REG - Herald Inv Trust PLC - Annual Financial Report
16/02/2023 07:00
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RNS Number : 0721Q Herald Investment Trust PLC 16 February 2023
ANNUAL FINANCIAL REPORT for the year ended
31 December 2022 (audited)
This is the Annual Financial Report of Herald Investment Trust plc as required
to be published under DTR 4 of the UKLA Listing Rules.
Results and dividend
The net asset value (NAV) of the Company as at 31 December 2022 was 2,099.1p
per ordinary share (2021 - 2,719.3p). This represented a decrease of 22.8%
during the year, compared to a decrease in the comparative total return
indices of 21.9% (Numis Smaller Companies plus AIM (ex. investment companies)
Index) and a decrease of 28.4% (Russell 2000® Technology Index (small cap)
(in sterling terms)). The discount at year end was 15.1% (2021 - 7.9%).
The directors do not recommend a dividend for the year ended 31 December 2022
(2021 - nil).
The financial information set out in this Annual Financial Report does not
constitute the Company's statutory accounts for 2021 or 2022. Statutory
accounts for the years ended 31 December 2021 and 31 December 2022 have been
reported on by the Independent Auditor. The Independent Auditors' Reports on
the annual report and financial statements for 2021 and 2022 were unqualified,
did not draw attention to any matters by way of emphasis, and did not contain
a statement under 498(2) or 498(3) of the Companies Act 2006. The Company's
statutory accounts for the year ended 31 December 2021 have been filed with
the Registrar of Companies. The Company's statutory accounts for the year
ended 31 December 2022 will be delivered to the Registrar in due course.
The financial information in this Annual Financial Report has been prepared
using 'FRS 102 The Financial Reporting Standard applicable in the UK and
Republic of Ireland' (FRS102), which forms part of Generally Accepted
Accounting Practice ('UK GAAP') issued by the Financial Reporting Council. The
financial statements have also been prepared in accordance with The Companies
Act 2006 and with the Statement of Recommended Practice 'Financial Statements
of Investment Trust Companies and Venture Capital Trusts' issued by the
Association of Investment Companies ('AIC') in July 2022.
STATISTICS AND PERFORMANCE - YEAR'S SUMMARY
31 December 2022 31 December 2021 % change
Total net assets £1,305.0m £1,760.9m
Shareholders' funds £1,305.0m £1,760.9m
Net asset value per ordinary share(A) 2,099.1p 2,719.3p -22.8
Share price(A) 1,782.0p 2,505.0p -28.9
Numis Smaller Companies plus AIM (ex. investment companies) Index (capital 5,406.8 7,116.5 -24.0
only)
Russell 2000® Technology Index (small cap) (in sterling terms) (capital 3,814.1 5,340.9 -28.6
only)(B)
Dividend per ordinary share - -
Profit/(loss) per ordinary share (revenue) 0.21p (8.33p)
Ongoing charges(A) 1.05% 1.02%
Discount to NAV(A) 15.1% 7.9%
Year to 31 December 2022 2022 2021 2021
Year's high and low High Low High Low
Share price 2,570.0p 1,560.0p 2,630.0p 2,045.0p
Net asset value(A) per ordinary share 2,719.0p 1,978.7p 2,849.1p 2,285.0p
Discount(A) 25.2% 4.1% 16.8% 1.8%
At 31 December 2022 2021
(Loss)/profit per ordinary share
Revenue 0.21p (8.33p)
Capital (641.23p) 439.51p
Total (641.02p) 431.18p
( )
A Alternative Performance Measure - see page 82.
B Investments and indices valued at USD/GBP exchange rate of 1.209 at 31
December 2022 (1.354 31 December 2021).
® Russell Investment Group.
CAPITAL RETURN SINCE INCEPTION
Inception
31 December 16 February
2022 1994 % change
Net asset value per ordinary share (including
current year revenue)(A) 2,099.05p 98.70p 2,026.70
Net asset value per ordinary share (excluding
current year revenue)(A) 2,098.83p 98.70p 2,026.47
Share price 1,782.00p 90.90p 1,860.40
Numis Smaller Companies plus AIM (ex. investment
companies) Index 5,406.82 1,750.00 208.96
2000® Technology Index (small cap)
(in sterling terms)(†) 3,814.11 688.70* 453.81
A Alternative Performance Measure - see page l.
* At 9 April 1996 being the date funds were first available for
international investment.
† The Russell 2000® Technology Index (small cap) was rebased during
2009 following some minor adjustments to its constituents. The rebased index
is used from 31 December 2008 onwards.
Chairman's Statement AND REVIEW OF 2022
Recent stock market declines have inevitably affected the Company and it is
disappointing to report a decline in net asset value ('NAV') per share of
22.8% in 2022. The decline was surprisingly uniform across all four of our
regions (UK, North America, Continental Europe and Asia). More positively, we
have seen profits growth in aggregate within the portfolio and generally
resilient trading in investee companies. As clearly set out in the Manager's
report, price to earnings ('p/e') valuations have been reverting to more
normal levels (17.8x) having been elevated in recent years as we highlighted
at the time. However, it should be noted that share price declines often
precede forecast downgrades.
Market-= induced valuation volatility is one dimension to performance. The
more important one for the long term is investing in successful growth
companies. The aims of this Company and its Manager are to achieve capital
appreciation by providing primary capital and being active in the secondary
market in smaller quoted companies in the telecommunications, multimedia and
technology sectors. In 2022, a further £21.4m was invested in primary
capital (both new issues and follow-on fundraisings by companies), which takes
the cumulative total to £645m since inception in 1994. That compares with
just £95m of capital that the Company itself has raised in total (1994: £65m
and 1996: £30m). Our belief is that good companies will grow whatever the
economic backdrop, and that technology will continue to open up new markets.
Early-stage capital is always scarce and by ensuring that we identify and
research good companies ahead of others we can benefit from this.
Technology spend used to be mainly a capital expenditure decision, and demand
was vulnerable to economic cycles. However, today businesses cannot run
without information systems which are increasingly provided as a service on a
rental basis, in effect outsourcing capital expenditure. This also means that
more technology spend, across datacentres and communications infrastructure as
well as software, has become non-discretionary. Importantly it means many
technology companies are less exposed to cyclical demand and have defensive
characteristics like utilities. Furthermore, businesses and governments alike
are faced with other inflating costs, and the UK and North America in
particular have very tight labour markets, so there is greater pressure than
ever to find efficiencies, driving further demand for technology investment.
The consumer, although wedded to the internet, is perhaps more fickle and may
reduce expenditure on content and consumer electronics in uncertain times.
Equally, inflationary pressures may squeeze advertising demand which is
showing signs of weakness, but digital media continues to gain share.
Business-facing subscription content should be more resilient.
Companies manufacturing technology products such as semiconductors are more
exposed to softening demand than software companies. They have suffered from
supply chain issues associated with Covid and capacity constraints,
particularly in the semiconductor industry. This has left many companies with
record order backlogs so short-term demand is assured, but for those higher up
the supply chain the inventory cycle could produce adverse impacts.
Takeovers have continued to be a strong feature this year. There were thirty
one takeovers of portfolio companies completed or yet to be completed, with an
aggregate value of £161m. Of these, thirteen were in the United States
(£73m) and nine in the UK (£57m). In contrast, IPOs were few and far
between, with stock markets virtually closed to new entrants. These takeovers,
together with the Manager's purposeful rotation into lower-rated stocks over
the last couple of years, have helped offset the losses in the portfolio. In
addition, the Manager has adopted a defensive stance by holding a lower
proportion of early-stage loss-making stocks (12.0%) than in the past, and by
retaining high cash balances. At the end of the year, cash and short-dated
government bonds were 12.1% of net assets (£158.1m). This is a near record
level and provides plenty of ammunition to invest at lower valuations in the
coming year.
Current year losses in the portfolio have been mitigated by the weakening of
sterling, relative to the dollar in particular, which has reduced the losses
on overseas holdings, and (albeit on a delayed basis) will improve revenues
and profits for UK companies with exports and overseas subsidiaries. In
addition, the Company bought back more of its stock in 2022: some 2.6m shares,
or 4.0% of the outstanding capital at the start of the year, with an aggregate
cost of £50m. During the year, the discount widened from 7.9% on 31 December
2021 to 15.1% at year end, but with such dramatic market movements during the
year, this is not altogether surprising.
The income statement is showing a marginal profit after several years of
losses. This reflects a growth in dividends received of 16%, increased
interest income on cash and government bonds, and reduced costs reflecting the
lower asset value.
Whilst we remain confident about the longer-term prospects for the majority of
the investee companies, we have concerns about the state of financial markets
particularly for smaller companies. The UK smaller quoted companies market is
the most challenged with particularly poor liquidity. This is an existential
threat. It is very sad when over the life of the Company the UK listed
investments have delivered a return in excess of £1bn including nearly £400m
of profits on AIM holdings. The returns from investing in smaller UK
technology companies have been first class over the longer term, bettering
those of the index of US smaller technology companies (Russell 2000®
Technology Index) by over 1,000% since 1 July 1996. The Company's capital is
much needed in the UK. The entrepreneurial early-stage part of the market,
which the Company addresses, is on the frontline in the conflict between
regulation and economic growth. Whilst we respect the need for regulation, it
appears to us that the process of reducing risk from the markets seems also to
be reducing the available risk capital. This is surely an unintended and
undesirable outcome and a major factor in our gradually decreasing exposure to
the UK market.
As previously announced, after ten years I shall retire from the board at the
forthcoming AGM. It has been a great honour to serve as Chairman of a company
which has served its shareholders so well and, at the same time, has made such
a significant contribution to the UK technology sector. I would like to thank
our excellent manager, Katie Potts, and the entire team at HIML for their
unstinting efforts on your behalf. Equally, my fellow board members have made
my time at Herald very straightforward with their ever-ready support and
constructive contributions. Andrew Joy joined the Board last October and will
replace me as Chairman in April. Andrew has already demonstrated that he will
add a great deal and I am sure I am leaving you in good hands.
Whilst the current economic and geopolitical challenges seem likely to
continue for some time, I am very confident that the Company is well-placed to
benefit and even thrive in such uncertain times. Your Board remains excited by
the investment opportunities in the sector and looks forward with confidence.
TOM BLACK
Chairman
15 February 2023
Investment Manager's Report
The factors behind the disappointing decline in the Company's NAV per share of
22.8% are multiple. Clearly the biggest negative that had not been factored
into valuations at the start of the year was Russia's invasion of Ukraine. It
has been a catalyst to end the era of virtually free money and exposed the
strains of the excess government debt associated with Covid, welfare, health
and defence expenditure, and energy subsidies. The p/e compression witnessed
is a direct and inevitable by-product of rising bond yields.
Price to Earnings and IRR
2016 2020 2021 2022
Year-end P/E Year-end P/E Year-end P/E Year-end P/E
UK 15.9 26.2 23.8 16.7
North America 20.7 45.0 29.4 17.9
EMEA 17.5 34.9 33.3 24.1
Asia 13.1 25.0 23.0 16.9
Total Company 16.7 30.7 25.9 17.8
1 year change 2 year change 1 year change 2 year change
P/E P/E IRR IRR
UK -29.8% -36.2% -25.9% -7.2%
North America -39.1% -60.2% -19.9% -10.4%
EMEA -27.7% -31.0% -27.5% 6.1%
Asia -26.4% -32.3% -27.4% -14.8%
Total Company -31.3% -42.1% -23.5% -8.5%
Source: Bloomberg. Analyst earnings estimates, where available, are aggregated
using the Bloomberg weighted harmonic average calculation. This excludes
loss-making companies from the p/e calculation. A weighted harmonic average
will normally be lower than a geometric or arithmetic average. By way of
comparison the 2022 Total Company weighted average arithmetic p/e (47.8x) or
median p/e (21.0x).
Although the regional returns are all down between 20% and 28% there are
variations in the underlying drivers of these falls between regions.
UK
The UK remains the largest region at 44.1% of net assets (47.7% at 31 December
2021). It has delivered a disappointing return of -25.9%, which is a little
worse than the Numis Smaller Companies plus AIM (ex. investment companies)
Index which returned -21.9% on a total return basis. In part this reflects
stocks that outperformed during Covid but are now lagging. The Company's UK
portfolio returned 48.7% total return over the five years encompassing the
Covid trauma, against the index returning only 1.1%. There are also more
stock-specific reasons to this year's declines which are discussed below.
Seven stocks returned an aggregate loss of £101.1m (each in excess of £10m)
which is nearly half the region's loss for the year. However, during our
entire period of ownership, these seven stocks have still delivered a positive
return of £123.2m notwithstanding this year's setback. Losses would have been
much greater had we not already realised aggregate gains of £90.0m, with some
gains realised from each of the seven investments. Historically, the pattern
was to realise profits in successful holdings as a source of cash to reinvest
in smaller companies. Due to liquidity it has become increasingly challenging
to reduce positions at the larger end, and we realise there is now a
structural issue exacerbated by MiFID (Markets in Financial Instruments
Directive) and other recent regulation. I find that smaller company investing
is now a separate world from large company investing with different brokers
and different analysts, so companies can no longer seamlessly transition their
shareholder register to larger investors as they grow. As successful small
caps outperform, they are left with overexposed shareholders, who struggle to
sell their holdings and are constrained from providing further capital. It is
therefore more difficult for companies to raise additional capital.
The first of the significant lossmakers in the period is BATM Advanced
Communications, a UK-listed Israeli company which soared in Covid supplying
ventilators and tests. That particular market has since disappeared. The
second is Future. I am delighted to say we contributed needed capital of
£250,000 in 2015 at 10p (or £1.50/share on a split-adjusted basis), a
further £2m at £12.75 in 2019, and made other market purchases so the peak
book value was £6.3m. Fortunately in 2021 we sold £24.2m of stock at an
average price of £28.59 in 22 transactions realising gains of £21.0m. The
share price fell to end the year at £12.67. But, with a prospective p/e of
8.1x on current market forecasts, the company continues to deliver growth. The
third is GB Group, which has been a wonderful long-term investment, but
painful for the last two years following a difficult placing to fund an
acquisition. Additionally, results from the highly valued acquisition have
disappointed a little, mainly reflecting reduced demand for identity solutions
for the opening of cryptocurrency accounts. Ilika, an early-stage company with
leading edge technology for solid-state batteries, soared on the green bubble,
and then plunged on manufacturing challenges. ITM Power also soared on the
green bubble in 2020. Fortunately, £20.2m gains had already been realised,
but again the business had execution challenges, so delivered negative returns
for a second year. Rapidly made profits in S4 Capital evaporated, in part from
self-inflicted pain of book-keeping issues delaying the audit, but also an
economy-induced negative sentiment in the advertising world. The seventh is
YouGov, where again, £11.0m in gains had been realised because we felt that
the valuation had become inflated. Trading is still fine, but the market
anticipates a slowdown in growth.
There were some successes in the year as well. ZOO Digital has performed best.
This is a particularly gratifying one because we supported the business
through a difficult transition from DVDs to on-line streaming. When no other
investors would support, other than the chief executive, we put in convertible
loan stock and went to 20% of the equity, making an unusual exception (which
was sanctioned by the board), when our general limit is 10% of outstanding
capital. We now have a total return over £20m since inception. WANdisco has
also done well this year. It is still loss-making but has announced some
encouraging orders.
The nine takeovers with an aggregate value of £57.2m have also produced
positive returns including Euromoney Institutional Investor, Ideagen, Avast
and EMIS. This pace of takeovers in relation to a portfolio of £575.5m seems
a normal rate.
REGIONAL ALLOCATION CHANGES (STERLING THOUSANDS)
Valuation at Net Valuation at
31 December acquisitions/ Appreciation/ 31 December
2021 (disposals) Amortisation (depreciation) 2022
Equities*
UK 839,466 (43,303) - (220,641) 575,522
North America 392,191 (30,660) - (77,081) 284,450
EMEA 201,244 (3,704) - (56,116) 141,424
Asia Pacific 208,333 (4,541) - (58,315) 145,477
Total equities 1,641,234 (82,208) - (412,153) 1,146,873
Government bonds 42,248 32,529 507 2,356 77,640
Total investments 1,683,482 (49,679) 507 (409,797) 1,224,513
Net liquid assets 77,395 (1,004) - 4,144 80,535
Total net assets+ 1,760,877 (50,683) 507 (405,653) 1,305,048
* Equities includes convertibles and warrants.
+ The total assets figure comprises assets less current liabilities.
YE market value Total return % of total
£m £m region 2022 IRR
Media 123.5 -78.5 21.5 -38.9%
Semiconductors 20.9 3.5 3.6 22.8%
Technology Hardware 61.2 -35.4 10.6 -36.4%
Software 173.7 -46.0 30.2 -19.5%
Technology Services 65.9 -5.2 11.5 -5.8%
Total main sectors 445.2 -161.6 77.4
Total UK region 575.5 -212.3 -25.9%
The sector performance in the table above highlights that the media sector was
the weakest, having reversed the stellar performance of 66.1% in 2021.
Fortunately, material profits had been taken or the damage would have been
greater. I also observe that UK technology valuations have been more
resilient than those of other regions because they had lower initial levels
from which to fall. The table also shows a decline in the value of the UK
portfolio greater than the negative returns because there were net sales from
the UK portfolio of £43.3m. This takes the cash withdrawal from the UK
portfolio to over £210m over the last 6 years, and more than £300m since
inception. The positive is that the portfolio of £575.5m effectively has a
negative book cost of £308.8m. It has been our deliberate strategy to reduce
the UK weighting due to the risk of poor liquidity and lack of co-investors.
The UK has a creative and entrepreneurial spirit, with many interesting
investment opportunities. However, we feel the risks of investing in
early-stage loss makers in the quoted market has risen. We have experienced
situations where we alone have provided follow-on funding, and others where we
would have provided funding but found there were insufficient co-investors. We
expect to continue to support existing investments, and remain open to new
ones, but I expect the UK to diminish as a percentage of the assets of the
Company unless there is a political will to redress the regulatory burden and
improve liquidity.
North America
For smaller technology companies, the North American market has probably been
the worst in 2022. However, due to our well positioned portfolio, our North
American holdings have declined less than the other regions. The return of
-19.9% compares favourably with the Russell 2000® Technology Index return of
-28.4% in sterling terms. The dollar decline in the index was -36.1%, and the
sterling return (for an unweighted basket of stocks between $100m and $3bn
market capitalisation in Bloomberg's technology and communication sector) was
-40%. This makes the Company's NAV decline gratifyingly small. Superficially,
the prospective p/e of 17.9x would seem to make the North American market
cheap. However, we regard this as rather meaningless given that forecast
earnings are generally made on an adjusted basis versus GAAP (Generally
Accepted Accounting Principles), which excludes share-based payments. In the
software sector in particular it is not uncommon to see 5% or more of the
outstanding capital issued each year, the value of which is often a material
percentage of revenues, let alone profit, and this inevitably dilutes
shareholders substantially. In addition, it has been a growing concern that
valuations were ridiculously high in the US and we have withdrawn capital from
this market to the tune of £31m in 2022 and £126m over six years. In fact,
like the UK, the US portfolio of £284.5m at the year end has effectively a
negative book value (£117m).
YE Market Value Total return % of total
£m £m region 2022 IRR
Media 8.5 -3.1 3.0 -27.8%
Semiconductors 40.6 -11.0 14.3 -21.3%
Technology Hardware 90.7 -2.8 31.9 -3.2%
Software 124.6 -51.8 43.8 -25.8%
Technology Services 7.4 -4.5 2.6 -32.0%
Total main sectors 271.8 -73.2 95.6
Total North America
region 284.5 -75.9 -19.9%
The outstanding sector in North America has been technology hardware.
Fabrinet, a Thailand-based but Nasdaq-quoted contract manufacturer in the
optical space has done well. The star performer, not just in North America,
but the whole portfolio has been Super Micro Computer which returned £14.2m.
It is the largest North American holding and was the second-best performing
stock in the Russell 2000® Technology Index (i.e. small and large companies).
It is also pleasing that we held Agilisys, the third best performer in this
344 stock index. An element of the market's significant derating reflects the
fact that lower rated hardware companies have performed better than the
overvalued software companies. In contrast, long held Pegasystems has been
extremely disappointing, largely due to the loss of a trade secrets
misappropriation lawsuit for a seemingly bizarre level of damages. They are
appealing, but in the meantime the investment was devalued by £16.3m.
The other obvious contributor to the good relative performance has been
takeovers. The thirteen takeovers in the year, with an aggregate value of
£73m, is a significant proportion of the North American portfolio.
Furthermore, the aggregate value of takeovers is £191m over the last five
years, which is extraordinary compared to the market value of the North
American portfolio of only £207m at the end of 2017. Over that time,
takeovers have significantly contributed to the region's IRR of 130%, in
contrast to the sterling return of the index of 56%.
2020 and 2021 saw a deluge of IPOs and SPACs (Special Purpose Acquisition
Companies) at unattractive valuations, offsetting the wave of takeovers. The
result is that a third of the addressable market by number of companies is new
to the market since 2020. The average local currency return is --38% for these
technology IPOs, and SPAC returns are much worse. The team has focused on
meeting many of these companies this year and expects interesting
opportunities to appear in a dislocated market.
Along with a binge in share-based compensation, generally with minimal vesting
criteria, there has also been a US obsession with valuing revenue growth
rather than profits. The US has been good at recognising the importance of
market dominance, and the required land grab, but it seems companies had taken
this way too far, to the point of ignoring fundamentals like return on capital
and profitability. Retained losses in many software companies are often in
excess of $1bn which is generally a red flag. We prefer companies where
founders retain worthwhile stakes because they will not dilute themselves
unnecessarily and are motivated to control costs. The most exciting thing
about this bear market is that not only have valuations come down, but
business models are changing to include a greater focus on cost control. This
should also mean a less tight labour market and returns actually going to
shareholders rather than only to directors and staff. The really successful
mega-caps such as Alphabet, Microsoft and Apple have been able to generate
huge revenues and margins per employee, and thus been able to pay for key
skills well. Smaller companies have been caught between these scaled
businesses and venture capitalists offering equity. In order to compete, they
have doled out RSUs (restricted stock units) and over-rewarded the workforce.
Europe Middle East and Africa
The EMEA return of -27.5% is disappointing, but must be viewed in light of the
three year return from the region which is 60.3%, and the five year return of
79.6% despite the decline in 2022. Furthermore, the positive and negative
returns have been dominated by the three biggest holdings Esker, BE
Semiconductor Industries (BESI) and Nordic Semiconductor. Over time they have
collectively delivered a total return of £63.6m despite losing £33.0m in
2022, which was over 60% of the overall EMEA decline. The Company benefited
from BESI and Nordic Semiconductor being two of the largest semiconductor
investments in the global portfolio. Semiconductors had a good year in 2021,
and there are few ways to invest in this sub-sector in North America and the
UK, hence the overweight positions in Europe were retained.
YE Market Value Total return % of total
£m £m region 2022 IRR
Media 9.7 -5.0 6.9 -34.6%
Semiconductors 37.9 -18.1 26.8 -33.0%
Technology Hardware 14.6 2.0 10.3 14.4%
Software 49.0 -27.3 34.7 -34.2%
Technology Services 19.4 -1.0 13.7 -4.9%
Total main sectors 130.6 -49.4 92.4
Total EMEA region 141.4 -54.7 -27.5%
Demonstrating the power of clustering expertise, the Netherlands has retained
a strong semiconductor hub spawned from Philips, led by ASML and NXP, with
BESI as the smaller player. Germany has Infineon Technologies and STMicro is
the other main European player. Sweden and Finland have clusters around
Ericsson and Nokia, but both companies seem past their prime.
European governments are in general more strategic in supporting industry than
the UK, and demonstrably they want the public markets for smaller companies to
prosper and to provide capital. CAST, Generix and ADVA Optical Networking
('ADVA') have all been taken over for an aggregate value of £17.8m, albeit
ADVA for US listed shares. Nevertheless, takeovers are less prevalent, and
stock-based compensation is a non-issue in Europe. Although the European
economy is challenging, we expect to find stock specific opportunities as we
have in the past.
Asia
The Asia return has been -27.4%. The significant distinct markets are Taiwan,
Japan, South Korea and Australia, as well as other small ones. Taiwan has been
the most successful market for the Company. Taiwan benefitted from the cluster
effect from Taiwan Semiconductor Manufacturing Company, which originally used
Philips technology, but was also the hub for US companies to manufacture PCs
and servers. They are therefore used to trading with listed US giants who have
high business standards and in consequence have transparency and strong ESG
credentials. South Korea has Samsung and LG, but is much less transparent and
has weaker corporate governance. Australia is more analogous to the UK as a
market. Japan is a relatively new market for the Company. For a number of
years it seemed lacking in entrepreneurialism, lost ground to Korea and China
in consumer electronics and to Taiwan and others in semiconductors, and had
limited software companies. More recently there have been a large number of
IPOs, and Japan seems to have a dynamic smaller companies stock market.
In consequence our weighting there has increased, but it is too early for us
to see meaningful returns.
YE Market Value Total return % of total
£m £m region 2022 IRR
Media 14.8 -2.2 10.2 -12.0%
Semiconductors 20.5 -11.1 14.1 -33.1%
Technology Hardware 26.2 -3.0 18.0 -9.8%
Software 42.5 -19.1 29.2 -31.9%
Technology Services 18.3 -7.1 12.6 -28.4%
Total main sectors 122.3 -42.5 84.1
Total Asia region 145.5 -56.1 -27.4%
Australia had a poor year with a negative 43.1% return, reflecting retail and
institutional investors fleeing small technology companies and weak business
performance in a number of cases. Taiwan declined 24.8% but benefitted from a
strong performance from Lanner Electronics. Over the last five years, the
return in Taiwan has been an exceptional 212.8%, which has been masked by less
good returns in newer Asian markets where investment has been made more
recently. We have increased the focus on the Asian region because we feel that
opportunities lie here.
China is an important market for the sector's supply chain. However, we choose
to have limited exposure, reflecting political risk and the uncertainty of
outside shareholders seeing returns. The case of 51Job, which was a Chinese
holding taken over at an unpalatable price, is a good illustrative example.
The Chinese economy has challenges including a fragile property market, a
leadership which is unsympathetic to business, a 17% urban unemployment rate
for 16-24 year olds and the US trying to make China's move to self-sufficiency
in semiconductors as challenging as possible. The threat of an invasion of
Taiwan by China is the scariest of all possible prospects.
Market Background
We are privileged to meet many management teams throughout the world on a
recurring basis and this gives us an interesting perspective from which to
assess our market background. Everyone thinks their own economic problems are
worst. The UK has a particularly negative view of its own position, perhaps
driven by recent political turmoil and media negativity on a wide range of
problems. Thus far, profit expectations for companies in the UK portfolio have
been particularly resilient, perhaps benefiting from sterling weakness
relative to the dollar, and more conservative management of growth
expectations. US businessmen are depressed by their country's social tensions
and excessive fiscal and trade deficits, which dwarf the UK's. In contrast to
the UK, in North America expectations for revenue growth are visibly
weakening, and many companies have faced currency headwinds on their overseas
revenues. The Chinese seem alarmed by their financial leverage, ageing
population and a leadership unsympathetic to business. The manufacturing
orientation of the sector in Asia means it is visibly more exposed to a
cyclical slowdown in demand. Europe has the additional challenge of its
proximity to Russia/Ukraine, energy supply issues, and most significantly the
different countries in the Eurozone operating under one central bank, but no
fiscal union. It is hard to find optimism in the current landscape.
As our home market, and still accounting for over 40% of the portfolio, the UK
is of prime importance to the Company today. Despite the myriad problems, the
UK has the advantage of its own central bank, debt in its own currency,
domestic gas production to meet half of its need and a significant capacity to
generate electricity from wind with huge further potential. Perhaps due to the
high cost of land and labour the UK has become a knowledge-based economy which
is a significant positive and produces a large trading surplus in services,
which are not energy-dependent. In addition, in a world of conflict and
increased tensions, the UK does still have a defence industry which benefits a
number of companies in the supply chain.
Beyond our home market, there continue to be opportunities for us in all of
our markets. We have a strong focus on the United States which has scaled some
software companies brilliantly, delivering high margins. As evidenced by the
takeover volumes the Company has experienced, the scale of North American
private equity activity has shrunk the size of the addressable listed market,
albeit in recent years offset by a wave of speculative new issues. Whereas the
AIM market in London has had numerous IPOs and secondary placings to raise
development capital, US IPOs tend to have been exits for venture capitalists
and private equity. Furthermore, there was a fashion for crossover funds or
public company investors participating in late-stage venture rounds. This
category of investor seems to have disappeared. As interest rates normalise,
the extent to which these trends continue, and how they achieve exits, remains
to be seen. Europe as a region is perhaps less easy to categorise and will
remain a stock-specific market for the Company. Asia clearly the primary
region for new listings, with its technology sector having emerged as a
low-cost manufacturing location and now progressively moving up the value
chain.
There are key areas of change which always open up opportunities for smaller
companies. For many years there was a trend for manufacturing to migrate to
China, with its lower labour costs. As salaries and skillsets in China rose
and, more recently, as political concerns about China's direction of travel
have grown, other emerging economies such as Vietnam and Mexico have become
more important as manufacturing hubs. Whilst this shift has been underway for
some years, 2022 has added a further dramatic twist. The Ukraine war and the
related supply chain issues have magnified concerns about security of supply.
'Just in time' and lowest cost is no longer the buyer's prime motivation.
'Just in case' has become the new mantra. In addition, the increasing tensions
between China and Taiwan are of great concern and any conflict there would
dwarf the Ukraine impact on the technology sector given the central role
played by Taiwan in semiconductor manufacturing.
The major disruption of Covid has also led to a change in the employment
market. There has been a rise in working from home as well as a significant
reduction in the proportion of working age people available to work in
developed countries. Despite the obvious attractions of avoiding the cost of
offices and employing people more cheaply from far corners of the earth, we
are unsure what long-run effect this will have. Many of the companies in our
portfolio are based in knowledge clusters such as San Francisco, Seattle,
Boston and London, where knowledge feeds on itself. Can this be sustained with
working from home? Will centres of excellence become less relevant? These
remain unanswered questions at this time. There is some evidence that the
tightness of the labour market is receding, and employees are coming back to
the office so perhaps the working from home trend may not be so acute as we
once thought.
Outlook
There are many reasons to be anxious as we look forward. Excess government
leverage globally in an environment where the cost of capital is normalising,
geopolitical tensions across the globe and energy market turmoil all play
their part. In this environment it is challenging to reduce risk in any
portfolio. However, against this background smaller companies with genuine
growth prospects and intellectual property seem appealing. This is where the
Company operates, and the best returns have been made from investments in
2002-3 post the internet boom and 2008-9 in the financial crisis. We are
optimistic there will be good buying opportunities ahead.
Sector Performance*
(Sterling Millions)
Market value % of Total return Total return
equity portfolio equity portfolio equity portfolio equity portfolio
31 Dec 2022 31 Dec 2022 31 Dec 2022 31 Dec 2021
Software 389.8 34.0 -144.2 39.3
Technology Hardware 192.7 16.8 -39.2 28.4
Semiconductors 119.9 10.5 -36.7 51.2
Technology Services 111.0 9.7 -17.8 44.8
Advertising & Marketing 71.3 6.2 -42.7 57.2
Internet Media & Services 47.6 4.1 -28.8 23.5
Industrial Intermediate Production 27.8 2.4 -7.0 13.0
Telecommunications 26.3 2.3 -3.7 5.0
Electrical Equipment 26.0 2.3 -12.4 7.1
Publishing & Broadcasting 24.2 2.1 -15.0 20.5
Other 110.3 9.6 -51.5 7.0
Total 1,146.9 100.0 -399.0 297.0
Source: BICS (Bloomberg Industry Classification Standard).
Katie Potts
15 February 2023
Classification of investments
North Japan & Asia 2022 2021
UK EMEA America Pacific Total Total
Classification* % % % % % %
COMMUNICATIONS 10.4 0.8 1.3 1.5 14.0 17.0
Advertising and Marketing 5.2 0.1 0.1 0.1 5.5 7.1
Entertainment Content 1.0 - - - 1.0 1.0
Internet, Media and Services 1.6 0.6 0.4 1.1 3.7 4.2
Publishing and Broadcasting 1.7 - 0.2 - 1.9 2.2
Telecommunications 0.9 0.1 0.6 0.3 1.9 2.5
CONSUMER DISCRETIONARY 0.2 - - 0.2 0.4 0.5
Automotive 0.1 - - - 0.1 -
E-Commerce Discretionary - - - 0.2 0.2 0.4
Wholesale - Discretionary 0.1 - - - 0.1 0.1
CONSUMER STAPLES - - - - - 0.1
Retail - Consumer Staples - - - - - 0.1
ENERGY 0.6 - - - 0.6 1.7
Renewable Energy 0.6 - - - 0.6 1.7
FINANCIALS 1.0 - - 0.7 1.7 1.4
Asset Management 0.2 - - - 0.2 0.3
Equity Investment Instruments 0.7 - - - 0.7 0.5
Specialty Finance 0.1 - - 0.7 0.8 0.6
HEALTH CARE 0.8 0.4 - - 1.2 1.7
Biotechnology and Pharmaceutical 0.1 - - - 0.1 0.9
Health Care Facilities and Services 0.2 - - - 0.2 0.2
Medical Equipment and Devices 0.5 0.4 - - 0.9 0.6
INDUSTRIALS 4.7 0.3 0.3 0.4 5.7 6.1
Aerospace and Defence - - 0.3 - 0.3 0.1
Commercial Support Services 1.2 - - - 1.2 1.0
Electrical Equipment 1.5 0.3 - 0.2 2.0 2.9
Industrial Intermediate Production 2.0 - - 0.2 2.2 2.1
MATERIALS 0.2 - - 0.2 0.4 0.4
Chemicals 0.1 - - 0.2 0.3 0.2
Forestry, Paper and Wood Products 0.1 - - - 0.1 0.2
TECHNOLOGY 24.5 9.3 20.2 8.2 62.2 63.9
Semiconductors 1.6 2.9 3.1 1.6 9.2 8.7
Software 13.2 3.8 9.6 3.2 29.8 34.1
Technology Hardware 4.7 1.1 6.9 2.0 14.7 12.4
Technology Services 5.0 1.5 0.6 1.4 8.5 8.7
UTILITIES 1.7 - - - 1.7 0.4
Electricity and Gas Marketing and Trading 1.4 - - - 1.4 -
Gas and Water Utilities 0.3 - - - 0.3 0.4
TOTAL EQUITIES (including convertibles and warrants) 44.1 10.8 21.8 11.2 87.9 -
Total equities - 2021 (including convertibles and warrants) 47.7 11.4 22.3 11.8 - 93.2
BONDS 3.4 - 2.5 - 5.9 2.4
NET LIQUID ASSETS** 2.3 0.5 2.2 1.2 6.2 4.4
TOTAL NET ASSETS 49.8 11.3 26.5 12.4 100.0 -
Total net assets - 2021 49.8 11.4 26.5 12.3 - 100.0
SHAREHOLDERS' FUNDS 49.8 11.3 26.5 12.4 100.0 -
Shareholders' Funds - 2021 49.8 11.4 26.5 12.3 - 100.0
Number of equity investments (including convertibles and warrants) 144 36 77 88 345 356
* Source: Bloomberg Industry Classification Standard.
** Cash, current assets and liabilities.
Top 20 Equity Holdings
AS AT 31 DECEMBER 2022
A brief description of the twenty largest equity holdings in companies is as
follows:
Next15
Next Fifteen Communications ('Next 15') is a group of businesses designed to £ 29.1m Valuation
help companies grow. Next 15 perceive themselves as more than marketing
consultants and as growth consultants. They help their clients in four 2.2% of total assets
different ways. Firstly, they use data to generate the insights that help
businesses understand the opportunities and challenges they face and arm them 3.0% of issued share
with the knowledge they need to make the best decisions. Secondly, they help capital held
their customers optimise their brand reputation and build the mission-critical
digital assets businesses need to engage with their audiences. Thirdly, they £2.4m Book Cost
use creativity, data, and analytics to create the connections with customers
to drive sales and other forms of customer interaction. Finally, Next 15 help
customers redesign their business model or create new ventures to maximise the
value of their organisation.
Super Micro
Super Micro Computer ('Supermicro') is a leading provider of £27.1m Valuation
application-optimised, high-performance server and storage solutions that
address a broad range of computational-intensive workloads. With over 20 years 2.1% of total assets
of hardware design experience, Supermicro's server Building Block Solutions,
coupled with extensive in-house design and manufacturing, enables the Company 0.8% of issued share
to rapidly develop, build, and test server and storage systems, subsystems, capital held
and accessories with unique configurations. This capability gives customers an
unparalleled breadth of choice in dynamic markets, including Edge/5G, data £7.8m Book Cost
centers, public/private cloud, and artificial intelligence; plus, Supermicro
offers world-class software and service.
Diploma
Diploma is an international group supplying specialised products and services £25.9m Valuation
to a wide range of end segments in three sectors of controls, seals and life
sciences. Diploma's businesses are focused on supplying essential products and 2.0% of total assets
services which are critical to customers' needs, providing recurring income
and stable revenue growth. By supplying essential solutions, Diploma builds 0.7% of issued share
strong long term relationships with customers and suppliers, which support capital held
attractive and sustainable margins. An entrepreneurial culture and
decentralised management structure ensures that decisions are made close to £0.7m Book Cost
the customer and that the businesses are agile and responsive to changes in
the market and the competitive environment. The Group employs ca. 2,900
employees and its principal operating businesses are located in the UK,
Northern Europe, North America and Australia.
YouGov
YouGov is an international online research data and analytics technology £20.4m Valuation
group. Their mission is to supply a continuous stream of accurate data and
insight into what the world thinks, so that companies, governments and 1.6% of total assets
institutions can make informed decisions. YouGov's innovative solutions help
the world's most recognised brands, media owners and agencies to plan, 1.8% of issued share
activate and track their marketing activities better. At the core of the capital held
platform is an ever-growing source of consumer data that has been amassed over
twenty years of operation. All products and services draw upon this detailed £2.0m Book Cost
understanding of 22 million registered panel members to deliver accurate,
actionable consumer insights. With operations in the UK, the Americas, Europe,
the Middle East, India and Asia Pacific, YouGov has one of the world's largest
research networks.
Idox
Idox develops specialist software for government and industry, with an £19.7m Valuation
established track record serving tightly regulated markets including local
authorities, health, engineering, transport and property. Built around the 1.5% of total assets
needs of the user and designed in collaboration with experts, the company's
software delivers exceptional functionality and reliability to critical 6.8% of issued share
operations and embeds workflows that drive efficiency and best practice. capital held
£5.1m Book Cost
Silicon Motion
Silicon Motion Technology ('Silicon Motion') is a global leader in developing £19.2m Valuation
NAND flash controllers for SSDs and other solid state storage devices and has
over 20 years of experience developing specialised processor ICs that manage 1.5% of total assets
NAND components and deliver high-performance storage solutions widely used in
data centers, PCs, smartphones and commercial and industrial applications. 1.1% of issued share
Silicon Motion has one of the broadest portfolios of NAND controller capital held
intellectual property enabling the design of unique, highly optimised
configurable IC plus related firmware controller platforms and complete £1.7m Book Cost
turnkey controller solutions. More NAND flash components, including current
and up-coming generations of 3D flash produced by Kioxia, Micron, Samsung, SK
Hynix, Solidigm, Western Digital and YMTC, are supported by Silicon Motion
controllers than any other company. Customers include NAND flash makers,
module makers, hyperscalers and OEMs. Silicon Motion are the world's leading
supplier of SSD controllers used in PCs and other client devices and is a
leading merchant supplier of eMMC/UFS controllers used in smartphones and IoT
devices. Silicon Motion also supplies custom-designed high-performance
Open-Channel data center SSDs to China's leading hyperscalers and customised
small single-chip form factor SSDs for industrial, commercial and automotive
applications. Silicon Motion was founded in 1995 in San Jose, California and
now operate from corporate offices in Hong Kong, Taiwan and the US. In May
2022, MaxLinear announced a takeover offer for Silicon Motion which has yet to
close.
Nordic
Nordic Semiconductor ('Nordic') is a Norwegian fabless semiconductor company £18.7m Valuation
specialising in wireless communication technology that powers the Internet of
Things (IoT). Nordic was established in 1983 and has more than 1300 employees 1.4% of total assets
across the globe. Nordic's Bluetooth Low Energy solutions pioneered ultra-low
power wireless, making them the global market leader. The technology range was 0.7% of issued share
later supplemented by ANT+, Thread and Zigbee, and in 2018 they launched low capital held
power, compact LTE-M/NB-IoT cellular IoT solutions to extend the penetration
of the IoT. The Nordic portfolio was further complemented by Wi-Fi technology £4.2m Book Cost
from Imagination Technologies in 2021. Nordic's Bluetooth LE solutions are
used by the world's leading brands in a variety of products, including
wireless PC peripherals, gaming, sports and fitness, mobile phone accessories,
consumer electronics, toys, healthcare and automation.
Telecom Plus
Telecom Plus, which owns and operates the Utility Warehouse brand, is the UK's £17.9m Valuation
only fully integrated provider of a wide range of competitively priced utility
services spanning the energy, broadband, mobile and insurance markets. 1.4% of total assets
Customers benefit from the convenience of a single monthly bill, consistently
good value across all their utilities and good levels of service. The business 1.0% of issued share
relies on word of mouth recommendation by existing satisfied customers and capital held
partners in order to grow its market share.
£3.1m Book Cost
Descartes Systems
Descartes Systems ('Descartes') is a leader in providing on-demand, £17.9m Valuation
software-as-a-service solutions focused on improving the productivity,
performance and security of logistics-intensive businesses. Customers use 1.4% of total assets
Descartes' modular, software-as-a-service solutions to route, schedule, track
and measure delivery resources; plan, allocate and execute shipments; rate, 0.4% of issued share
audit and pay transportation invoices; access global trade data; file customs capital held
and security documents for imports and exports; and complete numerous other
logistics processes by participating in the world's largest, collaborative £0.6m Book Cost
multimodal logistics community. Descartes headquarters are in Waterloo,
Ontario, Canada and they have offices and partners around the world.
Zoo
ZOO Digital ('ZOO') supports major Hollywood studios and streaming services to £17.8m Valuation
globalise their content and reach audiences everywhere, by providing
world-leading, technology-enabled localisation and media services. Founded in 1.4% of total assets
2001, ZOO operates from hubs in Los Angeles, London, Dubai, Turkey, South
Korea, India and Denmark with a development and production centre in 11.4% of issued share
Sheffield, UK. The Group provides media services through its platforms that capital held
include: ZOOsubs, ZOOdubs and ZOOstudio. Its full-service proposition delivers
the end-to-end services required to prepare both original and catalogue £3.0m Book Cost
content for digital distribution; these services include dubbing, subtitling
& captioning, metadata creation & localisation, mastering, artwork
localisation and media processing. Alongside this offering, ZOO also provides
its customers with management platforms and strategic solutions to support
their own internal globalisation operations. ZOO helps its customers to reduce
time to market, lower costs and deliver high quality products to their global
audiences. The business has frameworks in place with all major Hollywood
studios and streaming services. Its customers include Disney, NBCUniversal,
HBO and Paramount Global.
fabrinet
Fabrinet is a leading provider of advanced optical packaging and precision £17.6m Valuation
optical, electro-mechanical, and electronic manufacturing services to original
equipment manufacturers of complex products, such as optical communication 1.4% of total assets
components, modules and subsystems, industrial lasers and sensors. Fabrinet
offers a broad range of advanced optical and electro-mechanical capabilities 0.5% of issued share
across the entire manufacturing process, including process design and capital held
engineering, supply chain management, manufacturing, advanced packaging,
integration, final assembly and test. Fabrinet focuses on production of high £2.1m Book Cost
complexity products in any mix and volume. Fabrinet maintains engineering and
manufacturing resources and facilities in Thailand, the United States, and the
People's Republic of China.
Besi
BE Semiconductor Industries ('Besi') is a leading supplier of semiconductor £17.0m Valuation
assembly equipment for the global semiconductor and electronics industries
offering high levels of accuracy, productivity and reliability at a low cost 1.3% of total assets
of ownership. Besi develops leading edge assembly processes and equipment for
leadframe, substrate and wafer level packaging applications in a wide range of 0.4% of issued share
end-user markets including electronics, mobile internet, computer, automotive, capital held
industrial, LED and solar energy. Customers are primarily leading
semiconductor manufacturers, assembly subcontractors and electronics and £0.9m Book Cost
industrial companies.
GBG
GB Group ('GBG') is a global leader in digital location, identity and managing £14.5m Valuation
fraud risk and compliance. GBG helps organisations across the globe eliminate
customer friction and fraud from their digital experiences. GBG develop and 1.1% of total assets
deliver digital identity, address verification, fraud prevention and
compliance software to businesses globally. Through the combination of the 1.8% of issued share
latest technology, the most accurate data and its expertise, GBG helps capital held
organisations ranging from start-ups to the largest consumer and technology
brands in the world deliver seamless experiences, so their customers can £4.5m Book Cost
transact online with greater confidence.
bango
The world's largest online merchants, including Amazon, Google, and Microsoft, £14.3m Valuation
use Bango technology to acquire more paying users. Bango has developed unique
purchase behaviour technology that enables millions more users to buy the 1.1% of total assets
products and services they want, using innovative payment methods, including
carrier billing, digital wallets, and subscription bundling. Bango harnesses 10.4% of issued share
this purchase activity into valuable marketing segments called Bango capital held
Audiences. Merchants use these audiences to target their marketing at paying
customers based on their purchase behaviour. Better targeting increases spend £6.8m Book Cost
through the Bango payments business, in turn generating more data insights,
creating a powerful virtuous circle that drives growth.
Esker
Esker was founded as a software company in 1985 with a direct and simple £13.9m Valuation
vision in mind - to help businesses deliver their paper documents
electronically. Today, Esker's strategy is focused on developing and selling a 1.1% of total assets
cloud-based software platform for the automation of enterprise back-office
processes. These solutions cover both the order-to-cash (from the customer 1.7% of issued share
order to invoice collection) and procure-to-pay processes (from the selection capital held
of suppliers to the payment of invoices). The Company is focused on
accelerating organic growth largely through a direct sales force. Over the £4.4m Book Cost
past 38 years, Esker has grown into one of the leading document processing
automation solution providers, with more than 1,000 employees in 15
subsidiaries worldwide.
Kainos
Kainos is a UK-headquartered IT provider with expertise across three divisions £13.1m Valuation
- Digital Services, Workday Services, and Workday Products. Kainos Digital
Services division develops and supports custom digital service platforms for 1.0% of total assets
public sector, commercial, and healthcare customers. The Workday Services
division specialises in the deployment of Workday Inc.'s Finance, HR and 0.7% of issued share
Planning products to leading organisations across Europe and North America. capital held
Kainos are one of Workday's most respected partners, experienced in complex
deployments. The Workday Products division develops products that complement £1.5m Book Cost
Workday. These include the Smart product suite, including Smart Test (for
automated testing), Smart Audit (for compliance monitoring), and Smart Shield
(for data masking), are used by more than 350 customers globally to safeguard
their Workday systems. Kainos employs more than 2,900 people in 22 countries
across Europe and the Americas.
Radware
Radware is a global leader of cyber security and application delivery £13.0m Valuation
solutions for physical, cloud, and software defined data centers. Its
award-winning solutions portfolio secures the digital experience by providing 1.0% of total assets
infrastructure, application, and corporate IT protection and availability
services to enterprises globally. Radware's solutions empower more than 12,500 1.8% of issued share
enterprise and carrier customers worldwide to adapt to market challenges capital held
quickly, maintain business continuity and achieve maximum productivity while
keeping costs down. £6.0M Book Cost
Volex
Volex is a leader in integrated manufacturing for performance-critical £12.6m Valuation
applications and a supplier of power products. The company serves a diverse
range of markets and customers, with particular expertise in cable assemblies, 1.0% of total assets
higher-level assemblies, data centre power and connectivity, electric
vehicles, and consumer electricals. Volex are headquartered in the UK and 3.2% of issued share
operate from 18 manufacturing locations with a global workforce of over 6,900 capital held
employees across 22 countries. Products are sold through internal locally
based sales teams and via authorised distributor partners to Original £5.4M Book Cost
Equipment Manufacturers ('OEMs') and Electronic Manufacturing Services ('EMS')
companies worldwide. Volex products and services provide power and
connectivity to a range of products, from the most common household items to
the most complex medical equipment.
Seeing Machines
Seeing Machines, a global company founded in 2000 and headquartered in £12.0m Valuation
Australia, is an industry leader in vision-based monitoring technology that
enable machines to see, understand and assist people. Seeing Machines' 0.9% of total assets
technology portfolio of AI algorithms, embedded processing and optics power
products that need to deliver reliable real-time understanding of vehicle 4.8% of issued share
operators. The technology spans the critical measurement of where a driver is capital held
looking, through to classification of their cognitive state as it applies to
accident risk. Reliable "driver state" measurement is the end-goal of driver £8.6M Book Cost
monitoring systems (DMS) technology. Seeing Machines develops DMS technology
to drive safety for automotive, commercial fleet, off-road and aviation. The
company has offices in Australia, the U.S., Europe and Asia, and supplies
technology solutions and services to industry leaders in each market vertical.
CentralNic
CentralNic is a London‐based AIM‐listed company which drives the growth of £11.6m Valuation
the global digital economy by developing and managing software platforms
allowing businesses globally to buy subscriptions to domain names, used for 0.9% of total assets
their own websites and email, as well as for protecting their brands online.
These platforms can also be used for distributing domain name related software 2.6% of issued share
and services, an opportunity that contributes significantly to CentralNic's capital held
organic growth. The Company's inorganic growth strategy is identifying and
acquiring cash‐generative businesses in its industry with annuity revenue £3.5m Book Cost
streams and exposure to growth markets and migrating them onto the CentralNic
software and operating platforms. CentralNic operates globally with customers
in almost every country in the world. It earns recurring revenues from the
worldwide sales of internet domain names and other services on an annual
subscription basis.
INCOME STATEMENT
For the year ended 31 December 2022
2022 2022 2022 2021 2021 2021
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments - (409,797) (409,797) - 285,355 285,355
Gains on foreign exchange - 4,144 4,144 - 466 466
Income 15,326 - 15,326 12,253 - 12,253
Investment management fee (13,653) - (13,653) (16,102) - (16,102)
Other administrative expenses (996) (9) (1,005) (1,065) (9) (1,074)
Profit/(loss) before taxation 677 (405,662) (404,985) (4,914) 285,812 280,898
Taxation (542) - (542) (503) - (503)
Profit/(loss) after taxation 135 (405,662) (405,527) (5,417) 285,812 280,395
Profit/(loss) per ordinary shares (basic and diluted) 0.21p (641.23)p (641.02)p (8.33p) 439.51p 431.18p
There is no final dividend proposed (2021 - nil).
The total column of this statement is the profit and loss account of the
Company, prepared in accordance with UK Accounting Standards.
The (loss)/profit after taxation is the total comprehensive income and
therefore no additional statement of comprehensive income is presented. The
supplementary revenue and capital columns are presented for information
purposes in accordance with the Statement of Recommended Practice issued by
the Association of Investment Companies. All items in the above statement
derive from continuing operations of the Company. No operations were acquired
or discontinued in the year.
BALANCE SHEET
At 31 December
2022 2021
£'000 £'000
Fixed assets
Investments held at fair value through profit or loss 1,224,513 1,683,482
Current assets
Cash and cash equivalents 80,442 74,551
Other receivables 1,308 4,374
81,750 78,925
Current liabilities
Other payables (1,215) (1,530)
(1,215) (1,530)
Net current assets 80,535 77,395
TOTAL NET ASSETS 1,305,048 1,760,877
Capital and reserves
Called up share capital 15,543 16,189
Share premium 73,738 73,738
Capital redemption reserve 6,409 5,763
Capital reserve 1,217,387 1,673,351
Revenue reserve (8,029) (8,164)
TOTAL SHAREHOLDERS' FUNDS 1,305,048 1,760,877
NET ASSET VALUE PER ORDINARY SHARE
(including current year income) 2,099.05p 2,719.33p
NET ASSET VALUE PER ORDINARY SHARE
(excluding current year income) 2,098.83p 2,727.70p
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
Called up Capital Total
Share Share Redemption Capital Revenue Shareholders'
Capital Premium Reserve Reserve Reserve funds
£'000 £'000 £'000 £'000 £'000 £'000
Shareholders' funds at 1 January 2022 16,189 73,738 5,763 1,673,351 (8,164) 1,760,877
(Loss)/profit after taxation - - - (405,662) 135 (405,527)
Shares purchased for cancellation (646) - 646 (50,302) - (50,302)
Shareholders' funds at 31 December 2022 15,543 73,738 6,409 1,217,387 (8,029) 1,305,048
For the year ended 31 December 2021
Called up Capital Total
Share Share Redemption Capital Revenue Shareholders'
Capital Premium Reserve Reserve Reserve funds
£'000 £'000 £'000 £'000 £'000 £'000
Shareholders' funds at 1 January 2021 16,446 73,738 5,506 1,410,424 (2,747) 1,503,367
Profit/(loss) after taxation - - - 285,812 (5,417) 280,395
Shares purchased for cancellation (257) - 257 (22,885) - (22,885)
Shareholders' funds at 31 December 2021 16,189 73,738 5,763 1,673,351 (8,164) 1,760,877
CASH FLOW STATEMENT
For the year ended 31 December 2022
2022 2022 2021 2021
£'000 £'000 £'000 £'000
Cash flow from operating activities
(Loss)/profit before finance costs and taxation (404,985) 280,898
Adjustments for losses/(gains) on investments 409,797 (285,355)
Purchase of investments (191,478) (206,289)
Sale of investments 244,408 235,293
(Increase)/decrease in receivables (144) 358
(Decrease)/increase in payables (315) 128
Amortisation of fixed income book cost (507) (2)
Effect of foreign exchange rate changes (4,144) (466)
Overseas tax on overseas income (583) (524)
Net cash inflow from operating activities 52,049 24,041
Cash flow from financing activities
Shares purchased for cancellation (50,302) (22,885)
Net cash outflow from financing activities (50,302) (22,885)
Net increase in cash and cash equivalents 1,747 1,156
Cash and cash equivalents at start of the year 74,551 72,929
Effect of foreign exchange rate changes 4,144 466
Cash and cash equivalents at the end of the year 80,442 74,551
Comprised of:
Cash and cash equivalents 80,442 74,551
Cash flow from operating activities includes interest received of £1,078,000
(2021 - £777,000) and dividends received of £12,924,000 (2021 -
£11,269,000).
As the Company did not have any long term debt at both the current and prior
year ends, no reconciliation of the net debt position is presented.
INCOME
2022 2021
£'000 £'000
Dividend income from investments
UK dividends from listed investments 3,499 3,407
UK dividends from unlisted investments (inc AIM) 4,173 3,093
Overseas dividends from UK-listed and AIM companies 384 439
Overseas dividend income 5,375 4,670
13,431 11,609
Interest income from equity investments
Income from unlisted (inc AIM) UK convertible bonds 363 269
Income from unlisted US convertible bonds 49 44
412 313
Fixed interest
UK interest from government securities 391 (16)
Overseas interest from government securities 648 361
1,039 345
Other income
Deposit interest 444 (20)
Underwriting commission - 6
444 (14)
Total income 15,326 12,253
Included within dividend income are special dividends of £655,000 (2021:
£706,000). Included within deposit interest is interest received of £449,000
(2021: £nil), and interest paid of £5,000 (2021: 20,000).
STATUS
The Company is an investment company within the meaning of s833 of the
Companies Act 2006 and operates as an investment trust in accordance with
s1158 of the Corporation Tax Act 2010 as amended ('s1158'). The Company is
subject to the Listing Rules of the Financial Conduct Authority and governed
by its articles of association, amendments to which must be approved by
shareholders by way of a special resolution. The Company obtained approval
from HM Revenue and Customs of its status as an investment trust under s1158
and the directors are of the opinion that the Company has and continues to
conduct its affairs in compliance with s1158 since this approval was granted.
BUSINESS MODEL
The Company has appointed Herald Investment Management Limited ('HIML') as the
Alternative Investment Fund Manager to provide all portfolio management and
risk management services. HIML is authorised and regulated by the Financial
Conduct Authority both for investment management and as an Alternative
Investment Fund Manager.
Administration of the Company and its investments has been delegated by HIML
to the Bank of New York Mellon International Limited ('BNYMIL') and company
secretarial duties have been delegated to Apex Listed Companies Services (UK)
Limited ('Apex'), formerly Sanne Fund Services (UK) Limited.
BNYMIL is the depositary under a tripartite agreement between HIML, the
Company and BNYMIL. The depositary is also responsible for custody activities.
OBJECTIVE
The Company's objective is to achieve capital appreciation through investments
in smaller quoted companies in the areas of telecommunications, multimedia and
technology.
INVESTMENT POLICY - STRATEGY
While the policy is global investment in smaller quoted companies in TMT, the
approach is to construct a diversified portfolio through the identification of
individual companies which offer long-term growth potential, typically over a
five-year horizon or more. The portfolio is actively managed and does not seek
to track any comparative index. With a remit to invest in smaller companies
with market capitalisation generally below $3bn at the point of purchase,
there tends to be a correlation with the performance of smaller companies, as
well as that of the technology sector. A degree of volatility relative to the
overall market should be expected.
The risk associated with the illiquidity of smaller companies is reduced by
generally restricting the stake in any one company to less than 10% of the
shares in issue.
A number of investments are in early-stage companies, which have a higher
stock specific risk but the potential for above average growth. Stock specific
risk is reduced by having a diversified portfolio.
In addition, to contain the risk of any one holding, the Manager generally
takes profits when a holding reaches more than 5% of the portfolio. The
Manager actively manages the exposure within the constraint that illiquid
positions cannot be traded for short-term movements.
The Company has a policy not to invest more than 15% of gross assets in other
UK-listed investment companies.
From time to time, fixed interest holdings, non-equity or unlisted investments
may be held on an opportunistic basis.
The Company recognises the long-term advantages of gearing and has a maximum
gearing limit of 50% of net assets. Borrowings are invested primarily in
equity markets but the Manager is permitted to invest in other securities in
the companies in the target areas when it is considered that the investment
grounds merit the Company taking a geared position. The board's intention is
to gear the portfolio when appropriate. Gearing levels are monitored closely
by the Manager and reviewed by directors at each board meeting.
The Company may use derivatives which will be principally, but not
exclusively, for the purpose of efficient portfolio management (i.e. for the
purpose of reducing, transferring or eliminating investment risk in its
investments, including protection against currency risk).
PRINCIPAL RISKS AND UNCERTAINTIES
The audit committee, on behalf of the board, regularly undertakes a robust
assessment of the principal, including emerging, risks facing the Company.
These include those that would threaten its business model, future
performance, solvency or liquidity. Principal risks are also considered as
part of the board's annual strategy meeting. The principal risks that follow
are those identified by the board after taking account of mitigating factors.
All risks are documented on a risk register and are grouped into six main
categories: strategic risk; market, economic and geopolitical risk; investment
management risk; operational risk; emerging/external risk; and regulatory
risk. Risks are rated by impact and likelihood of occurrence, with the ratings
charted on two risk matrices: a pre-mitigation and a post-mitigation one.
Mitigation takes into account processes, procedures and internal controls, and
the post-mitigation matrix is used to identify the Company's principal risks.
The risk register is reviewed on an ongoing basis, in an attempt to capture
all risks and ensure appropriate mitigation is in place, and to enable
directors to concentrate on principal risks whilst ensuring all risks are
considered.
As part of the risk review, the board considered the challenging global
economic and geopolitical environment including the impact of the
Russian-Ukraine war, which has magnified uncertainty in global financial
markets, together with the ongoing secondary effects of Covid including supply
chain issues and China's now historic zero Covid policy. Inflation and the
resultant volatility that it created in the global stock markets was a key
risk during the financial year. Tensions between the US and China were also
considered by the board.
A. MARKET RISK
(i) Other price risk, being the risk that the value of investment
holdings will fluctuate as a result of changes in market prices caused by
factors other than interest rate or currency rate movement;
(ii) Interest rate risk, being the risk that the fair value or
future cash flows of a financial instrument will fluctuate because of changes
in market interest rates; and
(iii) Foreign currency risk, being the risk that the fair value or
future cash flows of a financial instrument will fluctuate because of changes
in foreign exchange rates.
B. CREDIT RISK
Being the risk that one party to a financial instrument will cause a financial
loss for the other party by failing to discharge an obligation.
The Company is exposed to counterparty credit risk from the parties with which
it trades and will bear the risk of settlement default. Counterparty credit
risk to the Company arises from transactions to purchase or sell investments
held within the portfolio.
There were no past due nor impaired assets as of 31 December 2022 (2021 -
nil).
The counterparties engaged with the Company are regulated entities and of high
credit quality.
C. LIQUIDITY RISK
Being the risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities.
These risks and the policies for managing them have been applied throughout
the year and are summarised below.
A. MARKET RISK
(i) Other Price Risk
The Company's investment portfolio is exposed to market price fluctuations
which are monitored by the Manager in pursuance of the corporate objective.
Listed securities held by the Company are valued at bid prices, whereas
material unlisted investments are valued by the directors on the basis of the
latest information in line with the relevant principles of the International
Private Equity and Venture Capital Valuation Guidelines (Accounting Policy
1(c)). These valuations represent the fair value of the investments.
Other Price Risk Sensitivity
14.9% of the Company's total equity investments at 31 December 2022 (2021 -
15.6%) were listed on the main list of the London Stock Exchange and a further
34.1% (2021 - 35.0%) on AIM. The NASDAQ Stock Exchange accounts for 21.5%
(2021 - 20.9%), New York Stock Exchange for 3.6% (2021 - 3.2%) and other stock
exchanges or unlisted 25.9% (2021 - 25.3%). A 10% increase in equity
investment prices at 31 December 2022 would have increased total net assets
and profit & loss after taxation by £114,687,000 (2021 - £164,123,000).
A decrease of 10% would have the exact opposite effect. The portfolio does not
target any exchange as a comparative index, and the performance of the
portfolio has a low correlation to generally used indices.
The shares of Herald Investment Trust plc have an underlying NAV per share.
The NAV per share of Herald Investment Trust plc fluctuates on a daily basis.
In addition, there is volatility in the discount/premium the share price has
to NAV.
(ii) Interest Rate Risk
The majority of the Company's assets are equity shares and other investments
which neither pay interest nor have a maturity date. However, the Company does
hold convertible bonds and government bonds, the interest rate and maturity
dates of which are detailed below. Interest is accrued on cash balances at a
rate linked to the UK base rate.
The interest rate risk profile of the financial assets and financial
liabilities at 31 December was:
FINANCIAL ASSETS
2022 2021
2022 Weighted 2021 Weighted
Weighted average Weighted average
average period average period
interest until interest until
2022 rate/ maturity/ 2021 rate/ maturity/
Fair value interest maturity Fair value interest maturity
£'000 rate date £'000 rate date
Fixed rate:
UK bonds 44,809 0.8% 0.3 Years 19,904 0.1% 1.1 Years
US bonds 32,831 1.3% 0.3 Years 22,344 1.4% 0.8 Years
UK convertible bonds 2,000 9.0% 1.1 Years 1,000 10.0% 2.2 Years
Overseas convertible bonds 827 5.7% 1.2 Years 739 5.7% 2.2 Years
Floating rate cash:
Non-sterling 49,675 0.5% 56,529 0.0%
Sterling 30,767 0.6% 18,022 0.0%
80,442 74,551
The benchmark rates which determine the interest payments received on cash
balances are the Bank of England base rate, the European Central Bank rate and
the United States Federal Reserve rate.
Interest rate risk sensitivity
(a) Cash
An increase of 100 basis points in interest rates as at 31 December 2022 would
have a direct effect on net assets. Based on the position at 31 December 2022,
over a full year, an increase of 100 basis points would have increased the
profit & loss after taxation by £804,000 (2021 - £746,000) and would
have increased the net asset value per share by 1.29p (2021 - 1.15p). The
calculations are based on the cash balances as at the respective balance sheet
dates and are not representative of the year as a whole.
(b) Fixed rate bonds
An increase of 100 basis points in bond yields as at 31 December 2022 would
have decreased total net assets and profit & loss after taxation by
£224,000 (2021 - £388,000) and would have decreased the net asset value per
share by 0.36p (2021 - 0.60p). A decrease in bond yields would have had an
equal and opposite effect. The convertible loan stocks having an element of
equity are not included in this analysis as given the nature of the businesses
and the risk profile of their balance sheets; they are considered to have more
equity like characteristics.
(iii) Foreign Currency Risk
The Company's reporting currency is sterling, but investments are made in
overseas markets as well as the United Kingdom and the asset value can be
affected by movements in foreign currency exchange rates.
Furthermore many companies trade internationally both through foreign
subsidiaries, and through exports. The greatest foreign currency risk occurs
when companies have a divergence in currencies for costs and revenues. A much
less risky exposure to currency is straight translation of sales and profits.
The list of investments on pages 21 to 28 breaks down the portfolio by
geographic listing. However the location of the stock market quote only has a
limited correlation to the costs, revenues and even activities of those
companies, and so this note should not be regarded as a reliable guide to the
sensitivity of the portfolio to currency movements. For example, the holdings
in the portfolio that would suffer most from US$ weakness are UK companies
with dollar revenues and sterling costs.
The Company does not hedge the sterling value of investments that are priced
in other currencies. Overseas income is subject to currency fluctuations. The
Company does not hedge these currency fluctuations because it is impossible to
quantify the effect for the reasons stated above. However, from time to time
the Manager takes a view by holding financial assets or liabilities in
overseas currencies.
Exposure to currency risk through asset allocation by currency of listing is
indicated below:
At 31 December 2022
Other
receivables
Cash and and Net
Investments deposits payables exposure
£'000 £'000 £'000 £'000
US dollar 321,822 27,885 118 349,825
Euro 98,470 6,106 93 104,669
Taiwan dollar 38,340 15,684 50 54,074
Japanese yen 50,047 - 55 50,102
Australian dollar 26,226 - - 26,226
Norwegian krone 24,331 - - 24,331
Korean won 16,156 - 133 16,289
Other overseas currencies 29,058 - 31 29,089
Exposure to currency risk on translation of valuations of securities listed in
overseas currencies 604,450 49,675 480 654,605
Sterling 620,063 30,767 (387) 650,443
1,224,513 80,442 93 1,305,048
At 31 December 2021
Other
receivables
Cash and and Net
Investments deposits payables exposure
£'000 £'000 £'000 £'000
US dollar 418,793 48,271 3,348 470,412
Euro 147,215 41 91 147,347
Taiwan dollar 61,495 8,217 48 69,760
Australian dollar 51,690 - - 51,690
Japanese yen 51,432 - 41 51,473
Norwegian krone 39,021 - - 39,021
Korean won 21,767 - 103 21,870
Other overseas currencies 33,030 - 17 33,047
Exposure to currency risk on translation of valuations of securities listed in
overseas currencies 824,443 56,529 3,648 884,620
Sterling 859,039 18,022 (804) 876,257
1,683,482 74,551 2,844 1,760,877
Foreign currency risk sensitivity
At 31 December 2022, had sterling strengthened by 10% (2021 - 10%) in relation
to all currencies, with all other variables held constant, total net assets
and profit & loss after taxation would have decreased by the amounts shown
below based on the balances denominated in foreign currency. A 10% (2021 -
10%) weakening of sterling against all currencies, with all other variables
held constant, would have had the exact opposite effect on the financial
statement amounts. However, companies whose cost base diverges in currency
terms from its sales will in the longer term have a significantly greater
effect on valuation than simple translation. In the short term investee
companies generally cover their currency exposure to varying degrees. There is
insufficient publicly disclosed information to quantify this, but in the long
term this effect is expected to dwarf simple translation of foreign listings
in terms of both risk and reward, because many investee companies trade
globally. Furthermore, the country of listing is not necessarily an indication
of the geography of some or even any operational activities for investee
companies. The Manager does not use financial instruments to protect against
currency movements. From time to time financial leverage has been made using
debt in overseas currencies.
2022 2021
£'000 £'000
US dollar 34,983 47,041
Euro 10,467 14,735
Taiwan dollar 5,407 6,976
Japanese yen 5,010 5,147
Australian dollar 2,623 5,169
Norwegian krone 2,433 3,902
Korean won 1,629 2,187
Other overseas currencies 2,909 3,305
65,461 88,462
B. Credit Risk
Credit risk is the risk that a counterparty to a financial instrument will
fail to discharge an obligation or commitment which it has entered into with
the Company. The Manager monitors counterparty risk on an ongoing basis.
The Company has investments in convertible loan stocks that have an element of
equity. These securities are viewed as having a risk profile similar to the
equity holdings. This is because the convertibles held are in nascent
technology companies that may be loss-making and may have weak balance sheets.
For this reason these stocks are categorised as equity holdings and for risk
management purposes excluded from the credit risk analysis.
Credit Risk Exposure
The exposure to credit risk at 31 December was:
2022 2021
£'000 £'000
Fixed interest investments 77,640 42,248
Cash and cash equivalents 80,442 74,551
Other receivables 1,308 4,374
159,390 121,173
During the year the maximum exposure in fixed interest investments was
£85,394,000 (2021 - £42,722,000) and the minimum £27,013,000 (2021 -
£41,518,000). The maximum exposure in cash was £91,114,000 (2021 -
£85,096,000) and the minimum £50,164,000 (2021 - £58,031,000) .
C. Liquidity Risk
The Company's policy with regard to liquidity is to provide a degree of
flexibility so that the portfolio can be repositioned when appropriate and
that most of the assets can be realised without an excessive discount to the
market price.
Equity Securities
The Company's unlisted investments are not readily realisable, but these only
amount to 1.1% of the Company's total assets at 31 December 2022 (2021 -
0.6%).
In practice, liquidity in investee companies is imperfect, particularly those
with a market value of less than £100 million. To reduce this liquidity risk
it is the policy to diversify the holdings and generally to restrict the
holding in any one company to less than 10% of the share capital of that
company. Furthermore the guideline is for no single investment to account for
more than 5% of the assets of the Company.
The market valuation of each underlying security gives an indication of value,
but the price at which an investment can be made or realised can diverge
materially from the bid or offer price depending on market conditions
generally and particularly to each investment. 13.9% (£158 million) (2021 -
9.0% (£147 million)) of the listed equities in the portfolio are invested in
stocks with a market capitalisation below £100 million, where liquidity is
expected to be more limited. If these stocks had on average a realisable
value 20% below the bid price the value of the total fund would be adversely
affected by 2.4% (2021 - 1.7%).
Liquidity Risk Exposure
Contractual maturities of the financial liabilities at the year end, based on
the earliest date on which payment can be required are as follows:
2022 2021
One year One year
or less or less
£'000 £'000
Other payables 1,215 1,530
1,215 1,530
Fair Value of Financial Instruments
The Company's investments, as disclosed in the Company's balance sheet, are
valued at fair value.
Nearly all of the Company's portfolio of investments are disclosed in the
Level 1 category as defined in FRS 102. Categorisation is based on the lowest
level input that is significant to the fair value measure in its entirety.
The three levels set out in FRS102 follow:
Level 1 - The unadjusted quoted price in an active market for identical assets
or liabilities that the entity can access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are
observable (i.e. developed using market data) for the asset or liability,
either directly or indirectly.
Level 3 - Inputs are unobservable (i.e. for which market data is unavailable)
for the asset or liability.
The investment Manager considers observable data to be that market data that
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 analysis of the valuation basis for the financial instruments based on the
hierarchy as at 31 December is as follows:
At 31 December 2022
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial assets
Equity investments 1,133,136 - 8,522 1,141,658
Government debt securities 77,640 - - 77,640
Convertible loan stocks - - 5,215 5,215
Total investments 1,210,776 - 13,737 1,224,513
At 31 December 2021
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial assets
Equity investments 1,630,749 - 6,359 1,637,108
Government debt securities 42,248 - - 42,248
Convertible loan stocks - - 4,126 4,126
Total investments 1,672,997 - 10,485 1,683,482
A reconciliation of fair value measurements in Level 3 is set out below:
At 31 December 2022
£'000
Opening balance at 1 January 2022 10,485
Purchases 1,000
Sales (69)
Total (losses) or gains
- on assets sold during the year (1,573)
- on assets held at 31 December 2022 3,436
Assets transferred during the year 516
Return of capital (58)
Closing balance at 31 December 2022 13,737
VIABILITY STATEMENT
The directors' view of the Company's viability has not changed since last
year. The Company, as an investment trust, is a collective investment vehicle
designed and managed for the long term. The directors consider that
three years is an appropriate forward-looking time period. This recognises
the Company's current position, the investment strategy, which includes
investment in smaller companies, some of which are early stage and for which
a three-year horizon is a meaningful period over which to judge prospects,
the board's assessment of the main risks that threaten the business model and
the relatively fast-moving nature of the sectors in which the Company invests.
Inevitably, investment in smaller and early-stage companies carries higher
risks, both in terms of stock liquidity and longer-term business viability and
this risk is accepted by the board as necessary to seek to deliver high
returns.
There are no current plans to amend the investment strategy, which has
delivered good investment performance for shareholders over many years and,
the directors believe, should continue to do so. The investment strategy and
its associated risks are kept under constant review by the board. The board
undertook a robust assessment of the risks pertaining to the Company,
including risks to the Company's viability, and this is set out in the
principal risks and uncertainties section. This included emerging risks such
as rising global tensions - for example between China and the US over Taiwan
and the war in Ukraine - and climate change. As part of this, the board
considered several severe but plausible scenarios, including the impact of
significant market movements.
Other items relevant in the directors' assessment of the Company's viability
were: income and expenses projections and the expectation that the majority of
the Company's investments comprise readily realisable securities as
substantiated by liquidity analysis of the portfolio; any borrowing facilities
in place - noting there were none at the year end; and the fact that as
a closed ended investment company the Company is not affected by the
liquidity issues of open-ended companies caused by large or unexpected
redemptions. The board also takes account of the triennial shareholder vote on
whether the Company should continue as an investment trust. At the AGM in
April 2022, 99.99% of votes cast were in favour of continuation. The next
continuation vote will be at the AGM to be held in 2025.
The directors confirm that, based on the above and on reviews conducted as
part of the detailed internal controls and risk management processes set out,
they have a reasonable expectation that the Company will continue to maintain
its status as an investment trust, to implement its investment strategy and to
operate and be able to meet its liabilities as they fall due for at least the
next three financial years.
Statement of Directors' Responsibilities
The directors are responsible for preparing the annual report and the
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 the directors have elected to prepare the
financial statements in accordance with applicable law and United Kingdom
Accounting Standards (United Kingdom Generally Accepted Accounting Practice),
including FRS 102 "The Financial Reporting Standard applicable in the UK and
Republic of Ireland". 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 the profit or loss of the
Company 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 accounting estimates that are reasonable and
prudent;
· state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and explained in the
financial statements; and
· prepare the financial statements on the going concern basis,
unless it is inappropriate to assume that the Company will continue in
business.
The directors have delegated responsibility to the Manager for the maintenance
and integrity of the Company's page of the Manager's website. Legislation in
the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
The directors are responsible for the keeping of adequate 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 the financial statements and the
directors' remuneration report comply with the Companies Act 2006. They are
also responsible for safeguarding the assets of the Company and hence for
taking reasonable steps for the prevention and detection of fraud and other
irregularities.
The work carried out by the auditor does not involve any consideration of
these matters and, accordingly, the auditor accepts no responsibility for any
changes that may have occurred to the financial statements since they were
initially presented on the website.
Each of the directors confirm that, to the best of their knowledge:
· the financial statements, which have been prepared in accordance
with applicable law and United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice), give a true and fair view of the
assets, liabilities, financial position and loss of the Company;
· the annual report and financial statements includes a fair review
of the development and performance of the business and the position of the
Company, together with a description of the principal risks and uncertainties
that it faces and the directors' report contains those matters required to be
disclosed by applicable law; and
· 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,
performance, business model and strategy.
On behalf of the board
TOM BLACK
Chairman
15 February 2023
Copies of the Company's annual report and financial statements will be
available shortly from the Company's registered office or at www.heralduk.com
(http://www.heralduk.com) .
On behalf of the board
Apex Listed Companies Services (UK) Limited
Company Secretary
15 February 2023
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