Invesco Perpetual UK Smaller Co's Investment Trust Plc - Annual Financial Report

Invesco Perpetual UK Smaller Companies Investment Trust plc

Annual Financial Report Announcement
For the year ended 31 January 2017

FINANCIAL HIGHLIGHTS                    

The Benchmark Index of the Company is the Numis Smaller Companies Index (excluding Investment Companies) with income reinvested.

AT 31 JANUARY	2017	2016	CHANGE
Net asset value(1) (NAV) per share as shown on the balance sheet	454.1p	390.3p	+16.3%
Shareholders’ funds (£’000)(1)	241,603	207,657	+16.3%
Share price	432.0p	362.0p	+19.3%
Discount(1)	4.9%	7.3%
Gearing(1):
– gross gearing	nil	nil
– net gearing	nil	nil
– net cash	3.1%	4.9%
Maximum authorised gearing	6.2%	7.2%
FOR THE YEAR ENDED 31 JANUARY	2017	2016
Total return (with income reinvested):
NAV(1):
– Datastream(2)	+21.3%	+11.7%
– based on prior year NAV after charging both paid and proposed dividends(3)	+20.4%	+10.9%
Benchmark Index(1)(2)	+18.6%	+3.8%
FTSE All-Share Index(2)	+20.1%	–4.6%
Share price(2)	+24.0%	+16.2%
Return(1) and dividend per ordinary share:
Revenue return	7.37p	8.98p
Capital return	70.83p	30.16p
Total return	78.20p	39.14p
First interim dividend	3.45p	3.40p
Second interim dividend	3.45p	3.40p
Third interim dividend	3.45p	3.40p
Final dividend	6.75p	4.10p
Total dividends	17.10p	14.30p	+19.6%
Dividend payable for the year:
– from revenue	7.37p	8.98p
– from capital	9.73p	5.32p
	17.10p	14.30p
Capital dividend as a % of year end net assets	2.1%	1.4%
Ongoing charges(1) – excluding performance fee	0.82%	0.82%
Performance fee	0.44%	1.01%

Notes:  (1)   The term is defined in the Glossary on page 62 of the annual financial report.

            (2)   Source: Thomson Reuters Datastream (‘Datastream’).

            (3)   Source: Invesco Perpetual and defined in the Glossary on page 63 of the annual financial report.

CHAIRMAN’S STATEMENT

Performance

I am pleased to report that for the year ended 31 January 2017 the net asset value (NAV) of your Company rose by 21.3%, on a total return basis, an outperformance of 2.7% versus the benchmark index of the Company, the Numis Smaller Companies Index (excluding Investment Companies) with income reinvested, which returned 18.6%. The Company also generated a small outperformance of 1.2% against the wider UK stock market (as measured by the FTSE All-Share Index) which rose by 20.1% over the same period. Over the past 12 months the underlying share price discount to NAV narrowed from 7.3% to 4.9%. As at the latest practical date prior to the publication of this report being 25 April 2017, the discount has further narrowed and now stands at 3.5%.

Recent Company History

The Company has come a long way over the last few years, enjoying strong absolute and relative total returns over the last five financial years, outperforming its benchmark index over one, three and five years. The NAV total return over the five years to 31 January 2017 was 123.0% and share price total return was 169.5% compared with 98.6% for the benchmark and 57.0% for the FTSE All-Share Index. The discount to net asset value at which the shares have traded has also substantially narrowed over the same period which has contributed to the strong share price performance. The Company’s positive performance has continued in the current financial year.

The Board believes that two specific initiatives in particular have helped narrow the discount from persistently above the sector average to now being one of the narrowest discounts within its peer group. The first of these initiatives was a commitment by the Board in 2012 to offer shareholders a number of options on or around the date of the annual general meeting in 2017. This was followed by a significant increase in the level of dividend to an initial yield target of 4% per annum (based on the share price prevailing at the time of the announcement in March 2015), with any revenue shortfall supplemented from profits retained as capital reserves, and the payment of dividends on a quarterly basis enhancing shareholder cash flow.

Future of the Company

In considering the future of the Company, the Board is mindful of its strong historical performance, the financial returns it has provided for shareholders and the outlook for the Company.

In the light of the above and in fulfilment of the Company’s commitment in 2012, the Board will offer shareholders a continuation of their investment together with the alternative of a Tender Offer at a level close to NAV.

This decision follows discussions over the future of the Company held with major shareholders, the Company’s broker and the Manager. The Board proposes that:

•      for shareholders wishing to retain their investment in the Company:

        –     the Company will continue to be managed by the portfolio managers in the same way that it is now;

        –     consistent with the current dividend policy,  and in the absence of unforeseen circumstances, the Board intends to pay a dividend for the year to 31 January 2018 of 17.1p per share, which equates to a yield of approximately 4% at the 2017 year end;

        –     the Board may seek to limit discount volatility through the prudent use of share buy-backs; and

        –     a further range of options will be put to shareholders on or around the annual general meeting in 2020.

•      those shareholders wishing to realise part or all of their investment will have a chance to do so through a tender offer for up to 40% of the Company’s shares in issue.

The full proposals are set out in a separate Circular to shareholders which accompanies the annual financial report.

Dividends

This year is the second full year of quarterly dividends, which are paid in September, December, March and June. For the year ended 31 January 2017, three interim dividends of 3.45p each have been paid and the Board has announced a proposed final dividend of 6.75p per share, making a total dividend for the year of 17.1p per share, an increase of 19.6% on the previous year’s total dividend. Based on the year end share price of 432p this gives a dividend yield of 4.0%. The final dividend will be payable, subject to shareholder approval, on 12 June 2017 to shareholders on the register on 5 May 2017 and the shares will go ex-dividend on 4 May 2017.

In my Chairman’s Statement last year I highlighted that there had been a notable increase in dividends earned, resulting in a substantial increase in revenue return per share – from 7.4p to 9p. This year has seen the exact opposite, with revenue return falling back to 7.4p. A small amount of the decrease arose from the receipt of fewer special dividends being recognised as revenue items this year, although the total of special dividends received in the year (i.e. including those attributed to capital) rose substantially to £883,000 (2016: £520,000). This has resulted in a balance of dividend being paid from capital reserves amounting to 9.73p, representing 2.1% of net assets (2016: 5.32p, 1.4%). This continues to represent only a small proportion of annualised returns over the last ten years.

General Meetings

This year’s Annual General Meeting (AGM) will be held on Thursday, 8 June 2017. A general meeting to consider the proposed tender offer will immediately follow the AGM. The Directors have carefully considered all of the resolutions proposed and believe them to be in the best interests of shareholders and the Company as a whole. Accordingly, the Directors recommend that shareholders vote in favour of each resolution, as will the Directors in respect of their own shareholdings.

Outlook

The year under review has been influenced by a number of political events including the UK’s vote in the referendum to leave the EU and the result of the US Presidential election. Despite these largely unanticipated outcomes, markets rallied during the year with the UK economy continuing to grow. However, it is likely that markets will remain volatile for some time to come, with uncertainties created in the short term by the recently announced UK snap election and the longer term by the Brexit negotiations, not helped by the possibility of a second Scottish referendum and upcoming key elections in Europe.

As you will read in the Portfolio Manager’s Report, all is not gloom and doom and whilst these political outcomes were unexpected – and there may be more to come this year – the UK economy is faring well on the back of a growing world economy and the depreciation in sterling relative both to the US dollar and the Euro; the latter has helped exporters but also makes domestic companies vulnerable to potential takeovers.

Nevertheless, having carefully constructed a portfolio of quality companies that have the characteristics required by the portfolio managers, and with a continued low interest rate environment, there is reason to be cautiously optimistic, at least in the short term. Donald Trump’s election as US President may be controversial but there is a reasonable expectation that this will lead to short-term growth in the US through infrastructure and defence spending and, coupled with his administration’s positive approach to a UK outside of Europe, the potential for home markets to benefit.

Your portfolio managers have a disciplined approach to stock selection which has served shareholders well for many years. They are mindful of the many potential pitfalls ahead of them in markets that are anything but straightforward and are well aware of the many political distractions on the horizon; your Board continues to be fully supportive of their considered and astute approach to portfolio construction.

Ian Barby
Chairman
26 April 2017

BUSINESS REVIEW

Invesco Perpetual UK Smaller Companies Investment Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below and have been approved by shareholders.

The Company has contracted the services of Invesco Fund Managers Limited (the ‘Manager’) to manage the portfolio in accordance with the Board’s strategy and under its oversight. The portfolio manager responsible for the day to day management of the portfolio is Jonathan Brown, assisted by Robin West, Deputy Portfolio Manager.

Investment Objective

The Company is an investment trust whose investment objective is to achieve long-term total return for shareholders primarily by investment in a broad cross-section of small to medium sized UK quoted companies.

Investment Policy

The portfolio primarily comprises shares traded on the London Stock Exchange including those traded on AIM. The portfolio manager can also invest in unquoted securities, though these are limited to a maximum of 5% of gross assets at the time of acquisition.

The Manager seeks to outperform the Numis Smaller Companies Index (excluding Investment Companies). As a result, the Manager’s approach can, and often does, result in significant overweight or underweight positions in individual stocks or sectors compared with the benchmark. Sector weightings are ultimately determined by stock selection decisions.

Risk diversification is sought through a broad exposure to the market, where no single investment may exceed 5% of the Company’s gross assets at the time of acquisition. The Company may utilise index futures to hedge risk of no more than 10% and other derivatives (including warrants) of no more than 5%. In addition, the Company will not invest more than 10% in collective investment schemes or investment companies, nor more than 10% in non-UK domiciled companies. All these limits are referenced to gross assets at the time of acquisition.

Borrowings may be used to raise market exposure up to the lower of 30% of net asset value and £25 million.

Dividend Policy

The Company’s dividend policy is to distribute all available revenue earned by the portfolio in the form of dividends to shareholders. In addition, the Board has approved the use of the Company’s capital reserves to enhance dividend payments. Therefore, the total dividend, paid to shareholders on a quarterly basis, comprises income received from the portfolio with any balance from capital reserves.

Performance

The Board reviews performance by reference to a number of Key Performance Indicators which include the following:

•      the movement in the net asset value (NAV) per share on a total return basis;

•      the performance relative to the benchmark index and the peer group;

•      the discount;

•      dividend per share;

•      the ongoing charges; and

•      the risk and volatility.

The ten year record for the NAV and share price performance compared with the Company’s benchmark index can be found on page 3 of the annual financial report, together with the five year discount record. The ten year record for dividends and ongoing charges is shown on page 4 of the annual financial report. Returns versus volatility are shown on the graph on page 14 of the annual financial report.

Results and Dividends

In the year ended 31 January 2017, the net asset value total return was 21.3%, compared with a total return on the benchmark index of 18.6%, an outperformance of 2.7%. The discount at the year end was 4.9% (2016: 7.3%). The Portfolio Manager’s Report shows an analysis of the relative performance in a table.

For the year ended 31 January 2017, three interim dividends of 3.45p per share were paid to shareholders in September and December 2016 and March 2017. A final dividend of 6.75p per share will be proposed to shareholders at the AGM on 8 June 2017 and will be paid on 12 June 2017 to shareholders on the register on 5 May 2017, subject to shareholder approval. This will give total dividends for the year of 17.1p (2016: 14.3p) which will be funded from the net revenue of 7.37p (2016: 8.98p) generated during the year, with the balance of 9.73p (2016: 5.32p) from capital reserves.

Financial Position and Borrowings

At 31 January 2017, the Company’s net assets were valued at £242 million (2016: £208 million), comprising a portfolio of equity investments and net current assets, with no borrowings (2016: £nil). Borrowings under a facility with Bank of New York Mellon are limited to the maximum of the lower of 30% of net assets and £15 million (2016: unchanged).

Outlook, including the Future of the Company

The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Manager’s Report. Details of the principal risks affecting the Company are set out under ‘Principal Risks and Uncertainties’ below.

Past performance has been good and the Directors believe that following the tender offer (as described in brief in the Chairman’s Statement) the Company will continue in its current form, and with strong shareholder support. The Manager will continue to use its best endeavours to attempt to achieve above-average performance for shareholders.

Principal Risks and Uncertainties

The principal risks facing the Company are subject to robust assessment by the Directors and these risks, and the steps taken to mitigate them, follow. Most of these risks are market related and are similar to those of other investment trusts investing primarily in listed markets.

Market (Economic) Risk

Factors such as fluctuations in stock markets, interest rates and exchange rates are not under the control of the Board and the portfolio manager, but may give rise to high levels of volatility in the share prices of investee companies, as well as affecting the Company’s own share price and discount to NAV. To a limited extent, futures can be used to mitigate this risk.

Investment Risk

The Company invests in small and medium-sized companies traded on the London Stock Exchange or on AIM. By their nature these are generally considered riskier than their larger counterparts and their share prices can be more volatile, with lower liquidity. In addition, as smaller companies do not generally have the financial strength, diversity and resources of larger companies, they may find it more difficult to overcome periods of economic slowdown or recession.

The portfolio manager’s approach to investment is one of individual stock selection. Investment risk is mitigated via the stock selection process, together with the slow build-up of holdings rather than the purchase of large positions outright. This allows the portfolio manager to observe more data points from a company before adding to a position. The overall portfolio is well diversified by company and sector. The weighting of an investment in the portfolio tends to be loosely aligned with the market capitalisation of that company. This means that the largest holdings will often be amongst the larger of the smaller companies available.

The portfolio manager is relatively risk averse, looks for lower volatility in the portfolio and seeks to outperform in more challenging markets. The portfolio manager remains cognisant at all times of the potential liquidity of the portfolio.

There can be no guarantee that the Company’s strategy and business model will be successful in achieving its investment objective. The Board monitors the performance of the Company and has guidelines in place to ensure that the portfolio manager adheres to the approved investment policy. The continuation of the Manager’s mandate is reviewed annually.

Shareholders’ Risk

The value of an investment in the Company may go down as well as up and an investor may not get back the amount invested.

On 10 March 2015 the Company announced a new dividend policy, targeting an initial yield of approximately 4% per annum, based on the prevailing share price at that time of 344p per share. Dividends will continue to be funded by distributing 100% of available income each year, with any balance paid from capital reserves.

The Board and the portfolio manager maintain an active dialogue with the aim of ensuring that the market rating of the Company’s shares reflects the underlying net asset value; and there are in place both share buy back and issuance facilities to help the management of this process.

Borrowings

The Company may borrow money for investment purposes. If the investments fall in value, any borrowings (or gearing) will magnify the extent of any loss. If the borrowing facility could not be renewed, the Company might have to sell investments to repay any borrowings made under it. All borrowing and gearing levels are reviewed at every Board meeting and limits agreed.

Reliance on the Manager and other Third Party Providers

The Company has no employees and the Directors have all been appointed on a non-executive basis. The Company is therefore reliant upon the performance of third party service providers for its executive function and service provisions. Third party service providers are subject to ongoing monitoring by the Manager and the Company, including review of their cyber security. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its investment policy. The Company’s main service providers are listed on page 61 of the annual financial report, of which the Manager is the principal provider.

The Manager may be exposed to reputational risks. In particular, the Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in potential counterparties and third parties being unwilling to deal with the Manager and by extension the Company, which carries the Manager’s name. This could have an adverse impact on the ability of the Company to pursue its investment policy successfully.

The Audit Committee regularly reviews the performance and internal controls of the Manager, the results of which are reported to the Board. The Manager reviews the performance of all third party providers regularly through formal and informal meetings.

Regulatory Risk

The Company is subject to various laws and regulations by virtue of its status as an investment trust, its listing on the London Stock Exchange and being an Alternative Investment Fund under the Alternative Investment Fund Managers Directive. A loss of investment trust status could lead to the Company being subject to capital gains tax on the sale of its investments. Other control failures, either by the Manager or any other of the Company’s service providers, could result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.

The Manager reviews the level of compliance with tax and other financial regulatory requirements on a daily basis. The Board regularly considers all risks, the measures in place to control them and the possibility of any other risks that could arise. The Manager’s Compliance and Internal Audit Officers produce regular reports for review at the Company’s Audit Committee.

Further details of risks and risk management policies as they relate to the financial assets and liabilities of the Company are detailed in note 17 to the financial statements.

Viability Statement

In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months required by the ‘Going Concern’ provision. The Company is an investment trust, a collective investment vehicle designed and managed for long term investment. The Company does not have a fixed life. The Board believes that the Company, at its essence, remains evergreen and the tender offer does not distort this view. In their going concern assessment, the Directors have assumed that the tender offer will not affect the Company’s ability to continue in operational existence. While the appropriate period over which to assess the Company’s viability may vary from year to year, the long term for the purpose of this viability statement is currently considered by the Board to be at least five years, with the life of the Company not intended to be limited to that or any other period.

The main risks to the Company’s continuation are: continuing poor investment performance; or shareholder dissatisfaction through failure to meet the Company’s investment objective; or the investment policy not being appropriate in prevailing market conditions. Accordingly, failure to meet the Company’s investment objective, and contributory market and investment risks, are deemed by the Board to be principal risks of the Company and are given particular consideration when assessing the Company’s long term viability.

The investment objective of the Company had been substantially unchanged for many years. The 2015 amendment to dividend policy gave some additional weight to targeting increased dividend income to shareholders. This change was not expected to, and did not, affect the total return sought or produced by the portfolio manager but was designed to increase significantly returns distributed to shareholders. This was well received by the market and accordingly, the Board considers the revised investment objective remains appropriate. This is confirmed by contact with major shareholders and demonstrated by demand for the Company’s shares, as evidenced by the narrower discount to net asset value at which they now trade.

Performance derives from returns for risk taken. The Portfolio Manager’s Report sets out his current investment strategy. The Company’s performance has been very strong for many years and through different market cycles, as shown by the ten year total return performance graph on page 3, and by comparison with its peer group’s returns versus volatility over five years, as set out on page 14 of the annual financial report. Whilst past performance may not be indicative of performance in the future, it should be noted that the Company’s current Manager has been in place throughout that ten years, the current portfolio manager has been involved with the Company for over 11 years, and there has been no material change in the Company’s investment objective or policy.

Demand for the Company’s shares and performance are not things that can be forecast, but there are no current indications that either or both of these may decline materially over the next five years so as to affect the Company’s viability.

The Company’s portfolio is readily realisable and is many times the value of its normal level of short term liabilities and annual operating costs. With respect to the short term liability that will arise as a result of the tender offer: the Manager has undertaken a detailed review of the liquidity of the portfolio and, based on the maximum tender amount, has confirmed that there is little to no prospect of the Company not being able to meet its obligations as they fall due.

Based on the above analysis, the Directors confirm that they expect the Company will continue to operate and meet its liabilities, as they fall due, during the five years ending January 2022.

Board Diversity

The Board considers diversity, including the balance of skills, knowledge, diversity (including gender) and experience, amongst other factors when reviewing its composition and appointing new directors, but does not consider it appropriate to establish targets or quotas in this regard. The Board consists of five directors, one of whom is a woman, thereby constituting 20% female representation.

Social and Environmental Matters

As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to, or not to, make an investment on environmental and social grounds alone. The Manager applies the United Nations Principles for Responsible Investment.

PORTFOLIO MANAGER’S REPORT

Investment Review

The year under review saw good returns from global stock markets. Investors shrugged off the “surprise” results of the EU referendum and the US election, and pushed the UK and US stock markets on to new all-time highs. The somewhat unusual combination of extreme political uncertainty and strong stock markets may be due to the hope that governments are turning away from “austerity” and adopting more inflationary policies. Increased government spending, particularly infrastructure investment, is likely to boost short term economic growth and push up demand for commodities and capital goods. These sectors have performed strongly and are part of the reason for the equity rally we’ve seen over the second half of the year. The second consequence of a more expansionary government policy is likely to be increased inflation and higher interest rates, which has potentially negative consequences for bond markets. With bond valuations at all-time highs, the appeal of equities has increased on a relative basis, and markets have been supported by additional investment flow.

During the year, the UK stock market, as measured by the FTSE All-Share Index, returned 20.1% on a total return basis. This very strong outcome is largely attributable to the significant fall in sterling prompted by the decision to leave the EU. A significant proportion of profit generated by businesses listed on the UK market is earned overseas, and this benefited from significant foreign exchange gains when translated into sterling. As an illustration, when calculated in US dollars, the FTSE All-Share Index returned a much more modest 6.5%. As you would expect, sectors with significant non-UK revenues were the biggest contributors to market returns, in particular the mining and oil & gas sectors, which also benefited from higher commodity prices. UK smaller companies, as measured by the Numis Smaller Companies Index (excl. Investment Companies), gained 18.6% on a total return basis. Smaller companies tend to have less overseas exposure and therefore enjoyed less of a currency related gain. However, the mining sector, which had a heavier weighting than usual this year, contributed around 6.5% to the index return.

Portfolio Strategy and Review

Against this background, your Company generated a net asset value total return of 21.3% for the fiscal year. Positive contributions came from retail and healthcare, while the portfolio's lack of exposure to the mining sector negatively impacted performance.

At the individual stock level, the stand-out performer was on-line fashion retailer boohoo.com (+256%). Its keenly priced “fast fashion” continued to be a hit with consumers as the business rapidly grew sales both in the UK and overseas. The stock has been a strong performer for the last two of years, so we have locked-in some profit and reduced the position. Keywords Studios (+168%), a leading provider of outsourced services to the computer games industry, had another good year driven by a combination of organic growth and acquisitions. The demand for games continues to grow around the world, which along with increasing complexity is providing a fertile market for Keyword Studios’ language translation and art creation services. Coats (+157%), the world’s leading manufacturer of industrial threads, also had a good year, following the resolution of its pension dispute. The company’s thread is used in around a fifth of all shirts, and a third of all the quality shoes worn in the world. It also produces a growing range of speciality fibres used in applications such as fibre optics, car air-bags and tyre casings. Ithaca Energy (+407%), a North Sea oil & gas producer, was one our worst performers last year but bounced back along with the oil price. The business also received a takeover approach following the year end. Sadly, we also had some disappointments. Carpetright (–53%), the UK’s leading carpet retailer, suffered from increased competition and a higher cost of goods due to the fall in sterling. The company is still reducing costs by rationalising its store estate and seeing improved trading as a result of its refurbishment programme, leading us for the time being to maintain our holding. Diversified manufacturing business Essentra (–44%), struggled due to management problems. We are hopeful that the new CEO can get to grips with the issues and return the business to growth. The UK’s leading tile retailer, Topps Tiles (–38%), experienced slower growth following the EU referendum and a slowdown in the housing market. The fall in the share price feels overdone and we are confident that the company can continue to take market share.

Invesco Perpetual UK Smaller Companies Investment Trust plc

Performance attribution for the year ended 31 January 2017

	Total
	Absolute
	%
Net asset value total return(1)	21.3
Less:?Benchmark total return(1)	18.6
Relative outperformance	2.7
Analysis of Relative Performance
Portfolio total return	22.6
Less: Benchmark total return(1)	(18.6)
Portfolio outperformance	4.0
Net gearing effect	—
Management fees	(0.7)
Performance fee	(0.4)
Interest payable	—
Other expenses	(0.2)
Total	2.7

(1) Source: Datastream

Performance attribution analyses the Company’s net asset value performance relative to its benchmark.

Portfolio outperformance measures the relative effect of the Company’s investment portfolio against that of its benchmark.

Net gearing effect measures the impact of borrowings less any cash balances on the Company’s relative performance. This is nil where there is no gearing in a year.

Management fees, performance fee and other expenses reduce the level of assets and therefore result in a negative effect for relative performance. There are no fees or expenses imputed to the benchmark index.

Investment Strategy

Our investment strategy remains unchanged. The current portfolio comprises around 80 stocks with the sector weightings being determined by where we are finding attractive companies at a given time, rather than by allocating assets according to a “top down” view of the economy. We continue to seek growing businesses, which have the potential to be significantly larger in the medium term. These tend to be companies that either have great products or services, that can enable them to take market share off their competitors, or companies that are exposed to higher growth niches within the UK economy or overseas. We prefer to invest in cash generative businesses that can fund their own expansion, although we are willing to back strong management teams by providing additional capital to invest for growth.

The sustainability of returns and profit margins is vital for the long term success of a company. The assessment of a business’ position within its supply chain and a clear understanding of how work is won and priced, are key to determining if a company has “pricing power”. It is also important to determine which businesses possess unique capabilities, in the form of intellectual property, specialist know-how or a scale advantage in their chosen market. We conduct around 350 company meetings and site visits a year, and these areas are a particular focus for us on such occasions.

Currently just under a third of our portfolio is invested in the highly diverse industrials sector. We continue to favour companies such as Johnson Service, which benefits from market leading positions in workwear and linen hire. Its scale ensures it has a greater customer density on its logistic routes, giving the company a cost advantage over smaller competitors. Management leverage this position by acquiring smaller competitors and consolidating them into its existing business, thereby driving further efficiencies.

Around a quarter of the portfolio is invested in the consumer goods and services sectors. There is some concern regarding consumer spending in the wake of Brexit, due to a weaker currency putting upward pressure on the cost of living. It is not all bad news however, with the increased minimum wage and decreasing tax burden on low earners providing an offset. Although the sector has had a poor year in general, it has been a strong contributor to our portfolio due to stock selection. We believe that companies such JD Sports Fashion, will continue to prosper. Its growth has been driven by the current fashion trend for “athleisure wear” and a strong performance from the stores it is rolling out in Europe. The company has a considerable opportunity to continue its overseas expansion, and is seen as a key strategic partner by the large sportswear brands such as Nike and Adidas.

Financials, technology and healthcare each account for around 10% of the portfolio. Within financials, we are finding value in the real estate sector. Companies such as Workspace, which provides high quality, flexible office space to small growing businesses, offers significant growth potential from redevelopments and increasing rental income. The stock can be bought at a large discount to asset value, despite carrying minimal debt on its balance sheet. In technology, we continue to hold FDM, which is growing strongly in the UK and US. Its model of training graduates in an IT specialism before placing them with blue chip clients is proving very popular. In the healthcare sector, veterinary drug specialist Dechra Pharmaceuticals remains our largest holding. Prospects for the business, which has produced excellent returns over many years, continue to look positive following the recent acquisition of US branded generic pharmaceutical business Putney. The company has extended its reach well beyond the UK in recent years, allowing it to market its products to a significantly larger customer base.

Outlook

The global economy is in reasonable shape. Both Japan and the Eurozone are experiencing a pick-up in economic growth, and the reflationary rhetoric emanating from the US suggests the potential for high growth there too. The UK economy has shrugged off the Brexit uncertainty so far and, although we are likely to experience increased inflation over the coming year, the continued record levels of employment should be supportive of consumer confidence. Exporting businesses should continue to benefit from weak sterling and the weak currency also increases the attractiveness of UK business to overseas acquirers. In the event of an economic downturn, the Government appears ready to stimulate the economy through increased infrastructure spending. So, notwithstanding political interference, the economic backdrop looks reasonably favourable.

There is no doubt that we are in a period of heightened political uncertainty. A combination of the UK “snap” election, protracted Brexit negotiations, the possibility now raised of a second Scottish referendum, key elections in France and Germany and the potential for significant changes in the US approach to global trade could lead to increased volatility within equity markets. Our investment approach seeks out companies that can shape their own destiny rather than rely on general market growth – for example through self-help, consolidating fragmented markets or through exposure to areas of structural growth. We believe that these kinds of businesses are well positioned to navigate current variable politico-economic conditions. We continue to find plenty of opportunities to invest in good quality, growing businesses trading at reasonable valuations, and we remain hopeful of continued positive performance over the coming year.

Jonathan Brown
Portfolio Manager

Robin West
Deputy Portfolio Manager

The Strategic Report was approved by the Board of Directors on 26 April 2017.

Invesco Asset Management Limited
Company Secretary

INVESTMENTS IN ORDER OF VALUATION
at 31 JANUARY 2017

Ordinary shares unless stated otherwise

		MARKET
		VALUE	% OF
ISSUER	SECTOR	£’000	PORTFOLIO
JD Sports Fashion	General Retailers	7,257	3.1
CVSAIM	General Retailers	7,071	3.0
Dechra Pharmaceuticals	Pharmaceuticals & Biotechnology	6,102	2.6
Sanne	Support Services	5,574	2.4
Johnson Service AIM	Support Services	5,468	2.3
boohoo.com AIM	General Retailers	5,087	2.2
FDM	Software & Computer Services	5,066	2.2
Coats	General Industrials	4,934	2.1
Clinigen AIM	Pharmaceuticals & Biotechnology	4,900	2.1
RPC	General Industrials	4,841	2.1
Top Ten Holdings		56,300	24.1
Keywords Studios AIM	Support Services	4,722	2.0
4imprint	Media	4,701	2.0
Safestore	Real Estate Investment Trusts	4,453	1.9
Consort Medical	Health Care Equipment & Services	4,409	1.9
Victrex	Chemicals	4,335	1.8
EMIS AIM	Software & Computer Services	4,286	1.8
Equiniti	Support Services	3,928	1.6
Ultra Electronics	Aerospace & Defence	3,804	1.6
RWS AIM	Support Services	3,774	1.6
Northgate	Support Services	3,764	1.6
Top Twenty Holdings		98,476	41.9
Faroe Petroleum AIM	Oil & Gas Producers	3,691	1.6
Euromoney Institutional Investor	Media	3,672	1.6
JD Wetherspoon	Travel & Leisure	3,558	1.5
Gamma Communications AIM	Mobile Telecommunications	3,493	1.5
Diploma	Support Services	3,485	1.5
Vectura	Pharmaceuticals & Biotechnology	3,466	1.5
Hill & Smith	Industrial Engineering	3,455	1.5
Severfield	Industrial Engineering	3,445	1.5
Ithaca Energy AIM	Oil & Gas Producers	3,330	1.4
Savills	Real Estate Investment & Services	3,311	1.4
Top Thirty Holdings		133,382	56.9
Mears	Support Services	3,248	1.4
Rathbone Brothers	Financial Services	3,156	1.3
SDL	Software & Computer Services	3,119	1.3
ECO Animal Health AIM	Pharmaceuticals & Biotechnology	3,031	1.3
Hilton Food	Food Producers	3,001	1.3
Servelec	Software & Computer Services	2,986	1.3
Staffline AIM	Support Services	2,983	1.3
Essentra	Support Services	2,981	1.3
Tarsus	Media	2,969	1.3
Amerisur Resources AIM	Oil & Gas Producers	2,880	1.2
Top Forty Holdings		163,736	69.9
VP	Support Services	2,819	1.2
St. Modwen Properties	Real Estate Investment & Services	2,705	1.1
Marston’s	Travel & Leisure	2,672	1.1
Polypipe	Construction & Materials	2,632	1.1
M&C Saatchi AIM	Media	2,606	1.1
Bovis Homes	Household Goods & Home Construction	2,599	1.1
Fisher (James) & Sons	Industrial Transportation	2,576	1.1
Dairy Crest	Food Producers	2,573	1.1
Advanced Medical Solutions AIM	Health Care Equipment & Services	2,568	1.1
Arrow Global	Financial Services	2,553	1.1
Top Fifty Holdings		190,039	81.0
Softcat	Software & Computer Services	2,545	1.1
Brooks Macdonald AIM	Financial Services	2,452	1.0
Secure Trust Bank	Banks	2,412	1.0
Workspace	Real Estate Investment Trusts	2,408	1.0
Sthree	Support Services	2,216	0.9
Aveva	Software & Computer Services	2,130	0.9
Restore AIM	Support Services	2,116	0.9
Brammer	Support Services	1,973	0.8
Majestic Wine AIM	General Retailers	1,930	0.8
Ricardo	Support Services	1,925	0.8
Top Sixty Holdings		212,146	90.2
Topps Tiles	General Retailers	1,900	0.8
CLS	Real Estate Investment & Services	1,867	0.8
Microgen	Software & Computer Services	1,828	0.8
Crest Nicholson	Household Goods & Home Construction	1,746	0.7
Cape	Oil Equipment, Services & Distribution	1,704	0.7
Patisserie Holdings AIM	Travel & Leisure	1,596	0.7
Ebiquity AIM	Media	1,565	0.7
E2V Technologies	Electronic & Electrical Equipment	1,340	0.6
Revolution Bars	Travel & Leisure	1,335	0.6
Carpetright	General Retailers	1,301	0.6
Top Seventy Holdings		228,328	97.2
Kainos	Software & Computer Services	1,172	0.5
Luceco	Electronic & Electrical Equipment	1,095	0.4
Digital Barriers AIM	Support Services	967	0.4
Young & Co’s Brewery – Non-Voting AIM	Travel & Leisure	893	0.4
Urban & Civic	Real Estate Investment & Services	820	0.3
Origin Enterprises	Food Producers	705	0.3
Earthport AIM	Software & Computer Services	533	0.2
Tracsis AIM	Software & Computer Services	481	0.2
Avon Rubber	Aerospace & Defence	322	0.1
Total Investments (79)		235,316	100.0

AIM: Investments quoted on AIM

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

in respect of the preparation of the Annual Financial Report

The Directors are responsible for preparing the annual financial report in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under the law the Directors have elected to prepare financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

•         select suitable accounting policies and then apply them consistently;

•         make judgements and estimates that are reasonable and prudent;

•         state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; and

•         prepare the financial statements on the going concern basis unless it is inappropriate to 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 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.

Under applicable law and regulations, the Directors are also responsible for preparing the Strategic Report, a Corporate Governance Statement, a Directors’ Remuneration Report and a Directors’ Report that comply with the law and regulations.

The Directors of the Company each confirm to the best of their knowledge, that:

•         the financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

•         this annual financial report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces.

The Directors consider that this annual financial report, 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.

Signed on behalf of the Board of Directors

Ian Barby
Chairman
26 April 2017

STATEMENT of comprehensive income
FOR THE YEAR ENDED 31 JANUARY

		2017			2016
		REVENUE	CAPITAL	TOTAL	REVENUE	CAPITAL	TOTAL
	NOTES	£’000	£’000	£’000	£’000	£’000	£’000
Profits on investments held at fair value		—	39,171	39,171	—	19,288	19,288
Exchange differences		—	3	3	—	45	45
Income	2	4,523	691	5,214	5,331	28	5,359
Investment management fee	3	(213)	(1,206)	(1,419)	(207)	(1,175)	(1,382)
Performance fee	3	—	(969)	(969)	—	(2,131)	(2,131)
Other expenses		(385)	(1)	(386)	(344)	(4)	(348)
Profit before finance costs and taxation		3,925	37,689	41,614	4,780	16,051	20,831
Finance costs		(1)	(3)	(4)	(1)	(5)	(6)
Profit before taxation		3,924	37,686	41,610	4,779	16,046	20,825
Taxation		—	—	—	—	—	—
Profit after taxation		3,924	37,686	41,610	4,779	16,046	20,825
Return per ordinary share
Basic	4	7.37p	70.83p	78.20p	8.98p	30.16p	39.14p

The total column of this statement represents the Company’s Statement of Comprehensive Income, prepared in accordance with International Financial Reporting Standards. The profit after tax is the total comprehensive income for the year. The supplementary revenue and capital columns are both prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations and the Company has no other gains or losses. No operations were acquired or discontinued in the year.

STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 JANUARY

				Capital
		Share	SHARE	redemption	CAPITAL	REVENUE
		Capital	PREMIUM	RESERVE	RESERVE	RESERVE	TOTAL
	NOTES	£’000	£’000	£’000	£’000	£’000	£’000
At 31 January 2015		10,642	21,244	3,386	155,767	5,875	196,914
Profit for the year		—	—	—	16,046	4,779	20,825
Dividends paid	5	—	—	—	(589)	(9,493)	(10,082)
At 31 January 2016		10,642	21,244	3,386	171,224	1,161	207,657
Profit for the year		—	—	—	37,686	3,924	41,610
Dividends paid	5	—	—	—	(2,831)	(4,833)	(7,664)
At 31 January 2017		10,642	21,244	3,386	206,079	252	241,603

The accompanying notes are an integral part of these financial statements.

BALANCE SHEET
FOR THE YEAR ENDED 31 JANUARY

		2017	2016
	NOTES	£’000	£’000
Non-current assets
Investments held at fair value through profit or loss		235,316	199,237
Current assets
Other receivables		253	845
Cash and cash equivalents		7,408	10,186
		7,661	11,031
Total assets		242,977	210,268
Current liabilities
Other payables		(1,374)	(2,503)
Total assets less current liabilities		241,603	207,765
Non-current liabilities		—	(108)
Net assets		241,603	207,657
Issued capital and reserves
Share capital	6	10,642	10,642
Share premium		21,244	21,244
Capital redemption reserve		3,386	3,386
Capital reserve		206,079	171,224
Revenue reserve		252	1,161
Total shareholders’ funds		241,603	207,657
Net asset value per ordinary share
Basic	7	454.1p	390.3p

These financial statements were approved and authorised for issue by the Board of Directors on 26 April 2017.

Signed on behalf of the Board of Directors

Ian Barby
Chairman

Richard Brooman
Deputy Chairman

The accompanying notes are an integral part of these financial statements.

STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 january

	2017		2016
	£’000		£’000
Cash flow from operating activities
Profit before tax	41,610		20,825
Adjustments for:
Purchases of investments		(46,937) 50,323		(67,678) 77,779
Sales of investments
	3,386		10,101
Profits on investments	(39,171)		(19,288)
Exchange differences	(3)		(45)
Finance costs	4		6
Operating cash flows before movements in working capital	5,826		11,599
Decrease/(increase) in receivables	74		(73)
(Decrease)/increase in payables	(1,013)		705
Net cash flows from operating activities after tax	4,887		12,231
Cash flows from financing activities
Finance costs paid	(4)		(6)
Equity dividends paid – note 5	(7,664)		(10,082)
Net cash used in financing activities	(7,668)		(10,088)
Net (decrease)/increase in cash and cash equivalents	(2,781)		2,143
Exchange differences	3		45
Cash and cash equivalents at the beginning of the year	10,186		7,998
Cash and cash equivalents at the end of the year	7,408		10,186
Reconciliation of cash and cash equivalents to the
Balance Sheet as follows:
Cash held at custodian	1,508		186
Short-Term Investment Company (Global Series) plc, money market fund	5,900		10,000
Cash and cash equivalents	7,408		10,186
Cash flow from operating activities includes:
Dividends received	5,289		5,288
Interest received	—		1

The accompanying notes are an integral part of these financial statements.

NOTES TO THE FINANCIAL STATEMENTS

1.       Principal Accounting Policies

Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the current year and the preceding year, unless otherwise stated. The financial statements have been prepared on a going concern basis. The disclosure on going concern on pages 27 and 28 in the Directors’ Report in the annual financial report forms part of the financial statements.

(a)     Basis of Preparation

(i)      Accounting Standards Applied

The financial statements have been prepared on an historical cost basis, except for the measurement at fair value of investments and derivatives, and in accordance with the applicable International Financial Reporting Standards (IFRS) and interpretations issued by the International Financial Reporting Interpretations Committee as adopted by the European Union. The standards are those endorsed by the European Union and effective as at the date the financial statements were approved by the Board.

Where presentational guidance set out in the Statement of Recommended Practice (SORP) ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’, issued by the Association of Investment Companies in November 2014, as amended in January 2017, is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. The supplementary information which analyses the statement of comprehensive income between items of a revenue and a capital nature is presented in accordance with this.

(ii)     Adoption of New and Revised Standards

New and revised standards and interpretations that became effective during the year had no significant impact on the amounts reported in these financial statements but may impact accounting for future transactions and arrangements.

At the date of authorising these financial statements, the following standards and interpretations, which have not been applied in these financial statements, were in issue but not yet effective (and in some cases had not yet been adopted by the EU).

•         IFRS 9: Financial Instruments (2014) (effective 1 January 2018).

•         Amendments to IAS 7: Disclosure initiative – Statement of Cash Flows (effective 1 January 2017).

The Directors do not expect the adoption of the above standards and interpretations (or any other standards and interpretations which are in issue but not effective) will have a material impact on the financial statements of the Company in future periods.

 2.      Income

This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.

	2017	2016
	£’000	£’000
Income from listed investments
UK dividends	3,754	4,043
UK unfranked investment income	180	249
Scrip dividends	—	244
Overseas dividends	397	302
Special dividends	192	492
	4,523	5,330
Other income
Deposit interest	—	1
Total income	4,523	5,331

Special dividends of £691,000 have been recognised in capital (2016: £28,000).

Overseas dividends include dividends received on UK listed investments where the investee company is domiciled outside of the UK.

3.       Investment Management Fees

This note shows the fees due to the Manager. These are made up of the management fee calculated and paid monthly and a performance fee calculated and paid annually. Both are based on the value of the assets being managed.

	2017			2016
	Revenue	Capital	Total	Revenue	Capital	Total
	£’000	£’000	£’000	£’000	£’000	£’000
Base management fee	213	1,206	1,419	207	1,175	1,382
Performance fee charged to capital	—	969	969	—	2,131	2,131
	213	2,175	2,388	207	3,306	3,513

Details of the Investment Management Agreement can be found in the Directors’ Report.

At 31 January 2017, £131,000 (2016: £113,000) was accrued in respect of the base management fee and £1,077,000 (2016: £2,023,000) was accrued for the performance fee. The performance fee payable in any year is capped at 1% of average funds under management, with any excess (subject to a total performance fee cap of 2%) carried forward. The excess brought forward and provided for last year of £108,000 became payable this year.

  4.     Returns per Ordinary Share

Return per share is the amount of gain generated for the financial year divided by the weighted average number of ordinary shares in issue.

	2017			2016
	Revenue	Capital	Total	Revenue	Capital	Total
Basic	7.37p	70.83p	78.20p	8.98p	30.16p	39.14p

Basic total returns per ordinary share is based on the net total profit for the financial year of £41,610,000 (2016: £20,825,000).

Basic revenue returns per ordinary share is based on the net revenue profit for the financial year of £3,924,000 (2016: £4,779,000).

Basic capital returns per ordinary share is based on the net capital profit for the financial year of £37,686,000 (2016: £16,046,000).

All three returns are based on the weighted average number of shares in issue during the year of 53,209,084 (2016: 53,209,084).

5.       Dividends on Ordinary Shares

The Company paid four dividends in the year – three interims and a final.

The final dividend shown below is based on shares in issue at the record date or, if the record date has not been reached, on shares in issue on the date the balance sheet is signed. The third interim and final dividends are paid after the balance sheet date.

	2017		2016
	pence	£’000	pence	£’000
Dividends paid from revenue in the year:
Third interim (prior year)	2.18	1,160	—	—
Final (prior year)	—	—	11.04	5,875
First interim	3.45	1,836	3.40	1,809
Second interim	3.45	1,836	3.40	1,809
Payment of unclaimed dividends from previous years	—	1	—	—
Total dividends paid from revenue	9.08	4,833	17.84	9,493
Dividends paid from capital in the year:
Third interim (prior year)	1.22	649	—	—
Final (prior year)	4.10	2,182	1.11	589
Total dividends paid from capital	5.32	2,831	1.11	589
Total dividends paid in the year	14.40	7,664	18.95	10,082

   

	2017		2016
	pence	£’000	pence	£’000
Dividends payable in respect of the year:
First interim	3.45	1,836	3.40	1,809
Second interim	3.45	1,836	3.40	1,809
Third interim	3.45	1,836	3.40	1,809
Final	6.75	3,591	4.10	2,182
	17.10	9,099	14.30	7,609

The Company’s dividend policy was changed in 2015 so that dividends will be paid firstly from any revenue reserves available, and thereafter from capital reserves. The amount payable in respect of the year is shown below:

	2017		2016
	pence	£’000	pence	£’000
Dividend payable in respect of the year:
– from revenue reserves	7.37	3,924	8.98	4,778
– from capital reserves	9.73	5,175	5.32	2,831
	17.10	9,099	14.30	7,609

6.       Share Capital

Share capital represents the total number of shares in issue, on which dividends accrue.

	2017		2016
	NUMBER	£’000	NUMBER	£’000
Allotted, called-up and fully paid
Ordinary shares of 20p each	53,209,084	10,642	53,209,084	10,642

During the year, the Company did not issue or repurchase any ordinary shares (2016: nil).

7.       Net Asset Value per Ordinary Share

The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue.

The net asset value per share and the net asset values attributable at the year end were as follows:

	net asset value per share		net assets attributable
	2017	2016	2017	2016
	PENCE	PENCE	£’000	£’000
Ordinary shares
– Basic	454.1	390.3	241,603	207,657

Net asset value per ordinary share is based on net assets at the year end and on 53,209,084 (2016: 53,209,084) ordinary shares, being the number of ordinary shares in issue at the year end.

8.       Related Party Transactions and Transactions with Manager

A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.

Under International Financial Reporting Standards, the Company has identified the Directors as related parties. The Directors’ remuneration and interests have been disclosed on page 33 with additional disclosure in note 4 in the annual financial report. No other related parties have been identified.

Details of the Manager’s services and fees are disclosed in the Directors' Report on page 28 and in note 3 in the annual financial report.

This Annual Financial Report announcement is not the Company's statutory accounts.  The statutory accounts for the year ended 31 January 2016 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 January 2016 received an audit report which was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report, and did not include a statement under either section 498(2) or 498(3) of the Companies Act 2006. The statutory accounts for the financial year ended 31 January 2017 have been approved and audited but have not yet been filed.

The Audited Annual Financial Report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the offices of Invesco Perpetual, 6^th Floor, 125 London Wall, London, EC2Y 5AS.

A copy of the Annual Financial Report will be available from Invesco Perpetual on the following website: 

www.invescoperpetual.co.uk/ipukscit

The Annual General Meeting (AGM) of the Company will be held at 12.00 noon on 8 June 2017 at 43-45 Portman Square, London, W1H 6LY.  A General Meeting will immediate follow the AGM.

By order of the Board
Invesco Asset Management Limited
Company Secretary
26 April 2017

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