throgmorton Avenue,
London EC2N 2DL. Details of the business of the meeting are set out in the
Notice of Annual General Meeting on pages 77 to 80 of the Annual Report and
Financial Statements. The Portfolio Managers will make a presentation to
shareholders on the Company’s progress and the outlook for the year
ahead. Shareholders who are unable to attend the AGM in person will be able
to watch it via a live stream. Further information on how to register for
this is set out on page 74 of the Annual Report and Financial Statements.
OUTLOOK
In his autumn statement to Parliament, the Chancellor of the Exchequer
announced that the Office of Budget Responsibility had revised its UK growth
forecasts for the coming year, down from 2.2% to 1.4%. In February 2017 the
forecast was raised to 2% following improving economic data. Overall growth
is expected to remain positive and levels of employment in the UK are expected
to rise over the next five years. In response to the outcome of the EU
Referendum, the UK Government has committed to additional spending on major
infrastructure, focusing on areas that it believes will boost productivity and
competitiveness. The Government has also agreed to reduce the rate of
corporation tax to 17% by 2020, all of which should be supportive of the
economy. However, there remains concern that the present lack of clarity on
the terms of the UK’s exit may deter investment in the short term.
Against this backdrop, your portfolio managers will seek to identify
opportunities to add to existing holdings or to introduce new stocks to the
portfolio which they believe are well positioned to benefit as the economy
adjusts post Brexit. Their fundamental strategy has not changed and they
continue to seek companies with robust business models, strong cash flows and
favourable industry characteristics, led by management teams capable of
‘self-help’. The focus remains on bottom–up stock selection, assembling
a portfolio of individual companies which, taken as a whole, should provide
capital growth and an attractive total return, regardless of short term
economic fluctuations. Your Board is fully supportive of this approach.
Crispin Latymer
Chairman
10 February 2017
INVESTMENT MANAGER'S REPORT
MARKET REVIEW AND OVERALL INVESTMENT PERFORMANCE
This has been a volatile year, heavily influenced by the impact of the UK’s
vote to leave the EU. This was a shock result and markets reacted very
negatively following the announcement. However, markets have subsequently
recovered well, helped by the forecast that UK GDP growth will slightly exceed
2% in 2016 and indications that the UK economy appears to be in good health.
UK stock markets have also benefited from the extent of overseas earnings of
UK listed companies and the fall in Sterling relative to the US Dollar. The
FTSE 100 is generally considered to derive about 75% of its earnings from
overseas; for our portfolio the figure is approximately 50%.
PERFORMANCE REVIEW
The Company’s NAV per share increased by 7.3% to 412.3p on a total return
basis. This compares to an increase in the benchmark index of 6.3% and the
FTSE 100 of 11.1%.
2016 was a strong year for the CFD portfolio, adding 2.5% to the NAV. The long
CFDs generated 2.6%, helped by some of the portfolio’s key holdings
delivering, and whilst the performance of the short CFD book was -0.1% it
should be noted that three of the top fifteen contributors to the CFDs
year-end performance were indeed shorts, and the flat performance from the
short book should be viewed in the context of a rising market, with the
benchmark delivering a 6.3% return.
As mentioned earlier, 2016 proved an eventful year, dominated by big global
macro events. The CFD portfolio has always tried to focus on the “micro”,
and whilst there will always be global events of significance that can augment
or detract from performance, the advantage of investing in UK small and mid
sized companies and our investment process, means that stock and industry
outcomes can dominate. 2016 is a case in point. This was another year where
the long CFD portfolio’s largest holdings delivered (JD Sports, MicroFocus,
RPC Group, CVS Group) responding to several positive trading updates through
the course of the year. We still own all of these, with the exception of
MicroFocus which we had to sell on it entering the FTSE 100, and remain very
confident on their prospects entering 2017. As for the short book, the fact
that three of the portfolio’s biggest contributors are shorts, reminds us of
the dispersion of returns within small and mid-caps and the value in
identifying companies and industries facing structural pressures. Whilst the
performance of the short book, in aggregate, was -0.1%, we think this is a
strong outcome in the face of a rising market.
Within the long only portfolio we saw excellent performances from a number of
our holdings with Fevertree Drinks, JD Sports, CVS Group, Hill & Smith,
4imprint and Accesso Technology each contributing more than 0.5% to relative
performance. Fevertree continues to grow strongly, helped by a focus on new
product development and good international distribution. Fevertree is
competing effectively in a large global market in which it still has a small
share for its superior premium mixers. JD Sports has continued to show strong
like-for-like growth in its UK stores, helped by good relationships with the
global brands whose products it sells. It has opened more large stores in
European cities and most recently its first store in Malaysia. We expect
further growth both from existing stores and as JD expands its international
footprint.
CVS Group continues to trade strongly, with most recent disclosed
like-for-like sales growth of 6.3%. It has continued to carry out acquisitions
of veterinary practices and ancillary activities, recently expanding into the
Netherlands. Hill & Smith is benefiting from increased infrastructure
spending, especially road widening. It has a good presence in the UK and the
US, both countries where it is believed infrastructure spending is likely to
increase. 4imprint has completed its US factory expansion and is ready to grow
further in the US; strong US GDP growth should encourage its customers to
maintain or increase their spending on promotional products, and 4imprint
should continue to win market share. Accesso have continued to win new
customers for its ticketing and virtual queuing solutions, and these are being
rolled out globally.
Other investments which performed strongly in the year include Keywords,
shares in which more than doubled, Trifast and Scapa Group.
The biggest headwind to relative performance in the long only portfolio was
our underweight position in mining stocks. Several previously FTSE 100 mining
stocks joined our benchmark in January 2016 and have subsequently performed
very strongly, for example Evraz and Vedanta. Share prices of both more than
trebled during the year, our underweight sector position detracted 3.4% from
relative performance over the financial year.
The other major headwind was BREXIT and the impact that this had on UK
domestic consumer and real estate stocks. Our holding in Topps Tiles detracted
0.8% during the year and holdings in Lookers and Vertu also proved painful.
These stocks have all been savagely de-rated in expectation of tougher times
ahead. Our holding in Workspace detracted 0.7% from relative performance; its
shares are now trading at a discount to NAV of more than 20% despite the fact
that it offers tenants flexible space at a time when they may be reluctant to
commit to conventional longer leases. Workspace’s occupancy remains high,
rents remain low, loan to value is historically low, and its portfolio is
valued on a conservative passing yield.
ACTIVITY
During the second half of the financial year complete disposals included long
only portfolio holdings in Lavendon, following an approach from a private
Belgian company, and Hutchison China Meditech, which has been a huge success
over the years. We also reduced a number of other holdings, in many cases to
cut back our aggregate UK exposure; these include our holdings in Rathbones,
Redrow and Ted Baker. We trimmed our holding in Fevertree after a sustained
strong run; in Vectura, following its all share merger with Skyepharma, in
which we were previously invested; and Senior, given tougher trading
conditions.
We added a few small companies on IPO, notably Premier Asset Management, which
is mainly focused on multi-asset funds, and Warpaint, a designer of fashion
cosmetics for younger women. We added holdings in Trifast, which has grown
strongly and is increasingly international, and Hiscox, the specialist insurer
with an excellent long term track record and growing US business. We also
added to holdings in Morgan Sindall, which we see as well exposed to increased
UK spending on infrastructure including social housing, and St Modwen which
trades at a large discount to NAV which we think is harsh.
Turning to the CFD portfolio, activity has been fairly limited in the long CFD
book, the two significant events being the full disposal of our holding in
MicroFocus as it entered the FTSE 100, and the purchase of Melrose in the
second half of the year, which is now a top 5 holding in the CFD portfolio.
The short book has seen greater portfolio turnover as it has always been more
catalyst driven. In the last few months new ideas have been introduced in the
short book, targeting opportunities where we believe there could be revenue
shortfalls and cost pressures – notably in the areas of small and mid-cap
technology where we believe IT budgets are very sensitive to fragile business
confidence, and in consumer services where several companies are facing a
triple whammy of wage pressures, rising sourcing costs and increased business
rates.
PORTFOLIO POSITIONING
Relative to our benchmark index, we remain most overweight consumer
discretionary stocks, including companies such as JD Sports, Cineworld and
Headlam. These are companies which have strong market positions and very
capable management. Should they see a UK referendum impact at some stage we
would expect them to fare much better than their competitors. We are also
significantly overweight healthcare with holdings such as CVS Group, Dechra
Pharmaceuticals and Advanced Medical Solutions. The latter two holdings are
very international and have long life products. CVS is defensive in that pet
owners are unlikely to cut back spending on their pets materially in tougher
times. We expect CVS to continue to gain market share. We are also
increasingly exposed to UK infrastructure spending through holdings such as
Marshalls, Morgan Sindall and Costain, another small new addition. We are also
more exposed to defence markets through holdings in Avon Rubber, Cohort and
Ultra Electronics. We are underweight financials, real estate, consumer
staples and energy.
With regard to the positioning structure of the CFD portfolio, the emphasis
has been and remains on identifying stock and industry specific outcomes, and
therefore invests with little benchmark awareness. Clearly, not owning
indebted commodity exposed names has cost the fund performance in 2016.
However, the high conviction holdings in both the long and short books have
delivered, which has been the key driver of returns this year. The long book
remains exposed to specific investment cases we think can deliver over and
above short term fluctuations in the economic and business cycles. The short
book continues to target companies that are over-earning and/or operating in
industries undergoing structural pressures.
OUTLOOK
2016 has been a year of uncertainty and we expect it to be followed by a
further year of uncertainty with a new US President, BREXIT negotiations
getting underway, and political elections in Continental Europe. This could
lead to nervous and volatile markets which will continue to provide the CFD
portfolio with interesting opportunities, both long and short. Within the long
only portfolio we have good exposure to overseas markets and our UK focused
holdings are either defensive or leaders in their field, well placed to cope
with challenges and gain further market share. The management teams we are
invested behind are very capable and the balance sheets of the companies they
manage are generally very strong. We feel our portfolio is well placed for a
continuation of current uncertainties.
Mike Prentis and Dan Whitestone
BlackRock Investment Management (UK) Limited
10 February 2017
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended
30 November 2016.
PRINCIPAL ACTIVITY
The Company carries on business as an investment trust and its principal
activity is portfolio investment.
OBJECTIVE
The Company’s objective is to provide shareholders with capital growth and
an attractive total return through investment primarily in UK smaller and
mid-capitalisation companies listed on the main market of the London Stock
Exchange.
STRATEGY, BUSINESS MODEL, INVESTMENT POLICY AND INVESTMENT PROCESS
The Company invests in accordance with the objective given above. The Board is
collectively responsible to shareholders for the long term success of the
Company and is its governing body. There is a clear division of responsibility
between the Board and the Manager, BlackRock Fund Managers Limited (BFM).
Matters for the Board include setting the Company’s strategy, including its
investment objective and policy, setting limits on gearing (both bank
borrowings and the effect of derivatives), capital structure, governance, and
appointing and monitoring of performance of service providers, including the
Manager.
The Company’s business model follows that of an externally managed
investment trust, therefore the Company does not have any employees and
outsources its activities to third party service providers, including the
Manager who is the principal service provider.
The management of the investment portfolio and the administration of the
Company have been contractually delegated to the Manager. The Manager,
operating under guidelines determined by the Board, has direct responsibility
for the decisions relating to the day-to-day running of the Company and is
accountable to the Board for the investment, financial and operating
performance of the Company.
Other service providers include the Depositary, BNY Mellon Trust & Depositary
(UK) Limited, the Fund Accountant, Bank of New York Mellon (International)
Limited, and the Registrar, Computershare Investor Services PLC. Details of
the contractual terms with third party service providers are set out in the
Directors’ Report.
INVESTMENT POLICY
The Company’s performance is measured against the Numis Smaller Companies
excluding AIM (excluding Investment Companies) Index (the Index).
The Company may hold up to 25% of its gross assets, at the time of
acquisition, in equities or collective investment vehicles traded on the AIM
market of the London Stock Exchange.
The Investment Manager, BdlackRock Investment Management (UK) Limited (BIM
(UK)), may invest in companies outside the Index without restriction subject
to the limits noted above.
In addition to holding a conventional long only portfolio of UK smaller and
mid-capitalisation equities, the Company will hold approximately 30% of its
net assets in a portfolio of contracts for difference (CFD) and/or comparable
equity derivatives which provide both long and short exposure. Under normal
circumstances, the long only portfolio is expected to comprise 100% of the
Company’s net assets. Therefore, the Company can have gross exposure of 130%
of net assets, albeit that some of this exposure may represent short
positions.
Portfolio risk will be mitigated by investment in a diversified portfolio of
companies. No more than 5% of the Company’s gross assets at the time of
acquisition, may be invested in any one single company excluding holdings in
cash or money market funds where up to 10% of the Company’s gross assets may
be held. The Company will not invest more than 10% of its gross assets, at the
time of the acquisition, in other listed closed-ended investment funds, unless
such companies have a stated investment policy not to invest more than 15% of
their gross assets in other listed closed-ended investment funds, in which
case the limit is 15% of gross assets.
The Board’s policy is that net gearing, borrowing less cash, should not
exceed 20% of gross assets. However, the Company is geared primarily through
its CFD portfolio.
No material change will be made to the investment objective and policy without
shareholder approval.
INVESTMENT PROCESS
A unique feature of the Company is that it has two potential sources of
performance. A traditional long only portfolio and a long/short portfolio
comprising CFDs, representing approximately 30% of the Company’s net assets.
Notwithstanding recent positive returns from UK small and mid-cap companies,
the sector has demonstrated considerable volatility over the past 20 years.
The chart on page 10 of the Annual Report and Financial Statements shows the
annual performance of the FTSE 250 Index since 1986 together with the extent
of the maximum decline in the Index during each of those years. Such an
environment provides an attractive opportunity to add value via CFDs,
instruments which can exploit share price moves whether up or down. During
2016, this facility added approximately 2.5% to performance and 18.7% since
inception on 11 September 2008.
As the maximum short CFD exposure is 30% of net assets, the Company will at
all times retain a significant exposure to the market.
In the course of their research the Portfolio Managers come across companies
which they judge are likely to underperform; the ability to use short CFDs
therefore significantly enhances the opportunity to make money for
shareholders. This is not possible in a conventional or long only portfolio.
When markets are expected to rise in the medium term, the CFD strategy is to
generate additional market exposure through ensuring that the long portfolio
exceeds the short portfolio in a range between 0% to 10% of the net assets of
the Company. Rising or ‘bull’ markets have historically (in the UK)
persisted for longer than falling or ‘bear’ markets. A typical net market
exposure might therefore be between 100% and 110%. This is lower than the
‘gross exposure’, which is the combination of the long only portfolio, and
the short and long CFDs added together expressed as a % of net assets.
BULL MARKET POSITIONING – % OF NAV (130% GROSS EXPOSURE)
Long CFDs 20%
Long Only Portfolio 100%
Short CFDs 10%
Net Market Exposure 110%
BEAR MARKET POSITIONING LIMIT – % OF NAV (130% GROSS EXPOSURE)
Long Only Portfolio 100%
Short CFDs 30%
Net Market Exposure 70%
In a recessionary environment the Portfolio Managers have the flexibility to
reduce market exposure to – at the maximum of its ‘least exposed’ level
– around 70%.
If successfully implemented this strategy would provide some cushioning of the
Company’s performance in falling markets.
PERFORMANCE
The Investment Manager’s report includes a review of the main developments
during the year, together with information on investment activity within the
Company’s portfolio.
RESULTS AND DIVIDENDS
The results for the Company are set out in the Statement of Comprehensive
Income on page 47 of the Annual Report and Financial Statements. The total
profit for the year, after taxation, was £20,213,000 (2015: a profit of
£54,325,000) of which the revenue return amounted to £5,723,000 (2015:
£5,911,000), and a capital profit of £14,490,000 (2015: £48,414,000).
Details of the dividends declared in respect of the year are set out in the
Chairman’s Statement.
KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of performance measures
to assess the Company’s success in achieving its objectives. The key
performance indicators (KPIs) used to measure the progress and performance of
the Company over time, which are comparable to those reported by other
investment trusts, are set out below.
Year ended 30 November 2016 Year ended 30 November 2015
Change in net asset value (1) 7.3% 23.2%
Change in ordinary share price (2) (2.1%) 27.7%
Change in benchmark (3) 6.3% 11.9%
Discount to cum income net asset value 21.2% 13.3%
Revenue return per share 7.83p 8.08p
Total dividend per share 7.50p 6.70p
Ongoing charges (1) 1.1% 1.1%
Ongoing charges (4) 1.3% 2.3%
1. Calculated in accordance with the Association of Investment Companies
(AIC) guidelines.
2. Calculated on a mid to mid basis with income reinvested.
3. Numis Smaller Companies excluding AIM (excluding Investment Companies)
Index.
4. Calculated as a percentage of average net assets for the year and using
expenses, including performance fees and interest costs.
The Board monitors the KPIs at each meeting. Additionally, it regularly
reviews a number of indices and ratios to understand the impact on the
Company’s relative performance of the various components such as asset
allocation and stock selection. This includes an assessment of the Company’s
performance and ongoing charges against its peer group of investment trusts
with similar investment objectives.
The Directors recognise that it is in the long term interests of shareholders
that the Company’s shares do not trade at a significant discount to their
prevailing NAV. In the year under review the discount to NAV of the ordinary
shares on a cum income basis has ranged between 4.6% and 22.2%, with the
average being 16.2%. The shares ended the year at a discount of 21.2% on a cum
income basis.
Your Board believes that the best way of addressing the discount over the
longer term is to continue to generate good performance and to create demand
for the Company’s shares in the secondary market through broadening
awareness of the Company’s unique structure. The Board will also be seeking
to renew the authority from shareholders to buy back shares when it believes
that it is in the interests of shareholders to do so, having taken into
account all relevant factors including the size of the Company and the
liquidity of its shares.
PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties and the Board
has in place a robust process to identify, assess and monitor the principal
risks faced by the Company. A core element of this process is the Company’s
risk register, which identifies the risks facing the Company and the
likelihood and potential impact of each risk, together with the controls
established for mitigation. A residual risk rating is calculated for each risk
which allows the effect of any mitigating procedures to be reflected in the
register. The principal risks and uncertainties faced by the Company during
the financial year, together with the potential effects, controls and
mitigating factors, are set out below:
PRINCIPAL RISK MITIGATION/CONTROL
INVESTMENT PERFORMANCE The Board is responsible for: - setting the investment policy to fulfil the Company’s objectives; and - monitoring the performance of the Company’s Investment Manager and the strategy adopted. An inappropriate policy or strategy may lead to: - poor performance compared to the Company’s benchmark, peer group or shareholder expectations; - a widening discount to NAV; - a reduction or permanent loss of capital; and - dissatisfied shareholders and reputational damage. To manage these risks the Board: - regularly reviews the Company’s investment mandate and long term strategy; - has set, and regularly reviews, the investment guidelines
and has put in place appropriate limits on levels of gearing and the use of derivatives; - receives from the Investment Manager a regular explanation of stock selection
decisions, portfolio gearing and any changes in gearing and the rationale for the composition of the investment portfolio; - receives from the Investment Manager regular
reporting on the portfolio’s exposure through derivatives, including the extent to which the portfolio is geared in this manner and the value of any short positions; and
- monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with particular sectors, based on the diversification
requirements inherent in the Company’s investment policy.
MARKET RISK Market risk arises from changes to the prices of the Company’s investments. It represents the potential loss the Company might suffer through holding investments whose prices decline. The Board carefully considers diversification of the portfolio, asset allocation, stock selection, unquoted investments and levels of gearing on a regular basis and has
set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. The Board monitors the implementation and results of the
investment process with the Investment Manager.
INCOME/DIVIDEND RISK The amount of dividends and future dividend growth will depend on the performance of the Company’s underlying portfolio. Any change in the tax treatment of the dividends or interest received by the Company may reduce the level of dividends received by shareholders. The Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each meeting. The Company also has a revenue reserve
and powers to pay dividends from capital which could potentially be used to support the Company’s dividend if required.
FINANCIAL RISK The Company’s investment activities expose it to a variety of financial risks that include market risk, foreign currency risk and interest rate risk. At 30 November 2016, the Company had approximately 26.3% of its gross asset value invested in AIM traded equity securities, and, by the very nature of its investment objective, largely invests in smaller companies. Liquidity in these securities can from time-to-time become constrained, making these investments difficult to realise at or near published prices. The Company is not materially exposed to foreign currency and interest rate risk. For mitigation of market risk, see above. There are also risks linked to the Company’s
use of derivative transactions including CFDs. Details are disclosed in note 12 on pages 58 and 59 of the Annual Report and Financial Statements, together with a summary
of the policies for
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