Aberforth Smaller Co Half-yearly Report

 
TIDMASL 
 
Aberforth Smaller Companies Trustplc 
 
Half Yearly Report 
For the six months to 30 June 2014 
 
The investment objective of ASCoT is to achieve a net asset value total return 
(with dividends reinvested) greater than on the Numis Smaller Companies Index 
(excluding Investment Companies) over the long term. 
 
Aberforth Smaller Companies Trust plc (ASCoT) invests only in small UK quoted 
companies and is managed by Aberforth Partners LLP. All data throughout this 
Half Yearly Report is to, or as at, 30 June 2014 as applicable, unless 
otherwise stated. 
 
 
FINANCIAL HIGHLIGHTS 
 
Total Return Performance                                                     % 
 
Net Asset Value                                                             1.0 
Numis Smaller Companies Index (XIC)                                        -0.6 
Ordinary Share Price                                                       -3.0 
 
 
                                       30 June      31 December         30 June 
                                          2014             2013            2013 
 
Shareholders' Funds                  GBP1,134.4m        GBP1,138.1m         GBP880.3m 
Market Capitalisation                  GBP997.5m        GBP1,044.4m         GBP775.5m 
Actual Gearing employed                   2.8%             2.6%            7.1% 
Ordinary Share net asset value       1,189.50p        1,193.22p         921.23p 
Ordinary Share price                 1,046.00p        1,095.00p         811.50p 
Ordinary Share price discount            12.1%             8.2%           11.9% 
 
 
 
CHAIRMAN'S STATEMENT 
 
Review of performance 
 
For the six months to 30 June 2014, Aberforth Smaller Companies Trust plc 
(ASCoT) achieved a net asset value total return of +1.0%, which compares with a 
total return of -0.6% from your Company's investment benchmark, the Numis 
Smaller Companies Index excluding Investment Companies (NSCI (XIC)). Meanwhile, 
the larger company oriented FTSE All-Share Index registered a total return of 
+1.6%. 
 
The UK economy continued to strengthen during the first half of 2014, but, as 
financial markets discount in advance, equities had already advanced strongly 
in 2013 in anticipation of the positive data. The current year has brought an 
array of geopolitical issues, a continuation of the inflation versus deflation 
debate, as well as the spectacle of central bank policy continually evolving in 
response to either unexpectedly strong or weak economic developments. Throw in 
a resurgent IPO market and a modest pick up in M&A activity and the first six 
months of 2014 can be described as anything but dull. The Managers' Report 
provides greater detail on the influences on markets and your Company during 
the period. 
 
Dividends 
 
One of the important contributors to your Company's good long term record has 
been its progressive dividend policy. Between your Company's launch in 1990 and 
December 2013, the dividend grew by 7.8% per annum. Your Board is pleased to 
announce an increased interim dividend of 7.75p per Ordinary Share for the year 
to 31 December 2014. This represents a 5.4% increase over 2013. The interim 
dividend will be paid on 28 August 2014 to Shareholders on the register as at 
close of business on 8 August 2014. The ex dividend date is 6 August 2014. 
 
ASCoT operates a Dividend Reinvestment Plan. Details of the plan, including the 
Form of Election, are available from Aberforth Partners LLP or on its website, 
www.aberforth.co.uk. 
 
Gearing 
 
During the period, your Board replaced your Company's existing borrowing 
facilities, which were due to expire on 2 May 2014, with a new GBP125m facility 
from The Royal Bank of Scotland plc. The new facility will expire on 15 June 
2017 and is on improved terms following an extensive tendering process. Your 
Board reviews the level of gearing regularly and is comfortable that your 
Company has access to sufficient liquidity for investment purposes and also to 
fund share buy-backs, as and when appropriate. 
 
Gearing has shown little change over the period and, at 30 June 2014, stood at 
2.8% of Shareholders' funds. It remains your Company's policy to use gearing in 
a tactical manner. 
 
Board changes 
 
An independent board of directors is undoubtedly one of the principal 
advantages and differentiators of investment trusts in the broader UK savings 
industry. 
 
Since its formation back in 1990, your Company has sought to manage succession 
in a professional and timely manner. With that in mind, and by virtue of having 
joined your Board in 2004, I will be standing down from your Board in October 
2014. It has been a thoroughly enjoyable experience to have served the 
Shareholders first as a Director and subsequently as Chairman since 2010. It 
has been a truly remarkable period for financial markets and I have been 
fortunate to have been surrounded by such able colleagues on your Board. In 
October 2014, Paul Trickett will succeed me as your Company's Chairman and will 
help steer your Company through its twenty-fifth year and beyond. In the world 
of investment trusts, ASCoT is barely beyond the adolescence stage but I 
consider myself fortunate to have been involved with its development. I will be 
remaining as an enthusiastic, long-term shareholder, and look forward to 
ASCoT's continuing future progress. 
 
Annual General Meeting 
 
I am pleased to report that at the Annual General Meeting held on 27 February 
2014 Shareholders overwhelmingly voted in favour of the continuation of your 
Company. Furthermore, all 14 resolutions were passed, including the renewal of 
authority to buy in up to 14.99% of ASCoT's Ordinary Shares. 
 
Share buy-in 
 
During the six months to 30 June 2014, 18,000 shares were bought in for a total 
consideration of GBP188,000. Your Board keeps under review the circumstances in 
which the authority is utilised in relation to the overall objective of seeking 
to manage the discount. 
 
Alternative Investment Fund Managers Directive 
 
As previously advised, your Board has appointed Aberforth Partners LLP as its 
Alternative Investment Fund Manager (AIFM). The Managers have received the 
necessary FCA authorisation and commenced this role on 1 July 2014. 
Additionally, from the same date, National Westminster Bank plc, was appointed 
as your Company's Depositary, as required by the Directive, delegating the 
provision of custody services, as permitted, to The Northern Trust Company, 
which has acted as your Company's custodian for many years. Furthermore, your 
Company has entered into a new Investment Management Agreement (IMA) with the 
Managers to incorporate the obligations imposed under the Directive, though I 
can confirm that the key commercial terms of the IMA remain unchanged. 
 
Scottish Independence 
 
The referendum on Scottish Independence takes place on 18 September 2014. As 
your Company is registered in Scotland, your Board has been considering the 
implications that this might have for shareholders. However, until the result 
of the referendum is known and results of subsequent negotiations are made 
available, significant uncertainty persists. Your Board is therefore reluctant 
to take any pre-emptive and potentially costly action, which would be based on 
conjecture, and for the time-being prefers to monitor actively the risks, 
positive or negative, of a different political, economic and regulatory 
landscape in Scotland. In the event of a "Yes" vote, there is expected to be an 
extended period of negotiations that will provide both time and greater 
certainty based on which the Board will implement an appropriate plan of action 
in the interests of Shareholders as a whole. 
 
Summary 
 
The strength of the UK recovery has surprised many commentators. While 2013 was 
ushered in amidst fears of a so-called triple dip, 2014 is likely to be ushered 
out amidst concerns as to what interest rate normalisation looks like. Such 
uncertainties can provide opportunities for the active investor and often 
herald shifts in investment styles. Your Board fully understands and supports 
the Managers' value investing philosophy and the current positioning of the 
portfolio towards "smaller small" companies. Your Board is confident that the 
Managers' experience and consistency of approach will continue to benefit ASCoT 
over the longer term. 
 
 
Professor Paul R Marsh 
Chairman 
25 July 2014 
[e-mail] 
 
 
 
MANAGERS' REPORT 
 
Introduction 
 
Most equity markets around the globe have made further progress in 2014. 
However, in a general theme of reversal, the stronger performing parts of the 
financial markets in 2013 have tended to under-perform so far this year, while 
many of last year's weaker performing areas have out-performed in 2014. Thus, 
in the context of the UK stockmarket, large companies have out-paced small 
companies: the FTSE All-Share has generated a total return of +1.6%, while the 
NSCI (XIC) has struggled to maintain its spectacular gains of 2013 with a total 
return of -0.6%. ASCoT's NAV total return over the six month period was +1.0%. 
This performance is examined in the Investment Performance section of this 
report. 
 
In the last annual report, your Managers cautioned that "the absolute returns 
that ASCoT generates in 2014 and beyond will be heavily influenced by global 
financial and macro economic factors that can seem very distant from the 
parochiality of small UK quoted companies". So far in 2014, there have been 
several such challenges - Cold War tensions in the Ukraine, volatility in 
emerging markets, renewed hostilities in Iraq, even more concern about the 
Chinese shadow-banking system, ambiguous US data following a harsh winter, and 
some confusing commentary on monetary tightening by central bankers. Against 
this background and in view of 2013's strong returns, 2014's modest decline 
from small company equities, which tend to be more volatile and less defensive 
than their larger peers, might be considered unsurprising. 
 
A further challenge, which plays to the theme of reversal, has come from a 
rally in government bond prices. Ten year gilt yields fell from 3.0% at 31 
December 2013 to 2.7% at the end of June. This has come despite a continued 
improvement in the domestic UK economy, which has recently given rise to 
speculation about an interest rate increase in 2014. The drop in yields has 
also been evident in the US and has wrong-footed many market observers, who had 
been forecasting a continuation of the trends of 2013, when yields rose sharply 
from 1.8% to 3.0%. 
 
That rise played to the theme of "great rotation", which was addressed in last 
year's interim report. The "great rotation" describes a strengthening of 
economic growth and normalisation of monetary conditions that create conditions 
favourable to equity investment. The relapse in government bond yields is 
therefore rather inconvenient for this scenario, potentially indicating 
deteriorating prospects for economic growth. However, this interpretation is 
complicated by central banks' bond purchases. Although the US is tapering its 
quantitative easing programme, additional extraordinary stimulus may be 
forthcoming from the Eurozone: Mario Draghi has indicated that, on top of 
recently announced measures, quantitative easing will be deployed if the threat 
of deflation remains. 
 
Perhaps the lesson to learn from the past year or so, with yields testing the 
3.0% level, is that economies are still not sufficiently resilient to cope with 
this degree of effective monetary tightening. Thus, while the logic of the 
"great rotation" is sound, the conditions necessary for it to play out in full 
are not yet in place. Financial markets will continue to test the strength of 
the real economy, but recovery will be drawn out and monetary conditions will 
remain looser for longer, even in the UK. 
 
Investment performance 
 
ASCoT's NAV total return over the six months to 30 June 2014 was +1.0%, which 
compares with -0.6% for the NSCI (XIC). The following table and paragraphs 
describe the significant influences on the relative performance. 
 
 
For the 6 months ended 30 June 2014                           Basis points 
 
Stock selection                                                        166 
Sector selection                                                        36 
                                                                      ---- 
Attributable to the portfolio of investments,                          202 
based on mid prices (after transaction costs of 16 basis points) 
 
Movement in mid to bid price spread                                     (4) 
Cash/gearing                                                             4 
Purchase of ordinary shares                                              - 
Management fee                                                         (38) 
Other expenses                                                          (3) 
                                                                      ---- 
Total attribution based on bid prices                                  161 
                                                                      ---- 
Note: 100 basis points = 1%. Total Attribution is the difference between 
the total return of the NAV and the Benchmark Index (i.e. NAV = +1.02%; 
Benchmark Index = -0.59%; difference is 1.61% being 161 basis points). 
 
 
Size 
 
The "smaller small" companies within the NSCI (XIC) performed slightly better 
than the "larger small" companies. An indication of this is the relative 
performance of the FTSE 250 and the FTSE SmallCap, whose total returns over the 
first half were -0.4% and +0.4% respectively. This was beneficial to the 
portfolio's relative performance since it has a relatively low exposure - 48% 
against 72% for the index - to the "larger small" companies. This positioning 
is motivated by the more attractive valuations still available among companies 
with market capitalisations less than GBP500m. 
 
Despite the superior returns from "smaller smalls" over the past 18 months, the 
FTSE 250 remains by some way the most buoyant component of the UK stockmarket 
since the turn of the millennium, having generated a total return of 301%, 
against 98% for the FTSE SmallCap and 79% for the FTSE All-Share. These 
performance figures, which are influenced by the peculiarities of the TMT 
bubble and the global financial crisis, are inconsistent with academic theory, 
which suggests that investors in smaller companies should be compensated for 
greater illiquidity by superior returns. 
 
Style 
 
Investment style was also helpful to returns, with the value component of the 
NSCI (XIC) out-pacing the growth component over the first six months of the 
year. This reflects specific problems confronting several growth companies over 
the period, but might be considered surprising from another perspective. The 
drop in gilt yields and consequent flattening of the yield curve, which were 
described in the opening section of this report, are often associated with 
headwinds to the value style. There are two reasons for this. First, falling 
long term gilt yields should, other things being equal, lower the discount 
rates applicable to profit streams over the mid to long term; since a greater 
proportion of growth companies' profits come over the mid to long term, the 
valuations of growth companies should benefit disproportionately. Second, 
flattening yield curves can reflect tighter monetary conditions, with short 
term rates rising to quell inflationary pressures; a subsequent slowdown in 
economic activity would usually affect value companies disproportionately since 
they tend to be more cyclical, lacking the secular growth opportunities of 
growth companies. 
 
Corporate activity 
 
The quietest year for small cap M&A in Aberforth's history was 2013, when only 
five acquisitions of NSCI (XIC) constituents were completed. However, as 
confidence has continued to improve around board room tables, there has been a 
pick-up in activity in 2014. As at 30 June, bids for 13 companies had either 
completed or were outstanding. The acquirers tend to be overseas companies. The 
average premium to the share price before announcement was 37%. Four of these 
were holdings in the portfolio. However, the real excitement for the investment 
bankers has come from the continued strength of the IPO market, which started 
in earnest in the middle of 2013. In the first half of 2014, 22 companies 
potentially eligible for inclusion in the NSCI (XIC) had floated on the main 
market of the London Stock Exchange. The combined market capitalisation of 
these companies was GBP15bn, roughly double the value of the 13 companies subject 
to M&A. A continuation of the recent rate of IPOs would render 2014 the busiest 
year since 2000. 
 
Your Managers tend to be wary of IPOs since the vendors, typically private 
equity houses, should know a lot more about the businesses than the acquirers. 
Moreover, IPO markets in full flood are particularly dangerous, as prices tend 
to be set by the vendors. Over-ambitious valuations can result in disappointing 
share price performance of the companies once on the stockmarket, an 
increasingly frequent phenomenon as the year has progressed. Within the 
portfolio at the end of the period were three 2014 IPOs. One of these positions 
was taken after the company had floated and its share price had dropped 
sharply. Other opportunities among the recent IPOs may be forthcoming over the 
coming year or so if IPO prices do indeed turn out to have been over-ambitious. 
 
The likely net effect of M&A and IPOs is a year of re-equitisation, as the 
stock of small company equity capital is replenished. This follows four years 
of de-equitisation. While the enthusiastic reception for IPOs might be viewed 
as part of the "great rotation", it could be argued that the supply-demand 
balance is being altered to the disadvantage of small company valuations. 
 
Results 
 
The 36.9% total return enjoyed by the NSCI (XIC) in 2013 came despite a lack of 
profits growth. There are 358 companies within the NSCI (XIC), of which 
Aberforth tracks closely 282. This "tracked universe" represents 98% by value 
of the total index. Of the 282, 138 have December year ends and reported their 
2013 results in the first quarter of this year. The aggregate sales of these 
companies rose by 1% in 2013, while their operating profits dropped by 3%. 
There is a distortion from 21 resources companies: with these stripped out of 
the analysis, the sales of the remainder grew by 2% and the operating profits 
by 4%. Nevertheless, these are hardly rates of growth that justify last year's 
surge in share prices. The market was therefore prepared to look further ahead. 
The outlook for 2014 does seem brighter, as the domestic economy, which 
accounts for roughly 50% of the aggregate sales of NSCI (XIC) constituents, 
continues to recover. However, as factors such as sterling's strength gnaw away 
at the value of sales generated outside the UK, the small cap universe 
continues to witness net downgrades to profit estimates. It is by no means 
certain that the market would take a repeat of 2013 with such insouciance. 
 
However, more positive evidence is emerging for the medium term. The 138 
companies noted above are investing. The ratio of aggregate capital expenditure 
to depreciation was 1.8x in 2013. A number above 1.0x suggests that companies 
are doing more than just replacing existing productive capacity. Even when the 
resources companies are again eliminated, the ratio for the remainder is a 
healthy 1.4x: the majority of companies in this cross section of small UK 
quoted companies, contrary to the rhetoric of some commentators, do appear to 
be investing for future growth. 
 
Income 
 
Despite the disappointing progress of profits in 2013, the income performance 
of small companies has remained strong. Another year of mid to high single 
digit growth across the asset base is plausible, as is a continuation of the 
phenomenon of special dividends. The impact of this encouraging backdrop on 
ASCoT's Income Statement can be affected by the timing of special dividends, 
the level of gearing and changes to the portfolio. However, the positive 
underlying dividend experience among investee companies is evident from the 
following analysis. Within the portfolio of 95 companies, 46 increased their 
most recent dividends, 12 made no change, 25 currently pay no dividend, 5 cut, 
4 are IPOs that have not yet paid a dividend, and 3 pay dividends but have no 
meaningful comparison. The number of nil payers, which account for 23% by value 
of the portfolio, is unusually high and helps boost the portfolio's average 
historic dividend cover, which, at 3.2x, is towards its highest ever level. 
Your Managers have not lost their fondness for dividends. However, it seems 
likely that the market, inspired by quantitative easing to a pursuit of yield 
in recent years, has overlooked companies that at the present time are not 
paying dividends. Crucially, most of the current nil yielders should be capable 
of returning to the dividend register over the short to medium term. As they do 
so, the average dividend cover of the portfolio will decline but ASCoT's income 
account will benefit. 
 
Strong balance sheets 
 
Balance sheets across the small company universe remain among the strongest 
seen in ASCoT's history. At 30 June, 36% and 33% of the portfolio and the 
tracked universe respectively were represented by companies with net cash on 
their balance sheets. In the case of the portfolio, this robustness was a 
feature even before the onset of the global financial crisis. And it persists 
despite encouraging evidence that company boards are willing to put some of 
their cash resource to use, either through higher investment or through returns 
of cash to shareholders in the form of special dividends or buy-backs. 
 
Turnover 
 
Portfolio turnover over the 12 months to 30 June 2014 was 38%. This is higher 
than ASCoT's long term average of c.35%. The most important influence on this 
is your Managers' value investment style. When equity prices rise sharply, as 
they have over the past 18 months, target valuations for portfolio companies 
are reached: the natural inclination of the value investor is to attempt to 
redeploy the capital invested in such companies into more attractively valued 
companies. Since a repeat of the very strong markets of 2013 is improbable in 
the near term at least, it is likely that ASCoT's portfolio turnover will 
subside over coming months. It is noteworthy that a portion of turnover is 
effectively forced: when holdings leave the NSCI (XIC) after growing too large 
or when holdings are subject to M&A, your Managers are required to sell. 
Excluding this influence, ASCoT's long term portfolio turnover is c.25%. 
 
Active share 
 
Active share, or active money, is a measure of how different a portfolio is 
from its benchmark and thus of fund managers' conviction in the stocks they 
choose to own. It may be calculated by summing the active weights (i.e. the 
portfolio weight less the benchmark weight) for each stock in the portfolio. A 
higher active share ratio implies a lower probability that the portfolio will 
perform like the benchmark. Active share may be flattered by owning stocks that 
are not constituents of the benchmark; since your Managers sell stocks that 
grow too large to be included in the NSCI (XIC), ASCoT's level of mismatch with 
the benchmark is low. Indeed, the present mismatch is accounted for by 
companies that will be eligible for membership of the NSCI (XIC) on its next 
rebalancing. Your Managers target an active share ratio of at least 70%, though 
will tolerate a temporarily depressed number. At 30 June 2014, the ratio for 
ASCoT's portfolio stood at 73%. Your Managers believe that this demonstrates 
conviction in ASCoT's holdings. However, while performance should differ from 
that of the benchmark, there is no guarantee that it will do so in a positive 
fashion! 
 
Valuation & conclusion 
 
 
Characteristics                          30 June 2014            30 June 2013 
                                      ASCoT  NSCI (XIC)       ASCoT   NSCI (XIC) 
 
Number of companies                     95         358           98         383 
Weighted average market              GBP628m       GBP812m        GBP566m       GBP882m 
capitalisation 
Price earnings ratio                 13.4x       15.2x        11.4x       14.3x 
(historic) 
Dividend yield (historic)             2.3%        2.4%         2.9%        2.5% 
Dividend cover                        3.2x        2.8x         3.0x        2.8x 
 
 
The very strong performance from equities in 2013, coupled with lacklustre 
profit growth, resulted in a substantial upwards revaluation. This re-rating 
was by no means confined to small UK quoted companies, but is evident in the 
movement in the NSCI (XIC)'s historic PE from 12.8x at the start of 2013 to 
15.2x at 30 June 2014. This most recent multiple represents a 13% premium to 
the average historic PE of the NSCI (XIC) over ASCoT's 24 year history of 
13.4x. It also represents a 3% premium to the 14.8x historic PE of large 
companies at the end of June, which compares with an average discount of small 
to large over ASCoT's history of 8%. 
 
There are potentially extenuating circumstances. Other things being equal, the 
very strong balance sheets enjoyed by small companies would merit a higher PE. 
And, in relation to large companies, radically different sector exposures can 
be more important than a direct size effect in explaining relative valuations. 
But it is difficult to argue that small companies as a whole are now cheap, at 
least on the basis of historic PE ratios. Of course, the market's purpose is to 
look ahead and discount what is to come and thus today's valuations may be 
justified by the imminence of strong profit growth. On this front, immediate 
prospects are clouded by sterling's strength and by a still uncertain recovery 
path in Europe. Over the medium term, stronger than average profit growth 
should be achievable if and when Europe recovers properly, but over the long 
term profit progression in line with nominal GDP is probably not too far from 
the mark. On balance, therefore, from a starting dividend yield of 2.4%, modest 
single digit total returns for small companies look likely over coming years. 
 
These comments pertain to the asset class as a whole, but it is still possible 
to differentiate within the confines of the NSCI (XIC). The valuation 
characteristics of ASCoT's portfolio differ from those of the asset class. The 
historic PE of 13.4x is 12% below that of the NSCI (XIC). The table below shows 
the valuation on a forward looking basis to December 2015, using the ratio of 
enterprise value to earning before interest, tax and amortisation (EV/EBITA), a 
metric that is unaffected by companies' balance sheet financing structures. 
 
                            2015 EV/EBITA ratio 
   38 growth          244 other       Tracked Universe      Portfolio 
   companies          companies 
 
     13.2x               9.4x               9.9x               8.5x 
 
This analysis demonstrates the differentiation possible through a value 
investment discipline, with the growth companies in the index on a 55% premium 
to the constituents of the portfolio. Part of this valuation advantage reflects 
the portfolio's exposure to the cheaper "smaller small" companies that the 
market at large still seems reluctant to embrace. 
 
It is necessary to be realistic: macro economics, geopolitics and the vagaries 
of the yield curve will buffet the stockmarket over the short term, determining 
its appetite for smaller companies and for the value investment style. However, 
your Managers are encouraged by the still wide disparity in valuations evident 
within the NSCI (XIC). The attractively valued businesses within the portfolio 
give ASCoT's investors exposure to the value investment style, which, in the 
recent past and over the long term, has delivered demonstrably superior 
returns. 
 
Aberforth Partners LLP 
Managers 
25 July 2014 
 
 
 
INTERIM MANAGEMENT REPORT 
 
Risks and Uncertainties 
 
A review of the half year and the outlook for the Company can be found in the 
Chairman's Statement and the Managers' Report. The Directors have established 
an ongoing process for identifying, evaluating and managing the key risks faced 
by the Company. The Board believes that the Company has a relatively low risk 
profile in the context of the investment trust industry. This belief arises 
from the fact that the Company has a simple capital structure; invests only in 
small UK quoted companies; has never been exposed to derivatives and does not 
presently intend any such exposure; and outsources all the main operational 
activities to recognised, well established firms. 
 
The principal risks faced by the Company relate to investment objective, 
investment policy, share price discount, regulatory, operational/financial risk 
and gearing risk. An explanation of these risks and how they are managed can be 
found in the Strategic Report contained within the 2013 Annual Report. 
Additionally, as the Company's investments consist of small UK quoted 
companies, the principal risks facing the Company are market related and 
include market price, interest rate, credit and liquidity risk. These principal 
risks and uncertainties have not changed from those disclosed in the 2013 
Annual Report. 
 
Going Concern 
 
The Directors are satisfied that the Company has sufficient resources to 
continue in operation for the foreseeable future, a period of not less than 12 
months from the date of this report. Accordingly, they continue to adopt the 
going concern basis in preparing the financial statements. 
 
 
 
DIRECTORS' RESPONSIBILITY STATEMENT 
 
The Directors confirm that, to the best of their knowledge: 
 
(i) the condensed set of financial statements has been prepared in accordance 
with the Statement `Half-yearly financial reports' issued by the Financial 
Reporting Council; and 
 
(ii) the half-yearly report includes a fair review of information required by: 
 
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of 
important events during the first six months of the year and their impact on 
the financial statements together with a description of the principal risks and 
uncertainties for the remaining six months of the year; and 
 
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being disclosure of 
related party transactions and changes therein. 
 
In addition, each of the Directors considers that the Half Yearly Report, taken 
as a whole, is fair, balanced and understandable and provides information 
necessary for Shareholders to assess the Company's performance, objective and 
strategy. 
 
On behalf of the Board 
Professor Paul Marsh 
Chairman 
25 July 2014 
 
 
The Income Statement, Reconciliation of Movements in Shareholders' Funds, 
Balance Sheet and the Cash Flow Statement are set out below:- 
 
INCOME STATEMENT (unaudited) 
For the six months ended 30 June 2014 
 
                                        Revenue        Capital         Total 
                                          GBP 000          GBP 000         GBP 000 
 
Realised net gains on sales                   -         92,169        92,169 
Movement in fair value                        -        (88,830)      (88,830) 
                                        _______        _______       _______ 
 
Net gains on investments                      -          3,339         3,339 
Investment income                        15,385              -        15,385 
Other income                                  1              -             1 
Investment management fee (Note 2)       (1,633)        (2,721)       (4,354) 
Transaction costs                             -         (1,814)       (1,814) 
Other expenses                             (307)             -          (307) 
                                        _______        _______       _______ 
 
Net return before finance costs          13,446         (1,196)       12,250 
and tax 
 
Finance costs                              (156)          (260)         (416) 
 
                                        _______        _______       _______ 
 
Net return on ordinary activities        13,290         (1,456)       11,834 
before tax 
Tax on ordinary activities                    -              -             - 
                                        _______        _______       _______ 
 
Return attributable to equity            13,290         (1,456)       11,834 
shareholders 
                                        _______        _______       _______ 
 
Returns per Ordinary Share (Note 4)      13.93p         (1.53p)       12.40p 
 
 
Dividends 
 
On 25 July 2014, the Board declared an interim dividend for the year ending 31 
December 2014 of 7.75p per Ordinary Share (2013 - 7.35p) which will be paid on 
28 August 2014. 
 
 
 
INCOME STATEMENT (unaudited) 
For the six months ended 30 June 2013 
 
                                        Revenue        Capital         Total 
                                          GBP 000          GBP 000         GBP 000 
 
Realised net gains on sales                   -         57,985        57,985 
Movement in fair value                        -         59,357        59,357 
                                        _______        _______       _______ 
 
Net gains on investments                      -        117,342       117,342 
 
Investment income                        16,378              -        16,378 
Other income                                  -              -             - 
Investment management fee (Note 2)       (1,220)        (2,034)       (3,254) 
Transaction costs                             -         (1,856)       (1,856) 
Other expenses                             (235)             -          (235) 
                                        _______        _______       _______ 
 
Net return before finance costs          14,923        113,452       128,375 
and tax 
Finance costs                              (250)          (416)         (666) 
 
                                        _______        _______       _______ 
 
Net return on ordinary activities        14,673        113,036       127,709 
before tax 
Tax on ordinary activities                    -              -             - 
                                        _______        _______       _______ 
 
Return attributable to equity            14,673        113,036       127,709 
shareholders 
                                        _______        _______       _______ 
 
Returns per Ordinary Share (Note 4)      15.35p        118.26p       133.61p 
 
 
 
INCOME STATEMENT (unaudited) 
For the year ended 31 December 2013 
 
                                        Revenue        Capital         Total 
                                          GBP 000          GBP 000         GBP 000 
 
Realised net gains on sales                   -        154,439       154,439 
Movement in fair value                        -        222,783       222,783 
                                        _______        _______       _______ 
 
Net gains on investments                      -        377,222       377,222 
Investment income                        29,741              -        29,741 
Other income                                  -              -             - 
Investment management fee (Note 2)       (2,614)        (4,357)       (6,971) 
Transaction costs                             -         (3,892)       (3,892) 
Other expenses                             (496)             -          (496) 
                                        _______        _______       _______ 
 
Net return before finance costs          26,631        368,973       395,604 
and tax 
Finance costs                              (485)          (808)       (1,293) 
                                        _______        _______       _______ 
 
Net return on ordinary activities        26,146        368,165       394,311 
before tax 
Tax on ordinary activities                    -              -             - 
                                        _______        _______       _______ 
 
Return attributable to equity            26,146        368,165       394,311 
shareholders 
                                        _______        _______       _______ 
 
Returns per Ordinary Share (Note 4)      27.37p        385.35p        412.72p 
 
 
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 
(unaudited) 
For the six months ended 30 June 2014 
 
                            Share    Capital    Special    Capital  Revenue     Total 
                          capital Redemption    reserve    reserve  reserve 
                                     reserve 
                            GBP 000      GBP 000      GBP 000      GBP 000    GBP 000     GBP 000 
 
Balance as at 31              954         34    176,703    910,616   49,818 1,138,125 
December 2013 
 
Return on ordinary              -          -          -     (1,456)  13,290    11,834 
activities after taxation 
 
Equity dividends paid           -          -          -          -  (15,404)  (15,404) 
 
Purchase of Ordinary Shares     -          -       (188)         -        -      (188) 
                          _______    _______    _______    _______  _______   _______ 
 
Balance as at 30 June 2014    954         34    176,515    909,160   47,704 1,134,367 
                          _______    _______    _______    _______  _______   _______ 
 
 
For the six months ended 30 June 2013 
 
                            Share    Capital    Special    Capital  Revenue     Total 
                          capital Redemption    reserve    reserve  reserve 
                                     reserve 
                            GBP 000      GBP 000      GBP 000      GBP 000    GBP 000     GBP 000 
 
Balance as at 31              957         31    179,461    542,451   45,279   768,179 
December 2012 
 
Return on ordinary              -          -          -    113,036   14,673   127,709 
activities after taxation 
 
Equity dividends paid           -          -          -          -  (14,584)  (14,584) 
 
Purchase of Ordinary Shares    (1)         1       (999)         -        -      (999) 
 
                          _______    _______    _______    _______  _______   _______ 
 
Balance as at 30 June 2013    956         32    178,462    655,487   45,368   880,305 
                          _______    _______    _______    _______  _______   _______ 
 
 
For the year ended 31 December 2013 
 
                            Share    Capital    Special    Capital  Revenue     Total 
                          capital Redemption    reserve    reserve  reserve 
                                     reserve 
                            GBP 000      GBP 000      GBP 000      GBP 000    GBP 000     GBP 000 
 
Balance as at 31              957         31    179,461    542,451   45,279   768,179 
December 2012 
 
Return on ordinary              -          -          -    368,165   26,146   394,311 
activities after taxation 
 
Equity dividends paid           -          -          -          -  (21,607)  (21,607) 
 
Purchase of Ordinary Shares    (3)         3     (2,758)         -        -    (2,758) 
                          _______    _______    _______    _______  _______   _______ 
 
Balance as at 31              954         34    176,703    910,616   49,818 1,138,125 
December 2013 
                          _______    _______    _______    _______  _______   _______ 
 
 
BALANCE SHEET 
(unaudited) 
As at 30 June 2014 
 
                                        30 June   31 December      30 June 
                                           2014          2013         2013 
                                          GBP 000         GBP 000        GBP 000 
 
Fixed assets: 
 
Investments at fair value through     1,165,755     1,167,630      942,368 
profit or loss 
                                        _______       _______      _______ 
 
Current assets 
 
Amounts due from brokers                  2,002             -        2,602 
Other debtors                             3,607         2,120        4,644 
Cash at bank                                 99           536          172 
                                        _______       _______      _______ 
 
                                          5,708         2,656        7,418 
                                        _______       _______      _______ 
 
Creditors (amounts falling due 
within one year) 
 
Amounts due to brokers                   (4,661)            -      (18,901) 
Bank debt facility                            -       (31,987)     (50,461) 
Other creditors                            (303)         (174)        (119) 
                                        _______       _______      _______ 
 
                                         (4,964)      (32,161)     (69,481) 
                                        _______       _______      _______ 
 
Net current assets/(liabilities)            744       (29,505)     (62,063) 
                                        _______       _______      _______ 
 
Total assets less current             1,166,499     1,138,125      880,305 
liabilities 
 
Creditors (amounts falling due          (32,132)            -            - 
after more than one year) 
Bank debt facility 
                                        _______       _______      _______ 
 
Total net assets                      1,134,367     1,138,125      880,305 
                                        _______       _______      _______ 
 
Capital and reserves: equity interests 
 
Called up share capital (Ordinary Shares)   954           954          956 
 
Reserves: 
 
Capital redemption reserve                   34            34           32 
Special reserve                         176,515       176,703      178,462 
Capital reserve                         909,160       910,616      655,487 
Revenue reserve                          47,704        49,818       45,368 
                                        _______       _______      _______ 
 
Total shareholders' funds             1,134,367     1,138,125      880,305 
                                        _______       _______      _______ 
 
 
Net Asset Value per Share (Note 5)    1,189.50p     1,193.22p      921.23p 
Share Price                           1,046.00p     1,095.00p      811.50p 
 
 
CASH FLOW STATEMENT 
(unaudited) 
For the six months ended 30 June 2014 
 
                                    Six months    Six months     Year ended 
                                         ended         ended    31 December 
                                  30 June 2014  30 June 2013           2013 
                                         GBP 000         GBP 000          GBP 000 
 
Cash inflow from operating activities 
 
Net return before finance costs         12,250       128,375        395,604 
and taxation 
Gains on investments                    (3,339)     (117,342)      (377,222) 
Scrip dividends received                     -             -           (223) 
Transaction costs                        1,814         1,856          3,892 
Increase in debtors                     (1,502)       (2,787)          (248) 
(Decrease)/increase in creditors           (27)           (9)            24 
 
                                       _______       _______        _______ 
 
Net cash inflow from operating           9,196        10,093         21,827 
activities 
Taxation 
Taxation recovered/(paid)                   15             -            (15) 
 
Returns on investments and                (553)         (646)        (1,225) 
servicing of finance 
 
Capital expenditure and financial investment 
Payments to acquire investments       (223,294)     (182,728)      (398,414) 
Receipts from sales of investments     229,353       185,027        417,219 
                                       _______       _______        _______ 
 
Net cash inflow from capital expenditure 
and financial investment                 6,059         2,299         18,805 
                                       _______       _______        _______ 
 
                                        14,717        11,746         39,392 
Equity dividends paid                  (15,404)      (14,584)       (21,607) 
                                       _______       _______        _______ 
 
                                          (687)       (2,838)        17,785 
Financing 
Purchase of Ordinary Shares                  -          (999)        (2,758) 
 
Net drawdown/(repayment) of bank           250         3,750        (14,750) 
debt facilities (before costs) 
                                       _______       _______        _______ 
 
Change in cash during the period          (437)          (87)           277 
                                       _______       _______        _______ 
 
 
 
NOTES TO THE FINANCIAL STATEMENTS 
 
1. ACCOUNTING STANDARDS 
 
The financial statements have been prepared on a going concern basis and in 
accordance with UK generally accepted accounting practice ("UK GAAP") and the 
AIC's Statement of Recommended Practice "Financial Statements of Investment 
Trust Companies and Venture Capital Trusts" issued in 2009. The total column of 
the Income Statement is the profit and loss account of the Company. All revenue 
and capital items in the Income Statement are derived from continuing 
operations. No operations were acquired or discontinued in the period. 
 
The same accounting policies used for the year ended 31 December 2013 have been 
applied. 
 
2. INVESTMENT MANAGEMENT FEE 
 
The Managers, Aberforth Partners LLP, are paid an annual management fee, 
payable quarterly in advance, equal to: 
 
 i. 0.8% of the net assets of the Company up to GBP800m; plus 
 
ii. 0.7% of the net assets of the Company between GBP800m and GBP1 billion (if 
    any); plus 
 
iii. 0.6% of the net assets of the Company greater than GBP1 billion (if any). 
 
The investment management fee has been allocated 62.5% to capital reserve and 
37.5% to revenue reserve, in line with the Board's expected long term split of 
returns, in the form of capital gains and income respectively, from the 
investment portfolio of the Company. 
 
3. DIVIDENDS 
 
Amounts recognised as distributions to   Six months   Six months    Year ended 
equity holders in the period:                 ended        ended   31 December 
                                       30 June 2014 30 June 2013          2013 
                                              GBP 000        GBP 000         GBP 000 
 
Second interim dividend of 15.25p for             -       14,584        14,584 
the year ended 31 December 2012 
 
Interim dividend of 7.35p for the year            -            -         7,023 
ended 31 December 2013 
 
Final dividend of 16.15p for the year        15,404            -             - 
ended 31 December 2013 
                                             ______       ______        ______ 
 
                                             15,404       14,584        21,607 
                                             ______       ______        ______ 
 
The interim dividend for the year ending 31 December 2014 of 7.75p (2013 - 
7.35p) will be paid on 28 August 2014 to shareholders on the register on 8 
August 2014. The ex-dividend date is 6 August 2014. 
 
4. RETURNS PER ORDINARY SHARE 
 
The returns per Ordinary Share are                                 31 December 
based on:                              30 June 2014 30 June 2013          2013 
 
Returns attributable to Ordinary        GBP11,834,000 GBP127,709,000  GBP394,311,000 
Shareholders 
 
Weighted average number of shares in 
issue during the period                  95,382,693   95,579,173    95,541,545 
 
Return per Ordinary Share                    12.40p      133.61p       412.72p 
 
5. NET ASSET VALUES 
 
The net assets and the net asset value per share attributable to the Ordinary 
Shares at each period end are calculated in accordance with their entitlements 
in the Articles of Association and were as follows: 
 
                                            30 June  31 December       30 June 
                                               2014         2013          2013 
                                              GBP 000        GBP 000         GBP 000 
 
Net assets attributable                   1,134,367    1,138,125       880,305 
 
                                              Pence        Pence         Pence 
Net asset value attributable per           1,189.50     1,193.22        921.23 
Ordinary Share 
 
As at 30 June 2014, the Company had 95,364,792 Ordinary Shares in issue 
(31 December 2013 - 95,382,792 and 30 June 2013 - 95,557,792). 
 
6. RELATED PARTY TRANSACTIONS 
 
There have been no related party transactions undertaken by the Company during 
the six months ended 30 June 2014. 
 
7. FURTHER INFORMATION 
 
The foregoing do not constitute statutory accounts (as defined in section 434 
of the Companies Act 2006) of the Company. The statutory accounts for the year 
ended 31 December 2013, which contained an unqualified Report of the Auditors, 
have been lodged with the Registrar of Companies and did not contain a 
statement required under section 498(2) or (3) of the Companies Act 2006. All 
information shown for the six months ended 30 June 2014 is unaudited. 
 
Certain statements in this announcement are forward looking statements. By 
their nature, forward looking statements involve a number of risks, 
uncertainties or assumptions that could cause actual results or events to 
differ materially from those expressed or implied by those statements. Forward 
looking statements regarding past trends or activities should not be taken as 
representation that such trends or activities will continue in the future. 
Accordingly, undue reliance should not be placed on forward looking statements. 
 
The Half Yearly Report is expected to be posted to shareholders on or before 
1 August 2014. Members of the public may obtain copies from Aberforth Partners 
LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website at 
www.aberforth.co.uk. 
 
CONTACT: 
 
Alistair Whyte/Euan Macdonald * Aberforth Partners LLP * 0131 220 0733 
Aberforth Partners LLP, Secretaries 
25 July 2014 
 
 
END