Schroder UK Growth Fund PLC Annual Financial Report (8274S)

TIDMSDU

RNS Number : 8274S

Schroder UK Growth Fund PLC

28 June 2018

28 June 2018

ANNUAL REPORT AND ACCOUNTS

Schroder UK Growth Fund plc (the "Company") hereby submits its Annual Report for the year ended 30 April 2018 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.1.

The Company's Annual Report and Accounts for the year ended 30 April 2018 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website http://www.schroders.co.uk/ukgrowth. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/8274S_1-2018-6-27.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

Andrea Davidson

Schroder Investment Management Limited

Tel: [phone]

Chairman's Statement

Performance

During the year to 30 April 2018, the Company's net asset value ("NAV") produced a total return of 9.1% while the share price produced a total return of 15.0%. This compares to a total return of 8.2% for the benchmark, the FTSE All-Share Index, over the same period.

For the 10 year period to 30 April 2018, the Company's NAV produced a total return of 93.9% while the share price produced a total return of 92.7%. This compares to a total return of 90.9% for the benchmark, the FTSE All-Share Index, over the same period.

Comment on performance over the period under review can be found in the Manager's Review.

Change of Manager and name

On 13 April 2018 the Board announced that it had decided to terminate the appointment of Schroder Unit Trusts Limited as the Company's Alternative Investment Fund Manager ("AIFM") and had entered into heads of terms to appoint Baillie Gifford & Co Limited ("Baillie Gifford AIFM") as the Company's new AIFM and Company Secretary. Baillie Gifford AIFM intends to delegate certain portfolio and risk management duties to Baillie Gifford & Co (together with Baillie Gifford AIFM, "Baillie Gifford").

The appointment of Baillie Gifford is expected to be completed by the end of June 2018, with the majority of the portfolio repositioned to be invested in capital growth stocks shortly thereafter. Baillie Gifford has agreed to waive its management fee to the extent of GBP732,000, being approximately equal to six months' management fee at the time of the agreement.

Upon appointment of the new AIFM, it is expected that the Company's name will be changed to Baillie Gifford UK Growth Fund plc and its ticker will change to BGUK.

The Board believes in the benefit of active management over a long-term investment horizon. Accordingly, it believes that investment management performance should be measured over the long term. It is very disappointing to note therefore that under Schroders' fund management, the Company's long-term investment performance is considerably below the Board's expectation and has even lagged the Benchmark since its inception. The Company, despite its ongoing share buy-back policy, has also struggled with a persistent and wide share price discount to NAV. Accordingly, the Board concluded that, while it is disappointing and disruptive to change the management of the Company's assets, in order to provide the best investment outcome for existing investors and to position the Company to attract new and ongoing investors, it should make the change to implement a new, 'best ideas' investment approach managed by Baillie Gifford; an established manager of investment trusts with a long-term track record in achieving capital growth from UK equities.

Although the Company's investment objective and policy will not change, Baillie Gifford will realign the portfolio to invest in a bespoke, 'best ideas' portfolio, with approximately 40 stocks, which will offer shareholders a UK-focused capital growth investment proposition.

The portfolio will be co-managed by Iain McCombie and Milena Mileva and will be populated with their highest conviction ideas, providing investors with exposure to some of the most exciting UK growth companies. The portfolio managers will seek to select high quality companies with strong competitive positions which they believe have the prospect of delivering strong earnings growth over a number of years. The Board and Baillie Gifford believe that the investment portfolio, constructed on a stock-picking, capital growth orientated, long-term basis will be highly differentiated relative to the Benchmark and to the peer group of all-cap UK equity investment trusts.

The Board believes that the change in AIFM and investment approach will provide the following benefits to investors:

- Access to Baillie Gifford's UK equity team. The team is experienced and well resourced, with an average investment experience of 13 years, almost all of which has been accumulated at Baillie Gifford. The team manages UK specialist assets of GBP5.2bn as at 30 April 2018.

- Strong track record. Although the proposed mandate for the Company is a customised investment proposition that is different from the UK open-ended funds managed by Baillie Gifford, both portfolio managers have strong track records of outperformance in UK equities and there will be a degree of crossover with their existing portfolios.

- A bespoke and unique investment portfolio. The 'best ideas' portfolio will consist of companies that the portfolio managers believe will outperform materially over the long term. Baillie Gifford expects active share for the portfolio to be over 80%.

- Long-term view. Baillie Gifford adopts a long-term view with an investment horizon of five years plus and turnover within UK portfolios is typically 10%-20% per annum.

- Baillie Gifford is one of the largest investment trust managers in the UK and currently manages eight other investment trusts.

It is the Board's view, after consultation with its advisers, that these changes provide the scope for improved future long-term performance and should enhance the appeal of the Company. With the support of Baillie Gifford, the aim will be to attract new investors and, over time, seek to achieve a narrowing of the Company's discount.

Depositary and Custodian

As part of the transition process, HSBC will cease as Depositary and Custodian co-terminously with the appointment of the new AIFM and BNY Mellon Trust & Depositary (UK) Limited will be appointed as the new Depositary and Custodian.

Earnings and dividends

The Directors have declared a second interim dividend of 3.00 pence per share taking total dividends for the year ended 30 April 2018 to 6.00 pence per share, an 11.1% increase over total dividends of 5.40 pence per share paid in respect of the previous year. The second interim dividend will be payable on 31 July 2018 to shareholders on the register on 6 July 2018.

The Company's investment policy highlights that the yield on the Company's investment portfolio is of secondary importance to that of achieving capital growth. Over the last few years, the Company has paid out dividends that reflected the portfolio revenue derived from Schroders' management style. As our new portfolio managers are explicitly growth investors, with any underlying income received being a by-product of that approach, earnings for future years are expected to be notably lower than previously: although the earnings for the year ending April 2019 will reflect the transition of the management mandate as a number of dividend payments have been received in May and June 2018.

Gearing

During the year, the Company maintained its total borrowing facilities at GBP35 million, equally divided between a one year revolving credit facility and an overdraft facility. Towards the end of the year a small amount of gearing was implemented to take advantage of the higher volatility that appeared in markets but that has now been withdrawn and the portfolio has a small cash position as we start the transition process to Baillie Gifford. The Board sets internal guidelines for the Manager's use of gearing which are altered from time to time but are subject to net effective gearing not representing more than 20% of shareholders' funds.

Share buy-backs

The share buy-back policy seeks to operate in the best interests of shareholders by taking into account the relative level of the Company's share price discount when compared with peer group trusts, the absolute level of discount, volatility in the level of discount and the impact from share buy-back activity on the long-term liquidity of the Company's issued shares.

Over recent years the Company has regularly bought back shares. Shares were regularly purchased for holding in treasury from May 2017 until the announcement of the appointment of Baillie Gifford on 13 April 2018 and a total of 5,068,700 ordinary shares (3.3% of the shares outstanding as at 30 April 2017) were purchased during that time.

No shares have been repurchased since 14 April 2018 and the discount has narrowed from 13.5% on 12 April 2018 to 6.5% on 15 June 2018. This is an encouraging indication that Baillie Gifford's appointment as Manager is starting to attract new investors.

Board composition and succession planning

The Board continues to review its composition and consider its succession and refreshment policies and accordingly will seek to appoint two new directors over the coming year. Mr Cowdell, who has served as a Director for six years, has indicated his intention to retire from the Board with effect from the end of September 2018. We will look to fill the vacancy that this creates in a way which ensures a continued breadth of expertise within the Board.

Outlook

As investors seeking capital growth, the new portfolio managers are of the view that the UK stock market provides ample opportunities for high-conviction, active managers to add value through identifying and investing in stocks in attractive growth companies and holding them for as long as possible for shareholders.

Annual General Meeting

The Annual General Meeting of the Company will be held on Thursday 2 August 2018 at 12.00 noon at the Institute of Directors, 116 Pall Mall, London SW1Y 5ED. Shareholders are warmly invited to attend. The meeting will include a presentation by the new portfolio managers on the prospects for UK equities, the positioning of the portfolio and the Company's investment strategy. They and the Board will be available to answer any questions.

Carolan Dobson

Chairman

27 June 2018

Manager's Review (Schroders)

Market background

The FTSE All-Share Index rose 8.2% over the period against the backdrop of a robust global economy. While the "Goldilocks" scenario of low and stable growth and inflation was put to the test, hopes remained that the world economy would continue to enjoy a sustained synchronised recovery.

While inflationary pressures have remained benign, markets have become more volatile as fears have grown over the build-up of inflationary pressures. In particular, the pace of policy tightening by the US Federal Reserve in response to strong US employment has led to greater volatility and sector rotation.

Sterling recovered as the Bank of England increased base rates for the first time since 2007, and as investors welcomed progress with Brexit negotiations. More recently macro-economic data has been disappointing, which may partly be explained by poor weather but highlights the relative weakness of the economy after the Brexit vote.

Performance

The NAV total return rose 9.1%, slightly ahead of the Benchmark. A number of large positions delivered strong stock-specific performance, helped by positive operational delivery and increased M&A activity. The portfolio also benefited from a rotation away from highly valued quality growth stocks towards 'value' stocks, which tend to perform well against a more inflationary backdrop.

Tesco was the standout contributor as the relatively new management have been executing their turnaround plan. Their success in delivering sector-leading volume growth has lead to a recovery in earnings, balance sheet deleveraging and increased cash flow. This has culminated in an 800% increase in profit and its first dividend in three years.

Our exposure to the software sector contributed positively, with IT infrastructure specialist Computacenter performing particularly well following a trading update. Ladbrokes Coral was another strong performer, after agreeing to a renewed offer from GVC. South32 performed strongly as the company benefited from supply reforms in China restricting pollutive domestic supply of aluminium. Publishing company Pearson has also been a positive contributor as evidence is emerging that the poor recent performance has stabilised and action to transition to digital delivery is gaining traction.

Support services group Capita was the key detractor following a disappointing trading update and a profit warning. Shares in transport company FirstGroup disappointed after a failed bid from private equity group Apollo.

Portfolio activity

The increase in market volatility earlier this year gave us an opportunity to use the gearing facility for the first time for a number of years.

We took advantage of a pull-back in the mining sector to add South32 and Glencore to the portfolio. We were attracted by South32's strong cash generation, exposure to aluminium/alumina where pollution-related supply-side reforms are supportive, and it has a management team willing to return cash to shareholders. Glencore's gearing has fallen significantly over the past two years on the back of self-help measures and a recovery in commodity prices.

Other new positions included Shire following the announcement that Takeda was interested in a bid; Barclays following negative news flow which left the shares trading on a significant valuation discount; and WPP following a series of negative trading statements that has left the company on a low valuation. We believe these concerns are already reflected in current valuations, and that WPP remains a high-quality global leader in its markets.

We exited a number of positions where the investment case had played out or we saw better value within the sector. Sales included BAE Systems, Ladrokes Coral, Fidessa, NEX Group, Morrison's, Sainsbury's, Mitchell's & Butler and ITV.

Schroder Investment Management Limited,

27 June 2018

Securities shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Manager's Review (Baillie Gifford)

As detailed in the Chairman's Statement, responsibility for managing the portfolio will move to Baillie Gifford from the end of the day on 29 June 2018, subject to the approval of the Financial Conduct Authroity ("FCA"), but no later than 13 July 2018. The portfolio will be co-managed by Iain McCombie and Milena Mileva who will re-align the portfolio to invest in a concentrated selection of what they believe to be the best UK growth companies. The report that now follows, written by the new portfolio managers, introduces their investment philosophy and process.

The Manager's core investment beliefs:

We believe the following key elements of our investment philosophy and process provide a sustainable basis for adding value for shareholders.

Long-term, committed, growth investors:

- We are genuinely long-term investors and believe this is our key advantage in the context of a financial services industry which is preoccupied with short-term noise and costly hyperactivity. We try to assess where a company's earnings might be in five to ten years' time, not to guess what the next quarter's earnings might be. As a result, our portfolio turnover is expected to be less than 20%, much lower than the industry average.

- We seek to add value by identifying the few companies capable of delivering and sustaining above average growth over long periods. Although short-term sentiment can often swing in unpredictable ways, we believe that share prices will, over time, move to reflect the economics of the underlying assets, and above average growth in earnings and cash flows will ultimately be rewarded with superior share price performance. Our patient, long-term approach ensures that company fundamentals are given time to drive returns.

- We prefer to run our successful investments and will resist the temptation to take profits provided we have confidence that our thesis remains intact. We believe it is counter-productive to sell dynamic growth equity investments because a static target price has been reached.

- We believe we have an obligation to act as responsible stewards of the businesses we own on shareholders' behalf. We endeavour to help the companies we invest in to manage their businesses in a sustainable manner through thoughtful and long-term engagement.

- Low trading costs are a natural consequence of our long-term approach and of benefit to shareholders.

Active investment manager:

- We are index agnostic investors. We buy companies we believe will outperform materially over the long-term and do not buy shares in a company just because it is a large component of the index. Given our clear philosophy, large swathes of the market will be unattractive and of no interest to us.

- We invest on a resolutely bottom-up basis. We pay little attention to macro-economic forecasts and believe we have a better chance of adding value for shareholders by identifying attractive individual company investments rather than by adopting larger thematic or industry positions.

- We view a high active share as a necessary prerequisite for adding value over the long-term and shareholders should be comfortable tolerating the inevitable ups and downs in short-term relative performance that will follow from that. Given our long-term approach, we respectfully request shareholders to judge our investment performance on a similar timescale (five years).

Small investment teams make better decisions:

- We believe that small teams promote effective decision-making. Our well-established process puts a significant emphasis on sharing information and ideas as well as encouraging an open and robust debate. Although, as co-managers, we retain final responsibility and accountability for the portfolio, we believe we benefit tremendously from this collective analytical input.

Multiple research inputs

- We think it is critical that we have a global perspective on our investments. We seek to achieve this through frequent interaction with the rest of the regional investors, global investors, and sector specialists around Baillie Gifford.

A differentiated portfolio

We believe our investment philosophy and process will result in a differentiated portfolio for shareholders. Our view is that the UK market is home to many exciting growth businesses and we have identified a number of these spanning many different sectors. We think some of these companies are true world leaders in their fields and benefit from strong and sustainable competitive positions. They are pursuing large and dynamic growth opportunities, which are often global in nature; their innovation is enabling them to disrupt and transform the industries in which they operate. These companies are managed in a genuinely long term manner, building businesses that can prosper over many years. We believe their strengths and adaptability will enable them to successfully navigate evidently seismic macro-economic and political shocks.

Outlook

The portfolio will reflect our highest conviction ideas which we believe will grow at an above average rate over the medium term. There will be periods when fundamentals are not reflected in shareholder returns, such as when our growth style is out of favour. We will, however, remain committed to our process and are confident that it will create significant value for shareholders over the long-term.

Baillie Gifford & Co Limited

27 June 2018

Principal Risks and Uncertainties

The Board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit Committee on an ongoing basis. This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving its strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last review took place in June 2018.

The principal risks and uncertainties have remained unchanged throughout the year under review. The Board has also considered the potential impact on the Company's principal risks that may arise as a consequence of the transfer to the new AIFM and the associated new custodian arrangements. These include the heightened risk of volatility in the Company's share price, operational disruption to custody and record keeping, and additional costs incurred in transitioning to the new investment strategy. Having identified these risks, the Board has made arrangements to both manage and where possible mitigate them, including negotiating the management fee waiver from the new manager and discussions with the Schroders ISA administrator to try to ensure that any sale of the Company's shares by it is conducted in an orderly manner aimed at avoiding or minimising any adverse impact on the share price.

The Board has also performed necessary due diligence to satisfy itself as to the adequacy and effectiveness of internal controls and risk management at the new AIFM and custodian.

Actions taken by the Board and, where appropriate, its Committees, to manage and mitigate the Company's principal risks and uncertainties are set out in the table below.

 
 Risk                                         Mitigation and management 
 Strategic 
 The Company's investment objectives          Appropriateness of the Company's 
  may become out of line with the              investment remit periodically 
  requirements of investors, resulting         reviewed and success of the 
  in a wide discount of the share              Company in meeting its stated 
  price to underlying net asset value.         objectives is monitored. 
 
                                               Share price relative to net 
                                               asset value monitored and use 
                                               of buy-back authorities considered 
                                               on a regular basis. 
 
                                               Marketing and distribution activity 
                                               is actively reviewed. 
 Investment management 
 The Manager's investment strategy,           Review of the Manager's compliance 
  if inappropriate, may result in              with the agreed investment restrictions, 
  the Company underperforming the              investment performance and risk 
  market and/or peer group companies,          against investment objectives 
  leading to the Company and its objectives    and strategy; relative performance; 
  becoming unattractive to investors.          the portfolio's risk profile; 
                                               and appropriate strategies employed 
                                               to mitigate any negative impact 
                                               of substantial changes in markets. 
 
                                               Ongoing review and monitoring 
                                               of the suitability of the Manager. 
 Financial and currency 
 The Company is exposed to the effect         Risk profile of the portfolio 
  of market fluctuations due to the            considered and appropriate strategies 
  nature of its business. A significant        to mitigate any negative impact 
  fall in equity markets could have            of substantial changes in markets 
  an adverse impact on the market              discussed with the Manager, 
  value of the Company's underlying            including those originating 
  investments.                                 from political risk. 
 
  The Company's cost base could become         Ongoing competitiveness of all 
  uncompetitive, particularly in light         service provider fees subject 
  of open-ended alternatives.                  to periodic benchmarking against 
                                               competitors. 
 
                                               Annual consideration of management 
                                               fee levels. 
 Depositary and Custody 
 Safe custody of the Company's assets         Depositary reports on safe custody 
  may be compromised through control           of the Company's assets, including 
  failures by the Depositary, including        cash, and portfolio holdings 
  cyber hacking.                               are independently reconciled 
                                               with the Manager's records. 
 
                                               Review of audited internal controls 
                                               reports covering custodial arrangements. 
 
                                               Annual report from the Depositary 
                                               on its activities, including 
                                               matters arising from custody 
                                               operations. 
 Gearing and leverage 
 The Company utilises credit facilities.      Gearing is monitored and strict 
  These arrangements increase the              restrictions on borrowings imposed: 
  funds available for investment through       gearing continues to operate 
  borrowing. While this has the potential      within pre-agreed limits so 
  to enhance investment returns in             as not to exceed 20% of shareholders' 
  rising markets, in falling markets           funds. The Company can also 
  the impact could be detrimental              hold up to 20% of shareholders' 
  to performance.                              funds in cash or cash equivalents. 
 Accounting, legal and regulatory 
 In order to continue to qualify              Confirmation of compliance with 
  as an investment trust, the Company          relevant laws and regulations 
  must comply with the requirements            by key service providers. 
  of Section 1158 of the Corporation 
  Tax Act 2010.                                Shareholder documents and announcements, 
                                               including the Company's published 
  Breaches of the UK Listing Rules,            Annual Report, are subject to 
  the Companies Act or other regulations       stringent review processes. 
  with which the Company is required 
  to comply, could lead to a number            Procedures have been established 
  of detrimental outcomes.                     to safeguard against disclosure 
                                               of inside information. 
 Service provider 
 The Company has no employees and             Service providers appointed 
  has delegated certain functions              subject to due diligence processes 
  to a number of service providers,            and with clearly-documented 
  principally the Manager, Depositary          contractual arrangements detailing 
  and Registrar. Failure of controls,          service expectations. 
  including as a result of cyber hacking, 
  and poor performance of any service          Regular reporting by key service 
  provider could lead to disruption,           providers and monitoring of 
  reputational damage or loss.                 the quality of services provided. 
 
                                               Review of annual audited internal 
                                               controls reports from key service 
                                               providers, including confirmation 
                                               of business continuity arrangements 
                                               and IT controls. 
 

Viability statement

The Directors have assessed the viability of the Company over a five year period, taking into account the Company's position at 30 April 2018 and the potential impacts of the principal risks and uncertainties it faces for the review period.

A period of five years has been chosen for the purposes of the assessment of viability as the Board believes that this reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding.

In its assessment of the viability of the Company, the Directors have considered each of the Company's principal risks and uncertainties detailed on pages 11 and 12 of the 2018 Annual Report and in particular the impact of a significant fall in UK equity markets on the value of the Company's investment portfolio. The Directors have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary and on that basis consider that five years is an appropriate time period.

The Directors have considered the potential effect of future developments, including the appointment of a new AIFM and the related changes to other service providers.

Based on the Company's processes for monitoring operating costs, the Board's assessment of the resources of the new AIFM, the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to 30 April 2023.

In reaching this decision, the Board has taken into account the Company's 2019 continuation vote, on the presumption that it will be passed.

Going concern

Having assessed the principal risks and the other matters discussed in connection with the viability statement set out above, and the "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" published by the FRC in 2014, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Statement of Directors' responsibilities in respect of the Annual Report and Accounts

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the financial statements, the Directors are required to:

   -    select suitable accounting policies and then apply them consistently; 

- state whether applicable United Kingdom Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;

   -    make judgements and accounting estimates that are reasonable and prudent; and 

- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.

The Directors are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Each of the Directors, whose names and functions are listed in the Board of Directors on pages 14 and 15 of the 2018 Annual Report confirm that, to the best of their knowledge:

- the Company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

- the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

Income Statement for the year ended 30 April 2018

 
                                         2018                          2017 
                              Revenue   Capital     Total   Revenue   Capital     Total 
                              GBP'000   GBP'000   GBP'000   GBP'000   GBP'000   GBP'000 
Gains on investments 
 held at fair value 
 through profit or 
 loss                               -    16,354    16,354         -    37,665    37,665 
Income from investments        10,977        91    11,068    10,068         -    10,068 
Other interest receivable 
 and similar income                 3         -         3         1         -         1 
---------------------------  --------  --------  --------  --------  --------  -------- 
Gross return                   10,980    16,445    27,425    10,069    37,665    47,734 
Investment management 
 fee                            (460)   (1,072)   (1,532)     (443)   (1,033)   (1,476) 
Administrative expenses         (399)         -     (399)     (375)         -     (375) 
---------------------------  --------  --------  --------  --------  --------  -------- 
Net return before 
 finance costs and 
 taxation                      10,121    15,373    25,494     9,251    36,632    45,883 
Finance costs                     (8)      (18)      (26)         -         -         - 
---------------------------  --------  --------  --------  --------  --------  -------- 
Net return on ordinary 
 activities before 
 taxation                      10,113    15,355    25,468     9,251    36,632    45,883 
Taxation on ordinary 
 activities                      (14)         -      (14)       (3)         -       (3) 
---------------------------  --------  --------  --------  --------  --------  -------- 
Net return on ordinary 
 activities after taxation     10,099    15,355    25,454     9,248    36,632    45,880 
---------------------------  --------  --------  --------  --------  --------  -------- 
Return per share                6.58p    10.00p    16.58p     5.83p    23.09p    28.92p 
 

Dividends declared in respect of the financial year ended 30 April 2018 amount to 6.00p (2017: 5.40p) per share. Further information on dividends is given in note 8 on pages 36 and 37 of the 2018 Annual Report.

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the year.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

Statement of Changes in Equity for the year ended 30 April 2018

 
                             Called-up                Capital    Warrant      Share 
                                 share     Share   redemption   exercise   purchase    Capital   Revenue 
                               capital   premium      reserve    reserve    reserve   reserves   reserve     Total 
                               GBP'000   GBP'000      GBP'000    GBP'000    GBP'000    GBP'000   GBP'000   GBP'000 
At 30 April 2016                40,229     9,875       19,759        417     77,191    119,471     7,938   274,880 
Net return on ordinary 
 activities after taxation           -         -            -          -          -     36,632     9,248    45,880 
Repurchase of the 
 Company's own shares 
 into treasury                       -         -            -          -    (7,955)          -         -   (7,955) 
Dividends paid in 
 the year                            -         -            -          -          -          -   (8,433)   (8,433) 
---------------------------  ---------  --------  -----------  ---------  ---------  ---------  --------  -------- 
At 30 April 2017                40,229     9,875       19,759        417     69,236    156,103     8,753   304,372 
Net return on ordinary 
 activities after taxation           -         -            -          -          -     15,355    10,099    25,454 
Repurchase of the 
 Company's own shares 
 into treasury                       -         -            -          -    (8,803)          -         -   (8,803) 
Dividends paid in 
 the year                            -         -            -          -          -          -   (8,771)   (8,771) 
---------------------------  ---------  --------  -----------  ---------  ---------  ---------  --------  -------- 
At 30 April 2018                40,229     9,875       19,759        417     60,433    171,458    10,081   312,252 
---------------------------  ---------  --------  -----------  ---------  ---------  ---------  --------  -------- 
 

Statement of Financial Position at 30 April 2018

 
                                                     2018      2017 
                                                  GBP'000   GBP'000 
Fixed assets 
Investments held at fair value through profit 
 or loss                                          318,885   300,204 
Current assets 
Debtors                                             2,219     4,357 
Cash at bank and in hand                            3,642     1,712 
-----------------------------------------------  --------  -------- 
                                                    5,861     6,069 
-----------------------------------------------  --------  -------- 
Current liabilities 
Creditors: amounts falling due within one year   (12,494)   (1,901) 
-----------------------------------------------  --------  -------- 
Net current (liabilities)/assets                  (6,633)     4,168 
-----------------------------------------------  --------  -------- 
Total assets less current liabilities             312,252   304,372 

-----------------------------------------------  --------  -------- 
Net assets                                        312,252   304,372 
-----------------------------------------------  --------  -------- 
Capital and reserves 
Called-up share capital                            40,229    40,229 
Share premium                                       9,875     9,875 
Capital redemption reserve                         19,759    19,759 
Warrant exercise reserve                              417       417 
Share purchase reserve                             60,433    69,236 
Capital reserves                                  171,458   156,103 
Revenue reserve                                    10,081     8,753 
-----------------------------------------------  --------  -------- 
Total equity shareholders' funds                  312,252   304,372 
-----------------------------------------------  --------  -------- 
Net asset value per share                         207.45p   195.63p 
 

Notes to the Accounts

   1.         Accounting Policies 

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in November 2014 and updated in February 2018. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments held at fair value through profit or loss.

The accounts are presented in sterling and amounts have been rounded to the nearest thousand.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 30 April 2017.

   2.         Taxation on ordinary activities 
 
                                          2018      2017 
                                       GBP'000   GBP'000 
(a) Analysis of charge in the year: 
Irrecoverable overseas tax                   3         3 
Income tax                                  11         - 
------------------------------------  --------  -------- 
Tax charge for the year                     14         3 
------------------------------------  --------  -------- 
 
   (b)        Factors affecting the tax charge for the year 

The tax assessed for the year is lower (2017: lower) than the Company's applicable rate of corporation tax for the year of 19.00% (2017: 19.92%).

The factors affecting the tax charge for the year are as follows:

 
                                                   2018                          2017 
                                        Revenue   Capital     Total   Revenue   Capital     Total 
                                        GBP'000   GBP'000   GBP'000   GBP'000   GBP'000   GBP'000 
Net return on ordinary activities 
 before taxation                         10,113    15,355    25,468     9,251    36,632    45,883 
-------------------------------------  --------  --------  --------  --------  --------  -------- 
Net return on ordinary activities 
 before taxation multiplied 
 by the Company's applicable 
 rate of corporation tax for 
 the year of 19.00% (2017: 
 19.92%)                                  1,921     2,917     4,838     1,843     7,297     9,140 
Effects of: 
Capital returns on investments                -   (3,107)   (3,107)         -   (7,503)   (7,503) 
Income not chargeable to corporation 
 tax                                    (1,993)      (17)   (2,010)   (1,993)         -   (1,993) 
Unrelieved expenses                          72       207       279       150       206       356 
Irrecoverable overseas tax                    3         -         3         3         -         3 
Income tax                                   11         -        11         -         -         - 
-------------------------------------  --------  --------  --------  --------  --------  -------- 
Tax charge for the year                      14         -        14         3         -         3 
-------------------------------------  --------  --------  --------  --------  --------  -------- 
 
   (c)        Deferred taxation 

The Company has an unrecognised deferred tax asset of GBP7,350,000 (2017: GBP7,099,000) based on a prospective corporation tax rate of 17% (2017: 17%). The reduction in the standard rate of corporation tax was substantively enacted in September 2016 and is effective from 1 April 2020.

The deferred tax asset has arisen due to the cumulative excess of deductible expenses over taxable income. Given the composition of the Company's portfolio, it is not likely that this asset will be utilised in the foreseeable future and therefore no asset has been recognised in the accounts.

The Company intends to meet the conditions required to retain its status as an Investment Trust Company and therefore no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments.

   3.         Dividends 
   (a)        Dividends paid and declared 
 
                                                          2018      2017 
                                                       GBP'000   GBP'000 
2017 second interim dividend of 2.70p (2016: 2.60p) 
 paid out of revenue profits(1)                          4,198     4,166 
2018 first interim dividend of 3.00p (2017: 2.70p) 
 paid out of revenue profits                             4,573     4,267 
----------------------------------------------------  --------  -------- 
Total dividends paid in the year                         8,771     8,433 
----------------------------------------------------  --------  -------- 
 
 
                                                            2018      2017 
                                                         GBP'000   GBP'000 
2018 second interim dividend declared of 3.00p (2017: 
 2.70p) to be paid out of revenue profits                  4,516     4,201 
------------------------------------------------------  --------  -------- 
 

1The 2017 second interim dividend amounted to GBP4,201,000. However the amount actually paid was GBP4,198,000 as shares were repurchased into treasury after the accounting date but prior to the dividend Record Date.

   (b)        Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ("S1158") 

The requirements of S1158 are considered on the basis of dividends declared in respect of the financial year as shown below. The revenue available for distribution by way of dividend for the year is GBP10,099,000 (2017: GBP9,248,000).

 
                                                       2018      2017 
                                                    GBP'000   GBP'000 
First interim dividend of 3.00p (2017: 2.70p)         4,573     4,267 
Second interim dividend of 3.00p (2017: 2.70p)        4,516     4,201 
-------------------------------------------------  --------  -------- 
Total dividends of 6.00p (2017: 5.40p) per share      9,089     8,468 
-------------------------------------------------  --------  -------- 
 
   4.         Return per share 
 
                                                           2018         2017 
Revenue return (GBP'000)                                 10,099        9,248 
Capital return (GBP'000)                                 15,355       36,632 
--------------------------------------------------  -----------  ----------- 
Total return (GBP'000)                                   25,454       45,880 
--------------------------------------------------  -----------  ----------- 
Weighted average number of shares in issue during 
 the year                                           153,594,108  158,643,285 
Revenue return per share                                  6.58p        5.83p 
Capital return per share                                 10.00p       23.09p 
--------------------------------------------------  -----------  ----------- 
Total return per share                                   16.58p       28.92p 
--------------------------------------------------  -----------  ----------- 
 
   5.         Called-up share capital 
 
                                                             2018      2017 
                                                          GBP'000   GBP'000 
Ordinary shares allotted, called-up and fully paid: 
Opening balance of 155,589,184 (2017: 160,375,184) 
 shares of 25p each, excluding shares held in treasury     38,897    40,094 
Repurchase of 5,068,700 (2017: 4,786,000) shares 
 into treasury                                            (1,267)   (1,197) 
-------------------------------------------------------  --------  -------- 
Subtotal of 150,520,484 (2017: 155,589,184) shares         37,630    38,897 
10,396,700 (2017: 5,328,000) shares held in treasury        2,599     1,332 
-------------------------------------------------------  --------  -------- 
Closing balance(1)                                         40,229    40,229 
 

(1) Represents 160,917,184 (2017: 160,917,184) shares of 25p each, including 10,396,700 (2017: 5,328,000) shares held in treasury. During the year, the Company purchased 5,068,700 of its own shares, nominal value GBP1,267,175 to hold in treasury for a total consideration of GBP8,803,000 representing 3.3% of the shares outstanding at the beginning of the year. The reason for these share repurchases was to seek to manage the volatility of the share price discount to net asset value per share.

   6.         Net asset value per share 
 
                                                           2018         2017 
Total equity shareholders funds (GBP'000)               312,252      304,372 
Shares in issue at the year end, excluding shares 
 held in treasury                                   150,520,484  155,589,184 
--------------------------------------------------  -----------  ----------- 
Net asset value per share                               207.45p      195.63p 
--------------------------------------------------  -----------  ----------- 
 
   7.         Disclosures regarding financial instruments measured at fair value 

The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio.

FRS 102 requires financial instruments to be categorised into a hierarchy consisting of the three levels below.

Level 1 - valued using unadjusted quoted prices in active markets for identical assets.

Level 2 - valued using observable inputs other than quoted prices included within Level 1.

Level 3 - valued using inputs that are unobservable.

Details of the valuation techniques used by the Company are given in note 1(b) on page 33 of the 2018 Annual Report.

At 30 April 2018, all investments in the Company's portfolio were categorised as Level 1 (2017: same).

   8.       Status of announcement 

2017 Financial Information

The figures and financial information for 2017 are extracted from the published Annual Report and Accounts for the year ended 30 April 2017 and do not constitute the statutory accounts for that year. The 2017 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2018 Financial Information

The figures and financial information for 2018 are extracted from the Annual Report and Accounts for the year ended 30 April 2018 and do not constitute the statutory accounts for the year. The 2018 Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2018 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

Neither the contents of the Company's webpage nor the contents of any website accessible from hyperlinks on the Company's webpage (or any other website) is incorporated into, or forms part of, this announcement.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [e-mail] or visit www.rns.com.

END

FR SEWFAWFASELM

(END) Dow Jones Newswires

June 28, 2018 02:00 ET (06:00 GMT)