Schroder UK Mid - Final Results
28/11/2024 07:00
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RNS Number : 9348N Schroder UK Mid Cap Fund PLC 28 November 2024
Thursday, 28 November 2024
SCHRODER UK MID CAP FUND PLC
("the Company")
ANNUAL FINANCIAL RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2024
Schroder UK Mid Cap Fund plc announces its financial results for the year
ended 30 September 2024.
· The NAV per share total return in the 12 months to 30 September 2024
was +17.3%. This compares to +21.4% from the FTSE Mid 250 ex Investment Trusts
Index. The share price total return was +17.5%.
· Over the longer term, the Company's performance is ahead of its
Benchmark (over five and ten years). There has been no change in the
investment process which has delivered this successful investment performance.
· Consumer discretionary, financials and domestically focused
industrial sub-sectors (construction, support services and transportation)
were among the largest contributors to the performance of mid-caps over the
year.
· The discount marginally widened, from 12.0% at the beginning of the
year to 12.3% at the end. Gearing was a positive factor and at the year end,
net gearing was 9.5% (2023: 6.8%) with £25 million of the Company's Revolving
Credit Facility deployed.
· A final dividend of 15.5 pence per share has been declared for year
the year ended 30 September 2024. The proposed final dividend, combined with
the interim dividend of 6.0 pence per share already paid during the year,
brings total dividends for the year to 21.5 pence per share.
· Harry Morley will be succeeding Robert Talbut as Chair following the
AGM on 24 February 2025 after a nine-year tenure.
Investor Presentation
The Company's Investment Managers are hosting an annual results presentation
for investors on Wednesday, 15 January 2025 at 2.00 p.m. Investors can
register for the event at: https://www.schroders.events/SCP24
(https://www.schroders.events/SCP24) .
Robert Talbut, Chair of Schroder UK Mid Cap Fund plc commented:
"We continue to remain optimistic about the outlook for the UK mid-cap sector
and the Company's portfolio holdings, which are largely focused upon longer
term growth businesses. The Investment Manager has a proven ability to find
attractive investment opportunities with the prospect of long-term returns for
shareholders."
The Company's Annual Report and Financial Statements for the year ended 30
September 2024 are also being published in hard copy format and an electronic
copy will shortly be available to download from the Company's website
www.schroders.com/ukmidcap.
Enquiries:
Katherine Fyfe / Phoebe Merrell 020 7658 6000
Schroder Investment Management Limited
Charlotte Banks 020 7658 6000
Schroder Investment Management Limited
Annual Report and Financial Statements for the year ended 30 September 2024
Chair's Statement
"We continue to remain optimistic about the outlook for UK mid-caps and the
Company's portfolio holdings, which are largely focused upon longer term
growth businesses."
Investment and share price performance
The Company's net asset value ("NAV") total return for the year was 17.3%,
which was less than the Company's Benchmark (the FTSE 250 ex Investment Trusts
Index), which produced a total return of 21.4% over the year. The share price
total return over the same period increased by 17.5%. Whilst the absolute
performance was attractive, relative return was affected by a rapid shift
within the mid-cap sector over the year, moving away from long-term
growth-oriented businesses and toward those more sensitive to interest rate
fluctuations. These latter businesses typically feature weaker balance sheets
and more problematic business models. Our Investment Manager's investment
strategy has consistently emphasised the importance of long-term growth firms,
whilst also recognising that there are shorter periods when the latter types
may outperform. Therefore, despite beating the Benchmark comfortably over the
last five years due to the emphasis upon higher quality businesses, the
Company has faced a period of shorter-term underperformance during this sharp
rotation.
Revenue and dividends
In June 2024, the Board was pleased to announce an increased interim dividend
of 6.0 pence per share which represented a 9.1% increase on the interim
dividend paid in 2023. We have declared a final dividend of 15.5 pence per
share for the year ended 30 September 2024. The proposed final dividend,
combined with the interim dividend of 6.0 pence per share already paid during
the year, brings total dividends for the year to 21.5 pence per share,
a level which is covered by current year earnings, and reflects an increase
of 4.8% in dividends declared in respect of the previous financial year. At
the current share price of 605.00 pence (as at 26 November 2024) this
represents a dividend yield of 3.6%. Since 2004, the total dividends for the
year have increased by 12.6% per annum.
A resolution to approve the payment of the final dividend for the year ended
30 September 2024 will be proposed at the forthcoming Annual General Meeting
("AGM"). If the resolution is passed, the dividend will be paid on 28 February
2025 to shareholders on the register on 31 January 2025.
Gearing
At the year end, net gearing was 9.5% (2023: 6.8%) with £25 million of the
Company's Revolving Credit Facility deployed of the £30 million available.
Having such gearing in place is an attractive feature of the investment trust
structure. It is expected that the Investment Manager will continue to use
this gearing to enhance shareholder returns by taking advantage of attractive
new investment opportunities and participating in capital raisings by
portfolio companies.
Discount management
During the year the Company's discount to NAV slightly widened from 12.0%
(2023) to 12.3% at year-end as UK equities still remain an out-of-favour asset
class. The Board continues to monitor the discount level carefully. In order
to facilitate future buy-backs should the Board consider these to be
appropriate and in shareholders long-term interests, we propose that the
Company's share buyback authorities be renewed at the forthcoming AGM. Any
shares so purchased will be cancelled, or held in treasury, for potential
reissue at a premium to NAV. During the financial year, the Company did not
buy-back any shares.
Board changes
In light of my nine year tenure, I will be retiring from the Board and will
not be offering myself for re-election at the upcoming AGM on 24 February
2025. I am pleased to announce that Harry Morley will be succeeding me as
Chair of the Company. The Board is confident that Harry, who was appointed as
a Director in 2023, has the right attributes and experience to successfully
lead the Board. The Board is currently undertaking a recruitment process for
an additional non-executive Director and will announce the outcome of this in
due course. It has been my honour to Chair your Company for almost four years
and I extend my grateful thanks to shareholders for their support and to my
colleagues for their diligence and hard work.
Amendment to the Company's Investment Policy
Whilst the Company predominantly invests in companies from the FTSE 250 ex
Investment Trust sector, under its Investment Policy, the Company may hold up
to 20% of its portfolio in equities and collective investment vehicles outside
the benchmark index. Although widely drafted, the Board has made a minor
amendment to the Investment Policy in order to clarify, for the benefit of
shareholders, that this 20% carve out may from time to time be utilised to
allow the Company to hold shares in companies listed outside of the UK. Such
overseas holdings could, for example, arise following corporate actions such
as mergers or spin outs from existing holdings. This change is not considered
to be material and should not be seen as indicating any change to the
Company's investment strategy or process. The revised Investment Policy is set
out in full on page 16.
Annual General Meeting and Results Webinar
Our Investment Manager will be giving a presentation at an investor webinar on
Wednesday, 15 January 2025 at 2.00 p.m. to discuss the Company's results which
can be signed up to via the following link:
https://www.schroders.events/SCP24.
The Company's AGM will be held at 1.00 p.m. on Monday, 24 February 2025. We
encourage shareholders to attend in person and, if unable to, to cast their
votes by proxy. The AGM will include a presentation by the Investment Manager
on the prospects for the UK market and the Company's investment strategy and
will provide an opportunity for shareholders to ask questions of the Board and
the Investment Manager. The meeting will be held at the Manager's office at
1 London Wall Place, London, EC2Y 5AU.
Regular news about the Company can be found on the Company's website:
http://www.schroders.com/trust-updates/.
Outlook
Both the Board and our Investment Manager remain positive about the outlook
for the UK economy, given the combination of low unemployment, rising
household disposable income, and increased business investment. The Bank of
England's Monetary Policy Committee has recently made its second rate cut in
four years, reducing the bank rate by 25 basis points to 4.75% and there
should be further cuts over the next 12 months. In addition, inflation, which
has been a concern over recent years, should remain at a moderate level going
forward boosting disposable incomes and generally helping improve sentiment
towards the UK.
It is encouraging to see that this supportive environment is now starting to
be reflected in growing interest and future expectations for the UK equity
market, as investors start to recognise the value on offer both relative to
other regional equity markets but also compared to historical valuations.
Within the wider UK market, the mid-cap sector is looking particularly
attractive given earnings growth expectations and healthy dividend prospects.
These factors help explain the increased merger and acquisition activity
within the mid-cap sector from both domestic and international corporate
buyers as well as private equity investors.
We continue to remain optimistic about the outlook for the UK mid-cap sector
and the Company's portfolio holdings, which are largely focused upon longer
term growth businesses. The Investment Manager has a proven ability to find
attractive investment opportunities with the prospect of long-term returns
for shareholders. The continued focus remains on looking for companies which
can deliver high risk-adjusted returns with rising cash flows and earnings and
with conservatively financed balance sheets. This should help to continue to
deliver attractive and sustainable returns to our shareholders in the future.
Robert Talbut
Chair
27 November 2024
Investment Manager's Review
"The FTSE 250 ex Investment Trusts Index is populated by multiple "unique"
companies with strong growth prospects, generating cash and delivering
attractive returns on capital."
The NAV per share total return in the 12 months to 30 September 2024 was
+17.3%. This compares to +21.4% from the FTSE Mid 250 ex Investment Trusts
Index. The share price total return was +17.5%.
Market Background
UK equities rose and mid-caps outperformed as they were spurred on by a
pick-up in overseas inbound bids and the prospect of UK interest rate cuts.
Consumer discretionary, financials and domestically focused industrial
sub-sectors (construction, support services and transportation) were among the
largest contributors to the performance of mid-caps over the year. This was in
large part driven by the improved UK economic outlook as interest rate
expectations moderated. Having experienced a shallow recession following the
rapid rise in rates over 2022/23, the market began to discount recovery as
rate cuts began to be priced in. Mortgage rates fell and house price growth
had resumed by the end of the year. July's UK election result was a further
catalyst for many mid-cap domestically focused equities to further rerate in
anticipation of greater policy certainty.
In contrast to a UK economy, which appeared to be improving, the global
macro-economic outlook became progressively more mixed. This deterioration
weighed on the more non-UK focused industrial sub-sectors of industrial
engineering and electronic and electrical equipment, in particular. Sharp
period-end de-ratings of these sub-sectors meant that stocks in these
categories were most likely to detract for the year overall. The aerospace and
defence sub-sector was a positive outlier, however, as increasingly uncertain
geopolitics drove a surge in orders.
Portfolio Performance
The portfolio NAV achieved a positive return of +17.3% during the year, though
it underperformed the Benchmark by 4.1%. The share price returned +17.5% and
the discount marginally widened, from 12.0% at the beginning of the year to
12.3% at the end. Gearing was a positive factor.
An underweight to the real estate sector and to more highly indebted companies
in the Benchmark more generally, was the main reason for the portfolio's
underperformance. Given a preference for stronger balance sheets, investors in
the strategy should not find this surprising.
Stocks held - significant positive and negative contributions versus the
Benchmark
Weight Relative
Positive Portfolio relative perform-
contributor weight(1) to index ance(2) Impact(3)
(%) (%) (%) (%)
Zegona Communications 1.1 +1.1 136.7 +1.1
Just Group 2.2 +1.8 75.7 +1.1
Paragon Banking 2.8 +2.2 45.7 +0.9
Keller Group 1.2 +0.8 101.2 +0.6
Britvic 2.2 +1.1 30.2 +0.5
Weight Relative
Negative Portfolio relative perform-
contributor weight(1) to index ance(2) Impact(3)
(%) (%) (%) (%)
Victrex 2.1 +1.6 -49.0 -0.9
Spectris 3.4 +1.9 -39.1 -0.8
Indivior 1.0 +0.4 -47.5 -0.8
Computacenter 3.6 +2.7 -21.0 -0.6
Vistry 0.3 -0.9 8.5 -0.6
Source: Schroders, Factset, close 30 September 2023 to close 30 September
2024.
(1)Weights are averages.
(2)Performance of the stock in the index relative to the FTSE 250 (ex. ITs)
Index return.
(3)Impact is the contribution to performance relative to the FTSE 250 (ex.
ITs) Index.
Turning to individual holdings, shares in both specialty chemicals company
Victrex and scientific and industrial instrumentation company Spectris
performed poorly. In the case of Victrex, a weak industrial backdrop and lower
than expected demand in the higher margin medical division meant that earnings
were lower than expected. However, the company is very well invested at this
point, so any recovery in end markets should be seen quickly and, in the
meantime, we expect to see a strong improvement in cash generated by the
business.
Spectris also saw a slowdown in demand in some of its end markets from
electric vehicles to pharmaceuticals and disruption from the implementation of
a new enterprise resource planning system which should over time be earnings
accretive. As well as its ongoing share buyback, the company has made three
interesting earnings enhancing acquisitions this year. Two of these complement
its existing Spectris Scientific division, by adding a hand-held instrument
offer. Both Spectris and Victrex are more than 40% below their five-year share
price high, and, given the cyclical aspects of both, it is logical to expect a
turning point before too long, in our view.
Specialty pharmaceuticals business Indivior also detracted. A competitor is
making more ground than expected in the opioid use disorder treatment market,
which meant that top line growth was less than expected. In addition,
re-enrolments into Medicare/Medicaid have proven to be an obstacle. However,
the market remains vast and, unfortunately for those needing the drugs,
growing. Indivior's share price is underpinned by rolling buy-backs. We
continue to see Indivior as another example of a unique investment opportunity
in the UK market.
IT services business Computacenter disappointed as profit from certain US
contracts moved into the second half of its financial year and expected
acquisitions did not materialise. The company maintains a strong balance
sheet, supporting an ongoing share buy-back, and good visibility over its H2.
It is exposed to structural growth, for example, in data centres and the
Cloud, has solid enterprise customers, and management are proven as excellent
allocators of capital (the shares have beaten the total return of the S&P
500 over both 10 and 20 years for example), and we have retained the bulk of
our holding.
An underweight holding in UK housebuilder Vistry was also unhelpful for
performance over the period. The position was sold too soon, only halfway into
what turned out to be an energetic rally, though some of the proceeds were
reinvested into increasing the holding size in house builder Redrow. Vistry
has since had a substantial profit warning and 20% downgrade to this year's
profit expectations, as such the shares have fallen considerably and the
Company was right to sell the holding. Redrow then became the subject of an
offer from larger housebuilder Barratt Developments at a 27.2% premium to the
undisturbed price.
Our top performer was a new holding, Zegona Communications, which outperformed
the Benchmark by 137%. The Company participated in fundraising by the Zegona
management team, which has previous successes in the telecoms sector. The
business model is one of buying telecoms assets, restructuring them, and then
selling them. Management has been active as anticipated: during the year,
Zegona acquired the Spanish assets of Vodafone. The company is now in
negotiations for two potential fibre broadband joint ventures with competitors
Telefonica and MasOrange (which could help to free up a possible c.€2
billion of cash), has received an investment grade credit rating and has
agreed a positive new fibre wholesale agreement with Telefonica.
Other top performing holdings included bulk annuities insurer Just Group. The
shares performed well after management revealed the company would
"substantially exceed" its previous goal set in 2021 of doubling profits over
five years, by achieving this and more in 2024. UK specialist lender Paragon
Banking Group announced better-than-expected final results and a new £50
million share buy-back to follow on from the £100 million announced in the
2023 financial year.
Shares in another one of our long-term holdings, specialty groundworks
contractor Keller, outpaced the benchmark return by more than 100%, thanks
mostly to strength in the US market. Finally, drinks company Britvic, a
company in which we had recently increased our stake, was in receipt of a bid
during the period from Danish drinks company Carlsberg, at a 35.6% premium to
the undisturbed price.
Stocks not held - significant positive and negative contributions versus the
Benchmark
Weight Relative
Positive Portfolio relative perform-
contributor weight(1) to index ance(2) Impact(3)
(%) (%) (%) (%)
Dowlais 0 -0.5 -63.9 +0.4
Close Brothers 0 -0.4 -72.3 +0.4
Wizz Air 0 -0.7 -45.9 +0.3
Dr Martens 0 -0.2 -80.3 +0.3
Aston Martin 0 -0.2 -79.3 +0.3
Weight Relative
Negative Portfolio relative perform-
contributor weight(1) to index ance(2) Impact(3)
(%) (%) (%) (%)
Persimmon 0 -0.5 15.8 -0.6
St James's Place 0 -0.4 13.7 -0.5
Ascential 0 -0.5 143.8 -0.4
Plus500 0 -0.7 73.8 -0.4
British Land Co 0 -1.6 24.4 -0.3
Source: Schroders, Factset, close 30 September 2023 to close 30 September
2024.
(1)Weights are averages.
(2)Performance of the stock in the index relative to the FTSE 250 (ex. ITs)
Index return.
(3)Impact is the contribution to performance relative to the FTSE 250 (ex.
ITs) Index
Not holding shares in Dowlais, an automotive engineering group, was positive
for performance, as they underperformed the benchmark by 63.9% over the
period. The company suffered a significant write-down in its powder metallurgy
division as well as softer than expected trading.
Not holding UK merchant bank Close Brothers also aided returns over the
period, as the shares tumbled following the FCA's announcement of a review
into the motor finance market, a factor outside the company's control. Of the
UK banks, Close Brothers has the biggest relative exposure to car finance
loans and the news led the company to cancel any 2024 dividend "given the
significant uncertainty regarding the outcome of the FCA's review of
historical motor finance commissions arrangements and any potential financial
impact as a result". (Source: Dividends/Close Brothers Group.)
Other stocks which it was right to avoid during the period included Wizz Air,
Dr Martens, and Aston Martin, which have all serially disappointed the market.
The Company did not own shares in housebuilder Persimmon. This was the main
single stock detractor in this category. More positive sentiment towards the
housebuilders, as expectations of rate cuts took hold, most notably in early
November 2023, drove the shares up. This assisted its promotion back into the
FTSE 100 following the delisting of Dechra (which, as a reminder, was acquired
by private equity). Shares in Ascential, which we had sold during the previous
year, performed well as a complex break up was executed during the year. Not
owning St. James's Place detracted, although our financial sector exposure
overall was a strong contributor. Having been relegated from the FTSE 100 in
the previous quarter, the wealth manager enjoyed something of a share price
recovery. A change of finance director in a time of regulatory change was
another factor in our decision not to hold St James's Place. Not holding
shares in trading platform provider Plus500 also detracted. Our preferred
long-term exposure to financials, however, includes companies such as
Just Group, retail CFD and derivatives broker IG and other specialists
including emerging market fund manager Ashmore (see below).
Finally, not owning enough highly interest rate sensitive stocks in the real
estate sector, such as British Land, also detracted from performance.
Portfolio activity
Attractively priced structural growth opportunities in market niches continue
to influence our new additions to the portfolio.
The Company bought back into Harbour Energy following its transformational
acquisition of BASF's oil and gas portfolio, a deal which also strengthens
Harbour Energy's balance sheet and lengthens the life of its assets.
Encouraged by signs of a bottoming out of the machine tooling cycle, the
Company also bought back into specialist engineer Renishaw. This has been a
top performer for the Company over the years and we last sold out of it on its
promotion into the FTSE 100. This is a unique company exposed to a number of
secular growth trends such as AI and quantum computing and, crucially, is
underpinned by a net cash balance sheet.
The Company initiated new positions in UK listed Spanish telecoms group Zegona
Communications, and in specialty pharmaceuticals business Indivior, as
discussed above.
Price comparison website group Mony Group (formerly known
as Moneysupermarket.com plc) promises to achieve greater efficiencies and was
another new portfolio addition. Its SuperSaveClub attracted over 750,000
members in its first nine months offering lead-generation cost savings and
scope to further enhance already attractive operating margins at a business
generating dependable mid-single digit top line growth.
We initiated a new holding in biotechnology company PureTech Health which has
$400 million in net cash relative to a market cap of c.$470 million at the
time of our initial investment. The U.S. Food and Drug Administration recently
approved the company's schizophrenia medication which is a huge step forward
for treatment in this area and the first new drug to be approved in more than
50 years. Not only does this trigger a milestone payment for PureTech, it also
shows the potential of the company's drug development team and process.
We established a position in electricals retailer Currys. With an improved
balance sheet, we anticipate that a stronger UK consumer, driving better
trading, and a recovery in margins in its Scandinavian markets as stock
overhangs in that market are cleared, will be further key catalysts. We also
anticipate a boost to growth in the sector thanks to a hardware refresh
tailwind four years after the pandemic and as consumers' tech appetite is
being whetted by new AI-enabled equipment. We also initiated a new position in
emerging markets fund manager Ashmore, which has £505 million cash and
£257 million in seed capital versus a market cap, at our entry price, of
£1.2 billion. Another new entrant to the portfolio is specialist insurer,
Lancashire Holdings, which has delivered superior returns on capital from both
insurance and reinsurance.
We initiated a new position in best-in-class facilities management business
Mitie, which is set to benefit from strong topline growth and a margin
improvement programme. We initiated a holding in travel food and beverage
group SSP given its recovery potential driven by growth in airline travel.
Bid activity has remained buoyant over the 12-month period, with mid-caps
continuing to command a significant premium. Bid activity was the driver
behind our disposals of our holdings in Virgin Money following a bid approach
from Nationwide, and Tyman, which was bid for by US peer Quanex. We exited a
relatively new holding in Hargreaves Lansdown as it went back into the FTSE
100 due to bid interest.
We sold Redrow following a bid, reinvesting the proceeds in peer housebuilder
Crest Nicholson. Although the bid approach for Crest from peer Bellway which
temporarily lifted the shares has since fallen away, the supply/demand
equation for the sector, alongside self-help potential, underpins our
investment thesis. Crest also has a new CEO on board (from peer Persimmon), so
we see in this a catalyst for change.
We sold shares in power supply solution provider, XP Power, as the shares rose
following a bid approach, subsequently rejected, and in manufacturing
components company Essentra, because we saw more upside in other industrial
companies.
The announcement of the retirement of the long-tenured CEO of soft drinks
business A.G. Barr prompted us to sell the shares, and we used the proceeds to
increase our holding in peer Britvic, which was then also bid for, as
mentioned above.
We sold residual stakes in marine services specialist James Fisher, special
interest online media group Future, buy-to-let lending specialist OSB
(increasing our position in higher quality peer Paragon Banking Group),
private equity and credit fund manager Bridgepoint, and defence contractor
Senior (using the proceeds to top up our holdings in Babcock, QinetiQ, and
Chemring).
Outlook
On performance: Although it is disappointing to report a year where
performance, significantly positive in absolute terms, has fallen behind the
Benchmark, a year is a brief period in investment, and over the longer term,
the Company's performance is ahead of its Benchmark (over five and ten years).
There has been no change in the investment process which has delivered this
successful investment performance.
On the backdrop in the UK: Following the shallowest UK recession on record, a
decisive +0.7% growth in Q1 2024 followed by +0.5% in Q2 2024, together with
an expectation of continued falling inflation and monetary easing, has led the
International Monetary Fund, for example, to upgrade its estimate of UK gross
domestic product growth to 1.1% for 2024 as a whole. They are one of a number
of forecasters who have needed to do this during 2024. This is evidence that
the UK economy can grow even at more "normal" (i.e. well above 0%) interest
rate levels, and counters some of the more bearish structural arguments
against UK equities, in addition to short term UK budget noise.
Whilst the economic backdrop is becoming more helpful, what matters most for
investors is how individual companies capture growth opportunities and turn
them into profit streams. The FTSE 250 continues to trade on a marginally
higher prospective dividend yield to the FTSE 100, for a far superior earnings
growth outlook, which demonstrates the highly cash generative and profitable
nature of many UK mid-cap stocks, which are therefore undervalued in our view.
We think that this valuation gap will close over time. Heightened levels of
incoming M&A at above average premia of 45% plus should help; we note that
almost a third of the companies in the Benchmark are trading at levels 50% or
more below share price highs reached in the last five years. Some UK
management teams are feeling more confident in rebutting offerors' lowly
proposals, which is an interesting new development and may indicate that these
companies' intrinsic values could be realised without succumbing to a bid.
The Investment Manager would therefore like to remind readers that we are
fishing in an attractive pond. In terms of the long-term potential of UK
equities, we suggest that investors willing to look beyond the persistent
negative media coverage will find that the UK punches above its weight. This
can be seen in terms of multi-baggers relative to the US. See our 2023 article
on ""30-baggers" why the UK has more than its fair share", and our podcast on
the topic, available on the Company's web pages:
https://www.schroders.com/en/global/individual/insights/30-baggers-why-the-uk-has-more-than-its-fair-share/.
We have had the great pleasure of interviewing for our podcast a number of
mid-cap CEOs, from >200 "bagger" Cranswick CEO Adam Couch to the CEO of the
UK's number one pet care company Pets at Home, and the link to these can be
found here:
https://www.schroders.com/en-gb/uk/individual/funds-and-strategies/investment-trusts/schroder-uk-mid-cap-fund-plc/.
Capital allocators such as these are why the Benchmark has beaten the S&P
500 return over the 25 years to 30 September 2024 , when measured in local
currency. In US dollar terms, it has very nearly matched the popular US index.
The FTSE 250 ex Investment Trusts Index is populated by multiple "unique"
companies with strong growth prospects, generating cash and delivering
attractive returns on capital. As stock pickers, we are confident that the
collective strength of our holdings' balance sheets will continue to provide
resilience in all manner of economic environments.
Schroder Investment Management Limited
27 November 2024
Past performance is not a guide to future performance. The value of
investments and the income from them may go down as well as up and investors
may not get back the amounts originally invested.
This information is not an offer, solicitation or recommendation to buy or
sell any financial instrument or to adopt any investment strategy.
For help in understanding any terms used, please visit
https://www.schroders.com/en/insights/invest-iq/investiq/education-hub/glossary/
Principal and emerging risks
Principal and emerging risks and uncertainties
The Board, itself and through its delegation to its Audit and Risk Committee,
is responsible for the Company's system of risk management and internal
control and for reviewing its effectiveness. The Board has adopted a detailed
matrix of principal risks affecting the Company's business as an investment
trust and has established associated policies and processes designed to manage
and, where possible, mitigate those risks, which are monitored by the Audit
and Risk Committee on an ongoing basis. This system assists the Board in
determining the nature and extent of the risks it is willing to take in
achieving the Company's strategic objectives.
Risk Mitigation and management Change
Strategy
Strategic The appropriateness of the Company's investment remit is periodically reviewed Unchanged
and the success of the Company in meeting its stated objectives is monitored.
The requirements of investors change or diverge in such a way as to diverge
from the Company's investment objectives, resulting in a wide discount of the The share price relative to NAV per share is monitored and the use of buy back
share price to underlying NAV per share. authorities is considered on a regular basis.
Marketing and distribution activity is actively reviewed.
The Company engages proactively with investors.
Cost base The ongoing competitiveness of all service provider fees is subject to Unchanged
periodic benchmarking against their competitors.
The Company's cost base could become uncompetitive, particularly in light of
open ended alternatives. Annual consideration of management fee levels is undertaken.
Investment
Investment management Review of the Manager's compliance with its agreed investment restrictions, Unchanged
investment performance and risk against investment objectives and strategy;
The Manager's investment strategy, if inappropriate, may result in the Company relative performance; the portfolio's risk profile; and whether appropriate
underperforming the market and/or peer group companies, leading to the Company strategies are employed to mitigate any negative impact of substantial changes
and its objectives becoming unattractive to investors. in markets. The Manager also reports on the Company's portfolio, and the
market generally.
Annual review of the ongoing suitability of the Manager, including resources
and key personnel risk.
Financial and market risk The risk profile of the portfolio is considered and appropriate strategies to Unchanged
mitigate any negative impact of substantial changes in markets are discussed
The Company is exposed to the effect of market fluctuations due to the nature with the Manager. See note 20 of the notes to the financial statements.
of its business. A significant fall in equity markets could have an adverse
impact on the market value of the Company's underlying
Custody The depositary reports on the safe custody of the Company's assets, including Unchanged
cash and portfolio holdings which are independently reconciled with the
Safe custody of the Company's assets may be compromised through control Manager's records.
failures by the depositary, including cyber hacking.
The review of audited internal controls reports covering custodial
arrangements is undertaken.
An annual report from the depositary on its activities, including matters
arising from custody operations is received.
Gearing and leverage Gearing is monitored and strict restrictions on borrowings are imposed: Unchanged
gearing continues to operate within pre-agreed limits so as not to exceed 25%
The Company utilises credit facilities. These arrangements increase the funds of total assets.
available for investment through borrowing. While this has the potential to
enhance investment returns in rising markets, in falling markets the impact The Manager is currently in discussion with several providers to secure new
could be detrimental to performance. borrowing facilities upon expiry of the Company's current facilities in
February 2025. If a new loan cannot be arranged with acceptable terms, the
Board is satisfied that this does not represent a significant risk to the
Company since it has sufficient readily realisable assets to repay the loan.
The Board also reviews the cost of gearing.
Compliance
Accounting, legal and regulatory The confirmation of compliance with relevant laws and regulations by key Unchanged
service providers is reviewed.
In order to continue to qualify as an investment trust, the Company must
comply with the requirements of section 1158 of the Corporation Tax Act 2010. Shareholder documents and announcements, including the Company's published
annual report are subject to stringent review processes.
Breaches of the UK Listing Rules, the Companies Act or other regulations with
which the Company is required to comply, could lead to a number of detrimental Procedures are established to safeguard against the disclosure of inside
outcomes. information.
Operational
Service provider Service providers are appointed subject to due diligence processes and with Unchanged
clearly-documented contractual arrangements detailing service expectations.
The Company has no employees and has delegated certain functions to a number
of service providers. Failure of controls, including as a result of cyber Regular reports are provided by key service providers and the quality of their
hacking, and poor performance of any service provider, could lead to services is monitored.
disruption, reputational damage or loss.
Review of annual audited internal controls reports from key service providers,
including confirmation of business continuity arrangements and IT controls is
undertaken.
Cyber Service providers report on cyber risk mitigation and management at least Unchanged
annually, which includes confirmation of business continuity capability in the
The Company's service providers are all exposed to the risk of cyber attacks. event of a cyber attack.
Cyber attacks could lead to loss of personal or confidential information or
disrupt operations.
Political risk The Board continues to monitor relevant political and geopolitical events to Unchanged
the extent that they apply to the Company.
Political risk includes the potential for political, socio-economic and
regional tensions such as diplomatic conflicts, trade wars and military The Board continues to receive regular updates on the current issues and
actions, globally as well as in the UK specifically. potential risks from the Manager for discussion.
The Board routinely evaluates thematic and factor risks, stock selection, and
the use of leverage. The Board have established investment restrictions and
guidelines, which are monitored and reported by the Manager.
The Board is mindful that changes to public policy in the UK, could impact the
company's investment strategy, objectives, and performance in the future.
The Board is mindful that recent political changes in the United States of
America ("USA") could lead to an increase in trade frictions which could cause
disruptions.
Climate change risk The Manager has developed a range of proprietary tools to better understand Unchanged
the impacts of climate change on the portfolio. The investment process applied
A failure to understand the pricing of assets affected by climate change or a by the portfolio managers is ESG "integrated". The Manager monitors the
lower demand for impacted assets could lead to poor investment decisions or emissions of investee companies and can engage with companies to reduce their
more volatile pricing as asset prices adjust to reflect the increasing emissions or aim to invest in companies committed to reaching net zero carbon
regulation of carbon emissions. emissions. The Board receives updates from the Manager at Board meetings and
continues to engage with the Manager and the Schroders sustainability team to
discuss ESG matters, including climate change. The Board has challenged the
Manager regarding the need to carefully consider and monitor sustainability
and environmental and societal impacts when assessing investment
opportunities, in addition to the well founded attention to good corporate
governance principles, which have been in place for many years.
Inflation and Global supply chain risk The Board has, in conjunction with the Manager, considered the risks relating Unchanged
to elevated levels of price inflation, generally, together with the evolution
Rising supplier costs and availability of supply. in the way that supply chains are operating and the concomitant risks of
rising supplier costs and availability of supply. It is the Board's view that
these considerations should be assessed as a principal risk as although the
previously elevated levels of inflation have now decreased, there is still
scope for them to increase again in the near term. The key mitigation to these
risks comes from diligent appraisal and monitoring of investments by the
Manager, including engagement with the management of investee companies,
together with a critical assessment of investee companies' ability to pass on
rising costs to customers as a result of their pricing power and strong market
positions alongside their ability to control costs.
Emerging risks
Artificial Intelligence ("AI")
The development of AI presents potential risks and opportunities to businesses
in almost every sector. The extent of the risk presented by AI is extremely
hard to assess at this point but the Board considers that it is an emerging
risk and together with the Manager will monitor developments in this area.
Regulatory Divergence
Given recent political changes in the USA, there is risk of regulatory
divergence between the UK and Europe, and the USA, with the USA more likely to
favour a de-regulated approach. This might make the UK market less attractive
in comparison, creating a competitive threat and potentially having
implications for UK companies.
Risk assessment and internal controls review by the Board
Risk assessment includes consideration of the scope and quality of the systems
of internal control operating within key service providers, and ensures
regular communication of the results of monitoring by such providers to the
Audit and Risk Committee, including the incidence of significant control
failings or weaknesses that have been identified at any time and the extent to
which they have resulted in unforeseen outcomes or contingencies that may have
a material impact on the Company's performance or condition.
Although the Board believes that it has a robust framework of internal
controls in place this can provide only reasonable, and not absolute,
assurance against material financial misstatement or loss and is designed to
manage, not eliminate, risk.
Both the principal risks and uncertainties and the monitoring system are also
subject to robust review at least annually. The last assessment took place in
June 2024.
During the year, the Board discussed and monitored a number of risks that
could potentially impact the Company's ability to meet its strategic
objectives. The Board receives updates from the Investment Manager, Company
Secretary and other service providers on emerging risks that could affect the
Company. The Board was mindful of the evolving global environment during the
year; and the risks posed by volatile markets; geopolitical uncertainty; and
inflation and corresponding interest levels which could affect the asset
class. However, these are not factors which explicitly impacted the Company's
performance. These risks are seen as exacerbating existing risks and have been
incorporated in the macro factors, including the geopolitical/economic
environment and climate change risk section in the table below.
The Board considered in detail whether there were any material emerging risks
and has included the development of artificial intelligence and regulatory
divergence as emerging risks in the table below.
No significant control failings or weaknesses were identified from the Audit
and Risk Committee's ongoing risk assessment throughout the financial year and
up to the date of this report. The Board is satisfied that it has undertaken a
detailed review of the risks facing the Company and that the internal control
environment continues to operate effectively.
Actions taken by the Board and, where appropriate, its Committees, to manage
and mitigate the Company's principal risks and uncertainties are set out in
the table below. The "Change" column on the right highlights at a glance the
Board's assessment of any increases or decreases in risk during the year after
mitigation and management. The arrows show the risks as increased, decreased,
or unchanged.
A full analysis of the financial risks facing the Company is set out in note
20 to the financial statements on pages 60 to 62.
Statement of Directors' Responsibilities
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 prepared the financial
statements in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising Financial Reporting
Standard ("FRS") 102 "The Financial Reporting Standard applicable in the UK
and Republic of Ireland" and applicable law). 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
return 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,
comprising FRS 102, have been followed, subject to any material departures
disclosed and explained in the financial statements;
- notify the Company's shareholders in writing about the use
of disclosure exemptions in FRS 102, used in the preparation of the financial
statements; and
- prepare the financial statements on a going concern basis
unless it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping 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 Manager is responsible for the maintenance and integrity of the web pages
dedicated to the Company. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Directors' statement
Each of the Directors, whose names and functions are listed on pages 28 and
29, confirm that to the best of their knowledge:
- the financial statements, which have been prepared in
accordance with United Kingdom Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable law), give a true and fair view of
the assets, liabilities, financial position and net return of the Company;
- the Strategic Report contained in the 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 and emerging risks and uncertainties that it faces; and
- 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 and performance,
business model and strategy.
On behalf of the Board
Robert Talbut
Chair
27 November 2024
Statement of Comprehensive Income
for the year ended 30 September 2024
2024 2023
Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Gains on investments held at fair value through
profit or loss 2 - 31,395 31,395 - 26,716 26,716
Income from investments 3 8,614 - 8,614 9,024 298 9,322
Other interest receivable and similar income 3 123 - 123 140 - 140
Gross return 8,737 31,395 40,132 9,164 27,014 36,178
Investment management fee 4 (495) (1,155) (1,650) (451) (1,053) (1,504)
Administrative expenses 5 (738) -- (738) (601) - (601)
Net return before finance costs and taxation 7,504 30,240 37,744 8,112 25,961 34,073
Finance costs 6 (402) (937) (1,339) (270) (630) (900)
Net return before taxation 7,102 29,303 36,405 7,842 25,331 33,173
Taxation 7 - - - - - -
Net return after taxation 7,102 29,303 36,405 7,842 25,331 33,173
Return per share (pence) 9 20.54 84.74 105.28 22.68 73.25 95.93
The "Total" column of this statement is the profit and loss account of the
Company. The "Revenue" and "Capital" columns represent supplementary
information prepared under guidance issued by The Association of Investment
Companies. The Company has no other items of other comprehensive income, and
therefore the net return after taxation is also the total comprehensive income
for the year.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year.
The notes on pages 53 to 62 form an integral part of these financial
statements.
Statement of Changes in Equity
for the year ended 30 September 2024
Called-up Capital Share
share Share redemption Merger purchase Capital Revenue
capital premium reserve reserve reserve reserves reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 30 September 2022 9,036 13,971 220 2,184 7,233 145,629 9,120 187,393
Net return after taxation - - - - - 25,331 7,842 33,173
Dividends paid in the year 8 - - - - - - (6,743) (6,743)
At 30 September 2023 9,036 13,971 220 2,184 7,233 170,960 10,219 213,823
Net return after taxation - - - - - 29,303 7,102 36,405
Dividends paid in the year 8 - - - - - - (7,262) (7,262)
At 30 September 2024 9,036 13,971 220 2,184 7,233 200,263 10,059 242,966
The notes on pages 53 to 62 form an integral part of these financial
statements.
Statement of Financial Position
at 30 September 2024
Restated
2024 2023
Note £'000 £'000
Fixed assets
Investments held at fair value through profit or loss 10 261,421 227,950
Current assets
Debtors 11 7,469 2,515
Current asset investments* 12 116 4,438
Cash at bank and in hand* 1,845 934
9,430 7,887
Current liabilities
Creditors: amounts falling due within one year 13 (27,885) (22,014)
Net current liabilities (18,455) (14,127)
Total assets less current liabilities 242,966 213,823
Net assets 242,966 213,823
Capital and reserves
Called-up share capital 14 9,036 9,036
Share premium 15 13,971 13,971
Capital redemption reserve 15 220 220
Merger reserve 15 2,184 2,184
Share purchase reserve 15 7,233 7,233
Capital reserves 15 200,263 170,960
Revenue reserve 15 10,059 10,219
Total equity shareholders' funds 242,966 213,823
Net asset value per share (pence) 16 702.60 618.32
*For details of the prior period restatement, please refer to note 1(l).
These financial statements were approved and authorised for issue by the board
of directors on 27 November 2024 and signed on its behalf by:
Robert Talbut
Chair
The notes on pages 53 to 62 form an integral part of these financial
statements.
Registered in England and Wales as a public company limited by shares
Company registration number: SC082551
Notes to the Accounts
1. Accounting policies
(a) Basis of accounting
Schroder UK Mid Cap Fund plc ("the Company") is registered in Scotland as a
public company limited by shares. The Company's registered office is 9
Haymarket Square, Edinburgh EH3 8FY.
The financial statements are prepared in accordance with the Companies Act
2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in
particular in accordance with Financial Reporting Standard (FRS) 102 "The
Financial Reporting Standard applicable in the UK and Republic of Ireland",
and with the Statement of Recommended Practice "Financial Statements of
Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by
the Association of Investment Companies in July 2022. All of the Company's
operations are of a continuing nature.
The financial statements have been prepared on a going concern basis under the
historical cost convention, as modified by the revaluation of investments held
at fair value through profit or loss. The directors believe that the Company
has adequate resources to continue operating for at least 12 months from the
date of approval of these financial statements. In forming this opinion, the
directors have taken into consideration: stress testing prepared by the
Manager which modelled a 50% decline in valuation of investments and
investment income and demonstrated the Company's ability to comply with the
covenants of its borrowing agreements and pay its operating expenses; the
controls and monitoring processes in place; the Company's level of
debt and other payables; the low level of operating expenses, comprising
largely variable costs which would reduce pro-rata in the event of a market
downturn; and that the Company's assets comprise cash and readily realisable
securities quoted in active markets. In forming this opinion, the directors
have also considered the loan currently in place which expires on 26 February
2025. Further details of directors' considerations regarding this are given in
the Chair's Statement, Portfolio Managers' Review, Going Concern Statement,
Viability Statement and under the Principal and emerging risks and
uncertainties heading on page 22.
The Company has not presented a statement of cash flows, as it is not required
for an investment fund whose investments are highly liquid, carried at market
value and which presents a statement of changes in equity. The financial
statements are presented in sterling and amounts have been rounded to the
nearest thousand.
The accounting policies applied to these financial statements are consistent
with those applied in the financial statements for the year ended
30 September 2023.
No significant judgements, estimates or assumptions have been required in the
preparation of the financial statements for the current or preceding financial
year.
(b) Valuation of investments
The Company's business is investing in financial assets with a view to
profiting from their total return in the form of income and capital growth.
This portfolio of financial assets is managed and its performance evaluated on
a fair value basis, in accordance with a documented investment objective and
information is provided internally on that basis to the Company's board of
directors. Accordingly, upon initial recognition the investments are
designated by the Company as "held at fair value through profit or loss". They
are included initially at fair value which is taken to be their cost,
excluding expenses incidental to purchase which are written off to capital at
the time of acquisition. Subsequently the investments are valued at fair
value, which are quoted bid prices.
Any investments that are unlisted or not actively traded would be valued using
a variety of techniques to determine their fair value; any such valuations
would be reviewed by both the AIFM's fair value pricing committee and by the
directors.
All purchases and sales are accounted for on a trade date basis.
(c) Accounting for reserves
Gains and losses on sales of investments and increases and decreases in the
valuation of investments are included in the statement of comprehensive income
and in capital reserves within "gains on investments held at fair value
through profit or loss".
(d) Income
Dividends receivable are included in revenue on an ex-dividend basis except
where, in the opinion of the board, the dividend is capital in nature, in
which case it is included in capital.
Where the Company has elected to receive scrip dividends in the form of
additional shares rather than in cash, the amount of the cash dividend
foregone is recognised in revenue. Any excess in the value of the shares
received over the amount of the cash dividend is recognised in capital.
Dividends from UK REITs are split into PID (Property Income Distributions) and
Non_PID components for tax purposes. Revenue arising from UK REITs tax exempt
rental business is colloquially known as PID revenue and is taxable in the
hands if the Trust. A UK REIT may also carry out activities that give rise to
taxable profits and gains, it is from these that the REIT will make a Non_PID
distribution, these are treated for tax purposes in the same way as dividends
from UK companies.
(e) Expenses
All expenses are accounted for on an accruals basis. Expenses are allocated
wholly to the revenue column of the Income Statement with the following
exceptions:
- The management fee is allocated 30% to revenue and 70% to
capital in line with the Board's expected long-term split of revenue and
capital return from the Company's investment portfolio.
- Expenses incidental to the purchase and sale of
investments are written off to capital at the time of the transaction.
These expenses are commonly referred to as transaction costs and comprise
brokerage commission and stamp duty.
Details of transaction costs are given in note 10 on page 56.
(f) Finance costs
Finance costs, including any premiums payable on settlement or redemption and
direct issue costs, are accounted for on an accruals basis using the effective
interest method and in accordance with FRS 102.
Finance costs are allocated 30% to revenue and 70% to capital in line with the
Board's expected long-term split of revenue and capital return from the
Company's investment portfolio.
(g) Financial instruments
Cash at bank and in hand compromises cash held in the bank. Current asset
investments comprise investments in money market funds and highly liquid
investments which are readily convertible to a known amount of cash and are
subject to insignificant risk of changes in value.
Other debtors and creditors do not carry any interest, are short-term in
nature and are accordingly stated at nominal value, with debtors reduced by
appropriate allowances for estimated irrecoverable amounts.
Bank loans and overdrafts are initially measured at fair value and
subsequently at amortised cost. They are recorded at the proceeds received net
of direct issue costs.
(h) Taxation
The tax charge for the year is based on amounts expected to be received or
paid.
Deferred tax is provided on all timing differences that have originated but
not reversed by the balance sheet date.
Deferred tax liabilities are recognised for all taxable timing differences but
deferred tax assets are only recognised to the extent that it is probable that
taxable profits will be available against which those timing differences can
be utilised.
Tax relief is allocated to expenses charged to the capital column of the
Income Statement on the "marginal basis". On this basis, if taxable income is
capable of being entirely offset by revenue expenses, then no tax relief is
transferred to the capital column.
Deferred tax is measured at the tax rate which is expected to apply in the
periods in which the timing differences are expected to reverse, based on tax
rates that have been enacted or substantively enacted at the accounting date
and is measured on an undiscounted basis.
(i) Value added tax ("VAT")
Expenses are disclosed inclusive of the related irrecoverable VAT.
(j) Dividends payable
In accordance with FRS 102, the final dividend is included in the financial
statements in the year in which it is approved by shareholders.
(k) Repurchases of shares into treasury and subsequent reissues
The cost of repurchasing shares into treasury, including the related stamp
duty and transaction costs is dealt with in the Statement of Changes in Equity
and charged to "Share purchase reserve". Share repurchase transactions are
accounted for on a trade date basis.
The sales proceeds of treasury shares reissued are treated as a realised
profit up to the amount of the purchase price of those shares and is
transferred to capital reserves. The excess of the sales proceeds over the
purchase price is transferred to "share premium".
(l) Prior Period Adjustment
Cash at bank and in hand in the Balance Sheet has been restated to exclude
investments in money market funds of £4.4 million for the year ended
30 September 2023 and disclose them separately as current asset investments,
to conform with those required by the Companies Act - Statutory format of the
Balance Sheet. As such cash at bank and in hand for the year ended 30
September 2023 has decreased by £4.4 million, and current asset investments
have increased by the same amount. There is no impact on other line items in
the Balance Sheet nor on total current assets.
2. Gains on investments held at fair value through profit or
loss
2024 2023
£'000 £'000
Gains/(losses) on sales of investments based on historic cost 4,542 (1,032)
Amounts recognised as investment losses/(gains) in the previous year in
respect of investments
sold in the year 5,878 9,922
Gains on sales of investments based on the carrying value at the previous 10,420 8,890
balance sheet date
Unrealised gain recognised in respect of investments continuing to be held 20,975 17,826
Gains on investments held at fair value through profit or loss 31,395 26,716
3. Income
2024 2023
£'000 £'000
Revenue:
Income from investments:
UK dividends 8,247 8,606
UK property income distributions 359 418
Other income 8 -
8,614 9,024
Other interest receivable and similar income:
Deposit interest 123 140
8,737 9,164
Capital:
Special dividends allocated to capital - 298
4. Investment management fee
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Management fee 495 1,155 1,650 451 1,053 1,504
The bases for calculating the investment management fee and performance fee
are set out in the Directors' Report on page 31 and details of all amounts
payable to the Manager are given in note 17 on page 58.
5. Administrative expenses
2024 2023
£'000 £'000
Other administrative expenses 351 238
Secretarial fee 176 162
Directors' fees 145 129
Auditor's remuneration for audit services(1) 66 72
738 601
(1)Includes £11,000 (2023: £12,000) irrecoverable VAT. No amounts are
payable to the auditor for non-audit services.
6. Finance costs
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Interest on bank loans and overdrafts 402 937 1,339 270 630 900
7. Taxation
(a) Analysis of tax charge for the year
2024 2023
£'000 £'000
Taxation for the year - -
(b) Factors affecting tax charge for the year
The tax assessed for the year is lower (2023: lower) than the Company's
applicable rate of corporation tax in for the year of 25% (2023: 22%) The
factors affecting the current tax charge for the year are as follows:
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return/(loss) on ordinary activities before taxation 7,102 29,303 36,405 7,842 25,331 33,173
Net return/(loss) on ordinary activities before taxation
multiplied by the Company's applicable rate of corporation tax for the year of 1,775 7,326 9,101 1,725 5,573 7,298
25% (2023: 22%)
Effects of:
Capital returns on investments - (7,849) (7,849) - (5,877) (5,877)
Income not chargeable to corporation tax (2,062) - (2,062) (1,893) (66) (1,959)
Unrelieved expenses 287 523 810 168 370 538
Taxation for the year - - - - - -
(c) Deferred tax
At 30 September 2024, the Company had surplus management expenses of
£37,833,000 (2023: £35,832,000) and a non-trade loan relationship deficit of
£5,278,000 (2023: £4,041,000). A deferred tax asset has not been recognised
in respect of these losses because the investment portfolio of the Company is
not expected to generate taxable income in future periods in excess of the
deductible expenses of those future periods and, accordingly, it is unlikely
that the Company will be able to reduce future tax liabilities through the use
of existing tax losses.
Accordingly, the deferred tax asset has been calculated based on the
corporation tax rate in effect from 1 April 2023 of 25%, as enacted by the
Finance Act 2021.
Given the Company's intention to meet the conditions required to retain its
status as an Investment Trust Company, no provision has been made for deferred
tax on any capital gains or losses arising on the revaluation or disposal of
investments.
8. Dividends
(a) Dividends paid and declared
2024 2023
£'000 £'000
2023 final dividend of 15.0p (2022: 14.0p) 5,187 4,841
Interim dividend of 6.0p (2023: 5.5) 2,075 1,902
Total dividends paid in the year 7,262 6,743
2024 2023
£'000 £'000
2024 final dividend declared of 15.5p (2023: 15.0p) 5,360 5,187
(b) Dividends for the purposes of Section 1158 of the
Corporation Tax Act 2010 ("Section 1158")
The requirements of Section 1158 are considered on the basis of dividends
declared in respect of the financial year as shown below. The revenue
available for distribution by way of dividend for the year is £7,102,000
(2023: £7,842,000).
2024 2023
£'000 £'000
Interim dividend of 6.0p (2023: 5.5p) 2,075 1,902
Final dividend of 15.5p (2023: 15.0p) 5,360 5,187
Total dividends paid in the year 7,435 7,089
9. Return per share
2024 2023
£'000 £'000
Revenue return 7,102 7,842
Capital return 29,303 25,331
Total return 36,405 33,173
Weighted average number of shares in issue during the year 34,581,190 34,581,190
Revenue return per share (pence) 20.54 22.68
Capital return per share (pence) 84.74 73.25
Total return per share (pence) 105.28 95.93
10. Investments held at fair value through profit or loss
2024 2023
£'000 £'000
Opening book cost 215,960 223,047
Opening investment holding gains/(losses) 11,990 (15,758)
Opening fair value 227,950 207,289
Analysis of transactions made during the year
Purchases at cost 90,533 57,741
Sales proceeds (88,457) (63,796)
Gains on investments held at fair value 31,395 26,716
Closing fair value 261,421 227,950
Closing book cost 222,578 215,960
Closing investment holding gains 38,843 11,990
Closing fair value 261,421 227,950
Sales proceeds amounting to £88,457,000 (2023: £63,796,000) were received
from disposals of investments in the year. The book cost of these investments
when they were purchased was £83,914,000 (2023: £64,828,000). These
investments have been revalued over time and until they were sold any
unrealised gains and losses were included in the fair value of the
investments.
All investments are listed on a recognised stock exchange.
The following transaction costs, comprising stamp duty and brokerage
commission were incurred during the year:
2024 2023
£'000 £'000
On acquisitions 409 305
On disposals 43 31
452 336
11. Debtors
2024 2023
£'000 £'000
Securities sold awaiting settlement 6,907 1,688
Dividends and interest receivable 552 813
Other debtors 10 14
7,469 2,515
12. Current asset investments
2024 2023
£'000 £'000
Money market funds 116 4,438
116 4,438
As at 30 September 2024, the Company held HSBC Sterling Liquidity fund with a
market value of £116,000 (30 September 2023: £4,438,000).
13. Creditors: amounts falling due within one year
2024 2023
£'000 £'000
Bank loan 25,000 20,000
Securities purchased awaiting settlement 1,815 1,465
Other creditors and accruals 1,070 549
27,885 22,014
The bank loan comprises a £30 million revolving credit facility agreement
with Bank of Nova Scotia, London Branch expiring on 26 February 2025, of
which, £25 million has been drawn down. This revolving credit facility was
amended to £30 million on the 27 February 2024, and replaced the £10 million
one-year term loan from Bank of Nova Scotia, London Branch which expired on 27
February 2024.
The directors consider that the carrying amount of creditors falling due
within one year approximates to their fair value.
14. Called-up share capital
2024 2023
£'000 £'000
Allotted, called-up and fully paid:
Ordinary shares of 25p each:
Opening balance of 34,581,190 (2023: 34,581,190) shares, excluding shares held 8,645 8,645
in treasury
Subtotal of 34,581,190 (2023: same) shares 8,645 8,645
1,562,500 (2023: same) shares held in treasury 391 391
Closing balance(1) 9,036 9,036
(1)Represents 36,143,690 (2023: same) shares of 25p each, including 1,562,500
(2023: same) shares held in treasury.
15. Reserves
Capital reserves
Gains and Investment
Capital Share losses on holding
Share redemption Merger purchase sales of gains and Revenue
premium(1) reserve(1) reserve(1) reserve(2) investments(2) losses(3) reserve(4)
Year ended 30 September 2024 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening balance at 30 September 2023 13,971 220 2,184 7,233 158,970 11,990 10,219
Gains on sales of investments based on the carrying
value at the previous balance sheet date - - - - 10,420 - -
Net movement in investment holding gains and losses - - - - - 20,975 -
Transfer on disposal of investments - - - - (5,878) 5,878 -
Management fee allocated to capital - - - - (1,155) - -
Finance costs allocated to capital - - - - (937) - -
Dividends paid - - - - - - (7,262)
Retained revenue for the year - - - - - - 7,102
Closing balance at 30 September 2024 13,971 220 2,184 7,233 161,420 38,843 10,059
Capital reserves
Gains and Investment
Capital Share losses on holding
Share redemption Merger purchase sales of gains and Revenue
premium(1) reserve(1) reserve(1) reserve(2) investments(2) losses(3) reserve(4)
Year ended 30 September 2023 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening balance at 30 September 2022 13,971 220 2,184 7,233 161,387 (15,758) 9,120
Gains on sales of investments based on the carrying
value at the previous balance sheet date - - - - 8,890 - -
Net movement in investment holding gains and losses - - - - - 17,826 -
Transfer on disposal of investments - - - - (9,922) 9,922 -
Management fee allocated to capital - - - - (1,053) - -
Special dividend allocated to capital - - - - 298 - -
Finance costs allocated to capital - - - - (630) - -
Dividends paid - - - - - - (6,743)
Retained revenue for the year - - - - - - 7,842
Closing balance at 30 September 2023 13,971 220 2,184 7,233 158,970 11,990 10,219
(1)These reserves are not distributable. The "Merger reserve" represents the
premium over the nominal value of shares issued following a merger in 1989.
(2)These are realised (distributable) capital reserves which may be used to
repurchase the Company's own shares or distributed as dividends. The "Share
purchase reserve" is for the purpose of financing share buy-backs and was
created following the cancellation of the "Warrant reserve" in 2003.
(3)This reserve comprises holding gains on liquid investments (which may be
deemed to be realised) and other amounts which are unrealised. An analysis has
not been made between those amounts that are realised (and may be distributed
as dividends or used to repurchase the Company's own shares) and those that
are unrealised.
(4)The revenue reserve may be distributed as dividends or used to repurchase
the Company's own shares.
16. Net asset value per share
2024 2023
Net assets attributable to the Ordinary shareholders (£'000) 242,966 213,823
Shares in issue at the year end, excluding shares held in treasury 34,581,190 34,581,190
Net asset value per share 702.60p 618.32p
17. Transactions with the Manager
Under the terms of the AlFM Agreement, the Manager is entitled to receive a
management fee and a company secretarial fee. Details of the basis of these
calculations are given in the Directors' Report on page 31. Any investments in
funds managed or advised by the Manager or any of its associated companies,
are excluded from the assets used for the purpose of the management fee
calculation and therefore incur no fee.
The management fee payable in respect of the year ended 30 September 2024
amounted to £1,650,000. (2023: £1,504,000) of which £854,000 (2023:
£374,000) was outstanding at the year end. The secretarial fee payable for
the year amounted to £176,000 (2023: £162,000) including VAT, of which
£88,000 (2023: £41,000) was outstanding at the year end.
No director of the Company served as a director of any member of the Schroder
Group, at any time during the year.
18. Related party transactions
Details of the remuneration payable to directors are given in the Remuneration
Report on page 41 and details of directors' shareholdings are given on page
42. Details of transactions with the Manager are given in note 17 above. There
have been no other transactions with related parties during the year (2023:
nil).
19. Disclosures regarding financial instruments measured at fair
value
The Company's financial instruments within the scope of FRS 102 that are held
at fair value comprise its investment portfolio.
FRS 102 requires that financial instruments held at fair value are categorised
into a hierarchy consisting of the three levels below. A fair value
measurement is categorised in its entirety on the basis of the lowest level
input that is significant to the fair value measurement.
Level 1: valued using unadjusted quoted prices in an active market for
identical assets.
Level 2: valued using inputs other than quoted prices included within Level 1,
that are observable (ie developed using market data).
Level 3: valued using inputs that are unobservable (ie for which market data
is unavailable).
Details of the Company's valuation policy are given in note 1(b) on page 53.
At 30 September 2024, the Company's investments were all categorised in Level
1 (2023: same).
20. Financial instruments' exposure to risk and risk management
policies
The Company's investment objective is to invest in mid-cap equities with the
aim of providing a total return in excess of the FTSE 250 (ex-Investment
Companies) Index. In pursuing this objective, the Company is exposed to a
variety of financial risks that could result in a reduction in the Company's
net assets or a reduction in the profits available for dividends.
These financial risks include market risk (comprising interest rate risk and
other price risk), liquidity risk and credit risk. The directors' policy for
managing these risks is set out below. The Board coordinates the Company's
risk management policy. The Company has no significant exposure to foreign
exchange risk.
The objectives, policies and processes for managing the risks and the methods
used to measure the risks that are set out below, have not changed from those
applying in the comparative year.
The Company's classes of financial instruments are as follows:
- investments in shares which are held in accordance with
the Company's investment objective;
- short-term debtors, creditors and cash arising directly
from its operations; and
- sterling revolving credit facilities with Bank of Nova
Scotia, the purpose of which are to assist with financing the Company's
operations.
(a) Market risk
The fair value or future cash flows of a financial instrument held by the
Company may fluctuate because of changes in market prices. This market risk
comprises two elements: interest rate risk and other price risk. Information
to enable an evaluation of the nature and extent of these two elements of
market risk is given in parts (i) and (ii) of this note, together with
sensitivity analyses where appropriate. The Board reviews and agrees policies
for managing these risks and these policies have remained unchanged from those
applying in the comparative year. The Manager assesses the exposure to market
risk when making each investment decision and monitors the overall level of
market risk on the whole of the investment portfolio on an ongoing basis.
(i) Interest rate risk
Interest rate movements may affect the level of income receivable on cash
deposits and the interest payable on any variable rate borrowings when
interest rates are re-set.
Management of interest rate risk
Liquidity and borrowings are managed with the aim of increasing returns to
shareholders. The Board's policy is to permit gearing up to 25%, where gearing
is defined as borrowings used for investment purposes less cash, expressed as
a percentage of net assets.
Interest rate exposure
The exposure of financial assets and financial liabilities to floating
interest rates, giving cash flow interest rate risk when rates are re-set, is
shown below:
2024 2023
£'000 £'000
Exposure to floating interest rates:
Cash at bank and in hand and current asset investments 1,961 5,372
Total exposure 1,961 5,372
Cash balances earn interest at a floating rate based on the Sterling Overnight
Index Average.
The Company's 366 day, £30 million credit facility with The Bank of Nova
Scotia, London Branch expires on 26 February 2025.
The facility is unsecured but subject to covenants and restrictions which are
customary for a facility of this nature.
Interest is payable at a rate of Sterling Overnight Interest Average (2023
same), or its replacement reference rate, as quoted in the market for the loan
period, plus a margin, plus Mandatory Costs, which are the lender's costs of
complying with certain regulatory requirements of the Bank of England. At 30
September 2024, the Company had drawn down £25 million.
The above year end amounts are not representative of the exposure to interest
rates during the year due to fluctuations in the level of cash and cash asset
investment balances. The maximum and minimum exposure during the year was as
follows:
2024 2023
£'000 £'000
Minimum interest rate exposure during the year - net debt (16,803) (9,957)
Maximum interest rate exposure during the year - net debt (23,927) (20,796)
Interest rate sensitivity
The following table illustrates the sensitivity of the return after taxation
for the year and net assets to a 1.0% (2023: 1.0%) increase or decrease in
interest rates in regards to the Company's monetary financial assets and
financial liabilities. This level of change is considered to be a reasonable
illustration based on observation of current market conditions. The
sensitivity analysis is based on the Company's monetary financial instruments
held at the accounting date with all other variables held constant.
2024 2023
1.0% increase 1.0% decrease 1.0% increase 1.0% decrease
in rate in rate in rate in rate
£'000 £'000 £'000 £'000
Income statement - return after taxation
Revenue return 20 (20) 54 (54)
Capital return - - - -
Total return after taxation 20 (20) 54 (54)
Net assets 20 (20) 54 (54)
In the opinion of the directors, this sensitivity analysis may not be
representative of the Company's future exposure to interest rate changes due
to fluctuations in the level of cash balances and drawings on the credit
facility.
(ii) Other price risk
Other price risk includes changes in market prices, other than those arising
from interest rate risk, which may affect the value of investments.
Management of market price risk
The Board meets on at least four occasions each year to consider the asset
allocation of the portfolio and the risk associated with particular industry
sectors. The investment management team has responsibility for monitoring the
portfolio, which is selected in accordance with the Company's investment
objective and seeks to ensure that individual stocks meet an acceptable
risk/reward profile.
Market price risk exposure
The Company's total exposure to changes in market prices at 30 September
comprises the following:
2024 2023
£'000 £'000
Investments held at fair value through profit or loss 261,421 227,950
The above data is broadly representative of the exposure to market price risk
during the year.
Concentration of exposure to market price risk
An analysis of the Company's investments is given on page 13. The Company's
investments are all listed in the United Kingdom. Accordingly there is a
concentration of exposure to this country. However it should be noted that an
investment may not be entirely exposed to the economic conditions in its
country of listing.
Market price risk sensitivity
The following table illustrates the sensitivity of the return after taxation
for the year and net assets to an increase or decrease of 20% (2023: 20%) in
the fair values of the Company's investments. This level of change is
considered to be a reasonable illustration based on observation of current
market conditions. The sensitivity analysis is based on the Company's exposure
through its investments and includes the impact on the management fee, but
assumes that all other variables are held constant.
2024 2023
20% increase 20% decrease 20% increase 20% decrease
in fair value in fair value in fair value in fair value
£'000 £'000 £'000 £'000
Income statement - return after taxation
Revenue return (102) 102 (89) 89
Capital return 52,046 (52,046) 45,382 (45,382)
Total return after taxation and net assets 51,944 (51,944) 45,293 (45,293)
Percentage change in net asset value 21.4 (21.4) 21.2 (21.2)
(b) Liquidity risk
This is the risk that the Company will encounter difficulty in meeting its
obligations associated with financial liabilities that are settled by
delivering cash or another financial asset.
Management of the risk
Liquidity risk is not significant as the Company's assets comprise mainly
readily realisable securities, which can be sold to meet funding requirements
if necessary.
Liquidity risk exposure
Contractual maturities of financial liabilities, based on the earliest date on
which payment can be required are as follows:
2024 2023
Within one Within one
year Total year Total
£'000 £'000 £'000 £'000
Creditors: amounts falling due within one year
Securities purchased awaiting settlement 1,815 1,815 1,465 1,465
Other creditors and accruals 1,070 1,070 542 542
Other payables: drawings on the revolving credit facility (including interest) 26,625 26,625 20,530 20,530
Total liquidity risk 29,510 29,510 22,537 22,537
(c) Credit risk
Credit risk is the risk that the failure of the counterparty to a transaction
to discharge its obligations under that transaction could result in loss to
the Company.
Management of credit risk
This risk is not significant and is managed as follows:
Portfolio dealing
The Company invests in markets that operate a "Delivery Versus Payment"
settlement process which mitigates the risk of losing the principal of a trade
during settlement. The Manager continuously monitors dealing activity to
ensure best execution, which involves measuring various indicators including
the quality of trade settlement and incidence of failed trades. Counterparties
must be pre-approved by the Manager's credit committee.
Exposure to the Custodian
The custodian of the Company's assets is HSBC Bank plc which has Long-Term
Credit Ratings of AA- with Fitch and Aa3 with Moody's. The Company's
investments are held in accounts which are segregated from the custodian's own
trading assets. If the custodian were to become insolvent, the Company's right
of ownership of its investments is clear and they are therefore protected.
However the Company's cash balances are all deposited with the custodian as
banker and held on the custodian's balance sheet. Accordingly, in accordance
with usual banking practice, the Company will rank as a general creditor to
the custodian in respect of cash balances.
Credit risk exposure
The following amounts shown in the Statement of Financial Position, represent
the maximum exposure to credit risk at the current and comparative year end.
2024 2023
Balance Maximum Balance Maximum
sheet exposure sheet exposure
£'000 £'000 £'000 £'000
Current assets
Debtors - securities sold awaiting settlement, dividends and interest
receivable
and other debtors 7,469 7,459 2,515 2,501
Cash at bank and in hand and current asset investments 1,961 1,961 5,372 5,372
Total credit risk 9,430 9,420 7,887 7,873
No debtors are past their due date and none have been written down or deemed
to be impaired.
(d) Fair values of financial assets and financial liabilities
All financial assets and liabilities are either carried in the Statement of
Financial Position at fair value or the amount is a reasonable approximation
of fair value.
21. Capital management policies and procedures
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding year.
The Company's debt and capital structure comprises the following:
2024 2023
£'000 £'000
Debt
Bank loan 25,000 20,000
Equity
Called-up share capital 9,036 9,036
Reserves 233,930 204,787
242,966 213,823
Total debt and equity 267,966 233,823
The Company's capital management objectives are to ensure that it will
continue as a going concern and to maximise the capital return to its equity
shareholders through an appropriate level of gearing.
The Board's policy is to permit gearing up to 25% where gearing is defined as
borrowings used for investment purposes less cash, expressed as a percentage
of net assets. If the figure so calculated were to be negative, this would be
shown as a "net cash" position.
2024 2023
£'000 £'000
Borrowings used for investment purposes, less Cash at bank and in hand and 23,039 14,628
current asset investments
Net assets 242,966 213,823
Gearing 9.5% 6.8%
The board, with the assistance of the Manager, monitors and reviews the broad
structure of the Company's capital on an ongoing basis. This review includes:
- the planned level of gearing, which takes into account the
Manager's views on the market;
- the need to buy back the Company's own shares for
cancellation or to hold in treasury, which takes into account the share price
discount;
- the opportunities for issues of new shares; and
- the amount of dividends to be paid, in excess of that
which is required to be distributed.
Status of results announcement
2024 Financial Information
The figures and financial information for 2024 are extracted from the Annual
Report and Financial Statements for the year ended 30th September 2024 and do
not constitute the statutory accounts for that year. The Annual Report and
Financial Statements include the Report of the Independent Auditors which is
unqualified and does not contain a statement under either section 498(2) or
section 498(3) of the Companies Act 2006. The Annual Report and Accounts will
be delivered to the Registrar of Companies in due course.
2023 Financial Information
The figures and financial information for 2023 are extracted from the
published Annual Report and Financial Statements for the year ended 30th
September 2024 and do not constitute the statutory accounts for the year. The
Annual Report and Financial Statements have been delivered to the Registrar of
Companies and included the Report of the Independent Auditors which was
unqualified and did not contain a statement under either section 498(2) or
section 498(3) of the Companies Act 2006.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
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