Annual Financial Report
Aberforth Smaller Companies Trust plc
Audited Final Results for the year to 31 December 2015
The following is an extract from the Company's Annual Report and Accounts for the year to 31 December 2015. The Annual Report is expected to be posted to shareholders on 2 February 2016. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website: http://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 | +10.2% |
| Numis Smaller Companies Index (Excl. Investment Companies) Total Return | +10.6% |
| Ordinary Share Price Total Return | +13.9% |
| Total Dividends increased to 28.75p per Ordinary Share (including a Special Dividend of 2.75p 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 2015 performance
Small UK quoted companies performed well in 2015, more so when compared with the returns of larger companies. The FTSE 100 Index gave a total return of -1.3%, while the FTSE All-Share Index, which is heavily weighted towards large companies, delivered a return of +1.0%. By comparison, the Numis Smaller Companies Index excluding Investment Companies (NSCI (XIC)), ASCoT’s benchmark, produced a return of +10.6%. Over the same period, the Company’s net asset value total return was +10.2%, while the share price total return was +13.9%. The share price total return out-performance benefited from a narrowing in the discount during the year, which was also seen by a number of other investment trusts in the sector.
ASCoT’s modest under-performance against the NSCI (XIC) came in a year that proved to be one of the most challenging for value investors in the Company’s twenty five year history. Importantly, the Board is confident that the year’s outcome did not reflect any dilution of the Managers’ dedication to their value investment principles. The Managers’ Report expands on the factors that affected performance in 2015.
Dividends
The Company continues to benefit from the positive dividend environment within the UK small company sector. In this context, the Board is pleased to propose a final ordinary dividend of 17.85p. This results in total ordinary dividends for the year of 26.0p, which represents an increase of +5.1% on 2014.
In 2015, the revenue account benefited from the receipt of seven special dividends paid by investee companies. This embarrassment of riches has led the Board to propose the payment of a special dividend of 2.75p per share in addition to the final ordinary dividend. This will ensure that the all-important retention test is passed and allow the Company to continue to operate as an investment trust in the eyes of HMRC.
The Board remains committed to a progressive dividend policy. The Company’s revenue reserves, after adjusting for payment of both the final ordinary and special dividends, amount to 45.1p per share (up from 38.6p as at 31 December 2014) and provide a degree of flexibility for the future. To be clear, I would highlight that the base level for the Company’s progressive dividend policy in 2016 is 26.0p, i.e. excluding the special dividend.
Both dividends are subject to Shareholder approval at the 2016 Annual General Meeting and, if approved, will be paid on 4 March 2016 to Shareholders on the register at the close of business on 12 February 2016. Their ex dividend date is 11 February 2016. ASCoT operates a Dividend Reinvestment Plan. Details of the plan, including the Form of Election, are available from Capita Registrars. Contact details can be found on the inside back cover.
Gearing
Throughout its life it has been the Company’s policy to use gearing in a tactical manner. The Royal Bank of Scotland facility is due to expire on 15 June 2017. The facility provides the Managers with flexibility in accessing liquidity for investment purposes, as well as the ability to fund share buy-ins without disturbing the underlying portfolio. At the year end, gearing stood at 0.3% of Shareholders’ funds. During the year, the level of gearing ranged from nil to 4.8% with an average of 2.1%.
Share buy-in
At the Annual General Meeting in February 2015, the authority to buy in up to 14.99% of the Company’s Ordinary Shares was approved. During the year, 321,000 Ordinary Shares (0.3% of issued share capital) were bought in at a total cost of £3.7 million. Those Shares have been cancelled rather than held in Treasury. Once again, the Board will be seeking to renew the buy-in authority at the Annual General Meeting on 1 March 2016.
Costs
Costs are also a significant influence on net returns. During the year the Board agreed with the Managers a simplified and reduced fee structure for the Company. The Board continues to monitor how the Company compares against its peers in fee terms but is always cognisant that delivering outperformance is of most importance. The fee adjustment helps to offset the ever increasing burden of regulatory costs.
The Managers’ Report comments on transaction costs incurred during the year. Again, the Board and the Managers discuss the extent of these costs regularly. We expect and welcome an industry trend to increased transparency of transaction costs in coming years.
Conclusion
ASCoT celebrated its quarter century in December 2015. Since the Company’s formation in 1990, the NSCI (XIC) has generated a total return of +11.2% per annum. By comparison, the Company’s net asset value total return has been +13.9% per annum. Outperformance of this magnitude over such a long period is beyond the realm of chance and credit must be paid to the Managers’ consistent and diligent application of investment style, coupled with sound research. During the past 25 years, the Company has experienced periods when small UK quoted companies have been in and out of fashion, and, in a similar vein, when the value investing style has waxed and waned. Consequently not every investor has the benefit of the 25 year record and some will have more difficult performance histories depending on the timing of their purchases. This will always be the case, no matter how successful the Manager or diligent the Board, but it serves to emphasise that investment in ASCoT should be viewed as a medium to long term opportunity for exposure to a sector and style that tend to reward the patient investor.
In the years since the global financial crisis, high absolute returns from small UK quoted companies have come against the background of leadership by the growth style. This has also been a period of extraordinary monetary policy. It is difficult to calibrate the precise effects of zero interest rates and quantitative easing on investment styles, but a relationship beyond pure coincidence seems plausible. With the Federal Reserve increasing interest rates in December 2015, we are at least reminded that nothing remains constant in financial markets: interest rates do not just fall and strong style leadership does not last forever.
As I alluded to earlier, 2015 has been an extremely challenging year for the value investor. None of us know what 2016 will deliver. The Board remains firmly of the view that the Company is extremely well served by the Managers. The value investment style has been applied consistently through cycles while the focus and evolution of the investment team continue to serve shareholders well. The experienced team, and its financial commitment to the Company, underpins a business structure that in the Board’s view has been of great importance in delivering an excellent long term performance record.
Finally, the Board very much welcomes the views of Shareholders and we are always available to talk to Shareholders directly. My email address is noted below.
Paul Trickett
Chairman
27 January 2016
paul.trickett@aberforth.co.uk
MANAGERS’ REPORT
Introduction
Benefiting from a resilient domestic economy and its low exposure to the struggling resources industries, the Numis Smaller Companies Index (excluding investment companies) performed well in 2015, securing a total return of 10.6%. This was well ahead of the FTSE All-Share’s 1.0% and, indeed, compared well with the results for many major stockmarkets, particularly when assessed in sterling. ASCoT’s NAV rose by 10.2% in total return terms. While acceptable in the broader context of 2015, this outcome is below that of the benchmark. Reasons for this are set out in the Performance section of this report.
Returning, for the time being, to the broader investment environment, risk assets tended to struggle in 2015, especially in the second half. Uncertainty continued as to the strength of recovery in the Eurozone, notwithstanding the introduction of quantitative easing long promised by Mario Draghi. Meanwhile, the pace of growth in the US ebbed even as speculation about the first rise in interest rates in the present cycle mounted. Adding to these undercurrents came the Autumn’s tide of concern about China and the emerging markets in general. Uncertainty rose as to the rate of deceleration in the Chinese economy following a loosening of its currency peg with the strong dollar, which fuelled recurrent fears about years of investment financed by unsustainable levels of debt. The slowdown in China’s rate of growth added to pressure on the resources industry, as diminishing demand met still rising supply, a legacy of the boom years. In turn, plummeting commodity prices and a stronger dollar intensified the woes of emerging markets, several of which have relied on dollar denominated debt to fund their growth.
The UK has proved a haven of comparative tranquillity: domestic demand has been boosted by wages rising above the rate of inflation and has offset austerity policies, which have in any case been watered down. However, the FTSE All- Share, which is dominated by large companies, has been weighed down by its significant exposure to the resources industries. This factor helps explain the out-performance of smaller companies in 2015: the NSCI (XIC) has a relatively low exposure to resources companies and a much greater exposure to sectors, such as retailing, that address the domestic economy. That said, overseas-facing companies within the NSCI (XIC) are showing signs of stress as patchy demand growth in other economies combines with the lagged effects of sterling’s revaluation over the past four years.
Against this backdrop of modest economic growth and mounting pessimism, government bond yields ended 2015 little changed from the levels at which they started the year. These are very low in the long term historical context and are also influenced by the prevailing monetary regime of zero interest rate policy and quantitative easing. The impact of bond yields on a portfolio of small UK quoted companies constructed in accordance with a value investment discipline is twofold.
- First, as already implied, bond yields are a gauge of underlying economic activity: yields tend to rise to reflect and compete with the returns available from a stronger economy and vice versa. In an environment of low growth across the economy, secular growth companies stand out and can be rewarded by the stockmarket with higher than normal valuations. A rising tide of improving prospects for the general economy should erode that growth premium.
- Second, value stocks may be considered “short duration†equities, which means that more of their worth is determined by near term cash flows from the underlying businesses. In contrast, growth stocks tend to be “long duration†equities, with a greater portion of their value derived from cash flows that are forecast to grow often over many years into the future. As such, the valuation of a growth company is more sensitive to the rate at which the cash flows are discounted to arrive at the business’s present value. To this extent, the present climate of very low interest rates and bond yields is likely to result in valuations for growth companies that are even higher than normal.
The theory has translated into practice since the global financial crisis: the value investment style has fared well in years such as 2013 when bond yields rose, but has faced a challenge over the period as a whole as yields have declined. This report’s initial focus on the big picture should not be mistaken for a change in the Managers’ investment approach: the portfolio remains a collection of individual businesses selected for their attractive valuations and prospects. However, it is clear that the performance of the portfolio, whether Aberforth likes it or not, is influenced by factors beyond its control. Some of this is by design: ASCoT ought to benefit from the value premium, which is the out-performance that value stocks have enjoyed over growth stocks over the long term both in the NSCI (XIC) and in equity markets around the world.
Investment performance
To recap, ASCoT’s NAV total return in 2015 was 10.2%, which compares with 10.6% from the NSCI (XIC). This section of the report analyses some of the factors behind the relative performance.
| For the 12 months ended 31 December 2015 | Basis points |
| Stock selection | (16) |
| Sector selection | 27 |
| ----- | |
| Attributable to the portfolio of investments, based on mid prices | 11 |
| (after transaction costs of 35 basis points) | |
| Movement in mid to bid price spread | 8 |
| Cash/gearing | 24 |
| Purchase of Ordinary Shares | 4 |
| Management fee | (79) |
| Other expenses | (7) |
| ----- | |
| Total attribution based on bid prices | (39) |
| ----- |
Note: 100 basis points = 1%. Total Attribution is the difference between the total return of the NAV and the Benchmark Index (i.e. NAV = 10.22%; Benchmark Index = 10.61%; difference is -0.39% being -39 basis points).
Style & size
With government bond yields remaining at very low levels over the year, the value investment style under-performed in 2015. An additional handicap came from the rebalancing of the NSCI (XIC) on 1 January 2015: this saw the admission of several resources companies, whose share prices had fallen steeply in 2014. According to the price-to-book methodology employed by the London Business School, which maintains the NSCI (XIC), these were classified as value companies. Their continued struggles in 2015 therefore represented a headwind to the value style. As explained in the Sectors paragraph below, the Managers are not slaves to third party definitions of what makes a value investment and choose to avoid many of these troubled resources businesses.
The Managers’ consistent application of their value style has led to a significantly larger exposure than that of the NSCI (XIC) to the smaller constituents of the index. One way to illustrate this is to focus on the NSCI (XIC)’s overlap with the FTSE 250. This overlap accounts for 63% of the NSCI (XIC) but for just 40% of the portfolio. This under-weight position in “larger small†companies and the accompanying over-weight position in “smaller small†companies reflects the strong performance of mid caps over the past 15 years. Consequently, the more attractive valuations are now on offer down the scale of market capitalisations, often irrespective of an individual company’s prospects. In part, this state of affairs is a result of the global financial crisis: fears of illiquidity have remained exaggerated and deterred many market participants from venturing below the FTSE 250. With little to choose between the returns from the FTSE 250 and the FTSE SmallCap in 2015, size was not a significant influence on the ASCoT’s relative performance.
Sectors
The resources sectors represent a conundrum for the value investor. Their constituents often look very cheap on metrics such as price-to-book, but their prospects are clouded by macro economic and political influences on underlying commodity prices. The Managers have differentiated between the oil companies and the miners, adopting a higher weight than the index in the former – for the first time in a decade – and remaining under-weight in the latter. An important means of differentiation is the balance sheet: the oil companies in the NSCI (XIC) tend to have stronger balance sheets, with net cash, modest debt or long term borrowing arrangements. In contrast, the miners’ balance sheets tend to be stretched. As a consequence, the miners in many cases require higher commodity prices sooner rather than later in order to survive, whereas it is possible to adopt a longer term investment horizon with the oil companies, most of which remain cash flow positive with the oil price at today’s depressed levels. On a one year view, the decision to add to the portfolio’s position in oil was unhelpful. However, this was out-weighed by the benefit of avoiding the worst of the miners.
Elsewhere, it has been challenging to find value in the healthcare sectors. Healthcare companies offer the benefits of secular growth dynamics and are able to stand apart from concerns about the economic cycle that afflict the majority of stockmarket sectors. As a consequence, they have attracted large amounts of capital, as resources companies were able to do a decade ago, and their valuations have risen to high levels. Other buoyant areas of the small cap universe in recent years have been those sectors addressing the domestic UK economy. Housebuilders and retailers have tended to perform well and ASCoT has benefited from significant exposure to those industries. However, it would appear that the good news about the UK’s recovery is now fully reflected in the valuations of several domestic cyclicals. As a consequence, the portfolio’s exposure has fallen as valuation targets have been achieved.
Corporate activity
M&A staged a substantial recovery in 2015. Bids for 27 members of the NSCI (XIC) were completed in the year, against 12 in 2014 and just 5 in 2013. On top of the completed deals, approaches for another 8 companies were outstanding at the year end. Acquirers were predominantly other corporates rather than private equity and takeover premiums were generally fair. Of the 27 completed deals, ASCoT held 8. The net effect of the takeover premiums collected by ASCoT less those missed was positive, though amounted to less than 100 basis points of relative performance.
The year under review was also noteworthy for the refreshment of the NSCI (XIC): the initial public offerings of 29 companies eligible for inclusion in the index were completed. This compares with 27 in 2014. As at 31 December 2015, ASCoT held four of 2015’s IPOs. It would appear that the pipeline of potential future IPOs is full, though its realisation clearly relies on acceptable price expectations on the part of the vendors and on general stockmarket conditions – neither of which is a given.
Income
The dividend performance of small companies in recent years has been very strong. In an investment world starved of income by zero interest rate policies, the dividend characteristics offered by the constituents of the NSCI (XIC) have been increasingly sought after. It is scarcely necessary to look further when attempting to understand the good share price performance of the asset class since the global financial crisis. The same logic applies when assessing the performance of small companies against large. Double digit per annum dividend growth and numerous special dividends from the NSCI (XIC) since 2009 contrast with the fortunes of the FTSE All-Share, which is dominated by large sectors, such as the banks and resources companies, whose dividends have been under considerable pressure.
ASCoT continues to benefit from this favourable backdrop. Its investment income rose by 25% in 2015, boosted by seven special dividends and also by the impact of companies resuming dividend payments after having suspended them during the 2009 recession. Given this performance, the general craving for income and the higher than average yields of the portfolio’s investee companies, it would seem likely that ASCoT’s income characteristics have been beneficial to both its total return and capital NAV performance in recent years. This would have mitigated to an extent the broader headwinds facing the value style that are associated with low interest rates and bond yields.
It is worth reiterating the caveats about income made in previous reports. First, the double digit growth in small company dividends since 2009 is unsustainable: the long term average is 2.5% per annum adjusted for inflation and there is little reason to believe that the future average should be any higher. Second, the Managers detect an element of faddishness to the rediscovered fondness for dividends: at the risk of too much cynicism, it may be the case that certain dividend decisions are being made with an eye to the shorter term fillip they might afford to a share price rather than to the longer term good of the company. Such situations may only be revealed when the next recession hits. Third, if interest rates and bond yields can begin a journey of normalisation, income becomes less scarce and the income characteristics of small companies become less sought after. This, though, should be a price worth paying by a value investor.
Significant stakes
Throughout ASCoT’s 25 years, the Managers have been prepared to take large stakes in investee companies across Aberforth’s client base. These stakes can rise as high as around 25% of a company’s outstanding share capital. The primary motivation relates to the value investment philosophy: the Managers want valuation to be the main determinant of a company’s position in the portfolio. A 25% ownership limit offers flexibility in this regard, though stakes of this size are a relatively small part of the portfolio and are usually amassed slowly, taking advantage of share price weakness.
Clearly, significant stakes can bring additional opportunities and responsibilities. The Managers have an established means of engagement with investee companies that focuses on the role of the chairman, which is the most important position in the UK’s corporate governance structure. The Managers may have a view on dividend policy or balance sheet structure, but, with the right person in the chair, they are generally happy to let the board run the company. Engagement is frequently time consuming, but the Managers are well resourced and believe that the investment of time provides a good payback. Significant stakes, with the inevitable mix of successes and failures, have made a net positive contribution to ASCoT’s returns over the years.
Turnover
Defined as the lower of purchases and sales divided by average month end net asset value over the past twelve months, turnover was 37% over the twelve months to 31 December 2015, which compares with 36% in 2014. In both years, turnover was boosted by situations in which ASCoT is in effect a forced seller but which represent good outcomes for shareholders. First, companies that have grown too large to remain in the NSCI (XIC) on its annual 1 January rebalancing are sold in an orderly fashion. Second, companies subject to takeover bids are sold to the acquirer. Adjusting for these circumstances, ASCoT’s underlying turnover over the long term has been 25% and in 2015 was 20%. The underlying turnover figure of 25% implies an average holding period of four years, though the portfolio contains many holdings that have been there for much longer.
The rise in overall turnover had a large influence on the rise in transaction costs from £3,346k in 2014 to £3,890k in 2015. Higher asset values, consistent with the positive return from the NSCI (XIC), also had an important effect. Other factors were less significant; these include the proportion of purchases incurring stamp duty, the mix of dealing venues, the impact of selling companies to bidders in M&A situations, and the significance within purchases of participation in issues of new equity.
The Managers are acutely conscious of transaction costs, not least because they affect the achievability of ASCoT’s investment objective – to out-perform the NSCI (XIC) over the long term. The Managers assess these costs, which represent a combination of commissions for execution and stamp duty reserve tax, together with underlying investment opportunities: in keeping with the value investment discipline, holdings are reduced when they no longer offer further upside and the proceeds are recycled into other positions. In the round, this process of recycling should be of benefit to shareholders: this was certainly the case in 2015, when so much of the turnover was a result of M&A and the sales of companies that had performed sufficiently well to be ejected from the NSCI (XIC).
Active share
Active share is a gauge of how different a portfolio is from an index. A higher active share ratio indicates a greater difference and increases the probability that the portfolio’s performance will diverge from that of the index. That divergence could be positive or negative. The Managers monitor active share to ensure that ASCoT’s portfolio does not inadvertently become too similar to the NSCI (XIC). They target a ratio of at least 70%, though will tolerate a temporarily depressed number. The target is assessed without the benefit of holdings that are not constituents of the index – such holdings flatter active share. At 31 December 2015, the ratio stood at 77%.
Valuation
31 December 2015 31 December 2014
| Characteristics | ASCoT | NSCI (XIC) | ASCoT | NSCI (XIC) |
| Number of companies | 86 | 349 | 88 | 369 |
| Weighted average market capitalisation | £567m | £750m | £614m | £754m |
| Price earnings ratio or PE (historic) | 12.5x | 14.6x | 13.0x | 13.2x |
| Dividend yield (historic) | 3.1% | 2.7% | 2.5% | 2.5% |
| Dividend cover | 2.6x | 2.5x | 3.1x | 3.0x |
The table above contains historic valuation data for ASCoT’s portfolio and for the NSCI (XIC). The portfolio’s historic PE fell over the course of 2015, while the NSCI (XIC)’s rose. This is consistent with the style dynamics already described: the small cap universe was led higher by the growth stocks, while value stocks performed less well. Meanwhile, the PE of large companies, represented by the FTSE All-Share, rose from 13.8x to 16.6x over the year. As a consequence, small companies ended the year 12% cheaper than large in terms of PE, which compares with a 4% discount twelve months earlier. As recently as September 2012, small companies were 24% more expensive than large on the basis of PEs.
The average portfolio yield rose in 2015, while the dividend cover dropped. An important influence on these movements is the impact of previously nil yielding companies resuming or starting dividends payments. At 2.6x, cover is now back closer to the long term average of 2.5x, having spent the years since the global financial crisis at above 3.0x.
2016 enterprise value / earnings before interest, tax and amortisation
| 43 growth companies | 244 other companies | Tracked Universe* | ASCoT’s portfolio |
| 16.0x | 11.1x | 11.8x | 9.8x |
* Companies followed closely by the Managers accounting for 96% by value of the NSCI (XIC).
The table above sets out the forward EV/EBITA ratio for the portfolio, the tracked universe and two subdivisions of the tracked universe, 43 growth companies and the 244 other companies. EV/EBITA is the Managers’ favoured valuation metric. It is unaffected by how a company is funded, whether through equity or debt, and it is closer to how a corporate acquirer values a target business. This latter point may explain the important contribution to ASCoT’s performance over the years from M&A. Consistent with the Managers’ value investment style, the portfolio is valued on a large discount to the tracked universe as a whole. This discount to the growth companies is wider, at 39%. A corollary of growth’s leadership in 2015 is that the population of potential investments for ASCoT has increased. It is the value investor’s contention that discounts will narrow over time to the benefit of the relative returns of portfolios managed in accordance with the style.
Outlook & conclusion
Although the Managers’ day-to-day focus is on individual businesses and their valuations, it is likely that the performance of ASCoT over the coming year will be significantly influenced by developments on a larger scale. If the recent interest rate increase in the US heralds a gradual normalisation of monetary conditions around the world and bond yields are higher in twelve months’ time, it is probable that ASCoT will have benefited from tailwinds for the value investment style. If, however, the rate increase proves more than the economy can take and bond yields stay the same or decline, then ASCoT will probably face headwinds similar to those of 2015. The outcome is not one that the Managers are able to call. However, the challenge that the interest rate rise in the US represents to the broader investment world’s safe and consensual preference for growth stocks is intriguing.
Closer to home, the outlook for the UK’s corporate sector is undeniably cloudy. Demand is challenged by the uncertain pace of growth in much of the world, while costs are, at last, coming under pressure from wages rising above the rate of inflation. Sliding commodity prices – particularly that of oil – offer some mitigation, but a squeeze on margins is plausible. It should not come as a surprise if the profit growth expected by the market for small companies in 2016 – currently around 9% – once again proves too ambitious. In mitigation, balance sheets do not appear stretched across the portfolio and the investment universe in general. Moreover, another year of above average dividend growth from small companies looks likely.
For the Managers, the most encouraging factor is that of valuation. The investment universe continues to offer up numerous attractively valued investment opportunities. Indeed, the consolation of a year in which growth stocks have led the NSCI (XIC) higher is that the valuation gap between growth and value has widened and the number of candidates for inclusion in the portfolio has risen. It is plausible that elements of the undoubted top-down risks are already discounted in valuations of today’s portfolio. Accordingly, without becoming hostage to the vagaries of equity returns over one year, the Managers look to the future with confidence and believe that ASCoT can continue to benefit from the careful stock selection and exploitation of the value premium that have characterised the first 25 years of your Company’s life.
Aberforth Partners LLP Managers
27 January 2016
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 Stategic 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.
(c) the Annual Report, taken as a whole, is fair, balanced and understandable and provides information necessary for Shareholders to assess the Company’s performance, business model and strategy.
On behalf of the Board
Paul Trickett
Chairman
27 January 2016
PRINCIPAL RISKS AND RISK MANAGEMENT
The Board carefully considers the principal risks faced by the Company and seeks to manage these risks through continual review, evaluation and taking action as necessary.
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. In addition, the Company has a simple capital structure 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. Further information regarding the review process can be found in the Corporate Governance and Audit Committee Reports.
(i) Investment policy/performance risk – the performance of the investment portfolio will typically differ from the performance of the benchmark and will be influenced by market related risks including market price and liquidity (refer to Note 18 for further details). The Board’s aim is to achieve the investment objective over the long term by ensuring the investment portfolio is managed appropriately. The Board has outsourced portfolio management to experienced managers with a clearly defined investment philosophy and investment process. The Board receives regular and detailed reports on investment performance including detailed portfolio analysis, risk profile and attribution analysis. Senior representatives of Aberforth Partners attend each Board meeting. 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. The Board intends to continue to use the share buy- in facility to seek to sustain as low a discount as seems possible.
(iii) Gearing risk – in rising markets, gearing will enhance returns; however, in falling markets the gearing effect will adversely affect returns to Shareholders. The Board and the Managers consider the gearing strategy and associated risk on a regular basis.
(iv) Reputational risk – the Board and the Managers monitor external factors outwith the Company’s control affecting the reputation of the Company and/or the key service providers and take action if appropriate. The Secretaries monitor regulatory developments and provide regular updates to the Board.
(v) 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 losing investment trust status and, as a consequence, any capital gains would then be subject to capital gains tax. The Board receives quarterly compliance reports from the Secretaries to evidence compliance with rules and regulations, together with information on future developments.
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 2015 (audited)
| For the year ended | For the year ended | |||||
| 31 December 2015 | 31 December 2014 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £ 000 | £ 000 | £ 000 | £ 000 | £ 000 | £ 000 | |
| Gains/(losses) on investments | - | 87,132 | 87,132 | - | (24,628) | (24,628) |
| Investment income | 37,652 | 1,462 | 39,114 | 30,166 | 291 | 30,457 |
| Other income | - | - | - | 1 | - | 1 |
| Investment management fee | (3,283) | (5,472) | (8,755) | (3,240) | (5,399) | (8,639) |
| Transaction costs | - | (3,890) | (3,890) | - | (3,346) | (3,346) |
| Other expenses | (778) | - | (778) | (661) | - | (661) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Net return on ordinary activities | 33,591 | 79,232 | 112,823 | 26,266 | (33,082) | (6,816) |
| before finance costs and tax | ||||||
| Finance costs | (242) | (403) | (645) | (289) | (482) | (771) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Return on ordinary activities | 33,349 | 78,829 | 112,178 | 25,977 | (33,564) | (7,587) |
| before tax | ||||||
| Tax on ordinary activities | - | - | - | - | - | - |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Return attributable to | ||||||
| equity shareholders | 33,349 | 78,829 | 112,178 | 25,977 | (33,564) | (7,587) |
| ====== | ======= | ======= | ====== | ======= | ======= | |
| Returns per Ordinary Share | 35.03p | 82.80p | 117.83p | 27.24p | (35.19)p | (7.95)p |
The Board declared on 27 January 2016 a final dividend of 17.85p per Ordinary Share and a special dividend of 2.75p per Ordinary Share. The Board also declared on 29 July 2015 an interim dividend of 8.15p per Ordinary Share.
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 year. A Statement of Comprehensive Income 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 2015 (audited)
| Capital | ||||||
| Share | redemption | Special | Capital | Revenue | ||
| Capital | reserve | reserve | reserve | reserve | Total | |
| £ 000 | £ 000 | £ 000 | £ 000 | £ 000 | £ 000 | |
| Balance as at 31 December 2014 | 953 | 35 | 176,300 | 877,052 | 53,000 | 1,107,340 |
| Return on ordinary activities after taxation | - | - | - | 78,829 | 33,349 | 112,178 |
| Equity dividends paid | - | - | - | - | (23,964) | (23,964) |
| Purchase of Ordinary Shares | (3) | 3 | (3,675) | - | - | (3,675) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Balance as at 31 December 2015 | 950 | 38 | 172,625 | 955,881 | 62,385 | 1,191,879 |
| ====== | ====== | ====== | ====== | ====== | ====== |
For the year ended 31 December 2014 (audited)
| Capital | ||||||
| Share | redemption | Special | Capital | Revenue | ||
| Capital | reserve | reserve | reserve | reserve | Total | |
| £ 000 | £ 000 | £ 000 | £ 000 | £ 000 | £ 000 | |
| Balance as at 31 December 2013 | 954 | 34 | 176,703 | 910,616 | 49,818 | 1,138,125 |
| Return on ordinary activities after taxation | - | - | - | (33,564) | 25,977 | (7,587) |
| Equity dividends paid | - | - | - | - | (22,795) | (22,795) |
| Purchase of Ordinary Shares | (1) | 1 | (403) | - | - | (403) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Balance as at 31 December 2014 | 953 | 35 | 176,300 | 877,052 | 53,000 | 1,107,340 |
| ====== | ====== | ====== | ====== | ====== | ====== |
BALANCE SHEET
As at 31 December 2015 (audited)
| 31 December | 31 December | |
| 2015 | 2014 | |
| £ 000 | £ 000 | |
| Fixed assets: | ||
| Investments at fair value through profit or loss | 1,195,581 | 1,138,793 |
| ---------- | ---------- | |
| Current assets | ||
| Debtors | 2,725 | 2,670 |
| Cash at bank | 1,025 | 238 |
| ---------- | ---------- | |
| 3,750 | 2,908 | |
| Creditors (amounts falling due within one year) | (510) | (209) |
| ---------- | ---------- | |
| Net current assets | 3,240 | 2,699 |
| ---------- | ---------- | |
| Total Assets less Current Liabilities | 1,198,821 | 1,141,492 |
| Creditors (amounts falling due after more than one year) | (6,942) | (34,152) |
| ---------- | ---------- | |
| Total Net Assets | 1,191,879 | 1,107,340 |
| ======= | ======= | |
| Capital and reserves: equity interests | ||
| Called up share capital (Ordinary Shares) | 950 | 953 |
| Reserves: | ||
| Capital redemption reserve | 38 | 35 |
| Special reserve | 172,625 | 176,300 |
| Capital reserve | 955,881 | 877,052 |
| Revenue reserve | 62,385 | 53,000 |
| ---------- | ---------- | |
| Total Shareholders’ Funds | 1,191,879 | 1,107,340 |
| ======= | ======= | |
| Net Asset Value per Ordinary Share | 1,254.30p | 1,161.41p |
CASH FLOW STATEMENT
For the year ended 31 December 2015 (audited)
| 31 December 2015 | 31 December 2014 | ||||||||
| £ 000 | £ 000 | ||||||||
| Operating activities | |||||||||
| Net revenue before finance costs and tax | 33,591 | 26,266 | |||||||
| Tax withheld from income | (59) | - | |||||||
| Tax recovered | - | 15 | |||||||
| Receipt of special dividend taken to capital | 1,462 | 291 | |||||||
| Investment management fee charged to capital | (5,472) | (5,399) | |||||||
| Increase in debtors | (432) | (129) | |||||||
| Increase in other creditors | 47 | 36 | |||||||
| -------- | -------- | ||||||||
| Net cash inflow from operating activities | 29,137 | 21,080 | |||||||
| ===== | ===== | ||||||||
| Investment activities | |||||||||
| Purchases of investments | (452,925) | (419,879) | |||||||
| Sales of investments | 480,102 | 420,312 | |||||||
| -------- | -------- | ||||||||
| Net cash inflow from investment activities | 27,177 | 433 | |||||||
| ===== | ===== | ||||||||
| Financing activities | |||||||||
| Purchase of Ordinary Shares | (3,675) | (403) | |||||||
| Equity dividends paid | (23,964) | (22,795) | |||||||
| Interest and fees paid | (638) | (863) | |||||||
| Net (repayment)/drawdown of bank debt facilities (before any costs) |
(27,250) | 2,250 | |||||||
| -------- | -------- | ||||||||
| Cash outflow from financing activities | (55,527) | (21,811) | |||||||
| ===== | ===== | ||||||||
| Change in cash during the period | 787 | (298) | |||||||
| ===== | ===== | ||||||||
| Cash at the start of the period | 238 | 536 | |||||||
| Cash at the end of the period | 1,025 | 238 | |||||||
| ====== | ====== | ||||||||
SUMMARY NOTES TO THE FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING STANDARDS
This is the first year that the Company has presented its financial statements under Financial Reporting Standard 102 (FRS 102) issued by the Financial Reporting Council and under the AIC’s Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital trust (SORP) issued in 2014. The last financial statements under previous UK GAAP were for the year ended 31 December 2014 and the date of transition to FRS 102 was therefore 1 January 2015. There have been no changes in accounting policies as a consequence of adopting FRS 102. The Cash Flow Statement for 31 December 2014, has been re-presented to be consistent with the format of FRS 102. The financial statements have been prepared on a going concern basis. The functional and presentation currency is pounds sterling, which is the currency of the environment in which the Company operates.
2. DIVIDENDS
Year to Year to
31 December 2015 31 December 2014
£000 £000
Amounts recognised as distributions to
equity holders in the period:
Final dividend of 17.00p for the year ended 16,209 15,404
31 December 2014 (2013: 16.15p)
Interim dividend of 8.15p for the year 7,755 7,391
ended 31 December 2015 (2014: 7.75p) --------- --------
23,964 22,795
===== =====
The special (2.75p per share) and final dividend (17.85p per share) for the year ended 31 December 2015 will be paid, subject to shareholder approval, on 4 March 2016. These dividends have not been included as a liability in these financial statements.
3. RETURNS PER ORDINARY SHARE
The returns per Ordinary Share are based on:
Year to Year to
31 December 2015 31 December 2014
Returns attributable to Ordinary Shareholders £ 112,178,000 £ (7,587,000)
Weighted average number of shares in issue
during the year 95,200,792 95,367,970
Return per Ordinary Share 117.83p (7.95)p
4. NET ASSET VALUES
The net assets and the net asset value per share attributable to the Ordinary Shares at each year end are calculated in accordance with their entitlements in the Articles of Association and were as follows:
31 December 31 December
2015 2014
Net assets attributable £1,191,879,000 £1,107,340,000
Ordinary Shares in issue at the end of the year 95,023,792 95,344,792
Net asset value attributable per Ordinary Share 1,254.30p 1,161.41p
No shares have been bought back for cancellation between 31 December 2015 and 27 January 2016.
5. 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 2014, 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 2 February 2016. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website: http://www.aberforth.co.uk/.
CONTACT: Alistair Whyte/Euan Macdonald, Aberforth Partners LLP, 0131 220 0733
Aberforth Partners LLP, Secretaries – 27 January 2016
ANNOUNCEMENT ENDS
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