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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Gart.Gwth | LSE:GGOR | London | Ordinary Share | GB00B07BP660 | ORD 0.025P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 471.50 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
0 | 0 | N/A | 0 |
TIDMGGOR GARTMORE GROWTH OPPORTUNITIES plc Final Results for the year to 30 June 2010 The following comprises extracts from the Company's Annual Report and Accounts for the year to 30 June 2010. The full Annual Report and Accounts is available to be viewed on or downloaded from the Company's website at http:// www.gartmoregrowthopps.co.uk . Copies will be mailed to shareholders shortly. Annual Report Page 3 Chairman's Statement In the year to 30 June 2010 your Company's net asset value per ordinary share (NAV) increased 19.8% from 410.88p to 492.15p, a good result despite falling back a little from the half year. This compares with an increase in the Company's benchmark, the FTSE SmallCap (ex investment companies) Index, of 16.6%. The Company's share price increased by 23.0% from 379.75p to 467.00p, reflecting a return of the discount to NAV to a generally narrow range after widening during the earlier months of 2009. Our continuing focus on the smaller end of the small-cap universe worked against us in the second half of the year, with the prices of larger mid-cap companies holding up better in the volatile conditions, but we continue to be positioned in this smaller-cap area, where our Manager believes that opportunities remain compelling. The Company's dealing subsidiary, Gartmore GO Dealing Limited, had a strong year capitalising on short-term opportunities and contributed significantly to the consolidated return with a profit of GBP1,227,000. Discounting last year's one-off receipts of refunded VAT from HMRC and interest thereon, revenue has held-up. The Board decided earlier in the year, as announced in December, to allocate 75% of management fees and finance costs to capital with 25% being allocated to the revenue account, instead of 100% being allocated to revenue as previously. This change has not affected the total return for shareholders, but had the effect of increasing the revenue earnings and of reducing the capital return for each Ordinary share in issue at the year-end by approximately 3.3p. The Directors have declared a dividend of 5.375p per Ordinary share for the year, up 25% from last year's ordinary dividend of 4.3p. The dividend will be paid on 30 September. One of our aims this year was to refresh the Board. Accordingly, two new Directors, Ian Dighé and Allan Jenkins were appointed in April. Ian and Allan will add new perspective and experience to the Board's deliberations. Peter Derby, who had been a Director since the launch of the Company in 1991, retired when Ian and Allan were appointed. David Peters, who had been Chairman since launch, had intended to retire after this year's Annual General Meeting, but sadly died in May. We, as the Board and on behalf of the Shareholders, would like to acknowledge the significant contributions to the Company of both David Peters and Peter Derby over the years. On 1 September 2010 the Board was informed that Gervais Williams, lead manager of the Company's portfolio, had resigned and would be leaving Gartmore shortly. The portfolio will continue to be actively managed in the same manner as it has been by the Gartmore UK smaller companies team. The Board is considering the longer-term management arrangements of the Company. An announcement will be made on this in due course. In the meantime, as a precaution and in order to protect shareholders interests, we have served 12 months protective notice to terminate our agreement with Gartmore. The latter half of the financial year has made it clear that, although the global economy has improved markedly, a smooth recovery is by no means assured and may be at risk. This has been reflected in equity markets, with the exuberance of the second and third quarters of 2009 giving way to more volatile markets and mixed fortunes since, particularly amongst smaller companies. Looking forward, although it seems likely that we will experience intermittent increases in market volatility and perhaps fluctuating performance in the near term, our universe is still a source of many opportunities. Valuations are still attractive and with the capital raising activity that has taken place many companies are now in a stronger position than they were a year ago and positioned to pursue opportunities of their own. Likewise, the trend for takeovers seems set to persist, if not increase, for the foreseeable future. . Robert Ware Chairman 8 September 2010 =--------- Annual Report Page 5 Manager's Review Our Objective In simple terms, our job is to generate a good return for shareholders by investing in a portfolio of quoted smaller businesses. To do this we seek to capitalise on the difference between the market perceptions and the underlying reality of the businesses we invest in. Occasionally we anticipate turning points in longer-term market trends and seek to take advantage of these on behalf of shareholders. The last time this occurred was late in 2005 and early in 2006 when we anticipated that a credit crisis was coming up and we "insured" the value of the investment portfolio from March 2006 onwards using put options on the FTSE100 Index. Events subsequently unfolded as we feared, and very substantial profits were taken on the options in October 2008 and the sizable cash profits were invested into additional portfolio holdings ready for the market to recover in 2009. We now have another strong view on future trends in the equity market and have positioned the portfolio to take advantage of this if and when these trends unfold: Our View On Future Market Trends Since 1985 the world economy has grown rapidly. Those who borrowed early and invested have benefited tremendously from extraordinary rises in asset prices since that time. And as others have seen this effect, more and more individuals have been willing to borrow in greater and greater scale. The most obvious example has been housing, but this trend has been evident in all sorts of assets including exchange traded funds (ETFs), commercial property, commodity funds and equities. This has fostered the perception that capital gains on investments are the main driver of total return. In stock market terms this is seen in debates about which specific group of equities are likely to perform strongly next; will it, for instance, be those associated with China or with Gold? The aim of market participants has been to anticipate the right areas at the right time, invest for the capital gains, and then for the "hot money" to move on to another area with similar short-term potential. Income generation, principally in the form of dividends, has received relatively little attention for many years, since frequently these returns have been modest relative to the capital gains. For example, in 2009 the FTSE All-Share price index rose 25% whereas the dividend yield over the year of the shares in the index was only 3.2%. It is our firm view that this pattern is now changing. Governments are now being forced to adopt austerity measures, since they need to bring Government spend back into line with tax revenues. It is widely expected that, partly because of this and partly by a general reduction in credit, future economic growth will be very slow in many countries and regions. Without good economic growth most larger businesses will struggle to grow earnings. The implication is that the world is going "ex-growth" and that stock market indices will not deliver much capital gain in the coming years. Within this context, the prospect of receiving a reliable dividend each year becomes much more important. In particular the power of compounding dividends year after year is often overlooked by investors. We believe that by taking full advantage of this trend over the coming years we will have scope to deliver returns that may be well above those available from other market sectors. We have an ambition to invest in a portfolio of stocks that have the scope to deliver good and growing yields over the coming years. =--------- Annual Report Page 6 If we are successful then we would expect two outcomes: * The first, is that we might be one of a very limited number of funds that actually deliver significant dividend growth over coming years. There is plenty of scope for smaller companies to increase dividends as currently many choose not to pay dividends in spite of the fact that they can afford to do so. Should these companies elect to pay or increase dividends we expect there would be an associated boost in the valuation of their underlying businesses too; and * secondly, the larger income funds, struggling to sustain income from larger quoted businesses, are likely to increasingly allocate a portion of their investment capital down the size bands to smaller companies that generate strong yields and this would also boost the valuations of these small-cap stocks. Positioning The Portfolio For These Trends How can we position the Company's portfolio to take full advantage of these trends? In the coming years we believe that investing in companies with scope to generate sizable amounts of cash will generate some of the best returns. In a world where credit may be constrained, those businesses with strong market positions will be in a hugely advantageous position. They will be able to pay out good and growing dividends to differentiate themselves from a majority of other quoted businesses. And those paying good and growing dividends should have access to the limited amount of available investment capital to buy distressed assets, at a time when few others can compete. The valuations of such acquisitions might be the cheapest in a generation! This is the real advantage of having a public quotation. We have differentiated ourselves from most of our competitor funds. Over the last ten years, the mid-cap stocks have performed well ahead of the FTSE All-Share Index. They have done particularly well as a result of enhancing their returns by borrowing money in the corporate bond market as asset prices rose. Management teams of mid-cap companies that were unwilling to gear up were often acquired by Private Equity so that sizable debt could be introduced thereafter to enhance short-term returns. Almost all of the Smaller Companies investment trusts still have a sizable portion of their assets invested in mid-cap stocks. Our view is that the cash flow in many of these businesses will be used to repay debt. The question arises as to how many small and micro-cap companies have had access to financial instruments as their funding mechanism, never mind built their business model on this basis? Well, small-cap and micro-cap stocks were generally too small to have access to the corporate bond markets and banks have generally sought not to lend to these companies as they were "too fiddly" when compared with large loans for the Private Equity businesses. For this reason many small-cap and micro-cap businesses have remarkably few borrowings. Indeed, a very large number of these companies have no borrowings at all and have surplus cash on their balance sheets. Also, these companies have often been advised that investors are principally looking for capital gain, so that cash generated by the company should be reinvested in the business rather than paid out as dividends. If the forthcoming change in trend unfolds as we expect, many of these businesses will be able and may be inclined to redirect their excess cash flow to paying good and growing dividends. =--------- Annual Report Page 7 For this reason, whilst there are some larger companies that fit our criteria and investment in these is not ruled out, we have focused our attention on these small and micro-cap stocks. Their valuations appear to be low as this sector has suffered from the regular withdrawal of investment capital year after year during the period when gearing and more gearing was fashionable and more recently from a perception that larger companies offer more protection in volatile times. Equally, we anticipate that many have strong market positions in areas that can continue to expand, even in spite of slow economic growth. And finally, we have an expectation that many will be in a position to pay good and growing dividends in the coming years. Key Drivers Of Performance During The Last Year Over the past twelve months the Company's NAV has increased 19.8%, while the Company's benchmark, the FTSE SmallCap (excluding investment companies) Index rose 16.6%. We benefited from our exposure to AIM-listed companies, with the FTSE AIM All-Share outperforming the FTSE SmallCap (excluding investment companies) Index with a return of 24.9%. Returns of this magnitude are considerably above those that should be anticipated in a low inflation world. How have they been achieved? There was considerable divergence between sectors and companies during the year, with chemicals and electronics delivering the highest returns within the benchmark index. The largest contributions to index returns overall, factoring in sector size, came from the sharp recovery of some of the larger sectors such as real estate, support services and financial services. Within the index particular weakness was found in pharmaceuticals, although much of this came down to Antisoma, which fell by more than 75% in March alone after reporting that one of its biggest hopes for commercial development, a lung cancer drug, had failed to perform in late-stage clinical trials. We did not have a holding in Antisoma at the time and on the whole our pharmaceutical holdings performed well. Retailers were also weak, with concerns about consumer demand in the medium term. Technology company Morse was the top contributor to the growth in NAV over the past year. Morse started off strongly with a positive earnings update last July and confirmation that a preliminary approach to buy the company at 25p per share had been made. This offer was rejected but positive news continued to flow and during October it reported a return to operating profitability over the third quarter despite lower revenues. Towards the end of the financial year Morse was acquired by 2e2 for a substantial premium over our original investment. The offer from 2e2 was at 51p (double the offer of 25p rejected last year) and at a 24% premium to the closing price before the news broke. Another strong performer was Nestor Healthcare, which provides staffing solutions to the health and social care market. We have held an interest in Nestor for some time, with our original purchase triggered by a very sharp fall (over 50%) in its share price in November 2007 after a profits warning. This caused it to drop out of the FTSE All-Share Index, which led to substantial index fund selling. This decline left the company's shares severely undervalued and offered active investors the opportunity to purchase it in size at a price that offered the prospect of substantial reward, whilst putting only a small amount of capital at risk. Since the end of 2007 Nestor has substantially outperformed the FTSE SmallCap (ex investment companies) Index. In early 2008 the shares performed particularly well after the company confirmed it had received indications of takeover interest. Most recently, despite Nestor reporting a drop in full-year profits in March, the positive outlook for 2010 boosted the share price and significant director acquisitions lent additional support. =--------- Annual Report Page 8 The portfolio's performance relative to the index also benefited from our lack of exposure to many of its weakest performers. The most significant of these were Southern Cross Healthcare and UK Coal, neither of which were in the portfolio. However, there was weakness among several of our larger positions too, which weighed on returns: One of the largest detractors was Pace, the share price of which has fallen in the absence of an earnings upgrade. We made considerable investment gains from this holding in the financial year to June 2009 when it was one of the best performers in the portfolio and we continue to believe that the investment case remains strong - Pace is still an attractive company with a compelling valuation. We sold a little of the holding around its peak price in September in order to reinvest some of the gains into new ideas, but still retain a significant position. BATM Advanced Communications, in which the portfolio is overweight relative to the benchmark, performed well over the first half of the financial year, but then dropped back considerably. The decline stemmed from a drop in profits, which was expected, accompanied by small downgrades. Its difficulties are, however, confined to the telecoms division and its medical division is prospering. With half of its market capital in cash, the valuation is extreme so we retain a position, cognisant that the anticipated return has been deferred. Another detractor was Penna Consulting. The share price of Penna Consulting, which provides career transition when large numbers of employees are made redundant, slipped over the past six months, although we believe prospects for their services remains strong. Penna is a good example of a company that is well placed to generate sizable amounts of cash from its operations, especially in adverse economic times, and has been exemplary in paying good and growing dividends in recent years. Prospects We are somewhat conservative in our outlook at the moment, as we wait for the impact of the new government's austerity changes. However, we believe the companies in the portfolio are well placed to deliver sizable cash flows in the coming years and that these may be paid out in good and growing dividends. We also hold a limited number of companies where there is potential for an event that could transform their prospects and where Gartmore Growth Opportunities plc's shareholders would be rewarded with a sizable appreciation of the share price. Gartmore Growth Opportunities plc is different from most other Smaller Company investment trusts in that the portfolio holds a large number of small-cap and micro-cap stocks and less exposure to mid-caps. We anticipate that the portfolio can deliver particularly attractive returns in the coming years. In the last ten years the FTSE SmallCap (excluding investment companies) Index has underperformed the FTSE250 Index (representing mid-cap shares) by a sizable amount. If the very long-term trend is re- established as we anticipate, then, in general, the smaller the market capitalisation, the better the total return. We anticipate that our portfolio can deliver premium returns for a number of years in this scenario. . Gartmore Investment Limited 8 September 2010 =--------- Annual Report Page 9 Financial Statistics At 30 June At 30 June Change 2010 2009 % Shareholders' Funds: Net Assets (GBP'000) 54,500 48,094 +13.3 Net Asset Value per Ordinary share 492.15p 410.88p +19.8 Share Price: Market Capitalisation (Ordinary shares GBP 51,715 44,450 +16.3 '000) Mid-Market Price 467.00p 379.75p +23.0 (Discount) (5%) (8%) 631,176 Ordinary shares were redeemed during the year, at a cost of GBP3,304,000. (2009: 2,726,129 Ordinary shares were redeemed at a cost of GBP8,796,000). Benchmark Index: FTSE SmallCap (excluding investment 2205.40 1891.40 +16.6 companies) Index Gearing (expressed as a percentage of Net Assets): Potential Gearing 11.2% 13.3% Actual Gearing 0.0% 2.5% Potential gearing is the maximum level of gearing that would be achieved if all existing loan facilities were fully drawn. Total Return per Ordinary Share:* Revenue 16.84p 7.75p Capital 73.47p 40.57p Total Return per Ordinary Share 90.31p 48.32p *Based on weighted average of 11,568,620 (2009: 12,959,428) Ordinary shares in issue during the year. Total Expense Ratio 1.5% 1.7% Dividend per Ordinary share for year 5.375p 4.30p =--------- Annual Report Page 10 Principal Investments Valuation at Percentage Sector 30 June 2010 Of Company Classification GBP'000 Portfolio Management Consulting Group Support Services 1,343 2.8 Pace Technology Hardware & 1,299 2.7 Equipment Nestor Healthcare Health Care Equipment & 1,240 2.6 Services BATM Advanced Technology Hardware & 1,194 2.5 Communications Equipment Juridica Investments Financial Services 1,136 2.4 Penna Consulting Support Services 1,083 2.3 Innovation Group Software & Computer 1,074 2.3 Services Oakley Capital Investments Financial Services 894 1.9 Renovo Group Pharmaceuticals & Biotech. 876 1.8 MWB 9.75% 9/12 Corporate Bonds 865 1.8 MBL Group | Media 711 1.5 Menzies (John) Support Services 709 1.5 Assetco | Support Services 685 1.4 Cathay International Real Estate & Investment 682 1.4 Services Sandvine | Health Care Equipment & 678 1.4 Services MDM Engineering Group | Industrial Engineering 670 1.4 Allocate Software | Software & Computer 579 1.2 Services Northgate Support Services 570 1.2 NXT Leisure Goods 531 1.1 Iomart Group | Software & Computer 528 1.1 Services Norcon Support Services 522 1.1 Powerflute Forestry & Paper 511 1.1 Stadium Group | Electronic & Electrical 497 1.0 Equipment Elementis Chemicals 496 1.0 Collins Stewart Financial Services 492 1.0 Lavendon Group Support Services 481 1.0 Nanoco Group | Technology Hardware & 479 1.0 Equipment Brammer Support Services 462 1.0 Communisis Support Services 457 1.0 Innovision Research & Technology Hardware & 451 0.9 Technology | Equipment Renold Industrial Engineering 449 0.9 Sportingbet Travel & Leisure 441 0.9 REA 9% Pref Food Producers 429 0.9 KBC Advanced Technologies | Oil Equipment & Services 423 0.9 Acal Support Services 422 0.9 Sportech Travel & Leisure 417 0.9 McBride Household Goods 407 0.9 eServGlobal | Software & Computer 399 0.8 Services Origin Enterprise | Food Producers 399 0.8 Sinclair (William) Holdings Household Goods 397 0.8 | Conygar Investment | Real Estate & Investment 386 0.8 Services Paragon Group Financial Services 377 0.8 ORA Capital Partners | Financial Services 368 0.8 Regenersis | Support Services 366 0.8 Sepura Technology Hardware & 363 0.8 Equipment Trifast Industrial Engineering 360 0.8 Acta | Electronic & Electrical 339 0.7 Equipment E-Therapeutics | Pharmaceuticals & Biotech. 338 0.7 Zotefoams Chemicals 328 0.7 Vitec Leisure Goods 322 0.7 Fifty Largest Investments 29,925 62.7 The value of the portfolio of investments on which the table is based was GBP 47,701,000. The total number of investments at 30 June 2010 was 172. | Alternative Investment Market. =--------- Annual Report Page 11 Sector Classification and Weightings of Equity Investments Portfolio Index* at 30 June 2010 At 30 June 2010 Sector GBP'000 % % Oil & Gas Oil & Gas Producers 457 1.0 1.7 Oil Equipment & Services 891 1.9 - Alternative Energy 384 0.8 0.5 1,732 3.7 2.2 Basic Materials Chemicals 1,644 3.4 2.6 Forestry & Paper 660 1.4 - Industrial Metals - - 0.5 Mining 426 0.9 2.1 2,730 5.7 5.2 Industrials Aerospace & Defence - - 1.6 Construction & Materials 531 1.1 4.4 Electronic & Electrical Equipment 1,192 2.5 3.0 General Industrials 405 0.8 1.4 Industrial Engineering 2,479 5.2 2.9 Industrial Transportation 83 0.2 3.9 Support Services 9,229 19.4 15.8 13,919 29.2 33.0 Consumer Goods Automobile & Parts - - - Beverages - - - Food Producers 1,191 2.5 3.8 Household Goods 1,041 2.2 1.2 Leisure Goods 852 1.8 0.6 Personal Goods - - - Tobacco - - - 3,084 6.5 5.6 Health Care Health Care Equipment & Services 1,664 3.5 1.1 Pharmaceuticals & Biotechnology 2,388 5.0 3.4 4,052 8.5 4.5 Consumer Services Food & Drug Retailers 71 0.1 0.9 General Retailers 110 0.2 4.9 Media 2,459 5.2 5.8 Travel & Leisure 1,727 3.6 4.3 4,367 9.1 15.9 Telecommunications Fixed Line Telecommunications - - 1.9 Mobile Telecommunications - - - - - 1.9 Utilities Electricity 525 1.1 - Gas, Water & Multiutilities - - - 525 1.1 - Financials Banks - - - Equity Investment Instruments 94 0.2 2.7 General Financial 5,805 12.2 6.4 Life Insurance - - 1.6 Non-life insurance 448 0.9 2.7 Real Estate 2,090 4.4 10.3 8,437 17.7 23.7 Technology Software & Computer Services 4,077 8.5 5.9 Technology Hardware & Equipment 4,778 10.0 2.1 8,855 18.5 8.0 TOTAL 47,701 100.0 100.0 * FTSE SmallCap (excluding investment companies) Index =--------- Annual Report Page 12 Analysis of Net Assets and Shareholders Funds Valuation at Net Appreciation/ Valuation at 30 June 2009 Transactions (Depreciation) 30 June 2010 GBP'000 % GBP'000 GBP'000 GBP'000 % Equities Oil & Gas 3,794 7.9 (3,778) 1,716 1,732 3.2 Basic Materials 3,291 6.8 (1,302) 741 2,730 5.0 Industrials 13,436 27.9 (1,578) 2,061 13,919 25.5 Consumer Goods 2,070 4.3 834 180 3,084 5.7 Health Care 4,487 9.3 (2,377) 1,942 4,052 7.4 Consumer Services 3,399 7.1 859 109 4,367 8.0 Telecommunications 407 0.9 (657) 250 - - Utilities 455 0.9 184 (114) 525 1.0 Financials 3,949 8.2 3,069 475 7,493 13.8 Technology 11,286 23.5 (4,432) 1,945 8,799 16.1 46,574 96.8 (9,178) 9,305 46,701 85.7 Convertibles/Corporate 1,036 2.2 55 (91) 1,000 1.8 Bonds 47,610 99.0 (9,123) 9,214 47,701 87.5 Current Assets 2,280 4.7 4,733 - 7,013 12.9 including cash Total Assets 49,890 103.7 (4,390) 9,214 54,714 100.4 Liabilities (1,796) (3.7) 1,518 64 (214) (0.4) Net Assets 48,094 100.0 (2,872) 9,278 54,500 100.0 Attributable to 48,094 100.0 (4,041)* 10,447| 54,500 100.0 Ordinary shareholders * Represents GBP3,304,000 paid in respect of shares redeemed and equity dividends paid of GBP737,000. | Total return for the year. =--------- Annual Report Page 15 Report of the Directors The Directors submit their Report and the Accounts for the year ended 30 June 2010. The Corporate Governance Statement on pages 25 to 31 forms part of the Report of the Directors. Business Review The Business Review has been prepared in accordance with the Companies Act 2006 and should be read in conjunction with the Chairman's Statement on page 3, the Managers Review on pages 5 to 8 and the analyses on pages 9 to 12. Nature and Status The Company is an investment trust company and a member of The Association of Investment Companies. It is registered as a public limited company (Registration number 2600028 England and Wales) and is an investment company as defined by section 833 of the Companies Act 2006. The Company has a wholly-owned subsidiary, Gartmore GO Dealing Limited, which trades in shares and securities. The Company was last approved by HM Revenue & Customs (HMRC) as an investment trust under Section 1158 of the Corporation Tax Act 2010 in respect of the year ended 30 June 2009. This approval is subject to there being no subsequent enquiry under corporation tax self-assessment. The Company has been approved as an investment trust for all previous years. Since 30 June 2009, the Company has directed its affairs so as to be able to continue to qualify for approval by HMRC as an investment trust for tax purposes. The close company provisions of the Income and Corporation Taxes Act 1988 do not apply to the Company. Investment Objective The Company seeks capital appreciation from investment primarily in the shares of quoted UK smaller companies and aims to be one of the leading investment trusts in its sector. Investment Policy Asset Allocation: The Company mainly invests in UK smaller companies, with a wide range of market capitalisations, targeting sustained returns even in difficult markets. A number of the UK smaller companies within the portfolio may therefore be outside the universe of the benchmark index when it is believed this will increase shareholder value. Whilst the majority of investments are equities, other instruments such as warrants and convertible and non-convertible securities (including preference shares and loan stocks) may be used. Cash and derivative instruments (such as futures and options) may also be utilised for efficient portfolio management and as part of investment strategy, not only as a short-term measure. In addition, the Company's trading subsidiary targets absolute returns in order to enhance shareholder returns under a broader range of market conditions and to offer further downside protection to the portfolio as a whole. Risk Diversification: Portfolio risk is mitigated by investing in a diversified spread of investments. In compliance with section 1159 Corporation Tax Act 2010 investments in any one company, other than holdings in another investment company, shall not, on acquisition, exceed 15% of the portfolio value. Gearing: The Company will make use of borrowings when it is considered that gearing will enhance total returns. The Company has bank borrowing facilities in place and the Board currently has a policy that gearing shall not exceed 20% of the value of Net Assets. =--------- Annual Report Page 16 Benchmark Index Performance is measured against the FTSE SmallCap (excluding investment companies) Index. The Company sources index and price data from Thomson Reuters Datastream. Performance Please refer to the Manager's Review on pages 5 to 8 for an overview of the Company's investment activities in the year and to the analyses on pages 9 to 12. These, together with this Business Review, illustrate how the Group's assets have been invested with a view to spreading investment risk in accordance with the Group's published investment policy. The Directors consider that the key indicator of the Group's performance is the movement of the net asset value per Ordinary share compared with the movement of the Benchmark Index. Net asset value per share increased 19.8% in the year under review (2009: 16.1% increase) compared with a rise in the Index of 16.6% (2009: decrease of 24.2%). The mid-market price of the Company's Ordinary shares rose 23.0% (2009: 15.1% rise). As regards the principal contributors to the year's performance, in common with the Company's benchmark, holdings in the chemicals and electronics sectors delivered particularly strong returns, as did our support services holdings, although here we were underweight and consequently underperformed relative to the benchmark. Technology related sectors and Health Care also contributed strongly to our returns, and in these we were overweight relative to the index and consequently made relatively better returns. At the stock level, Morse and Nestor Healthcare stand out amongst a number of strong performers and relative to the benchmark we benefitted from not holding some constituents that performed poorly, such as Antisoma. Since investment in an investment trust company is generally considered to be for longer-term returns it is also relevant to consider performance over a longer period. Over the last three, five and ten years the Net asset value per share increased, respectively, by 10.8%, 56.6% and 78.5% compared with decreases in the index for those periods of -43.0%, -23.4% and -33.5%. The mid-market price of the Company's Ordinary shares increased 7.6%, 60.2% and 116.2% over the same periods. Financial Position and Finance Net Assets at 30 June 2010 amounted to GBP54,500,000, compared with GBP48,094,000 at 30 June 2009. In the financial year 631,176 Ordinary shares, being 5.4% of the shares in issue at 30 June 2009, were redeemed, with matching buyers having been found for a further 845,440 shares that had been submitted for redemption. The Company's equity share capital at the year-end comprised 11,073,864 fully paid up Ordinary shares of 0.025p (2009: 11,705,040 Ordinary shares). The Company also has 50,000 Management shares of GBP1 in issue which are paid up to 25p each and are treated as long-term debt on the balance sheet. All of the Company's investments are listed on recognised exchanges and are realisable within a relatively short period. At 30 June 2010 the Group had no outstanding bank loans (2009: short-term bank borrowing of GBP900,000). The most stringent covenant applying to gearing is a requirement that the Group's indebtedness should not exceed 25% of Net Assets. If the whole of the borrowing facilities had been drawn at 30 June 2010 Group indebtedness would have been approximately 11% of Net Assets. =--------- Annual Report Page 17 The Group made a net revenue profit in the year, after expenses and taxation, of GBP1,948,000, compared with a profit of GBP1,004,000 for the previous year. The strong result of the Company's trading subsidiary, Gartmore GO Dealing Limited, contributed a profit of GBP1,227,000 to this Group result (2009: GBP92,000 profit). Dividend income was similar to last year, with last year's result having been bolstered by a substantial refund of VAT and associated interest. The Company's ratio of annual expenses to average year-end net assets (TER) for the year was 1.5% (2009: 1.7%). The following costs are excluded from the annual expenses used to calculate the TER: transaction costs of GBP284,000 (2009: GBP267,000); interest on borrowings of GBP49,000 (2009: GBP67,000); and tax. The Directors have declared an increased dividend of 5.375p for the year, (2009: 4.3p) which will be paid on 30 September 2010. Gearing The Managers are authorised to borrow money to make additional investments on top of shareholders' funds (gearing) and flexible borrowing facilities are available for that purpose. These comprise a committed facility of up to GBP3 million and an uncommitted facility for a further GBP3 million, each provided by The Bank of New York Mellon. These facilities were used to varying degrees during the course of the year. At the year-end there were no drawings on these facilities (2009: GBP900,000 drawn on the committed facility). The Directors currently have a policy that gearing under these facilities shall not exceed 20% of the value of Net Assets. Additionally, the Company has a GBP100,000 Royal Bank of Scotland overdraft facility which can be used for normal business purposes and short-term settlement mismatches. Socially Responsible Investment The Company has delegated responsibility for making and holding investments to the Manager, Gartmore lnvestment Limited, on the basis that, subject to an overriding requirement to pursue the best economic interests of the Company and its shareholders, the Manager should take account of social, environmental and ethical factors. Future Trends Although we are cautious on a short-term view with continuing sovereign debt concerns and uncertainty as to the impact of the new government's austerity changes, longer-term prospects for many smaller companies continue to be positive. This is reflected in rising corporate activity and our Manager continues to find attractive opportunities to invest. Principal Risks and Uncertainties The Board's policy on risk management has not changed from last year. As expanded on pages 30 and 31 the Directors have put in place processes to identify and manage significant risks to the company, including internal controls to minimise operational risks. The main areas of risk, in the opinion of the Board, are summarised below and are further discussed in Note 26 to the Accounts on pages 56 to 59: Market Risk Since the Company is an investment company its performance is dependent on the performance of the companies and market sectors in which it invests. Investment risk is spread by holding a diversified portfolio that normally comprises around 200 holdings, however a significant proportion of these holdings may not be represented in the benchmark index. At their regular meetings, the Directors and the Manager review the Company's activities and performance, and determine investment strategy. =--------- Annual Report Page 18 Gearing With its current credit facilities the Company has the ability to gear up to around 11% of the Group's net assets. Gearing will magnify portfolio returns per share, be they positive or negative. The potential for bank gearing to have a negative impact is limited by the short-term revolving (usually weekly) nature of drawings on the bank loan facilities combined with the reasonable level of liquidity of the investments in the portfolio. Other Financial Risks The Company minimises the risk of a counter party failing to deliver securities or cash by dealing through organisations that have undergone rigorous due diligence by the Manager. The Group holds its liquid funds almost entirely in UK interest bearing bank accounts or on short term deposit and has arranged flexible borrowing facilities to accommodate foreseeable liquidity requirements. This, together with the portfolio being invested in quoted securities, mitigates the Company's exposure to liquidity risk. Internal Control As expanded on pages 30 and 31 the Board keeps under review the risks facing the Company and minimises operational risks through its arrangements with service providers, whose services and internal controls it regularly reviews. Discount Management The Company's capital structure was altered in June 2005 to provide shareholders with a quarterly opportunity to request redemption of their shares. Redemption is subject to certain limitations and the Directors exercising their discretion. The redemption value, which is termed the Dealing Value, is close to net asset value, being based upon the realisation value of the portfolio, less costs and an exit charge of 2% that is retained by the Company. As a result, the shares tend to trade at a narrow discount during normal market conditions. The financial year to June 2009 saw extreme volatility and the Company's discount widened in the unsettled conditions. In the last year the discount mostly kept within the narrow range that has been more typical since the capital was restructured. The average discount to net asset value for the year to 30 June 2010 was 2% (2009: 10%) compared with the sector average discount of 16% (2009: 17%). =--------- Annual Report Page 24 (extract) Declaration Each of the Directors, who are listed on page 14 of this Report, confirm to the best of their knowledge that: (a) the Accounts, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the subsidiary undertaking included in the consolidation taken as a whole; and (b) the Annual Report includes a fair review of the development and performance of the business and the position of the Company and the subsidiary undertaking included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Robert Ware Chairman 8 September 2010 =--------- Annual Report Page 36 Group Statement of Comprehensive Income for the year to 30 June 2010 Year to 30 June 2010 Revenue Capital Total Return Return Return Notes GBP'000 GBP'000 GBP'000 Income and Capital Profits Dividends and other income 2 1,302 5 1,307 Gains on investments held at fair value 3 1,267 9,214 10,481 Currency gains - - - Total Income 2,569 9,219 11,788 Expenses Management fees 4 (112) (335) (447) Other fees and expenses 5 (441) (284) (725) Operating expenses before Finance Costs and (553) (619) (1,172) Taxation Net Profit before Finance Costs and Taxation 2,016 8,600 10,616 Finance Costs Interest payable 6 (12) (37) (49) Movement in fair value of Loan Stock 14 - (64) (64) Total Finance Costs (12) (101) (113) Net Profit before Taxation 2,004 8,499 10,503 Taxation 7 (56) - (56) Profit for the year and Total Comprehensive 1,948 8,499 10,447 Income Earnings per Ordinary share 9 16.84p 73.47p 90.31p The total column of this statement represents the Group's Statement of Comprehensive Income, prepared in accordance with IFRS, as adopted by the European Union. The revenue return and capital return columns are supplementary disclosures provided in accordance with guidance issued by The Association of Investment Companies. All items derive from continuing operations. The Notes on pages 42 to 60 form part of these Accounts. =--------- Annual Report Page 37 Group Statement of Comprehensive Income for the year to 30 June 2009 Year to 30 June 2009 Revenue Capital Total Return Return Return Notes GBP'000 GBP'000 GBP'000 Income and Capital Profits Dividends and other income 2 1,778 32 1,810 (Losses)/gains on investments held at fair 3 (51) 5,387 5,336 value Currency gains - 5 5 Total Income 1,727 5,424 7,151 Expenses Management fees 4 (228) - (228) Other fees and expenses 5 (418) (267) (685) Operating expenses before Finance Costs and (646) (267) (913) Taxation Net Profit before Finance Costs and Taxation 1,081 5,157 6,238 Finance Costs Interest payable 6 (67) - (67) Movement in fair value of Loan Stock 14 - 101 101 Total Finance Costs (67) 101 34 Net Profit before Taxation 1,014 5,258 6,272 Taxation 7 (10) - (10) Profit for the year and Total Comprehensive 1,004 5,258 6,262 Income Earnings per Ordinary share 9 7.75p 40.57p 48.32p The total column of this statement represents the Group's Statement of Comprehensive Income, prepared in accordance with IFRS, as adopted by the European Union. The revenue return and capital return columns are supplementary disclosures provided in accordance with guidance issued by The Association of Investment Companies. All items derive from continuing operations. The Notes on pages 42 to 60 form part of these Accounts. =--------- Annual Report Page 36 Group Balance Sheet at 30 June 2010 At At 30 June 30 June 2010 2009 Notes GBP'000 GBP'000 Non-Current Assets Investments held at fair value through profit or 10 47,701 47,610 loss Current Assets Investments held for trading 11 311 1,168 Balances due from brokers 1,072 680 Other receivables 13 219 216 Cash and cash equivalents 5,411 216 7,013 2,280 Total Assets 54,714 49,890 Current Liabilities Equity-Linked Unsecured Loan Stock 2004/09 14 - (299) Balances due to brokers - (435) Bank loan 15 - (900) Other payables 16 (201) (149) (201) (1,783) Total Assets less Current Liabilities 54,513 48,107 Non-Current Liabilities Non-equity management shares 17 (13) (13) Net Assets 54,500 48,094 Equity Attributable to Equity Shareholders Called-up share capital 18 3 3 Special distributable reserve 19 51,523 51,523 Capital redemption reserve 20 1 1 Retained earnings: 21 Capital reserve (837) (6,032) Revenue reserve 3,810 2,599 Total Equity 54,500 48,094 Net Asset Value per Ordinary share 22 492.15p 410.88p Approved by the Board on 8 September 2010 Robert Ware Chairman Registered No. 2600028 England and Wales The Notes on pages 42 to 60 form part of these Accounts. =--------- Annual Report Page 39 Company Balance Sheet at 30 June 2010 At At 30 June 30 June 2010 2009 Notes GBP'000 GBP'000 Non-Current Assets Investments held at fair value through profit or 10 47,701 47,610 loss Investment in subsidiary 12 2,264 1,037 49,965 48,647 Current Assets Balances due from brokers 1,072 493 Due from subsidiary - 324 Other receivables 13 219 215 Cash and cash equivalents 5,286 61 6,577 1,093 Total Assets 56,542 49,740 Current Liabilities Equity-Linked Unsecured Loan Stock 2004/09 14 - (299) Balances due to brokers - (285) Due to subsidiary (1,871) - Bank loan 15 - (900) Other payables 16 (158) (149) (2,029) (1,633) Total Assets less Current Liabilities 54,513 48,107 Non-Current Liabilities Non-equity management shares 17 (13) (13) Net Assets 54,500 48,094 Equity Attributable to Equity Shareholders Called-up share capital 18 3 3 Special distributable reserve 19 51,523 51,523 Capital redemption reserve 20 1 1 Retained earnings: 21 Capital reserve 1,427 (4,995) Revenue reserve 1,546 1,562 Total Equity 54,500 48,094 Net Asset Value per Ordinary share 22 492.15p 410.88p Approved by the Board on 8 September 2010 Robert Ware Chairman Registered No. 2600028 England and Wales The Notes on pages 42 to 60 form part of these Accounts. =--------- Annual Report Page 40 Statement of Changes in Equity for the year to 30 June 2010 Called-up Special Capital share Distributable Redemption Retained capital reserve reserve earnings Total Group and Company Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 At 1 July 2009 3 51,523 1 (3,433) 48,094 Total Comprehensive Income: Net profit for the year - - - 10,447 10,447 to 30 June 2010 Transactions with owners, recorded directly to equity: Equity dividends paid on 8 - - - (737) (737) Ordinary shares Redemption of Ordinary 18 - - - (3,304) (3,304) shares At 30 June 2010 3 51,523 1 2,973 54,500 . At 1 July 2008 4 51,523 - (435) 51,092 Total Comprehensive Income: Net profit for the year - - - 6,262 6,262 to 30 June 2009 Transactions with owners, recorded directly to equity: Equity dividends paid on 8 - - - (464) (464) Ordinary shares Redemption of Ordinary (1) - 1 (8,796) (8,796) shares At 30 June 2009 3 51,523 1 (3,433) 48,094 The Notes on pages 42 to 60 form part of these Accounts. =--------- Annual Report Page 41 Cash Flow Statement for the year to 30 June 2010 Group Company Group Company Year to Year to Year to Year to 30 June 30 June 30 June 30 June 2010 2010 2009 2009 Notes GBP'000 GBP'000 GBP'000 GBP'000 Cash Flows from Operating Activities Net Profit before taxation 10,503 10,503 6,272 6,272 Adjustments for: Increase/(decrease) in investments 766 (1,361) 1,327 2,146 (Increase)/decrease in receivables (395) (259) 730 558 (Decrease)/increase in payables (423) 1,598 63 (723) Finance costs 113 113 (34) (34) Net Cash Flows from Operating 10,564 10,594 8,358 8,219 Activities before taxation Taxation paid (13) (13) (10) (10) Net Cash Flows from Operating 23 10,551 10,581 8,348 8,209 Activities Cash Flows from Financing Activities Redemption of Ordinary shares (3,304) (3,304) (8,796) (8,796) Redemption of Equity-linked loan (363) (363) (11) (11) stock units Bank loans (repaid)/drawn down (900) (900) 900 900 Loan interest paid (52) (52) (68) (68) Equity dividends paid on Ordinary (737) (737) (464) (464) shares Net Cash Flows used in Financing (5,356) (5,356) (8,439) (8,439) Activities Net Increase/(Decrease) in Cash and 5,195 5,225 (91) (230) Cash Equivalents Cash and Cash Equivalents at 1 July 216 61 307 291 Cash and Cash Equivalents at 30 June 5,411 5,286 216 61 The Notes on pages 42 to 60 form part of these Accounts. =--------- Annual Report Page 42 Notes to the Accounts 1. Accounting Policies The Group comprises Gartmore Growth Opportunities plc (the "Company") and its wholly owned subsidiary, Gartmore GO Dealing Limited. The nature of the Group's operations and its principal activities are set out in the Report of the Directors on page 15. Group and Company accounts have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC), as adopted by the European Union (EU). The principal accounting policies followed are set out below: Basis of Preparation The Group and Company accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments at fair value. Where presentational guidance set out in the Statement of Recommended Practice (SORP) for investment trusts issued by The Association of Investment Companies (AIC) in January 2009 is consistent with the requirements of IFRS, the Directors have sought to prepare the accounts on a basis compliant with the recommendations of the SORP. Basis of Consolidation The Group accounts comprise the audited Accounts of the Company and its subsidiary drawn up to the Balance Sheet date. The Statement of Comprehensive Income is only presented in consolidated form, as provided by Section 408 of the Companies Act 2006. Presentation of Statement of Comprehensive Income In order to better reflect the activities of an investment trust company and in accordance with the guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. In accordance with the Company's status as a UK investment company under section 833 of the Companies Act 2006, net capital returns may not be distributed by way of dividend. Additionally, the net profit after taxation in the revenue column is the measure the Directors believe to be appropriate in assessing the Group's compliance with certain requirements set out in section 1159 Corporation Tax Act 2010. Revenue Dividends from investments are recognised on the ex-dividend date and credited to revenue, with the exception of dividends of a capital nature, which are credited to the capital column of the Statement of Comprehensive Income. Where the Group has elected to receive its dividends in the form of additional shares rather than cash, the amount of cash dividend foregone is recognised as income in the revenue column of the Statement of Comprehensive Income. Any excess in the value of shares received over the amount of cash dividend foregone is recognised as a gain in the capital column of the Statement of Comprehensive Income. Income on fixed income securities, deposit and other interest receivable is recognised under the effective interest rate method. This method discounts the estimated future cash flows, including any discount, premium or costs incurred, in respect of the financial instrument through its expected life, or through an appropriate shorter period. Underwriting commission is recognised as revenue in so far as it relates to shares the Company is not required to take up. Where the Company is required to take up a proportion of the shares underwritten, an equal proportion of the commission received is offset against the cost of the shares taken up. Expenses Management fees and administrative expenses are accounted for on an accruals basis. Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated, and accordingly, management fees are allocated 25% to revenue and 75% to capital, in order to reflect the directors' expected long-term view of the nature of the investment returns of the Group. Expenses that are incidental to the acquisition and disposal of investments are disclosed as expenses in the capital column of the Statement of Comprehensive Income. =--------- Annual Report Page 43 1. Accounting Policies (continued) Finance Costs Interest payable is calculated using the effective interest rate method and is allocated 25% to revenue and 75% to capital, in accordance with the Board's expected long-term view of the nature of the investment returns of the Group. This method discounts the estimated future cash flows, including any discount, premium or costs incurred, in respect of the financial instrument through its expected life, or through an appropriate shorter period. Any fair value movement is allocated to capital. Taxation The tax expense comprises the sum of current tax and deferred tax. Current tax is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. In line with recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented in the capital column of the Statement of Comprehensive Income is the marginal basis. Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue column of the Statement of Comprehensive Income, then no tax relief is transferred to the capital column. Deferred Taxation Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that tax profits will be available against which deductible temporary differences can be utilised. No provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments as the Company expects to continue to qualify as an investment trust for tax purposes. Investment trust companies which have approval under section 1158 Corporation Tax Act 2010 are not liable for taxation on capital gains. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised and charged or credited in the Statement of Comprehensive Income. Non-Current Asset Investments Held at Fair Value Purchases and sales are normally transacted with contractual terms that require delivery within a fixed timeframe according to the relevant market. The investments concerned are recognised or derecognised on the trade date. On initial recognition all non-current asset investments are designated as held at fair value through profit or loss as defined by IFRS, as adopted by the EU. They are further categorised into the following fair value hierarchy: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Having inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices). Level 3: Having inputs for the asset or liability that are not based on observable market data. Non-current asset investments including derivative instruments are measured at fair value with gains and losses arising from changes in their fair value being included in net profit or loss for the year as a capital item. =--------- Annual Report Page 44 1. Accounting Policies (continued) Non-Current Asset Investments Held at Fair Value (continued) The fair value of listed investments and derivative instruments is based on their quoted bid market price at the close of business on the balance sheet date without any deduction for estimated future selling costs. Where there is not an active market in a stock the fair value is established using alternative methods and may be based on recent arms length market transactions, stockbrokers valuations, net asset values or other relevant information. Such valuations are approved by a Pricing Committee constituted of senior executives of the Manager. Stocks valued in this way are not expected to form a material proportion of the portfolio. In accordance with the Articles of Association of the Company, any gains and losses realised on disposal are recognised in the capital column of the Statement of Comprehensive Income, and are not distributable by way of dividend. Current Asset Investments Held for Trading Current asset investments held for trading are measured at fair value with gains and losses arising from changes in their fair value being included in the Statement of Comprehensive Income as a revenue item. Investment in Subsidiary The parent company's investment in its subsidiary company, Gartmore GO Dealing Limited, is valued at fair value in the Company's balance sheet. Fair value is considered to be the net asset value of the subsidiary. Loan to Subsidiary Intercompany loans are free of charges and are recognised at their nominal value, which is considered to be their fair value, both initially and subsequently. Such loans are disclosed as a component of the investment in the subsidiary. Other Receivables Other receivables do not carry any right to interest and are short-term in nature. Accordingly they are stated at their nominal value reduced by appropriate allowances for estimated irrecoverable amounts. Cash and Cash Equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash. Equity-Linked Unsecured Loan Stock 2004/09 The Equity-Linked Unsecured Loan Stock 2004/09 was redeemed during the year. On initial recognition it was designated as held at fair value through profit or loss which meant that its performance was evaluated on a similar basis to the investment portfolio. The movement in the fair value has been treated as a finance cost recorded in the capital column of the Statement of Comprehensive Income. Short-Term Borrowings Short-term borrowings under bank credit facilities are stated as the net proceeds of the drawing plus related accrued finance costs at the balance sheet date. The finance costs of servicing such borrowings are calculated using the effective interest rate method and allocated 25% to the revenue column and 75% to the capital column of the Statement of Comprehensive Income. Other Payables Other payables are not interest-bearing and are stated at their nominal amount. Reserves (i) Special Distributable Reserve: The Special Distributable Reserve was created by the cancellation of the Capital Redemption Reserve as at 5 May 2005 as part of the Company's reorganisation at that time to make the Ordinary shares redeemable. It can be used to finance the redemption and/or repurchase of shares in issue. (ii) Capital Redemption Reserve: The Capital Redemption Reserve, which is non-distributable, holds the amount by which the nominal value of the Company's issued share capital is diminished when shares are redeemed or purchased out of the Company's profits. =--------- Annual Report Page 45 1. Accounting Policies (continued) Reserves (continued) (iii) Capital Reserve: The Capital Reserve comprises both gains and losses on disposals of investments and investment holding gains and losses. Under the terms of the Company's Articles of Association, sums standing to the credit of the capital reserve are available for distribution only by way of redemption or purchase of any issue of the Company's own shares. The Company may only distribute in this way "realised" profits, which comprise net gains less losses on the realisation of investments together with changes in the fair value of investments that are considered to be readily convertible into cash without accepting adverse terms. (iv) Revenue Reserve: The Revenue Reserve comprises accumulated undistributed revenue profits available for distribution as dividends. Rates of Exchange Transactions in foreign currencies are translated into sterling at the rate of exchange ruling on the date of each transaction. Foreign currency assets or liabilities at the balance sheet date are translated into sterling at the rates of exchange ruling on that date. Realised profits or losses on exchange, together with differences arising on the translation of foreign currency assets or liabilities, are taken to the capital column of the Statement of Comprehensive Income. These accounts are presented in pounds sterling, as this is the principal currency in which the Group's transactions are undertaken and is therefore considered to be the functional currency of the Group. Derivative Financial Instruments The Group's activities expose it primarily to the financial risks of changes in market prices and interest rates. The Company and its subsidiary may enter into derivative transactions including futures, swaps, quoted options on shares held within the portfolio, or on indices, for the purpose of providing protection against falls in the capital values of holdings. The Group does not use derivative contracts for speculative purposes. The use of financial derivatives is subject to the Group's investment policy as approved by shareholders. The Manager consults with the Board on derivative investment strategies and their implementation is closely monitored. A derivative instrument is considered to be used for hedging purposes when it alters the market risk profile of an existing underlying exposure of the Group. The use of financial derivatives by the Group does not qualify for hedge accounting. Derivatives are held at fair value and changes in the fair value of derivative instruments are recognised in the Statement of Comprehensive Income as they arise. If capital in nature, the associated change in value is presented in the capital column of the Statement of Comprehensive Income. Segmental Reporting The Group has adopted IFRS 8, `Operating Segments' for the first time, replacing the previous reporting under IAS 14, `Segment Reporting'. Under IFRS 8, operating segments are considered to be components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Manager, with oversight from the Board) in deciding how to allocate resources and in assessing performance. The Directors are of the opinion that the Group has two operating segments, details of which are disclosed in note 25. The Group primarily invests in equity and debt related securities, issued by companies operating and generating revenue in a single region, the United Kingdom, therefore no geographical segmental analysis is provided. =--------- Annual Report Page 46 1. Accounting Policies (continued) Accounting Standards (a) Standards, amendments and interpretations becoming effective in the year to 30 June 2010: - IAS 1 (Revised), `Presentation of Financial Statements'. Requires the separate presentation of changes in equity attributable to the owners (equity shareholders) and other non-owner changes. Non-owner changes are required to be shown in a performance statement, which can either comprise a statement of comprehensive income or an income statement together with a statement of comprehensive income. The Group has applied IAS 1 (revised) from 1 July 2009 and has elected to present solely a statement of comprehensive income. Where an entity restates or reclassifies comparative information, they are also required to present a restated balance sheet as at the beginning of the comparative period. The adoption of this revised standard has not resulted in a significant change to the presentation of the Group's performance statement, as the Group has no elements of comprehensive income not previously included in its Income Statement. - IFRS 7 (Amendment), `Financial Instruments: Disclosures'. Introduces new disclosure requirements, whereby financial instruments must be categorised under a three-level fair value hierarchy. A reconciliation is also required for any investments categorised as Level 3. The additional disclosures resulting from this amendment have been included in Notes 10 and 11 on pages 51 and 52. - IFRS 8, `Operating Segments'. Replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131. The new standard requires a `management approach' under which segment information is presented on the same basis as that used for internal reporting purposes. The adoption of this standard has not had a significant effect. - IAS 23 (Amendment), `Borrowing Costs'. Requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. Not currently relevant to the Group, which has no qualifying assets. - IAS 27 (revised), `Consolidated and separate financial statements'. Introduces changes to the accounting for transactions with non-controlling interests (minority interests), the accounting for a loss of control and the presentation of non-controlling interests in consolidated financial statements. Adoption did not have any impact on the Group's financial statements. - IAS 32 (amendment), `Financial Instruments: Presentation' and IAS 1 (amendment), `Presentation of financial statements - Puttable financial instruments and obligations arising on liquidation'. Provides exemptions from financial liability classification for (a) puttable financial instruments that meet certain conditions; and (b) certain instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation. Adoption did not have any impact on the Group's financial statements. - IAS 39 (Amendment), `Financial Instruments: Recognition and Measurement'. Permits an entity to reclassify particular financial assets in some circumstances and the definition of financial asset or liability at fair value through profit or loss as it relates to items that are held for trading was amended. Adoption did not have a significant impact on the Group's financial statements. (b) Standards, amendments and interpretations to existing standards that become effective in future accounting periods and have not been adopted early by the Group or Company: - IAS 24 (revised), `Related Party Disclosures' (effective for financial periods beginning on or after 1 January 2011, subject to EU endorsement). Revises the definition of related parties. Unlikely to have a significant effect. - Improvements to IFRS' were issued in May 2008 and April 2009 and comprise numerous amendments to IFRS that result in accounting changes for presentation, recognition or measurement purposes as well as terminology or editorial amendments related to a variety of individual standards. Most of the amendments are effective for annual periods beginning on or after 1 July 2009 and 1 July 2010 with earlier application permitted. No material changes to accounting policies are expected as a result of these amendments. =--------- Annual Report Page 47 1. Accounting Policies (continued) Accounting Standards (continued) (c) The following standards, amendments and interpretations to existing standards become effective in future accounting periods, but are not relevant for the Group's operations: - IFRS 1 (amendment), `First-time Adoption of International Financial Reporting Standards' and `Additional exemptions for first-time adopters' (effective from 1 January 2010). - IFRS 2 (amendment), `Group cash-settled share-based payment transactions' (effective from 1 January 2010). - IFRS 5 (amendment), `Non-current Assets Held for Sale and Discontinued Operations'. - IAS 17 (amendment), Leases. - IAS 32 (amendment), `Financial Instruments: Presentation' - Amendments relating to classification of rights issues.. 2. Dividends and Other Income 30June 30June 2010 2009 GBP'000 GBP'000 Revenue: Income from investments held at fair value through profit or loss: UK dividends 868 1,035 Overseas dividends 233 223 Stock dividends 25 - Interest on debt securities 110 112 1,236 1,370 Other income: Interest on deposits - 31 VAT reclaim interest received - 296 Underwriting commission 66 81 1,302 1,778 Capital: Special dividends allocated to capital 5 32 1,307 1,810 3. Gains/(Losses) on Investments held at Fair Value 30June 30June 2010 2009 GBP'000 GBP'000 Gains on non-current asset investments 9,214 5,387 Gains/(losses) on investments held for trading (see 1,267 (51) note 11) 10,481 5,336 4. Management Fees 30June 30June 2010 2009 GBP'000 GBP'000 Management fees 447 325 Value-added tax recovered - (97) 447 228 Allocated: Revenue 112 228 Capital 335 - 447 228 With effect from 1 July 2009 management fees have been allocated 75% to capital and 25% to revenue. Prior to 1 July 2009 all such costs were allocated to revenue. =--------- Annual Report Page 48 5. Other Fees and Expenses 30June 30June 2010 2009 GBP'000 GBP'000 Revenue: Secretarial fees 60 60 Directors' fees 99 93 Auditors' fees: For audit of the annual accounts 23 21 For other services* 9 11 General expenses 212 200 Value-added tax 38 33 441 418 * Paid to the auditors for quarterly certification of the calculation of interest in respect of the Equity-Linked loan stock and quarterly certification of the Ordinary share redemption calculation. Capital: Purchase transaction costs on non-current asset 179 203 investments Sales transaction costs on non-current asset 105 64 investments 284 267 6. Interest Payable 30June 30June 2010 2009 GBP'000 GBP'000 Short-term borrowing facility 43 51 Equity-Linked Unsecured Loan Stock 2004/09 6 16 49 67 Allocated: Revenue 12 67 Capital 37 - 49 67 With effect from 1 July 2009 interest charged on borrowings has been allocated 75% to capital and 25% to revenue. Prior to 1 July 2009 all such costs were allocated to revenue. The loan stock was redeemed on 18 December 2009. 7. Taxation 30June 30June 2010 2009 GBP'000 GBP'000 (a) Analysis of tax charge for the year: Overseas tax 13 10 Corporation tax 43 - 56 10 =--------- Annual Report Page 49 7. Taxation (continued) 30June 30June 2010 2009 GBP'000 GBP'000 (b) Factors affecting current tax charge for the year: The charge for the year can be reconciled to the profit per the Statement of Comprehensive Income as follows: Net profit before taxation 10,503 6,272 Tax at the UK corporation tax rate of 28% (2009: 28%) 2,941 1,756 Effects of: Income not subject to corporation tax (296) (284) Gains and losses on investments that are not taxable (2,580) (1,508) Expenses and finance costs not deductible for tax 83 76 purposes Utilisation of losses brought forward (92) (40) Overseas tax 13 10 Tax relief on overseas tax suffered (3) - Marginal tax relief available for subsidiary (10) - Total tax for the year 56 10 (c) There is an unrecognised deferred tax asset comprising: Unutilised management expenses 2,252 2,261 Non-trading loan relationship deficits 1,005 993 Trading losses - 87 3,257 3,341 It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these expenses and deficits and therefore no deferred tax asset has been recognised. Due to the Company's status as an investment trust and the intention to continue meeting the conditions required to obtain approval of such status in the foreseeable future, the Company has not provided tax on any capital gains arising on the revaluation or disposal of investments. 8. Dividends on Ordinary shares 30June 30June 2010 2009 GBP'000 GBP'000 Amounts recognised in these Accounts as distributions 503 209 to equity holders in the year: Interim dividend declared in respect of the year to 30 June 2009 of 4.30p per share paid on 2 October 2009 on 11,705,040 shares (2009: 1.50p paid on 17 October 2008 on 13,913,120 shares). Special dividend of 2.00p paid on 2 October 2009 on 234 255 11,705,040 shares (2009: 2.00p paid on 31 March 2009 on 12,763,685 shares) 737 464 The declared interim dividend in respect of the year to 30 June 2010, which is in lieu of a final dividend, has not been included as a liability in these Accounts. =--------- Annual Report Page 50 8. Dividends on Ordinary shares (continued) The total dividends payable in the respect of the financial year, which is the basis on which the requirements of Section 1159 Corporation Tax Act 2010 are considered, is set out below: 30June 30June 2010 2009 GBP'000 GBP'000 Interim dividend of 5.375p (2009: 4.30p) per share 595 503 payable on 30 September 2010 on 11,073,040 (2009: 11,705,040) shares Special dividend of 2.00p per share paid on 2 October - 234 2009 on 11,705,040 shares 595 737 9. Earnings per Ordinary Share (i) The Total profit per Ordinary share of 90.31p (2009: 48.32p) is calculated on the profit to equity shareholders of GBP10,447,000 (2009: GBP6,262,000) and 11,568,620 (2009: 12,959,428) Ordinary shares, being the weighted average number of shares in issue during the year. (ii) The Revenue profit of 16.84p (2009: 7.75p) per Ordinary share is calculated on the revenue profit to equity shareholders of GBP1,948,000 (2009: GBP 1,004,000,000) and the weighted average number of shares in issue during the year as per (i) above. (iii) The Capital profit of 73.47p (2009: 40.57p) per Ordinary share is calculated on the capital profit to equity shareholders of GBP8,499,000 (2009: GBP 5,258,000) and the weighted average number of shares in issue during the year as per (i) above. 10. Non-Current Asset Investments Held at Fair Value 30June 30June 2010 2009 Group and Group and Company Company GBP'000 GBP'000 (i) Summary of Movements: Opening valuation Opening book cost 59,123 61,575 Opening fair value adjustment (11,513) (11,728) 47,610 49,847 Movements in the year: Acquisitions at cost 33,789 34,500 Proceeds of disposals (42,912) (42,124) Net profit realised on disposals 7,076 5,172 Increase in fair value adjustment 2,138 215 Closing valuation 47,701 47,610 Closing book cost 57,076 59,123 Closing fair value adjustment (9,375) (11,513) Closing valuation 47,701 47,610 With the exception of a small number of suspended or delisted (Level 3) investments all of the Group's investments are either listed or are quoted on the Alternative Investment Market in the UK. All investments are included in the balance sheet at fair value. The Group's equity investments are registered in the name of nominees of, and held to the order of, The Bank of New York Mellon, as custodians to the Company. =--------- Annual Report Page 51 10. Non-Current Asset Investments Held at Fair Value (continued) (ii) Classification under fair value hierarchy Total Level 1 Level 2 Level 3 GBP'000 GBP'000 GBP'000 GBP'000 Equity investments 46,730 46,652 - 78 Fixed interest investments 971 921 - 50 47,701 47,573 - 128 Categorisation within the hierarchy has been determined on the basis of the lowest level of input that is significant to the fair value measurement of the relevant asset as follows: Level 1 - valued using quoted prices in active markets for identical assets. Level 2 - valued by reference to valuation techniques using observable inputs other than quoted prices included within Level 1. Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data as explained in the accounting policies note on page 44. There are not considered to be other reasonably possible valuations. There have been no transfers during the year between Levels 1 and 2. A reconciliation of fair value measurements in Level 3 is set out below. (iii) Level 3 investments at fair value through profit Total or loss 2010 GBP'000 Opening balance 226 Acquisitions 55 Disposal proceeds (50) Transfers into Level 3 (from Level 1) 785 Transfers out of Level 3 - Total gains/(losses) included in the Statement of Comprehensive Income - on assets sold (907) - on assets held at the year end 19 Closing balance 128 11. Current Asset Investments Held for Trading 30June 30June 2010 2009 Group Group GBP'000 GBP'000 (i) Summary of Movements: Quoted Equity Investments: Opening valuation Opening book cost 1,422 829 Opening fair value adjustment (254) (205) 1,168 624 Movements in the year: Acquisitions at cost 6,132 10,370 Proceeds of disposals (8,256) (9,892) Net profit realised on disposals 1,093 115 Increase/(decrease) in fair value adjustment 174 (49) Closing valuation 311 1,168 Closing book cost 391 1,422 Closing fair value adjustment (80) (254) Closing valuation 311 1,168 =--------- Annual Report Page 52 11. Current Asset Investments Held for Trading (continued) 30June 30June 2010 2009 GBP'000 GBP'000 Gains/(losses) on investments held for trading: On equity investments: Net profit realised on disposals 1,093 115 Increase/(decrease) in fair value adjustment 174 (49) On derivative positions: Realised loss on closed positions - (117) Total gain/loss on investments held for trading 1,267 (51) The investments held by the dealing subsidiary (Gartmore GO Dealing Limited) have been designated as held for trading and valued at fair value through profit or loss. (ii) Classification under fair value hierarchy Total Level 1 Level 2 Level 3 GBP'000 GBP'000 GBP'000 GBP'000 Equity investments 301 301 - - Fixed interest investments 10 - - 10 311 301 - 10 There have been no transfers during the year between Levels 1 and 2. A reconciliation of fair value measurements in Level 3 is set out below. (iii) Level 3 investments at fair value through profit Total or loss GBP'000 Opening balance 13 Acquisitions - Disposal proceeds (3) Transfers into Level 3 (from Level 1) - Transfers out of Level 3 - Total gains/(losses) included in the Statement of Comprehensive Income - on assets sold (4) - on assets held at the year end 4 Closing balance 10 12. Investment in Subsidiary Gartmore GO Dealing Limited The Company owns the whole of the issued share capital (GBP2) of Gartmore GO Dealing Limited, a dealing company registered in England and Wales. 30June 30June 2010 2009 GBP'000 GBP'000 Balance brought forward at 1 July 1,037 945 Profit of subsidiary for the year 1,227 92 Balance carried forward at 30 June 2,264 1,037 =--------- Annual Report Page 53 13. Other Receivables 30 June 30 June 30 June 30 June 2010 2010 2009 2009 Group Company Group Company GBP'000 GBP'000 GBP'000 GBP'000 Accrued income 198 198 203 202 Prepaid expenses 17 17 11 11 Recoverable overseas tax 4 4 2 2 219 219 216 215 The carrying amounts of other receivables approximate their fair value. None of the other receivables are past due or impaired. 14. Equity-Linked Unsecured Loan Stock 2004/09 30June 30June 2010 2009 GBP'000 GBP'000 Balance brought forward at 1 July 299 411 Cost of loan stock repurchased (363) (11) Change in fair value 64 (101) Balance carried forward at 30 June - 299 15. Bank Loan 30 June 30 June 30 June 30 June 2010 2010 2009 2009 Group Company Group Company GBP'000 GBP'000 GBP'000 GBP'000 Due within one week - - 900 900 The Company has a committed facility to GBP3 million and an uncommitted facility to GBP3 million, both provided by The Bank of New York Mellon. Interest is charged at the prevailing interbank market rates, plus a contractually agreed margin. The Company also has an overdraft facility of GBP100,000 with Royal Bank of Scotland plc. Interest on any overdraft is charged at 1.5% over the base rate set by the Bank of England. 16. Other Payables 30 June 30 June 30 June 30 June 2010 2010 2009 2009 Group Company Group Company GBP'000 GBP'000 GBP'000 GBP'000 Accrued expenses 158 158 149 149 Corporation tax payable 43 - - - 201 158 149 149 The carrying amounts of other payables approximate their fair value. 17. Non-Current Liabilities 30June 30June 2010 2009 GBP'000 GBP'000 Non-Equity Management Shares Authorised and Issued 50,000 Management shares of GBP1 50 50 Paid up 50,000 Management shares of GBP1, one quarter paid 13 13 Management shares are entitled to receive a fixed cumulative dividend equal to 0.00001p per annum, payable annually in arrears on 30 June. The Management shares confer the right to be paid out of the assets of the Company available for distribution the capital paid up on such shares, without any right to participate in any surplus remaining following payment of such amount. =--------- Annual Report Page 54 18. Share Capital Allotted, Called-up, Issued and Fully-paid 30June 30 June 2010 2009 GBP'000 GBP'000 11,073,864 (2009: 11,705,040) Ordinary shares of 3 3 0.025p Shareholders can request the redemption of Ordinary shares on a quarterly basis, subject to certain limitations and the Directors exercising their discretion. All movements in share capital are presented in the Statement of Changes in Equity. In respect of the four quarterly share redemption opportunities provided to shareholders in the financial year, the Directors agreed to the following redemptions: 15 July 2009 843,012 Ordinary shares 14 October 2009 2,428 Ordinary shares 20 January 2010 14,200 Ordinary shares 14 April 2010 616,976 Ordinary shares The redemptions in July and October were matched with buyers. The remaining 631,176 shares were redeemed at a cost of GBP3,304,000. 19. Special Distributable Reserve 30June 30June 2010 2009 GBP'000 GBP'000 Balance brought forward carried forward 51,523 51,523 20. Capital redemption Reserve 30June 30 June 2010 2009 GBP'000 GBP'000 Balance brought forward at 1 July 1 - Redemption of 631,176 (2009: 2,726,129) Ordinary - 1 shares Balance carried forward at 30 June 1 1 21. Retained Earnings Capital Revenue Retained reserve reserve earnings GBP'000 GBP'000 GBP'000 Group: At 1 July 2008 (2,494) 2,059 (435) Redemption of Ordinary shares (8,796) - (8,796) Profit for the year to 30 June 2009 5,258 1,004 6,262 Equity dividends paid on Ordinary shares - (464) (464) At 30 June 2009 (6,032) 2,599 (3,433) Redemption of Ordinary shares (3,304) - (3,304) Profit for the year to 30 June 2010 8,499 1,948 10,447 Equity dividends paid on Ordinary shares - (737) (737) At 30 June 2010 (837) 3,810 2,973 Company: At 1 July 2008 (1,549) 1,114 (435) Redemption of Ordinary shares (8,796) - (8,796) Profit for the year to 30 June 2009 5,350 912 6,262 Equity dividends paid on Ordinary shares - (464) (464) At 30 June 2009 (4,995) 1,562 (3,433) Redemption of Ordinary shares (3,304) - (3,304) Profit for the year to 30 June 2010 9,726 721 10,447 Equity dividends paid on Ordinary shares - (737) (737) At 30 June 2010 1,427 1,546 2,973 =--------- Annual Report Page 55 21. Retained Earnings (continued) At the year-end 40% (2009: 40%) of the portfolio was considered to be sufficiently liquid to be regarded as readily convertible into cash. Accordingly, the split of capital reserve in order to determine distributable realised profits is as follows: 30 June 30 June 30 June 30 June 2010 2010 2009 2009 Group Company Group Company GBP'000 GBP'000 GBP'000 GBP'000 Capital reserve - distributable in respect of investments sold 8,618 10,802 5,731 6,518 in respect of investments held (3,750) (3,750) (4,605) (4,605) Capital reserve - (5,705) (5,625) (7,158) (6,908) non-distributable (837) 1,427 (6,032) (4,995) 22. Net Asset Value per Ordinary share The Net Asset Value per Ordinary share is calculated on attributable assets of GBP54,500,000 (2009: GBP48,094,000) and 11,073,864 (2009: 11,705,040) Ordinary shares in issue at the year-end. 23. Notes to the Cash Flow Statement Cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with an original maturity of three months or less. Purchases and sales of investments are considered to be operating activities of the Company, given its purpose, rather than investing activities. However, the cash flows associated with these activities are presented below: 30 June 30 June 30 June 30 June 2010 2010 2009 2009 Group Company Group Company GBP'000 GBP'000 GBP'000 GBP'000 Proceeds on disposal of fair 50,671 42,228 52,049 42,344 value through profit or loss investments Purchases of fair value through 40,535 34,253 44,972 34,752 profit or loss investments 24. Related Party Transactions The investment manager, Gartmore Investment Limited (GIL), is regarded as a related party of the Company. During the year, total management fees of GBP447,000 (2009: GBP325,000) and secretarial fees of GBP70,000 (2009: GBP70,000), including value-added tax, were payable to GIL for the provision of investment management and secretarial services to the Company. The basis of management fees charged is disclosed in the Directors' Report. At the balance sheet date, management and secretarial fees totalling GBP69,000 (2009: GBP61,000) and GBP12,000 (2009: GBP12,000) respectively, were accrued. The Company has also financed and been financed by the trading activity of its subsidiary, Gartmore GO Dealing Limited, during the years to 30 June 2010 and 2009. In addition, the Company has provided group relief from tax of GBP740,000 (2009: GBPnil) to the subsidiary and has also borne audit fees amounting to GBP500 (2009: GBP500). At 30 June 2010, there was an outstanding balance of GBP1,871,000 due to (2009: GBP324,000 due from) the subsidiary. The compensation payable to key management personnel comprised GBP99,058 (2009: GBP 92,500) paid by the Company to the Directors in respect of services to the Company as shown in the Directors' Remuneration Report on page 33. =--------- Annual Report Page 56 25. Operating Segments The directors consider that the Group has two operating segments, being the parent Company, Gartmore Growth Opportunities plc, which invests in shares and securities for capital appreciation in accordance with the Company's published investment objective, and its wholly owned subsidiary, Gartmore GO Dealing Limited, which trades in securities to enhance Group returns. Discrete financial information for these sectors is reviewed regularly by the Manager and the Board who allocate resources and assess performance. Segment financial information 30June 30June 2010 2009 GBP'000 GBP'000 External Revenues: Parent Company 10,518 7,059 Subsidiary 1,270 92 Total Income 11,788 7,151 Net Profit: Parent Company 9,220 6,170 Subsidiary 1,227 92 Total Comprehensive Income 10,447 6,262 Total Assets: Parent Company 56,542 49,740 Subsidiary 2,307 1,511 Consolidation adjustments (4,135) (1,361) Group Total Assets 54,714 49,890 26. Financial Instruments: Risk Management The Directors manage investment risk principally through setting an investment policy (see page 15) (that is approved by shareholders), by contracting management of the Group's investments to an investment manager under a contract which incorporates appropriate duties and restrictions and by monitoring performance in relation to these. The Board's relationship with the investment manager is discussed on pages 27 and 28 of this Report. Internal control and the Board's approach to risk is discussed on pages 30 and 31. There have been no material changes to the management or nature of the Group's investment risks from the prior year. The main risks arising from the Group's pursuit of its investment objective (see page 17) are market risk, credit risk and liquidity risk. The effects of these can also be increased by gearing. Market risk Market risk comprises three types of risk: market price risk, interest rate risk and currency risk. Market price risk: The Company is an investment company and as such its performance is dependent on the valuation of its investments. Consequently market price risk is the most significant risk that the Group is exposed to. The fair value of the investments in the portfolio is normally their bid-market price. Market price of investee companies' shares is subject to their performance, supply and demand for the shares and investor sentiment regarding the companies, or their industry sectors. The Company's investment objective and policy require that it invests primarily in the shares of quoted UK smaller companies. The prices of shares of smaller companies as a whole tend to be more volatile than those of larger companies. The Company normally holds around 200 stocks which significantly spreads the risk of individual investments performing poorly. The largest individual stock at the year-end represented just 2.8% of the value of the portfolio. =--------- Annual Report Page 57 26. Financial Instruments: Risk Management (continued) The level of risk, relative to the benchmark, is increased by holding stocks not represented in the benchmark index and by over or underweighting industry sectors relative to the benchmark, which tends to concentrate risk in those over and underweighted areas. At the year-end approximately 58% by value of stocks held were not represented in the benchmark index. These stocks were listed stocks that were too small to be included in the index, bonds or were AIM quoted stocks. As can be seen from the chart on page 11 the largest industry sector weighting variances were in the Financials, Consumer Services (underweighted), Technology and Health Care (overweighted) sectors. Although the net movement in the benchmark index over the 10 years to 30 June 2010 was a drop of 33.5%, the annual movement over that period averaged 18.3%. This illustrates the volatility of this sector and indicates that it could move by a similar amount in the forthcoming financial year. Accordingly, to illustrate the Group's sensitivity to market prices, an 18.3% change to the market value of the equity portfolio at 30 June 2010 would generate a corresponding increase or decrease in the net asset value per share of around 15.7% and because of the effect on the management fee, would have a converse effect on annual earnings per share of around 0.1p. The effect on capital return would be materially the same as the effect on net assets. The Company's trading subsidiary, Gartmore GO Dealing Limited, has similar risks to its parent in respect of equity holdings in its trading portfolio which are also valued at bid-market prices. Gartmore GO Dealing seeks to make returns from short-term positions and the exposure to market price risk is limited by this short-term nature of the holdings and because the trading subsidiary portfolio is limited to 15% of Group Total Assets. Both the Company and the trading subsidiary can also invest in derivatives, although none were held during the year. At the year-end the Group's assets exposed to market price risk were as follows: 30 June 30 June 30 June 30 June 2010 2010 2009 2009 Group Company Group Company GBP'000 GBP'000 GBP'000 GBP'000 Non-current asset investments at 47,701 47,701 47,610 47,610 fair value through profit or loss Current asset investments held 311 - 1,168 - for trading 48,012 47,701 48,778 47,610 The level of assets exposed to market price risk reduced by approximately 1.4% during the year, through a combination of changes in the market prices of investments held, reductions in loan stock and bank gearing and increases in short term deposits. Interest rate risk The Group can draw on flexible loan facilities, the interest rates for which are set at the time of drawing. Since cash positions are constantly monitored and drawings on the loan facilities are normally for short rolling periods the risk of exposure to excessive interest costs is limited. The maximum level of drawings on the flexible bank loan facilities in the year was GBP6.0 million (2009: GBP5.1 million). No hedging of the interest rates paid on the Group's financial liabilities is undertaken. The Group also earns interest on its cash and short-term deposits. Fixed deposits are normally placed on a one week rolling basis. =--------- Annual Report Page 58 26. Financial Instruments: Risk Management (continued) At the year-end financial assets and liabilities exposed to interest rates were as follows: 30 June 30 June 30 June 30 June 2010 2010 2009 2009 Group Company Group Company GBP'000 GBP'000 GBP'000 GBP'000 Financial Assets: Cash balances 2,411 2,286 216 61 Short term deposits 3,000 3,000 - - Financial Liabilities: Equity-Linked Unsecured Loan - - (299) (299) Stock 2004/09 (redeemed) Bank loans - - (900) (900) The weighted average rate of interest paid on the loan stock in the year was 3.3% (2009: 5.9%) and on bank loans under the Company's flexible loan facilities was 1.6% (2009: 3.1%). The weighted average rate of interest earned on short-term deposits during the year was 0.5% (2009: nil). Although there were no drawings on bank loan facilities at the year-end this may not be representative of the exposure to interest rates in the year ahead since the level of borrowings and/or cash held during the year will be affected by the strategy being followed in response to the Board's and Manager's perception of market prospects and the investment opportunities available at any particular time. During the year the level of financial assets exposed to interest obligations fluctuated between zero and GBP3 million. The cost of borrowing compared with the anticipated returns from investment is considered as part of the investment management process. To illustrate the potential sensitivity to changes in interest rates, if the bank loan facilities were fully extended to their GBP6 million limit a change of 0.5% in the rate of interest charged would, over the course of a year, amount to GBP30,000, less than 0.1% of year-end net assets. Currency risk: The Group is not subject to a material level of currency risk since, with very occasional exceptions, all of its investments are denominated in sterling. Credit risk Credit risk is the exposure to loss from the failure of a counterparty to deliver securities or cash for acquisitions or disposals of investments or to repay deposits. The Company and its subsidiary manage credit risk by using brokers from a database of approved brokers who are subject to independent review of key criteria by the Manager's Counterparty Management Committee and by dealing through Gartmore Investment Limited with banks approved by the Financial Services Authority. During the year all deposits placed by the Company were with banks that had ratings of A or higher. The subsidiary does not normally hold material levels of cash. The maximum exposure to credit risk at 30 June 2010 was as follows: 30 June 30 June 30 June 30 June 2010 2010 2009 2009 Group Company Group Company GBP'000 GBP'000 GBP'000 GBP'000 Balances due from brokers 1,072 1,072 680 493 Due from subsidiary - - - 324 Other debtors 21 21 13 13 Accrued income 198 198 203 202 Cash and short term deposits 5,411 5,286 216 61 6,702 6,577 1,112 1,093 All of the above financial assets are current, their fair values are considered to be the same as the values shown and the likelihood of a material credit default is considered to be low. =--------- Annual Report Page 59 26. Financial Instruments: Risk Management (continued) Liquidity risk Liquidity risk is the possibility of failure of the Group to realise sufficient assets to meet its financial liabilities. The Group minimises this risk by investing only in listed or quoted securities and by ensuring that it has adequate cash and credit facilities in place to support normal operations. The Group's liquidity is held primarily in sterling, almost entirely on interest-bearing current accounts or short-term deposits in the money market. As noted above, deposits are rarely fixed for terms in excess of one week. In addition to using shareholders' funds to finance investments the Group can also invest funds available from the management shares and from drawings on its flexible loan facilities (gearing). The Group's short-term borrowing facilities comprise a committed loan facility of GBP3,000,000 and an uncommitted facility of a further GBP3,000,000 that can be drawn to meet liquidity requirements arising either from operations or investment strategy. Cash requirements are monitored constantly. Drawings on the credit facilities are normally arranged on a rolling weekly basis. At 30 June 2010 financial liabilities comprised: 30 June 30 June 30 June 30 June 2010 2010 2009 2009 Group Company Group Company GBP'000 GBP'000 GBP'000 GBP'000 Due within 1 month: Balances due to brokers - - 435 285 Accrued expenses 158 158 149 149 Bank loan - - 900 900 Equity-Linked Unsecured Loan - - 299 299 Stock 2004/09* Due after 1 month and within 1 year: Due to subsidiary - 1,871 - - Corporation tax payable 43 - - - Due after 1 year: Management shares 13 13 13 13 The above liabilities are stated at fair value. Gearing Market risks can be amplified by gearing. As discussed above, in addition to using shareholders' funds to finance investments the Group can also invest funds available from the Management shares and from drawings on its loan facilities. See the liquidity risk section above and the Business Review on pages 17 and 18 for further information. Such gearing will exaggerate the effect on net asset value of a change in the value of the portfolio. If the Group's borrowing facilities were fully extended the bank gearing would amount to 11.2% of net assets and in those circumstances a change of 10% in the value of the portfolio would be expected to change the net asset value by approximately 9.9%. As noted on page 57 in the interest rate risk section, the level of borrowings and/or cash held during the year will be affected by the strategy being followed in response to the Board's and Manager's perception of market prospects and the investment opportunities available at any particular time. At the year-end there was no bank gearing (2009: GBP900,000, 1.9% of net assets). =--------- Annual Report Page 60 27. Capital The Company's capital, or equity, is represented by its net assets which are managed to achieve the Groups' investment objective set out on page 15. The main risks to the Company's investments are shown in Note 26. Note 26 also explains that the company is able to gear and that gearing will amplify the effect on equity of changes in the value of the investment portfolio. The Board can also manage the capital structure directly since it has discretion to approve requests by shareholders to redeem their shares, determines dividend payments and has taken the powers, which it is seeking to renew, to issue and buy-back shares. The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by section 1159 Corporation Tax Act 2010 and by the Companies Act, respectively, and with respect to the availability of borrowing facilities, by the covenant imposed by The Bank of New York Mellon (see page 16). The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year. Total Equity at 30 June 2010, the composition of which is shown on the Balance Sheet on page 39, was GBP54,500,000 (2009: GBP48,094,000). 28. Contingent Liabilities and Commitments At 30 June 2010 the Group had potential commitments of GBP250,000 in respect of exercise of warrants (2009: GBP183,000 re warrants and GBP150,000 in respect of a placing). Of these, the commitments of the Company amounted to GBP195,000 (2009: GBP128,000). . Gartmore Investment Limited Corporate Company Secretary 8 September 2010 END
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