REG-BlackRock Throg Tst: Final Results <Origin Href="QuoteRef">THRG.L</Origin>
12/02/2018 07:50
BlackRock Throgmorton Trust plc
(Legal Entity Identifier: 5493003B7ETS1JEDPF59)
Information disclosed in accordance with Article 5 Transparency Directive and
DTR 4.2
Annual Results Announcement for the year ended 30 November 2017
PERFORMANCE RECORD
Attributable to ordinary shareholders 30 November 2017 30 November 2016
Net assets (£’000) (1) 396,846 301,547
Net asset value per ordinary share 542.66p 412.34p
Ordinary share price (mid-market) 457.50p 325.00p
Discount to cum income net asset value (2) 15.7% 21.2%
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Performance
Net asset value per share (total return) (3) +33.9% +7.3%
Numis Smaller Companies excluding AIM (excluding Investment Companies) Index +21.3% +6.3%
Ordinary share price (total return) (3) +43.8% -2.1%
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1. The change in net assets reflects market movements.
2. This is the difference between the share price and the NAV per share.
3. This measures the Company’s NAV total return and share price, which
assumes dividends paid by the Company have been reinvested.
Further information in relation to the calculations in the above table can be
found in the glossary on page 81 of the Annual Report and Financial
Statements.
Year ended 30 November 2017 Year ended 30 November 2016 Change
Revenue
Net revenue profit after taxation (£’000) 7,396 5,723 +29.2%
Revenue return per ordinary share 10.11p 7.83p +29.1%
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Dividends
– Interim 2.00p 1.25p +60.0%
– Final 7.00p 6.25p +12.0%
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Total dividends paid and payable 9.00p 7.50p +20.0%
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OVERVIEW AND PERFORMANCE
TEN YEAR HISTORICAL RECORD
ASSETS
Year to 30 November Equity shareholders' funds £m NAV per share p Total return % Mid-market price per share p
2007 272.5 194.6 (2) -1.6 152.0
2008 77.0 (1) 93.5 -51.4 (3) 62.8
2009 106.9 144.3 +63.7 115.8
2010 127.3 212.8 +51.7 163.0
2011 147.8 202.1 -3.9 170.0
2012 174.1 238.0 +19.4 193.3
2013 240.8 329.2 +40.1 290.0
2014 235.5 322.0 -1.1 270.0
2015 286.3 391.6 +23.2 339.5
2016 301.5 412.3 +7.3 325.0
2017 396.8 542.7 +33.9 457.5
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Compound annual growth rate over the ten year period - 10.8% - 11.6%
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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) Revenue return per share (5) Dividends per share
£m p p
2007 2.3 1.54 2.20
2008 4.8 3.85 2.40 (4)
2009 3.1 3.86 2.75 (4)
2010 1.9 2.85 3.00
2011 2.1 3.29 3.15
2012 2.7 3.64 3.32
2013 3.7 4.99 4.00
2014 3.8 5.19 4.40
2015 5.9 8.08 6.70
2016 5.7 7.83 7.50
2017 7.4 10.11 9.00
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Compound annual growth rate over the ten year period - 20.7% 15.1%
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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
after 30 November 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
I am delighted to report another year of very strong performance for your
Company. During the year to 30 November 2017, the Company’s Net Asset Value
per share (NAV) returned 33.9% on a total return basis, compared with a total
return of 21.3% from the Company’s benchmark index, the Numis Smaller
Companies excluding AIM (excluding Investment Companies) Index. This is a
notable achievement and a significant outperformance of the benchmark by your
investment managers. Since the year end and up to the close of business on 8
February 2018, the NAV has fallen by 0.6%, compared to the benchmark index
return which fell by 4.0% (all figures in sterling terms with income
reinvested).
It is also important to consider the Company’s NAV and share price
performance over the longer term. During the five year period to 30 November
2017, NAV and share price returns have been 145.3% and 158.2% respectively,
placing the Company second out of eleven in the UK smaller companies
investment trust peer group. This performance compares very favourably to the
benchmark index return over the same period of 88.6%. Additionally, when we
compare the Company’s NAV performance to the wider UK stock market, the
Company’s five year NAV return of 145.3% represents a substantial
outperformance over the FTSE All-Share Index return of 57.1% over the same
period, demonstrating the ability of smaller companies to outperform their
larger counterparts over the medium to longer term.
Further information on portfolio performance can be found in the Investment
Manager’s report.
SHARE PRICE DISCOUNT
During the year to 30 November 2017 the Company’s share price discount to
NAV ranged between 12.7% and 20.8%, ending the year at 15.7%. As at 8
February 2018 the discount was 13.4%. 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 16.3%. Further information in relation to the
discount can be found on page 10 of the Annual Report and Financial
Statements.
REVENUE RETURN AND DIVIDENDS
The revenue return per share for the year amounted to 10.11 pence per share,
compared with 7.83 pence per share for the previous year, an increase of
29.1%.
The Directors are pleased to declare a proposed final dividend of 7.00 pence
per share for the year ended 30 November 2017. This, together with the interim
dividend of 2.00 pence per share paid on 23 August 2017, gives a total
dividend for the year of 9.00 pence per share, an increase of 20.0% on the
total dividend distributed to shareholders in the prior financial year. This
dividend will be paid on 29 March 2018, subject to shareholder approval at the
forthcoming AGM, to shareholders on the Company’s register on 23 February
2018. The ex-dividend date is 22 February 2018.
INVESTMENT MANAGEMENT ARRANGEMENTS AND PROPOSED CHANGE OF INVESTMENT POLICY
Following the Board’s announcement in July of last year of a new lower fee
structure (further details of which can be found on pages 22 and 23 of the
Annual Report and Financial Statements) and an increase in the level of AIM
holdings permitted to be held in the Company’s portfolio, the Board has
continued to consider how best the Company should evolve to meet its
objectives.
Following these discussions a number of changes to the Company’s portfolio
management and Investment Policy are being proposed.
First, the benefits arising from the ability to vary market exposure and
establish short positions through derivatives will now be achieved through a
combined portfolio with a single manager, rather than in two separate
portfolios. It has been agreed that Dan Whitestone, who has worked alongside
Mike Prentis on the fund since March 2015 and who heads the UK smaller
companies team at BlackRock, will become the sole portfolio manager following
publication of the 2017 Annual Report. Mike remains a key member of
BlackRock’s UK Small Cap team which collectively conducts investment
research and shares ideas, and this team-based approach will continue to be a
feature of the investment management of the Company. Collectively the
four-strong BlackRock UK smaller companies team have 60 years’ experience
of investing in smaller companies.
In a move that it is not anticipated will materially change the overall source
of revenues or profits made collectively by companies in the portfolio, the
Board is proposing that, in order to better reflect the evolving nature of the
listing environment for UK smaller companies, in which an increasing number of
high quality companies are choosing initially to list (and thereafter remain
listed) on AIM, the Company will seek shareholder approval to remove the
current restriction on the percentage of the portfolio permitted to be
invested in AIM, and also to change the benchmark index to one which includes
AIM.
Additionally, the Board is conscious that the geographical location of a
company’s listing can often reflect where the best valuations can be
achieved at IPO and subsequently, and not necessarily where the Company’s
business is located or where most of its turnover is derived. In order to
provide further flexibility, the Board are therefore also requesting
shareholder approval that up to 15% of the Company’s gross assets may be
invested in non UK-listed securities which will allow the portfolio manager to
benefit from specific opportunities in the Small Cap space that may be listed
or conduct their operations in countries other than the UK. We anticipate that
these would be predominately European smaller companies where we see a more
encouraging outlook. Other mandates managed by the portfolio manager have
similar flexibility, and this change may allow the Company to take advantage
of particular opportunities previously not available.
Taken together, we believe these changes equip the Company to be a uniquely
attractive vehicle for investors looking to achieve exposure to UK smaller
companies.
On behalf of both the Board and the Company, I would like to take this
opportunity to thank Mike for the excellent performance he has delivered for
shareholders, along with the BlackRock team, since BlackRock took on the
mandate in 2008. We would also like to wish Dan continued success as he takes
on his increased responsibilities.
PRIIPS REGULATION
With effect from 1 January 2018 the EU’s Packaged Retail and Insurance-based
Products regulation came into force and is applicable to investment companies.
Amongst other things, the regulation requires that the Company’s AIFM
produce a PRIIPS compliant Key Information Document (KID) which must be made
freely available on the Company’s website. The format and content of the KID
are strictly prescribed, as are the calculation methodologies for the forward
looking performance scenarios and risk disclosures therein, which are based on
historic performance and may, in certain circumstances, produce figures that
may not be reflective of the expected returns. Further information can be
found on page 36 of the Annual Report and Financial Statements.
BOARD COMPOSITION
As announced last year, the Company’s previous Chairman, Crispin Latymer,
retired on 24 July 2017 and I succeeded him as Chairman of the Board with
effect from this date. On behalf of the Board and the Company I would like to
thank Crispin for his capable and diligent leadership of the Board and for his
stewardship of the Company since his appointment as Chairman in 2012. We wish
him well for the future.
ANNUAL GENERAL MEETING
The Company’s Annual General Meeting will be held on Thursday, 22 March 2018
at 11.00 a.m. at the offices of BlackRock, 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 investment managers will make a presentation to shareholders
on the Company’s progress and the outlook for the year ahead.
OUTLOOK
There remain a number of headwinds for the UK economy, and UK GDP growth is
being outpaced by both the Eurozone and the US. However, in this context it is
worth noting that the UK equity market derives well over two thirds of its
revenues from currencies other than sterling and that the Company’s
portfolio has significant overseas exposure, notably to the US.
Against this backdrop, your investment managers continue to seek to identify
attractive investment opportunities, either to add to existing holdings or to
introduce new stocks to the portfolio. The investment managers believe that
the portfolio is well positioned and is constructed of companies which have
robust business models, strong cash flows, favourable industry characteristics
and which are led by strong management teams.
CHRISTOPHER SAMUEL
Chairman
9 February 2018
INVESTMENT MANAGER’S REPORT
MARKET REVIEW AND OVERALL INVESTMENT PERFORMANCE
Economic growth and improving corporate earnings drove global equity markets
higher, with the UK market rising strongly over the reporting period. Within
this we saw UK small and medium sized companies outperforming larger companies
as the domestic economy continued to shrug off fears of a slowdown. Falling
unemployment alongside other positive data were sufficient for the Bank of
England to raise the base rate to 0.5%. Political concerns around Europe
abated somewhat following national elections in France and Germany but
geopolitical tensions were ratcheted upwards around the Korean peninsula as
North Korean missile launches were met by hard words from President Trump.
PERFORMANCE REVIEW
The Company has had a very successful financial year, with the NAV per share
rising by 33.9% to 542.66p on a total return basis. This return significantly
outperforms the benchmark return of 21.3% and the FTSE 100 return of 12.3%
over the same period.
The largest positive contributor to performance during the financial year has
been Keywords Studios, the leading international technical services provider
to the global video games industry which has seen its share price more than
double during the period. Keywords' most recent results showed strong growth
in revenues and profits, which increased by 50% and 60% respectively, driven
by continued organic growth as well as positive contributions from
acquisitions. The company has been taking advantage of the significant market
fragmentation and the shift of the big games companies to outsource more of
their requirements, and continues to expand its capabilities and geographical
presence through M&A. Copper producer Kaz Minerals reported interim results
showing earnings and costs better than expected helped by a higher copper
price, whilst the company also raised production guidance for the full year.
Driven by successful new projects, Kaz remains the fastest growing and one of
the lowest cost copper miners in the world. Veterinary products manufacturer
Dechra Pharmaceuticals continued to deliver strong organic growth ahead of
consensus whilst higher synergies from acquisitions has resulted in broker
upgrades to forecasts. Ticketing and virtual queuing solutions provider
Accesso has been another top contributor during the year. Accesso is a great
example where we see an opportunity for long-term compounding growth, as the
company is benefiting from a shift towards electronic and mobile commerce in
the attractions market, where their market leading technology is becoming
increasingly central to their customers’ propositions, leveraging software
and data to improve guest experience while driving operator profitability.
Whilst the short book cost money in absolute terms, losing less than 2%
against our benchmark which appreciated by over 23% we think is a good
outcome. 2017 has been a positive year for delivering stock specific successes
from short positions, and our approach of targeting over-leveraged or capital
intensive business, and companies facing structural or cyclical pressures has
been rewarded throughout the year. In fact the second largest contributor to
performance of the total trust return was from one of our short positions in a
UK construction company that has fallen more than 90% on the back of reduced
financial guidance, increased contract provisions and rising net debt. This is
a company that we have been short for a long period of time, operating in a
highly commoditised and capital intensive industry, with no pricing power, and
this year our patience and disciplined approach certainly paid off.
The largest stock specific detractor during the period was the UK’s leading
veterinary practitioner CVS Group. This was a disappointing result as CVS, a
core holding across our team, had been a strong contributor to performance for
most of the financial year, delivering consistent profit and revenue growth,
acquiring surgeries at attractive valuations whilst also benefiting from
structural underlying growth in veterinary spending. However the shares fell
sharply on the last day of November (our financial year end) after the company
released a trading statement flagging that like-for-like sales grew at only
1.5% (versus last year’s growth of over 6%) and that recent sales patterns
had been more volatile. The circa 20% fall in the share price has since
proved to be an overreaction to the 3% earnings downgrade for a quality
business that we believe has a long runway of growth as they continue to
consolidate the veterinary market and the shares have subsequently rallied.
Elsewhere plastic packaging engineer RPC fell as the market grew concerned
around the company’s acquisition strategy following the announced
acquisition of Letica for $490m funded by a 1 for 4 rights issue. Whilst
RPC’s management has an excellent track record we have since sold the
position.
ACTIVITY
As discussed in previous reports, we have been becoming progressively more
cautious around the outlook for the UK economy and in particular those
companies exposed to UK consumer spending. We have therefore continued to
reduce our exposure to this area of the market, whilst increasing our exposure
to more international earners such as Central Asia Metals, Ultra Electronics
and Hill & Smith.
We purchased a new holding in Stock Spirits following a second positive
meeting with the management team. Stock Spirits is an international spirits
company with profits mainly generated in Poland and the Czech Republic.
We also invested in SuperDry, the distinctive fashion retailer. The company
design, produce and sell premium clothing and accessories, which appeal to a
broad range of customers of all ages, at an affordable price through stores
and online. There is a clear strategy for continued growth of the e-commerce
business while also growing the business overseas.
We continue to use strong share price performance to take some profits in a
number of long term holdings which have performed well and where valuations
are now quite high. Our view on many of these companies remains unchanged and
we would add to many of these on any setback.
Within the short book we remain focused on identifying over-leveraged and
capital intensive businesses. The rising market also continues to present
short opportunities in many consumer services businesses facing structural
headwinds such as digital disruption, low cost/specialised formats, or
cyclical pressures, particularly in UK domestics, from falling demand and
rising costs pressures.
PORTFOLIO POSITIONING
Relative to our benchmark index we are overweight construction companies,
media companies and industrial engineers. Within the construction sector our
holdings have a more infrastructure and public housing focus, including
Ibstock, Morgan Sindall and Marshalls. Our media stocks include 4imprint,
which generates all of its revenues from the US, and YouGov. Our engineering
holdings include Hill & Smith, Avon Rubber, Bodycote, Gooch & Housego and
Trifast. All these companies are very internationally focused and generally
supplying attractive vertical markets.
We remain underweight travel & leisure companies, challenger banks and food
producers.
We estimate that more than half of the revenues of our portfolio originate
overseas. Our UK exposure is very deliberate, either to more defensive
businesses, or businesses that may benefit from positive structural or
cyclical trends in the current environment, such as those which are exposed
to the building of affordable housing to name one example.
There has been little change to the overall shape of the portfolio, because we
believe the key shares and sectors where we see good long investment
opportunities are the same, and the short book still targets the same areas
that we see as over-earning or under structural or cyclical pressure. The long
book remains exposed to specific investment cases, often where companies have
harnessed the power and convenience of technology in a capital light model
that disrupts mature profit pools. Many of our short positions are wIthin
Consumer Services, either facing structural headwinds (digital disruption, low
cost or specialised formats) or cyclical (weakening consumer demand, rising
cost pressures).
OUTLOOK
Following the strong performance of the UK stock market in 2017, the potential
for a market correction may be a concern for investors, meanwhile Brexit
negotiations continue, creating prolonged political and economic uncertainty
in the UK. Despite these concerns we remain optimistic in the outlook for
the Company as we enter the new year, a confidence derived from our belief
that stock selection will once again be key in the coming year.
The UK domestic economy remains challenged and in the face of political
uncertainty we see the possibility of weakness continuing for some time.
Unemployment has continued to fall, but with negative real wages acting as a
headwind for consumers, and uncertainty potentially causing companies to delay
investment decisions, there are clear headwinds to UK growth. We are
particularly cautious of those areas exposed to discretionary consumer
spending, where we believe the risks are increasing with cost pressures from
sterling and the national living wage impacting corporate margins while rising
inflation and real wages turning negative is impacting demand for many
consumer facing business models. This is a view that we have held for some
time now and a number of consumer related profit warnings have reinforced our
cautious view.
However, while we are cautious on the outlook for the UK economy, we are
positive on the outlook for UK plc. Economic growth globally remains positive,
supported by the US, Europe, Japan, China and Emerging Markets. We believe our
portfolio is suitably diversified by sector and geography, and comprises many
dynamic market-leading businesses, run by strong management teams, that are
well capitalised and good cash generators. It is supplemented by short
positions in a variety of fundamentally weak businesses. Overall we believe
our portfolio continues to be well placed for the current environment.
DAN WHITESTONE AND MIKE PRENTIS
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
9 February 2018
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended
30 November 2017.
As noted in the Chairman’s Statement, a proposal is being put forward at the
Company’s AGM to seek approval from shareholders to make an amendment to the
investment policy of the Company. The proposed amendment, if approved, shall
come into effect from 22 March 2018. The proposed amendment to the Company’s
investment policy and consequential amendment to the Company’s investment
objective are described in the appendix on page 82 of the Annual Report and
Financial Statements.
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 and 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 investment performance is measured against the Numis Smaller
Companies excluding AIM (excluding Investment Companies) Index (the Index).
The Company may hold up to 35% 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, BlackRock 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 can hold up to 30% of its net
assets in a portfolio of contracts for difference (CFDs) 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 portfolio of CFDs.
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 an additional source of
performance. A traditional long only portfolio and a long/short portfolio,
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 9 of the Annual Report and Financial Statements shows the
annual performance of the FTSE 250 Index since 1997 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 derivatives,
instruments which can exploit share price moves whether up or down. During
2017, this facility added approximately 4.2% to performance and has added
22.8% since its inception on 11 September 2008.
As the maximum short portfolio exposure through derivatives is 30% of net
assets, the Company will at all times retain a significant exposure to the
market, as shown in the following chart.
In the course of their research the Portfolio Managers come across companies
which they judge are likely to underperform; the ability to take short
positions 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 long/short strategy
is used to generate additional market exposure through ensuring that the long
portfolio exceeds the short portfolio in a range between 0% to 15% 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 115%. This is lower than
the ‘gross exposure’, which is the combination of the long only portfolio,
and the short and long positions added together expressed as a percentage of
net assets.
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 46 of the Annual Report and Financial Statements. The total
profit for the year, after taxation, was £101,332,000 (2016: a profit of
£20,213,000) of which the revenue return amounted to £7,396,000 (2016:
£5,723,000), and a capital profit of £93,936,000 (2016: £14,490,000).
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 in the following table.
Year ended 30 November 2017 Year ended 30 November 2016
Net asset value total return (1) 33.9% 7.3%
Share price total return (2) 43.8% (2.1%)
Benchmark total return (3) 21.3% 6.3%
Discount to cum income net asset value 15.7% 21.2%
Revenue return per share 10.11p 7.83p
Total dividend per share 9.00p 7.50p
Ongoing charges (1) 0.9% 1.1%
Ongoing charges (4) 2.2% 1.3%
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 12.7% and 20.8%, with the
average being 16.8%. The shares ended the year at a discount of 15.7% on a cum
income basis. As at 8 February 2018 the discount was 13.4%.
DISCOUNT
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 effective
communication of the Company’s unique structure to existing and potential
shareholders. The Board will also be seeking to renew the authority from
shareholders to buy back 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 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.
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.
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. Market risk includes the potential impact of events which 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.
are outside the scope of the Company’s control, such as the UK’s decision to leave the European Union.
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 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.
dividends received by shareholders.
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 2017, the Company had approximately 31.3% of its gross asset value invested 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 11 on pages 57 and 58 of the Annual Report and Financial Statements, together with a summary of the policies for managing and controlling these risks in note 16 of the Annual Report and Financial Statements.
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.
Operational risk In common with most other investment trust companies, the Company has no employees. The Company therefore relies upon the services provided by BlackRock (the Manager) and Bank of New York Mellon (International) Limited (the Depositary and The Board reviews the overall performance of the Manager, Investment Manager and all other third party service providers and compliance with the investment management agreement on a regular basis. The Fund Accountant’s and the Manager’s internal control processes are regularly tested and monitored throughout the year and are evidenced through their Service Organisation Control (SOC 1) reports, which are subject to review by an Independent Service Assurance Auditor. The SOC 1 reports provide assurance in respect of the effective operation of internal controls. The Company’s assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate that the loss was a result of an event beyond its reasonable control. The Board considers succession arrangements for key employees of the Manager and the Investment Manager and receives reports on the business continuity arrangements for the Company’s key service providers. The Board also receives regular reports from BlackRock’s internal audit
Fund Accountant) who maintain the Company’s accounting records. Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or function.
custody records, as a result of a cyber-attack or otherwise, could impact the monitoring and reporting of the Company’s financial position. The security of the Company’s assets, dealing procedures, accounting records and maintenance of regulatory and legal
requirements, depend on the effective operation of these systems.
Legal and regulatory risk The Company has been accepted by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions, and operates as an investment trust in accordance with Chapter 4 of Part 24 of the The Investment Manager monitors investment movements, the level of forecast income and expenditure and the amount of proposed dividends, if any, to ensure that the provisions of Chapter 4 of Part 24 of the Corporation
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