Annual Financial Report
Aberforth Smaller Companies Trust plc
Audited Final Results for the year to 31 December 2013
The following is an extract from the Company's Annual Report and Accounts for
the year to 31 December 2013. The Annual Report is expected to be posted to
shareholders on 1 February 2014. Members of the public may obtain copies from
Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its
website at www.aberforth.co.uk. A copy will also shortly be available for
inspection at the National Storage Mechanism at: www.morningstar.co.uk/uk/NSM
facility.
FINANCIAL HIGHLIGHTS
Net Asset Value Total Return +52.4%
Benchmark Index Total Return +36.9%
Ordinary Share Price Total Return +62.0%
Final Dividend increased by 5.9% to 16.15p per Ordinary Share
The objective of Aberforth Smaller Companies Trust plc (ASCoT) is to achieve a
net asset value total return (with dividends reinvested) greater than that of
the Numis Smaller Companies Index (excluding Investment Companies) over the
long term. ASCoT is managed by Aberforth Partners LLP.
CHAIRMAN'S STATEMENT TO SHAREHOLDERS
Review of 2013 performance
In last year's Chairman's Statement, I warned that the returns we had enjoyed
from smaller companies in 2012 were unlikely to be repeated in 2013. I am
delighted to say that this proved wide of the mark. 2013 was another excellent
year for UK smaller companies, surpassing the substantial returns in 2012. The
FTSE 100 Index gave a total return of 18.7%, while the FTSE All-Share Index,
which is heavily weighted towards large companies, gave a return of 20.8%. By
comparison, the Numis Smaller Companies Index excluding Investment Companies
(NSCI (XIC)), your Company's benchmark, gave a return of 36.9%. Over the same
period, your Company's net asset value total return was 52.4%, while the share
price total return was 62.0%.
From a historical perspective, 2013 returns represent the best absolute annual
returns achieved by your Company since its inception in 1990. The Managers'
Report provides more detail on 2013's performance and, importantly, will put it
into a longer term perspective, with regard to the size and style influences
that have prevailed since the 2008 crisis.
It would be remiss of me not to re-iterate what I said last year, namely, that
returns of this magnitude require a health warning. They are unlikely to be
matched in 2014.
Continuation vote
It is your Company's policy to hold a continuation vote every three years. The
Annual General Meeting on 27 February 2014 brings the seventh such vote in your
Company's history. In performance terms, the three year returns for your
Company compared to its benchmark (73.9% vs 61.7%) provide a favourable
backdrop to the upcoming vote. That has not always been the case and indeed the
future will inevitably involve continuation votes that are set against periods
of three year underperformance. All fund managers, including the most talented,
experience runs of poor returns. This is why performance needs to be assessed
over very long intervals in order to distinguish between luck, whether good or
bad, and true investment skill.
This is especially true of value investors. The Managers, Aberforth Partners,
have a consistent investment approach based on the value investing style. This
can lead to indeterminate periods of underperformance. These periods can be
both savage, as was the case during the TMT bubble in the late 1990s, and
enduring, as has been the case in the post 2008 financial crisis world. For the
value manager, such times represent a clear and present danger. It is during
these periods of extreme underperformance that the temptation to become a
"little less value" and a "bit more growth" becomes intense. Yielding to
temptation would obviously dilute any outperformance as and when value returned
to favour as was the case in 2013.
The Managers' consistent investment approach and long run performance record
over 23 years are two of the most important facets that your Board has
considered in putting forward a recommendation with regard to the continuation
vote. Your Board continues to have confidence in the Managers and believes that
their niche offering, coupled with a commitment to restrict the business in
terms of funds under management, has served Shareholders well over the past 23
years. A well resourced and experienced, but evolving, investment team, which
holds a significant stake in your Company, brings additional benefits in the
opinion of your Board and avoids some of the "star manager issues" that have
characterised the broader fund management industry in recent years. Your Board
is therefore recommending that Shareholders vote in favour of your Company's
continuation. Your Board intends to do so in respect of their aggregate
beneficial holdings of 73,686 Ordinary Shares.
Dividends
In 2013, despite a lacklustre profits backdrop, the dividend experience from
investee companies continued to be generally positive. In this context, your
Board is pleased to declare a final dividend of 16.15p. This results in total
dividends for the year of 23.5p, representing an increase of 5.6% on 2012.
Based on the year end share price of 1095p, your Company's shares deliver a
2.1% yield.
Your Board remains committed to a progressive dividend policy. Your Company's
revenue reserves, after adjusting for payment of the final dividend, amount to
36.1p per share (up from 32.1p as at 31 December 2012), and provide a degree of
flexibility going forward.
The final dividend, subject to shareholder approval at the 2014 Annual General
Meeting, will be paid on 6 March 2014 to Shareholders on the register as at the
close of business on 7 February 2014. The ex dividend date is 5 February 2014.
Your Company operates a Dividend Reinvestment Plan and details of the plan,
including the Form of Election, are available from Aberforth Partners LLP or on
its website, www.aberforth.co.uk.
Gearing
It has been your Company's policy to use gearing in a tactical manner
throughout its 23 year history. The existing £100m facility with The Royal Bank
of Scotland has a term expiring in May 2014. As has been the case in the past
the facility term dovetails with the three yearly continuation vote cycle.
After the Annual General Meeting, and providing the continuation vote is duly
passed, your Board and the Managers would seek to put in place a new facility
which would continue to provide your Company with access to liquidity for
investment purposes and to fund share buy-ins as and when appropriate. In an
illiquid, and at times volatile, asset class such as UK smaller companies
having access to immediate funds through a credit facility provides the
Managers with enhanced flexibility. At the year end, gearing stood at 2.6% of
Shareholders' funds. During the year, the level of gearing ranged from 1.7% to
8.0% with an average of 5.4%.
Board changes
Professor Walter Nimmo, who has been a Director since July 2004, will not be
standing for re-election at the forthcoming Annual General Meeting. Walter has
been an excellent member of your Board and we will all miss his invaluable
contributions. We wish Walter all the very best for the future.
We are delighted to appoint both Julia Le Blan and Paula Hay-Plumb as directors
of your Company with effect from 29 January 2014. Both bring a wealth of
knowledge of the investment world, including investment trusts, and we look
forward to working with them.
Share buy-in
At the Annual General Meeting in March 2013, the authority to buy in up to
14.99% of your Company's Ordinary Shares was approved. During the year, 310,000
Ordinary Shares (0.3% of the Company's issued share capital) were bought in at
a total cost of £2.758 million. Consistent with your Board's stated policy,
those Ordinary Shares have been cancelled rather than held in Treasury. Once
again, your Board will be seeking to renew the buy-in authority at the Annual
General Meeting on 27 February 2014.
Regulatory developments
As highlighted previously, your Company is an "Alternative Investment Fund" as
defined by the Alternative Investment Fund Managers Directive. Your Board has
invited the Managers to act as the "Alternative Investment Fund Manager" for
your Company. The various steps to be completed to ensure your Company and the
Managers comply with the requirements of the Directive are well underway.
Summary
In my statement last year I drew attention to tentative signs that investors
were returning to both value investing and to the smaller constituents of the
NSCI (XIC). Those trends remained largely in place through 2013 to the benefit
of your Company's absolute and relative performance. Encouragingly, historical
data might suggest that such shifts can often persist over several years but,
equally importantly, historical data would also suggest 2014 returns will be
materially below those achieved in 2013.
Irrespective of what 2014 delivers, your Board continues to have confidence in
the value investment style and in the Managers' consistent application of that
style to the benefit of Shareholders. That consistency lies at the heart of the
excellent long term returns achieved by your Company. Since your Company's
formation in 1990, the NSCI (XIC) has risen by 11.8% pa in total return terms.
By comparison, your Company's net asset value total return has been 14.8% pa.
Finally, your Board very much welcomes your views and we are always available
to talk to Shareholders directly. My email address is noted below.
Professor Paul Marsh
Chairman
28 January 2014
paul.marsh@aberforth.co.uk
MANAGERS' REPORT
Introduction
With an NAV total return in 2013 of 52.4%, ASCoT enjoyed its best ever year of
absolute performance since its launch in 1990. This return is analysed in
detail in the Investment Performance section of this report, but the principal
influences were the general buoyancy of equity markets, the particular strength
of small companies and a re-emergence of the value style. In the UK, the FTSE
All-Share recorded a total return of 20.8%. Large companies have now exceeded
their previous peak levels, set in 2007, in both capital only and total return
terms. Small companies, measured by the NSCI (XIC), entered new territory some
time ago and in 2013, with a total return of 36.9%, extended their record of
out-performance against large companies since the global financial crisis.
Indeed, the period since the crisis has witnessed small companies' best five
year performance against large companies in ASCoT's history.
The roots of these returns from small companies were in the very low valuations
ascribed to riskier assets as they emerged from the recession and global
financial crisis. In the immediate aftermath, investors tended to crave
certainty and thus eschewed the more illiquid or, what they perceived as, more
volatile small companies. The "risk-on, risk-off" phenomenon of recent years
acted as a further discouragement. In 2013, impetus was given to the
performance of small companies by improving confidence amongst investors, as
evidence mounted that the global macro economy is stabilising, if not
improving.
The Eurozone stopped getting worse, though the buoyancy of the core at the
expense of the periphery continues and thus probably raises the future threat
to the integrity of the currency union. In the US, the recovery proceeds,
despite the best efforts of the politicians and uncertainty over the "tapering"
of quantitative easing. With the US current account deficit showing less
inclination to expand than in previous recoveries, China has experienced
pressure on its still high growth rates, though there is some optimism that the
new leadership regime is determined to effect a rebalancing of the economy
towards domestic demand.
The UK's economy confounded the majority of expectations that prevailed at the
start of the year. The recovery became more firmly entrenched as the
coalition's growth initiatives, together with less difficult export markets,
started to take effect. "Help-to-buy" divides opinion but there is little doubt
that it is influential, directly on the housing market and indirectly on areas
such as general confidence and tax revenues. The concern is that a recovery
based on higher lending is ephemeral, so examination of movements in real
incomes will intensify in 2014. While interest rates are likely to remain
extremely low until 2015, scrutiny of Mark Carney and his own "tapering"
tactics will increase over coming months.
The pick-up in confidence arising from improving world economies has, in turn,
engendered a willingness among investors to venture into long-neglected parts
of the stockmarket, which has been accompanied by a shift in investment style
towards the value approach of your Managers. But enthusiasm continues to be
tempered by the influence of today's very loose monetary conditions: the extent
of the real economy's reliance on quantitative easing and low interest rates is
unclear. In an investment world confronted by "tapering", the prevailing
mind-set of investors would appear to be that good news, from the perspective
of the real economy, is bad news for asset prices. However, with anything
approaching a long term investment horizon, should not a normalisation of
monetary conditions, associated with an improving economy, be cause for
encouragement?
Investment performance
ASCoT's NAV total return in 2013 was 52.4%, which is the best calendar year
result in the trust's history. Gearing, which averaged 5.4% through the year,
was helpful, as the table below demonstrates.
For the 12 months ended 31 December 2013 Basis points
Stock selection 1,264
Sector selection (25)
------
Attributable to the portfolio of investments, 1,239
based on mid prices
(after transaction costs of 51 basis points)
Movement in mid to bid price spread 75
Cash/gearing 321
Purchase of ordinary shares 5
Management fee (91)
Other expenses (6)
-----
Total attribution based on bid prices 1,543
-----
Note: 100 basis points = 1%. Total Attribution is the difference between
the total return of the NAV and the Benchmark Index (i.e. NAV = 52.36%;
Benchmark Index = 36.93%; difference is 15.43% being 1,543 basis points).
Sectors
The distinction between stock and sector selection shown in the preceding table
may give a false impression of your Managers' investment process. The vast
majority of companies enter the portfolio through a bottom-up assessment of
their individual merits; it is very unusual for top-down considerations to
affect the portfolio's profile. However, collections of decisions on individual
businesses can result in an exposure of the portfolio to sector themes. At the
current time, one such theme would be the portfolio's relatively low weighting
in resources. This reflects a concern that the cheap money available to this
sector over the past decade and consequent substantial investment has resulted
in an imbalance of supply and demand for several commodities. Few company
boards within the small company resources arena have as yet woken up to the new
environment of greater capital discipline that is exemplified by some of their
larger peers. That said, if they do, opportunities may emerge.
With an exposure of 11.4% against 7.8% for the NSCI (XIC), the portfolio's
largest over-weight sector position is in Technology. This very much reflects
an aggregation of decisions on individual businesses, rather than a particular
optimism for spending on technology. In 2013, this positioning was unhelpful to
ASCoT's relative return as the market was led by sectors more likely to benefit
from a domestic cyclical recovery.
Style
Your Managers' tendency to revisit the influence of investment style is due to
their consistent adherence to their value investment philosophy. The
stockmarket is more fickle and oscillates between periods of favouring either
the growth or the value style. Between the global financial crisis and the
beginning of 2013, the growth style was in the ascendancy, as tough economic
conditions and heightened uncertainty favoured companies with secular, albeit
often modest, growth characteristics. However, the rising confidence of 2013
encouraged a more general re-acquaintance with the cheaper "smaller small"
companies that have inhabited ASCoT's portfolio for some time. Aberforth
employs two third party style models to gauge style influences on the
performance of the NSCI (XIC). These give mixed messages about the precise
performance of the value style in 2013. However, your Managers would suggest
that the extent of ASCoT's out-performance against the NSCI (XIC) would have
been difficult to achieve without a following wind from style.
Strong balance sheets
The national accounts show that the UK corporate sector has been a net saver
for over a decade. The global financial crisis and recession only added to the
reluctance of boards to utilise their cash and so balance sheets have
strengthened significantly over the past five years. Small companies have been
part of this trend: one third of Aberforth's tracked universe is represented by
companies with net cash on their balance sheets. While cash provides strategic
flexibility, it drags down returns on equity, particularly in the present low
interest rate environment. Companies with net cash on their balance sheets
account for 37% of ASCoT's portfolio. In many cases, cash levels are more than
sufficient even in the eventuality of another recession. Your Managers are
therefore keen to see more of that financial strength employed. The preference
is clearly organic investment. Failing such opportunities, acquisitions might
make sense, though only if they compare favourably with the benchmark of low
risk returns of cash to shareholders.
De-equitisation
The good performance of small companies in 2013 came despite a dearth of M&A
activity. Only five deals within the NSCI (XIC) were completed; of these, ASCoT
held one. This was by some distance the quietest year for M&A in ASCoT's
history. With balance sheets strong across much of the global corporate
landscape and with the valuations of the majority of small companies relatively
attractive, the explanation for the lack of M&A probably lies in low levels of
confidence around board tables in the early part of the year. However, with
confidence now picking up, it is likely that the frequency of M&A will increase
in 2014, but then again it can hardly decline.
Though they were deprived of M&A fees, it is difficult to feel too sorry for
the investment bankers since the IPO market has been resurgent: 15 IPOs
eligible for inclusion in the NSCI (XIC) were completed in 2013. Enthusiasm for
these deals was boosted by the desire of investors to increase exposure to the
often illiquid part of the stockmarket represented by the NSCI (XIC). Moreover,
in the early stages of the IPO market at least, valuations were attractive as
vendors had to accept lower prices in order to ensure that the listing would
take place. ASCoT participated in four IPOs through 2013, two of which were
still in the portfolio at the year end. Experience suggests that such
opportunities will become fewer as the IPO market gains momentum.
Dividends
Small companies have not traditionally been the first port of call for income
investors, despite income characteristics substantially accounting for the
superior total return over the long term of small companies against large.
However, it is plausible that a wider recognition of small companies' income
credentials has played a role in the particularly strong recent performance of
the asset class. At work have been two dynamics. First, the prevailing low
interest rate environment has starved the investment world of yield. With extra
impetus from quantitative easing, higher yielding assets have attracted the
attention of income investors and have seen their yields drop as a result. This
phenomenon, dubbed by some "yieldfall", has benefited higher yielding denizens
of the NSCI (XIC). Encouraging the process has been the second dynamic:
dividend growth, which has averaged close to 10% per annum in the years since
the global financial crisis. However, it is important to put this rate of
dividend growth in perspective: the base year, 2009, was the worst for small
company dividends since 1955.
Band Nil Down Flat Up New Other
No. of holdings 20 8 11 47 3 3
ASCoT's income account has benefited from this rising tide and from special
dividends. The most recent dividend experience is shown in the table above,
which categorises the portfolio according to each investee company's most
recent dividend action. Encouragingly, around half of the holdings raised their
dividends. "New" denotes those companies that started paying dividends for the
first time or that, having cut to zero, have resumed payments. The "Other"
category contains those companies whose most recent dividends have no relevant
comparison, such as the two 2013 IPOs. The "Nil" category contains those
companies that do not currently pay dividends; it may act as a reminder that
ASCoT is not an income fund, though your Managers' value style tends to bring
superior income characteristics across the portfolio as a whole. Most of the
members of the "Nil" category should be capable of paying dividends over the
next few years. As they do, ASCoT should enjoy a boost to its income and the
portfolio's average dividend cover, which at 3.2x is the highest in ASCoT's
history, will fall closer to the long term 2.4x average.
Valuations Characteristics
31 December 2013 31 December 2012
ASCoT NSCI(XIC) ASCoT NSCI (XIC)
Number of companies 92 363 90 389
Weighted average £646m £833m £511m £748m
market capitalisation
Price earnings ratio 13.6x 16.8x 10.5x 12.8x
(historic)
Dividend yield 2.3% 2.2% 3.0% 2.8%
(historic)
Dividend cover 3.2x 2.7x 3.1x 2.8x
Small companies experienced a sharp re-rating in 2013. Share prices climbed,
but profits across the asset class fell slightly over the year. This
disappointing profit performance reflects sluggish macro economic demand
conditions in the earlier part of the year and the particular difficulties
faced by many of the resources companies in the benchmark. The historic PE of
the NSCI (XIC) moved from 12.8x to 16.8x, crossing the average over ASCoT's 23
year history of 13.3x. Therefore, the valuation credentials of small companies,
which made them such an attractive asset class in the wake of the global
financial crisis, are no longer so compelling. However, there are mitigating
factors.
* The stockmarket is forward-looking and, with macro economic demand
picking-up and cost bases still lean, the prospects for profit growth in
2014 are good: consensus estimates suggest a 10% increase in profits across
the small company universe. Moreover, the weakness of 2013 makes
comparisons somewhat easier.
* ASCoT is actively managed and is not condemned to track the NSCI (XIC),
something that the experience of recent years amply demonstrates, both on
the upside and the downside. Your Managers strive to keep the portfolio
different from the benchmark. A statistical measure of this is Active
Money, which has been the focus of much academic research in recent years.
Active Money is the sum of the differences between the portfolio weight and
the benchmark weight for each stock held in the portfolio. Your Managers
aim to keep the ratio above 70%. Given this definition of Active Money, it
is impossible to reach 100% without holding companies that are not part of
the benchmark index. This is a practice that ASCoT has not pursued: it
invests in companies that are members of the benchmark or are likely to
become members on future rebalancing.
* "Value stretch" is an important concept in a value investment philosophy
and may be thought of as the degree to which growth companies are more
highly rated than value companies. If the value stretch is wide, then value
investors should be presented with an abundance of investment
opportunities. As the stockmarket valuations of these opportunities move to
reflect more fairly the underlying worth of the companies, the value
investor should enjoy good relative performance, other things being equal.
Your Managers believe that although the value style was helpful in 2013, the
value stretch remains at attractive levels. This may be demonstrated in two
ways. First, from a historical perspective, the average portfolio PE of 13.6x
sits 19% lower than the NSCI (XIC)'s 16.8x. Over ASCoT's history, the average
discount has been 10%, which suggests that there remain many attractively
valued companies within the investment universe.
2014 EV/EBITA ratio
34 growth 257 other Tracked Universe ASCoT's portfolio
companies companies
14.8x 10.8x 11.3x 9.5x
Second, as demonstrated by the preceding table, forward valuations also
demonstrate a significant gap between the valuation of the portfolio and that
of small companies as a whole. In comparing the valuations of businesses, your
Managers favour the ratio of enterprise value to earnings before interest, tax
and amortisation (EV/EBITA), since it is unaffected by balance sheet structure
and is also the metric commonly used in M&A situations. The table above shows
the 2014 EV/EBITA ratio for four categories of company. The Tracked Universe
represents 98% of the NSCI (XIC) by value and comprises the 291 companies that
are followed closely by your Managers. These are subdivided into 34 "growth
companies" and 257 "other companies". The average EV/EBITA of the former group,
which tended to perform well in the aftermath of the global financial crisis,
is 37% higher than that of the latter group. The premium of the growth stocks
to ASCoT's portfolio is higher, at 56%.
Outlook & conclusion
The improving performance of economies around the world, not least the UK's,
has challenged the orthodoxy that dominated financial markets in the aftermath
of the global financial crisis. Thus the focus has started to shift from the
relative safety of bonds' returns to their skimpiness, and there are
indications, albeit not yet "great", of a rotation from bonds into equities.
Within equity markets themselves, investors now seem more prepared to explore
areas that were overlooked in the aftermath of the global financial crisis.
Within the context of the NSCI (XIC), this means that interest has started to
broaden from the exclusive cadre of mid caps whose secular growth
characteristics or underlying steadiness of business model appealed in a
financial world craving certainty. Companies not displaying such "quality" and
whose valuations were consequently penalised are now attracting interest, which
is to the benefit of the value investment style and therefore to ASCoT.
Given the strength of returns over 2013, it is natural to question the
attractiveness of today's valuations. Your Managers take heart from what seems
still to be a wide value stretch. Moreover, there is evidence of broader
valuation anomalies still in place within the NSCI (XIC). "Smaller small"
companies remain more lowly rated than the mid cap components of the index: the
weighted average market capitalisation of the highly rated growth companies
described in the Valuations section above is £1.2bn, considerably higher than
the portfolio's £0.6bn. There is also evidence that the craving for certainty
continues to affect the valuations of companies with more volatile share
prices: since the global financial crisis, companies with more volatile share
prices are valued at a discount to those with lower volatility; prior to 2009,
the reverse was the case. This phenomenon represents an opportunity for those
funds, such as ASCoT, that are ready and able to adopt a longer term investment
horizon.
For these reasons, your Managers are optimistic that the NSCI (XIC) remains set
up in a manner that can benefit ASCoT's relative performance. However, as
recent years have made all too clear, the absolute returns that ASCoT generates
in 2014 and beyond will be heavily influenced by global financial and macro
economic factors that can seem very distant from the parochiality of small UK
quoted companies. With global debt levels still elevated and the precise
effects of quantitative easing difficult to assess, a normalisation of the
financial world is not without risk, but your Managers struggle to see
"tapering" as anything other than good news for equities in general and the
value style in particular over the medium to long term.
The events of the global financial crisis and its aftermath have taught many
lessons. Among these, from ASCoT's perspective, it has been shown again that
the long term out-performance of the value investment style can come in violent
bursts. Determining when the value stretch reaches its limits is difficult - it
was easy to miss the opportunities of 2009 or 2013. Your Managers seek to
minimise such risk by adhering at all times to their value investment
philosophy. This can result in years of poor performance relative to the
benchmark index, notably the TMT period and more recently the aftermath of the
global financial crisis. However, history suggests that consistent application
of such an investment approach does work over time. With its closed end
structure and ability to utilise gearing, ASCoT is well placed to exploit
shorter term swings in stockmarket sentiment to the benefit of its longer term
returns.
Aberforth Partners LLP
Managers
28 January 2014
DIRECTORS' RESPONSIBILITY STATEMENT
Each of the Directors confirm to the best of their knowledge that:
(a) the financial statements, 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
(b) the Annual 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 it faces. A summary of these can be found
below.
In addition, each of the Directors considers that the Annual Report, taken as a
whole, is fair, balanced and understandable and provides information necessary
for Shareholders to assess the Company's performance, objective and strategy.
On behalf of the Board
Prof Paul Marsh
Chairman
28 January 2014
PRINCIPAL RISKS AND RISK MANAGEMENT
The Directors have established an ongoing process for identifying, evaluating
and managing the principal risks faced by the Company. This process was in
operation during the year and continues in place up to the date of this report.
Investment in small companies is generally perceived to carry more risk than
investment in large companies. While this is reasonable when comparing
individual companies, it is much less so when comparing the volatility of
returns from diversified portfolios of small and large companies. The Company
has a diversified portfolio. In addition, the Company has a simple capital
structure, invests only in small UK quoted companies, and outsources all the
main operational activities to recognised, well-established firms.
The principal risks faced by the Company, together with the approach taken by
the Board towards them, have been summarised below:
i. Investment policy/performance - the performance of the investment portfolio
will typically not match the performance of the benchmark and will be
influenced by market related risks including market price, interest rate
and liquidity (refer to the Annual Report for further details). However,
the Board's aim is to achieve the investment objective over the long term
whilst managing risk by ensuring the investment portfolio is managed
appropriately. The Board has outsourced portfolio management to experienced
managers and receives regular and detailed reports on investment
performance. Peer group performance is also regularly monitored by the Board.
ii. Share price discount - investment trust shares tend to trade at discounts
to their underlying net asset values. The Board and the Managers monitor
the discount on a daily basis. Furthermore, the Board intends to continue
to use the share buy back facility to seek to sustain as low a discount as
seems possible.
iii.Gearing risk - in rising markets, the effect of borrowings would be
beneficial but in falling markets the gearing effect would adversely affect
returns to Shareholders. The Board considers the gearing strategy and
associated risk on a regular basis.
iv. Reputational risk - the Board and the Managers monitor external factors
affecting the reputation of the Company and take action if appropriate.
v. Risk appetite - the effect of inappropriate risk appetite or failure to
establish an appropriate framework to manage the Company to a desired risk
level. The Managers have a clearly defined investment philosophy which
includes a number of risk metrics, and they manage a diversified portfolio.
The Board continually monitors the Company's performance against the
benchmark, and regularly receives a detailed portfolio attribution
analysis, including risk measures.
vi. Regulatory risk - failure to comply with applicable legal and regulatory
requirements could lead to suspension of the Company's share price listing,
financial penalties or a qualified audit report. A breach of Section 1158 of
the Corporation Tax Act 2010 could lead to the Company being subject to capital
gains tax. The Board receives quarterly compliance reports from the Secretaries
to monitor compliance with rules and regulations, together with information on
future developments.
In summary, the Board regularly considers the principal risks associated with
the Company, the measures in place to monitor them and the possibility of any
other risks that may arise.
The Income Statement, Balance Sheet, Reconciliation of Movements in
Shareholders' Funds and summary Cash Flow Statement are set out below:-
INCOME STATEMENT
For the year ended 31 December 2013
(audited)
For the year ended For the year ended
31 December 2013 31 December 2012
Revenue Capital Total Revenue Capital Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Gains on investments - 377,222 377,222 - 169,537 169,537
Investment income 29,741 - 29,741 28,065 - 28,065
Other income - - - 1 - 1
Investment management fee (2,614) (4,357) (6,971) (2,057) (3,428) (5,485)
Other expenses (496) (3,892) (4,388) (443) (2,035) (2,478)
-------- -------- -------- -------- -------- --------
Return on ordinary 26,631 368,973 395,604 25,566 164,074 189,640
activities before finance
costs and tax
Finance costs (485) (808) (1,293) (540) (899) (1,439)
-------- -------- -------- -------- -------- --------
Return on ordinary 26,146 368,165 394,311 25,026 163,175 188,201
activities before tax
Tax on ordinary activities - - - (18) - (18)
activities
-------- -------- -------- -------- -------- --------
Return attributable to
equity shareholders 26,146 368,165 394,311 25,008 163,175 188,183
======= ======= ======= ======= ======= =======
Returns per Ordinary Share 27.37p 385.35p 412.72p 26.07p 170.13p 196.20p
The Board declared on 28 January 2014 a final dividend of 16.15p per Ordinary
Share (2012 - 15.25p). The Board also declared on 18 July 2013 an interim
dividend of 7.35p per Ordinary Share (2012 - 7.0p).
The total column of this statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued in the
period. A Statement of Total Recognised Gains and Losses is not required as all
gains and losses of the Company have been reflected in the above statement.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
For the year ended 31 December 2013
(audited)
Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Balance as at 31 December 957 31 179,461 542,451 45,279 768,179
2012
Return on ordinary - - - 368,165 26,146 394,311
activities after taxation
Equity dividends paid - - - - (21,607) (21,607)
Purchase of Ordinary Shares (3) 3 (2,758) - - (2,758)
------ ------ ------- ------- ------- --------
Balance as at 31 December 954 34 176,703 910,616 49,818 1,138,125
2013
====== ====== ====== ====== ====== ========
For the year ended 31 December 2012
(audited)
Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Balance as at 31 December 961 27 182,103 379,276 40,724 603,091
2011
Return on ordinary - - - 163,175 25,008 188,183
activities after taxation
Equity dividends paid - - - - (20,453) (20,453)
Purchase of Ordinary Shares (4) 4 (2,642) - - (2,642)
------ ------ ------- ------- -------- -------
Balance as at 31 December 957 31 179,461 542,451 45,279 768,179
2012
====== ====== ====== ====== ====== ======
BALANCE SHEET
As at 31 December 2013
(audited)
31 December 31 December
2013 2012
£ 000 £ 000
Fixed assets:
Investments at fair value through 1,167,630 813,326
profit or loss
---------- ----------
Current assets
Debtors 2,120 1,857
Cash at bank 536 259
---------- ----------
2,656 2,116
Creditors (amounts falling due within (32,161) (577)
one year)
---------- ----------
Net current (liabilities)/assets (29,505) 1,539
---------- ----------
Total Assets less Current Liabilities 1,138,125 814,865
Creditors (amounts falling due after - (46,686)
more than one year)
--------- ---------
Total Net Assets 1,138,125 768,179
========= =========
Capital and reserves: equity interests
Share Capital: Ordinary Shares 954 957
Capital redemption reserve 34 31
Special reserve 176,703 179,461
Capital reserve 910,616 542,451
Revenue reserve 49,818 45,279
--------- ---------
Total Shareholders' Funds 1,138,125 768,179
========= =========
Net Asset Value per Ordinary Share 1,193.22p 802.76p
SUMMARY CASH FLOW STATEMENT
For the year ended 31 December 2013
(audited)
For the year ended For the year ended
31 December 2013 31 December 2012
£ 000 £ 000 £ 000 £ 000
Net cash inflow from operating 21,827 22,708
activities
Taxation (15) 9
Returns on investments and (1,225) (1,394)
servicing of finance
Capital expenditure and
financial investment
Payments to acquire investments (398,414) (200,491)
Receipts from sales of 417,219 223,997
investments
-------- --------
Net cash inflow from capital
expenditure and financial 18,805 23,506
investment
-------- --------
39,392 44,829
Equity dividends paid (21,607) (20,453)
-------- --------
17,785 24,376
Financing
Purchase of Ordinary Shares (2,758) (3,018)
Net repayment of bank debt facilities (14,750) (21,250)
(before costs)
-------- --------
Increase in cash 277 108
======== ========
Reconciliation of net cash flow to
movement in net debt
Increase in cash in the year 277 108
Net repayment of bank debt facilities 14,750 21,250
Amortised costs in respect of (51) (52)
the bank debt facility
-------- --------
Change in net debt 14,976 21,306
Opening net debt (46,427) (67,733)
-------- --------
Closing net debt (31,451) (46,427)
======== ========
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING STANDARDS
The financial statements have been prepared on a going concern basis and in
accordance with applicable accounting standards and the AIC's Statement of
Recommended Practice "Financial Statements of Investment Trust Companies and
Venture Capital Trusts" issued in 2009.
The same accounting policies used for the year ended 31 December 2012 have been
applied.
2. INVESTMENT MANAGEMENT FEE
For the year to 31 December 2013 Revenue Capital Total
£ 000 £ 000 £ 000
Investment management fee 2,614 4,357 6,971
====== ====== ======
For the year to 31 December 2012 Revenue Capital Total
£ 000 £ 000 £ 000
Investment management fee 2,057 3,428 5,485
====== ====== ======
3. DIVIDENDS
Year to Year to
31 December 2013 31 December 2012
£000 £000
Amounts recognised as distributions to
equity holders in the period:
Second interim dividend of 15.25p for the year ended 14,584 13,748
31 December 2012 (2012: 14.3p)
First interim dividend of 7.35p for the year 7,023 6,705
ended 31 December 2013 (2012: 7.0p)
------- -------
21,607 20,453
======= =======
The final dividend for the year ended 31 December 2013 of 16.15p will be paid
on 6 March 2013. This dividend has not been included as a liability in these
financial statements.
4. RETURNS PER ORDINARY SHARE
The returns per Ordinary Share are based on:
Year to Year to
31 December 2013 31 December 2012
£000 £000
Returns attributable to Ordinary Shareholders 394,311 188,183
Weighted average number of shares in
issue during the period 95,541,545 95,911,500
Return per Ordinary Share 412.72p 196.02p
5. NET ASSET VALUES
The net assets and the net asset value per share attributable to the Ordinary
Shares at each period end are calculated in accordance with their entitlements
in the Articles of Association and were as follows:
31 December 31 December
2013 2012
£000 £000
Net assets attributable 1,138,125 768,179
Pence Pence
Net asset value attributable per Ordinary Share 1,193.22 802.76
As at 31 December 2013, the Company had 95,382,792 Ordinary Shares in issue
(31 December 2012 - 95,692,792). During the year to 31 December 2013, the Company
bought in and cancelled 310,000 shares (2012 - 446,000 shares) at a total cost
of £ 2,758,000 (2012 - £2,642,000). No shares have been bought back for
cancellation between 31 December 2013 and 28 January 2014.
6. FURTHER INFORMATION
The foregoing do not constitute statutory accounts (as defined in section 434
(3) of the Companies Act 2006) of the Company. The statutory accounts for the
year ended 31 December 2012, which contained an unqualified Report of the
Auditors, have been lodged with the Registrar of Companies and did not contain
a statement required under section 498(2) or (3) of the Companies Act 2006.
Certain statements in this announcement are forward looking statements. By
their nature, forward looking statements involve a number of risks,
uncertainties or assumptions that could cause actual results or events to
differ materially from those expressed or implied by those statements. Forward
looking statements regarding past trends or activities should not be taken as
representation that such trends or activities will continue in the future.
Accordingly, undue reliance should not be placed on forward looking statements.
The Annual Report is expected to be posted to shareholders on 1 February 2014.
Members of the public may obtain copies from Aberforth Partners LLP,
14 Melville Street, Edinburgh EH3 7NS or from its website at
www.aberforth.co.uk.
CONTACT: Alistair Whyte/Euan Macdonald, Aberforth Partners LLP, 0131 220 0733
Aberforth Partners LLP, Secretaries - 28 January 2014
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